2008 Ruling 2007-0247611R3 - Public butterfly reorganization

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CRA.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ARC.

Principal Issues: Whether the proposed spin-off of DC's rental business qualifies for the butterfly exemption provided in paragraph 55(3)(b)

Position: (1) The proposed spin-off of DC's rental business will qualify for the butterfly reorganization under paragraph 55(3)(b) provided that there is no 55(3.1)(b) event as part of the series (e.g. an unrelated person acquires the Spinco common shares from a specified shareholder and/or a person or group of person acquires control of Spinco) (2) Given DC issued a press release prior to the formal annoucement of the proposed butterfly reorganization stating it was considering an offer to purchase DC's rental business from an unrelated party, we included a caveat to confirm that nothing in this ruling can be construed as implying that the CRA has made any determination as to whether any future transaction of DC will be part of the same series of transactions for the purpose of paragraph 55(3.1)(b) (3) Should there be a transaction further to the butterfly reorganization, we will make such a determination on the basis of the circumstances surrounding such a transaction

Reasons: Paragraphs 55(3)(b) and 55(3.1)(b)

XXXXXXXXXX

XXXXXXXXXX , 2008

Dear XXXXXXXXXX :

Re: Advance Income Tax Ruling - XXXXXXXXXX

We are writing in response to your letter dated XXXXXXXXXX , which was amended on

XXXXXXXXXX , wherein you requested an advance income tax ruling on behalf of XXXXXXXXXX . in respect of the corporate reorganization described below.

We also acknowledge receipt of the additional information you provided in response to our various requests for clarification.

DEFINITIONS

In this letter, the following terms have the meanings specified below:

• "Acquiror" has the meaning assigned in the definition of "specified corporation" in subsection 55(1);
• "Act" means the Income Tax Act, R.S.C. 1985 (5th Supp.) c. 1, as amended to the date hereof, and unless otherwise stated, every reference herein to a part, section, subsection, paragraph, subparagraph or clause is a reference to the relevant provision of the Act;
• "Act 2" means the Business Corporations Act (XXXXXXXXXX );
• "Act 3" means the Business Corporations Act (XXXXXXXXXX );
• "adjusted cost base" has the meaning assigned by section 54;
• "agreed amount" in respect of a property means the amount that the transferor
and the transferee of the property have agreed upon in an election under subsection 85(1);
• "Aggregate DC Redemption Amount" has the meaning assigned by Paragraph 47;
• "Aggregate Spinco Redemption Amount" has the meaning assigned by
Paragraph 39;
• "arm's length" has the meaning assigned by section 251;
• "Business 1" means the business of Opco 2 and Opco 3 of XXXXXXXXXX ;
• "Business 2" means the business of XXXXXXXXXX ;
• "capital property" has the meaning assigned by section 54;
• "Capital Reorganization" means the exchange of each DC Common Share for one DC New Common Share and one DC Special Share as described in Paragraph 48;
• "cost amount" has the meaning assigned by subsection 248(1);
• "DC" has the meaning assigned in Paragraph 1;
• "DC Common Shares" means the common shares that DC is currently authorized to issue as described in Paragraph 6;
• "DC New Common Shares" means the new common shares that DC will be authorized to issue as described in Paragraph 47;
• "DC Redemption Amount" has the meaning assigned by Paragraph 47;
• "DC Redemption Note" means the demand promissory note with a principal amount equal to the Aggregate DC Redemption Amount to be issued by DC in favour of Spinco as described in Paragraph 61;
• "DC Shares" means the DC New Common Shares and the DC Special Shares collectively;
• "DC Shareholders" means all of the holders of DC Common Shares immediately before the Effective Date;
• "DC Special Shares" means the special shares that DC will be authorized to issue as described in Paragraph 47;
• "DC Stock Options" has the meaning assigned by Paragraph 8;
• "Dissenting Shareholder" means a DC Shareholder who exercises the right to dissent under the Plan of Arrangement;
• "distribution" has the meaning assigned by subsection 55(1);
• "Effective Date" means the date on which the Plan of Arrangement becomes effective, which is currently pending approval of this ruling;
• "fair market value" means the highest price available in an open and unrestricted market between informed prudent parties acting at arm's length and under no compulsion to act, expressed in terms of cash;
• "Leaseco" has the meaning assigned by Paragraph 24;
• "New Opco" has the meaning assigned by Paragraph 44;
• "New Opco Common Shares" has the meaning assigned by Paragraph 44;
• "Old Opco" has the meaning assigned by Paragraph 19;
• "Old Opco Receivable" has the meaning assigned by Paragraph 23;
• "Opco 2" means XXXXXXXXXX .;
• "Opco 3" means XXXXXXXXXX .;
• "paid-up capital" has the meaning assigned by subsection 89(1);
• "Paragraph" refers to a numbered paragraph in this advance income tax ruling;
• "Participant" means a DC Shareholder other than a Dissenting Shareholder;
• "Plan of Arrangement" means the plan of arrangement under Act 2 to effect the divisive reorganization described in the "Proposed Transactions";
• "Proposed Amendments" means the amendments that are proposed to be introduced by Bill C-10, Income Tax Amendments Act, 2006;
• "Proposed Transactions" means the transactions described in Paragraphs 43 to 68, inclusive;
• "public corporation" has the meaning assigned to that term by subsection 89(1);
• "related person" has the meaning assigned by subsection 251(2);
• "restricted financial institution" has the meaning assigned by subsection 248(1);
• "Retained DC Assets" means all assets of DC owned by DC immediately before the Spin-off other than the New Opco Common Shares;
• "Share Option Plan" means the stock-based compensation plan pursuant to which the DC Stock Options were granted as described in paragraph 8;
• "specified financial institution" has the meaning assigned by subsection 248(1);
• "Spinco" means the newly incorporated corporation incorporated for the purposes of completing the Plan of Arrangement as described in Paragraph 38;
• "Spinco Common Shares" means the common shares which Spinco is authorized to issue as described in Paragraph 39;
• "Spinco Redemption Amount" has the meaning assigned by Paragraph 39;
• "Spinco Redemption Note" means the demand promissory note with a principal amount equal to the Aggregate Spinco Redemption Amount issued by Spinco in favour of DC as described in Paragraph 60;
• "Spinco Shares" means the Spinco Common Shares and Spinco Special Shares, collectively;
• "Spinco Special Shares" means the special shares that Spinco is authorized to issue as described in Paragraph 39;
• "Spin-off" means the transfer by DC to Spinco of the New Opco Common Shares as described in Paragraph 54;
• "stated capital" has the meaning assigned by Act 2;
• "Stock Exchange 1" has the meaning assigned by Paragraph 1;
• "Stock Exchange 2" has the meaning assigned by Paragraph 1;
• "taxable Canadian corporation" has the meaning assigned to that term by subsection 89(1);
• "taxable dividend" has the meaning assigned by subsection 89(1); and
• "Transfer Percentage" means the number, expressed as a percentage, which the net fair market value of the New Opco Common Shares represents of the fair market value of all of the net assets of DC, determined immediately before the Spin-off.

FACTS

DC

1. The common shares of XXXXXXXXXX . ("DC") are publicly traded on the XXXXXXXXXX ("Stock Exchange 1") under the symbol XXXXXXXXXX . Prior to XXXXXXXXXX , the common shares of DC were listed on the XXXXXXXXXX ("Stock Exchange 2").

2. DC is a taxable Canadian corporation and a public corporation that is governed by Act 2.

3. DC has a XXXXXXXXXX financial and taxation year end.

4. The registered head office of DC is located at XXXXXXXXXX . The head office of DC is located at XXXXXXXXXX .

5. A predecessor to DC was incorporated on XXXXXXXXXX under Act 2 as XXXXXXXXXX . On XXXXXXXXXX changed its name to XXXXXXXXXX . ("Predecessor XXXXXXXXXX ") which subsequently amalgamated with XXXXXXXXXX under Act 2, effective XXXXXXXXXX with the amalgamated company continuing as DC. XXXXXXXXXX was incorporated under the Company Act (XXXXXXXXXX ) on XXXXXXXXXX under the name XXXXXXXXXX The name of XXXXXXXXXX was changed to XXXXXXXXXX . on XXXXXXXXXX and XXXXXXXXXX was subsequently continued under Act 2, effective XXXXXXXXXX . Pursuant to the amalgamation of Predecessor XXXXXXXXXX and XXXXXXXXXX , each common share of Predecessor XXXXXXXXXX was exchanged for one common share of DC and each XXXXXXXXXX common shares of XXXXXXXXXX were exchanged for one common share of DC.

Share Capital of DC

6. The authorized share capital of DC consists of an unlimited number of common shares without par value (the "DC Common Shares") and an unlimited number of preferred shares.

7. As of XXXXXXXXXX there were XXXXXXXXXX DC Common Shares issued and outstanding and no preferred shares are issued and outstanding.

Stock-Based Compensation Plan

8. DC's stock option plan ("Share Option Plan") provides senior employees, officers and directors an incentive to acquire an equity ownership interest in DC over a period of time ("DC Stock Options"). The Share Option Plan limits the maximum number of DC Stock Options to XXXXXXXXXX DC Common Shares. The maximum term of the DC Stock Options issued is XXXXXXXXXX years with a vesting period, unless the board determines otherwise, of XXXXXXXXXX immediately and XXXXXXXXXX for each of the next XXXXXXXXXX years after grant. The grant price may not be lower than the market price as required by Stock Exchange 1. In addition, a predecessor company of Old Opco had an approved stock option plan. There are XXXXXXXXXX outstanding options under this plan.

9. As of XXXXXXXXXX , there were XXXXXXXXXX DC Stock Options outstanding with XXXXXXXXXX exercisable as of that date. Holders of DC Stock Options may exercise their options from time to time.

Warrants

10. As of XXXXXXXXXX , there were no warrants outstanding or exercisable.

Significant Shareholders

11. XXXXXXXXXX , DC's founder, Chairman and Chief Executive Officer and XXXXXXXXXX ., a company controlled by XXXXXXXXXX , owned approximately XXXXXXXXXX % of the DC Common Shares as of XXXXXXXXXX .

A corporation unrelated to XXXXXXXXXX ., owned approximately XXXXXXXXXX % of the DC Common Shares as of XXXXXXXXXX .

DC is not controlled, whether because of a beneficial interest in one or more trusts or otherwise, by or for the benefit of an individual or a related group of individuals.

12. To the best of the knowledge of the senior officers of DC, as of the date hereof, other than the persons described in the immediately preceding paragraph, no person or related group of persons beneficially owned, directly or indirectly, or had control or direction over, more than ten per cent of the outstanding DC Common Shares.

Business 1 and Business 2

13. DC is a holding company and through its subsidiaries operates businesses of XXXXXXXXXX (Business 1) and XXXXXXXXXX (Business 2).

14. XXXXXXXXXX

15 XXXXXXXXXX

16. DC's principal Business 1 subsidiary is Opco 2. Opco 3 is a subsidiary of Opco 2.

17. XXXXXXXXXX

Subsidiary Corporations

18. DC owns all of the issued and outstanding shares of Old Opco, Opco 2 and Leaseco.

Old Opco

19. XXXXXXXXXX . was formed by DC under Act 3 on XXXXXXXXXX and changed its name to XXXXXXXXXX on XXXXXXXXXX .

On XXXXXXXXXX acquired all of the shares of

XXXXXXXXXX in exchange for XXXXXXXXXX DC Common Shares.

On XXXXXXXXXX acquired all of the shares of XXXXXXXXXX . in exchange for cash and a note payable. On

XXXXXXXXXX . were amalgamated to form XXXXXXXXXX ("Old Opco").

20. On XXXXXXXXXX , Old Opco acquired the business assets of XXXXXXXXXX . in exchange for cash and a note payable.

On XXXXXXXXXX , Old Opco acquired the business assets of XXXXXXXXXX . in exchange for cash and a note payable.

21. Old Opco operates Business 2 and XXXXXXXXXX

22. As of XXXXXXXXXX , Old Opco had approximately $XXXXXXXXXX of non-capital losses carried forward.

23. As of XXXXXXXXXX Old Opco had an intercompany balance of approximately

$XXXXXXXXXX owing to DC (the "Old Opco Receivable").

Leaseco

24. XXXXXXXXXX . ("Leaseco") was formed under Act 3 in XXXXXXXXXX . Leaseco holds a majority of the property leases for both Business 1 and Business 2.

Opco 2

25. Opco 2 and its subsidiaries operate Business 1.

26. Opco 2 was formed under Act 3 on XXXXXXXXXX under the name XXXXXXXXXX ., and changed its name to XXXXXXXXXX . on XXXXXXXXXX .

27. On XXXXXXXXXX , Opco 2 acquired the business assets of XXXXXXXXXX for consideration of XXXXXXXXXX DC Common Shares and $XXXXXXXXXX cash. The operations of XXXXXXXXXX are included in Business 1.

28. On XXXXXXXXXX , Opco 2 acquired the business assets of a XXXXXXXXXX for cash consideration of $XXXXXXXXXX .

On XXXXXXXXXX , Opco 2 acquired the business assets of XXXXXXXXXX for cash consideration of approximately $XXXXXXXXXX . The operations of XXXXXXXXXX are included in Business 1.

29. On XXXXXXXXXX , Opco 2 acquired all the business assets of XXXXXXXXXX for cash consideration of approximately $XXXXXXXXXX . XXXXXXXXXX The operations of XXXXXXXXXX are included in Business 1.

30. Opco 2 owns all of the issued and outstanding shares of Opco 3, XXXXXXXXXX ("Foreignco"), XXXXXXXXXX . (operating as "XXXXXXXXXX ") ("Opco 4"), and XXXXXXXXXX . ("Opco 5").

Foreignco

31. Foreignco is an XXXXXXXXXX company and is being operated at the sole risk, cost and principal benefit of an unrelated third party. Foreignco was registered under the XXXXXXXXXX

Opco 4

32. Opco 4 was formed under Act 3 on XXXXXXXXXX . Opco 4 provides XXXXXXXXXX

Opco 3

33. Opco 3 was formed under Act 3 on XXXXXXXXXX .

34. On XXXXXXXXXX , Opco 3 acquired the business assets and assumed certain liabilities of the XXXXXXXXXX group of companies for cash consideration of approximately $XXXXXXXXXX . Opco 3 has XXXXXXXXXX across Canada, the majority of which are in XXXXXXXXXX . The operations of Opco 3 are included in Business 1.

Opco 5

35. Opco 5 was formed under the Canada Business Corporations Act on XXXXXXXXXX .

36. On XXXXXXXXXX , Opco 2 acquired all the outstanding shares of Opco 5 for cash consideration of approximately $XXXXXXXXXX . Opco 5 operates in the XXXXXXXXXX business.

Inter-company dividends paid

37. On XXXXXXXXXX , Opco 3 declared and paid dividends to Opco 2 and

Opco 2 declared and paid dividends to DC.

The result of these inter-corporate dividends was to consolidate inter-corporate debt owing by various subsidiaries at the DC level.

Incorporation of Spinco

38. A new corporation ("Spinco") has been incorporated under the provisions of

Act 2. Prior to the completion of the Proposed Transactions, Spinco will not have any assets and will have no liabilities. No shares of Spinco were issued on its incorporation and no shares will be issued prior to the issuance of the Spinco Common Shares described in Paragraph 51. As further described below, the Spinco Common Shares will be listed on Stock Exchange 2. Spinco will, pursuant to the post-amble in the definition of "public corporation" in subsection 89(1), elect in its return of income for its first taxation year to have been a public corporation from the beginning of such year.

39. The authorized capital of Spinco includes the following classes of shares:

(a) common shares ("Spinco Common Shares"), each of which is a fully participating voting common share with the holder thereof being entitled to one vote at each meeting of the shareholders of Spinco; and

(b) special shares ("Spinco Special Shares") having the following attributes:

(i) each Spinco Special Share is redeemable, subject to applicable law, at any time at the option of Spinco for the amount equal to the quotient (such quotient being the "Spinco Redemption Amount") obtained by dividing the fair market value of the property transferred to Spinco as consideration for the Spinco Special Shares, being the aggregate fair market value of the New Opco Common Shares, determined immediately before the Spin-off, by the number of Spinco Special Shares issued as consideration for the New Opco Common Shares,

(ii) each Spinco Special Share is retractable, subject to applicable law, at any time at the option of the holder thereof at the Spinco Redemption Amount,

(iii) the holder of each Spinco Special Share is entitled to such non-cumulative cash dividends as are declared by the directors of Spinco from time to time, which dividends need not also be declared on any other class of shares of Spinco,

(iv) the payment of dividends on other classes of shares of Spinco is restricted so that no such dividend may be paid on any other class of shares of Spinco if the realizable value of the net assets of Spinco after payment of the dividend would be less than the product (such product being the "Aggregate Spinco Redemption Amount") obtained by multiplying the number of then outstanding Spinco Special Shares by the Spinco Redemption Amount,

(v) the holder of each Spinco Special Share is entitled, upon the liquidation, dissolution or winding-up of Spinco, to a payment in priority to all other classes of shares of Spinco of an amount per Spinco Special Share equal to the Spinco Redemption Amount to the extent of the amount or value of property available under applicable law for payment to the shareholders of Spinco upon such liquidation, dissolution or winding-up, but will not be entitled to any additional amount,

(vi) the holder of each Spinco Special Share is not entitled to vote at any meeting of the shareholders of Spinco, other than as provided under applicable law, and

(vii) for the purpose of subsection 191(4) of the Act, each Spinco Special Share will, at the time of issue, have specified an amount in respect thereof and the amount to be so specified in respect of each Spinco Special Share will

A) be pursuant to a resolution of the directors of Spinco,

B) be expressed as a dollar amount,

C) not be determined by a formula, and

D) not exceed the fair market value of the property received by Spinco in consideration for its issue.

Shareholder and Court Approval

40. DC and Spinco entered into an agreement to implement the Plan of Arrangement pursuant to which DC will transfer the New Opco Common Shares to Spinco as described in paragraph 54.

41. A management information circular, dated XXXXXXXXXX , containing prospectus level disclosure, which describes the Proposed Transactions (including the Plan of Arrangement) was prepared and distributed to DC Shareholders. At an annual and special meeting of DC shareholders, on XXXXXXXXXX , the Plan of Arrangement was approved. Over XXXXXXXXXX % of the shares voted were voted in favour of the Plan of Arrangement.

Dissenting Shareholders

42. Each DC Shareholder was entitled to dissent from the Plan of Arrangement pursuant to the provisions of the Plan of Arrangement. For the purposes of the transactions which occur pursuant to, and in accordance with, the Plan of Arrangement, any Dissenting Shareholder who ultimately was entitled to be paid the fair market value of the DC Common Shares held by the Dissenting Shareholder would have been deemed, pursuant to the Plan of Arrangement, to have transferred such DC Common Shares to DC and such DC Common Shares would have been deemed to have been cancelled by DC on the Effective Date. However, none of DC's shareholders exercised dissent rights.

PROPOSED TRANSACTIONS

43. Subject to, among other things, final court approval, the Proposed Transactions in paragraphs 47 to 64 generally will be undertaken pursuant to, and in accordance with, the Plan of Arrangement. With the exception of the filing of elections under the Act and the listing of the Spinco Common Shares on Stock Exchange 2, it is contemplated that the Proposed Transactions described in Paragraphs 46 to 64, inclusive, will occur pursuant to the Plan of Arrangement and will be designated in the Plan of Arrangement to occur on the Effective Date in the order set out in Paragraphs 47 to 64, inclusive.

Transactions to be implemented prior to the Plan of Arrangement

44. Old Opco formed a new corporation ("New Opco") under Act 2. No shares of New Opco were issued on its incorporation. Prior to the completion of the Proposed Transactions, New Opco will not have any assets and will have no liabilities. The authorized share capital of New Opco will consist of an unlimited number of common shares (the "New Opco Common Shares")

45. Old Opco will sell all or substantially all of its assets to New Opco at fair market value. As consideration, New Opco will assume certain liabilities and will issue New Opco Common Shares to Old Opco. It is expected that an election under subsection 85(1) will not be filed for this transfer.

46. Old Opco will transfer all of the New Opco Common Shares to DC, at fair market value, as partial repayment of the Old Opco Receivable.

Transactions to be implemented pursuant to the Plan of Arrangement

DC Capital Reorganization

47. The articles of DC will be amended to create the following new classes of shares:

(a) common shares ("DC New Common Shares"), each of which will be a fully participating voting common share with the holder thereof entitled to one vote at each meeting of the shareholders of DC. The terms of the DC New Common Shares will be slightly different than the DC Common Shares, but otherwise will have attributes the same as the DC Common Shares; and
(b) special shares ("DC Special Shares") with the following attributes

(i) each DC Special Share will be redeemable, subject to applicable law, at any time at the option of DC at an amount equal to the amount (such amount being the "DC Redemption Amount") obtained by multiplying the aggregate fair market value of the outstanding DC Common Shares immediately prior to the Capital Reorganization by the Transfer Percentage and then dividing such product by the number of DC Special Shares issued on the Capital Reorganization,
(ii) each DC Special Share will be retractable, subject to applicable law, at any time at the option of the holder thereof at the DC Redemption Amount,
(iii) the holder of each DC Special Share will be entitled to such non-cumulative cash dividends as are declared by the directors of DC from time to time, which dividends need not also be declared on any other class of shares of DC,
(iv) the payment of dividends on other classes of shares of DC will be restricted so that no such dividend may be paid on any other class of shares of DC if the resulting realizable value of the net assets of DC after payment of the dividend would be less than the product (such product being the "Aggregate DC Redemption Amount") obtained by multiplying the number of then outstanding DC Special Shares by the DC Redemption Amount,
(v) the holder of each DC Special Share will be entitled, upon the liquidation, dissolution or winding-up of DC, to a payment in priority to all other classes of shares of DC of an amount per DC Special Share equal to the DC Redemption Amount to the extent of the amount or value of property available under applicable law for payment to shareholders of DC upon such liquidation, dissolution or winding-up, but will not be entitled to any additional amount, and
(vi) the holder of each DC Special Share will not be entitled to vote at any meeting of the shareholders of DC, other than as provided under applicable law, and
(vii) for the purpose of subsection 191(4) of the Act, each DC Special Share will, at the time of issue, have specified an amount in respect thereof and the amount to be specified in respect of each DC Special Share will

B) be expressed as a dollar amount,
C) not be determined by a formula, and
D) not exceed the fair market value of the property received by XXXXXXXXXX in consideration for its issue.

48. Each Participant will exchange each of their DC Common Shares for one DC New Common Share and one DC Special Share (the "Capital Reorganization"). No fractional DC Special Shares will be issued and no additional consideration will be received by a Participant in lieu of a fraction of a DC Special Share. Each Participant will receive that number of DC Special Shares rounded down to the nearest whole number. The DC Common Shares so exchanged will be cancelled.

49. The aggregate addition to the stated capital in respect of the DC New Common Shares and the DC Special Shares issued by DC on the Capital Reorganization described in Paragraph 48 will be equal to the aggregate stated capital of the DC Common Shares, immediately before the Capital Reorganization. Such aggregate stated capital will be apportioned between the DC New Common Shares and the DC Special Shares in proportion to the relative aggregate fair market values of such shares.

Transfer of DC Special Shares to Spinco

50. It is contemplated that Stock Exchange 2 will have conditionally listed the Spinco Common Shares to be issued pursuant to, and in accordance with, the Plan of Arrangement prior to the Effective Date, subject to Spinco fulfilling the usual requirements of Stock Exchange 2. It is anticipated that the listing of the Spinco Common Shares will become effective on the first business day following their issuance.

51. Each Participant will transfer to Spinco the DC Special Shares owned by the Participant and, in full consideration therefor, Spinco will issue the same number of Spinco Common Shares to the Participant. The share certificate representing the DC Special Shares which otherwise would be delivered to the Participant will be delivered to Spinco.

Pursuant to the Plan of Arrangement, the addition to the stated capital of Spinco in respect of the issue of the Spinco Common Shares will equal the fair market value of the transferred DC Special Shares.

52. The fair market value, immediately before the Spin-off described in Paragraph 54, of each Participant's shares of the capital stock of Spinco will be equal to the amount determined by the formula: (A × B/C) + D as set out in subparagraph (b)(iii) of the definition "permitted exchange" in subsection 55(1).

Transfer of New Opco Common Shares to Spinco

53. Immediately before the transfer of property described in Paragraph 54 below, the fair market value of the property of DC will be determined as though there is only one type of property, as contemplated by subsection 55(3.02), on a net fair market value basis. For greater certainty:

(a) any tax accounts, such as the balance of any non-capital losses, net capital losses and tax pools, will not be considered to be property for the purposes of determining the net fair market value of the property of DC as described herein, and
(b) the contingent obligations of DC in respect of the DC Stock Options will not be considered a liability of DC for these purposes.

54. DC will transfer to Spinco (the "Spin-off") all of the New Opco Common Shares at their fair market value determined immediately before the Spin-off.

55. Immediately after the Spin-off described in Paragraph 54, the aggregate net fair market value of:

(a) the New Opco Common Shares acquired by Spinco on the Spin-off will approximate the proportion of the net fair market value of all of the property of DC determined immediately before the Spin-off, that

(i) the aggregate fair market value of the DC Special Shares owned by Spinco immediately before the Spin-off, is of
(ii) the aggregate fair market value of all of the outstanding DC Shares immediately before the Spin-off, and

(b) the Retained DC Assets owned by DC will approximate the proportion of the net fair market value of all of the property of DC determined immediately before the Spin-off, that

(iii) the aggregate fair market value of the DC New Common Shares owned by the Participants immediately before the Spin-off, is of
(iv) the aggregate fair market value of all of the outstanding DC Shares immediately before the Spin-off.

56. As consideration for the Spin-off of the New Opco Common Shares to Spinco, as described in Paragraph 54, Spinco will issue Spinco Special Shares to DC which will have an aggregate fair market value and redemption amount equal to the fair market value, at the time of the Spin-off, of the New Opco Common Shares, being an amount equal to the Aggregate Spinco Redemption Amount.

57. DC and Spinco will jointly elect, in prescribed form and within the time determined under subsection 85(6) of the Act, for the provisions of subsection 85(1) to apply to the transfer of the New Opco Common Shares to Spinco on the Spin-off. The agreed amount will be the lesser of

(a) the adjusted cost base to DC of the New Opco Common Shares, and
(b) the fair market value of the New Opco Common Shares at the time of the Spin-off.

58. Pursuant to the Plan of Arrangement, the addition to the stated capital of the Spinco Special Shares in respect of the issue of the Spinco Special Shares to DC, as described in Paragraph 56, will be equal to the fair market value of the New Opco Common Shares.

Cross-Redemption

59. DC will reduce the aggregate stated capital of the DC Special Shares to $XXXXXXXXXX . No amount will be paid to Spinco on this reduction of stated capital.

60. Spinco will redeem from DC all of the outstanding Spinco Special Shares for an amount equal to the Aggregate Spinco Redemption Amount and will issue to DC in consideration therefor a non-interest-bearing demand promissory note having a fair market value and principal amount equal to the Aggregate Spinco Redemption Amount (the "Spinco Redemption Note"). DC will accept the Spinco Redemption Note as full and absolute payment of the Aggregate Spinco Redemption Amount with the risk of the note being dishonoured.

61. DC will redeem from Spinco all of the outstanding DC Special Shares for an amount equal to their aggregate fair market value, being the Aggregate DC Redemption Amount and will issue to Spinco in consideration therefor a non-interest-bearing demand promissory note having a fair market value and principal amount equal to the Aggregate DC Redemption Amount (the "DC Redemption Note"). Spinco will accept the DC Redemption Note as full and absolute payment of the Aggregate DC Redemption Amount with the risk of the note being dishonoured.

Set-Off

62. The Spinco Redemption Note will be set off against the DC Redemption Note in full satisfaction of the respective obligations under each note and the notes will be cancelled.

Amendment to Articles of DC

63. The articles of DC will be amended by

(a) changing DC's name to XXXXXXXXXX .;
(b) decreasing the authorized share capital of DC by deleting the authorized but unissued DC Special Shares and the DC Common shares;
(c) redesignating the authorized and issued DC New Common Shares as common shares;
(d) declaring that the authorized capital of DC, after giving effect to the forgoing, shall consist of an unlimited number of common shares and an unlimited number of preferred shares, issuable in series; and
(e) deleting the existing share conditions and providing that the rights, privileges, restrictions and conditions attaching to the common shares and preferred shares shall be as set out in Schedule C of the XXXXXXXXXX Plan of Arrangement in the Management Information Circular.

Amendment to Articles of Spinco

64. The articles of Spinco will be amended by

(a) decreasing the authorized capital of Spinco by deleting the authorized but unissued Spinco Special Shares;
(b) declaring that the authorized capital of Spinco, after giving effect to the forgoing, shall consist of an unlimited number of common shares;
(c) deleting the existing share conditions and providing that the rights, privileges, restrictions and conditions attaching to the common shares shall be as set out in Act 2.

Transactions to be implemented subsequent to the Plan of Arrangement

Stock Option Plan

65. The DC Stock Options will be repriced (i.e. the amount payable by a holder to acquire DC Common Shares will be reduced) to reflect the transactions described above whereby Business 2 has been removed from DC.

The DC Stock Options held by employees who will transfer employment to Spinco or New Opco will expire in accordance with the terms of the Share Option Plan.

Amalgamation of Opco 2 and Old Opco

66. Old Opco will amalgamate with Opco 2.

Restatement of the Articles of DC and Spinco

67. The articles of DC will be restated to provide for a share capital consisting of an unlimited number of common shares and preferred shares. The restatement allows for all prior amendments to be consolidated into one document.

68. The articles of Spinco will be restated to provide for a share capital consisting of an unlimited number of common shares. The restatement allows for all prior amendments to be consolidated into one document.

ADDITIONAL INFORMATION

69. None of the shares of DC or Spinco is, or will be at any time during the implementation of the Proposed Transactions:

(a) the subject of any undertaking that is referred to in subsection 112(2.2) as a "guarantee agreement";
(b) the subject of a dividend rental arrangement referred to in subsection 112(2.3), as that term is defined in subsection 248(1);
(c) the subject of any secured undertaking of the type described in paragraph 112(2.4)(a); or
(d) issued for consideration that is or includes:

(i) an obligation of the type described in subparagraph 112(2.4)(b)(i); or
(ii) any right of the type described in subparagraph 112(2.4)(b)(ii).

70. No property has or will become property of either DC or any corporation controlled by it in contemplation of and before the Spin-off, except as described herein, and no liabilities have been, or will be, incurred or discharged by DC or any corporation controlled by DC in contemplation of the Spin-off except as described herein.

71. Except as specifically outlined herein, there is no expectation or intention of DC, Spinco or any corporation controlled by DC or Spinco to dispose of any property in the foreseeable future, other than in the ordinary course of business.

72. None of DC, Spinco or any corporation that is a related person of either of them is, or will be, at any time during the series of transactions described herein

(a) a corporation described in any of paragraphs (a) to (f) of the definition "financial intermediary corporation" in subsection 191(1), or
(b) a specified financial institution or a restricted financial institution.

73. Each of DC and Spinco will have the financial capacity to honour, upon presentation for payment, the amount payable under the note issued by it as a part of the Proposed Transactions.

74. Spinco and DC will enter into an Interim Services Agreement pursuant to which DC will provide Spinco, on an interim transitional basis, various services such as administrative and technological services.

75. If the Arrangement is completed, Spinco proposes to introduce a new stock option plan that reflects the current policies of Stock Exchange 2, which permit issuers to implement a stock option plan using one of two methods. XXXXXXXXXX proposes to introduce a Rolling Plan that would govern grants of stock options made following receipt of Shareholder approval and completion of the Arrangement.

PURPOSES OF THE PROPOSED TRANSACTIONS

76. DC believes that the "Spin-off" of Business 2 by the transfer of the New Opco Common Shares to Spinco is in the best interests of the DC Shareholders. DC further believes that the separation of Business 2 from Business 1 will enhance the ability of each of DC and Spinco to pursue independent corporate objectives and strategies and will maximize value to the Shareholders.

77. Old Opco has approximately $XXXXXXXXXX in non-capital losses carried forward which arose primarily in XXXXXXXXXX and XXXXXXXXXX . Spinning off New Opco, rather than Old Opco, allows the existing corporate group to make use of the operating losses.

RULINGS

Provided that the preceding statements constitute a complete and accurate disclosure of: (i) all the relevant facts, and (ii) the proposed transactions and their purposes, our rulings are as follows:

DC Capital Reorganization

A. The provisions of subsection 86(1) will apply and the provisions of subsection 86(2) will not apply to DC's Capital Reorganization pursuant to which each Participant's DC Common Shares will be exchanged for DC New Common Shares and DC Special Shares, as described in Paragraph 48, provided that

(a) the Participant holds the DC Common Shares as capital property, and
(b) the Participant and DC do not file an election under subsection 85(1) in respect of the Capital Reorganization,
such that
(c) the cost of the DC New Common Shares and DC Special Shares received on the Capital Reorganization by the Participant will be deemed by paragraph 86(1)(b) to be an amount equal to that portion of the aggregate adjusted cost base of the DC Common Shares to the Participant immediately before the Capital Reorganization that the fair market value of the DC New Common Shares or the DC Special Shares, as the case may be, received by the Participant for the DC Common Shares of the Participant, immediately after the Capital Reorganization, is of the fair market value of all of the DC New Common Shares and DC Special Shares received by the Participant for the DC Common Shares of the Participant,
(d) pursuant to paragraph 86(1)(c), the Participant will be deemed to have disposed of the DC Common Shares of the Participant for aggregate proceeds of disposition equal to the aggregate cost to the Participant of the DC New Common Shares and DC Special Shares received by the Participant as determined in (c) above,
(e) pursuant to subsection 86(2.1) the aggregate paid-up capital of the DC New Common Shares and the DC Special Shares will be equal to the paid-up capital of the DC Common shares which were exchanged for the DC New Common Shares and the DC Special Shares, and
(f) for the purposes of section 116, the DC Common Shares owned by a Participant who is not a resident of Canada at the time of the Capital Reorganization will be excluded property by virtue of paragraph 116(6)(b).

Transfer of DC Special Shares to Spinco

B. Provided that a Participant who, immediately before the exchange of DC Special Shares for the same number of Spinco Common Shares, as described in Paragraph 51,

(a) holds the DC Special Shares as capital property,
(b) deals at arm's length with Spinco immediately before the exchange,
(c) does not file an election under subsection 85(1) with respect to the exchange, and
(d) does not include any portion of the gain or loss otherwise determined in computing the income of the Participant for the year in which the exchange occurs,
and further provided that, immediately after such exchange,
(e) neither the Participant nor any person with whom the Participant does not deal at arm's length, nor the Participant together with any other person or persons with whom the Participant does not deal at arm's length, will

(i) control Spinco, or
(ii) beneficially own Spinco Shares having a fair market value of more than 50 per cent of the fair market value of all of the then outstanding Spinco Shares,

then, pursuant to paragraph 85.1(1)(a), the Participant will be deemed:

(f) to have disposed of the DC Special Shares of the Participant for proceeds of disposition equal to the adjusted cost base to the Participant of such DC Special Shares immediately before the exchange, and
(g) to have acquired the Spinco Common Shares of the Participant at a cost to the Participant equal to the adjusted cost base to the Participant of such DC Special Shares immediately before the exchange.

C. The cost to Spinco of each DC Special Share acquired from each Participant as described in Paragraph 51, will be deemed pursuant to paragraph 85.1(1)(b) to be the lesser of the fair market value thereof and the paid-up capital thereof, in both cases determined immediately before the exchange of the DC Special Shares of the Participant for Spinco Common Shares as described in Paragraph 51.

Transfer of New Opco Common Shares to Spinco

D. Provided that the requisite joint elections are filed in prescribed form and within the prescribed time period, the provisions of subsection 85(1) will apply to the Spin-off by DC to Spinco, as described in Paragraph 54, of the New Opco Common Shares, such that the agreed amount, as described in Paragraph 57, in respect of such transfer will be deemed to be proceeds of disposition and Spinco's cost thereof pursuant to paragraph 85(1)(a).

E. Pursuant to subsection 85(2.1), the paid-up capital of the Spinco Special Shares will be equal to the agreed amount, referred to in paragraph 57 and Ruling D.

F. The paid-up capital of the Spinco Common Shares issued to holders of DC Special Shares in exchange therefor, as described in Paragraph 51, will be equal to the paid-up capital of the DC Special Shares exchanged, pursuant to subsection 85.1(2.1)

Cross-Redemption and Set-Off

G. On the reduction of the stated capital described in Paragraph 59, DC will not be deemed to have paid, and Spinco will not be deemed to have received, a dividend pursuant to either of subsections 84(4) and (4.1) as no amount will be paid by DC on such reduction of stated capital.

H. Subsection 84(3) will apply

(a) on the redemption, as described in Paragraph 60, of the Spinco Special Shares owned by DC, to deem Spinco to have paid, and DC to have received, and
(b) on the redemption, as described in Paragraph 61, of the DC Special Shares owned by Spinco, to deem DC to have paid, and Spinco to have received,
a dividend on the Spinco Special Shares and the DC Special Shares, respectively, equal to the amount, if any, by which the aggregate amount paid upon such redemption exceeds the aggregate paid-up capital in respect of the Spinco Special Shares and the DC Special Shares, as the case may be, immediately before such redemption, and any such dividend
(c) will be included, pursuant to subsection 82(1) and paragraph 12(1)(j), in computing the income of DC and Spinco, as the case may be,
(d) will be deductible pursuant to subsection 112(1) in computing the taxable income of DC and Spinco, as the case may be,
(e) will not be a dividend to which any of subsections 112(2.1), (2.2), (2.3) or (2.4) will apply,
(f) will be excluded, pursuant to paragraph (j) of the definition of "proceeds of disposition" in section 54, in determining the proceeds of disposition to DC and Spinco, as the case may be, of the Spinco Special Shares or DC Special Shares so redeemed,
(g) will not be subject to tax under Parts IV.1 or VI.1, but only to the extent that the amount paid by Spinco or DC, as the case may be, on the redemption of the Spinco Special Shares or the DC Special Shares does not exceed the amount specified in respect of those shares for the purposes of subsection 191(4), and
(h) will not be subject to tax under Part IV.

I. Provided that:

(a) there is not a distribution by DC to a corporation that is not an Acquiror before the day that is three years after the Effective Date; and
(b) there is not a distribution by Spinco before the day that is three years after the Effective Date;
(c) as part of the series of transactions or events that includes the Proposed Transactions, there is not:

(i) a disposition of property in the circumstances described in subparagraph 55(3.1)(b)(i);
(ii) an acquisition of control in the circumstances described in subparagraph 55(3.1)(b)(ii);
(iii) an acquisition of any shares of DC in contemplation of the Spin-off in the circumstances described in subparagraph 55(3.1)(b)(iii); or
(iv) an acquisition of property in the circumstances described in paragraphs 55(3.1)(c) or (d),

which has not been described in Paragraphs 43 to 68, then by virtue of paragraph 55(3)(b), subsection 55(2) will not apply to the taxable dividends referred to in Ruling H above and for greater certainty, subsection 55(3.1) will not apply to deny the exemption under paragraph 55(3)(b).

J. The cost to Spinco of the DC Redemption Note and the cost to DC of the Spinco Redemption Note will, upon the issue thereof, be equal to the principal amount of the particular note and accordingly, no amount will be included in the income of:

(a) Spinco upon the repayment of the principal amount of the DC Redemption Note as described in Paragraph 62, or
(b) DC upon the repayment of the principal amount of the Spinco Redemption Note as described in Paragraph 62.

K. The repayment of each of the DC Redemption Note held by Spinco and of the Spinco Redemption Note held by DC as described in Paragraph 62 will not, in and of itself, give rise to a "forgiven amount" within the meaning assigned by subsections 80(1) or 80.01(1);

L. Provided that the DC Common Shares constitute capital property to a Participant prior to the commencement of the Proposed Transactions, the Proposed Transactions will not, in and by themselves, cause the DC New Common Shares, the DC Special Shares or the Spinco Common Shares to be received by the Participant as a result of the Proposed Transactions not to be capital property of the Participant.

M. The Proposed Transactions, in and of themselves, will not result in the application of subsections 15(1), 56(2), or 246(1).

N. Provided that:

(a) a Participant is a holder of DC Common Shares that were acquired through the exercise of the Participant's stock options granted under the DC Share Option Plan,

(b) the Participant made an election under subsection 7(8) with respect to such DC Common Shares, and

(c) the conditions of paragraph 7(1.5)(c) are satisfied with respect to the particular share exchange referred to in (d) and (e) below,

the provisions of subsection 7(1.5) will apply, for the purposes of section 7 and paragraph 110(1)(d), to the exchange of

(d) the Participant's DC Common Shares for DC New Common Shares and DC Special Shares as described in Paragraph 48, and

(e) the Participant's DC Special Shares for Spinco Common Shares as described in Paragraph 51.

O. The DC New Common Shares, DC Special Shares and Spinco Common Shares will be a "qualified investment":

(a) for a deferred profit sharing plan by virtue of paragraph (h) of the definition "qualified investment" in section 204;

(b) for a registered retirement savings plan by virtue of paragraph (d) of the definition "qualified investment" in subsection 146(1);

(c) for a registered retirement income fund by virtue of paragraph (c) of the definition "qualified investment" in subsection 146.3(1); and

(d) for a registered education savings plan by virtue of paragraph (e) of the definition "qualified investment" in subsection 146.1(1)

P. Subject to Opinion B, below, the repricing of the DC Stock Options, as described in Paragraph 65, will not, in itself, result in a disposition by a holder of DC Stock Options of rights under the Stock Option Plan or the disposition of DC Stock Options for the purposes of paragraph 7(1)(b) or under the definition of "disposition" in subsection 248(1).

Q. Subsection 245(2) will not be applied to the Proposed Transactions, in and by themselves, to redetermine the tax consequences confirmed in the rulings given above.

OPINIONS

Provided that the preceding statements constitute a complete and accurate disclosure of: (i) all the relevant facts, and (ii) the proposed transactions and their purposes:

A. Provided that the proposed amendment to the Act to introduce subsection 55(6) is enacted substantially in the form contained in the Proposed Amendments, and further provided that, immediately before the exchange described in paragraph 48, a DC Common Share is not taxable Canadian property to its holder, then the DC Special Shares will be deemed, for the purposes of subsection 116(6) and the definition "taxable Canadian property" in subsection 248(1) to be listed on a prescribed stock exchange.

B. Provided that the proposed amendments to the Act to introduce subsections 110(1.7) and (1.8) are enacted substantially in the form contained in the Proposed Amendments, and further provided that the conditions in proposed subsection

110 (1.8) are met in respect of the repricing of the DC Stock Options described in Paragraph 65 at the time of the repricing, then:

(a) the rights that a holder of DC Stock Options had immediately before that time (the "old rights") will be deemed to have been disposed of by the holder immediately before that time;

(b) the rights that the holder of DC Stock Options has under the agreement as a result of the repricing (the "new rights") will be deemed to be acquired by the holder at that time; and

(c) the holder will be deemed to receive the new rights as consideration for the disposition of the old rights.

The foregoing opinions are not rulings and, as noted in Information Circular 70-6R5, are not binding on the CRA.

OTHER COMMENTS

A. Nothing in this letter should be construed as implying that the CRA has confirmed, reviewed or has made any determination in respect of:

(a) the amount of the paid-up capital of any share or the adjusted cost base or fair market value of any property referred to herein;

(b) the characterization of any property (i.e. as capital property, inventory, etc) described herein to the holder thereof prior to the Proposed Transactions or the characterization of any property following the Proposed Transactions, other than as specifically provided herein.

(c) the amount of any non-capital loss or any other amount of any person referred to herein; or

(d) any other tax consequence relating to the facts, Proposed Transactions or any transaction or event taking place either prior to the Proposed Transactions or subsequent to the Proposed Transactions, whether described in this letter or not, other than those specifically described in the rulings or opinions given above.

B. Without restricting the generality of the foregoing comments, nothing in this letter should be construed as implying that the CRA has confirmed, reviewed or has made any determination in respect of whether any transaction occurring after the Proposed Transactions will be considered to occur as part of the same series of transactions for the purposes of subsection 55(3.1). Whether any such transaction occurs as part of the same series of transactions will be based on all the circumstances of the transaction, including, for example, whether any party to such transaction was involved in the offer for, or the expressions of interest in, the assets of Business 2, which were referred to in DC's News Release dated

XXXXXXXXXX .

Yours truly,

Manager
Corporate Reorganizations Section I
Reorganizations and Resources Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch