7 July 2008 Income Tax Severed Letter 2008-0288701R3 - Supplemental to ruling 2007-023750

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.

SUMMARY: Supplemental to ruling 2007-023750—ITA-55(3.1)—Amendments to advance tax rulingissued in 2008 due to changes to the proposed transactions including changes to a share consolidation ratio, addition of an apportionment of the distributing corporation's credit facility to Spinco/Amalco and to advise that a normal course issuer bid authorization that will be obtained for Amalco.

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: Changes to the proposed transactions described in the advance income tax ruling 2007-023750 [] to add greater detail to the described transactions, to change a share consolidation ratio, to inform of an apportionment of the distributing corporation's credit facility to Spinco / Amalco and to inform of a normal course issuer bid authorization that will be obtained for Amalco.

POSITION: The rulings given in 2007-023750 [] will remain the same subject to limited clean-up changes that are being made.

REASONS: Changes to the proposed transactions do not alter the rulings previously given.

XXXXXXXXXX 2008-028870

XXXXXXXXXX, 2008

Dear XXXXXXXXXX:

Re: XXXXXXXXXX

Supplemental Advance Income Tax Ruling

This is in reply to your letter of XXXXXXXXXX in which you requested confirmation that certain changes to the advance income tax ruling we issued on XXXXXXXXXX, 2008 to the above-noted corporations (our file No. 2007-023750 [], hereinafter referred to as the “Ruling”) would not affect the rulings and the opinion given therein.

A reference herein to a “Paragraph” or to “Paragraphs”, as the case may be, is to a paragraph or to paragraphs in the Ruling. Unless otherwise defined herein, all capitalized terms are references to those terms defined in the Ruling.

As a result of your letter, the following changes to the Ruling are made:
• 1. Eco recently incorporated a new subsidiary. Accordingly, the following definition is added in the Definitions section:

  “Fco” means XXXXXXXXXX., a corporation existing under the laws of XXXXXXXXXX;

• 2. At the end of Paragraph 9, the following sentence is added:

  Fco, a subsidiary wholly-owned corporation of Eco, is also a controlled foreign affiliate of DC.

• 3. In Paragraph 10(b) and in the concluding sentence of Paragraph 10 replace XXXXXXXXXX
• 4. In Paragraph 11 replace XXXXXXXXXX
• 5. In Paragraph 12 replace XXXXXXXXXX
• 6. In Paragraph 18, the last sentence is changed to read as follows:

  As a result, Bco will own all of DC's XXXXXXXXXX business, including the parts of that business carried on through Cco and Holdco (the latter, through Dco, Eco and Fco).

• 7. XXXXXXXXXX. Accordingly, the first three sentences in Paragraph 24 are changed to read as follows:

  Each Participant will exchange each of the Participant's DC Common Shares for consideration consisting of XXXXXXXXXX DC New Common Share and XXXXXXXXXX DC Butterfly Share. Each Participant will receive an aggregate number of DC New Common Shares and DC Butterfly Shares rounded down to the nearest whole number. Fractional shares will not be issued to any Participant.

• 8. Add the following sentence at the beginning of the Paragraph 26:

  The Plan of Arrangement will amend the DC Stock Option Plan specifically to take into account the stock option exchanges described in this paragraph, and will also cause the Spinco Stock Option plan to come into force.

• 9. Due to the change in the XXXXXXXXXX stock consolidation described in paragraph 7 above, replace Paragraph 26(b) with the following:

  the original exercise price of a holder's DC Stock Options will be allocated to the New DC Stock Options and the Spinco Stock Options acquired by such holder on the exchange, taking into account the XXXXXXXXXX of Spinco described in Paragraph 24, such that an amount equal to the Butterfly Proportion of such original exercise price will be payable to Spinco for each XXXXXXXXXX Spinco Common Share acquired under the Spinco Stock Options, and an amount equal to the remainder of the original exercise price will be payable to DC for each whole DC New Common Share acquired under the New DC Stock Options;

• 10. Due to the change in the XXXXXXXXXX stock consolidation described in paragraph 7 above, replace Paragraph 26(c) with the following:

  the other material financial terms and conditions of the New DC Stock Options and the Spinco Stock Options will parallel those of the DC Stock Options, taking into account the adjustments to reflect the XXXXXXXXXX of Spinco described in Paragraph 24, and in particular, the number of New DC Common Shares and Spinco Common Shares to be issued in each case will be such that, for each DC Common Share that the holder would have been entitled to acquire under the DC Stock Option, the holder will become entitled to acquire XXXXXXXXXX New DC Common Share under the corresponding New DC Stock Options and XXXXXXXXXX Spinco Common Share under the corresponding Spinco Stock Options, provided that, if the aggregate number of Spinco Common Shares to which a holder would be entitled under the holder's Spinco Stock Options is a fraction, then the aggregate number of Spinco Common Shares to which a holder is entitled will be rounded down to the nearest whole number of Spinco Common Shares;

• 11. Due to the change in the XXXXXXXXXX stock consolidation described in paragraph 7 above in the first sentence of Paragraph 27 the words “adjusted to reflect the difference” will be changed to “increased to reflect the reduction” and the second sentence will be deleted in its entirety To accommodate these and minor other changes, the paragraph will be changed to read as follows:

  27. Pursuant to the terms of the DC DSU Plan, the number of the DC DSUs recorded in the account of each participant in the DC DSU Plan will be proportionately increased to reflect the reduction in the fair market value of a DC Common Share that will arise solely as a result of the Proposed Transactions. The difference in the fair market value of a DC Common Share will be determined by comparing the weighted average trading price of a DC New Common Share on the Stock Exchange for a five day trading period beginning on the first trading day immediately after the Effective Date on which the DC New Common Shares trade on an “ex-distribution” basis on the Stock Exchange with the weighted average trading price of a DC Common Share on the Stock Exchange for the five day trading period ending on the Effective Date. There will be no other changes to the DC DSU Plan.

• 12. Immediately following the second subparagraph (b) in Paragraph 28, a new paragraph is added that reads as follows:

  For this purpose, the aggregate fair market value at such time of the Spinco Stock Options so issued will be determined as the amount equal to the aggregate In the Money Amount of the Spinco Stock Options at such time. This in turn will be determined as the aggregate In the Money Amount of the DC Stock Options, determined immediately before the Effective Date and measured by reference to the closing price of the DC Common Shares on the Stock Exchange on the day preceding the Effective Date, multiplied by the Butterfly Proportion.

• 13. Immediately following the heading “Elimination of Cross Shareholdings”, a new Paragraph 28.1 is added that reads as follows:

  28.1 In the Plan of Arrangement, each of Spinco and DC will designate the dividends deemed to be paid by each of them as a consequence of the redemption of the Spinco Reorganization Shares (described in Paragraph 29 below) and the DC Butterfly Shares (described in Paragraph 30 below), respectively, to be eligible dividends for purposes of subsection 89(14) of the Act.

• 14. The Plan of Arrangement will provide for the “clean-up” of the authorized capital of DC and Amalco following the completion of the spin-off. Accordingly, immediately following Paragraph 31, add the following heading and new Paragraph 31.2:

  Deletion of Spinco Reorganization Shares

  31.2 The articles of Spinco will be amended by deleting the Spinco Reorganization Shares from the share capital which Spinco is authorized to issue.

• 15. Paragraph 32(d) is changed to read as follows:

  Each issued and outstanding Spinco Common Share will be converted into one Amalco Common Share.

• 16. For the purposes of the corporate “clean-up” described in paragraph 14 above, immediately following Paragraph 32, the following heading and new Paragraph 32.1 are added:

  Deletion of DC Butterfly Shares

  32.1 The articles of DC will be amended to delete the DC Butterfly Shares from the share capital which DC is authorized to issue. In addition, the DC Common Shares will be deleted from DC's authorized share capital and the New DC Common Shares will be redesignated as common shares.

• 17. Immediately following the heading “Additional Information”, new paragraphs 32.2, 32.3 and 32.4 are added to read as follows:

  32.2 Prior to the Plan of Arrangement, it is expected that DC will have non-convertible inter-company receivables owing to it by Bco, Holdco, Cco, Dco, Eco and/or Fco. Following implementation of the Plan of Arrangement, it is expected that Amalco (as successor to Bco), and/or its subsidiaries including Holdco, Cco, Dco, Eco and/or Fco, will borrow funds under a newly established credit facility with third party lenders, and will use all or a part of the borrowed funds to repay their indebtedness owing to DC.

  32.3 DC has in effect a shareholder rights plan that will continue in effect after the Plan of Arrangement. At the meeting of holders of DC Common Shares held to approve the Plan of Arrangement as described in Paragraph 20, DC shareholders will be asked to conditionally approve the adoption of a shareholder rights plan for Amalco. If approved, the shareholder rights plan would come into effect pursuant to a distribution of rights that would occur at the earliest possible time after completion of the Plan of Arrangement.

  32.4 DC has in effect a normal course issuer bid that has been approved by the Stock Exchange and that will expire on or before XXXXXXXXXX. The DC normal course issuer bid complies in all respects with the requirements of the Stock Exchange. In addition, prior to implementation of the Plan of Arrangement, approval of the Stock Exchange will be requested for a normal course issuer bid of Amalco XXXXXXXXXX. The Amalco normal course issuer bid will otherwise comply in all respects with the requirements of the Stock Exchange. Following completion of the Plan of Arrangement each of DC and Amalco may from time to time repurchase their own shares through the facilities of the Stock Exchange pursuant to, and within the limitations and conditions specified in, their respective normal course issuer bids as described above.

• 18. In Paragraph 33, the last sentence is deleted in its entirety.
• 19. Paragraph 36 is changed to read as follows:

  36. Except as specifically described herein, there is no expectation or intention of DC or Spinco or Amalco to dispose of any property owned by it following completion of the Plan of Arrangement as part of the series of transactions including the Proposed Transactions, other than in the ordinary course of business.

You advised us that, apart from the amendments to the Facts and Proposed Transactions described above, there are no other changes to the Facts and Proposed Transactions described in the Ruling, and the Facts, Proposed Transactions and Purpose of the Proposed Transactions described in the Ruling, as amended by this letter, constitute a complete and accurate disclosure of all relevant facts and transactions.

The rulings contained in the Ruling are amended as follows:
• 20. In the part of Ruling D preceding subparagraph (a), the words “XXXXXXXXXX DC New Common Share” are replaced with “XXXXXXXXXX DC New Common Share”.
• 21. In Ruling N, subparagraph (b) is deleted in its entirety.
• 22. In Ruling P the part preceding subparagraph (a) is changed to read as follows:

  P. The DC New Common Shares, the Spinco Common Shares and the Amalco Common Shares will be “qualified investments”:

• 23. A new Ruling P.1 is added to read as follows:

  P.1. The provisions of subsections 15(1), 56(2), 69(4) and 246(1) will not be applied as a result of the transactions proposed in Paragraphs 29 through 31, in and of themselves.

• 24. We acknowledge your advice that Spinco has been incorporated as of the date of this letter so that its incorporation will not form part of the Proposed Transactions.
• Under the heading “Comments”, the following subparagraph (c) is changed to read as follows:

  (c) any tax consequences relating to the Facts and Proposed Transactions described herein other than those specifically described in the rulings given above (for example, there has been no review or acceptance of the tax consequences associated with the making of the eligible dividend elections described in Paragraph 28.1 hereof).

• Under the heading “Comments”, following subparagraph (c) thereof a new paragraph is added to read as follows:

  For greater certainty, a disposition in the ordinary course of business by a specified shareholder of a DC Common Share, a DC New Common Share or an Amalco Common Share through the Stock Exchange, including while a normal course issuer bid of DC or Amalco is in effect, is not necessarily part of the same series of transactions or events that includes the Proposed Transactions.

The Comments and Opinions included in the Ruling should be read as amended by this letter.

We hereby confirm that, subject to the conditions, limitations, qualifications, comments and opinions set out in the Ruling, as amended by this letter, the rulings contained in the Ruling, as amended by this letter, will continue to be binding on the Canada Revenue Agency provided that the Proposed Transactions are completed before XXXXXXXXXX.

Yours truly,

XXXXXXXXXX

for the Director

Reorganizations and Resources Division

Income Tax Rulings Directorate

Legislative Policy and Regulatory Affairs Branch