2012 Ruling 2012-0460811R3 - Public Company Spin-Off Butterfly

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 proposed transactions are exempt from the application of subsection 55(2).

Position: Yes.

Reasons: Meet the requirements of paragraph 55(3)(b).

XXXXXXXXXX 2012-046081

XXXXXXXXXX, 2012

Dear Sir:

Re: Advance Income Tax Rulings
XXXXXXXXXX

This is in reply to your letter of XXXXXXXXXX in which you requested an advance income tax ruling on behalf of the above-noted taxpayer. We also acknowledge the information provided in your numerous emails and during our various telephone conversations (XXXXXXXXXX).

We understand that to the best of your knowledge and that of the taxpayer involved, none of the issues described herein is:

(i) dealt with in an earlier return of DC or a related person;

(ii) being considered by a tax services office or a taxation centre in connection with a previously filed return of DC or a related person;

(iii) under objection by DC or a related person;

(iv) before the courts or, if a judgment has been issued, the time limit for appeal to a higher court has expired; or

(v) the subject of a ruling previously issued by the Income Tax Rulings Directorate.

Unless otherwise noted, all references herein to sections or components thereof are references to the Income Tax Act, R.S.C. 1985, c.1 (5th Supp.), as amended, or the Income Tax Regulations, C.R.C., c. 945, as appropriate; and all references to monetary amounts are in Canadian dollars.

Throughout this letter, the entities mentioned in this letter will be referred to as follows:

"DC" refers to XXXXXXXXXX;

"Holdco" refers to XXXXXXXXXX;

"Holdco Shareholder" refers to XXXXXXXXXX;

"Spinco" refers to XXXXXXXXXX;

"Subco 1" refers to XXXXXXXXXX;

"Subco 2" refers to XXXXXXXXXX;

"Subco 3" refers to XXXXXXXXXX; and

"Subco 4" refers to XXXXXXXXXX.

DEFINITIONS

Unless otherwise noted, the following terms have the meanings ascribed to them below:

(a) "ACB" has the meaning assigned to the expression "adjusted cost base" by section 54;

(b) "Act" refers to the Income Tax Act;

(c) "agreed amount", in respect of an eligible property, means the amount that the transferor and the transferee of a property will have agreed upon in a joint election under subsection 85(1);

(d) "Agreement" means the arrangement agreement entered into between DC and Spinco, including the appendices, as supplemented, amended or amended and restated from time to time;

(e) "arm's length" has the meaning assigned by subsection 251(1);

(f) "Butterfly Proportion" means the fraction A/B where:

A is the net FMV of the Transferred Assets, immediately before the distribution described in Paragraph 32; and

B is the net FMV of all the property owned by DC immediately before the distribution described in Paragraph 32.

(g) "capital property" has the meaning assigned by section 54;

(h) "CBCA" means the Canada Business Corporations Act;

(i) "CCEE" has the meaning assigned to the expression "cumulative Canadian exploration expense" by subsection 66.1(6);

(j) "CRA" means the Canada Revenue Agency;

(k) "DC Butterfly Shares" means the new class of shares in the capital of DC described in Paragraph 24;

(l) "DC Butterfly Share Redemption Amount" means the aggregate FMV of all of the DC Common Shares outstanding immediately before the exchange of DC Common Shares described in Paragraph 27, multiplied by the Butterfly Proportion, and then divided by the number of issued and outstanding DC Butterfly Shares;

(m) "DC Common Shares" means the common shares in the capital of DC that are issued and outstanding immediately prior to the implementation of the Plan of Arrangement;

(n) "DC New Common Shares" means the common shares of DC issued to the Shareholders pursuant to the reorganization of capital described in Paragraph 27, which will be the only issued and outstanding shares of DC following the completion of the Plan of Arrangement, and which will give the holders thereof the right to vote, to the exclusion of any other class of shares of DC, for the election of directors at any meeting of shareholders called for that purpose;

(o) "DC New Stock Options" has the meaning set out in Paragraph 28;

(p) "DC Redemption Note" means the promissory note to be issued by DC as described in Paragraph 40;

(q) "DC Shareholder" means a person holding a DC Common Share;

(r) "DC Stock Option" means a right to acquire one DC Common Share under the DC Stock Option Plans;

(s) "DC Stock Option Holder" means a person who holds a DC Stock Option;

(t) "DC Stock Option Plans" means the stock option plans for directors, officers, employees and third-party consultants of DC. Under the terms of the DC Stock Option Plans, qualifying individuals are entitled to acquire a DC Common Share at a price that cannot be lower than the closing price of such share on the XXXXXXXXXX on the trading day immediately preceding the day on which the particular DC Stock Option was granted;

(u) "designated stock exchange" has the meaning assigned by subsection 248(1);

(v) "disposition" has the meaning assigned by subsection 248(1);

(w) "distribution" has the meaning assigned by subsection 55(1);

(x) "Effective Date" means the effective date of the Plan of Arrangement;

(y) "effective time" means 12:01 a.m. on the Effective Date, which is the time that the Proposed Transactions will be implemented;

(z) "eligible property" has the meaning assigned by subsection 85(1.1);

(aa) "Exercise Price Proportion" means the fraction A/B where:

A is the volume-weighted average trading price of Spinco Common Shares on the XXXXXXXXXX, as the case may be, on the first day following completion of the Proposed Transactions described in the Plan of Arrangement, and

B is the aggregate of (i) the volume-weighted average trading price on such day of Spinco Common Shares on the XXXXXXXXXX, as the case may be, and (ii) the volume-weighted average trading price on such day of DC New Common Shares on the XXXXXXXXXX;

(bb) "fair market value" hereinafter ("FMV") means the highest price expressed in terms of money or money's worth, obtainable in an open and unrestricted market between knowledgeable, informed and prudent parties acting at arm's length, neither party being under any compulsion to transact;

(cc) "flow-through share" has the meaning assigned by subparagraph 66(15);

(dd) XXXXXXXXXX.

(ee) "guarantee agreement" has the meaning assigned by subsection 112(2.2);

(ff) "In The Money Amount" means, in relation to a particular DC Stock Option, the amount by which the FMV of a DC Common Share that is the subject of the particular DC Stock Option is greater than the exercise price of such DC Stock Option;

(gg) XXXXXXXXXX;

(hh) "Paragraph" refers to a numbered paragraph in this advance income tax ruling;

(ii) "Plan of Arrangement" means a plan of arrangement under the XXXXXXXXXX in the form approved by the Shareholders on XXXXXXXXXX, to effect the divisive reorganization as described in Paragraph 27 through and including Paragraph 43, as amended, modified or supplemented from time to time in accordance with the Agreement, the Plan of Arrangement or at the direction of the court;

(jj) "Proposed Transactions" means the proposed transactions which are described in Paragraphs 22 to 43 inclusively;

(kk) "public corporation" has the meaning assigned by subsection 89(1);

(ll) "PUC" has the meaning assigned to the expression "paid-up capital" by subsection 89(1);

(mm) XXXXXXXXXX;

(nn) "Regulations" refers to the Income Tax Regulations;

(oo) "related person" has the meaning assigned by subsection 251(2);

(pp) "repurchase right" means the right of a Shareholder to require DC to repurchase its DC Common Shares as provided by section XXXXXXXXXX;

(qq) "restricted financial institution" has the meaning assigned by subsection 248(1);

(rr) "Shareholder" means a holder of a DC Common Share, a DC Butterfly Share, a DC New Common Share or a Spinco Common Share, as the case may be;

(ss) "short-term preferred shares" has the meaning assigned by subsection 248(1);

(tt) "significant influence" has the meaning assigned by section 3050 of the Canadian Institute of Chartered Accountants Handbook;

(uu) "specified financial institution" has the meaning assigned by subsection 248(1);

(vv) "specified shareholder" has the meaning assigned by subsection 248(1) as modified by subsections 55(3.2) and (3.3);

(ww) "Spinco Common Shares" means the common shares in the capital of Spinco described in Paragraph 15;

(xx) "Spinco Redemption Note" means the promissory note to be issued by Spinco as described in Paragraph 37;

(yy) "Spinco Redemption Shares" means the class of preferred shares in the capital of Spinco as described in Paragraph 26;

(zz) "Spinco Redemption Share Redemption Amount" means the aggregate net FMV of the Transferred Assets transferred by DC to Spinco pursuant to the distribution described in Paragraph 32, less the aggregate FMV as at the Effective Date of the Spinco Stock Options, and divided by the number of Spinco Redemption Shares issued as consideration therefor;

(aaa) "Spinco Stock Options" has the meaning set out in Paragraph 28;

(bbb) "stated capital" means, in relation to DC, the stated capital as defined in the XXXXXXXXXX, and in relation to Spinco, the stated capital as defined in the XXXXXXXXXX;

(ccc) "Subsidiaries" means Subco 1, Subco 2, Subco 3, and Subco 4, and "subsidiary" means any one of the Subsidiaries;

(ddd) "taxable Canadian corporation" has the meaning assigned by subsection 89(1);

(eee) "taxable dividend" has the meaning assigned by subsection 89(1);

(fff) "taxable preferred shares" has the meaning assigned by subsection 248(1);

(ggg) "taxation year" has the meaning assigned by subsection 249(1);

(hhh) "term preferred shares" has the meaning assigned by subsection 248(1);

(iii) "Transferred Assets" means all of the assets transferred by DC to Spinco pursuant to the distribution described in Paragraph 32;

(jjj) XXXXXXXXXX; and

(kkk) XXXXXXXXXX.

FACTS

DC

1. DC was incorporated on XXXXXXXXXX. DC is and will be, at any relevant time and for all purposes of the Act, a public corporation and a taxable Canadian corporation. DC's taxation year and fiscal period end is XXXXXXXXXX.

2. Within the last XXXXXXXXXX years, neither DC nor a related person has acquired any property pursuant to a distribution.

3. DC is a "principal business corporation" as defined in subsection 66(15) in that its principal business consists of mineral exploration directly, primarily in Canada. Of its Subsidiaries, only XXXXXXXXXX own interests in mineral properties. XXXXXXXXXX.

4. The authorized share capital of DC consists of an unlimited number of common shares. As at XXXXXXXXXX, there were XXXXXXXXXX DC Common Shares issued and outstanding.

5. The DC Common Shares represent all of the issued shares of DC. The DC Common Shares are listed on the XXXXXXXXXX. The DC Common Shares are neither short-term preferred shares, taxable preferred shares nor term preferred shares.

6. Based on the closing price on XXXXXXXXXX of the DC Common Shares on the XXXXXXXXXX of $XXXXXXXXXX, the market capitalization of DC is approximately $XXXXXXXXXX.

7. The directors and senior management of DC are not aware of any person or related group of persons that beneficially owns, directly or indirectly, 10% or more of the issued and outstanding DC Common Shares, other than XXXXXXXXXX.

8. Based on DC's filed tax returns, at XXXXXXXXXX, DC had non-capital losses of approximately $XXXXXXXXXX. In addition, the CCEE account of DC was $XXXXXXXXXX.

DC Stock Options Plans

9. Under the terms of the DC Stock Option Plans, the number of DC Stock Options that may be granted cannot exceed XXXXXXXXXX% of the issued and outstanding DC Common Shares. As at XXXXXXXXXX, DC had outstanding XXXXXXXXXX DC Stock Options, exercisable at prices XXXXXXXXXX per share. The weighted average exercise price of the DC Stock Options is approximately $XXXXXXXXXX.

Each of the DC Stock Option Holders deals at arm's length with DC for purposes of the Act and will continue to do so both during and after the Proposed Transactions.

Pre-Butterfly Grant of DC Stock Options

10. In the XXXXXXXXXX fiscal year, DC granted a total of XXXXXXXXXX DC Stock Options under the DC Stock Option Plans to its officers and directors at a weighted average exercise price of $XXXXXXXXXX. To date in its XXXXXXXXXX fiscal year, DC has granted a total of XXXXXXXXXX DC Stock Options under the DC Stock Option Plans to its officers and directors at a weighted average exercise price of $XXXXXXXXXX as well as XXXXXXXXXX DC Stock Options to a third-party consultant at an exercise price of $XXXXXXXXXX.

Pre-Butterfly Issuance of DC Common Shares

11. Since XXXXXXXXXX, DC has completed the following issuances of DC Common Shares:

XXXXXXXXXX

Pre-Butterfly Disposition of Property

12. In XXXXXXXXXX, DC disposed of certain XXXXXXXXXX properties as described hereinafter in this Paragraph. In addition, a third party paid DC $XXXXXXXXXX for a XXXXXXXXXX day standstill with regard to certain business properties being transferred by DC to Spinco. Nothing transpired from this. DC senior management confirmed that there has not been any discussion with regard to the properties and that management is not aware of any "expression of interest" with regard to the properties.

XXXXXXXXX

In XXXXXXXXXX, DC disposed of certain XXXXXXXXXX properties as described hereinafter in this Paragraph.

XXXXXXXXXX

Each sale or option was made or granted in the ordinary course of the business of DC.

Spinco

13. Spinco was incorporated on XXXXXXXXXX under the CBCA.

14. Spinco is a taxable Canadian corporation. On XXXXXXXXXX, the Spinco Common Shares have been conditionally accepted for listing on the XXXXXXXXXX. Spinco, at the time of the commencement of the Proposed Transactions and for all purposes of the Act, will be a public corporation and will continue to be a public corporation.

15. The authorized share capital of Spinco consist of: a) an unlimited number of Spinco Common Shares each of which are fully participating common shares with the holder thereof entitled to one vote at meetings of shareholders of Spinco; and b) an unlimited number of Spinco preferred shares each of which is non-voting, non-participating, with additional conditions to be determined by the Board of Directors of Spinco.

16. Spinco has no assets and, according to your representations, has not issued any shares of its capital stock. Spinco's only liabilities are accrued professional fees. No shares will be issued prior to the transactions described in Paragraph 30 below.

DC Plan of Arrangement

17. On XXXXXXXXXX, DC and Spinco have entered into the Agreement to implement the Plan of Arrangement.

18. On XXXXXXXXXX, DC obtained an interim Order from the XXXXXXXXXX Court for the Plan of Arrangement.

19. On XXXXXXXXXX, a special meeting of DC Shareholders was held in XXXXXXXXXX in which the Plan of Arrangement was approved.

20. Final approval of the Plan of Arrangement remains subject to all regulatory and court approvals. The Plan of Arrangement will be implemented in the sequence set out below. With the exception of the filing of any elections under the Act, the Proposed Transactions will occur by virtue of the Plan of Arrangement and will be designated in the Plan of Arrangement to occur on the Effective Date and in the order set out below. The Effective Date of the Plan of Arrangement will be a date that will be subsequent to the date of the issuance of the rulings requested.

Repurchase Right

21. Each DC Shareholder was entitled to issue, prior to the date set for approval of the Plan of Arrangement by the Shareholders, a written notice informing DC of the intention of the Shareholder to exercise the right to demand the repurchase of its DC Common Shares under the XXXXXXXXXX and the Plan of Arrangement at the effective time. For the purposes of the Proposed Transactions comprising the Plan of Arrangement, any Shareholder exercising its repurchase right would be deemed to have transferred its DC Common Shares to DC for cancellation at the effective time and would be considered to have ceased to be a Shareholder of DC at the effective time, such that the DC Common Shares held by a Shareholder exercising its repurchase right would no longer be considered to be outstanding for the purpose of the Proposed Transactions comprising the Plan of Arrangement. However, no DC Shareholder exercised its repurchase right.

PROPOSED TRANSACTIONS

22. The aggregate stated capital and PUC of the DC Common Shares will be divided by the number of DC Common Shares outstanding immediately prior to the effective time.

23. Spinco will elect to be a public corporation under subparagraph (b)(i) of the definition of "public corporation" in subsection 89(1) by filing the T2073 prescribed form.

Amendment of DC's Articles

24. The articles of DC will be amended to create and authorize the issuance of an unlimited number of DC New Common Shares and an unlimited number of DC Butterfly Shares, and to delete from the articles the authorization to issue DC Common Shares.

Each DC New Common Share will be a fully-participating voting common share with the holder thereof entitled to one vote at meetings of Shareholders of DC. The terms of the DC New Common Shares will be substantially similar to the terms of the existing DC Common Shares, save and except that the DC New Common Shares will give the holders thereof the right to vote, to the exclusion of any other class of shares of DC, for the election of directors at any meeting of shareholders called for that purpose.

25. The DC Butterfly Shares will have the following attributes:

a. Each DC Butterfly Share will be redeemable, subject to applicable law, at any time at the option of DC at a redemption amount equal to the DC Butterfly Share Redemption Amount;

b. Each DC Butterfly Share will be retractable, subject to applicable law, at any time at the option of the holder at a retraction amount equal to the DC Butterfly Share Redemption Amount;

c. The holders of the DC Butterfly Shares will not be entitled to any dividends;

d. For the purpose of subsection 191(4), the amount specified in respect of each DC Butterfly Share which is to be redeemed, acquired or cancelled, will be the amount specified by a director or officer of DC in a certificate that is made (i) effective concurrently with the issuance of such DC Butterfly Share; and (ii) pursuant to a resolution of the Board of Directors of DC duly passed and evidenced in writing authorizing the issuance of such DC Butterfly Share, such amount to be expressed as a dollar amount (and not expressed as a formula), such amount to be not subject to change thereafter, and such amount to be equal to the FMV of the consideration for which such DC Butterfly Share is issued;

e. The holder of each DC Butterfly 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 equal to the DC Butterfly Share Redemption Amount to the extent of the amount of value of property available under applicable law for payment to Shareholders upon such liquidation, dissolution or winding-up and to no other amount; and

f. The holder of each DC Butterfly Share will not be entitled to vote at meetings of shareholders of DC, other than as provided under the XXXXXXXXXX.

Amendment of Spinco's Articles

26. Under the Plan of Arrangement, the articles of Spinco will be amended to create the Spinco Redemption Shares, which will have the following attributes:

a. Each Spinco Redemption Share will be redeemable, subject to applicable law, at any time at the option of Spinco at a redemption amount equal to the Spinco Redemption Share Redemption Amount;

b. Each Spinco Redemption Share will be retractable, subject to applicable law, at any time at the option of the holder at a retraction amount equal to the Spinco Redemption Share Redemption Amount;

c. The holders of the Spinco Redemption Shares will be not entitled to any dividends;

d. For the purpose of subsection 191(4), the amount specified in respect of each Spinco Redemption Share which is to be redeemed, acquired or cancelled, will be the amount specified by a director or officer of Spinco in a certificate that is made: (i) effective concurrently with the issuance of such Spinco Redemption Share; and (ii) pursuant to a resolution of the Board of Directors of Spinco duly passed and evidenced in writing authorizing the issuance of such Spinco Redemption Share, such amount to be expressed as a dollar amount (and not expressed as a formula), such amount to be not subject to change thereafter, and such amount to be equal to the FMV of the consideration for which such Spinco Redemption Share is issued;

e. The holder of each Spinco Redemption Share will be 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 equal to the Spinco Redemption Share Redemption Amount to the extent of the amount of value of property available under applicable law for payment to Shareholders upon such liquidation, dissolution or winding-up, and no other amount; and

f. The holder of each Spinco Redemption Share will not be entitled to vote at meetings of shareholders of DC other than as provided under the CBCA.

Reorganization of the Capital of DC

27. Each Shareholder will exchange each DC Common Share on the Effective Date for one DC New Common Share and one DC Butterfly Share. Each Shareholder will cease to be the holder of the DC Common Shares so exchanged and will become the holder of the same number of DC New Common Shares and of DC Butterfly Shares as the number of DC Common Shares then owned by such Shareholder. In addition:

a. All DC Common Shares will be cancelled;

b. The DC New Common Shares will be listed for trading on the XXXXXXXXXX; and

c. The aggregate addition to the stated capital of both the DC New Common Shares and the DC Butterfly Shares issued by DC on the exchange described in this Paragraph 27 will equal the aggregate PUC of the DC Common Shares subject to this exchange. This PUC will be allocated to the DC New Common Shares and to the DC Butterfly Shares based on the ratio that the FMV of the DC New Common Shares and the DC Butterfly Shares, as the case may be, is of the aggregate FMV of the DC Common Shares so exchanged.

Exchange of DC Stock Options

28. Each DC Stock Option Holder will dispose of its DC Stock Options to each of DC and Spinco in consideration for the issuance to the particular holder of a DC New Stock Option granted by DC to acquire a DC New Common Share and a Spinco Stock Option granted by Spinco to acquire a Spinco Common Share in such a manner that:

a. The particular DC Stock Option Holder will receive no consideration for the exchange of its DC Stock Options other than a DC New Stock Option and a Spinco Stock Option;

b. The original exercise price of each DC Stock Option to each DC Stock Option Holder will be allocated to the DC New Stock Option and the Spinco Stock Option such that an amount equal to the Exercise Price Proportion of the exercise price of each DC Stock Option will be payable to Spinco on exercise of the Spinco Stock Option and an amount equal to the remainder of the original DC Stock Option exercise price will be payable to DC on exercise of the DC New Stock Option. In the event that Spinco is listed on the XXXXXXXXXX, where the allocation described in this Paragraph 28 with respect to the exercise price of a Spinco Stock Option results in an exercise price that is less than $XXXXXXXXXX, the exercise price for the Spinco Stock Option shall be increased to $XXXXXXXXXX (without resulting in an equivalent reduction in the exercise price of a DC New Stock Option);

c. The expiry date of a DC New Stock Option and a Spinco Stock Option will, aside from certain differences in termination provisions, be the same as that of the corresponding DC Stock Option;

d. The other material commercial terms and conditions of the DC New Stock Options and the Spinco Stock Options will generally parallel those of the DC Stock Options, but there may be certain differences in recognition of the fact that DC is listed on the XXXXXXXXXX and Spinco may be listed on the XXXXXXXXXX; and

e. The DC Stock Options will be cancelled upon the foregoing transfers.

29. The issuance by Spinco of the Spinco Stock Options will be in anticipation of the distribution described in Paragraph 32 and will form part of the non-share consideration relating to such transfer.

Transfer of DC Butterfly Shares to Spinco

30. Each Shareholder will transfer its DC Butterfly Shares to Spinco. The sole consideration issued by Spinco for each DC Butterfly Share will be one Spinco Common Share. Spinco shall add to the stated capital account maintained for the Spinco Common Shares an amount equal to the aggregate PUC of the DC Butterfly Shares acquired by Spinco.

Immediately after the share-for-share exchange described herein, the FMV of each DC Shareholder's Spinco Common Shares will be equal to or approximate the amount determined by the formula provided in subparagraph (b)(iii) of the definition of "permitted exchange" in subsection 55(1). In addition, no person other than a DC Shareholder will own any shares of the capital stock of Spinco.

The Spinco Common Shares will be listed on a designated stock exchange at the time of their issuance.

If requested by a Shareholder, Spinco and the Shareholder will jointly elect, in prescribed form and within the time limit referred to in subsection 85(6), to have the provisions of subsection 85(1) apply to the transfer of DC Butterfly Shares by the Shareholder to Spinco.

There will be no agreement with respect to the DC Butterfly Shares, except as described in this ruling application.

Transfer of the Transferred Assets to Spinco

31. Immediately prior to the distribution described in Paragraph 32, the net FMV of each type of property of DC will be determined on a consolidated basis. For this purpose, the property owned by each relevant corporation will be classified into the following three types of property for the purpose of the distribution, as follows:

a. cash or near cash;

b. investment property; and

c. business property.

In computing the net FMV of each type of property, where the property of DC is a share of a corporation over which DC has a significant influence, the net FMV of the share of the particular corporation will be multiplied by the proportion that the net FMV of that type of property of the particular corporation is of the net FMV of all the property of the particular corporation.

In determining, on a consolidated basis, the net FMV of each type of property of a particular corporation, all tax accounts of that particular corporation, including non-capital losses, and CCEE pools will not be considered property of that corporation and the FMV of such accounts will be nil. In determining the net FMV of the cash or near cash, investment property and business property immediately before the distribution described in Paragraph 32, the liabilities of a particular corporation will be allocated to, and be deducted from, the calculation of the FMV of each type of property as follows:

a. No amount will be considered to be a liability unless it represents a true legal liability which is capable of quantification;

b. Current liabilities of the particular corporation (including the current portion of long-term debt) will be allocated to each cash or near cash property (including accounts receivable, inventories and prepaid expenses) of such corporation in the proportion that the FMV of each such property is of the FMV of all cash or near cash property owned by the particular corporation. To the extent that the allocation of current liabilities exceeds the aggregate FMV of the cash or near cash property of the particular corporation, such corporation will be considered to have a negative amount of cash or near cash property.

c. Following the allocation of current liabilities to each cash or near cash property in (b) above, any remaining net FMV of any accounts receivable, inventories and prepaid expenses of the particular corporation will be reclassified as business property and excluded from cash or near cash property, to the extent that such property will be collected, sold or used by the particular corporation in the ordinary course of the business to which such property relates.

d. Liabilities (other than current liabilities) of the particular corporation that relate to a particular property will then be allocated to that particular property (and effectively to the type of property to which the particular property belongs) to the extent of the property's FMV. Any excess of such liabilities over the FMV of such particular property will be allocated to the type of property to which the particular property relates. Liabilities that pertain to a type of property, but not to a particular property, will then be allocated to that type of property. To the extent that the allocation of liabilities to a particular type of property as described herein exceeds the aggregate FMV of all property of that particular type of the particular corporation, such corporation will be considered to have a negative net FMV for that type of property.

e. Any liabilities (other than current liabilities) of the particular corporation which do not relate to a particular type of property will then be allocated to the cash or near cash, investment and business property of such corporation based on the relative remaining net FMV of each type of property determined prior to the allocation of such liabilities, but after the allocation of the liabilities described in (b) and (d) above and the reallocation of amounts described in (c) above.

f. Deferred income tax will not be considered a liability.

32. DC will transfer to Spinco each of the Transferred Assets for an amount equal to its FMV; such that immediately following the transfers, the percentage of the net FMV of each of the type of property of DC so transferred to Spinco will, for greater certainty, approximate the Butterfly Proportion.

For the purposes of this Paragraph, the expression "approximate the Butterfly Proportion" means that a discrepancy in the Butterfly Proportion, if any, will not exceed one percent (1%), as determined as a percentage of the net FMV of each type of property that Spinco will receive as compared to what Spinco would have received had it received its appropriate pro rata share of the net FMV of that type of DC's property.

33. As consideration for the property transferred by DC, Spinco will:

a. Have issued the Spinco Stock Options as described in Paragraph 28, and

b. Issue XXXXXXXXXX Spinco Redemption Shares having an aggregate FMV equal to the amount by which the net FMV of the Transferred Assets exceeds the FMV of the Spinco Stock Options issued pursuant to Paragraph 28.

34. Spinco and DC will jointly elect, in prescribed form and within the time limit referred to in subsection 85(6), to have the provisions of subsection 85(1) apply to the transfer of each Transferred Asset that is an eligible property. The agreed amount for purposes of subsection 85(1) in respect of such Transferred Asset will not exceed its FMV.

35. Spinco will add to the stated capital maintained for the Spinco Redemption Shares (i) the aggregate of the agreed amount in respect of each eligible property in respect of which an election under subsection 85(1) will be made, and (ii) the FMV of each of the other Transferred Assets.

36. Immediately after the distribution described in Paragraph 32, the FMV of each type of property forming part of the Transferred Assets, determined using a net FMV consolidated look-through approach, will be equal to or approximate that proportion of the net FMV of each type of property of DC using a consolidated net FMV consolidated look-through approach, determined immediately before that transfer, that:

a. The aggregate FMV of the DC Butterfly Shares owned by Spinco, immediately before that transfer, is of

b. The aggregate FMV of all DC Butterfly Shares and all DC Common Shares issued and outstanding immediately before that transfer.

Redemption of the Spinco Redemption Shares

37. Spinco will redeem all of the Spinco Redemption Shares issued to DC in Paragraph 33 and will issue to DC, as payment, the Spinco Redemption Note which will be a non-interest bearing promissory note, payable on demand and having a principal amount and FMV equal to the issue price of the Spinco Redemption Shares as described in Paragraph 33.

38. Spinco will make a designation in respect of the amount of the dividend that will be deemed to be paid to DC on the redemption of the Spinco Redemption Shares in Paragraph 37 for the purposes of subsection 89(14).

39. DC will accept the Spinco Redemption Note as full payment for the redemption of the Spinco Redemption Shares with the risk that the Spinco Redemption Note may not be honoured.

Redemption of the DC Butterfly Shares

40. DC will redeem all of the DC Butterfly Shares acquired by Spinco as described in Paragraph 30 and will issue to Spinco, as payment, the DC Redemption Note which will be a non-interest bearing promissory note, payable on demand having a principal amount and FMV equal to the FMV of the DC Butterfly Shares as determined in Paragraph 27.

41. DC will make a designation in respect of the amount of the dividend that will be deemed to be paid to Spinco on the redemption of the DC Butterfly Shares in Paragraph 40 for the purposes of subsection 89(14).

42. Spinco will accept the DC Redemption Note as full payment for redemption of the DC Butterfly Shares with the risk that the DC Redemption Note may not be honoured.

Set-Off

43. DC will satisfy its obligations under the DC Redemption Note by transferring the Spinco Redemption Note to Spinco, and Spinco will accept the Spinco Redemption Note in full satisfaction of DC's obligations under the DC Redemption Note. Similarly, Spinco will satisfy its obligations under the Spinco Redemption Note by transferring the DC Redemption Note to DC, and DC will accept the DC Redemption Note in full satisfaction of Spinco's obligations under the Spinco Redemption Note.

ADDITIONAL INFORMATION

44. Spinco will effect a private placement to raise funds by issuing Spinco Common Shares in order to finance the XXXXXXXXXX acquired by Spinco. However, it is not expected that any person or group of persons will acquire control of Spinco as a consequence of this share issuance.

45. The Plan of Arrangement is not being undertaken to facilitate any proposed or contemplated acquisition of control of either DC or Spinco.

46. Neither DC nor Spinco is or will be at the time of the Proposed Transactions, either a specified financial institution or a restricted financial institution.

47. 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 or agreement that is referred to in subsection 112(2.2) as a "guarantee agreement";

b. A share that is issued or acquired as part of a transaction, event or series of transactions or events of the type described in subsection 112(2.5); or

c. The subject of a "dividend rental arrangement" referred to in subsection 112(2.3), as such term is defined in subsection 248(1).

48. Except as described herein, no liabilities have been or will be incurred and no assets have been or will be acquired, or disposed of, by DC or a Subsidiary in contemplation of and before the distribution described in Paragraph 32 above, other than in the normal course of business.

49. The Proposed Transactions will occur in the order presented unless otherwise indicated, with the exception of the filing of any applicable election forms, which will be filed by the applicable due date following the completion of the Proposed Transactions.

50. Each of the DC New Common Shares and Spinco Common Shares will be listed on the respective designated stock exchange for DC or Spinco, as applicable.

51. No person who is a specified shareholder of DC has or will have acquired any DC Common Shares in contemplation of the Proposed Transactions.

52. Except as described herein, no debts have been or will be incurred or paid and no property has been or will be acquired by DC or any Subsidiary in contemplation of the distribution described in this letter and other than in a transaction described in this letter, and other than in a transaction described in subparagraphs 55(3.1)(a)(i) to (iv).

53. Neither DC nor Spinco will sell or transfer any property as part of a series of transactions or events that includes the Proposed Transactions to an unrelated person or partnership subsequent to the Proposed Transaction.

54. There will not be any material change in the composition of DC's assets or liabilities (except as contemplated in the Proposed Transactions) from the date of this letter until the date following the Effective Date, except in the normal course of its business.

55. DC is not aware of any DC Shareholder contemplating the sale or transfer of any DC Common Shares.

56. Except as described in this letter, it is not contemplated that subsequent to the implementation of the transactions described herein under the Proposed Transactions that DC or Spinco will transfer or sell any of its assets to any other person except in the normal course of its business.

57. Following completion of the Proposed Transactions, certain management services will be provided by DC to Spinco at cost plus XXXXXXXXXX percent (XXXXXXXXXX%), which the parties believe represents FMV.

PURPOSES OF THE PROPOSED TRANSACTIONS

DC considers that the distribution of the XXXXXXXXXX and other Transferred Assets to Spinco will be in the best interests of the DC Shareholders. The Proposed Transactions will separate the XXXXXXXXXX from the other DC XXXXXXXXXX properties with the expectation that it will enhance the ability of DC and Spinco to pursue their respective objectives, strategies and financings in order to maximize the value of the DC Common Shares currently owned by the DC Shareholders.

RULINGS GIVEN

Provided that the preceding statements constitute complete and accurate disclosure of all of the relevant Facts, Proposed Transactions, Additional Information and the Purposes of the Proposed Transactions, and provided that the Proposed Transactions are completed in the manner described above, our rulings are as follows:

A. The amendment to the articles of DC, as described in Paragraph 24, in and of itself will not result in a disposition of the DC Common Shares.

B. Provided that there is a disposition at law on the exchange of DC Common Shares by a Shareholder, as described in Paragraph 27, the provisions of subsection 86(1) will apply and the provisions of subsection 86(2) will not apply to the disposition of each DC Common Share by a Shareholder for one DC New Common Share and one DC Butterfly Share provided that:

(a) the Shareholder holds the DC Common Shares as capital property; and

(b) the Shareholder and DC do not file an election under subsection 85(1) or (2) in respect of the exchange,

such that:

(c) the Shareholder will be deemed by paragraph 86(1)(b) to have acquired the DC New Common Shares and the DC Butterfly Shares at a cost equal to the proportion of the ACB to the Shareholder of such DC Common Shares immediately before the exchange that:

(i) the FMV, immediately after the exchange, of the DC New Common Shares or of the DC Butterfly Shares, as the case may be, received by the Shareholder,

is of

(ii) the FMV, immediately after the exchange, of all the shares of DC acquired by the participant on the exchange; and

(d) Pursuant to paragraph 86(1)(c), such Shareholder will be deemed to have disposed of the Shareholder's DC Common Shares for aggregate proceeds of disposition equal to the aggregate cost to the Shareholder of the DC New Common Shares and DC Butterfly Shares received by the Shareholder as determined in (c) above.

C. Provided that a Shareholder holds its DC Common Shares as capital property, the share exchange described in Paragraph 27 will not, in and by itself, cause the DC Butterfly Shares or the DC New Common Shares not to be capital property to that Shareholder immediately after such exchange.

D. The provisions of subsection 7(1.4) will apply with respect to each exchange by a holder of DC Stock Options (except with respect to an exchange by a third-party consultant) that are subject to the provisions of subsection 7(1) for DC New Stock Options and Spinco Stock Options, as described in Paragraph 28, provided that the aggregate In The Money Amount of the DC New Stock Options and the Spinco Stock Options received by the holder on the exchange does not exceed the aggregate In The Money Amount of the DC Stock Options that were so exchanged by the holder, with the result that for the purposes of section 7:

(a) such holder will be deemed (other than for the purposes of subparagraph 7(9)(d)(ii)) not to have disposed of such holder's DC Stock Options and not to have acquired such holder's DC New Stock Options and Spinco Stock Options;

(b) the DC New Stock Options and Spinco Stock Options will be deemed to be the same as, and a continuation of, the corresponding DC Stock Options; and

(c) Spinco will be deemed in respect of the Spinco Stock Options to be the same person as, and a continuation of, DC.

E. Provided that a particular Shareholder who, immediately before the exchange of DC Butterfly Shares for an identical number of Spinco Shares as described in Paragraph 30,

(a) holds such DC Butterfly Shares as capital property;

(b) does not receive any consideration other than the Spinco Common Shares in exchange for the DC Butterfly Shares;

(c) deals at arm's length with Spinco immediately before the exchange;

(d) does not file an election under subsection 85(1) or subsection 85(2) with respect to the exchange; and

(e) does not include any portion of the gain or loss otherwise determined in computing his or her income for that year;

(f) is not a person described in paragraph 85.1(2)(e) who has included any portion of the gain or loss in computing its foreign accrual property income (as defined in subsection 95(1)) for that year;

and further provided that immediately after such exchange:

(g) such Shareholder or persons with whom such Shareholder does not deal at arm's length, or such Shareholder together with any other person or persons with whom such Shareholder does not deal at arm's length, will not control Spinco or beneficially own shares of Spinco having an aggregate FMV representing more than 50% of the aggregate FMV of all of the Spinco Common Shares;

then pursuant to paragraph 85.1(1)(a):

(h) such Shareholder will be deemed to have disposed of such DC Butterfly Shares for proceeds of disposition equal to the aggregate ACB of such DC Butterfly Shares to such Shareholder immediately before the exchange; and

(i) such Shareholder will be deemed to have acquired such Spinco Common Shares at an aggregate cost equal to the aggregate ACB of such Shareholder's DC Butterfly Shares immediately before the exchange;

and pursuant to paragraph 85.1(1)(b):

(j) the cost to Spinco of each DC Butterfly Share acquired from each DC Shareholder will be deemed to be the lesser of its FMV immediately before the exchange and the PUC of such DC Butterfly Share immediately before the exchange.

F. Subject to the application of subsection 69(11), provided that the transferor and the transferee jointly elect in prescribed form and within the time determined under subsection 85(6), and that each Transferred Asset so transferred is an eligible property in respect of which shares have been issued as full or partial consideration therefor, the provisions of subsection 85(1) will apply to the transfer by DC of each such eligible property as described in Paragraph 32 such that the agreed amount in respect of each transfer of eligible property will be deemed to be the transferor's proceeds of disposition and the transferee's cost thereof pursuant to paragraph 85(1)(a). For greater certainty, paragraph 85(1)(e.2) will not apply to such transfers.

G. Subsection 84(3) will apply:

(a) on the redemption, as described in Paragraph 37 above, of the Spinco Redemption Shares owned by DC, to deem Spinco to have paid, and DC to have received; and

(b) on the redemption, as described in Paragraph 40 above, of the DC Butterfly Shares owned by Spinco, to deem DC to have paid, and Spinco to have received,

a dividend on the Spinco Redemption Shares and the DC Butterfly Shares, respectively, equal to the amount, if any, by which the aggregate amount paid upon such redemption exceeds the aggregate PUC, in respect of the shares redeemed, immediately before such redemption; and any such dividend;

(c) will be included in the recipient corporation's income pursuant to subsection 82(1) and paragraph 12(1)(j), in computing the income of the corporation of the corporation deemed to have received such dividend;

(d) will be deductible, pursuant to the subsection 112(1), by the corporation deemed to have received such dividend;

(e) will not be a dividend to which any of subsections 112(2.1), (2.2), (2.3) or (2.4) apply to deny the subsection 112(1) deduction described in (d) above;

(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 the recipient corporation of the shares which are redeemed;

(g) will not be subject to tax under Part IV.1 or VI.1, to the extent that the amount paid on the redemption do not exceed the amount specified in respect of those shares for the purposes of subsection 191(4), as the dividends will be deemed to be excepted dividend and excluded dividend, as the case may be, pursuant to subsection 191(4); and

(h) the provisions of subsection 112(3) will apply to reduce any loss that would otherwise be realized by the recipient corporation as a result of the redemption of the Spinco Redemption Shares or the DC Butterfly Shares.

H. By virtue of the provisions of paragraph 55(3)(b), subsection 55(2) will not apply to the taxable dividends referred to in Ruling G provided that as part of a series of transactions or events that includes the dividends described in Ruling G, there is not:

(a) an acquisition of property in circumstances described in paragraph 55(3.1)(a);

(b) a disposition of property in the circumstances described in subparagraph 55(3.1)(b)(i);

(c) an acquisition of control in the circumstances described in subparagraph 55(3.1)(b)(ii); or

(d) an acquisition of shares in the capital stock of DC in the circumstances described in subparagraph 55(3.1)(b)(iii),

(e) an acquisition of property in the circumstances described in paragraphs 55(3.1)(c) or (d),

which has not been described herein and, for greater certainty, subsection 55(3.1) will not apply to deny the exemption under paragraph 55(3)(b).

I. The cost to DC of the Spinco Redemption Note issued to DC by Spinco as described in Paragraph 37 and the cost to Spinco of the DC Redemption Note issued to Spinco by DC as described in Paragraph 40 will in each case be equal to the DC Redemption Amount or the Spinco Redemption Amount, and neither Spinco nor DC will realize any gain or incur any loss therefrom as a result of the payment and cancellation described in Paragraph 43.

J. The payment and cancellation of the Spinco Redemption Note and the DC Redemption Note described in Paragraph 43 will not, in either case, give rise to a "forgiven amount" within the meaning thereof in subsection 80(1) or 80.01(1).

K. The DC Butterfly Shares and the Spinco Common Shares, provided the Spinco Common Shares are listed on the XXXXXXXXXX, as the case may be, prior to the commencement of the Plan of Arrangement, will be "qualified investments" pursuant to paragraph 4900(1)(b) of the Regulations for:

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

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

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

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

(e) a "registered disability savings plan" by virtue of paragraph (d) of the definition of "qualified investment" in subsection 205(1); and

(f) a tax-free savings account by virtue of paragraph (c) of the definition of "qualified investment" in subsection 207.01(1).

L. The provisions of 15(1), 56(2), 56(4), 69(4) and 246(1) will not apply to any of the Proposed Transactions, in and of themselves.

M. The provisions of subsection 245(2) will not be applied as a result of the Proposed Transactions, in and of themselves, to redetermine the tax consequences confirmed in the rulings given above.

The above rulings are given subject to the limitations and qualifications set out in Information Circular 70-6R5 dated May 17, 2002 and are binding on the CRA provided that the Proposed Transactions are completed before XXXXXXXXXX.

The above rulings are based on the law as it presently reads and do not take into account any proposed amendments to the Act and the Regulations which, if enacted, could have an effect on the rulings provided herein.

COMMENTS

Unless otherwise confirmed, nothing in this letter should be construed as implying that CRA has confirmed, reviewed, made any determination, or accepted any method for the determination in respect of:

a. the PUC of any share or the ACB or FMV of any property referred to herein;

b. the balance, if any, of CCEE pool, general rate income pool or non-capital losses of any corporation;

c. whether section 7 or 9 applies to the holder of stock options issued by DC or Spinco;

d. the legal relationship between any of the parties referred to herein; and

e. any other tax consequences 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 given above.

An invoice for our fees in connection with this ruling request will be forwarded to you under separate cover.

Yours truly,

XXXXXXXXXX
for Division Director
Reorganizations Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch