2017 Ruling 2016-0679281R3 - subsections 84(4.1) and 86(1)

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 subsection 84(4.1) applies to a reduction of the aggregate PUC of the Class A Common Shares on the Reorganization?

Position: No.

Reasons: Complies with law and CRA administrative positions.

XXXXXXXXXX
2016-067928
XXXXXXXXXX, 2017

Dear XXXXXXXXXX:

Re: XXXXXXXXXX (B/N XXXXXXXXXX)
XXXXXXXXXX (B/N XXXXXXXXXX)
Advance Income Tax Ruling Request

This is in reply to your letter of XXXXXXXXXX, in which you requested an advance income tax ruling on behalf of the above-noted taxpayers. We also acknowledge the additional information provided to us in subsequent letters and emails, and during our various telephone conversations.

To the best of your knowledge, and that of the taxpayers involved, none of the issues involved in this ruling request is

(i) in a previously filed tax return of the taxpayers or persons related to the taxpayers;

(ii) being considered by a tax services office or taxation centre in connection with a previously filed tax return of the taxpayers or persons related to the taxpayers;

(iii) under objection by the taxpayers or persons related to the taxpayers;

(iv) the subject of a current or completed court process involving the taxpayers or persons related to the taxpayers; or

(v) the subject of an advance income ruling previously issued by the Income Tax Rulings Directorate.

I. ENTITIES INVOLVED

1. Throughout this letter, the entities below will be referred to as follows:

“Canadian Subsidiary” means XXXXXXXXXX;

“First Tier US Subsidiary” means XXXXXXXXXX;

“Newco” means XXXXXXXXXX;

“Parent” means XXXXXXXXXX;

“Parent Group” means Parent and its direct and indirect subsidiaries over which Parent exercises control including: Canadian Subsidiary, First Tier US Subsidiary, Second Tier US Subsidiary, Second Tier US Sister Subsidiary, Specified Subsidiary 1 and Specified Subsidiary 2 (except for Specified Subsidiary 1 and Specified Subsidiary 2 on or subsequent to the execution of the Proposed Transactions);

“Second Tier US Subsidiary” means XXXXXXXXXX;

“Second Tier US Sister Subsidiary” means XXXXXXXXXX;

“Specified Subsidiaries” means Specified Subsidiary 1 and Specified Subsidiary 2 collectively, and individually as a “Specified Subsidiary”;

“Specified Subsidiary 1” means XXXXXXXXXX;

“Specified Subsidiary 2” means XXXXXXXXXX;

“SS Vendors” means XXXXXXXXXX; and

“US Holdco” means the corporation to be formed under Foreign Act 1, as described in Paragraph 35.

II. DEFINITIONS

Unless otherwise expressly stated, every reference herein to the “Act” or to a part, section or subsection, paragraph or subparagraph and clause or subclause is a reference to the relevant provision of the Income Tax Act (Canada), R.S.C. 1985 (5th Supp.) c.1, as amended from time to time and consolidated to the date of this letter and the Income Tax Regulations thereunder are referred to as the “Regulations.”

Unless otherwise noted, all references herein to a currency are a reference to Canadian dollars.

2. In this letter, the following terms have the meanings specified and, where the circumstances so require, the singular should be read as plural and vice versa:

“Act 1” means the XXXXXXXXXX, as amended;

“Act 2” means the XXXXXXXXXX, as amended;

“ACB” means adjusted cost base, as defined in section 54;

“Arm’s Length” has the meaning assigned by subsection 251(1);

“Arrangement” has the meaning provided in Paragraph 28(a);

“Arrangement Agreement” has the meaning provided in Paragraph 28;

“CRA” means the Canada Revenue Agency;

“Canadian Subsidiary Shares” means the issued and outstanding common shares of Canadian Subsidiary;

“Canadian Subsidiary Receivable” has the meaning provided in Paragraph 9(b);

“Capital” in relation to the shares of a corporation formed under a particular corporate statute has the meaning provided for the particular statute;

“Capital Contribution” has the meaning provided in Paragraph 36;

“Capital Property” has the meaning assigned by section 54;

“Class A Common Shares” has the meaning provided in Paragraph 42(f)(i);

“Common Shares” means the common shares of Parent, as described in Paragraph 3;

“Controlled Foreign Affiliate” has the meaning assigned by subsection 95(1);

“Cost Amount” has the meaning assigned by subsection 248(1);

“Court” means the XXXXXXXXXX;

“Disposition” has the meaning assigned by subsection 248(1);

“Dissent Rights” means the rights of qualifying holders of Common Shares to dissent to the Arrangement in the manner set out in Act 2, as modified by the Interim Order or Final Order;

“Dissent Securities” means the Common Shares held by a Dissenting Securityholder in respect of which the Dissenting Securityholder has duly and validly exercised the Dissent Rights;

“Dissenting Securityholder” means a registered Parent Securityholder who has duly and validly exercised the Dissent Rights;

“Effective Date” means the date on which a certified copy of the Final Order has been accepted for filing by the XXXXXXXXXX appointed under Act 2, or such other date as may be specified in the Plan of Arrangement;

“Effective Time” means 12:01 a.m. on the Effective Date or such other time as may be specified in the Plan of Arrangement;

“Exchange” has the meaning provided in Paragraph 42(g);

“Excluded Property” has the meaning assigned by subsection 95(1);

“Existing Plan” means the stock option plan, dated XXXXXXXXXX, as amended to which Parent is a party that permits the granting of options to acquire Common Shares, as described in Paragraph 4;

“FMV” means fair market value, being the highest price available in an open and unrestricted market between informed and prudent parties dealing at Arm’s Length and under no compulsion to act, expressed in money terms;

“Final Order” means the final order of the Court approving the Arrangement;

“Foreign Act 1” means the XXXXXXXXXX;

“Foreign Affiliate” has the meaning assigned by subsection 95(1);

“Interim Order” means the interim order of the Court in respect of the Arrangement, as the same may be amended, supplemented or varied by the Court;

“Meeting” has the meaning provided in Paragraph 31(a);

“New Common Shares” means the new class of common shares of Parent created in the course of the Arrangement, as described in Paragraph 42(f)(ii);

“Newco Shares” means the common shares of Newco;

“Non-Resident” has the meaning assigned by subsection 248(1);

“Paragraph” means a numbered paragraph of this letter;

“Parent Options” has the meaning provided in Paragraph 4;

“Parent Securityholders” means the holders of Common Shares;

“Parent Warrants” has the meaning provided in Paragraph 4;

“Past Transactions” means the past transactions described in Paragraphs 19 to 30 inclusive;

“PUC” means paid-up capital which has the meaning assigned by subsection 89(1);

“Plan of Arrangement” has the meaning provided in Paragraph 28;

“Pre-1972 Capital Surplus On Hand” has the meaning assigned by subsection 88(2.1);

“Pre-Acquisition Surplus” has the meaning applied for the purposes of Part LIX of the Regulations;

“Principal Amount” has the meaning assigned by subsection 248(1);

“Proceeds of Disposition” has the meaning assigned by section 54;

“Proposed Transactions” means the transactions described in Paragraphs 31 to 44;

“Public Corporation” has the meaning assigned by subsection 89(1);

“Reorganization” means the transactions described in Paragraphs 42(f) and (g);

“Rulings” means the advance income tax rulings labelled “A” to “H” in this letter;

“Second Tier Receivables” has the meaning provided in Paragraph 15(c);

“Securities Exchange” means the XXXXXXXXXX;

“SS Consideration Common Shares” has the meaning provided in Paragraph 22(b);

“SS Issuance Option” has the meaning provided in Paragraph 25;

“SS Payables” has the meaning provided in Paragraph 15;

“Series of Transactions or Events” has the meaning assigned by subsection 248(10);

“Taxable Canadian Corporation” has the meaning assigned by subsection 89(1);

“Taxation Year” has the meaning assigned by subsection 249(1);

“Transfer 1” has the meaning provided in Paragraph 37;

“Transfer 2” has the meaning provided in Paragraph 38;

“Transfer 3” has the meaning provided in Paragraph 39;

“Transfer 4” has the meaning provided in Paragraph 40;

“Transfer 5” has the meaning provided in Paragraph 41;

“US Holdco Share Purchase Agreement” has the meaning provided in Paragraph 29; and

“US Holdco Shares” means the common shares of US Holdco.

III. FACTS

PARENT

3. Parent is a Public Corporation and a Taxable Canadian Corporation, which is governed by Act 2. The shares of Parent are listed on the Securities Exchange.

Parent was incorporated on XXXXXXXXXX, under Act 1 and was continued under Act 2 on XXXXXXXXXX, on account of it being a more flexible corporate statute that contains, among other things, more permissive director residency requirements.

Parent’s Taxation Year ends XXXXXXXXXX. Parent deals with the XXXXXXXXXX Tax Services Office and files its T2 Corporation Income Tax Returns with the XXXXXXXXXX Taxation Centre.

Parent’s only issued and outstanding shares are one class of unrestricted, no par value common shares (the “Common Shares”). Each Common Share entitles the holder thereof to one vote at meetings of shareholders of Parent.

The aggregate PUC in respect of the Common Shares exceeds $XXXXXXXXXX.

The market capitalization of Parent, based on the closing market price of the Common Shares on XXXXXXXXXX, was approximately $XXXXXXXXXX.

All of the Capital of Parent has been raised by way of equity contributions (either in the form of cash contributions on subscriptions for the Common Shares or of FMV property contributions in consideration for the issuance of the Common Shares in the course of the acquisition of new subsidiaries), which has been utilized by the Parent Group to fund:

(a) the acquisition of subsidiaries that, directly or indirectly, carry on active businesses; and

(b) the expenses of Parent and the general business expenses and capital expenditures incurred in the course of the active business operations of subsidiaries.

All material Capital contributions made to Parent have occurred since XXXXXXXXXX of XXXXXXXXXX.

No person currently holds more than XXXXXXXXXX% of the Common Shares. No person or group of persons currently controls Parent.

4. Parent currently has XXXXXXXXXX outstanding warrants that entitle the holders thereof to acquire a specified number of Common Shares at the prices and under the terms specified in the particular warrant (collectively, the “Parent Warrants”).

Parent is party to a stock option plan (the “Existing Plan”), dated effective XXXXXXXXXX, as amended pursuant to which options have been granted to officers, directors, employees and consultants of Parent and certain of the indirect subsidiaries of Parent. The outstanding options to acquire Common Shares (collectively, the “Parent Options”) granted under the Existing Plan, as of XXXXXXXXXX, entitle the holders thereof to acquire XXXXXXXXXX Common Shares upon the valid exercise of such options.

5. Prior to XXXXXXXXXX, Parent operated as a XXXXXXXXXX company. Since XXXXXXXXXX, Parent has principally carried on an XXXXXXXXXX business through its direct and indirect subsidiaries over which it exercises control.

Substantially all of the commercial activities of the Parent Group are conducted outside of Canada.

6. The assets of Parent include:

(a) all of the issued and outstanding common shares of Newco (the “Newco Shares”);

(b) all of the issued and outstanding common shares (the “Canadian Subsidiary Shares”) of Canadian Subsidiary; and

(c) a non-interest bearing loan receivable from Canadian Subsidiary (currently in an amount in excess of $XXXXXXXXXX).

Parent’s aggregate ACB of (i) its shares of Canadian Subsidiary exceeds $XXXXXXXXXX; and (ii) its Newco Shares is a nominal amount.

The liabilities of Parent include debentures with an aggregate outstanding Principal Amount of $XXXXXXXXXX.

PARENT GROUP

Newco

7. Newco is a Taxable Canadian Corporation, which is governed by Act 2.

All of the issued and outstanding Newco Shares (being XXXXXXXXXX shares) are owned by Parent.

Canadian Subsidiary

8. Canadian Subsidiary is a Taxable Canadian Corporation, which is governed by Act 2.

Canadian Subsidiary was incorporated on XXXXXXXXXX, under Act 2.

All of the issued and outstanding Canadian Subsidiary Shares are owned by Parent.

The aggregate PUC of the Canadian Subsidiary Shares exceeds $XXXXXXXXXX.

Other than the aggregate PUC of the Canadian Subsidiary Shares referenced in Paragraph 19(a), all of the PUC of Canadian Subsidiary has arisen by virtue of Capital contributions by Parent to Canadian Subsidiary for Canadian Subsidiary Shares.

9. Canadian Subsidiary’s principal activity is the holding of shares of First Tier US Subsidiary.

The assets of Canadian Subsidiary include:

(a) all of the issued and outstanding shares of First Tier US Subsidiary; and

(b) a non-interest bearing loan receivable (the “Canadian Subsidiary Receivable”) from First Tier US Subsidiary in excess of $XXXXXXXXXX.

Canadian Subsidiary’s aggregate ACB of its shares of First Tier US Subsidiary exceeds $XXXXXXXXXX.

The Canadian Subsidiary Receivable is being utilized by First Tier US Subsidiary to fund: (i) the acquisition of subsidiaries that, directly or indirectly, carry on active businesses, and (ii) the expenses of First Tier US Subsidiary and the general business expenses and capital expenditures incurred in the course of the active business operations of subsidiaries.

The liabilities of Canadian Subsidiary include an amount payable (non-interest bearing) to Parent in excess of $XXXXXXXXXX.

First Tier US Subsidiary

10. First Tier US Subsidiary is a Non-Resident corporation, which is governed by Foreign Act 1.

First Tier US Subsidiary was incorporated under the laws of XXXXXXXXXX and was continued under Foreign Act 1 on XXXXXXXXXX.

All of the issued and outstanding shares of First Tier US Subsidiary are owned by Canadian Subsidiary.

The Capital of the shares of First Tier US Subsidiary exceeds $XXXXXXXXXX.

11. First Tier US Subsidiary acts as the common US parent of Second Tier US subsidiary and Second Tier US Sister Subsidiary for US tax consolidation purposes.

The assets of First Tier US Subsidiary include:

(a) all of the issued and outstanding shares of Second Tier US Subsidiary;

(b) all of the issued and outstanding shares of Second Tier US Sister Subsidiary;

(c) a non-interest bearing loan receivable from Second Tier US Subsidiary of approximately $XXXXXXXXXX; and

(d) a non-interest bearing loan receivable from Second Tier US Sister Subsidiary of approximately $XXXXXXXXXX.

First Tier US Subsidiary’s aggregate ACB of: (i) its shares of Second Tier US Subsidiary exceeds $XXXXXXXXXX, and (ii) its shares of Second Tier US Sister Subsidiary is a nominal amount.

The liabilities of First Tier US Subsidiary include an amount payable (non-interest bearing) to Canadian Subsidiary in excess of $XXXXXXXXXX.

Second Tier US Sister Subsidiary

12. Second Tier US Sister Subsidiary is a Non-Resident corporation, which is governed by the laws of XXXXXXXXXX.

All of the issued and outstanding shares of Second Tier US Sister Subsidiary are owned by First Tier US Subsidiary.

The Capital of the shares of Second Tier US Sister Subsidiary is a nominal amount.

13. Second Tier US Sister Subsidiary is in the business of XXXXXXXXXX.

Second Tier US Sister Subsidiary also maintains a XXXXXXXXXX to meet the emerging market for XXXXXXXXXX.

The liabilities of Second Tier US Sister Subsidiary include an amount payable (non-interest bearing) to First Tier US Subsidiary of approximately $XXXXXXXXXX.

Second Tier US Subsidiary

14. Second Tier US Subsidiary is a Non-Resident corporation, which is governed by Foreign Act 1.

Second Tier US Subsidiary was incorporated on XXXXXXXXXX, under the laws of XXXXXXXXXX and was continued under Foreign Act 1 on XXXXXXXXXX.

All of the issued and outstanding shares of Second Tier US Subsidiary are owned by First Tier US Subsidiary.

The Capital of the shares of Second Tier US Subsidiary exceeds $XXXXXXXXXX.

15. The assets of Second Tier US Subsidiary include:

(a) all of the issued and outstanding membership interests of Specified Subsidiary 1 and Specified Subsidiary 2 (collectively referred to hereinafter as the “Specified Subsidiaries” and individually as a “Specified Subsidiary”);

(b) shares of various other holding and operating subsidiaries; and

(c) non-interest bearing inter-company receivables of approximately $XXXXXXXXXX (the “Second Tier Receivables”).

The liabilities of Second Tier US Subsidiary include an amount payable (non-interest bearing) to First Tier US Subsidiary of approximately $XXXXXXXXXX.

Second Tier US Subsidiary’s aggregate ACB of its membership interests in the Specified Subsidiaries is approximately $XXXXXXXXXX.

Of the $XXXXXXXXXX Second Tier Receivables, approximately $XXXXXXXXXX is owed by the Specified Subsidiaries (the “SS Payables”).

The Second Tier Receivables are being utilized by Second Tier US Subsidiary’s wholly-owned, direct and indirect subsidiaries to fund (i) the initial acquisition of subsidiaries that conduct active businesses, and (ii) the general business expenses and capital expenditures incurred in the course of the active business operations of subsidiaries.

Specified Subsidiary 1 and Specified Subsidiary 2

16. Specified Subsidiary 1 and Specified Subsidiary 2 each are limited liability companies formed under the laws of XXXXXXXXXX.

Specified Subsidiary 1 and Specified Subsidiary 2 are Non-Resident corporations and are each treated as a corporation for US tax purposes.

Equity interests in Specified Subsidiary 1 and Specified Subsidiary 2 are represented solely by “membership” interests in the XXXXXXXXXX corporations.

All of the issued and outstanding membership interests in Specified Subsidiary 1 and Specified Subsidiary 2 are owned by Second Tier US Subsidiary.

17. The Specified Subsidiaries each carry on an active business of XXXXXXXXXX.

XXXXXXXXXX

Prior to the acquisition by Second Tier US Subsidiary of the Specified Subsidiaries described in Paragraph 22, no direct or indirect subsidiary of Parent conducted the same business as the business currently conducted by the Specified Subsidiaries.

Each of the direct and indirect subsidiaries of Second Tier US Subsidiary, in broad terms, carry on an XXXXXXXXXX; however, the specific business conducted by the Specified Subsidiaries is distinct from that conducted by the remaining subsidiaries of Second Tier US Subsidiary in that the business of the Specified Subsidiaries is XXXXXXXXXX.

18. Parent believes that the aggregate FMV of the membership interests in the Specified Subsidiaries is approximately US$XXXXXXXXXX (being the US dollar equivalent of approximately CDN$XXXXXXXXXX).

PAST TRANSACTIONS OF NOTE

Acquisition by Parent of Canadian Subsidiary

19. In XXXXXXXXXX, Parent acquired all of the issued and outstanding Canadian Subsidiary Shares from several vendors, each of whom dealt at Arm’s Length with Parent, for an aggregate purchase price of $XXXXXXXXXX.

At the time Parent acquired Canadian Subsidiary:

(a) the aggregate PUC of the Canadian Subsidiary Shares was approximately $XXXXXXXXXX; and

(b) the assets of Canadian Subsidiary included all of the issued and outstanding shares of Second Tier US Sister Subsidiary (being XXXXXXXXXX shares of Second Tier US Sister Subsidiary that Canadian Subsidiary acquired for nominal consideration when Second Tier US Sister Subsidiary was incorporated by Canadian Subsidiary under the laws of XXXXXXXXXX on XXXXXXXXXX).

Acquisition by Canadian Subsidiary of Second Tier US Subsidiary

20. On XXXXXXXXXX, Canadian Subsidiary acquired all of the issued and outstanding shares of Second Tier US Subsidiary from XXXXXXXXXX, an individual who dealt at Arm’s Length with Canadian Subsidiary, for FMV consideration.

Incorporation of First Tier US Subsidiary and the transfer by Canadian Subsidiary of Second Tier US Subsidiary and Second Tier US Sister Subsidiary to First Tier US Subsidiary

21. On XXXXXXXXXX, Canadian Subsidiary incorporated First Tier US Subsidiary under the laws of XXXXXXXXXX.

Upon the incorporation of First Tier US Subsidiary, Canadian Subsidiary:

(a) subscribed for shares of First Tier US Subsidiary for a nominal amount;

(b) transferred all of its shares of Second Tier US Subsidiary and Second Tier US Sister Subsidiary to First Tier US Subsidiary. In consideration therefor, First Tier US Subsidiary issued additional shares of First Tier US Subsidiary to Canadian Subsidiary having an aggregate FMV, at the time of that transfer, equal to the aggregate FMV of the shares of Second Tier US Subsidiary and Second Tier US Sister Subsidiary so transferred to First Tier US Subsidiary; and

(c) transferred all of its loan receivables from Second Tier US Subsidiary and Second Tier US Sister Subsidiary to First Tier US Subsidiary in exchange for a loan receivable from First Tier US Subsidiary in a corresponding aggregate amount.

The transfer described in Paragraph 21(b) was effected on a tax-deferred basis pursuant to subsection 85.1(3).

Acquisition by Second Tier US Subsidiary of all of the membership interests in Specified Subsidiary 1 and Specified Subsidiary 2

22. On XXXXXXXXXX, Second Tier US Subsidiary acquired all of the membership interests in Specified Subsidiary 1 and Specified Subsidiary 2 from the SS Vendors, each of whom were resident in XXXXXXXXXX for the purposes of the Act and dealt at Arm’s Length with Second Tier US Subsidiary, for FMV consideration that consisted of:

(a) cash of approximately $XXXXXXXXXX; and

(b) Common Shares (the “SS Consideration Common Shares”) that Parent issued to the SS Vendors having an aggregate FMV, at the time of their issuance, of approximately $XXXXXXXXXX.

Second Tier US Subsidiary’s aggregate Cost Amount of its membership interests in the Specified Subsidiaries was approximately $XXXXXXXXXX.

The source of the cash used to fund the acquisition by Second Tier US Subsidiary of the membership interests in the Specified Subsidiaries (i.e., approximately $XXXXXXXXXX) is described in Paragraph 24.

Parent received consideration from Second Tier US Subsidiary for issuing the SS Consideration Common Shares to the SS Vendors, as described in Paragraph 25.

23. The assets of the Specified Subsidiaries, at the time of their acquisition by Second Tier US Subsidiary, included:

(a) accounts receivable of $XXXXXXXXXX;

(b) inventory of $XXXXXXXXXX (book value); and

(c) property plant and equipment of $XXXXXXXXXX (book value).

In addition, in accordance with applicable accounting principles, as at the date of acquisition of the Specified Subsidiaries by Second Tier US Subsidiary, goodwill (internally generated) in the amount of approximately $XXXXXXXXXX, and other intangible assets (consisting of XXXXXXXXXX) in the amount of approximately $XXXXXXXXXX, were recorded in the accounting records of the Specified Subsidiaries.

24. The source of the cash used to fund the acquisition by Second Tier US Subsidiary of the membership interests in the Specified Subsidiaries (i.e., approximately $XXXXXXXXXX, as described in Paragraph 22(a)) came from the cash subscription proceeds of the Common Shares that Parent issued pursuant to a private placement, which cash proceeds amounts were loaned:

(a) first, by Parent to Canadian Subsidiary, in consideration for a loan receivable from Canadian Subsidiary in a corresponding amount; and

(b) second, by Canadian Subsidiary to Second Tier US Subsidiary, in consideration for a loan receivable from Second Tier US Subsidiary in a corresponding amount.

25. In consideration for Parent issuing the SS Consideration Common Shares to the SS Vendors, as described in Paragraph 22(b), Second Tier US Subsidiary issued to Parent an option (the “SS Issuance Option”) to purchase all of its membership interests in the Specified Subsidiaries for approximately $XXXXXXXXXX (being the cash amount that Second Tier US Subsidiary paid to the SS Vendors to acquire their membership interests in the Specified Subsidiaries, as described in Paragraph 22(a)).

The SS Issuance Option had a FMV, at the time of its issuance, of approximately $XXXXXXXXXX.

The SS Issuance Option was subsequently successively transferred:

(a) first, by Parent to Canadian Subsidiary, in consideration for additional shares of Canadian Subsidiary having an aggregate FMV equal to the FMV, at the time of the transfer described in Paragraph 25(a), of the SS Issuance Option so transferred to Canadian Subsidiary; and

(b) second, by Canadian Subsidiary to Second Tier US Subsidiary, in consideration for additional shares of Second Tier US Subsidiary having an aggregate FMV equal to the FMV, at the time of the transfer described in Paragraph 25(b), of the SS Issuance Option so transferred to Second Tier US Subsidiary (at which point, upon receipt by Second Tier US Subsidiary of the SS Issuance Option, it was extinguished by operation of law).

As a consequence of the SS Issuance Option transfers described in Paragraph 25(a) and (b):

(i) Parent’s aggregate ACB, and the aggregate PUC, in respect of the shares of Canadian Subsidiary, increased by approximately $XXXXXXXXXX; and

(ii) Canadian Subsidiary’s aggregate ACB, and the Capital, in respect of the shares of Second Tier US Subsidiary, increased by approximately $XXXXXXXXXX.

Arrangement Agreement and US Holdco Share Purchase Agreement

26. In the XXXXXXXXXX, external advisors to Second Tier US Subsidiary estimated that the aggregate FMV, at that time, of Second Tier US Subsidiary’s membership interests in the Specified Subsidiaries was approximately US$XXXXXXXXXX (being the US dollar equivalent of approximately CDN$XXXXXXXXXX).

27. On XXXXXXXXXX, Parent incorporated Newco under Act 2, and upon its incorporation, Parent subscribed for XXXXXXXXXX Newco Shares for nominal consideration.

28. On XXXXXXXXXX, Parent and Newco entered into an “Arrangement Agreement,” (the “Arrangement Agreement”) which set out:

(a) the contemplated terms of certain transactions (the “Arrangement”) to be executed pursuant to the provisions of Act 2; and

(b) the rights and obligations of the parties to the Arrangement Agreement in respect of the pursuit and execution of the Arrangement.

The Arrangement, as amended from time to time, is described in a “Plan of Arrangement” (the “Plan of Arrangement”), a draft of which is appended to the Arrangement Agreement.

The Plan of Arrangement also stipulated that, among other things:

(i) the exercise price of the Parent Warrants will be adjusted to reflect the reduction in value resulting from the contemplated disposition by Parent of the Newco Shares (as described in Paragraph 42(g)); and

(ii) the issued and outstanding Parent Options will be cancelled and replacement options will be issued to the holders of such Parent Options with adjusted exercise prices that reflect the reduction in value resulting from the contemplated disposition by Parent of the Newco Shares (as described in Paragraph 42(g)).

The execution of the Arrangement, as stipulated in the Arrangement Agreement, is subject to certain conditions precedent set out in the provisions of the Arrangement Agreement, which include the following:

(I) the Securities Exchange will have conditionally approved the transactions contemplated therein, including the listing of the New Common Shares and the Newco Shares, subject to compliance with the listing requirements of the Securities Exchange; and

(II) Parent and Canadian Subsidiary will have received the Rulings from the CRA (as described in this letter).

29. On XXXXXXXXXX, Parent and Newco also entered into an “Asset Purchase Agreement,” (the “US Holdco Share Purchase Agreement”) that stipulated that, among other things, the US Holdco Shares will be transferred to Newco in exchange for a specified number of Newco Shares, on the terms, and subject to the conditions, more particularly set out therein.

Securities Exchange conditional approval

30. Parent has obtained conditional approval of the Arrangement from the Securities Exchange.

IV. PROPOSED TRANSACTIONS

Preliminary Steps- Shareholder Meeting, Interim Order, Shareholder Approval, and Final Order

31. Within XXXXXXXXXX business days of receiving this letter, Parent will request an Interim Order from the Court:

(a) authorizing Parent to call a shareholder meeting (the “Meeting”) to obtain the requisite shareholder approval of the Arrangement, and

(b) approving certain procedural matters in respect of the Meeting.

32. Upon or prior to receipt of the Interim Order, Parent will call the Meeting.

33. After receipt of the required shareholder approvals at the Meeting, Parent will seek the Final Order from the Court.

34. After receipt of the Final Order, except as indicated below, the following Proposed Transactions will be undertaken prior, or pursuant, to the Plan of Arrangement and will occur on or prior to the Effective Date.

Incorporation of US Holdco

35. Second Tier US Subsidiary will incorporate a new corporation (“US Holdco”) under Foreign Act 1.

The authorized share Capital of US Holdco will consist solely of one class of common shares (the “US Holdco Shares”).

Upon the incorporation of US Holdco, Second Tier US Subsidiary will subscribe for XXXXXXXXXX US Holdco Shares for nominal consideration.

Capital contribution by Second Tier US Subsidiary to the Specified Subsidiaries

36. Second Tier US Subsidiary will contribute the SS Payables owed by each of the Specified Subsidiaries to the respective debtor Specified Subsidiary as a contribution of capital (the “Capital Contribution”) in respect of its membership interests in the Specified Subsidiaries.

As consideration for the Capital Contribution, each of the Specified Subsidiaries will issue additional membership interests to Second Tier US Subsidiary having an aggregate FMV equal to the aggregate FMV, at the time of the Capital Contribution, of the SS Payables owed by the particular Specified Subsidiary to Second Tier US Subsidiary.

Upon receipt of the SS Payables by the respective debtor Specified Subsidiaries, the SS Payables will be extinguished by operation of law.

Transfer by Second Tier US Subsidiary of its membership interests in the Specified Subsidiaries to US Holdco

37. Second Tier US Subsidiary will transfer (the “Transfer 1”) all of its membership interests in the Specified Subsidiaries to US Holdco.

As consideration for the Transfer 1, US Holdco will issue XXXXXXXXXX US Holdco Shares to Second Tier US Subsidiary having an aggregate FMV equal to the aggregate FMV, at the time of the Transfer 1, of the membership interests of the Specified Subsidiaries so transferred to US Holdco.

Repayment by Second Tier US Subsidiary of its indebtedness to First Tier US Subsidiary

38. Second Tier US Subsidiary will transfer (the “Transfer 2”) all of its US Holdco Shares to First Tier US Subsidiary in partial or complete repayment of the outstanding Principal Amount of its indebtedness to First Tier US Subsidiary.

The repayment will be an amount equal to the lesser of: (a) the aggregate FMV, at the time of the Transfer 2, of the US Holdco Shares so transferred to First Tier US Subsidiary, and (b) the outstanding Principal Amount of Second Tier US Subsidiary’s indebtedness to First Tier US Subsidiary.

To the extent that the aggregate FMV, at the time of the Transfer 2, of the US Holdco Shares so transferred to First Tier US Subsidiary, exceeds $XXXXXXXXXX, being the outstanding Principal Amount of Second Tier US Subsidiary’s indebtedness to First Tier US Subsidiary, the directors of Second Tier US Subsidiary will make a resolution, in accordance with Foreign Act 1, to treat such excess amount as a pro rata distribution in respect of the shares of Second Tier US Subsidiary (which will effectively represent a return of past contributions to the Capital of Second Tier US Subsidiary).

Repayment by First Tier US Subsidiary of its indebtedness to Canadian Subsidiary

39. First Tier US Subsidiary will transfer (the “Transfer 3”) all of its US Holdco Shares to Canadian Subsidiary in partial repayment of the outstanding Principal Amount of its indebtedness to Canadian Subsidiary.

The partial repayment described in Paragraph 39 will be an amount equal to the aggregate FMV, at the time of the Transfer 3, of the US Holdco Shares so transferred to Canadian Subsidiary.

Repayment by Canadian Subsidiary of its indebtedness to Parent

40. Canadian Subsidiary will transfer (the “Transfer 4”) all of its US Holdco Shares to Parent in partial repayment of the outstanding Principal Amount of its indebtedness to Parent.

The partial repayment described in Paragraph 40 will be an amount equal to the aggregate FMV, at the time of the Transfer 4, of the US Holdco Shares so transferred to Parent.

Transfer by Parent of its US Holdco Shares to Newco

41. Pursuant to the US Holdco Share Purchase Agreement, Parent will transfer (the “Transfer 5”) all of its US Holdco Shares to Newco.

As consideration for the Transfer 5, Newco will issue such number of Newco Shares to Parent as is equal to the number of such shares contemplated to be distributed to the holders of the Class A Common Shares pursuant to the Plan of Arrangement, less the number of existing shares of Newco, with such Newco Shares having an aggregate FMV equal to the aggregate FMV, at the time of the Transfer 5, of the US Holdco Shares so transferred to Newco.

For the purposes of Act 2, Newco will add to the Capital of the Newco Shares so issued to Parent as consideration for the Transfer 5, an amount equal to the aggregate FMV, at the time of the Transfer 5, of the US Holdco Shares so transferred to Newco.

Parent does not currently anticipate making an election in respect of the Transfer 5 pursuant to section 85, on account of the expectation that Parent’s aggregate ACB of its US Holdco Shares, at the time of the Transfer 5, should be equal to their aggregate FMV at that time.

Arrangement

42. Pursuant to the Plan of Arrangement, a number of successive transactions will be executed or deemed to be executed, commencing at the Effective Time, in the order set out below:

Dissent Rights

(a) All Dissent Securities held by Dissenting Securityholders will be deemed to be transferred to Parent.

(b) For the purposes of Act 2, all Dissenting Securityholders will cease to have any rights as a Parent Securityholder other than the right to be paid by Parent in cash, in accordance with the Dissent Rights, the fair value of such Dissent Securities.

(c) Each Dissenting Securityholder’s name will be removed as the holder of such Dissent Securities from the central securities register of Parent.

(d) The Dissent Securities will be cancelled.

For greater certainty, for the purposes of Act 2, on the cancellation of the Dissent Securities, the Capital in relation to the Common Shares will be reduced by an aggregate amount equal to the pro rata portion of the Capital associated with such Dissent Securities.

(e) Each Dissenting Securityholder will be deemed to have executed and delivered all consents, releases, assignments and waivers, statutory or otherwise, required to transfer and assign such Dissent Securities to Parent.

For greater certainty, holders of Parent Options or Parent Warrants will not have the Dissent Rights in respect of such holdings.

Reorganization of Parent’s Capital

(f) The notice of articles and articles of Parent will be amended to provide the following:

(i) Concurrently, the identifying name of the Common Shares (which, for greater certainty, will not include the Dissent Securities) will be changed from “Common” shares to “Class A Common” shares and the rights attached to such shares will be amended such that each holder of the “Class A Common Shares” will be entitled to cast XXXXXXXXXX votes at the meetings of Parent for each “Class A Common Share” held (as opposed to the current entitlement of one vote per Common Share) (such shares hereinafter referred to as the “Class A Common Shares”).

For greater certainty, the Capital of the Class A Common Shares will not be adjusted as a consequence of the amendments described in Paragraph 42(f)(i).

(ii) A new class of common shares of Parent (the “New Common Shares”), being shares without par value, will be created.

(iii) The identifying name of the New Common Shares will be “Common” shares, the maximum number of New Common Shares which Parent will be authorized to issue will be unlimited, the terms and attributes of the New Common Shares will be the same as the terms and attributes of the Common Shares immediately prior to the change of terms described in Paragraph 42(f)(i).

Parent’s notice of articles and articles will be altered accordingly.

(g) Each issued and outstanding Class A Common Share will be exchanged (the “Exchange”) (without any further act or formality on the part of the holder of such Class A Common Share), free and clear of all encumbrances, for one (1) New Common Share and XXXXXXXXXX of one Newco Share (provided that if the foregoing would result in the issuance of a fraction of a Newco Share, then the number of Newco Shares otherwise issued will be rounded down to the nearest whole number of Newco Shares).

For greater certainty, the sum of:

(I) the aggregate FMV, immediately after the Exchange, of the New Common Shares; and

(II) the aggregate FMV, at the time of the Exchange, of the Newco Shares,

that are received by all of the holders of the Class A Common Shares on the Exchange, will be equal to the aggregate FMV, immediately before the Exchange, of the Class A Common Shares that are owned by all of the holders of the Class A Common Shares.

The Class A Common Shares will be cancelled immediately after the Exchange.

Pursuant to the Plan of Arrangement:

(A) the Capital in respect of the New Common Shares issued to all of the holders of the Class A Common Shares on the Exchange, will be the amount by which the aggregate PUC of the Class A Common Shares (that are owned by all of the holders of the Class A Common Shares), immediately before the Exchange, exceeds the aggregate FMV, at the time of the Exchange, of the Newco Shares so distributed to all of the holders of the Class A Common Shares on the Exchange; and

(B) upon the cancellation of the Class A Common Shares (described in Paragraph 42(g)), there will be no Capital in respect of the Class A Common Shares.

No elections under section 85 will be made in respect of the Exchange.

(The Transactions described in Paragraphs 42(f) and (g) will be referred to as the “Reorganization”.)

Listing of the New Common Shares and the Newco Shares and the Removal of the Class A Common Shares

43. Both the New Common Shares and the Newco Shares will be listed on the Securities Exchange.

44. Subsequent to the implementation of the Reorganization, the notice of articles and articles of Parent will be amended to remove the Class A Common Shares.

V. ADDITIONAL INFORMATION

45. Parent does not have a formal dividend policy, and no dividends have been paid by Parent to its shareholders to date.

46. No dividends have been paid on the shares of any direct or indirect subsidiary of Parent subsequent to their acquisition by a direct or indirect subsidiary of Parent.

47. None of the aggregate PUC in respect of the Class A Common Shares is derived from the capitalization of Pre-1972 Capital Surplus On Hand.

48. As at the end of its XXXXXXXXXX Taxation Year, Parent had no retained earnings (on a consolidated basis) for accounting purposes.

49. For the purposes of the Foreign Affiliate provisions of the Act, the surplus balances in respect of the Specified Subsidiaries, First Tier US Subsidiary and Second Tier US Subsidiary, are no greater than nominal amounts.

50. Each of the Non-Resident corporations that are part of the Parent Group is a Controlled Foreign Affiliate of Canadian Subsidiary for the purposes of the Act.

51. Canadian Subsidiary may elect, on a timely basis, under subparagraph 5901(2)(b)(i) of the Regulations, for any distribution made by Second Tier US Subsidiary to First Tier US Subsidiary, as described in Paragraph 38, to be deemed to have been paid out of the Pre-Acquisition Surplus of Second Tier US Subsidiary in respect of Canadian Subsidiary.

52. The aggregate FMV, at the time of the Transfer 3, of the US Holdco Shares so transferred by First Tier US Subsidiary to Canadian Subsidiary, as described in Paragraph 39, will be less than the outstanding Principal Amount of First Tier US Subsidiary’s indebtedness to Canadian Subsidiary at that time.

53. The aggregate FMV, at the time of the Transfer 4, of the US Holdco Shares so transferred by Canadian Subsidiary to Parent, as described in Paragraph 40, will be less than the outstanding Principal Amount of Canadian Subsidiary’s indebtedness to Parent at that time.

54. The aggregate FMV, at the time of the Exchange, of the Newco Shares so distributed by Parent to all of the holders of the Class A Common Shares, as described in Paragraph 42(g), will not exceed the aggregate PUC in respect of the Class A Common Shares owned by all of those holders immediately before the Exchange.

55. The membership interests in each of the Specified Subsidiaries are, or will, at all material times, be Excluded Property to Second Tier US Subsidiary and US Holdco.

The shares of US Holdco (which will own all of the membership interests in the Specified Subsidiaries as described in Paragraph 37) will, at all material times, be Excluded Property to Second Tier US Subsidiary and First Tier US Subsidiary.

56. It is expected that, immediately following the implementation of the Proposed Transactions, the SS Vendors will collectively hold approximately XXXXXXXXXX% of the Newco Shares.

VI. PURPOSES OF PAST TRANSACTIONS AND PROPOSED TRANSACTIONS

57. The reason for First Tier US Subsidiary’s continuance under Foreign Act 1, as described in Paragraph 10, was that Foreign Act 1 was a comparatively modern corporate statute with more detailed provisions relating to Capital and other shareholder matters.

58. The reason for Parent issuing Common Shares (as opposed to Second Tier US Subsidiary issuing its own shares) to the SS Vendors as partial consideration for Second Tier US Subsidiary’s acquisition of the membership interests in the Specified Subsidiaries from the SS Vendors, as described in Paragraph 22, was because the shares of Parent were publicly traded, which offered future liquidity to the SS Vendors.

59. The acquisition by Second Tier US Subsidiary of the membership interests in the Specified Subsidiaries, as described in Paragraph 22, was a product of the strategy of Parent to acquire enterprises in the XXXXXXXXXX business and associated commercial space with a view to capturing synergies and economies of scale through integration and consolidation.

60. The incorporation of Newco, as described in Paragraph 27, was to facilitate the execution of the Proposed Transactions.

The reason for Parent transferring all of its US Holdco Shares to Newco in exchange for the Newco Shares, as described in Paragraph 41, is to distribute shares of a separate Canadian Public Corporation, as opposed to shares of a Non-Resident corporation, to the shareholders of the Class A Common Shares on the Exchange.

61. The contribution by Second Tier US Subsidiary of the SS Payables to the Specified Subsidiaries, as described in Paragraph 36, will be undertaken to simplify the capital structure of the Specified Subsidiaries.

62. The amendment to increase the number of votes that may be cast by holders of the Common Shares, as described in Paragraph 42(f)(i), is being undertaken to ensure that, for the purposes of subsection 86(1), all of the Class A Common Shares are being disposed of for “other shares” of the capital stock of Parent on the Exchange.

63. The selection of the XXXXXXXXXX exchange ratio to constrain the number of Newco Shares issued, as described in Paragraph 42(g), is motivated solely by commercial considerations. The XXXXXXXXXX exchange ratio is set to ensure that a reasonable number of Newco Shares are issued after the execution of the Plan of Arrangement and that the trading price of the Newco Shares after the Arrangement is not mere pennies.

64. The Arrangement that separates the Specified Subsidiaries from the Parent Group, as described in Paragraph 42, is intended to permit the members of the Parent Group to devote their attention and commercial efforts solely to the advancement of the elements of the XXXXXXXXXX business currently being pursued by the subsidiaries of Second Tier US Subsidiary (other than the Specified Subsidiaries).

The ability to focus solely on a narrower subset of the XXXXXXXXXX will permit the Parent Group to capture greater efficiencies and be able to respond to emerging market dynamics in a more effective manner.

Conversely, resources otherwise required to be deployed to facilitate and manage the greater integration of the operations of the Specified Subsidiaries with those of the other indirect subsidiaries of Parent can be devoted to efforts that will accrete greater value to the shareholders of Parent.

The management of Parent believes that:

(a) the Arrangement may also unlock shareholder value by permitting Parent and Newco to separately trade on the public market as free-standing corporations; and

(b) the combined trading prices of the shares of Parent and Newco, when traded separately, will exceed what would be the trading price of Parent if the Proposed Transactions were not executed.

VII. RULINGS

Provided that the preceding statements constitute a complete and accurate disclosure of all of the relevant facts, transactions, Additional Information and the purposes of the Past Transactions and the Proposed Transactions, and provided that the Proposed Transactions are completed in the manner described above, our Rulings are set forth below:

A. The redesignation of the Common Shares as the Class A Common Shares and the amendment to their terms to increase the voting rights, as described in Paragraph 42(f)(i), will not, in and by themselves, result in a Disposition of the Common Shares.

B. On the Exchange, provided that:

(a) the Class A Common Shares constitute Capital Property to a holder; and

(b) the holder and Parent do not file an election under subsection 85(1) or (2) in respect of the Exchange,

the provisions of subsection 86(1) will apply, and the provisions of subsection 86(2) will not apply, to the Disposition of a Class A Common Share for a New Common Share and XXXXXXXXXX of a Newco Share, such that:

(c) the cost to the holder of the Newco Shares received on the Exchange will be deemed by paragraph 86(1)(a) to be the amount equal to the aggregate FMV, at the time of the Exchange, of the Newco Shares received by the holder on the Exchange;

(d) the cost to the holder of the New Common Shares received on the Exchange, will be deemed by paragraph 86(1)(b) to be the amount, if any, by which the holder’s aggregate ACB of its Class A Common Shares, immediately before the Exchange, exceeds the aggregate FMV, at the time of the Exchange, of the Newco Shares received by the holder on the Exchange;

(e) pursuant to paragraph 86(1)(c), the holder will be deemed to have disposed of its Class A Common Shares for Proceeds of Disposition equal to the aggregate cost to the holder of all the Newco Shares and the New Common Shares received by the holder for its Class A Common Shares, as described in Rulings B(c) and (d), respectively; and

(f) to the extent that the holder’s Proceeds of Disposition of its Class A Common Shares, as described in Ruling B(e), exceeds the holder’s aggregate ACB thereof, the excess will be deemed to be a capital gain of the holder for the year from the Disposition of such shares.

C. The provisions of subsection 84(1) or (2) will not apply to deem a dividend to have been paid by Parent and received by the holders of the Class A Common Shares on the Reorganization.

D. Subsection 84(3) only will apply to deem a dividend to have been paid by Parent and received by the holders of the Class A Common Shares on the acquisition or cancellation by Parent of the Class A Common Shares on the Reorganization, to the extent that the sum of:

(a) the aggregate FMV, at the time of the Exchange, of the Newco Shares paid by Parent to the holders of the Class A Common Shares on the Exchange; and

(b) the aggregate PUC, at the time of the Exchange, of the New Common Shares paid by Parent to the holders of the Class A Common Shares on the Exchange,

exceeds

(c) the aggregate PUC of the Class A Common Shares owned by the holders of the Class A Common Shares immediately before the Exchange.

E. The provisions of subsection 84(4.1) will not apply to deem any amount paid by Parent on the reduction of the aggregate PUC of the Class A Common Shares (owned by all of the shareholders of the Class A Common Shares), on the Reorganization of the Capital of Parent, to be a dividend to have been paid by Parent and received by the shareholders of the Class A Common Shares.

F. Part II.1 will not apply to Parent as a consequence of the Exchange.

G. The provisions of subsection 15(1) will not, in and of itself, be applied as a result of the Proposed Transactions described in Paragraphs 42, 43 and 44.

H. The provisions of subsection 245(2) will not be applied as a result of the Proposed Transactions described in Paragraphs 42, 43 and 44, in and by themselves, to redetermine the tax consequences confirmed in the Rulings.

The Rulings are given subject to the limitations and qualifications set out in Information Circular 70-6R7 issued by the CRA on April 22, 2016, and are binding on the CRA provided that the Proposed Transactions are completed on or before XXXXXXXXXX.

The Rulings are based on the Act in its present form and do not take into account any proposed amendments to the Act which, if enacted, could have an effect on the Rulings provided herein.

COMMENTS

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

(a) the Capital or PUC of any share, or the ACB or FMV of any property, referred to herein;

(b) any other tax account of any corporation referred to herein;

(c) the characterization of any property described herein to the holder thereof; or

(d) any other tax consequence relating to the facts, transactions, 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, including whether any of the Proposed Transactions would also be included in a Series of Transactions or Events that includes other transactions or events that are not described in this letter.

Yours truly,

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