2096 Ruling 9600283 - BUTTERFLY REORGANIZATION

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

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the Department.

Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle du ministère.

3-960028
XXXXXXXXXX

Attention: XXXXXXXXXX

XXXXXXXXXX 1996

Dear Sirs:

Re:XXXXXXXXXX
Advance Income Tax Ruling Request

This is in reply to your letter of XXXXXXXXXX in which you requested various advance income tax rulings on behalf of the above-noted taxpayers. We also acknowledge your letters of XXXXXXXXXX and our telephone conversations in connection herewith.

We understand that, to the best of your knowledge and that of the taxpayers involved, none of the issues involved in the requested rulings is being considered by a district office or a taxation centre in connection with a tax return already filed, or is under objection or appeal.

DEFINITIONS

Non-Statutory Terms

In this letter unless otherwise expressly stated:

(a)"XXXXXXXXXX" means the Business Corporations Act, XXXXXXXXXX as amended;

(b)"Applicants" means XXXXXXXXXX;

(c)"Class XXXXXXXXXX Shares" means the authorized Class XXXXXXXXXX voting, fully participating, common shares of XXXXXXXXXX;

(d)"Class XXXXXXXXXX Shares" means the authorized Class XXXXXXXXXX voting, non-cumulative, redeemable, retractable preferred shares of XXXXXXXXXX;

(e)"Class XXXXXXXXXX Shares" means the authorized Class XXXXXXXXXX voting, non-cumulative, redeemable, retractable preferred shares of XXXXXXXXXX;

(f)"Class XXXXXXXXXX Shares" means the authorized Class XXXXXXXXXX voting, non-cumulative, preferred shares of XXXXXXXXXX with a limited participation entitlement on liquidation;

(g)"Class XXXXXXXXXX Shares" means the authorized Class XXXXXXXXXX voting, non-cumulative, preferred shares of XXXXXXXXXX with a limited participation entitlement on liquidation;

(h)"Estate" means the testamentary trust for the estate of the late XXXXXXXXXX;

(i)"Exchange" has the meaning assigned in Paragraph 28;

(j) XXXXXXXXXX;

(k)"XXXXXXXXXX" means XXXXXXXXXX who is the trustee for the testamentary trust for the estate of the late XXXXXXXXXX;

(l)" XXXXXXXXXX " has the meaning assigned in Paragraph 29;

(m) XXXXXXXXXX;

(n)"Newco" means the new XXXXXXXXXX corporation described in paragraph 26;

(o)"New Common Shares" has the meaning assigned in Paragraph 28;

(p)"New Preferred Shares" has the meaning assigned in Paragraph 28;

(q)"Newco Common Shares" has the meaning assigned in Paragraph 27;

(r)"Newco Preferred Shares" has the meaning assigned in Paragraph 27;

(s)"Newco Reorganization Shares" has the meaning assigned in Paragraph 27;

(t)"Newco Redemption Amount" has the meaning assigned in Paragraph 36;

(u)"Reorganization Shares" has the meaning assigned in Paragraph 28;

(v) XXXXXXXXXX;

(w)"XXXXXXXXXX Shares" has the meaning assigned in Paragraph 10;

(x) XXXXXXXXXX;

(y)"Trust" means the XXXXXXXXXX.

Statutory Terms

In this letter unless otherwise expressly stated:

(a)"Act" means the Income Tax Act, R.S.C. 1985 (5th Supp.) c.1 as amended to the date hereof, and unless otherwise stated, every reference herein to a part, section, subsection, paragraph or subparagraph is a reference to the relevant provision of the Act;

(b)"ACB" means adjusted cost base as that expression is defined in section 54 and subsection 248(1);

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

(d)"cost amount" has the meaning assigned by subsection 248(1);

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

(f)"dividend rental arrangement" has the meaning assigned by subsection 248(1);

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

(h)"paid-up capital" has the meaning assigned by subsection 89(1);

(i)"private corporation" has the meaning assigned by subsection 89(1);

(j)"RDTOH" means "refundable dividend tax on hand" which has the meaning assigned by subsection 129(3);

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

(l)"series of transactions or events" has the meaning assigned by subsection 248(10);

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

(n)"specified investment business" has the meaning assigned by subsection 125(7);

(o)"stated capital" has the meaning assigned in XXXXXXXXXX; and

(p)"taxable Canadian corporation" has the meaning assigned by subsection 89(1).

Our understanding of the facts and of the proposed transactions is as follows:

FACTS

1.XXXXXXXXXX is a private corporation and a taxable Canadian corporation incorporated under the XXXXXXXXXX is engaged in the XXXXXXXXXX.

2.The issued and outstanding shares of XXXXXXXXXX are held as follows:

see chart in permanent file.

The paid-up capital of:

(a)the Class XXXXXXXXXX shares is $XXXXXXXXXX;

(b)the Class XXXXXXXXXX shares is $XXXXXXXXXX

(c)the Class XXXXXXXXXX shares is $XXXXXXXXXX;

(d)the Class XXXXXXXXXX shares is $XXXXXXXXXX; and

(e)the Glass XXXXXXXXXX shares is $XXXXXXXXXX

3.The outstanding Class XXXXXXXXXX Shares and Class XXXXXXXXXX Shares have a XXXXXXXXXX fair market value. The dividend and capital entitlements of the Class XXXXXXXXXX Shares and Class XXXXXXXXXX Shares are restricted to amounts realized by XXXXXXXXXX which are attributable to the Class XXXXXXXXXX shares of XXXXXXXXXX In turn, the dividend and return of capital rights of the Class XXXXXXXXXX shares of XXXXXXXXXX are restricted to income that XXXXXXXXXX derives directly or indirectly from the common shares of XXXXXXXXXX.

XXXXXXXXXX disposed of its shares of XXXXXXXXXX to an arm's-length purchaser, XXXXXXXXXX The after-tax proceeds from the disposition of the shares of XXXXXXXXXX were paid to XXXXXXXXXX as a dividend on its Class XXXXXXXXXX shares by XXXXXXXXXX has flowed the foregoing dividend through as a dividend to the holders of its Class XXXXXXXXXX Shares and Class XXXXXXXXXX Shares in accordance with the rights of those shares.

The sale agreement on the disposition of the XXXXXXXXXX shares included an XXXXXXXXXX As a result there will be no further dividends or return of capital on the Class XXXXXXXXXX Shares and Class XXXXXXXXXX Shares.

4.Each holder of shares of XXXXXXXXXX holds XXXXXXXXXX shares as capital property.

5.Each of XXXXXXXXXX is a resident of Canada for purposes of the Act.

XXXXXXXXXX

6.The taxation year of XXXXXXXXXX ends on XXXXXXXXXX

As at XXXXXXXXXX had RDTOH in the amount of $XXXXXXXXXX

7.The Trust is a trust settled by XXXXXXXXXX The trustees of the Trust are XXXXXXXXXX Decisions of the Trust are determined by a majority of the trustees. The beneficiaries of the Trust are:

(a) XXXXXXXXXX

(b) XXXXXXXXXX

8.XXXXXXXXXX is a private corporation and a taxable Canadian corporation incorporated under the XXXXXXXXXX.

The only issued and outstanding shares of XXXXXXXXXX Class XXXXXXXXXX voting, fully participating common shares, XXXXXXXXXX of which are held by XXXXXXXXXX and XXXXXXXXXX.

9.XXXXXXXXXX is a private corporation and a taxable Canadian corporation incorporated under the XXXXXXXXXX.

The issued and outstanding shares of XXXXXXXXXX are held as follows:

(a) XXXXXXXXXX Class XXXXXXXXXX voting, fully participating common shares held by the Trust;

(b) XXXXXXXXXX Class XXXXXXXXXX voting, non-cumulative, redeemable preferred shares held by XXXXXXXXXX.

10.XXXXXXXXXX is a private corporation and a taxable Canadian corporation incorporated under the XXXXXXXXXX is in the business of XXXXXXXXXX to arm's-length parties on a fee for service basis.

The taxation year of XXXXXXXXXX ends on XXXXXXXXXX.

11.XXXXXXXXXX owns all the issued and outstanding shares of XXXXXXXXXX which consist of:

(a)XXXXXXXXXX Class XXXXXXXXXX voting, fully participating common shares which have an aggregate paid-up capital of $XXXXXXXXXX; and

(b)XXXXXXXXXX Class XXXXXXXXXX non-voting, non-cumulative, redeemable, retractable preferred shares with an aggregate paid-up capital of $XXXXXXXXXX

XXXXXXXXXX holds the shares of XXXXXXXXXX as capital property.

XXXXXXXXXX owns XXXXXXXXXX common shares and XXXXXXXXXX preferred shares of XXXXXXXXXX is a private corporation and a taxable Canadian corporation incorporated under the XXXXXXXXXX The fair market value of the XXXXXXXXXX shares is approximately $XXXXXXXXXX

12.XXXXXXXXXX is a private corporation and a taxable Canadian corporation incorporated under the XXXXXXXXXX

13.The only issued and outstanding shares of XXXXXXXXXX are XXXXXXXXXX voting, fully participating common shares, which are held as follows:

Shareholder Number of Shares

XXXXXXXXXX

The paid-up capital of the XXXXXXXXXX common shares of XXXXXXXXXX is $XXXXXXXXXX and the ACB to each holder of such shares is $XXXXXXXXXX per share.

14.Immediately before the transfers of property described in paragraph 36 below (the "Butterfly Transfer"), the property of XXXXXXXXXX will be determined on a consolidated basis by including the appropriate pro rata share of the assets of any corporation over which XXXXXXXXXX has the ability to exercise significant influence (XXXXXXXXXX and each such company will hereinafter be referred to as the "XXXXXXXXXX") and will be classified into three types of property for the purposes of a distribution, as follows:

(a)cash or near cash property, comprising all of the current assets of the XXXXXXXXXX Companies, including any cash, deposits, marketable securities, accounts receivable, inventory and rights arising from prepaid expenses (hereinafter referred to as "prepaid expenses");

(b)investment property, comprising all of the assets of the XXXXXXXXXX other than cash or near cash property, any income from which would, for the purposes of the Act, be income from property or a specified investment business; and

(c)business property, comprising all of the assets of the XXXXXXXXXX other than cash or near cash property, any income from which would be income from a business (other than a specified investment business).

For greater certainty, any tax accounts, such as the balance of any RDTOH account or capital dividend account of the XXXXXXXXXX will not be considered property for purposes of the proposed transactions described herein.

For the purposes of this paragraph, XXXXXXXXXX will be considered to have significant influence over a corporation if it has significant influence, within the meaning of section 3050 of the CICA Handbook, over that corporation or over any other corporation which has significant influence over that corporation. For greater certainty, XXXXXXXXXX will be considered to exercise significant influence over XXXXXXXXXX will not be considered to exercise significant influence over XXXXXXXXXX.

For greater certainty, the fair market value of the shares of any corporation over which XXXXXXXXXX has the ability to exercise significant influence and of any indebtedness receivable by XXXXXXXXXX from such a corporation will be allocated between the three types of property by multiplying the fair market value of the shares of the particular corporation or amount receivable from the particular corporation, as the case may be, by the proportion that the net fair market value of each type of property owned by the particular corporation (as determined in this paragraph and paragraph 16 below) is of the aggregate net fair market value of all of the property owned by such corporation.

XXXXXXXXXX

15.In determining, on a consolidated basis, the net fair market value of its cash or near-cash property, business property and investment property immediately before the Butterfly Transfer, liabilities of XXXXXXXXXX also determined on a consolidated basis by including the appropriate pro rata share of the liabilities of each corporation over which XXXXXXXXXX has significant influence, will be deducted in the calculation of the net fair market value of each such type of property of XXXXXXXXXX in the following manner:

(a)current liabilities of XXXXXXXXXX determined on a consolidated basis, will be allocated to cash or near-cash property;

(b)liabilities of XXXXXXXXXX determined on a consolidated basis, other than current liabilities, that relate, to a particular property, will then be allocated to the particular property (and effectively to the type to which the particular property belongs) to the extent of its fair market value. Liabilities that pertain to a type of property, but not to a particular property, will then be allocated to that type of property, but not in excess of the net fair market value of such type of property after the allocation of liabilities to a particular property, as described herein; and

(c)any liabilities ("excess unallocated liabilities"), determined on a consolidated basis, that remain after the allocations described in steps (a) and (b) are made (including excess current liabilities, if any), will then be allocated to the cash or near-cash property, business property, and investment property of XXXXXXXXXX on a consolidated basis based on the relative net fair market value of each type of property prior to the allocation of such excess unallocated liabilities.

For the purpose of calculating the net fair market value of the types of property of XXXXXXXXXX deferred taxes, if any, will be ignored.

16.XXXXXXXXXX and Newco are neither restricted financial institutions nor specified financial institutions.

17.No property has or will become property of, and no liabilities have been or will be incurred by, XXXXXXXXXX in contemplation of and before the Butterfly Transfer, except as described herein.

18.Neither XXXXXXXXXX nor Newco will dispose of any of the assets owned by XXXXXXXXXX immediately before the Butterfly Transfer, following the Proposed Transactions and neither corporation will dispose of any assets as part of the same series of transactions or events, other than in the ordinary course of business. XXXXXXXXXX will not dispose of any of its assets following the Proposed Transactions as part of the same series of transactions or events, other than in the ordinary course of business.

19.There are not, and will not be at any time prior to the completion of the Proposed Transactions, any guarantee agreements in respect of any of the Reorganization Shares or Newco Preferred Shares.

20.Neither XXXXXXXXXX nor Newco has entered, or will enter, into a dividend rental arrangement in respect of any of the shares to be redeemed as part of the Proposed Transactions.

21.None of the Reorganization Shares or the Newco Preferred Shares will be issued or acquired as part of a series of transactions described in subsection 112(2.5).

22.Neither XXXXXXXXXX nor Newco is a financial intermediary corporation.

23.Each of XXXXXXXXXX and Newco will have the financial capacity to honour, upon presentation for payment, the amount payable under the promissory note issued by it as part of the Proposed Transactions.

ADDITIONAL INFORMATION

24.XXXXXXXXXX has agreed, conditional on obtaining financing, to purchase a XXXXXXXXXX. The proposed closing date of the purchase of the XXXXXXXXXX will beXXXXXXXXXX.

XXXXXXXXXX The proposed purchase of the XXXXXXXXXX is not in contemplation of the series of Proposed Transactions. The opportunity to acquire the XXXXXXXXXX arose independently of the Proposed Transactions and would be undertaken irrespective of whether the Proposed Transactions are carried out by the Participants.

XXXXXXXXXX has entered into a sale agreement with XXXXXXXXXX an arm's-length party, for the sale to XXXXXXXXXX for cash proceeds of disposition of $XXXXXXXXXX The sale will take place before the Butterfly Transfer.

PROPOSED TRANSACTIONS

25.XXXXXXXXXX will declare and pay a dividend to XXXXXXXXXX of such amount that, immediately before the Butterfly Transfer, the cash or near cash property of XXXXXXXXXX will have a net fair market value, determined in the manner described in paragraphs 14 and 15 above, that is equal to nil. XXXXXXXXXX will pay the dividend by transferring to XXXXXXXXXX cash or near cash assets, including certain accounts receivable immediately before the Butterfly Transfer.

26.Newco will be incorporated under the XXXXXXXXXX and it will be a private corporation and a taxable Canadian corporation. No shares of Newco will be issued until the transfers described in paragraph 34 below.

27.The authorized share capital of Newco will consist of common shares ("Newco Common Shares") and two classes of redeemable and retractable preferred shares ("Newco Preferred Shares" and "Newco Reorganization Shares").

The Newco Preferred Shares will have the following attributes:

(a)each Newco Preferred Share will be redeemable, subject to applicable law, at any time at the option of Newco at a redemption amount equal to the aggregate fair market value of the assets transferred to Newco at the time of issuance divided by the number of Newco Preferred Shares issued as consideration therefor;

(b)each Newco Preferred Share will be retractable, subject to applicable law, at any time at the option of the holder at a retraction amount equal to the redemption amount of the share at that time, as described in subparagraph (a) above;

(c)the holder of each Newco Preferred Share will be entitled to a non-cumulative cash dividend as and when declared by the Board of Directors from time to time, which dividend need not also be declared on any other class of shares of Newco;

(d)there will be a provision restricting the payment of dividends on other classes of shares so that no such dividends may be paid on any other class of shares of Newco if the resulting realizable value of the net assets of Newco after payment of the dividends would be less than the aggregate redemption amount, as described in subparagraph (a) above, of all of the Newco Preferred Shares then outstanding;

(e)the holder of each Newco Preferred Share will be entitled, upon the liquidation, dissolution or winding-up of Newco, to a payment in priority to all other classes of shares of Newco of an amount equal to the redemption amount of that share at that time, as described in subparagraph (a) above, to the extent of the amount or value of property available under applicable law for payment to shareholders upon dissolution, but will be entitled to no more than the amount of that payment; and

(f)the holder of a Newco Preferred Share will be entitled to one vote per share at meetings of shareholders of Newco.

The Newco Reorganization Shares will have the same attributes as the Newco Preferred Shares described in subparagraphs (a) to (e) above and the holder of a Newco Reorganization Share will not be entitled to vote at meetings of shareholders of Newco, except in circumstances where the holders of the class are entitled to a vote pursuant to the XXXXXXXXXX.

28.Pursuant to the filing of Articles of Amendment under the XXXXXXXXXX will reorganize its capital. The share capital of XXXXXXXXXX will be reorganized by converting all the issued and outstanding shares of XXXXXXXXXX into New Preferred Shares and Reorganization Shares. Each holder of shares of XXXXXXXXXX will exchange all of his shares for:

(a)new voting, redeemable and retractable preferred shares ("New Preferred Shares") and non-voting, redeemable and retractable special shares ("Reorganization Shares"); and

(b)in the case of the holders of Class XXXXXXXXXX Shares, in addition to New Preferred Shares and Reorganization Shares, one new voting, fully participating common shares ("New Common Shares") for each Class XXXXXXXXXX Share held by the holder immediately before the Exchange.

Elections under subsection 85(1) will not be filed with respect to the exchange of shares described herein.

Immediately following the Exchange, all of the previously issued and outstanding Class XXXXXXXXXX Shares, Class XXXXXXXXXX Shares, Class XXXXXXXXXX Shares, Class XXXXXXXXXX Shares and Class XXXXXXXXXX Shares will be cancelled.

29.The redemption amount ("XXXXXXXXXX Redemption Amount") of all of the Reorganization Shares issued on the Exchange will be equal to a proportion ("Business Proportion") of the fair market value of all the issued shares of XXXXXXXXXX immediately before the Exchange. The Business Proportion is the proportion that:

(a)the net fair market value of the business property of XXXXXXXXXX immediately before the Butterfly Transfer

is of

(b)the aggregate net fair market value of all the business property of XXXXXXXXXX immediately before the Butterfly Transfer.

Each holder of shares of XXXXXXXXXX immediately before the Exchange will receive that number of Reorganization Shares which will have an aggregate redemption amount equal to the Business Proportion of the total fair market value of all the shares of XXXXXXXXXX that he owns immediately before the Exchange.

30.The redemption amount of the New Preferred Shares will be equal to the fair market value of all the issued shares of XXXXXXXXXX immediately before the Exchange less the XXXXXXXXXX Redemption Amount and the amount equal to the fair market value of the New Common Shares.

31.The articles of amendment of XXXXXXXXXX will provide that the New Preferred Shares will have the following attributes:

(a)each New Preferred Share will be redeemable and retractable for an amount equal to the amount described in paragraph 30 above, divided by the number of New Preferred Shares issued as consideration therefor;

(b)the holder of each New Preferred Share will be entitled to a non-cumulative cash dividend as and when declared by the Board of Directors from time to time, which dividend need not also be declared on any other class of shares ofXXXXXXXXXX;

(c)there will be a provision restricting the payment of dividends on other classes of shares so that no such dividends may be paid on any other class of shares of XXXXXXXXXX if the resulting realizable value of the net assets of XXXXXXXXXX after the payment of the dividends would be less than the aggregate of the redemption amount of all of the New Preferred Shares then outstanding;

(d)the holder of each New Preferred Share will be entitled , upon the liquidation, dissolution or winding-up of XXXXXXXXXX, to a payment ratably with holders of Reorganization Shares and otherwise in priority to all other classes of shares of XXXXXXXXXX of an amount equal to the redemption amount of that share at that time, as described in subparagraph 31(a), to the extent of the amount or value of property available under applicable law for payment to shareholders upon dissolution, but will be entitled to no more than the amount of that payment; and

(e)the holder of a New Preferred Share will be entitled to one vote at meetings of shareholders of XXXXXXXXXX.

32.The articles of amendment of XXXXXXXXXX will provide that the Reorganization Shares will have the following attributes:

(a)each Reorganization Share will be redeemable and retractable for an amount equal to the amount described in paragraph 29 above, divided by the number of Reorganization Shares issued as consideration therefor;

(b)the holder of each Reorganization Share will be entitled to a non-cumulative cash dividend equal to XXXXXXXXXX% of the redemption amount of the share at that time, as described in subparagraph 32(a);

(c)there will be a provision restricting the payment of dividends on other classes of shares so that no such dividends may be paid on any other class of shares of XXXXXXXXXX if the resulting realizable value of the net assets of XXXXXXXXXX after the payment of the dividends would be less than the aggregate of the redemption amount, as described in subparagraph 32(a), of all of the Reorganization Shares then outstanding;

(d)the holder of each Reorganization Share will be entitled , upon the liquidation, dissolution or winding-up of XXXXXXXXXX to a payment ratably with holders of New Preferred Shares and otherwise in priority to all other classes of shares of XXXXXXXXXX of an amount equal to the redemption amount of that share at that time, as described in subparagraph 32(a), to the extent of the amount or value of property available under applicable law for payment to shareholders upon dissolution, but will be entitled to no more than the amount of that payment; and

(e)the holder of a Reorganization Share will not be entitled to vote at meetings of shareholders of XXXXXXXXXX except in circumstances where the holders of the class are entitled to a vote pursuant to the XXXXXXXXXX.

33.The aggregate of the amounts to be credited to the stated capital accounts of the New Common Shares, the New Preferred Shares and the Reorganization Shares will be equal to the amount of the paid-up capital of the Class XXXXXXXXXX Shares, the Class XXXXXXXXXX Shares, the Class XXXXXXXXXX Shares, the Class XXXXXXXXXX Shares and the Class XXXXXXXXXX Shares immediately before the Exchange. The stated capital of the outstanding Class XXXXXXXXXX Shares, Class XXXXXXXXXX Shares, Class XXXXXXXXXX Shares, Class XXXXXXXXXX Shares and the Class XXXXXXXXXX Shares will be allocated between the New Common Shares, the New Preferred Shares and the Reorganization Shares based on the proportion that the fair market value of the New Common Shares, the New Preferred Shares and the Reorganization Shares, as the case may be, is of the fair market value of all new shares issued.

34.Each of the XXXXXXXXXX will transfer all of the Reorganization Shares that they own to Newco. As sole consideration for such transfer, Newco will issue to the respective transferor Newco Preferred Shares that are redeemable and retractable in the aggregate at an amount equal to the fair market value of the Reorganization Shares transferred to Newco.

Newco will add to the stated capital account maintained for its Newco Preferred Shares an amount not to exceed the paid-up capital of the Reorganization Shares. The paid-up capital of the Reorganization Shares will not exceed the adjusted cost base of such shares to its respective holder.

35.In connection with each transfer of shares described in paragraph 34 above, the transferor and the transferee will jointly elect in prescribed form within the time limit referred to in subsection 85(6), to have the provisions of subsection 85(1) apply to the transfer. The agreed amount in respect of the shares so transferred will, in each case, be equal to the adjusted cost base to the particular transferor, immediately before the transfer, which amount will be less than the fair market value of such shares.

36.XXXXXXXXXX will sell, at fair market value, to Newco a portion of its cash and near-cash property, business property (XXXXXXXXXX) and investment property. As a result of such transfer, the net fair market value of the cash and near-cash property, business property and investment property received by Newco will be equal to the proportion of the net fair market value of all of the cash and near-cash property, business property and investment property, respectively, owned by XXXXXXXXXX immediately before the transfer, that:

(a)the fair market value, immediately before the transfer, of all the shares of the capital stock of XXXXXXXXXX owned by Newco at that time

is of

(b)the fair market value, immediately before the transfer, of all the issued shares of the capital stock of XXXXXXXXXX at that time.

In consideration for such transfer, Newco will issue to XXXXXXXXXX Newco Reorganization Shares with an aggregate redemption amount ("Newco Redemption Amount") equal to the aggregate net fair market value of the transferred property.

Newco will add to the stated capital account maintained for its Newco Reorganization Shares an amount equal to the agreed amounts in respect of the transfer as described in paragraph 37 below.

37.XXXXXXXXXX and Newco will jointly elect in prescribed form within the time limit referred to in subsection 85(6), to have the provisions of subsection 85(1) apply to the transfer of each property of XXXXXXXXXX that is an eligible property transferred to Newco. The agreed amount in respect of such property so transferred will, in each case, be equal to the lesser of the cost amount or fair market value of the property at the time of the transfer. The fair market value of each property will equal or exceed the agreed amount.

38.Newco will redeem all of the Newco Reorganization Shares held by XXXXXXXXXX for an amount equal to the Newco Redemption Amount. This amount will be satisfied by the issuance of a non-interest-bearing demand promissory note ("Newco Redemption Note") with a principal amount equal to the Newco Redemption Amount.

39.XXXXXXXXXX will purchase for cancellation the Reorganization Shares owned by Newco. In consideration XXXXXXXXXX will issue to Newco a non-interest-bearing promissory note ("XXXXXXXXXX Redemption Note") with a principal amount equal to the XXXXXXXXXX Redemption Amount.

40.The Newco Redemption Note will be set off against the XXXXXXXXXX Redemption Note and they will be cancelled.

41.Each of the XXXXXXXXXX will transfer all of the XXXXXXXXXX shares that they own to Newco. As sole consideration for such transfer, Newco will issue to the respective transferor Newco Common Shares on XXXXXXXXXX basis.

Newco will add to the stated capital account maintained for its Newco Common Shares an amount equal to the paid-up capital of the XXXXXXXXXX common shares of $XXXXXXXXXX each.

42.In connection with each transfer of shares described in paragraph 41 above, the transferor and the transferee will jointly elect in prescribed form within the time limit referred to in subsection 85(6), to have the provisions of subsection 85(1) apply to the transfer. The agreed amount in respect of the shares so transferred will, in each case, be equal to the adjusted cost base to the particular transferor, immediately before the transfer, which amount will be less than the fair market value of such shares.

PURPOSE OF THE PROPOSED TRANSACTIONS

43.XXXXXXXXXX was formed as a corporation to provide XXXXXXXXXX It was formed for the purpose of XXXXXXXXXX The intention at that time was not to utilize

XXXXXXXXXX

The purpose of the proposed transactions is to allow

XXXXXXXXXX

RULINGS

Provided that the above statements are accurate and constitute complete disclosure of all of the relevant facts, proposed transactions and the purposes of the proposed transactions, we confirm the following:

A.Pursuant to subparagraph 256(7)(a)(ii), the cancellation of the shares of XXXXXXXXXX in the Exchange described in paragraph 28 will not result in an acquisition of control of XXXXXXXXXX

B.Provided that the Class XXXXXXXXXX Shares, the Class XXXXXXXXXX Shares, the Class XXXXXXXXXX Shares, the Class XXXXXXXXXX Shares and Class XXXXXXXXXX Shares constitute capital property to the particular holder and the particular holder does not make an election pursuant to subsection 85(1) with respect to such exchange, subsection 86(1) will apply to the Exchange, with the result that:

(a)the cost to the particular holder of the Reorganization Shares, the New Preferred Shares and New Common Shares in each case will be deemed by paragraph 86(1)(b) to be that proportion of the aggregate ACB to the particular holder, immediately before the Exchange, of all of the shares of XXXXXXXXXX held by that holder that

(i)the fair market value, immediately after the Exchange, of the Reorganization Shares, the New Preferred Shares or the New Common Shares, as the case may be,

is of

(ii)the fair market value, immediately after the Exchange, of all of the Reorganization Shares, the New Preferred Shares and the New Common Shares received by the particular shareholder for his shares of XXXXXXXXXX and

(b)the particular holder will be deemed by paragraph 86(1)(c) to have disposed of the shares of XXXXXXXXXX that he owned immediately before the Exchange for proceeds of disposition equal to the aggregate cost to the holder of all the Reorganization Shares, the New Preferred Shares and the New Common Shares received by the holder on the Exchange, as determined above.

For greater certainty, subsection 86(2) will not apply to such exchange.

C.The provisions of subsection 85(1) will apply, subject to the application of subsections 85(5.1) and 69(11), to the transfer:

(i)by each holder of the Reorganization Shares to Newco described in paragraph 34 above;

(ii)by XXXXXXXXXX of its properties that are eligible properties to Newco described in paragraph 36 above; and

(iii)by each holder of XXXXXXXXXX shares to Newco described in paragraph 41 above

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 the transfers.

D.For the purposes of subparagraph (b)(iii) of the definition of paid-up capital in subsection 89(1), the paid-up capital, immediately after the issuances described below, of:

(i)the Reorganization Shares, the New Preferred Shares and the New Common Shares, as the case may be, described in paragraph 33 above;

(ii)the Newco Preferred Shares described in paragraph 34 above;

(iii)the Newco Reorganization Shares described in paragraph 34 above; and

(iv)the Newco Common Shares described in paragraph 41 above

will be equal to their stated capital under the XXXXXXXXXX

E.On the redemption of the Newco Reorganization Shares held by XXXXXXXXXX as described in paragraph 38 above and the purchase for cancellation of the Reorganization Shares held by Newco as described in paragraph 39 above, the amount, if any, by which the amount paid to redeem or purchase the particular shares, as the case may be, exceeds the paid-up capital of the particular shares immediately before the redemption or the purchase for cancellation:

(i)will be deemed pursuant to paragraph 84(3)(a) to be a dividend paid by the issuer of such shares;

(ii)will be deemed pursuant to paragraph 84(3)(b) to be a dividend received by the holder of such shares;

(iii)will be included in income pursuant to paragraph 12(1)(j);

(iv)to the extent that a dividend described in (ii) above is a taxable dividend, such dividend will, pursuant to subsection 112(1), be deductible in computing the taxable income of the recipient for the year in which the dividend is deemed to have been received, and, for greater certainty, such deduction will not be precluded by any of subsections 112(2.1), (2.2), (2.3) or (2.4); and

(v)by virtue of the application of paragraph (j) of the definition "proceeds of disposition" in section 54, the amount of a deemed dividend described in (ii) above will be excluded from the proceeds of disposition of the share, and any loss arising from the disposition of the share will be reduced by the amount of such dividends pursuant to subsection 112(3).

F.No taxes under Part IV of the Act would be payable in respect of a dividend described in Ruling E above except as provided in paragraph 186(1)(b).

G.Part IV.1 of the Act will not apply to the deemed dividends described in Ruling E above because the dividends will be excepted dividends pursuant to paragraph (b) of the definition of "excepted dividend" in section 187.1.

H.Part VI.1 of the Act will not apply to the deemed dividends described in Ruling E above because the dividends will be excluded dividends pursuant to paragraph (a) of the definition of “excluded dividend” in subsection 191(1).

I.By virtue of the provisions of paragraph 55(3)(b), the provisions of subsection 55(2) will not apply to the deemed dividends described in Ruling E above, provided that, as part of the series of transactions that includes the proposed transactions described herein, there is no:

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

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

(c)acquisition of property in the circumstances described in paragraph 55(3.1)(c); or

(d)acquisition of property in the circumstances described in paragraph 55(3.1)(d)

which has not been described herein.

J.The provisions of section 80 will not apply to the settlement by way of set off of the Newco Redemption Note and XXXXXXXXXX Redemption Note described in paragraph 40 above.

K.The Reorganization Shares and the Newco Preferred Shares will be capital property for the purposes of the transactions described herein.

L.The provisions of subsections 15(1), 56(2), 56(4), and 246(1), will not apply to the proposed transactions, in and of themselves.

M.Subsection 245(2) will not be applied to the proposed transactions, in and by themselves, to redetermine the tax consequences confirmed in the rulings given.

These rulings are given subject to the limitations and qualifications set out in Information Circular 70-6R2 dated September 28, 1990 issued by Revenue Canada and are binding provided that the proposed transactions are completed before July 31, 1996.

These rulings are based on the Act as it currently reads and do not take into account any future amendments, whether currently proposed or not, to the Act.

COMMENTS

1.XXXXXXXXXX had RDTOH at its year-end on XXXXXXXXXX (and will have a balance at its year-end on XXXXXXXXXX), and the taxation year of XXXXXXXXXX in which it purchases for cancellation the Reorganization Shares owned by Newco will coincide with the taxation year of Newco in which it redeems its Newco Preferred Shares held by XXXXXXXXXX Consequently, this gives rise to the so-called circularity problem with respect to RDTOH, which is described in the paper given by Mr. R. Read of this Department on pages 18:23/24 of the 1988 Conference Report of the Canadian Tax Foundation. As explained in that paper, it is important to ensure that the dividends deemed by subsection 84(3) to be paid on the redemption or purchase for cancellation of shares, are paid by a corporation that does not have any RDTOH and that does not receive any dividends from another corporation which was entitled to a dividend refund during the taxation year of the first mentioned corporation in which such corporation would redeem or purchase for cancellation its shares.

You have indicated that while you are aware of the Department's position as set out herein, you do not propose to avoid the problem of circularity as described herein. Consequently, we must inform you that, in our view, this will result in XXXXXXXXXX being subject to Part IV tax. It is also our view that the circularity problem causes uncertainty as to which corporation is ultimately entitled to a dividend refund and which corporation is ultimately liable for Part IV tax. Since the problem will affect the assessment of the income tax returns of XXXXXXXXXX, the district taxation office at which each of XXXXXXXXXX files its respective T2 income tax return will have to be consulted in order to determine which corporation will receive the dividend refund and which corporation will be subject to the Part IV tax liability described in these comments.

2.Nothing in this ruling should be construed as confirmation, express or implied, of the adjusted cost base or fair market value of the shares of XXXXXXXXXX

3.In the event of a subsequent disposition of any shares of XXXXXXXXXX nothing in this letter should be construed as implying that the transactions described herein will not, for the purposes of paragraph 110.6(7)(a), be considered as part of a series of transactions or events which includes such subsequent disposition of shares of XXXXXXXXXX

Yours truly,

for Director
Reorganizations and Foreign Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch