7 July 1996 Income Tax Severed Letter 9603093 - 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.

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.

960309 XXXXXXXXXX

Attention: XXXXXXXXXX

XXXXXXXXXX, 1996

Dear Sirs:

Re: XXXXXXXXXX Advance Income Tax Ruling

We are writing in response to your letter of XXXXXXXXXX wherein you requested an advance income tax ruling on behalf of the above- referenced taxpayers. We also acknowledge the additional information provided in your letters dated XXXXXXXXXX and in our various telephone conversations.

XXXXXXXXXX file their returns with the XXXXXXXXXX Taxation Centre. The rest of the above-referenced taxpayers file their returns with the XXXXXXXXXX Taxation Centre.

To the best of your knowledge and that of the taxpayers involved:

a) none of the issues involved in the requested rulings is being considered by a Tax Services Office or a Taxation Centre in connection with a tax return already filed, and

b) none of the issues involved in the requested rulings is the subject of any notice of objection or is under appeal. Definitions

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) "adjusted cost base" has the meaning assigned by section 54;

(c) "CBCA" means Canada Business Corporations Act;

(d) "capital dividend account" has the meaning assigned by subsection 89(1);

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

(f) "cost amount" has the meaning assigned under subsection 248(1);

(g) "dividend refund" has the meaning assigned by subsection 129(1);

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

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

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

(k) "predecessor corporation" has the meaning assigned by subsection 87(1);

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

(m) "RDTOH" means the expression "refundable dividend tax on hand" as defined in subsection 129(3);

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

(o) "significant influence" has the meaning assigned to that term by section 3050 of the CICA Handbook;

(p) "specified financial institution" and "restricted financial institution" have the meanings assigned under subsection 248(1);

(q) "specified investment business" has the meaning assigned to that term by subsection 125(7) of the Act;

(r) "stated capital account" has the meaning assigned by section 26 of the CBCA;

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

(t) "taxable dividend" has the meaning assigned by subsection 89(1).

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

Facts

1. XXXXXXXXXX is a taxable Canadian corporation and a private corporation which was incorporated on XXXXXXXXXX under the CBCA.

The authorized share capital of XXXXXXXXXX includes:

(a) an unlimited number of common shares;

(b) an unlimited number of non-voting redeemable and retractable, XXXXXXXXXX% per month, non-cumulative Class A preferred shares; and

(c) an unlimited number of non-voting redeemable XXXXXXXXXX% per annum, non-cumulative preferred shares.

The issued and outstanding shares of XXXXXXXXXX, all of which are owned by XXXXXXXXXX consists of XXXXXXXXXX common shares and XXXXXXXXXX Class A preferred shares. The aggregate paid-up capital and adjusted cost base of the common shares of XXXXXXXXXX is $XXXXXXXXXX and $XXXXXXXXXX respectively. The aggregate paid-up capital and adjusted cost base of the Class A preferred shares of XXXXXXXXXX is $XXXXXXXXXX and $XXXXXXXXXX respectively. The Class A preferred shares have an aggregate redemption value of $XXXXXXXXXX and were issued on XXXXXXXXXX as part of a series of transactions in which XXXXXXXXXX crystallized XXXXXXXXXX capital gains exemption pursuant to subsection 110.6(2.1) of the Act. 2. XXXXXXXXXX is a taxable Canadian corporation and a private corporation which was incorporated on XXXXXXXXXX under the CBCA.

The authorized share capital of XXXXXXXXXX includes:

(a) an unlimited number of common shares;

(b) an unlimited number of non-voting redeemable and retractable, XXXXXXXXXX% per month, non-cumulative Class A preferred shares; and

(c) an unlimited number of non-voting redeemable XXXXXXXXXX% per annum, non-cumulative preferred shares.

The issued and outstanding shares of XXXXXXXXXX all of which are owned by XXXXXXXXXX consists of XXXXXXXXXX common shares and XXXXXXXXXX Class A preferred shares. The aggregate paid-up capital and adjusted cost base of the common shares of XXXXXXXXXX is $XXXXXXXXXX and $XXXXXXXXXX respectively. The aggregate paid-up capital and adjusted cost base of the Class A preferred shares of XXXXXXXXXX is $XXXXXXXXXX and $XXXXXXXXXX respectively. The Class A preferred shares have an aggregate redemption value of $XXXXXXXXXX and were issued on XXXXXXXXXX as part of a series of transactions in which XXXXXXXXXX crystallized XXXXXXXXXX capital gains exemption pursuant to subsection 110.6(2.1) of the Act.

3. XXXXXXXXXX and, pursuant to paragraph 55(5)(e), are deemed for purposes of section 55 to be dealing with each other at arms length and not to be related.

4. XXXXXXXXXX is a taxable Canadian corporation and a private corporation which was incorporated on XXXXXXXXXX under the CBCA as XXXXXXXXXX By certificate of amendment dated XXXXXXXXXX the company changed its name from XXXXXXXXXX

The authorized share capital of XXXXXXXXXX includes the following classes of shares:

(i) unlimited number of voting Class A common;

(ii) unlimited number of non-voting redeemable, XXXXXXXXXX% per month non-cumulative Class A preferred; and

(iii) unlimited number of non-voting redeemable, XXXXXXXXXX% per month non-cumulative Class B preferred.

Each of XXXXXXXXXX currently owns XXXXXXXXXX Class A common shares, XXXXXXXXXX Class A preferred shares and XXXXXXXXXX Class B preferred shares of XXXXXXXXXX The aggregate paid-up capital of the Class A common shares is $XXXXXXXXXX while that of the Class A preferred shares and the Class B preferred shares is $XXXXXXXXXX and $XXXXXXXXXX respectively. The adjusted cost base of the Class A common shares of XXXXXXXXXX to each of XXXXXXXXXX is $XXXXXXXXXX The adjusted cost base of the Class A preferred shares and the Class B preferred shares of XXXXXXXXXX to each of XXXXXXXXXX is equal to their redemption value of $XXXXXXXXXX per share.

The Class A common, Class A preferred and Class B preferred shares of XXXXXXXXXX were issued on XXXXXXXXXX as consideration for the transfer by XXXXXXXXXX under subsection 85(1) of XXXXXXXXXX common, XXXXXXXXXX Class A preferred and XXXXXXXXXX Class B preferred shares of XXXXXXXXXX ceased operations effective XXXXXXXXXX and wound up pursuant to subsection 88(1) into XXXXXXXXXX

XXXXXXXXXX was a corporation incorporated XXXXXXXXXX under the name XXXXXXXXXX It was amalgamated under XXXXXXXXXX by Certificate of Amalgamation dated XXXXXXXXXX with XXXXXXXXXX

5. XXXXXXXXXX The assets and liabilities of XXXXXXXXXX consist of the net operating assets of the

XXXXXXXXXX

In addition, XXXXXXXXXX currently has certain loans receivable from its officers and shareholders. The loans receivable from shareholders are not subject to any specific terms of repayment whereas the XXXXXXXXXX loans are subject to specific repayment terms. The balances of these loans receivable at XXXXXXXXXX year end were as follows:

XXXXXXXXXX

6. XXXXXXXXXX generally pays annual dividends to its shareholders. Dividends paid over the last five years are as follows:

XXXXXXXXXX

7. XXXXXXXXXX owns XXXXXXXXXX common shares of XXXXXXXXXX which represents XXXXXXXXXX% of the issued and outstanding shares of XXXXXXXXXX The paid-up capital of the common shares of XXXXXXXXXX was incorporated XXXXXXXXXX and was continued under the CBCA on XXXXXXXXXX It is a taxable Canadian corporation and a private corporation.

XXXXXXXXXX The assets and liabilities of XXXXXXXXXX consist of the net operating assets for the XXXXXXXXXX services it provides to XXXXXXXXXX Included in the current assets is a trade receivable due from XXXXXXXXXX on account of XXXXXXXXXX services rendered to it.

8. XXXXXXXXXX is a taxable Canadian corporation and a private corporation which was incorporated on XXXXXXXXXX under the CBCA. XXXXXXXXXX

XXXXXXXXXX owns XXXXXXXXXX non-voting, redeemable and retractable XXXXXXXXXX% per annum non- cumulative Class B preferred shares of XXXXXXXXXX having an aggregate paid-up capital and adjusted cost base of $XXXXXXXXXX The aggregate redemption value of the Class B preferred shares is $XXXXXXXXXX

Each of XXXXXXXXXX owns XXXXXXXXXX common shares of XXXXXXXXXX No other shares of XXXXXXXXXX are currently issued and outstanding.

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

The issued and outstanding shares of XXXXXXXXXX consists of XXXXXXXXXX Class A common shares, XXXXXXXXXX of which is held by each of XXXXXXXXXX Each of XXXXXXXXXX acquired its XXXXXXXXXX Class A common share for a subscription price of $XXXXXXXXXX

XXXXXXXXXX commenced operations in XXXXXXXXXX and its first year-end was XXXXXXXXXX

10. The shares of XXXXXXXXXX are capital property to each of XXXXXXXXXX The shares of XXXXXXXXXX are capital property to XXXXXXXXXX

11. Neither XXXXXXXXXX expects to have any refundable dividend tax on hand at the end of its taxation year in which the proposed transactions are carried out. XXXXXXXXXX may have a small amount of refundable dividend tax on hand at the end of their taxation year in which the proposed transactions are carried out.

12. XXXXXXXXXX with the result that, for purposes of section 55, XXXXXXXXXX are related pursuant to subparagraph 251(2)(c)(i).

Proposed Transactions

13. XXXXXXXXXX will amalgamate pursuant to the provisions of the CBCA to form a corporation (hereinafter referred to as "Amalco") in such manner that:

a) all of the property (except amounts receivable from any predecessor corporation) of the predecessor corporations immediately before the amalgamation will become property of Amalco by virtue of the amalgamation;

b) all of the liabilities (except amounts payable to any predecessor corporation) of the predecessor corporations immediately before the amalgamation will become liabilities of Amalco by virtue of the amalgamation; and

c) all of the shareholders of the predecessor corporations immediately before the amalgamation will receive shares of the capital stock of Amalco by virtue of the amalgamation.

Upon the amalgamation, Amalco will issue XXXXXXXXXX common shares to each of XXXXXXXXXX None of the shareholders of Amalco described herein will receive any consideration for the disposition of their shares in XXXXXXXXXX other than the Amalco common shares referred to herein. The common shares of Amalco will represent capital property to each of XXXXXXXXXX

Amalco will be a taxable Canadian corporation and a private corporation.

Amalco will add to the stated capital account of its common shares an amount which will not exceed the aggregate paid-up capital, immediately before the amalgamation, of all of the issued and outstanding shares of XXXXXXXXXX

14. Amalco will cause two new corporations ( hereinafter referred to as "XXXXXXXXXX") to be incorporated under the provisions of the CBCA. XXXXXXXXXX will each be a taxable Canadian corporation and a private corporation. The authorized share capital of XXXXXXXXXX will include an unlimited number of voting fully participating common shares.

No shares of either XXXXXXXXXX will be issued until the transfers described in paragraph 17 below.

15. Immediately before the transfers of property described in paragraph 17 below, the property of Amalco will be determined on a consolidated basis by including the appropriate pro rata share of the assets of any corporation over which Amalco has the ability to exercise significant influence (Amalco and such corporations will hereinafter be referred to as the "Amalco Group") and will be classified into three types of property for the purposes of the definition of "distribution" in subsection 55(1) of the Act, as follows:

(a) cash or near cash property, comprising all of the current assets of the Amalco Group, including any cash, deposits, marketable securities, accounts receivable, inventories, rights arising from prepaid expenses (hereinafter referred to as "prepaid expenses"), loans without any specific terms of repayment and the current portion of any term loans;

(b) investment property, comprising all of the assets of the Amalco Group, other than cash or near cash property, any income from which would, for purposes of the Act, be income from property or from a specified investment business, including the XXXXXXXXXX Class B preferred shares of XXXXXXXXXX and

(c) business property, comprising all of the assets of the Amalco Group, other than cash or near cash property, any income from which would, for the purposes of the Act, be income from a business (other than a specified investment business). For greater certainty, any tax accounts, such as the balance of any RDTOH or CDA of the Amalco Group, will not be considered property for purposes of the proposed transactions described herein.

For the purposes of this paragraph, Amalco will be considered to have significant influence over a corporation if it has significant influence over that corporation or over any other corporation that has significant influence over that corporation. For the purposes of this paragraph and paragraph 16 below, Amalco will not exercise significant influence over any corporation other than XXXXXXXXXX

For greater certainty, the fair market value of the XXXXXXXXXX common shares of XXXXXXXXXX and of any indebtedness receivable by Amalco from XXXXXXXXXX will be allocated between the three types of property by multiplying the fair market value of the shares of XXXXXXXXXX or amount receivable from XXXXXXXXXX as the case may be, by the proportion that the net fair market value of each type of property owned by XXXXXXXXXX (as determined in this paragraph and paragraph 16 below) is of the aggregate net fair market value of all the property owned by XXXXXXXXXX

16. In determining, on a consolidated basis, the net fair market value of each type of property of Amalco immediately before the transfers described in paragraph 17 below, the liabilities of Amalco and XXXXXXXXXX will be allocated to, and be deducted in the calculation of, the net fair market value of each such type of property of such corporation in the following manner:

(a) In determining the net fair market value of each type of property of XXXXXXXXXX immediately before the transfers described in paragraph 17 below, the liabilities of XXXXXXXXXX (other than any amount owing by it to Amalco) will be allocated to, and be deducted in the calculation of, the net fair market value of each type of property of XXXXXXXXXX in the following manner:

(i) current liabilities of XXXXXXXXXX will be allocated to the cash or near cash property (including any cash, accounts receivable, inventory and prepaid expenses) of XXXXXXXXXX in the proportion that the fair market value of each such property is of the fair market value of all cash or near cash property owned by XXXXXXXXXX To the extent that the allocation of current liabilities as described herein exceeds the aggregate fair market value of the cash or near cash property of XXXXXXXXXX will be considered to have a negative amount of cash or near cash property;

(ii) provided that the amount of XXXXXXXXXX current assets exceeds its current liabilities, any accounts receivable, inventories and prepaid expenses of XXXXXXXXXX initially classified in accordance with subparagraph (a)(i) as cash or near cash property, that will relate to XXXXXXXXXX business and that will be collected, sold or consumed by XXXXXXXXXX in the ordinary course of its business, will then be reclassified as business property and the net fair market value thereof, determined after the allocation of the current liabilities described in (a)(i) herein, will be included in the net fair market value of business property and will not be included in the net fair market value of cash or near cash property;

(iii) liabilities, other than current liabilities, of XXXXXXXXXX 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. To the extent that the allocation of liabilities that pertain to a particular type of property as described herein exceeds the aggregate fair market value of all that particular type of property of XXXXXXXXXX will be considered to have a negative amount of that type of property;

(iv) any liabilities, other than current liabilities, of XXXXXXXXXX which do not relate to a particular type of property will then be allocated to the cash or near cash property, investment property, and business property of XXXXXXXXXX based on the relative net fair market value of each type of property prior to the allocation of such liabilities, but after the allocation of the liabilities described in subparagraphs (a)(i) and (a)(iii) above.

(b) In determining, on a consolidated basis, the net fair market value of each type of property of Amalco immediately before the transfers of property described in paragraph 17 below, Amalco will include the appropriate pro rata share of the net fair market value of each type of property of XXXXXXXXXX as determined in accordance with paragraph (a) herein, and any liabilities of Amalco will then be allocated to, and be deducted in the calculation of, the net fair market value of each type of property of Amalco in the following manner:

(i) current liabilities of Amalco will be allocated to cash or near cash property (including any cash, accounts receivable, inventory and prepaid expenses) of Amalco in the proportion that the fair market value of each such property is of the fair market value of all cash or near cash property of Amalco. The allocation of current liabilities as described herein will not exceed the aggregate fair market value of the cash or near cash property of Amalco;

(ii) provided that the amount of Amalco's current assets exceeds its current liabilities, any accounts receivable, inventories and prepaid expenses of Amalco, initially classified in accordance with subparagraph (b)(i) as cash or near cash property, that relates to the business of Amalco and that will relate to the business that will be carried on by XXXXXXXXXX as the case may be, following the transfer described in paragraph 17 below that will be collected, sold or consumed by XXXXXXXXXX as the case may be, in the ordinary course of its business, will then be reclassified as business property and the net fair market value thereof, determined after the allocation of the current liabilities described in (b)(i) herein, will be included in the net fair market value of Amalco's business property and will not be included in the net fair market value of cash or near cash property;

(iii) liabilities of Amalco, other than current liabilities, that relate to a particular property will 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. The 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;

(iv) if any liabilities remain after the allocations described in steps (b)(i) and (b)(iii) above are made ("excess unallocated liabilities"), such excess unallocated liabilities will then be allocated to the cash or near cash property, investment property, and business property, if any, of Amalco 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 determining the net fair market value of the types of property of any corporation, deferred taxes, if any, will be ignored. In addition, any income taxes payable, including any such amounts payable under any proposed assessments, will be classified as a current liability.

17. Immediately following the determination of the net fair market value of its properties as described in paragraphs 15 and 16 above, Amalco will transfer a pro rata share of all of its cash or near cash property and investment property to XXXXXXXXXX in such manner that the net fair market value of each such type of property so transferred to each of XXXXXXXXXX will be equal to XXXXXXXXXX% of all of the property of that type owned by Amalco. In this regard, each of XXXXXXXXXX will acquire XXXXXXXXXX% of the Class B preferred shares of XXXXXXXXXX which are referred to in paragraph 8 above.

At the same time, Amalco will transfer a share of all of its business property XXXXXXXXXX to XXXXXXXXXX

As consideration therefor, each of XXXXXXXXXX will

(a) assume a portion of Amalco's liabilities in an amount that will result in the net fair market value of each type of property that will be transferred by Amalco to XXXXXXXXXX as described in paragraph 18 below being equal to the net fair market value of that type of property that will be transferred by Amalco to XXXXXXXXXX as described in paragraph 19 below; and

(b) issue XXXXXXXXXX common shares of its capital stock to Amalco.

In respect of the property so transferred, Amalco and each of XXXXXXXXXX as the case may be, will jointly elect in prescribed form and within the time limits referred to in subsection 85(6), to have the rules in subsection 85(1) apply to the transfer of any property that is eligible property (other than cash). The amount agreed upon in such elections in respect of each of the eligible properties so transferred will be equal to the cost amount of such property to Amalco immediately before the transfer. The fair market value of any such property at that time will equal or exceed the amount agreed upon. For greater certainty, the liabilities assumed by either of XXXXXXXXXX as consideration for the transfer of any particular eligible property included in the subsection 85(1) elections will not be greater than the agreed amount for such property.

For the purposes of the CBCA, the amount that will be added to the stated capital account of the common shares of XXXXXXXXXX that will be issued as described herein will not exceed the aggregate of the cost (as determined pursuant to subsection 85(1) of the Act where relevant) to of the property transferred to such corporation as described herein, less the amount of the liabilities of Amalco assumed by such corporation as consideration for such properties.

18. Amalco will then transfer its XXXXXXXXXX common shares of XXXXXXXXXX and such portion (hereinafter referred to as "XXXXXXXXXX") of the XXXXXXXXXX to XXXXXXXXXX such that the net fair market value of each particular type of property of Amalco so transferred will be equal to XXXXXXXXXX% of the net fair market value of that particular type of property of Amalco immediately before the transfers of property described herein.

As sole consideration therefor, XXXXXXXXXX will issue to Amalco non-voting redeemable XXXXXXXXXX% per annum, non-cumulative preferred shares of its capital stock (the "XXXXXXXXXX") having a redemption value and a fair market value equal to the aggregate fair market value of the shares of XXXXXXXXXX of the XXXXXXXXXX

In respect of the property so transferred, Amalco and XXXXXXXXXX will jointly elect, in prescribed form and within the time limits referred to in subsection 85(6), to have the rules in subsection 85(1) apply to the transfer of any property that is eligible property. The amount agreed upon in such election in respect of each of the eligible properties so transferred will be equal to the cost amount of such property to Amalco immediately before the transfer. The fair market value of any such property at that time will equal or exceed the amount agreed upon.

For the purposes of the CBCA, the amount that will be added to the stated capital account of the XXXXXXXXXX Preferred Shares upon the issue of such shares as described herein will not exceed the aggregate of the agreed amounts elected by Amalco and XXXXXXXXXX with respect to such properties.

19. Amalco will then transfer its XXXXXXXXXX common shares of XXXXXXXXXX and such portion (hereinafter referred to as "XXXXXXXXXX") of the XXXXXXXXXX to XXXXXXXXXX such that the net fair market value of each particular type of property of Amalco so transferred will be equal to XXXXXXXXXX% of the net fair market value of that particular type of property of Amalco immediately before the transfers of property described herein.

As sole consideration therefor, XXXXXXXXXX will issue to Amalco non-voting redeemable XXXXXXXXXX% per annum, non-cumulative preferred shares of its capital stock (the "XXXXXXXXXX") having a redemption value and a fair market value equal to the aggregate fair market value of the shares of XXXXXXXXXX of the XXXXXXXXXX

In respect of the property so transferred, Amalco and XXXXXXXXXX will jointly elect, in prescribed form and within the time limits referred to in subsection 85(6), to have the rules in subsection 85(1) apply to the transfer of any property that is eligible property. The amount agreed upon in such election in respect of each of the eligible properties so transferred will be equal to the cost amount of such property to Amalco immediately before the transfer. The fair market value of any such property at that time will equal or exceed the amount agreed upon.

For the purposes of the CBCA, the amount that will be added to the stated capital account of the XXXXXXXXXX upon the issue of such shares as described herein will not exceed the aggregate of the agreed amounts elected by Amalco and XXXXXXXXXX with respect to such properties.

20. XXXXXXXXXX will offer to redeem the XXXXXXXXXX owned by Amalco for an amount equal to their redemption amount and Amalco will accept such offers. As consideration for these redemptions, XXXXXXXXXX will each issue a non-interest bearing demand note having a principal amount and fair market value equal to the redemption price of such shares to Amalco. Amalco will accept such notes in full satisfaction of the redemption amounts.

21. The shareholders of Amalco will, by special resolution, resolve to wind up and dissolve Amalco pursuant to subsection 210(3) of the CBCA. In connection with the winding-up, Amalco will distribute to each of XXXXXXXXXX the note issued by that corporation upon the redemption of the XXXXXXXXXX as the case may be, referred to in paragraph 20 above.

In the event that Amalco has a balance in its capital dividend account at such time, Amalco will, prior to the distribution of such notes, elect pursuant to subsection 83(2), in prescribed manner and prescribed form, that the full amount of any resulting dividend referred to in subparagraph 88(2)(b)(i) be deemed to be a capital dividend.

As a result of the assignment and distribution of the above notes, the obligations under the notes will be extinguished.

All property of Amalco will be distributed and all liabilites of Amalco will be discharged. Articles of Dissolution will then be executed and will be filed pursuant to subsection 210(4) of the CBCA. The common shares of Amalco will be cancelled and Amalco will be dissolved.

22. The sale agreements respecting the sales of property described in paragraphs 17, 18 and 19 will contain a price adjustment clause which will allow the parties thereto to alter the sale price, as well as the retraction and redemption value of the consideration paid thereon, in the event that the taxation authorities do not concur with the fair market value assigned to the property sold by the parties.

Additional Information

23. Other than as described in this letter, no liabilities have been or will be incurred, and no assets have been or will be acquired, in contemplation of and before the transactions described herein, by any of XXXXXXXXXX other than in the ordinary course of business.

24. None of XXXXXXXXXX is or will be, at the time of the proposed transactions, a specified financial institution.

25. None of the shares of XXXXXXXXXX has been or will be, at any time during the implementation of the proposed transactions described herein:

(a) the subject of any undertaking 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.

26. Otherwise than as described in this letter,

(a) Neither XXXXXXXXXX intends to dispose of any shares of XXXXXXXXXX

(b) Neither XXXXXXXXXX intends to dispose of any shares of XXXXXXXXXX or of any of the XXXXXXXXXX; and

(c) Neither XXXXXXXXXX intends to dispose of any shares of XXXXXXXXXX or of any of the property transferred to them by Amalco as described in paragraph 17 above, otherwise than in the ordinary course of carrying on its business.

Purpose of the Proposed Transactions

The purpose of the proposed transactions is to separate the interests of XXXXXXXXXX as well as the operations of Amalco into two companies, one indirectly belonging to XXXXXXXXXX and the other indirectly to XXXXXXXXXX The proposed transactions will enable each of the individuals to deal separately with his interests in the net operating assets acquired as a result of the proposed reorganization.

Rulings Given

Provided that the preceding statements constitute a complete and accurate disclosure of all of the relevant facts, proposed transactions and purpose of the proposed transactions, and provided that the proposed transactions are completed in the manner described above, our rulings are as follows:

A. The provisions of subsections 87(2) and (4) of the Act, other than paragraphs 87(4)(c), (d) and (e) thereof, will apply to the the proposed amalgamation of XXXXXXXXXX as described in paragraph 13 above.

B. Subject to the application of the provisions of subsections 20(1.2) and 26(5) of the Income Tax Application Rules (the "Itar") and to the application of paragraph 88(2.2)(b) of the Act, which applies for the purposes stated in the preamble to subsection 88(2.2) of the Act, and subject also to the application of subsection 85(5.1) of the Act as it may apply to the transfers referred to herein, the provisions of subsection 85(1) will apply to:

(a) the transfer of each eligible property by Amalco to XXXXXXXXXX as described in paragraph 17 above;

(b) the transfer of each eligible property by Amalco to XXXXXXXXXX as described in paragraph 18 above; and

(c) the transfer of each eligible property by Amalco to XXXXXXXXXX as described in paragraph 19 above;

such that the agreed amounts in respect of each such transfer shall be deemed to be the transferor's proceeds of disposition and the transferee's cost thereof pursuant to paragraph 85(1)(a) of the Act. For greater certainty, paragraph 85(1)(e.2) of the Act will not apply to the transfers referred to herein.

C. Subsection 85(2.1) will not apply to reduce the paid-up capital of:

(a) the common shares of XXXXXXXXXX issued to Amalco as described in paragraph 17 above; or

(b) the XXXXXXXXXX issued to Amalco as described in paragraphs 18 and 19 above.

D. As a result of the redemption by XXXXXXXXXX held by Amalco and as a result of the distributions by Amalco in the course of its winding-up, as described in paragraphs 20 and 21:

(a) By virtue of paragraph 84(3)(a) and paragraph 84(3)(b), each of XXXXXXXXXX will be deemed to have paid and Amalco will be deemed to have received a taxable dividend equal to the amount by which the amount paid in respect of the redemption of the XXXXXXXXXX as the case may be, exceeds the paid- up capital thereof.

(b) (i) Pursuant to paragraph 88(2)(b) and subsection 84(2), but subject to (ii) to (iv) herein, each of XXXXXXXXXX will be deemed to have received a dividend (the "winding-up dividend") on its common shares of Amalco equal to the proportion of the amount by which the aggregate fair market value of the property of Amalco distributed by Amalco to XXXXXXXXXX as the case may be, on its winding-up as consideration for the cancellation of its common shares, exceeds the paid-up capital of such shares, that the number of shares held by each of XXXXXXXXXX is of the number of shares of that class that are cancelled.

(ii) Pursuant to subparagraph 88(2)(b)(i), such portion of the winding-up dividend referred to in (b)(i) as does not exceed Amalco's capital dividend account determined immediately before the payment of the winding-up dividend shall be deemed, for the purposes of the subsection 83(2) election referred to in paragraph 21, to be the full amount of a separate dividend.

(iii) Pursuant to subparagraph 88(2)(b)(ii), the portion of the winding-up dividend that is equal to the lesser of:

(A) Amalco's pre-1972 capital surplus on hand as determined immediately before the payment of the winding-up dividend, and

(B) the amount by which the winding-up dividend exceeds the portion thereof in respect of which Amalco will elect under subsection 83(2)

shall be deemed not to be a dividend.

(iv) Pursuant to subparagraph 88(2)(b)(iii), the winding-up dividend, to the extent that it exceeds the portion thereof referred to in (ii) herein that is deemed to be a separate dividend and the portion referred to in (iii) herein that is deemed not to be a dividend, shall be deemed to be a separate dividend that is a taxable dividend.

(c) (i) By virtue of subsections 186(2) and 186(4), each of XXXXXXXXXX will be connected with Amalco. Provided that neither of XXXXXXXXXX is entitled to a dividend refund in respect of its taxation year in which it is deemed to pay the dividend referred to in (a) above, Amalco will not be subject to Part IV tax under subsection 186(1) in respect of such dividend;

(ii) By virtue of subsections 186(2) and 186(4), Amalco will be connected with each of XXXXXXXXXX Consequently, provided that Amalco is not entitled to a dividend refund in respect of its taxation year in which it is deemed to pay the dividend referred to in (b)(iv) above, neither of XXXXXXXXXX will be subject to Part IV tax under subsection 186(1) in respect of such dividend.

E. The taxable dividends deemed to have been received by each of XXXXXXXXXX and by Amalco as a result of the winding-up of Amalco and the redemption of the XXXXXXXXXX as the case may be, which are described in paragraphs D(a) and D(b)(iv) above will:

(a) be deductible by the recipient thereof in computing its taxable income pursuant to subsection 112(1). For greater certainty, the provisions of subsections 112(2.2) and (2.4) will not apply to deny the subsection 112(1) deduction in respect of such dividends; and

(b) be excluded in computing the proceeds of disposition of such shares by virtue of paragraph (j) of the definition of "proceeds of disposition" in section 54 of the Act.

F. (a) By virtue of the definition of "substantial interest" as set out under paragraph 191(2)(a), Amalco will have a substantial interest in each of XXXXXXXXXX immediately before the redemption of the XXXXXXXXXX both as described in paragraph 20 above. Consequently, no tax will be payable under either section 187.2 or section 191.1 in respect of the dividend deemed to have been paid by each of XXXXXXXXXX to Amalco upon the redemption of its preferred shares since each such dividend will be an "excepted dividend" within the meaning assigned by paragraph (b) of the definition of "excepted dividend" in section 187.1 in the capacity of Amalco as the recipient of the particular dividend, and shall be an "excluded dividend" within the meaning of paragraph (a) of the definition of "excluded dividend" in subsection 191(1) in the capacity of each of XXXXXXXXXX as the payer of the particular dividend.

(b) By virtue of the definition of "substantial interest" as set out under paragraph 191(2)(a), each of XXXXXXXXXX will have a substantial interest in Amalco immediately before the distribution of their notes as described in paragraph 21 above. Consequently, no tax will be payable under either section 187.2 or section 191.1 in respect of the dividend deemed to have been paid by Amalco to each of XXXXXXXXXX upon the distribution of such notes since each such dividend will be an "excepted dividend" within the meaning assigned by paragraph (b) of the definition of "excepted dividend" in section 187.1 in the capacity of XXXXXXXXXX as the recipient of the particular dividend, and shall be an "excluded dividend" within the meaning of paragraph (a) of the definition of "excluded dividend" in subsection 191(1) in the capacity of Amalco as the payer of the particular dividend.

G. Provided that as part of the series of transactions or events that includes the proposed transactions described herein, there is not:

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

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

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

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

which has not been described herein, then by virtue of paragraph 55(3)(b), subsection 55(2) will not apply to the taxable dividends referred to in the rulings given in D(a) and D(b)(iv) above and for greater certainty, subsection 55(3.1) will not apply to deny the exemption under paragraph 55(3)(b).

H. The extinguishment of the debt obligations in respect of the notes of XXXXXXXXXX as a result of the cancellation of such notes as described in paragraph 21 will not give rise to a "forgiven amount" within the meaning of subsection 80(1) or 80.01(1).

I) The provisions of subsections 15(1), 56(2), 56(4), 69(4), and section 246 will not apply to the proposed transactions in and by themselves.

J) As a result of the proposed transactions, in and by themselves, subsection 245(2) will not be applied to redetermine the tax consequences confirmed in the rulings given above.

The above rulings are given subject to the general limitations and qualifications set out in Information Circular 70-6R2 dated September 28, 1990, and the Special Release thereto dated September 30, 1992, and are binding on Revenue Canada, Customs, Excise and Taxation provided that the proposed transactions are completed by XXXXXXXXXX

These 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 into law, could have an effect on the rulings provided herein.

Comments

1. You have informed us, in paragraph 22 above, that the sale agreements relating to the transfers of property described in paragraphs 17, 18 and 19 will include a price adjustment clause which will permit the parties to alter the sale price of any such property, as well as the retraction and redemption amount of any shares received as consideration for such property.

Nothing in this letter should be interpreted as confirming that,

(a) for purposes of the Act, any adjustment made pursuant to any such price adjustment clause in respect of a transaction subsequent to the time of such transaction will be effective, retroactively, to the time of such transaction,

(b) for the purposes of the Act, any amount paid pursuant to any such price adjustment clause, in respect of a transaction subsequent to the time of such transaction will be an additional payment of the redemption or purchase price of any shares redeemed or repurchased, or

(c) in the event that any adjustment is made pursuant to any such price adjustment clause, the proposed transactions referred to in paragraphs 15 to 21 above will be considered to have been carried out as described in those paragraphs, in particular, for the purposes of ruling G above.

The operation of a price adjustment clause is not a proposed transaction and, consequently, advance rulings are not given by the Department in respect thereof. The Department's general position with respect to price adjustment clauses in agreements is set out in Interpretation Bulletin IT-169 dated August 6, 1974.

2. Nothing in this ruling should be construed as implying that Revenue Canada, Customs, Excise and Taxation has agreed to or reviewed:

(a) the determination of the fair market value or adjusted cost base of any particular asset or the paid-up of any shares referred to herein; or

(d) any tax consequences relating to the facts and proposed transactions described herein other than those specifically described in the rulings given above.

Yours truly,

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