7 July 1996 Income Tax Severed Letter 9617323 - Single-wing butterfly — assumption of liabilities

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

SUMMARY: Single-wing butterfly—assumption of liabilities—ITA-55(3)(b)—Advance income tax ruling—Tax implications in a particular corporate reorganization involving a single-wing butterfly and the assumption of liabilities.

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.

PRINCIPAL ISSUES:

single-wing butterfly-assumption of liabilities on the redemption of shares, not on the transfer of property

POSITION:

acceptable

REASONS:

pro-rata test is met after all the redemptions take place

XXXXXXXXXX 961732 XXXXXXXXXX

Attention: XXXXXXXXXX

XXXXXXXXXX, 1996

Dear Sirs:

Re: XXXXXXXXXX Advance Income Tax Ruling

This is in reply to your letter of XXXXXXXXXX in which you requested advance income tax rulings on behalf of the above-noted taxpayers. In your letters of XXXXXXXXXX you informed us of additional information in respect of, and amendments to, the facts and proposed transactions described in your original letter.

To the best of your knowledge, none of the issues involved in this advance ruling request is being considered by a Tax Services Office or a Taxation Centre in connection with a tax return already filed and none of the issues is under objection.

Definitions

In this letter, the following terms have the meanings specified:

(a) Unless otherwise indicated, all references to statute are to the Income Tax Act (the "Act");

(b) "adjusted cost base", "capital property", "eligible capital property" and "proceeds of disposition" have the meanings assigned by section 54 of the Act;

(c) "active business", and "specified investment business" have the meanings assigned by subsection 125(7) of the Act;

(d) XXXXXXXXXX (e) "cost amount", "dividend rental arrangement", "fiscal period", "specified financial institution" and "subsidiary wholly-owned corporation" have the meanings assigned by subsection 248(1) of the Act;

(f) "eligible property" has the meaning assigned by subsection 85(1.1) of the Act;

(g) "paid-up capital", "public corporation", "taxable Canadian corporation" and "taxable dividend" have the meanings assigned by subsection 89(1) of the Act;

(h) "prepaid expenses" means rights arising from prepaid expenses; and

(i) "specified person" has the meaning assigned to that term by paragraph (h) of the definition of "taxable preferred share" found within subsection 248(1) of the Act.

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

Facts

1. XXXXXXXXXX was incorporated in XXXXXXXXXX under the laws of the Province of XXXXXXXXXX and was continued under the XXXXXXXXXX is a taxable Canadian corporation and a public corporation. The fiscal period of XXXXXXXXXX ends on XXXXXXXXXX 2. As at XXXXXXXXXX, the issued and outstanding share capital of XXXXXXXXXX consisted of XXXXXXXXXX common shares having a stated capital of $XXXXXXXXXX. Stated capital is equal to paid-up capital for income tax purposes.

XXXXXXXXXX shares are listed on the XXXXXXXXXX Stock Exchange and the XXXXXXXXXX Stock Exchange.

XXXXXXXXXX

3. XXXXXXXXXX was incorporated in XXXXXXXXXX under the laws of the Province of XXXXXXXXXX is a taxable Canadian corporation and a subsidiary wholly-owned corporation of XXXXXXXXXX The fiscal period of XXXXXXXXXX ends on XXXXXXXXXX

4. As at XXXXXXXXXX the share capital structure of XXXXXXXXXX was an unlimited number of common shares without nominal or par value, of which XXXXXXXXXX were issued and outstanding having a stated capital of $XXXXXXXXXX Stated capital is equal to paid-up capital for income tax purposes. The adjusted cost base of the common shares of XXXXXXXXXX held by XXXXXXXXXX as at XXXXXXXXXX is $XXXXXXXXXX holds the common shares in the capital of XXXXXXXXXX as capital property. No changes to the capital structure of XXXXXXXXXX are contemplated before the date of the commencement of the proposed reorganization.

5. Prior to XXXXXXXXXX owned all of the shares of XXXXXXXXXX previously owned by XXXXXXXXXX, were transferred to XXXXXXXXXX as part of a series of transactions the purpose of which is to consolidate profits and losses within the XXXXXXXXXX corporate group. Revenue Canada, Customs, Excise and Taxation provided an advance tax ruling to XXXXXXXXXX with respect to this transaction on XXXXXXXXXX (control number XXXXXXXXXX).

6. XXXXXXXXXX is a holding company, with XXXXXXXXXX as its wholly-owned subsidiary.

XXXXXXXXXX sole asset is the shares of XXXXXXXXXX

The liabilities of XXXXXXXXXX consist of interest payable and demand notes payable to related corporations.

7. XXXXXXXXXX was incorporated in XXXXXXXXXX under the laws of the Province of XXXXXXXXXX is a taxable Canadian corporation and a subsidiary wholly-owned corporation of XXXXXXXXXX The fiscal period of XXXXXXXXXX

8. As at XXXXXXXXXX, the share capital structure ofXXXXXXXXXX was an unlimited number of common shares without nominal or par value, of which XXXXXXXXXX were issued and outstanding having a stated capital of $XXXXXXXXXX. Stated capital is equal to paid-up capital for income tax purposes. No changes to the capital structure of XXXXXXXXXX are contemplated before the date of the commencement of the proposed reorganization.

The adjusted cost base of the common shares of XXXXXXXXXX held by XXXXXXXXXX The fair market value of the XXXXXXXXXX Shares exceeds the adjusted cost base to XXXXXXXXXX of the XXXXXXXXXX Shares and has been estimated to be approximately $XXXXXXXXXX Shares are held as capital property by XXXXXXXXXX

9. XXXXXXXXXX

10. XXXXXXXXXX assets consist primarily of :

a) cash;

b) accounts receivable;

c) deferred charges;

d) prepaid expenses;

e) investments in XXXXXXXXXX and

f) XXXXXXXXXX The assets outlined in (e) and (f) above represent capital property to XXXXXXXXXX

The liabilities of XXXXXXXXXX consist primarily of:

g) accounts payable and accrued liabilities;

h) long-term debt; and

i) deferred pension liability.

11. The investments held by XXXXXXXXXX are entirely in affiliated corporations carrying on business that are integral or related to XXXXXXXXXX business.

XXXXXXXXXX

XXXXXXXXXX

XXXXXXXXXX

XXXXXXXXXX

XXXXXXXXXX

Proposed Transactions

12. XXXXXXXXXX will incorporate a subsidiary wholly-owned corporation under the provisions of the XXXXXXXXXX ("Holdco"). The share capital of Holdco will include an unlimited number of common shares without nominal or par value. Holdco will be a taxable Canadian corporation. XXXXXXXXXX will subscribe for 1 common share of the share capital of Holdco for the sum of $XXXXXXXXXX upon its incorporation.

13. XXXXXXXXXX will determine the Holdco Relevant Percentage and the Newco1 Relevant Percentage in accordance with the formulae set out herein.

The Newco1 Relevant Percentage will be the proportion that is equal to the amount determined when

a) the aggregate fair market value, immediately before the transfer, of the XXXXXXXXXX shares which are to be transferred to Newco1 as described in paragraph 16 below

is of

b) the aggregate fair market value, immediately before the transfer, of all of the shares of XXXXXXXXXX owned by XXXXXXXXXX

The Holdco Relevant Percentage will be equal to 1 minus the Newco1 Relevant Percentage.

XXXXXXXXXX will then transfer to Holdco the Holdco Relevant Percentage of its common shares in XXXXXXXXXX and in exchange, as sole consideration, Holdco will issue XXXXXXXXXX common shares of its capital stock to XXXXXXXXXX Based on estimates of fair market value as at XXXXXXXXXX total common shareholding in XXXXXXXXXX will be transferred to Holdco.

. In respect of the above transfer, XXXXXXXXXX and Holdco will jointly elect pursuant to subsection 85(1) of the Act, in prescribed form and within the time referred to in subsection 85(6) of the Act. The agreed amount in respect of the shares transferred will be expressed in dollars and will be equal to the adjusted cost base to XXXXXXXXXX of the transferred shares in respect of which such election is made, which amount will not exceed the fair market value thereof.

The aggregate stated capital of the XXXXXXXXXX common shares of Holdco to be issued to XXXXXXXXXX will be equal to the aggregate cost amount of the property transferred to Holdco as described herein. This restriction will be made by passing a resolution to this effect under XXXXXXXXXX

14. XXXXXXXXXX will incorporate a subsidiary wholly-owned corporation under the provisions of the XXXXXXXXXX ("Newco1"). Newco1 will be a taxable Canadian corporation. The share capital of Newco1 will include the following:

a) an unlimited number of common shares without nominal or par value; and

b) an unlimited number of redeemable and retractable, non-voting preferred shares without nominal or par value, redeemable at a redemption price to be calculated on a formula basis by reference to the fair market value of property transferred to Newco1 in exchange for their issue.

XXXXXXXXXX will subscribe for 1 common share of the share capital of Newco1 for the sum of $XXXXXXXXXX upon its incorporation.

15. XXXXXXXXXX will transfer to Newco1 the Newco1 Relevant Percentage of its shares of XXXXXXXXXX and in exchange, as sole consideration, Newco1 will issue XXXXXXXXXX common shares of its capital stock to XXXXXXXXXX

. In respect of the above transfer, XXXXXXXXXX and Newco1 will jointly elect pursuant to subsection 85(1) of the Act, in prescribed form and within the time referred to in subsection 85(6) of the Act. The agreed amount in respect of the shares transferred will be expressed in dollars and will be equal to the adjusted cost base to XXXXXXXXXX of the transferred shares in respect of which such election is made, which amount will not exceed the fair market value thereof.

The aggregate stated capital of the XXXXXXXXXX common shares of Newco1 to be issued to XXXXXXXXXX will be equal to the aggregate cost amount of the property transferred to Newco1 as described herein. This restriction will be made by passing a resolution to this effect under XXXXXXXXXX

16. XXXXXXXXXX will transfer to Newco1 that proportion (herein referred to as the "XXXXXXXXXX") of its common shares in XXXXXXXXXX that is equal to the proportion that

(a) the aggregate net fair market value, immediately before the transfer, of the business property relating to XXXXXXXXXX Business (which is to be transferred to Newco2 as described in paragraph 23 below)

is of

(b) the aggregate net fair market value, immediately before the transfer described in paragraph 23 below, of all of the business property owned by XXXXXXXXXX

Based on current estimates of fair market value, approximately XXXXXXXXXX common shares in XXXXXXXXXX will be transferred to Newco1.

As consideration for such transferred shares of XXXXXXXXXX Newco1 will issue to XXXXXXXXXX redeemable and retractable, non-voting preferred shares, having an aggregate redemption amount and fair market value equal to the fair market value of such shares of XXXXXXXXXX so received.

XXXXXXXXXX and Newco1 will jointly elect pursuant to subsection 85(1) of the Act, in prescribed form and within the time referred to in subsection 85(6) of the Act in respect of the common shares of XXXXXXXXXX so transferred. The agreed amount specified in such election will be expressed in dollars and will be equal to the adjusted cost base to XXXXXXXXXX of the transferred shares in respect of which such election is made, which amount will not exceed the fair market value thereof.

Pursuant to XXXXXXXXXX, the amount to be added to the stated capital account of the Newco1 preferred shares to be issued to XXXXXXXXXX as described herein will be equal to the cost amount of the common shares of XXXXXXXXXX so transferred.

17. XXXXXXXXXX will offer to purchase for cancellation all of its common shares held by Newco1 at their fair market value. As consideration for such purchase for cancellation, XXXXXXXXXX will issue to Newco1 a demand, non-interest bearing promissory note (the "XXXXXXXXXX Promissory Note") having a face amount and fair market value equal to the purchase price of its common shares so purchased. Newco1 will accept the XXXXXXXXXX Promissory Note as full payment for the purchase price of the XXXXXXXXXX common shares.

18. Newco1 will redeem its Newco1 preferred shares held by XXXXXXXXXX at their aggregate redemption price. The consideration to be paid by Newco1 for the redemption of its Newco1 Preferred shares will consist of:

a) the assumption of a portion of XXXXXXXXXX outstanding demand debt equal to the XXXXXXXXXX of XXXXXXXXXX total liabilities; and

b) the issuance of a demand, non-interest bearing promissory note (the "Newco1 Promissory Note") having a face amount and fair market value equal to the redemption price of its Newco1 preferred shares so redeemed less the liabilities assumed in a) above.

XXXXXXXXXX will accept the assumption of its liabilities and the issuance of the Newco1 Promissory Note as full payment for the redemption amount of the Newco1 preferred shares.

19. The mutual obligations of XXXXXXXXXX and Newco1 under the XXXXXXXXXX Promissory Note and the Newco1 Promissory Note will be settled by set-off and these notes will thereupon be cancelled.

20. Newco1 will incorporate a subsidiary wholly-owned corporation under the provisions of the XXXXXXXXXX ("Newco2"). The share capital of Newco2 will include the following:

a) an unlimited number of common shares without nominal or par value; and

b) an unlimited number of redeemable and retractable non-voting preferred shares without nominal or par value, redeemable at a redemption price to be calculated on a formula basis by reference to the fair market value of property transferred to Newco2 in exchange for their issue.

Newco1 will subscribe for 1 common share of the share capital of Newco2 for the sum of $XXXXXXXXXX upon its incorporation.

21. Immediately before the transfers of property described in paragraph 23 below, 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 (all such corporations and XXXXXXXXXX are hereinafter referred to as the "XXXXXXXXXX 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 XXXXXXXXXX Group, including any cash, accounts receivable, and prepaid expenses;

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

c) business property, comprising all of the assets of the XXXXXXXXXX Group, 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, the shares of XXXXXXXXXX will be classified as business property as described herein.

Immediately before the transfer described in paragraph 23 below, XXXXXXXXXX will not own any property which would be classified as investment property.

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 a corporation or over any corporation which has significant influence over that corporation. XXXXXXXXXX will not exercise significant influence over any corporation other than 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 22 below) is of the aggregate net fair market value of all the property owned by such corporation.

22. In determining, on a consolidated basis, the net fair market value of each type of property of XXXXXXXXXX immediately before the transfers of property described in paragraph 23 below, the liabilities of XXXXXXXXXX and any corporation over which XXXXXXXXXX exercises significant influence will be allocated to, and deducted in the calculation of, the net fair market value of each such type of property of such corporation, as follows: a) In determining the net fair market value of each type of property of a corporation over which XXXXXXXXXX exercises significant influence, immediately before the transfers described in paragraph 23 below, liabilities of that particular corporation (other than any amount owing by such corporation to XXXXXXXXXX) will be allocated to, and be deducted in the calculation of, the net fair market value of each type of property of the particular corporation in the following manner:

(i) Current liabilities of such corporation will be allocated to cash or near cash property (including any cash, accounts receivable, inventory and prepaid expenses) of such corporation 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 the particular corporation. 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 the particular corporation, such corporation will be considered to have a negative amount of cash or near cash property.

(ii) Liabilities, other than current liabilities, of such corporation 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 the particular corporation, the particular corporation will be considered to have a negative amount of that type of property.

(iii) Any liabilities other than current liabilities of such corporation 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 such corporation 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 liabilities described in (i) and (ii) above.

b) In determining, on a consolidated basis, the net fair market value of each type of property of XXXXXXXXXX immediately before the transfers described in paragraph 23 below, XXXXXXXXXX will include the appropriate pro- rata share of the net fair market value of each type of property of any corporation over which XXXXXXXXXX exercises significant influence, as determined in accordance with subparagraph a) herein, and any liabilities of XXXXXXXXXX will then 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 cash or near cash property (including any cash, accounts receivable 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. The allocation of current liabilities as described herein will not exceed the aggregate fair market value of all cash or near cash property of XXXXXXXXXX

(ii) any accounts receivable and prepaid expenses of XXXXXXXXXX, initially classified in accordance with subparagraph 22a) as cash or near cash property, that will relate to a business that will be carried on by any member of the XXXXXXXXXX Group and that will be collected, sold or consumed by that member of the XXXXXXXXXX Group in the ordinary course of that particular 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) 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 of XXXXXXXXXX, other than current liabilities, that relate to a particular property, will then be allocated to the particular property (and effectively to the type of property 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

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

23. XXXXXXXXXX will transfer the business property relating to its XXXXXXXXXX Business and the XXXXXXXXXX of the cash or near cash property to Newco2.

As a result of the transfer described herein, the fair market value of the cash or near cash property and the business property received by Newco2, determined in the manner described in paragraph 21 above, will be equal to the proportion of the net fair market value of all of the cash or near cash property and the business property owned by XXXXXXXXXX, determined in the manner described in paragraph 21 above (after allocating and deducting liabilities in the manner described in paragraph 22 above) immediately before such transfer, that:

a) the fair market value immediately before the transfer of all the shares of the capital stock of XXXXXXXXXX owned by Newco1

is of

b) the fair market value, immediately before the transfer, of all the issued shares of the capital stock of XXXXXXXXXX

As consideration for such transferred property of XXXXXXXXXX, Newco2 will issue to XXXXXXXXXX Newco2 redeemable and retractable non-voting preferred shares having an aggregate redemption amount and fair market value equal to the aggregate fair market value of such property so received.

In respect of the transfer of the XXXXXXXXXX Business, XXXXXXXXXX and Newco2 will jointly elect pursuant to subsection 85(1) of the Act, in prescribed form and within the time referred to in subsection 85(6) of the Act, with respect to any eligible property of XXXXXXXXXX which is transferred to Newco2 that has a fair market value in excess of its cost amount. The agreed amount for each property included in the subsection 85(1) election shall, in the case of each capital property (other than depreciable property of a prescribed class) be equal to the lesser of the cost amount to XXXXXXXXXX of the property and the fair market value thereof. In the case of the transfer of any eligible capital property, the elected amount will be equal to the least of 4/3 of the cost amount to XXXXXXXXXX of the property, the cost to XXXXXXXXXX of the property and the fair market value thereof.

Pursuant to XXXXXXXXXX, the amount to be added to the stated capital account of the Newco2 preferred shares to be issued to XXXXXXXXXX as described herein will be equal to the cost amount of the assets of the XXXXXXXXXX business so transferred.

24. Newco2 will redeem its Newco2 preferred shares held by XXXXXXXXXX at their aggregate redemption price. The consideration to be paid by Newco2 for the redemption of its Newco2 preferred shares will consist of the issuance of a demand, non-interest bearing promissory note (the "Newco2 Promissory Note") having a face value and fair market value equal to the redemption price of its Newco2 preferred shares so redeemed. XXXXXXXXXX will accept the Newco2 Promissory Note as full payment for the redemption amount of the Newco2 Preferred shares.

25. Newco1 will then take steps to authorize and complete the winding-up and voluntary dissolution of Newco2 under the applicable provisions of the XXXXXXXXXX All of the property of Newco2, which will consist of cash or near-cash property and the XXXXXXXXXX Business, will be distributed to Newco1. In addition, Newco1 will assume all liabilities of Newco2, including its indebtedness under the Newco2 Note.

26. XXXXXXXXXX will purchase for cancellation its common shares held by Newco1 at their fair market value. As consideration for such purchase for cancellation, XXXXXXXXXX will issue to Newco1 a demand, non-interest bearing promissory note (the "XXXXXXXXXX Promissory Note") having a face value and fair market value equal to the purchase price of its common shares so purchased. Newco1 will accept such XXXXXXXXXX Promissory Note in full payment of the purchase price of its common shares of XXXXXXXXXX

27. The mutual obligations of XXXXXXXXXX and Newco1 under the XXXXXXXXXX Promissory Note held by Newco1 and the Newco2 Promissory Note held by XXXXXXXXXX will be settled by set- off and these notes will thereupon be cancelled.

28. Immediately following the transfers described in paragraph 23 above, the redemption of the Newco2 preferred shares as described in paragraph 24 above and XXXXXXXXXX purchase for cancellation of its common shares as described in paragraph 26 above, the net fair market value of each of the types of property retained by XXXXXXXXXX, determined in accordance with the guidelines described in paragraphs 21 and 22 above, will be equal to the proportion of the aggregate net fair market value of that type of property of XXXXXXXXXX that,

(a) the aggregate fair market value of all of the issued and outstanding shares of XXXXXXXXXX owned by XXXXXXXXXX, immediately before the transfer of property described in paragraph 23 above,

is of

(b) the aggregate fair market value of all of the shares of XXXXXXXXXX immediately before such transfer.

29. XXXXXXXXXX will then take steps to authorize and complete the winding-up and voluntary dissolution of Newco1 under the applicable provisions of the XXXXXXXXXX All of the property of Newco1, which will consist of cash or near-cash assets and the XXXXXXXXXX Business will be distributed to XXXXXXXXXX

30. XXXXXXXXXX will subsequently, and prior to XXXXXXXXXX transfer the XXXXXXXXXX Business to a partnership in exchange for a partnership interest. The partnership will be formed under the laws of the XXXXXXXXXX and all other members of the partnership will jointly elect pursuant to subsection 97(2) of the Act to have the transfer of the XXXXXXXXXX Business from XXXXXXXXXX to the partnership occur on a tax-deferred basis. As consideration, XXXXXXXXXX will receive a XXXXXXXXXX percentage interest in the partnership.

Additional Information

31. Except as described in this letter, or in the ordinary course of its business, no property has been or will be acquired by or disposed of by XXXXXXXXXX or any corporation controlled by them and no liabilities have been or will be incurred by XXXXXXXXXX or any corporation controlled by them in contemplation of the proposed transactions described above.

32. a) None of XXXXXXXXXX, Newco1 or Newco2 is or will be, at the time the proposed transactions described above are implemented, a specified financial institution.

b) None of the shares of XXXXXXXXXX, Newco1 or Newco2 has been or will be subject to a guarantee agreement that is given by a specified financial institution, for any of the purposes described in subsection 112(2.2);

c) none of the shares of XXXXXXXXXX, Newco1 or Newco2 has been or will be issued or acquired as part of a transaction or event or series of transactions or events of the type described in subsection 112(2.5) of the Act; and

d) none of the shares of XXXXXXXXXX Newco1 or Newco2 will be the subject of a dividend rental arrangement.

33. XXXXXXXXXX is considering a transaction that could involve the wind-up of XXXXXXXXXX (a subsidiary wholly owned corporation of XXXXXXXXXX) and XXXXXXXXXX (a subsidiary wholly-owned corporation of XXXXXXXXXX) into XXXXXXXXXX Should this transaction proceed, the wind-up of XXXXXXXXXX would likely occur subsequent to the completion of the transactions contemplated by this ruling.

34. XXXXXXXXXX

Purpose of the Proposed Transactions

35. The proposed transactions will consist of a series of steps that would result in the transfer of XXXXXXXXXX to XXXXXXXXXX

Rulings

Provided that the preceding statements constitute a complete and accurate disclosure of all the relevant facts, proposed transactions, additional information and the 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 subsection 85(1) will apply to:

(a) the transfer of the shares in XXXXXXXXXX by XXXXXXXXXX to Holdco as described in paragraph 13 above;

(b) the transfer of the shares in XXXXXXXXXX by XXXXXXXXXX to Newco1 as described in paragraph 15 above;

(c) the transfer of the common shares of XXXXXXXXXX by XXXXXXXXXX to Newco1 as described in paragraph 16 above;

(d) the transfer of the XXXXXXXXXX Business assets of XXXXXXXXXX to Newco2 which are the object of the election as described in paragraph 23 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.

B. The provisions of subsection 84(3) of the Act will apply:

(a) as a result of the purchase for cancellation by XXXXXXXXXX of its common shares as described in paragraph 17 above, to deem XXXXXXXXXX to have paid and Newco1 to have received a dividend equal to the amount by which the purchase price paid exceeds the paid-up capital of those shares immediately before the purchase;

(b) as a result of the redemption by NewCo1 of its preferred shares as described in paragraph 18 above, to deem NewCo1 to have paid and XXXXXXXXXX to have received a dividend equal to the amount by which the redemption price paid exceeds the paid-up capital of those shares immediately before the redemption;

(c) as a result of the redemption by Newco2 of its preferred shares held by XXXXXXXXXX as described in paragraph 24 above, to deem NewCo2 to have paid and XXXXXXXXXX to have received a dividend equal to the amount by which the redemption price paid exceeds the paid-up capital of those shares immediately before the redemption; and

(d) as a result of the purchase for cancellation by XXXXXXXXXX of its common shares held by Newco1 as described in paragraph 26 above, to deem XXXXXXXXXX to have paid and Newco1 to have received a dividend equal to the amount by which the purchase price paid exceeds the paid-up capital of those shares immediately before the purchase.

C. The deemed dividends referred to in Ruling B above, to the extent that they are taxable dividends, will:

(a) be deductible by the recipient pursuant to subsection 112(1) of the Act in computing its taxable income for the year in which such dividend is deemed to have been received, and such deduction will not be prohibited by any of subsections 112(2.2), (2.3) or (2.4) of the Act; and

(b) be excluded in computing the proceeds of disposition of the shares so redeemed or purchased for cancellation by virtue of paragraph (j) of the definition of "proceeds of disposition" in section 54 of the Act.

D. The dividends referred to in Ruling B will not be subject to tax under Part IV.1 and Part VI.1 of the Act by virtue of paragraph (b) of the definition of "excepted dividend" in section 187.1 of the Act and paragraph (a) of the definition of "excluded dividend" in subsection 191(1) of the Act because each of the recipients will have a substantial interest, within the meaning assigned by subsection 191(2) of the Act, in the payer immediately before the redemption of such shares.

E. 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) of the Act, subsection 55(2) of the Act will not apply to the taxable dividends referred to in the Rulings given in B(a), (b) and (d) above and, for greater certainty, subsection 55(3.1) of the Act will not apply to deny the exemption under paragraph 55(3)(b) of the Act.

F. The set-off and cancellation of:

(a) the XXXXXXXXXX Promissory Note and the Newco1 Promissory Note, as described in paragraph 19 above, and

(b) the XXXXXXXXXX Promissory Note and the Newco2 Promissory Note, as described in paragraph 27 above,

will not give rise to a "forgiven amount" within the meaning of subsections 80(1) or 80.01(1) of the Act.

G. The provisions of subsections 15(1), 56(2), 56(4) and 246(1) of the Act will not apply to any of the proposed transactions described in paragraphs 12 through 29 above, in and of themselves.

H. As a result of the proposed transactions, in and of themselves, subsection 245(2) of the Act will not be applied to redetermine the tax consequences as described in the rulings given.

These rulings are given subject to the limitations and qualifications set out in Information Circular 70-6R2 issued by Revenue Canada, Customs, Excise and Taxation on September 28, 1990 and are binding provided that the proposed transactions are completed by XXXXXXXXXX

The above 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.

Opinion

Provided that:

(a) our understanding of the facts and proposed transactions described herein is correct;

(b) the proposed amendment to the definition of "permitted redemption" in subsection 55(1) of the Act is enacted in substantially the same form as proposed in the Notice of Ways and Means Motion to Amend the Income Tax Act and Related Statutes (the "Ways and Means Motion") which was tabled by the Minister of Finance on June 20, 1996;

(c) as part of the series of transactions or events that includes the proposed transactions described herein, there is not:

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

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

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

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

which has not been described herein,

it is our opinion that by virtue of paragraph 55(3)(b) of the Act, subsection 55(2) of the Act will not apply to the taxable dividends referred to in the rulings given in B(c) above and, for greater certainty, subsection 55(3.1) of the Act will not apply to deny the exemption under paragraph 55(3)(b) of the Act.

Comments

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 share, or the paid-up capital of any shares referred to herein; or

(b) 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 International Division Income Tax Rulings and Interpretations Directorate Policy and Legislation Branch