30 November 1996 Ruling 9701663 - SPLIT UP OF A CORPORATION

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.

Principal Issues:

The ruling request involved the split-up of a corporation under paragraph 55(3)(a) of the Act. The assets of one division will be transferred to a corporation resident in Canada, and the shares of an operating company will be transferred to a second corporation resident in Canada. All corporations involved in the proposed transactions are related.

Position:

Favourable rulings were given.

Reasons:

The provisions of subsection 85(1) have been complied with, and no benefits are arising under paragraph 85(1)(e.2). Standard rulings were given regarding the deemed dividends arising on the cross-redemptions, since the appropriate representations had been made, for example for purposes of subsection 112(1), Parts IV, IV.1 and VI.1 of the Act. The deemed dividends arising on the cross-redemptions will be exempt from subsection 55(2) by virtue of subsection 55(3)(a).

XXXXXXXXXX							970166
XXXXXXXXXX

Attention: XXXXXXXXXX

XXXXXXXXXX, 1997

Dear Sirs:

Re: XXXXXXXXXX
Advance Income Tax Ruling

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

To the best of your knowledge, and that of the taxpayers involved, none of the issues contained herein:

(i)is in an earlier return of the taxpayers or a related person;

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

(iii)is under objection by the taxpayers or a related person;

(iv)is before the courts or, if a judgement has been issued, the time limit for appeal to a higher court has not expired; and

(v)is the subject of a ruling previously issued by the Directorate.

Definitions

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

Unless otherwise indicated, all references to statute are to the Income Tax Act (Canada), R.S.C. 1985 (5th Supp.), c.1, as amended (the "Act");

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

"agreed amount" has the meaning assigned by subsection 85(1) of the Act;

XXXXXXXXXX

"Canco" means XXXXXXXXXX;

"capital property" has the meaning assigned by section 54 of the Act;

"CBCA" means the Canada Business Corporations Act, and where applicable, its predecessor statutes;

"connected" has the meaning assigned by subsection 186(4) of the Act;

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

"depreciable property" has the meaning assigned by subsection 13(21) of the Act;

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

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

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

"exempt surplus" has the meaning assigned by paragraph 5907(1)(d) of the Regulations;

"FA" means XXXXXXXXXX, a corporation incorporated under the laws of XXXXXXXXXX;

"foreign affiliate" has the meaning assigned by subsection 95(1) of the Act;

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

"Holdco1" means XXXXXXXXXX, a company incorporated under the XXXXXXXXXX;

"Holdco2" means XXXXXXXXXX, a company incorporated under the XXXXXXXXXX;

"Itar" refers to the Income Tax Application Rules;

"Middleco" means XXXXXXXXXX;

"Opco" means XXXXXXXXXX, a company incorporated under the laws of Canada and engaged in the business of XXXXXXXXXX;

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

"Parentco" means XXXXXXXXXX, a corporation that was incorporated under the laws of XXXXXXXXXX;

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

"proceeds of disposition" has the meaning assigned by section 54 of the Act;

"refundable dividend tax on hand" has the meaning assigned by subsection 129(3) of the Act;

"Regulations" means the Income Tax Regulations, Consolidated Regulations of Canada, 1978, c.945, as amended;

"related" has the meaning assigned by section 251 of the Act;

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

"Retained Division" refers to those operations of Canco relating to the manufacture and sale in Canada of

XXXXXXXXXX

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

"specified person" has the meaning assigned by paragraph (h) of the definition "taxable preferred share" in subsection 248(1) of the Act;

"subsidiary wholly-owned corporation" has the meaning assigned by subsection 248(1) of the Act;

"Target Division" refers to those operations of Canco relating to the manufacture and sale in Canada of

XXXXXXXXXX

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

"taxable Canadian property" has the meaning assigned by paragraph 115(1)(b) of the Act;

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

"term preferred share" has the meaning assigned by subsection 248(1) of the Act; and

"Treaty" means the Convention between Canada and the United States of America with Respect to Taxes on Income and on Capital, signed on September 26, 1980, as amended by the Protocols signed on June 14, 1983, March 28, 1984 and March 17, 1995.

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

Facts

Parentco is a resident of the United States for purposes of the Treaty. Parentco is not resident in Canada for purposes of the Act or the Treaty. Parentco is the owner of all of the issued and outstanding common shares of Canco, having purchased on XXXXXXXXXX the single common share of Canco owned by XXXXXXXXXX. Parentco's aggregate adjusted cost base in respect of these shares is approximately $XXXXXXXXXX.

Canco is a private corporation and a taxable Canadian corporation. It was formed in XXXXXXXXXX as a result of an amalgamation of Old Canco with one of its subsidiary wholly-owned corporations. Old Canco was incorporated under the laws of XXXXXXXXXX. The authorized share capital of Canco consists of an unlimited number of common shares with no par value. The issued and outstanding share capital of Canco consists of XXXXXXXXXX common shares with an aggregate stated capital of $XXXXXXXXXX.

Canco is engaged in the manufacture and sale in Canada of XXXXXXXXXX, through two divisions, the Retained Division and the Target Division. Canco also holds all of the shares of Opco. The Opco business operations are not related to the activities of the Target and Retained Divisions.

In XXXXXXXXXX a wholly-owned subsidiary of Old Canco purchased certain Canadian trademarks and goodwill that were complementary to Old Canco's business operations. The wholly-owned subsidiary was subsequently merged with Old Canco in XXXXXXXXXX to form Canco.

Canco's assets consist primarily of the following:

• cash;
• accounts receivable, and rights arising from prepaid expenses;
• inventories;
• land and buildings employed directly in the operating activities of Canco;
• machinery and equipment;
• other assets; and
• intangible assets.

The other assets include all the issued and outstanding shares of Opco and a XXXXXXXXXX% share interest in FA. The balance of the shares of FA are owned by Parentco. FA is a foreign affiliate of Canco.

Canco's liabilities consist primarily of current liabilities including an operating bank line of credit, accounts payable and accrued liabilities, and accounts payable to affiliated companies.

The shares of Canco are held by Parentco as capital property and the shares of FA and Opco are held by Canco as capital property. The shares of Canco owned by Parentco are not term preferred shares.

Canco and Parentco are both specified financial institutions by virtue of paragraph (g) of the definition of specified financial institution. Canco and Parentco are not restricted financial institutions.

Canco did not have any refundable dividend tax on hand as at XXXXXXXXXX nor is it contemplated that Canco will generate any refundable dividend tax on hand prior to the end of its taxation year in which the proposed series of transactions described hereunder is implemented.

The value of the outstanding shares of Canco is not derived principally from real property situated in Canada as defined for the purposes of Article XIII of the Treaty.

Parentco is the sole shareholder of Holdco1 and Holdco2. The authorized share capital of each of Holdco1 and Holdco2 consists of an unlimited number of common shares. Parentco holds one common share of each corporation; each such share was acquired for the nominal amount of $XXXXXXXXXX. No shares of Holdco1 or Holdco2 were issued at the time of incorporation; such shares were issued to Parentco subsequent to incorporation. However, prior to the issuance of such shares, Parentco controlled Holdco1 and Holdco2 by virtue of the fact that Holdco1 and Holdco2 were incorporated on behalf of Parentco and Parentco had the ability to select the directors of Holdco1 and Holdco2. Therefore, at the time of the issuance of the one common share of each of Holdco1 and Holdco2 to Parentco, Parentco was related to each of Holdco1 and Holdco2.

Each of Holdco1 and Holdco2 is a taxable Canadian corporation, a private corporation and a specified financial institution. Holdco1 and Holdco2 are not restricted financial institutions.

Middleco is a subsidiary wholly-owned corporation of Parentco. Middleco is a resident of the United States for purposes of the Treaty. Middleco is not resident in Canada for purposes of the Act.

Proposed Transactions

The authorized share capital of Holdco1 and Holdco2 will be amended in accordance with the provisions of the XXXXXXXXXX to include:

(a) an unlimited number of no par value common shares; and

(b) an unlimited number of non-voting, redeemable, retractable, preference shares with an aggregate redemption amount equal to the fair market value, at the time of their issue, of the consideration in respect of which the shares were issued.

Canco will pay a dividend-in-kind to Parentco in the form of its shares of FA. As a result, Canco will, pursuant to subsection 52(2) of the Act, be deemed to have disposed of these shares for proceeds of disposition equal to their fair market value and will realize a capital gain to the extent that the fair market value of the FA shares exceeds Canco's adjusted cost base in respect of the shares. Canco will elect, in prescribed manner and within the prescribed time, under subsection 93(1) of the Act in respect of this disposition to the extent of available exempt surplus in respect of the FA shares. Parentco will pay an amount to Revenue Canada on its own behalf and on behalf of Canco equal to 5% of the fair market value of the dividend-in-kind in respect of withholding tax on the dividend-in-kind required to be withheld from the dividend by Canco under the terms of the Act and Article X of the Treaty within the time limits required for remittance of this amount by Canco.

The share capital of Canco will be amended in accordance with the relevant provisions of the XXXXXXXXXX to create the following new classes of shares:

(i)an unlimited number of new common shares;

(ii)a class of participating, non-cumulative, non-voting, redeemable, retractable, special shares (the "Target Reorganization Shares") with an aggregate redemption value and an aggregate fair market value equal to the net fair market value of the property to be transferred to Holdco1 as described in paragraph 20 below; and

(iii)a class of participating, non-cumulative, non-voting redeemable, retractable, special shares (the "Opco Reorganization Shares") with an aggregate redemption value and an aggregate fair market value equal to the net fair market value of the property to be transferred to Holdco2 as described in paragraph 23 below.

The issued share capital of Canco will then be reorganized such that each common share of Canco (the "Canco Old Common Shares") held by Parentco will be exchanged for one Canco new common share (the "Canco New Common Shares"), one Target Reorganization Share and one Opco Reorganization Share (the "Share Reorganization"). No other consideration will be received by Parentco in respect of the Share Reorganization. The class of Canco Old Common Shares will be cancelled by Canco. No election under subsection 85(1) of the Act will be filed in respect of the Share Reorganization.

For purposes of the relevant corporate laws, the aggregate amount to be added to the stated capital of the Canco New Common Shares, the Target Reorganization Shares and the Opco Reorganization Shares as a result of the Share Reorganization will be equal to the aggregate stated capital of the Canco Old Common Shares immediately before the Share Reorganization, and such stated capital will be allocated among the Target Reorganization Shares, the Opco Reorganization Shares and the Canco New Common Shares in proportion to their respective fair market values.

Parentco will sell all of the Target Reorganization Shares held by it to Holdco1 and will receive, as sole consideration therefor, XXXXXXXXXX common shares of Holdco1. For purposes of the relevant corporate laws, the aggregate amount to be added to the stated capital of the common shares of Holdco1 to be issued as consideration for the Target Reorganization Shares will be equal to the stated capital of the Target Reorganization Shares transferred by Parentco.

In respect of the transfer described herein, Parentco and Holdco1 will file a joint election under 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 will be equal to the fair market value of the Target Reorganization Shares transferred by Parentco, which is in excess of the adjusted cost base of such shares to Parentco. Parentco will recognize a capital gain on the transfer of the Target Reorganization Shares to Holdco1. Such capital gain will constitute a gain from the disposition of taxable Canadian property.

Parentco will comply with the provisions of section 116 to obtain from the Minister a certificate in prescribed form in respect of the disposition of the Target Reorganization Shares.

Coincident with the sale described in paragraph 18 above, Parentco will sell all of the Opco Reorganization Shares held by it to Holdco2 and will receive, as sole consideration therefor, XXXXXXXXXX common shares of Holdco2. For purposes of the relevant corporate laws, the aggregate amount to be added to the stated capital of the common shares of Holdco2 to be issued as consideration for the Opco Reorganization Shares will be equal to the stated capital of the Opco Reorganization Shares transferred by Parentco.

In respect of the transfer described herein, Parentco and Holdco2 will file a joint election under 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 will be equal to the fair market value of the Opco Reorganization Shares transferred by Parentco, which is in excess of the adjusted cost base of such shares to Parentco. Parentco will recognize a capital gain on the transfer of the Opco Reorganization Shares to Holdco2. Such capital gain will constitute a gain from the disposition of taxable Canadian property.

Parentco will comply with the provisions of section 116 to obtain from the Minister a certificate in prescribed form in respect of the disposition of the Opco Reorganization Shares.

Canco will transfer the following Target Division properties to Holdco1:

(a) inventory;

(b) fixed assets;

(c) prepaid expenses; and

(d) certain intangibles;

in return for the assumption of certain liabilities of Canco and the issuance of non-voting, preferred shares of Holdco1 ("Holdco1 Preferred Shares") having an aggregate fair market value and redemption amount equal to the aggregate fair market value at that time of the properties so transferred by Canco less the aggregate amount of liabilities assumed. For greater certainty, the amount of liabilities assumed by Holdco1 as described herein will be less than the aggregate fair market value of the property transferred to Holdco1.

In respect of the transfers described in paragraph 20 above, Canco and Holdco1 will file a joint election under 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 property that is inventory (other than real property), capital property (including depreciable property of a prescribed class) or eligible capital property that has a fair market value in excess of its cost amount. The agreed amount, to be determined by Canco in its sole discretion, in respect of each transferred property included in the subsection 85(1) election shall be within the limits imposed by that subsection. Specifically, 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) and inventory, be an amount not greater than the fair market value of such property and not less than the lesser of the amounts described in subparagraphs 85(1)(c.1)(i) and (ii);

in the case of depreciable property of a prescribed class, be an amount not greater than the fair market value of such property and not less than the least of the amounts described in subparagraphs 85(1)(e)(i), (ii) and (iii); and

in the case of the transfer of any eligible capital property, an amount not greater than the fair market value of such property and not less than the least of the amounts described in subparagraphs 85(1)(d)(i), (ii) and (iii).

Canco and Holdco1 will allocate the liabilities assumed as described in paragraph 20 above to specific property acquired, in such a manner that the amount of such non-share consideration allocated to a particular property will not exceed the agreed amount in respect of any property in respect of which an election is filed as described above or the fair market value of any other property.

For the purposes of the relevant corporate laws, the aggregate amount that will be added to the stated capital of the Holdco1 Preferred Shares to be issued as described in paragraph 20 above will be equal to the maximum amount that could be added to the paid-up capital for purposes of the Act without invoking any consequences under subsection 85(2.1) of the Act.

Canco will enter into an arrangement with Holdco1 in respect of the use of the business premises currently occupied by the Target Division. The fees to be paid by Holdco1 for the use of such premises will represent fair market value.

Canco will transfer the shares of Opco to Holdco2 in return for the issuance of non-voting, preferred shares of Holdco2 ("Holdco2 Preferred Shares") having an aggregate fair market value and redemption amount equal to the fair market value at that time of the Opco shares so transferred by Canco.

In respect of the transfer of the shares of Opco described in paragraph 23 above, Canco and Holdco2 will file a joint election under 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, to be determined by Canco in its sole discretion, in respect of the shares of Opco shall not be greater than the fair market value of the shares of Opco and shall not be less than their adjusted cost base to Canco.

For the purposes of the relevant corporate laws, the aggregate amount that will be added to the stated capital of the Holdco2 Preferred Shares to be issued as described in paragraph 23 above will be equal to the agreed amount in respect of the election as described herein.

Immediately after the completion of the transactions described above, Canco will be connected with Holdco1 and Holdco1 will be connected with Canco, and Canco will be connected with Holdco2 and Holdco2 will be connected with Canco.

Holdco1 and Holdco2, respectively, will redeem the Holdco1 Preferred Shares and the Holdco2 Preferred Shares owned by Canco and in consideration therefor each will issue to Canco a demand non-interest bearing promissory note (in the case of Holdco1, the "Holdco1 Note", and in the case of Holdco2, the "Holdco2 Note") having a principal amount and fair market value equal to the respective aggregate redemption amount of the redeemed shares. Canco will accept the Holdco1 Note and the Holdco2 Note in full satisfaction of the redemption price of such shares.

Canco will redeem all of the Target Reorganization Shares owned by Holdco1 and in consideration therefor will issue to Holdco1 a demand non-interest bearing promissory note (the "Canco Target Note") having a principal amount and fair market value equal to the aggregate redemption amount of the Target Reorganization Shares so redeemed. Holdco1 will accept the Canco Target Note in full satisfaction of the redemption price of the Target Reorganization Shares.

Canco will redeem all of the Opco Reorganization Shares owned by Holdco2 and in consideration therefor will issue to Holdco2 a demand non-interest bearing promissory note (the "Canco Opco Note") having a principal amount and fair market value equal to the aggregate redemption amount of the Opco Reorganization Shares so redeemed. Holdco2 will accept the Canco Opco Note in full satisfaction of the redemption price of the Opco Reorganization Shares.

The Holdco1 Note and the Canco Target Note will be set off in full satisfaction of the obligations under each such note. Similarly, the Holdco2 Note and the Canco Opco Note will be set off in full satisfaction of the obligations under each such note.

Parentco will transfer the Holdco1 shares and the Holdco2 shares to Middleco, which will be responsible for Holdco2 and the corporate group members carrying on operations similar to Holdco1. Immediately before these transfers, the value of the outstanding shares of Holdco1 and Holdco2 will not be derived principally from real property situated in Canada as defined for the purposes of Article XIII of the Treaty.

Parentco will comply with the provisions of section 116 to obtain from the Minister a certificate in prescribed form in respect of the disposition of the Holdco1 shares and the Holdco2 shares.

Holdco2 will be continued under the provisions of the CBCA and will be amalgamated with Opco to form one corporation ("Amalco") in such a manner that:

(a) all of the property (except amounts receivable from any predecessor corporation or shares of the capital stock of 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 (except any predecessor corporation) of the predecessor corporations immediately before the amalgamation will receive shares of the capital stock of Amalco by virtue of the amalgamation.

On the amalgamation of Holdco2 and Opco described herein, the holders of Holdco2 common shares will receive common shares of Amalco for their Holdco2 common shares, and the Opco common shares held by Holdco2 will be cancelled. The aggregate stated capital of the common shares of Amalco will be equal to the aggregate stated capital, immediately before the amalgamation, of the Holdco2 common shares.

Additional Information

None of the shares of Canco, Holdco1 or Holdco2 has been or will be subject to a guarantee agreement, within the meaning referred to in subsection 112(2.2) of the Act, that is given by a specified financial institution or a specified person in relation to any such institution for any of the purposes described in that subsection. None of the shares of Canco, Holdco1 or Holdco2 will be part of a dividend rental arrangement for purposes of subsection 112(2.3) of the Act.

None of the Target Reorganization Shares, the Opco Reorganization Shares, the Holdco1 Preferred Shares or the Holdco2 Preferred Shares will be, at any time before the completion of the proposed transactions described herein, shares to which paragraph (g) of the definition of "taxable preferred share" in subsection 248(1) of the Act or paragraph (e) of the definition "taxable RFI shares" in subsection 248(1) of the Act would apply to deem the share to be, respectively, a taxable preferred share or a taxable RFI share.

None of the Target Reorganization Shares, the Opco Reorganization Shares, the Holdco1 Preferred Shares or the Holdco2 Preferred Shares 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.

None of Parentco, Canco, Holdco1 or Holdco2 is, or will be, at any time before the completion of the proposed transactions described herein, a corporation described in any of the paragraphs (a) to (f) of the definition "financial intermediary corporation" in subsection 191(1) of the Act.

There is not a present intention to dispose of the shares of any of Middleco, Amalco, Canco or Holdco1 to a person or partnership who was not related to Canco, Amalco or Holdco1 immediately prior to such disposition.

Purpose of the Proposed Transactions

The purpose of the proposed transactions is to restructure the current corporate organization of Canco so that the shares of the companies owning the Target Division and the Opco operations are each owned directly by the U.S. corporation responsible for overseeing the investments in the Canadian Target Division and the Opco operations and, similarly, the shares of the company owning the Retained Division are owned directly by the U.S. corporation responsible for overseeing the investment in the Canadian Retained Division, to effect better managerial and marketing control of the respective operations.

Rulings

Provided that the preceding statements constitute a complete and accurate disclosure of all the relevant facts, proposed transactions 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:

The provisions of subsection 86(1) of the Act will apply, and the provisions of subsection 86(2) of the Act will not apply, to the Share Reorganization described in paragraph 16 above, such that:

(i)the cost to Parentco of the New Common Shares, Target Reorganization Shares and Opco Reorganization Shares of Canco received on the Share Reorganization will be deemed by paragraph 86(1)(b) of the Act to be an amount equal to that proportion of the aggregate adjusted cost base to Parentco, immediately before the Share Reorganization, of the Old Common Shares of Canco, that

(a)the fair market value, immediately after the Share Reorganization, of the New Common Shares, Target Reorganization Shares and Opco Reorganization Shares, as the case may be,

is of

(b)the fair market value, immediately after the Share Reorganization, of all of the shares of Canco received by Parentco for the Old Common Shares of Canco.

(ii)Pursuant to paragraph 86(1)(c) of the Act, Parentco will be deemed to have disposed of the Old Common Shares of Canco for aggregate proceeds of disposition equal to the aggregate cost to Parentco of the New Common Shares, Target Reorganization Shares and Opco Reorganization Shares determined in (i) above.

The Share Reorganization described in paragraph 16 above will not, in and by itself, cause the Canco New Common Shares, the Target Reorganization Shares and the Opco Reorganization Shares to be received by Parentco as a result of the Share Reorganization not to be capital property of Parentco.

Subject to the application of the provisions of subsections 20(1.2) and 26(5) of 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 subsections 85(4) and 85(5.1) of the Act as they may apply to the transfers referred to herein, the provisions of subsection 85(1) will apply to:

the transfer by Parentco of the Target Reorganization Shares to Holdco1 as described in paragraph 18 above;

the transfer by Parentco of the Opco Reorganization Shares to Holdco2 as described in paragraph 19 above;

the transfer by Canco to Holdco1 of any eligible property described in paragraph 20, which is the object of the election described in paragraph 21 above; and

the transfer by Canco of the shares of Opco to Holdco2, 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.

The cost to Parentco of the common shares of Holdco1 and Holdco2, as the case may be, received as consideration for the transfers of the Target Reorganization Shares and the Opco Reorganization Shares, as described in paragraphs 18 and 19 above, respectively, will be deemed by paragraph 85(1)(h) of the Act to be equal to the deemed proceeds of disposition to Parentco of the Target Reorganization Shares and the Opco Reorganization Shares, as the case may be.

By virtue of paragraph 1102(14)(d) of the Regulations, depreciable property of a prescribed class or a separate prescribed class of Canco that is acquired by Holdco1 as described in paragraph 20 above, shall be deemed to be property of that same prescribed class or separate prescribed class, as the case may be, to Holdco1.

Provided that the condition specified in either of paragraphs 1100(2.2)(f) or (g) of the Regulations is satisfied in respect of a particular depreciable property of a prescribed class in Schedule II of the Regulations acquired by Holdco1 from Canco as described in paragraph 20 above, pursuant to the provisions of paragraph 1100(2.2)(h) of the Regulations no amount will be included under paragraph 1100(2)(a) thereof in respect of that property.

Any gain on the sale by Parentco of its Target Reorganization Shares to Holdco1, as described in paragraph 18 above, and of its Opco Reorganization Shares to Holdco2 as described in paragraph 19 above, will be exempt from Canadian taxation by virtue of paragraph 4 of Article XIII of the Treaty.

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

as a result of the redemption by Holdco1 of its Holdco1 Preferred Shares as described in paragraph 26 above, to deem Holdco1 to have paid and Canco 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;

as a result of the redemption by Canco of its Target Reorganization Shares held by Holdco1 as described in paragraph 27 above, to deem Canco to have paid and Holdco1 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;

as a result of the redemption by Holdco2 of its Holdco2 Preferred Shares as described in paragraph 26 above, to deem Holdco2 to have paid and Canco 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

as a result of the redemption by Canco of its Opco Reorganization Shares held by Holdco2 as described in paragraph 28 above, to deem Canco to have paid and Holdco2 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.

The deemed dividends referred to in Ruling H above will 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 and, to the extent that they are taxable dividends:

will be included in the recipient's income pursuant to paragraph 12(1)(j) of the Act;

will 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(2.1), (2.2), (2.3) or (2.4) of the Act;

provided that none of Canco, Holdco1 or Holdco2 is entitled to a dividend refund in respect of its taxation year in which it is deemed to pay the dividends referred to in Ruling H, none of Holdco1, Holdco2 or Canco will be subject to Part IV tax under subsection 186(1) of the Act in respect of such dividend; and

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 Canco, Holdco1 and Holdco2 will have a substantial interest, within the meaning assigned by subsection 191(2) of the Act, in the payer immediately before the redemption or purchase for cancellation of such shares.

By virtue of paragraph 55(3)(a) of the Act, the provisions of subsection 55(2) of the Act will not apply to the deemed dividends referred to in Ruling H, in and by themselves, provided that there is not:

(i)a disposition of any property to a person with whom Canco, Holdco1 or Holdco2 would not be related for the purposes of the Act,

		or

(ii)a significant increase in the interest in any corporation of any person with whom Canco, Holdco1 or Holdco2 would not be related for the purposes of the Act,

either of which is part of a transaction or event or a series of transactions or events, determined with reference to subsection 248(10) of the Act, that includes the proposed transactions described in this letter. For greater certainty, the proposed transactions described in paragraphs 13 to 31 above, in and by themselves, will not be considered to result in any of the events described in (i) or (ii) above.

Interest paid in the year or payable in respect of the year (depending on the method regularly followed by Holdco1 in computing its income) pursuant to a legal obligation to pay interest on the liabilities of Canco assumed by Holdco1 as described in paragraph 20 above will be deductible by Holdco1 in computing its income provided that the assets received by Holdco1 as described in paragraph 20, or property substituted therefor, continue to be used by Holdco1 for the purpose of earning income from a business or property (other than property the income from which would be exempt or for property that is an interest in a life insurance policy) and to the extent that such interest payable:

would have been deductible by Canco in computing its income pursuant to paragraph 20(1)(c) if the proposed transactions were not undertaken; and

does not exceed a reasonable amount.

With respect to the amalgamation of Opco and Holdco2 described in paragraph 31 above:

the provisions of subsection 87(1) will apply;

provided that the Holdco2 common shares were capital property to Middleco immediately before the amalgamation, the provisions of subsection 87(4) of the Act, other than paragraphs (c), (d) and (e) thereof, will apply such that:

(i)Middleco will be deemed by paragraph 87(4)(a) to have disposed of its Holdco2 common shares for proceeds equal to their adjusted cost base immediately before the amalgamation; and

(ii)Middleco will be deemed by paragraph 87(4)(b) to have acquired its common shares of Amalco for an amount equal to the proceeds described in (i) above.

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

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 70-6R3 issued by Revenue Canada, Customs, Excise and Taxation on December 30, 1996 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 our understanding of the facts and proposed transactions described herein is correct and further provided that proposed paragraph 55(3)(a) of the Act is enacted in substantially the same form as proposed in Bill C-69 which received first reading on December 2, 1996, it is our opinion that, by virtue of paragraph 55(3)(a) of the Act, the provisions of subsection 55(2) of the Act will not apply to the deemed dividends referred to in Ruling H above provided that there is no disposition or increase in interest described in any of proposed subparagraphs 55(3)(a)(i) to (v) as part of a series of transactions or events which includes the redemption by Holdco1 of its Holdco1 Preferred Shares held by Canco, the redemption by Holdco2 of its Holdco2 Preferred Shares held by Canco, the redemption by Canco of its Target Reorganization Shares held by Holdco1 and the redemption by Canco of its Opco Reorganization Shares held by Holdco2. For greater certainty, the proposed transactions described in paragraphs 13 to 31 above, in and by themselves, will not be considered to result in any of disposition or increase in interest described in any of proposed subparagraphs 55(3)(a)(i) to (v).

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, adjusted cost base or V-day value of any particular asset or share or the paid-up capital of any shares referred to herein;

(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