30 November 1996 Ruling 9709193 - BUTTERFLY REORGANIZATION

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

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

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

Principal Issues:

Single-wing butterfly, preceded by amalgamation of two predecessor corporations.

Position:

Siblings make up a "group of persons" that control each predecessor.

Reasons:

Similar to rationale in 962034-3

XXXXXXXXXX							3-970919
XXXXXXXXXX

Attention: XXXXXXXXXX

XXXXXXXXXX
XXXXXXXXXX

Attention: XXXXXXXXXX

XXXXXXXXXX, 1997

Dear Sirs:

Re: XXXXXXXXXX
Advance Income Tax Ruling Request

This is in reply to your letter of XXXXXXXXXX in which you requested various advance income tax rulings. We also acknowledge your letters of XXXXXXXXXX and our various telephone conversations.

We understand that to the best of your knowledge and that of the taxpayers involved none of the issues involved in the requested rulings is being considered by a tax services office or a taxation centre in connection with a tax return already filed, or is under objection or 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) "capital dividend account" has the meaning assigned by subsection 89(1);

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

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

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

(g) "distribution" has the meaning assigned by subsection 55(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) "financial intermediary corporation" has the meaning assigned by subsection 191(1);

(k) "forgiven amount" has the meaning assigned by subsections 80(1) and 80.01(1);

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

(m) XXXXXXXXXX;

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

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

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

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

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

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

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

(u) "taxable dividend" has the meaning assigned by subsection 89(1); and

(v) "testamentary trust" has the meaning assigned by subsection 108(1).

FACTS

1. XXXXXXXXXX was incorporated on XXXXXXXXXX by letters patent under the Corporations Act (XXXXXXXXXX). On XXXXXXXXXX, XXXXXXXXXX was amalgamated with XXXXXXXXXX and continued under the name XXXXXXXXXX. XXXXXXXXXX is a private corporation and a taxable Canadian corporation.

2. The authorized share capital of XXXXXXXXXX consists of XXXXXXXXXX Class XXXXXXXXXX shares; XXXXXXXXXX Class XXXXXXXXXX shares and an unlimited number of common shares.

3. The issued share capital of XXXXXXXXXX immediately following the amalgamation on XXXXXXXXXX was held as follows:

Number and Class of Shares Held

Shareholder Common Class XXXXX Class XXXXX

XXXXXXXXXX

On XXXXXXXXXX, the shares of XXXXXXXXXX held by XXXXXXXXXX were redeemed and cancelled.

The issued share capital of XXXXXXXXXX is now held as follows:

Number and Class of Shares Held

Shareholder Common Class XXXXX Class XXXXX

XXXXXXXXXX

The paid-up capital of the XXXXXXXXXX common shares is $XXXXXXXXXX, the Class XXXXXXXXXX shares is $XXXXXXXXXX and the Class XXXXXXXXXX shares is $XXXXXXXXXX.

4. XXXXXXXXXX was incorporated under the laws of XXXXXXXXXX. XXXXXXXXXX is a private corporation and a taxable Canadian corporation. XXXXXXXXXX owns all the issued and outstanding shares of XXXXXXXXXX.

On XXXXXXXXXX, XXXXXXXXXX transferred his shares XXXXXXXXXX in exchange for XXXXXXXXXX common shares of XXXXXXXXXX. XXXXXXXXXX jointly elected to have the provisions of subsection 85(1) apply to the transfer.

5. XXXXXXXXXX was incorporated under the laws of XXXXXXXXXX. XXXXXXXXXX is a private corporation and a taxable Canadian corporation. XXXXXXXXXX owns all the issued and outstanding shares of XXXXXXXXXX.

On XXXXXXXXXX, XXXXXXXXXX transferred his shares XXXXXXXXXX in exchange for XXXXXXXXXX common shares of XXXXXXXXXX. XXXXXXXXXX jointly elected to have the provisions of subsection 85(1) apply to the transfer.

6. XXXXXXXXXX was incorporated under the laws of XXXXXXXXXX. XXXXXXXXXX is a private corporation and a taxable Canadian corporation. The estate of XXXXXXXXXX (the "Estate") owns all the issued and outstanding shares of XXXXXXXXXX. The Estate is a testamentary trust.

On XXXXXXXXXX, XXXXXXXXXX transferred his shares XXXXXXXXXX in exchange for XXXXXXXXXX common shares of XXXXXXXXXX. XXXXXXXXXX jointly elected to have the provisions of subsection 85(1) apply to the transfer.

Besides the XXXXXXXXXX shares the only asset held by XXXXXXXXXX is a XXXXXXXXXX interest in property located at XXXXXXXXXX. XXXXXXXXXX was acquired from XXXXXXXXXX for a non-interest-bearing promissory note in the amount of $XXXXXXXXXX (XXXXXXXXXX").

XXXXXXXXXX had no RDTOH and a nil balance in its capital dividend account as at XXXXXXXXXX.

7. The principal business of XXXXXXXXXX consists of real estate investment and development. As at XXXXXXXXXX, the value of the assets and liabilities of XXXXXXXXXX, after giving effect to the sale of the XXXXXXXXXX property described in paragraph 21 below and adjusting the value of XXXXXXXXXX real property to fair market value were as follows:

XXXXXXXXXX

** Liabilities, immediately before the transfers of property described in paragraph 34 below (the "Butterfly Transfer"), will include an amount in respect of taxes payable as a consequence of the sale of the XXXXXXXXXX property and the transfer of inventory properties in the course of the proposed transactions.

8. XXXXXXXXXX had RDTOH of $XXXXXXXXXX. XXXXXXXXXX will have an amount of approximately $XXXXXXXXXX in its capital dividend account immediately before the proposed transactions described herein.

9. XXXXXXXXXX.

10. XXXXXXXXXX.

11. Pursuant to Minutes of Settlement entered into in

XXXXXXXXXX

the parties have agreed that the shares of XXXXXXXXXX held indirectly by the Estate through the Estate's holding of the shares of XXXXXXXXXX should be distributed such that, after the distribution, XXXXXXXXXX will hold XXXXXXXXXX% of the fair market value of all the issued and outstanding shares of XXXXXXXXXX. The shares of XXXXXXXXXX held by XXXXXXXXXX will be distributed as follows:

Common Class XXXXX Class XXXXX

XXXXXXXXXX

The Minutes of Settlement also provide for, among other things, the distribution of a portion of the assets of XXXXXXXXXX to a new corporation to be set up by XXXXXXXXXX in the manner described in the Proposed Transactions. The parties have agreed that the terms of the Minutes of Settlement will be varied to require that XXXXXXXXXX make a payment to XXXXXXXXXX as a reimbursement of a portion of the legal fees incurred by XXXXXXXXXX.

12. XXXXXXXXXX are residents of Canada and XXXXXXXXXX is a resident of the United States and a non-resident of Canada for purposes of the Act.

XXXXXXXXXX

13. Immediately before the Butterfly Transfer, the property of Amalco, a new corporation formed on the amalgamation of XXXXXXXXXX as described in paragraph 23 below, will be classified into three types of property for the purposes of a distribution, as follows:

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

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

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

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

14. In determining the net fair market value of its cash or near-cash property, investment property and business property immediately before the Butterfly Transfer, liabilities of Amalco will be deducted in the calculation of the net fair market value of each type of property of Amalco in the following manner:

(a) current liabilities of Amalco will be allocated to cash or near-cash property;

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

(c) any liabilities ("excess unallocated liabilities") that remain after the allocations described in steps (a) and (b) are made (including excess current liabilities, if any), will then be allocated to the cash or near-cash property, investment property and business property 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 calculating the net fair market value of the types of property of Amalco, taxes payable as a result of the sale of the XXXXXXXXXX property, as described in paragraph 21 below, and the disposition of Amalco's real property to Newco 2, as described in paragraph 34 below, if any, will be classified as a current liability of Amalco.

ADDITIONAL INFORMATION

15. None of XXXXXXXXXX, Newco 1 and Newco 2 is either a restricted financial institution or a specified financial institution.

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

17. None of the parties are contemplating a disposition of any of the shares of XXXXXXXXXX, Newco 1 or Newco 2 other than as described herein.

18. There are not, and will not be at any time prior to the completion of the proposed transactions described herein, any guarantee agreements in respect of any of XXXXXXXXXX, Newco 1 or Newco 2 shares.

19. None of XXXXXXXXXX, Newco 1 or Newco 2 has entered, or will enter, into a dividend rental arrangement in respect of any of the shares to be redeemed or acquired as part of the proposed transactions described herein.

20. None of the shares of XXXXXXXXXX, Newco 1 or Newco 2 will be issued or acquired as part of a series of transactions described in subsection 112(2.5).

PRELIMINARY TRANSACTIONS

21. XXXXXXXXXX.

The sale of the XXXXXXXXXX property will close before the commencement of the Proposed Transactions.

22. Pursuant to the Minutes of Settlement, the XXXXXXXXXX shares held by the Estate will be distributed to XXXXXXXXXX, in satisfaction of their capital interests in the Estate, as follows:

					Number of Shares

XXXXXXXXXX

The XXXXXXXXXX Property held by XXXXXXXXXX will be transferred to the Estate in satisfaction of the XXXXXXXXXX Note.

PROPOSED TRANSACTIONS

23. XXXXXXXXXX (referred to in this paragraph as "predecessor corporations") will amalgamate under the provisions of the XXXXXXXXXX to form a new corporation ("Amalco") in such manner that:

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

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

(c) all the shareholders of the predecessor corporations before the merger, other than XXXXXXXXXX, will receive shares of the capital stock of Amalco by virtue of the merger.

On the amalgamation, each holder of the shares of the predecessor corporations will only receive common shares of Amalco, which common shares will have a fair market value equal to the aggregate fair market value immediately before the amalgamation of the common shares, Class XXXXXXXXXX shares and Class XXXXXXXXXX shares of XXXXXXXXXX or common shares of XXXXXXXXXX, as the case may be, held by that shareholder immediately before the amalgamation.

The common shares of Amalco will be issued as follows:

					Number of Shares

XXXXXXXXXX

The stated capital of the common shares of Amalco, immediately after the issue of such shares on the amalgamation, will not exceed the aggregate of the paid-up capital of the common shares, Class XXXXXXXXXX shares and Class XXXXXXXXXX shares of the predecessor corporations immediately before the merger less the paid-up capital of the XXXXXXXXXX shares held by XXXXXXXXXX at that time.

24. XXXXXXXXXX will transfer all of the Amalco shares that he owns to XXXXXXXXXX. As sole consideration for such transfer, XXXXXXXXXX will issue to XXXXXXXXXX common shares with a fair market value equal to the fair market value at the time of the transfer of the Amalco shares transferred to XXXXXXXXXX. XXXXXXXXXX will add to the stated capital account maintained for its common shares an amount equal to the paid-up capital of the shares transferred.

25. XXXXXXXXXX will jointly elect in prescribed form within the time limit referred to in subsection 85(6), to have the provisions of subsection 85(1) apply to the transfer. The agreed amount in respect of the shares so transferred will be equal to the adjusted cost base of the shares to XXXXXXXXXX immediately before the transfer, which amount will be equal to or less than the fair market value of such shares.

26. XXXXXXXXXX will transfer all of the Amalco shares that he owns to XXXXXXXXXX. As sole consideration for such transfer, XXXXXXXXXX will issue to XXXXXXXXXX common shares with a fair market value equal to the fair market value at the time of the transfer of the Amalco shares transferred to XXXXXXXXXX. XXXXXXXXXX will add to the stated capital account maintained for its common shares an amount equal to the paid-up capital of the shares transferred.

27. XXXXXXXXXX will jointly elect in prescribed form within the time limit referred to in subsection 85(6), to have the provisions of subsection 85(1) apply to the transfer. The agreed amount in respect of the shares so transferred will be equal to the adjusted cost base of the shares to XXXXXXXXXX immediately before the transfer, which amount will be equal to or less than the fair market value of such shares.

28. XXXXXXXXXX will incorporate a new corporation ("Newco 1") under the XXXXXXXXXX. Newco 1 will be a private corporation and a taxable Canadian corporation.

29. The authorized share capital of Newco 1 will consist of an unlimited number of Class XXXXXXXXXX common shares and an unlimited number of Class XXXXXXXXXX common shares.

XXXXXXXXXX will subscribe for one Class XXXXXXXXXX common share for an amount of $XXXXXXXXXX and XXXXXXXXXX will subscribe for one Class XXXXXXXXXX common share for an amount of $XXXXXXXXXX on incorporation. No other shares of Newco 1 will be issued until shares issues as described in paragraph 32 below are effected.

30. Newco 1 will incorporate a new corporation ("Newco 2") under the XXXXXXXXXX. Newco 2 will be a private corporate and taxable Canadian corporation.

31. The authorized share capital of Newco 2 will consist of:

(a) an unlimited number of common shares; and

(b) a fixed number of non-voting XXXXXXXXXX% non-cumulative redeemable, retractable preference shares (the "Newco 2 Preference Shares") redeemable and retractable for an amount equal to the amount for which they were issued.

Newco 1 will subscribe for XXXXXXXXXX common shares of Newco 2 for a subscription price of $XXXXXXXXXX.

32. Each of XXXXXXXXXX will transfer all of the Amalco shares that it or she owns to Newco 1. As sole consideration for such transfers, Newco 1 will issue to XXXXXXXXXX Class XXXXXXXXXX common shares and to XXXXXXXXXX Class XXXXXXXXXX common shares, with a fair market value equal to the fair market value at the time of the transfer of the shares transferred by that transferor to Newco 1. Newco 1 will add to the stated capital account maintained for its common shares an amount equal to the paid-up capital of the shares transferred.

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

34. Amalco will sell at fair market value to Newco 2 a portion of the cash or near-cash property, business property and investment property described in paragraphs 4 and 8 above. As a result of such transfers, the net fair market value of the cash or near-cash property, business property and investment property received by Newco 2, determined in the manner described in paragraph 11 above (after allocating and deducting liabilities, in the manner described in paragraph 12 above), will be equal to the proportion of the net fair market value of each type of property of Amalco, determined in the manner described in paragraph 11 above (after allocating and deducting, in the manner described in paragraph 11 above, the liabilities of Amalco), immediately before the transfer, that:

(a) the aggregate of the fair market value, immediately before the transfer, of all shares of the capital stock of Amalco owned by Newco 1, at that time

is of

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

In consideration for such transfers, Newco 2 will issue Preference Shares and assume a portion of the liabilities of Amalco. The Newco 2 Preference Shares issued by Newco 2 will have a redemption amount equal to the fair market value of the properties at the time of the transfer less the amount of liabilities assumed by that transferee. The liabilities assumed by Newco 2, in respect of eligible properties transferred, will not exceed the aggregate of the agreed amounts in respect of such properties.

Newco 2 will add to the stated capital account maintained for its Preference Shares an amount equal to the amount by which the aggregate of the cost amounts, in the case of eligible properties, and the fair market value, in the case of other properties including real property inventory, of the properties transferred to Newco 2 exceeds the liabilities assumed by Newco 2.

Newco 2 will assume a mortgage payable by Amalco in the amount of approximately $XXXXXXXXXX. Amalco will transfer to Newco 2 the following properties:

(a) cash, accounts receivable and prepaid expenses;

(b) Business Properties

XXXXXXXXXX

(c) Investment Properties

XXXXXXXXXX

The agreements in respect of the transfers described herein will contain a price adjustment clause.

35. Amalco and Newco 2 will jointly elect, in prescribed form within the time limit referred to in subsection 85(6), to have the provisions of subsection 85(1) apply to the transfer of each property of Amalco that is an eligible property transferred to Newco 2. The agreed amount for the purposes of subsection 85(1) in respect of such property will be:

(a) where the particular property is inventory or capital property (other than depreciable property of a prescribed class), the cost amount of the property to Amalco at the time of the disposition; and

(b) where the particular property is depreciable property of a prescribed class, the cost amount of such property immediately before the disposition.

The fair market value of each property will equal or exceed the agreed amount in respect thereof.

36. Following the transfer of assets to Newco 2, Newco 2 will redeem its Preference Shares issued to Amalco in the Butterfly Transfer, by the issuance of a demand non-interest-bearing promissory note (the "Newco 2 Note") having a principal amount and fair market value equal to the redemption amount of the Newco 2 Preference Shares so redeemed.

37. Newco 2 will then be wound up into its parent, Newco 1. As a result of the wind-up, the Newco 2 Note will become a liability of Newco 1.

38. Following the wind-up of Newco 2 into Newco 1 as described in paragraph 37 above, Amalco will then purchase for cancellation, at fair market value, its common shares held by Newco 1 in two stages:

(a) in the first stage, Amalco will purchase a sufficient number of common shares or part thereof which will result in a deemed dividend, pursuant to the provisions of subsection 84(3), equal to Newco 2's share of Amalco's capital dividend account immediately before that time, which Amalco will elect, pursuant to subsection 83(2), to have been paid from its capital dividend account; and

(b) in the second stage, Amalco will purchase the balance of its common shares held by Newco 1.

Amalco will issue to Newco 1 as consideration for the purchase of its common shares two non-interest-bearing promissory notes, one note having a principal amount equal to the fair market value of the common shares purchased in the first stage ("Amalco Note 1") and a second note with a principal amount equal to the fair market value of the common shares purchased in the second stage ("Amalco Note 2").

39. The Newco 2 Note will be set off against the Amalco Note 1 and the Amalco Note 2 and the notes will all be cancelled.

40. On the receipt of the dividend refund due to Amalco on the deemed dividends arising from the purchase for cancellation of the shares of Amalco described in paragraph 38 above, a proportion of the cash received from the dividend refund by Amalco, equal to the same proportion described in paragraph 34 above, will be paid immediately to Newco 1.

PURPOSE OF THE PROPOSED TRANSACTIONS

41. The purpose of the proposed transactions is to permit XXXXXXXXXX, as shareholders of XXXXXXXXXX, to separate their interests to the extent possible, in order to enable XXXXXXXXXX through Newco 1, to own their various property interests independently from XXXXXXXXXX.

RULINGS

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

A. The provisions of subsection 85(1) will apply to the transfer by each of XXXXXXXXXX of the shares of Amalco to Newco 1 described in paragraph 32 above such that the agreed amount in respect of each transfer of eligible property will be deemed to be the transferor's proceeds of disposition and the transferee's cost thereof pursuant to paragraph 85(1)(a).

B. The provisions of subsection 85(1) will apply to the transfer of the properties of Amalco that are eligible property by Amalco to Newco 1, as described in paragraph 34 above, such that, the agreed amount in respect of each transfer of eligible property will be deemed to be the transferor's proceeds of disposition and the transferee's cost thereof pursuant to paragraph 85(1)(a) of the Act.

For the purposes of the joint election described in paragraph 35 above, the reference to "the undepreciated capital cost to the taxpayer of all the property of that class immediately before the disposition ..." in subparagraph 85(1)(e)(i) will be read to mean the proportion of the undepreciated capital cost to the taxpayer of all the property of that class that the capital cost to the taxpayer of the property of that class transferred is of the capital cost to the taxpayer of all property of the class.

C. On the redemption of the Newco 2 Preference Shares, as described in paragraph 36 above, the amount, if any, by which the amount paid to redeem these shares exceeds the paid-up capital of these shares immediately before the redemption:

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

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

D. On the purchase for cancellation of the common shares of Amalco held by Newco 1, as described in paragraph 38 above, the amount, if any, by which the amount paid to purchase these shares exceeds the paid-up capital of these shares immediately before the purchase for cancellation:

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

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

E. The deemed dividends referred to in Rulings C and D above, to the extent that they are taxable dividends, such dividends will:

(i) pursuant to subsection 112(1), be deductible in computing the taxable income of the recipient for the year in which the dividend is deemed to have been received, and, for greater certainty, such deduction will not be precluded by subsection 112(2.4); and

(ii) provided that Amalco elects pursuant to subsection 83(2), a dividend described herein, arising as a result of the purchase for cancellation of the common shares of Amalco described in subparagraph 38(a) above, will be deemed to be a capital dividend to the extent that the dividend does not exceed Amalco's capital dividend account immediately before the time the dividend becomes payable.

F. No taxes under Part IV of the Act will be payable in respect of a dividend described in Rulings C and D above except as provided in paragraph 186(1)(b).

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

H. Part VI.1 of the Act will not apply to the deemed dividends described in Rulings C and D above because the dividends will be excluded dividends pursuant to paragraph (a) of the definition of "excluded dividend" in subsection 191(1).

I. Provided that as part of the series of transactions or events that includes the proposed transactions described herein, there is no:

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

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

(iii) acquisition of shares in the circumstances described in subparagraph 55(3.1)(b)(iii);

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

(v) 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 dividend referred to in Ruling D above and, for greater certainty, subsection 55(3.1) will not apply to deny the exemption under paragraph 55(3)(b).

I. The provisions of subsection 88(1) will apply to the winding-up of Newco 2 into Newco 1 described in paragraph 37 above such that:

(i) each property of Newco 2 distributed to Newco 1 on the winding-up will be deemed by paragraph 88(1)(a) to have been disposed of by Newco 2 for proceeds of disposition determined under that paragraph; and

(ii) each property of Newco 2 distributed to Newco 1 on the winding-up will be deemed by paragraph 88(1)(c) to have been acquired by Newco 1 for an amount equal to the amount deemed by paragraph 88(1)(a) to be Newco 2's proceeds of disposition of the property.

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

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

These rulings are given subject to the limitations and qualifications set out in Information Circular 70-6R3 dated December 30, 1996 issued by Revenue Canada and are binding provided that the proposed transactions are completed before XXXXXXXXXX.

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

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) is enacted in substantially the same form as proposed in Bill C-69 which received first reading on December 2, 1996;

(c) as part of the series of transactions or events that includes the proposed transactions described herein, there is no:

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

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

(iii) acquisition of shares in the circumstances described in subparagraph 55(3.1)(b)(iii);

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

(v) 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), subsection 55(2) will not apply to the taxable dividend referred to in Ruling C above and, for greater certainty, subsection 55(3.1) will not apply to deny the exemption under paragraph 55(3)(b).

COMMENTS

1. Nothing in this letter should be construed as implying that the Department has agreed to or accepted:

(a) the determination of the fair market value or adjusted cost base of any property referred to herein, or the paid-up capital of any shares, or

(b) any tax consequences arising from the facts or proposed transactions described above other than those specifically confirmed in the rulings given.

2. Nothing in this letter should be construed as confirming that, for the purposes of any of the rulings given herein, any adjustment to the fair market value of the properties transferred and redemption amount of the Newco 2 Preference Shares issued as consideration pursuant to a price adjustment clause referred in paragraph 34 above, will be effective retroactively to the time of the transfer and issuance of shares. In addition, any such adjustment could affect the ruling given in Ruling G above. Furthermore, the rulings in this letter are not intended to apply to the operation of a price adjustment clause, since its coming into effect will be due to circumstances that do not constitute proposed transactions that are seriously contemplated. The general position of the Department with respect to price adjustment clauses is as stated in Interpretation Bulletin IT-169.

Yours truly,

for Director
Reorganizations and International Division
Rulings Directorate
Legislative and Intergovernmental
Affairs Branch