30 November 1996 Ruling 9710373 - PUBLIC COMPANY SPIN-OFF

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: butterfly - public company spin-off

Position: favourable ruling issued

Reasons: complies with provisions of law

XXXXXXXXXX							971037
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 taxpayer. We also acknowledge your letters of 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 taxpayer 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 taxpayer or a related person;

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

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

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");

“BCA” means the XXXXXXXXXX Business Corporations Act, XXXXXXXXXX;

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

“active business” has the meaning assigned by subsection 248(1);

“agreed amount” has the meaning assigned by subsection 85(1). All agreed amounts referred to in this letter will be expressed in dollars;

“arm’s length” has the meaning assigned by section 251;

“Assumed Debt” means all of the current liabilities and Non-current Debt of Opco immediately prior to undertaking the Proposed Transactions which is allocable to:

the business property of Business 1;

the cash or near cash property which will be transferred by Opco to Stockco as described in Paragraph 20; and

the investment property, if any, which will be transferred by Opco to Stockco as described in Paragraph 20;

“Business 1” means the XXXXXXXXXX business of Opco. Business 1 of Opco continues to be operated under the trade name XXXXXXXXXX and involves the provision of XXXXXXXXXX;

“Business 2” means the XXXXXXXXXX business of Opco, which relates to the XXXXXXXXXX;

“capital property” has the meaning assigned by the definition in section 54;

“cost amount” has the meaning assigned by subsection 248(1);

“depreciable property” has the meaning assigned by subsection 13(21);

“eligible capital property” has the meaning assigned by section 54;

“eligible property” has the meaning assigned by subsection 85(1.1);

“Former Opco” means XXXXXXXXXX, which was originally incorporated under the BCA on XXXXXXXXXX. The name of the corporation was changed to XXXXXXXXXX;

“FMV” means fair market value;

“Holdco” means XXXXXXXXXX, a company incorporated under the BCA which is more fully described in Paragraph 13;

“ITAR” refers to the Income Tax Application Rules;

“Mr. A” refers to XXXXXXXXXX, who is the Chairman and President of Opco;

“Newco” means the BCA corporation to which the Transferred Assets will be indirectly transferred, prior to its amalgamation with Stockco to create NewPubco;.

“Newco Common Shares” means the fully participating voting common shares of Newco;

“New Opco Common Shares” means the voting fully participating Common Shares of Opco as described in Paragraph 26;

“NewPubco” means the BCA corporation created as a result of the amalgamation of Stockco and Newco;

“NewPubco Common Shares” means the voting fully participating common shares of NewPubco;

“NewPubco Stock Options” has the meaning assigned by Paragraph 37;

“Non-Current Debt” means the debt obligations of Opco other than current liabilities;

“Numbered Co.” means XXXXXXXXXX, a BCA corporation that owns XXXXXXXXXX, the income from which generally is distributed to its shareholders by way of periodic dividend;

“Opco” means XXXXXXXXXX, which was formed as a result of the amalgamation of Former Opco and XXXXXXXXXX under the BCA on XXXXXXXXXX;

“Opco Common Shares” means the outstanding voting fully participating Class XXXXXXXXXX common shares of Opco;

“Opco Redemption Note” means the promissory note to be issued in satisfaction of the redemption of the Opco Special Shares, as described in Paragraph 34;

“Opco Shareholders” means all of the holders of Opco Common Shares immediately before the Share Exchange;

“Opco Stock Options” means the employee stock options of Opco described in Paragraph 9;

“Opco Special Shares” means the preferred shares of Opco with the terms and conditions described in Paragraph 25;

“Paragraph” refers to a numbered paragraph in this letter;

“Plan of Arrangement” means the proposed plan of arrangement under the BCA to effect the divisive reorganization described in the Proposed Transactions;

“prepaid expenses” means rights arising from prepaid expenses;

“prescribed stock exchange” has the meaning assigned by section 3200 of the Income Tax Regulations;

“proceeds of disposition” has the meaning assigned by section 54;

“Proposed Transactions” means the transactions described in Paragraphs 17 to 40;

“public corporation” has the meaning assigned in subsection 89(1);

“PUC” means paid-up capital as that expression is defined in subsection 89(1);

“related person” has the meaning assigned by section 251;

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

“SFI” means specified financial institution as defined in subsection 248(1);

“Share Exchange” means the reorganization of the capital of Opco as contemplated in Paragraphs 25 and 26;

“Specified Investment Business” (“SIB”) has the meaning assigned by the definition in subsection 125(7);

“Stated Capital” means stated capital as that expression is used in the BCA;

“Stockco” means a new BCA corporation which will be utilized in the course of the Proposed Transactions to facilitate the exchange of Opco Stock Options for NewPubco Stock Options and to facilitate the transfer to NewPubco of the Transferred Assets;

“Stockco Common Shares” means the voting fully participating common shares of Stockco;

“Stockco Proportion” has the meaning assigned in Paragraph 26;

“Stockco Stock Options” means the employee stock options of Stockco as described in Paragraph 30;

“Subco” means a new BCA corporation which will be utilized in the course of the Proposed Transactions to facilitate the transfer to NewPubco of the Transferred Assets;

“Subco Common Shares” means the voting, fully participating common shares of Subco as described in Paragraph 18;

“Subco Preferred Shares” means the preferred shares of Subco with the terms and conditions described in Paragraph 18;

“Subco Redemption Amount” means the amount for which each Subco Preferred Share will be redeemed or retracted, as described in Paragraph 18;

“Subco Redemption Note” means the promissory note to be issued in satisfaction of the redemption of the Subco Preferred Shares, as described in Paragraph 34;

“Targetco” means XXXXXXXXXX, a BCA corporation which is more fully described in Paragraph 4;

“taxable Canadian corporation” has the meaning assigned in subsection 89(1);

“taxable dividend” has the meaning assigned by subsection 89(1);

“Transaction Date” means the date on which the Proposed Transactions in Paragraphs 20 to 39 will occur; and

“Transferred Assets” means those assets of Opco on the Transaction Date the beneficial ownership of which will be transferred by Opco to Stockco, as described in Paragraph 20.

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

Facts

Opco is a public corporation and a taxable Canadian corporation with its head office in XXXXXXXXXX.

The shares of Opco are listed for trading on the XXXXXXXXXX.

Opco currently carries on Business 1 and Business 2 as separate divisions. Opco has no subsidiaries and owns no shares of other corporations with the exception of its XXXXXXXXXX% interest in Numbered Co. as described in Paragraphs 11 and 12 below.

Effective XXXXXXXXXX Former Opco acquired all of the shares of Targetco, the assets of which included XXXXXXXXXX. XXXXXXXXXX Former Opco and Targetco amalgamated. The assets acquired from Targetco comprise the principal assets currently used in Business 1. In XXXXXXXXXX approximately $XXXXXXXXXX has been spent upgrading Opco’s XXXXXXXXXX. To the date hereof, during XXXXXXXXXX a further $XXXXXXXXXX has been spent. The acquisition and related transactions were made in the ordinary course of business and were not made in contemplation of the Proposed Transactions described below.

Prior to the XXXXXXXXXX acquisition of Targetco, Former Opco’s only business assets related to Business 2, which it had conducted since XXXXXXXXXX.

As of XXXXXXXXXX Opco had XXXXXXXXXX Opco Common Shares issued and outstanding with an aggregate PUC of approximately $XXXXXXXXXX. Opco has no shares of any other class outstanding.

XXXXXXXXXX

To the best of the knowledge of the directors and senior officers of Opco, as of the date hereof no person or related group of persons beneficially owns, directly or indirectly, more than 10% of the issued and outstanding Opco Common Shares, other than Mr. A and persons related to him, who own in aggregate XXXXXXXXXX Opco Common Shares.

Opco has granted certain rights under which certain employees of Opco are entitled to acquire Opco Common Shares at specified exercise prices (“Opco Stock Options”). The following Opco Stock Options have been exercised in XXXXXXXXXX:

XXXXXXXXXX

The options were not exercised in contemplation of the Proposed Transactions described below and would have been exercised regardless of whether the Proposed Transactions were to be implemented.

XXXXXXXXXX

Opco’s assets may be summarized as follows:

certain cash or near cash property, including cash, term deposits, accounts receivable, materials and supplies and prepaid expenses;

assets used in connection with Business 1 and Business 2;

certain fixed assets (principally office furnishings, equipment and computers) used in Opco’s business operations; and

XXXXXXXXXX% of the shares of Numbered Co.

Opco's liabilities include accounts payable and an operating loan which is payable on demand. The operating loan constitutes long-term debt to Opco in accordance with generally accepted accounting principles, since the lender has indicated that it will not demand payment within a 12 month period.

The other shareholders of Numbered Co. include a corporation controlled by Mr. A and certain other persons who deal at arm’s length with Mr. A and Opco, some of whom own Opco Common Shares. Opco accounts for its interest in Numbered Co. on the proportionate consolidation basis and thereby includes in its balance sheet, on a line by line basis, its proportionate interest in the assets and liabilities of Numbered Co.

Historically Opco has grown through a combination of internally generated expansion and the acquisition of assets or interests in other corporations which complement existing business operations or facilitate achievement of corporate objectives. Similarly, from time to time, assets or corporate interests have been sold or rationalized where continued ownership is inconsistent with current business operations or corporate objectives. The only material acquisition or disposition during XXXXXXXXXX was the acquisition of all of the outstanding share capital of Holdco on XXXXXXXXXX. The shareholders of Holdco exchanged their shares of Holdco for shares of Opco pursuant to Section 85.1 of the Act. The only asset owned by Holdco at the time was XXXXXXXXXX shares of Opco. By resolution dated XXXXXXXXXX, Holdco was wound up into Opco pursuant to Section 88 of the Act.

Holdco was a corporation with only one class of shares issued, being common shares. Its common shares were owned by XXXXXXXXXX unrelated shareholders, none of whom owned more than XXXXXXXXXX% of such shares. One of the shareholders was XXXXXXXXXX, which was owned by, or for the benefit of, Mr. A or persons related to him. XXXXXXXXXX held XXXXXXXXXX% of the Holdco common shares.

Holdco acquired its shares in Opco as a result of a disposition of preferred shares that Holdco owned in Targetco. The common shares of Targetco were also acquired by Opco as part of the same transaction as outlined in paragraph 4 above.

Pursuant to the request of the XXXXXXXXXX Stock Exchange, Holdco was subject to a voluntary hold period relating to the Opco shares acquired by it, allowing XXXXXXXXXX% of the Opco shares to become freely tradeable on XXXXXXXXXX and the remaining XXXXXXXXXX% to become freely tradeable on XXXXXXXXXX. Holdco complied with this voluntary hold period, and contacted the XXXXXXXXXX Stock Exchange in XXXXXXXXXX to advise that they wished to undertake the series of transactions outlined in this paragraph.

The business reasons for undertaking the transactions outlined above were :

the transactions permitted the shareholders of Holdco to deal with their proportion of Opco shares separately, rather than through a commonly held corporation; and

holding a block of Opco shares in Holdco was unnecessary and potentially negative in the eyes of other shareholders or the public market generally.

The transactions undertaken between Holdco and Opco during XXXXXXXXXX were not in contemplation of, or part of the series of transactions which includes the Proposed Transactions described herein.

There have been no acquisitions or dispositions of significance during XXXXXXXXXX.

While no other significant arm’s length acquisitions or dispositions of shares or assets by Opco are currently under negotiation, it is conceivable such may occur at any time as circumstances change or as opportunities may arise. However, no such acquisition will occur in contemplation of the Proposed Transactions.

The fiscal year-end for Opco is XXXXXXXXXX.

Neither of Opco nor Numbered Co. has any investment property and it is anticipated that neither will have any investment property on the Transaction Date.

Opco has recorded an amount on its balance sheet as a “Provision for XXXXXXXXXX”. This amount relates to an estimate of the future cost which may be incurred by Opco in connection with the XXXXXXXXXX forming part of the assets of Business 2. Opco has also recorded an amount in respect of “Deferred Income Taxes” on its balance sheet.

Proposed Transactions

Newco will be an existing shelf corporation or a newly-created corporation incorporated under the BCA. Newco will be a taxable Canadian corporation. Prior to the transactions relating hereto, Newco will not have had any assets, liabilities or issued any outstanding shares. Newco’s Articles of Incorporation will provide that its authorized capital will include Newco Common Shares, each of which will be a fully participating voting common share with the holder thereof entitled to one vote at meetings of shareholders of Newco.

Stockco will be an existing shelf corporation or a newly-created corporation incorporated under the BCA. Stockco will be a taxable Canadian corporation. Prior to the transactions relating hereto, Stockco will not have had any assets, liabilities or issued any outstanding shares. Stockco’s Articles of Incorporation will provide that its authorized capital will include Stockco Common Shares, each of which will be a fully participating voting common share with the holder thereof entitled to one vote at meetings of shareholders of Stockco.

Subco will be an existing shelf corporation or a newly created corporation incorporated under the BCA. Subco will be a taxable Canadian corporation. Prior to the transactions relating hereto, Subco will not have had any assets, liabilities or issued and outstanding shares.

Subco’s Articles of Incorporation will provide that its authorized capital will consist of Subco Common Shares and Subco Preferred Shares having the following attributes:

each Subco Common Share will be a fully participating voting common share with the holder thereof entitled to one vote at meetings of shareholders of Subco;

each Subco Preferred Share will be redeemable, subject to applicable law, at any time at the option of Subco at the Subco Redemption Amount which will equal the aggregate FMV of the Stockco Common Shares transferred by Opco to Subco, divided by the number of Subco Preferred Shares issued as consideration therefor (plus any declared but unpaid dividends);

each Subco Preferred Share will be retractable, subject to applicable law, at any time at the option of the holder at a retraction amount equal to the Subco Redemption Amount;

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

there will be a provision restricting the payment of dividends on other classes of shares so that no such dividends may be paid on any other class of shares of Subco if the resulting realizable value of the net assets of Subco after payment of the dividends would be less than the aggregate of the Subco Redemption Amounts of all of the Subco Preferred Shares then outstanding;

to the extent of the amount or value of property available under applicable law for payment to shareholders in such circumstances, upon the liquidation, dissolution or winding-up of Subco, in respect of each Subco Preferred Share a holder will be entitled to a payment in priority to all other classes of shares of Subco of an amount up to the Subco Redemption Amount, but will be entitled to no more than the amount of that payment;

the holder of each Subco Preferred Share will not be entitled to vote at meetings of shareholders of Subco, other than as provided under the BCA; and

for the purpose of subsection 191(4), the terms and conditions of the Subco Preferred Shares to be issued as described herein will, at the time of their issue, specify an amount in respect of each Subco Preferred Share, including an amount for which the share is to be redeemed, acquired or cancelled. The amount to be specified in respect of each of the Subco Preferred Shares, will be pursuant to a resolution of the board of directors of Subco, will be expressed as a dollar amount, will not be determined by a formula and will be equal to the FMV of the property received by Subco as consideration for such share.

Utilizing funds borrowed from Mr. A, Newco will subscribe for one Subco Common Share for $XXXXXXXXXX cash.

Opco will transfer to Stockco at FMV all of its business property relating to Business 1 and certain of its cash or near cash property (and certain of its investment property if it has any at the Transaction Date) in consideration of:

Stockco assuming the Assumed Debt which is debt of Opco that is allocable to Opco’s cash or near cash property and investment property, if any transferred to Stockco and the business property relating to Business 1, all determined in accordance with Paragraph 31, not exceeding the aggregate of the amounts agreed upon in the joint elections under subsection 85(1) described in Paragraph 21; and

Stockco issuing Stockco Common Shares to Opco.

Opco and Stockco will jointly elect pursuant to subsection 85(1), in prescribed form and within the time determined under subsection 85(6), with respect to the transfer to Stockco of any eligible property of Opco that has a FMV in excess of its cost amount. Specifically, the amount agreed upon in each joint election will not be less than the least of:

the amounts specified in subparagraphs 85(1)(d)(i), (ii) or (iii) in the case of eligible capital property,

the amounts specified in subparagraphs 85(1)(e)(i), (ii) or (iii) in the case of depreciable property of a prescribed class, and

the amounts specified in subparagraphs 85(1)(c.1)(i) or (ii) in the case of property described in paragraph 85(1)(c.1).

In each case, the agreed amount will not exceed the FMV of the respective property, nor will it be less than the amount permitted under paragraph 85(1)(b).

Pursuant to XXXXXXXXXX, the addition to the Stated Capital of Stockco in respect of the issuance of the Stockco Common Shares will equal the amount by which the aggregate of the cost (determined pursuant to subsection 85(1) of the Act, where relevant) of the property transferred to Stockco as described in Paragraph 20 exceeds the principal amount of the Assumed Debt assumed by Stockco as described in Paragraph 20.

Subject to, among other things, the appropriate shareholder, court and regulatory approvals, the transactions described in Paragraphs 25 to 38 below will be undertaken pursuant to a plan of arrangement (the “Plan of Arrangement”) under XXXXXXXXXX. With the exception of the filing of elections under the Act, these transactions will occur by virtue of the Plan of Arrangement and will be designated in the Plan of Arrangement to occur on the date (the “Transaction Date”) on which the Plan of Arrangement is effective, and in the order set out below. The Transaction Date will be on a date that will be subsequent to the receipt of the advance income tax rulings provided in this letter.

Each public shareholder of Opco will be entitled to dissent from the Plan of Arrangement pursuant to the provisions of the BCA. Where a public shareholder so dissents, such dissenting shareholder will cease to be a shareholder of Opco on the Transaction Date, and immediately prior to the transactions undertaken pursuant to the Plan of Arrangement such that the Opco Common Shares held by such a shareholder will no longer be considered to be outstanding as common shares for the purpose of the corporate law transactions comprising the Plan of Arrangement. After the completion of the proposed transactions comprising the Plan of Arrangement, each such dissenting shareholder will be entitled to be paid the FMV of the Opco Common Shares in respect of which the right of dissent is exercised.

As part of the Plan of Arrangement, Opco’s Articles of Incorporation will be amended in such manner that, in addition to any other shares that may be authorized for issue, its share capital will be comprised of at least two classes of shares, being New Opco Common Shares and Opco Special Shares. The New Opco Common Shares and the Opco Special Shares will have the following attributes:

each New Opco Common Share will be a fully participating voting common share with the holder thereof entitled to one vote at meetings of shareholders of Opco;

each Opco Special Share will be redeemable, subject to applicable law, at any time at the option of Opco at the Opco Redemption Amount which will equal the aggregate redemption amount of all of the Opco Special Shares issued on the Share Exchange divided by the number of Opco Special Shares issued on the Share Exchange (plus any declared but unpaid dividends);

each Opco Special Share will be retractable, subject to applicable law, at any time at the option of the holder at a retraction amount equal to the Opco Redemption Amount;

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

there will be a provision restricting the payment of dividends on other classes of shares so that no such dividends may be paid on any other class of shares of Opco if the resulting realizable value of the net assets of Opco after payment of the dividends would be less than the aggregate of the Opco Redemption Amounts of all of the Opco Special Shares then outstanding;

to the extent of the amount or value of property available under applicable law for payment to shareholders in such circumstances, upon the liquidation, dissolution or winding-up of Opco, in respect each Opco Special Share a holder will be entitled to a payment in priority to all other classes of shares of Opco of an amount up to the Opco Redemption Amount, but will be entitled to no more than the amount of that payment;

the holder of each Opco Special Share will be entitled to one vote for every two Opco Special Shares held; and

for the purpose of subsection 191(4) of the Act, the terms and conditions of the Opco Special Shares to be issued as described herein will, at the time of their issue, specify an amount in respect of each share, including an amount for which the share is to be redeemed, acquired or cancelled. The amount to be specified in respect of each of the Opco Special Shares will be pursuant to a resolution of the board of directors of Opco, will be expressed as a dollar amount, will not be determined by a formula and will be equal to the FMV of the property received by Opco as consideration for such share.

Each Opco Common Share held by an Opco Shareholder will be exchanged for one New Opco Common Share and one Opco Special Share. As a result:

the aggregate redemption amount of the Opco Special Shares issued on the Share Exchange will be equal to a proportion (the “Stockco Proportion”) of the FMV of all of the issued Opco Common Shares immediately before the Share Exchange. The Stockco Proportion is the proportion that:

the net FMV of the business property of Opco as represented by the Stockco Common Shares

is of

the net FMV of all of the business property of Opco,

determined immediately before the transfer of the Stockco Common Shares as described in Paragraph 33 and by applying the rules in Paragraphs 30 and 31;

the aggregate Stated Capital of the New Opco Common Shares and the Opco Special Shares will not exceed the aggregate PUC of the Opco Common Shares and

the addition to the Stated Capital of the Opco Special Shares will equal that portion of the aggregate PUC of the Opco Common Shares that the FMV of the Opco Special Shares is of the total FMV of the New Opco Common Shares and the Opco Special Shares; and

the addition to the Stated Capital of the New Opco Common Shares will equal that proportion of the aggregate PUC of the Opco Common Shares that the FMV of the New Opco Common Shares is of the total FMV of the Opco Common Shares and the Opco Special Shares; and

Each Opco Common Share will be cancelled.

In accordance with the Plan of Arrangement, Newco will acquire from the Opco Shareholders all of the issued Opco Special Shares in exchange for an identical number (currently estimated to be XXXXXXXXXX) of Newco Common Shares. The certificates for the Opco Special Shares which otherwise would be delivered to the Opco Shareholders on the Share Exchange instead will be delivered directly to Newco.

Immediately after the share-for-share exchange described herein, the FMV of each Opco Shareholder’s shares of the capital stock of Newco will be equal to or approximate the amount determined by the formula

(A x B) + D
C

as found in subparagraph (b)(iii) of the definition of “permitted exchange” in subsection 55(1). In addition, no person who is not an Opco Shareholder will own any shares of Newco.

If requested by a particular Opco Shareholder, Newco will execute a joint election as permitted under subsection 85(1) in respect of the disposition by that shareholder of Opco Special Shares for Newco Common Shares. It is anticipated that Mr. A and certain persons related to him that will own Opco Special Shares will jointly elect with Newco pursuant to subsection 85(1), in prescribed form and within the time referred to in subsection 85(6) in respect of the disposition of Opco Special Shares. The agreed amount in respect of each such election will not be less than the lesser of the amounts specified in subparagraphs 85(1)(c.1)(i) or (ii). In each case the agreed amount will not exceed the FMV of the Opco Special Shares, nor will it be less than the amount permitted by paragraph 85(1)(b).

Pursuant to the Plan of Arrangement and XXXXXXXXXX of the BCA, the addition to the Stated Capital of Newco in respect of the issuance of the Newco Common Shares will not exceed the aggregate PUC of the Opco Special Shares transferred to Newco.

All employees of Opco will exchange all of their rights under the Opco Stock Options for:

new rights under a stock option plan of Opco (the “New Opco Stock Options”) to acquire Opco Common Shares; and

rights under a stock option plan of Stockco (the “Stockco Stock Options”) to acquire Stockco common shares (“Stockco Common Shares”).

Under each of the New Opco Stock Options and the Stockco Stock Options issued to a particular employee, the total FMV of the Opco Common Shares and the Stockco Common Shares, respectively, issuable thereunder may exceed the total amount payable by the option holder to acquire the Opco Common Shares and the Stockco Common Shares, respectively, under the relevant New Opco Stock Option and the Stockco Stock Option, respectively. However, the total of such excess for both the New Opco Stock Options and the Stockco Stock Options, if any, will not exceed the amount by which the total FMV of the Opco Common Shares issuable under the applicable exchanged Opco Stock Option exceeds the exercise price payable by the option holder to acquire the Opco Common Shares under the exchanged Opco Stock Option.

Immediately before the transfer of property described in Paragraph 33 below, the property of Opco will be determined on a consolidated basis by including the appropriate pro-rata share of the assets of any corporation over which Opco has the ability to exercise significant influence (Opco and such corporations will hereinafter be referred to as the "Opco Group"), which assets will be classified into three types of property for the purposes of the definition of “distribution” in subsection 55(1), as follows:

cash or near cash property, comprising all of the current assets of the Opco Group, including any cash, term deposits, accounts receivable, materials and supplies and prepaid expenses;

business property, comprising all of the assets of the Opco Group, other than cash or near cash property, any income from which would, for the purposes of the Act, be income from a business (other than a SIB); and

investment property, comprising all of the assets of the Opco Group, other than cash or near cash property, any income from which would, for purposes of the Act, be income from property or a SIB.

It is anticipated there will be no investment property.

For greater certainty, any tax accounts, such as the balance of any non-capital losses of the Opco Group, will not be considered property for purposes of the Proposed Transactions described herein.

For the purposes of this Paragraph and Paragraph 32 below, Opco will be considered to have significant influence over a corporation if it has significant influence over that corporation or over any other corporation that has significant influence over that corporation. Opco will have significant influence over Stockco and Numbered Co.

For greater certainty, the FMV of the shares of any corporation over which Opco has the ability to exercise significant influence and of any indebtedness receivable by Opco from such a corporation will be allocated between the three types of property described above by multiplying the FMV 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 FMV of each type of property owned by the particular corporation (as determined in this Paragraph and Paragraph 32 below) is of the aggregate net FMV of all of the property owned by such corporation.

In determining, on a consolidated basis, the net FMV of each type of property of Opco immediately before the transfer described in Paragraph 33 below, the liabilities of Opco and any corporation over which Opco exercises significant influence will be allocated to, and will be deducted in the calculation of, the net FMV of each such type of property of such corporation in the following manner:

In determining the net FMV of each type of property of a corporation over which Opco exercises significant influence, immediately before the transfer described in Paragraph 33 below, the liabilities of that particular corporation (other than any amount owing by such corporation to Opco) will be allocated to, and will be deducted in the calculation of, the net FMV of each type of property of the particular corporation in the following manner:

Current liabilities of such corporation will be allocated to the cash or near cash property (including any cash, accounts receivable, inventory and prepaid expenses) of such corporation in the proportion that the FMV of each such property is of the FMV 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 FMV 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;

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 FMV. 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 FMV 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;

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 FMV of each type of property prior to the allocation of such liabilities, but after the allocation of the liabilities described in subparagraphs (a)(i) and (a)(ii) above.

In determining, on a consolidated basis, the net FMV of each type of property of Opco immediately before the transfer of property described in Paragraph 33, Opco will include the appropriate pro-rata share of the net FMV of each type of property of any corporation over which Opco exercises significant influence, as determined in accordance with subparagraph (a) herein, and any liabilities of Opco will then be allocated to, and be deducted in the calculation of, the net FMV of each type of property of Opco in the following manner:

Current liabilities of Opco will be allocated to the cash or near cash property (including any cash, accounts receivable, inventory and prepaid expenses) of Opco in the proportion that the FMV of each such property is of the FMV of all cash or near cash property owned by it. The allocation of current liabilities as described herein will not exceed the aggregate FMV of the cash or near cash property of Opco;

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

If any current liabilities remain after the allocations described in steps (b)(i) and (b)(ii) above are made (“excess unallocated liabilities”), such excess unallocated liabilities will then be allocated to the cash or near cash property, investment property and business property, if any, of Opco, based on the relative net FMV of each type of property prior to the allocation of such excess unallocated liabilities.

For greater certainty, and for the purposes of subparagraph (b) hereof, the amount to be paid to any dissenting shareholders of Opco for their interest in the Opco Common Shares will represent a current liability of Opco.

For the purposes of this Paragraph, and for the purposes of the Proposed Transactions described herein, no amount will be considered to be a liability unless it represents a true legal liability which is capable of quantification. The amount of any deferred income tax and any amount relating to the provision for XXXXXXXXXX in the financial statements will not be considered a liability for the purposes of the Proposed Transactions described herein because each such amount does not represent a legal obligation of the particular corporation. However, the contingent liability for XXXXXXXXXX may be relevant in determining the FMV of the related property.

Opco will transfer to Subco at FMV all of the Stockco Common Shares such that, immediately after the transfer, the net FMV of the cash or near cash property, business property and investment property of Opco, calculated as described in Paragraphs 31 and 32, which is represented by the Stockco Common Shares transferred to Subco as described herein, will approximate that proportion of the net FMV of all of that type of property of Opco, determined immediately before the transfer referred to herein that:

the aggregate FMV of the Opco Special Shares immediately before the transfer

is of

the aggregate FMV of all the issued and outstanding shares of Opco immediately before the transfer.

For the purpose of this Paragraph and Paragraph 39 below, the expression "approximate that proportion" means that the discrepancy from that proportion, if any, would not exceed 1%, determined as a percentage of the FMV of each type of property which Subco has received (or Opco has retained) as compared to what Subco would have received (or Opco would have retained) had it received (or retained) its appropriate pro rata share of the FMV of that type of property. However, the agregate net FMV of all property of Opco transferred to Subco as described herein will be equal to the proportion determined by (a) and (b) above of the aggregate net FMV of all property of Opco immediately before the transfer.

As sole consideration for such transfer Subco will issue to Opco Subco Preferred Shares having an aggregate Stated Capital not exceeding the agreed amount for the Stockco Common Shares and an aggregate redemption amount and FMV equal to the FMV of the Stockco Common Shares.

Opco and Subco will jointly elect, in prescribed form and within the time referred to in subsection 85(6) in respect of the disposition of the Stockco Common Shares. The agreed amount in respect of such election will not be less than the lesser of the amounts specified in subparagraphs 85(1)(c.1)(i) or (ii) and will not exceed the FMV of the Stockco Common Shares, nor will it be less than the amount permitted by paragraph 85(1)(b).

Opco will redeem from Newco all of its Opco Special Shares for an amount equal to the aggregate of the Opco Redemption Amounts of the Opco Special Shares so redeemed and will issue to Newco in consideration therefor the Opco Redemption Note, being a demand promissory note with a principal amount and FMV equal to the aggregate of the foregoing Opco Redemption Amounts. Newco will accept such Opco Redemption Note as full payment of the Opco Redemption Amount in respect of each redeemed Opco Special Share with the risk of the note being dishonoured.

Subco will redeem from Opco all of its Subco Preferred Shares for an amount equal to the aggregate of the Subco Redemption Amounts of the Subco Preferred Shares so redeemed and will issue to Opco in consideration therefor the Subco Redemption Note, being a demand promissory note with a principal amount and FMV equal to the aggregate of the foregoing Subco Redemption Amounts. Opco will accept such note as full and absolute payment of the Subco Redemption Amount in respect of each Subco Preferred Share with the risk of the note being dishonoured.

The Opco Special Shares owned by Newco immediately before the redemption by Opco of such shares will have more than 10% (but less than 50%) of the voting rights under all circumstances of the issued and outstanding shares of all classes of Opco and will have a FMV of more than 10% of the FMV of all of the issued and outstanding shares of Opco, such that Opco will be connected with Newco pursuant to paragraph 186(4)(b) immediately prior to the redemption of the Opco Special Shares.

Each of the Opco Redemption Note and the Subco Redemption Note will be a demand promissory note with interest payable only from the date of demand for payment by the holder to the date of payment of the amount owing under the particular note at a rate equal to the average monthly prime rate of a Canadian chartered bank.

Subco will be wound-up into Newco under the applicable provisions of the BCA, such that Newco will receive all of Subco’s interest in the Stockco Common Shares and will assume all of the liabilities of Subco, including the Subco Redemption Note.

Following receipt by Newco of the Stockco Common Shares, Newco and Stockco will be amalgamated under the vertical short-form amalgamation provisions of the BCA to form NewPubco in such a manner that

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

c)no shares of NewPubco will be issued in connection with the amalgamation. The Newco Common Shares will not be cancelled and will remain outstanding following the amalgamation as NewPubco Common Shares while the Stockco Common Shares will be cancelled without any repayment of capital in respect thereof on the amalgamation.

NewPubco’s share capital will include NewPubco Common Shares, each of which will be a fully participating voting common share with the holder thereof entitled to one vote at meetings of shareholders of NewPubco. The Stated Capital of the NewPubco Common Shares will be equal to the PUC of the Newco Common Shares. The NewPubco Common Shares will be listed for trading on one or more prescribed stock exchanges in Canada.

As a result of the amalgamation, each employee who held Stockco Stock Options will receive, as consideration for the disposition of those options on the amalgamation, options to acquire NewPubco Common Shares (“NewPubco Stock Options”). Under each of the NewPubco Stock Options issued to a particular employee, the total FMV of the NewPubco Common Shares issuable thereunder determined immediately after the completion of the Proposed Transactions will in most cases exceed the total amount payable by the holder of the option to acquire the NewPubco Common Shares under the relevant NewPubco Stock Option. However, such excess, if any, will not exceed the amount, if any, by which the total FMV of the Stockco Common Shares issuable under the applicable exchanged Stockco Stock Option exceeds the exercise price payable by the option holder to acquire the Stockco Common Shares under the applicable exchanged Stockco Stock Option the particular employee held prior to the exchange of options with Stockco.

Opco will pay the principal amount of the Opco Redemption Note by transferring to NewPubco the Subco Redemption Note (which became a liability of NewPubco by virtue of the amalgamation referred to in Paragraph 37 above) which will be accepted by NewPubco in full payment of Opco’s obligation. NewPubco will pay the principal amount of the Subco Redemption Note by transferring to Opco the Opco Redemption Note which will be accepted by Opco in full payment of NewPubco’s obligation. The Opco Redemption Note and the Subco Redemption Note will both thereupon be marked paid in full and cancelled.

Immediately following the Proposed Transactions described above, the net FMV of each of the types of property retained by Opco, determined in the manner described in Paragraphs 31 and 32 above, will approximate that proportion of the aggregate FMV of that type of property of Opco that:

the aggregate FMV, immediately before the transfer of property described in Paragraph 33, of the New Opco Common Shares

is of

the aggregate FMV, immediately before such transfer of property, of all of the issued and outstanding shares of Opco.

Upon completion of the foregoing transactions, each of Opco and NewPubco will operate as separate entities. In the course of such operations, NewPubco may transfer to Opco certain of the Transferred Assets that it received on the amalgamation described in Paragraph 37 above, or Opco may transfer to NewPubco certain assets that it has retained, subject to the restrictions set forth in paragraphs 55(3.1)(c) and (d).

Additional Information

No property has or will become property of Opco and no liabilities have been or will be incurred by Opco in contemplation of and before the transfer described in Paragraph 33, except in the ordinary course of business, or as described herein. Opco currently is considering the possible acquisition of additional XXXXXXXXXX and other related businesses to expand Business 1 and is also considering the acquisition of additional XXXXXXXXXX properties to expand Business 2. Such transactions could occur before or after the Proposed Transactions. However, at this time no agreements or other commitments have been entered into in respect of such acquisitions.

Except as outlined herein, Opco does not have any specific intention of disposing of any assets currently owned to an unrelated person following the Proposed Transactions and neither Opco or NewPubco will dispose of any of its assets as part of a series of transactions which includes the Proposed Transactions.

There are not, and will not be at any time prior to the completion of the Proposed Transactions, any agreements or undertakings which constitute or include a “guarantee agreement”, as defined in subsection 112(2.2), in respect of any of the Opco Special Shares or Subco Preferred Shares.

Neither Opco nor NewPubco has, or will have, entered into a “dividend rental arrangement”, as defined in subsection 248(1), in respect of any of the shares to be redeemed as part of the Proposed Transactions.

None of the Opco Special Shares or the Subco Preferred Shares will be issued or acquired as part of a series of transactions of the type described in subsection 112(2.5) of the Act.

None of Opco, Subco, Newco, NewPubco or Stockco will be a corporation described in any of paragraphs (a) to (f) of the definition of “financial intermediary corporation” in subsection 191(1) of the Act. None of Opco, Subco, Newco, NewPubco or Stockco is or will be an SFI prior to completion of the Proposed Transactions.

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

Purpose of the Proposed Transactions

The purpose of the Proposed Transactions can be summarized as follows:

The separation of Opco’s businesses into two separate independent corporations will enhance the ability of such corporations to pursue their independent strategies through an increased management focus on growth and profitability in their respective businesses.

The economics of Business 2 are essentially unrelated to that of Business 1 and, accordingly, it would be preferable to give the shareholders of Opco the choice to make independent investment decisions in respect of their holdings in each business.

The separation of Opco into two separate independent corporations will create two less diversified corporations. It is anticipated that the capital markets will find it easier to effectively value these two new corporations when comparing them to more specific industry benchmarks and performance criteria.

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:

Subject to the application of subsection 55(2) of the Act, a holder of Opco Common Shares who dissents to the Plan of Arrangement, and who, pursuant to the BCA, is given rights of dissent, will be deemed by paragraph 84(3)(b) of the Act to have received a taxable dividend equal to the amount by which the consideration received by such dissenting shareholder from Opco for such shareholder's Opco Common Shares exceeds the PUC thereof. Pursuant to paragraph (j) of the definition of "proceeds of disposition" in section 54 of the Act, but subject to subsection 55(2) of the Act, the proceeds of disposition in respect of such Opco Common Shares received by such dissenting shareholder shall be reduced by the amount of the dividend so deemed to have been received.

For each Opco Shareholder who holds Opco Common Shares as capital property, 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 Exchange described in Paragraphs 25 and 26 above, such that:

(i)the cost of the New Opco Common Shares and Opco Special Shares received on the Share Exchange will be deemed by paragraph 86(1)(b) of the Act to be an amount equal to that proportion of the aggregate ACB to the particular Opco Shareholder, immediately before the Share Exchange, of the Opco Common Shares, that

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

is of

(b)the fair market value, immediately after the Share Exchange, of all of the shares of Opco received by the particular Opco Shareholder for the Common Shares of Opco.

(ii)Pursuant to paragraph 86(1)(c) of the Act, each particular Opco Shareholder will be deemed to have disposed of the Opco Common Shares for aggregate proceeds of disposition equal to the aggregate cost to the particular Opco Shareholder of the New Opco Common Shares and Opco Special Shares determined in (i) above.

Subject to the provisions of subsection 26(26) of the ITAR and provided that an Opco Shareholder (other than an Opco Shareholder who dissents to the Plan of Arrangement) who, immediately before the share-for-share exchange described in Paragraph 27 above, holds Opco Special Shares,

holds those shares as capital property;

deals at arm’s length with Newco immediately before such share-for-share exchange;

does not include any portion of the gain or loss otherwise determined, from the disposition of those shares, in computing his income for the taxation year in which the exchange takes place;

does not file an election under subsection 85(1) or 85(2) with Newco with respect to those shares; and

does not receive any consideration other than Newco Common Shares in exchange for those shares;

and further provided that immediately after the exchange:

no such holder or any person or persons with whom the holder does not deal at arm’s length, or no such holder together with any person or persons with whom the holder does not deal at arm’s length, will

control Newco, or

beneficially own shares of Newco having a FMV of more than 50% of the FMV of all of the outstanding shares of Newco

then, pursuant to paragraph 85.1(1)(a) such holder shall be deemed

to have disposed of his Opco Special Shares for proceeds of disposition equal to the ACB to him of those shares immediately before the share-for-share exchange, and

to have acquired the Newco Common Shares at a cost to him equal to the ACB to him of the Opco Special Shares immediately before the share-for-share exchange.

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 69(11), 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 of all Opco Special Shares to Newco by any Opco Shareholder (including Mr. A) as described in Paragraph 27 above, who jointly files an election with Newco pursuant to subsection 85(1) in respect of such transfer, as described in Paragraph 28 above;

the transfer by Opco of any of the Transferred Assets which is an eligible property to Stockco, as described in Paragraph 20, which is the object of the election described in Paragraph 21 above; and

the transfer by Opco of all of the Common Shares of Stockco to Subco as described in Paragraph 33 above,

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

For the purposes of subparagraph (b)(iii) of the definition of PUC in subsection 89(1), the paid-up capital of

the Opco Common Shares and the Opco Special Shares issued to the Opco Shareholders as described in Paragraph 26;

the Newco Common Shares issued to the Opco Shareholders as described in Paragraph 27;

the Stockco Common Shares issued to Opco as described in Paragraph 20; and

the Subco Preferred Shares issued to Opco as described in Paragraph 33,

computed without reference to the Act will be equal to their Stated Capital as determined for purposes of the BCA.

Subsection 84(3) will apply on the redemption:

as described in Paragraph 34, of the Opco Special Shares held by Newco, to deem Opco to have paid and Newco to have received;

as described in Paragraph 34, of the Subco Preferred Shares issued to Opco to deem Subco to have paid and Opco to have received;

a dividend on such shares equal to the amount, if any, by which the aggregate amount paid upon such redemption exceeds the aggregate PUC in respect of such shares immediately before such redemption, and any such dividend

will be included in computing the income, pursuant to subsection 82(1) and paragraph 12(1)(j), of the person deemed to have received such dividend;

will be deductible by a recipient that is a corporation pursuant to subsection 112(1) 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);

will be excluded in determining the proceeds of disposition to the recipient of the shares so redeemed or purchased pursuant to paragraph (j) of the definition of “proceeds of disposition” in section 54;

in the case of the dividend described in (a) above will not be subject to tax under Part IV by virtue of the fact that Newco is connected with Opco, immediately before the share redemption; and

provided that the amount paid on the redemption of the Opco Special Shares and the Subco Preferred Shares, as the case may be, is equal to the amount specified in respect of such shares as described in Paragraphs 18 and 25 above, the dividends referred to in (a) and (b) will not be subject to tax under Parts IV.1 and VI.1 of the Act because they will be dividends deemed by paragraph 191(4)(d) to be “excluded dividends” as defined in subsection 191(1) and “excepted dividends” as defined in section 187.1.

The provisions of subsection 112(3) will apply to reduce any loss which otherwise would be determined for the particular holder as a result of the redemptions of shares described in Paragraph 34 above.

The cost to NewPubco of the Opco Redemption Note and the cost to Opco of the Subco Redemption Note will in each case, upon the issuance thereof, be equal to the principal amount of the particular note. Accordingly, no amount will be included in the income of NewPubco or Opco upon payment of the principal amount of the particular note.

Provided that the aggregate FMV of the New Opco Stock Options and the Stockco Stock Options received by a holder of Opco Stock Options at the time of the exchanges described in Paragraph 30 above does not exceed the FMV of the Opco Stock Options immediately before the exchanges, the provisions of subsection 7(1.4) will apply to the exchanges such that the holders of Opco Stock Options who exchange them for New Opco Stock Options and Stockco Stock Options as described in Paragraph 30 shall be deemed not to have disposed of the Opco Stock Options and not to have acquired the New Opco Stock Options and the Stockco Stock Options, and the New Opco Stock Options and the Stockco Stock Options shall be deemed to be the same options as, and a continuation of, the Opco Stock Options.

Provided that the FMV of the NewPubco Stock Options received by a holder of Stockco Stock Options at the time of the exchange as described in Paragraph 37 above does not exceed the FMV of the Stockco Stock Options immediately before the exchange, the provisions of subsection 7(1.4) will apply to the exchanges such that the holders of Stockco Stock Options who exchange them for NewPubco Stock Options as described in Paragraph 37 shall be deemed not to have disposed of the Stockco Stock Options and not to have acquired the NewPubco Stock Options, and the NewPubco Stock Options shall be deemed to be the same options as, and a continuation of, the Stockco Stock Options.

For greater certainty, to the extent that subsection 7(1.4) is applicable to the exchanges described in (a) and (b), paragraph 7(1)(b) will not apply in respect of such exchanges.

The provisions of subsection 88(1) will apply in respect of the wind-up of Subco described in Paragraph 36.

By virtue of subsection 87(1.1), the provisions of subsection 87(1) will apply to the amalgamation of Stockco and Newco as described in Paragraph 37 above.

The repayment of the Opco Redemption Note held by NewPubco and the Subco Redemption Note held by Opco as described in Paragraph 38 will not give rise to a “forgiven amount” within the meaning of subsection 80(1) or 80.01(1). Neither NewPubco nor Opco will realize any gain or incur any loss as a result of the repayment and resultant cancellation of the Opco Redemption Note and the Subco Redemption Note as described in Paragraph 38 above.

Provided that the Opco Common Shares constitute capital property to a particular Opco Shareholder immediately prior to the commencement of the Proposed Transactions, the Proposed Transactions will not, in and by themselves, cause the Opco Common Shares and Opco Special Shares to be received by that shareholder as a result of the Proposed Transactions not to be capital property of that shareholder. Furthermore, the Proposed Transactions will not, in and by themselves, cause the Subco Preferred Shares to be received by Opco not to be capital property of Opco.

Interest payable in respect of a year by NewPubco on the Assumed Debt owing by it and which became a liability of NewPubco on the amalgamation described in Paragraph 37 above will be deductible by NewPubco in computing its income provided that the assets received by Newco as a result of the wind-up of Subco into Newco as described in Paragraph 36, or acquired by NewPubco on the amalgamation as described in Paragraph 37, or property substituted therefor, continue to be used by NewPubco for the purpose of earning income from a business or property and to the extent that such interest payable:

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

does not exceed a reasonable amount.

Provided that as part of the series of transactions or events that includes the Proposed Transactions described herein, there is not:

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

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

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

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

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

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

The provisions of subsections 15(1), 56(2), 56(4) and 246(1) will not apply to any of the proposed transactions described in Paragraphs 17 to 39 above, in and of themselves.

As a result of the proposed transactions described in Paragraphs 17 to 39 above, in and of themselves, subsection 245(2) will not be applied to redetermine the tax consequences confirmed in the rulings given above.

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.

Opinions

1.Provided that:

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

the proposed amendment to the definition of “permitted redemption” in subsection 55(1) of the Act is enacted in substantially the same form as was proposed in Bill C-69 which received First Reading in the House of Commons on December 2, 1996; and

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

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

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

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

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

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 F(b) 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.

2.Provided the facts and Proposed Transactions described herein are correct and further provided that proposed subsection 112(3) is enacted in substantially the same form as proposed in Bill C-69, then the provisions of subsection 112(3) will apply to reduce any loss which otherwise would be determined for the particular holder as a result of the redemptions of shares described in the Proposed Transactions.

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 FMV or ACB of any particular asset or share or the PUC 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