30 November 1996 Ruling 9722883 - 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:

Typical butterfly reorganization (split-up)

Position:

55(3)(b) rulings issued.

Reasons:

XXXXXXXXXX							3-972288
XXXXXXXXXX

Attention: XXXXXXXXXX

XXXXXXXXXX, 1997

Dear Sirs:

Re: XXXXXXXXXX ("Distributorco")
XXXXXXXXXX ("Shareholderco 1")
XXXXXXXXXX ("Shareholderco 2")

XXXXXXXXXX ("Mrs. A")

XXXXXXXXXX ("Mr. B")

Advance Income Tax Ruling Request

This is in reply to your letter of XXXXXXXXXX in which you requested various advance income tax rulings on behalf of the above-noted taxpayers. We also acknowledge your letter of XXXXXXXXXX and our telephone conversations in connection herewith.

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 district tax services office or a taxation centre in connection with a tax return already filed, or is under objection or appeal.

DEFINITIONS

Non-Statutory Terms

In this letter unless otherwise expressly stated:

(a)"ABCA" means the Business Corporations Act, S.A. 1981, c. B-15, as amended;

(b)"Applicants" means Distributorco, Shareholderco 1 and Shareholderco 2;

(c)"Farming Business" means the business of farming, carried out by several corporations, but particularly as carried on by Distributorco, as described in paragraph 4 below;

(d) XXXXXXXXXX;

(e)"Management Business" means the business of managing the XXXXXXXXXX and companies within the group carried on in XXXXXXXXXX;

(f)"Financing Business" means the business of borrowing money from banks and external lenders to re-lend to prospective purchasers of XXXXXXXXXX;

(g)"Opcos" means the XXXXXXXXXX companies and the management company, within the corporate group in which Distributorco has direct or indirect economic interests, as follows:

XXXXXXXXXX

(h)"Holdcos" means those corporations whose primary purpose is the holding of interests in other corporations, and which generally do not carry on any active business activity of their own. Some of the Holdcos act as a bare trustee to hold legal title to property or partnership interests on behalf of other corporations. Holdcos include the following:

XXXXXXXXXX

XXXXXXXXXX

(i) "Partnerships" means the partnerships known as:

XXXXXXXXXX

(j)"Joint Venture" means the co-ownership relationship known as the XXXXXXXXXX co-tenancy, which operates the XXXXXXXXXX on behalf of its co-tenants, being XXXXXXXXXX.

XXXXXXXXXX

(k)"Farming Companies" means the corporations which, among other things, carry on a farming business. In addition to carrying on a farming business, these corporations hold interests in other corporations and entities. The Farming Companies include the following corporations:

(i) Shareholderco 2;

(ii) XXXXXXXXXX;

(iii) Shareholderco 1;

(iv) XXXXXXXXXX;

(v) Distributorco; and

(vi) XXXXXXXXXX.

(l)"Corporate Group" means the companies in which Mr. B and Mrs. A have a direct or indirect economic interest which would include all of the Opcos, Holdcos, and Farming Companies.

(m) XXXXXXXXXX

Statutory Terms

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

(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 by subsection 248(1);

(f)"distribution" has the meaning assigned by subsection 55(1);

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

(h)"farm loss", "net capital loss" and "non-capital loss" have the meanings assigned by subsection 111(8);

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

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

(k)"investment tax credit" has the meaning assigned by subsection 127(5);

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

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

(n)"RDTOH" means "refundable dividend tax on hand" which has the meaning assigned by subsection 129(3);

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

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

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

(r)"specified investment business" has the meaning assigned by subsection 125(7);

(s)"stated capital" has the meaning assigned in section 26 of the ABCA; and

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

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

FACTS

1.Mrs. A was the spouse of the deceased brother of Mr. B. Mrs. A and Mr. B are not related for purposes of the Act.

2.Distributorco was incorporated under laws of the province of XXXXXXXXXX. Distributorco is a Canadian-controlled private corporation and a taxable Canadian corporation. Distributorco was amalgamated with a subsidiary corporation on XXXXXXXXXX.

3.The only issued and outstanding shares of Distributorco are XXXXXXXXXX Class XXXXXXXXXX common voting shares and XXXXXXXXXX Class XXXXXXXXXX common non-voting shares held as follows:

Shareholder Class XXXX Class XXXX% of Votes% of Equity

Shareholderco 1 XXXXXXXXXX

Shareholderco 2 XXXXXXXXXX
XXXXXXXXXX

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

4.Distributorco carries on two types of businesses:

(a) the Farming Business, which includes the

XXXXXXXXXX

The properties of the Farming Business consist of land, buildings (including a farm residence), equipment, and inventory; and

(b) XXXXXXXXXX, as represented by Distributorco's direct and indirect interests in the Holdcos, Opcos, Partnerships and Joint Venture.

Distributorco elects to compute its income from the Farming Business on the "cash basis" pursuant to section 28 and has a XXXXXXXXXX year end.

In its XXXXXXXXXX taxation years, rental revenue from the lands represented from XXXXXXXXXX% of gross farm revenues.

5.As at XXXXXXXXXX, Distributorco had RDTOH in the amount of $XXXXXXXXXX and a nil balance in its capital dividend account. Distributorco does not anticipate any change to its RDTOH or its capital dividend account at the time of the transfer of properties described in paragraph 24 below (the "Butterfly Transfer").

6.Shareholderco 1 was incorporated under laws of the province of XXXXXXXXXX. Shareholderco 1 is a Canadian-controlled private corporation and a taxable Canadian corporation.

7.The only issued and outstanding shares of Shareholderco 1 are XXXXXXXXXX Class XXXXXXXXXX common voting shares and XXXXXXXXXX Class XXXXXXXXXX preferred non-voting shares, with a redemption price of $XXXXXXXXXX per share, held by Mrs. A.

The paid-up capital of the Class XXXXXXXXXX common voting shares and the Class XXXXXXXXXX preferred non-voting shares of Shareholderco 1 is $XXXXXXXXXX and $XXXXXXXXXX, respectively.

The shares of Shareholderco 1 are capital property to Mrs. A.

8.Shareholderco 2 was incorporated under laws of the province of XXXXXXXXXX. Shareholderco 2 is a Canadian-controlled private corporation and a taxable Canadian corporation.

9.The only issued and outstanding shares of Shareholderco 2 are XXXXXXXXXX Class XXXXXXXXXX common voting shares and XXXXXXXXXX Class XXXXXXXXXX preferred non-voting shares, with a redemption price of $XXXXXXXXXX per share, held by Mr. B.

The paid-up capital of the Class XXXXXXXXXX common voting shares and the Class XXXXXXXXXX preferred shares of Shareholderco 2 is $XXXXXXXXXX and $XXXXXXXXXX, respectively.

The shares of Shareholderco 2 are capital property to Mr. B.

10.Mr. B is actively engaged in managing the Farming Business, XXXXXXXXXX and the Management Business. Mr. B is a director and executive officer in each of the Opcos and Holdcos, and is the controlling mind and management for XXXXXXXXXX with influence over decisions concerning the use of funds and management.

11.The types of property for the purposes of a distribution pursuant to subsection 55(1), of Distributorco, immediately before the Butterfly Transfer, will be determined on a consolidated look-through basis by including the appropriate pro-rata share of the assets of any corporation or partnership over which Distributorco has the ability to exercise significant influence (the "Consolidated Group") and will be properties of the following types:

(a) cash or near-cash property comprising all of the current assets of the Consolidated Group including any cash, deposits, accounts receivable, inventory, patronage reserves, material and supplies and rights arising from prepaid expenses (hereinafter referred to as "prepaid expenses");

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

(c) investment property, comprising all of the assets of the Consolidated Group, other than cash or near-cash property, any income from which would, for the purposes of the Act, be income from property or from a specified investment business.

For this purpose, Distributorco will be considered to have significant influence over a corporation if it has the ability to exercise significant influence, within the guidelines provided by section 3050 of the CICA Handbook, over that corporation or partnership or over any corporation or partnership which has significant influence over that corporation.

For determining Distributorco's appropriate pro-rata share of each type of property of the assets of the Consolidated Group, the fair market value of the shares of any corporation over which Distributorco has the ability to exercise significant influence, partnership interest and of any amount receivable by Distributorco from such a corporation or partnership will be allocated between the three types of property by multiplying the fair market value of the shares of the particular corporation, partnership interest or amount receivable from the particular corporation or partnership, as the case may be, by the proportion that the net fair market value of each type of property owned by the particular corporation (as determined in this paragraph and paragraph 12 below) is of the aggregate net fair market value of all the property owned by such corporation.

For greater certainty:

(a) Distributorco will be considered to exercise significant influence over the Holdcos, the Opcos, XXXXXXXXXX; and

(b) any tax accounts, such as the balance of any capital losses, non-capital losses or farm losses, investment tax credits or RDTOH, will not be considered to be property for purposes of the proposed transactions described herein.

For the purpose of determining the types of property:

(a) all the land in Distributorco, which will be used in the Farming Business following the Butterfly Transfer;

(b) XXXXXXXXXX; and

(c) shares and reserves in

XXXXXXXXXX

will be classified as business property for purposes of the distribution described herein.

12.In determining, on a consolidated basis, the net fair market value of its cash or near-cash property, business property and investment property immediately before the Butterfly Transfer, liabilities of Distributorco, also determined on a consolidated basis by including the appropriate pro rata share of the liabilities of each member of the Consolidated Group (other than any amount owing by a member of the Consolidated Group to Distributorco or to any other member of the Consolidated Group), will be deducted in the calculation of the net fair market value of each such type of property of Distributorco in the following manner:

(a) current liabilities of Distributorco determined on a consolidated basis, will be allocated to cash or near-cash property in the proportion that the fair market value of each such property is of the fair market value of all cash or near-cash property. The allocation of current liabilities as described herein will not exceed the aggregate fair market value of all the cash or near-cash property of Distributorco;

(b) any accounts receivable, inventory and prepaid expenses of Distributorco, determined on a consolidated basis, that are initially classified in accordance with paragraph (a) herein as cash or near cash property, that will relate to a business that will be carried on by Distributorco or each corporation over which Distributorco has significant influence and that will be collected, sold or consumed by such corporation in the ordinary course of that business, will then be reclassified as business property and the net fair market value thereof, determined after the allocation of current liabilities described in (a) herein, will be included in the net fair market value of business property and will not be included in the net fair market value of cash or near cash property;

(c) liabilities of Distributorco, determined on a consolidated basis, 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

(d) any liabilities ("excess unallocated liabilities"), determined on a consolidated basis, 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, business property, and investment property of Distributorco on a consolidated basis 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 Distributorco:

(a) deferred taxes will not be considered; and

(b) deferred revenue will be considered to be a liability to the extent that the amount of such deferred revenue gives rise to a legal obligation to repay such amount should the services not be provided or goods not be delivered.

As a result of the determination described herein, Distributorco will have two types of property for purposes of the Butterfly Transfer, cash or near-cash property and business property.

13.Except as described herein, no debts have been or will be incurred or paid, and no property has been or will be acquired by Distributorco in contemplation of the proposed transactions described below.

14.Each of Distributorco, Shareholderco 1, Shareholderco 2 and Newco (a new corporation to be set up as described in paragraph 22 below) is a specified financial institution.

15.None of the issued shares referred to herein (including the shares to be issued as described in the proposed transactions) is or will be subject to a guarantee agreement, within the meaning referred to in subsection 112(2.2).

16.None of the issued shares referred to herein (including the shares to be issued as described in the proposed transactions) has been or will be issued or acquired as part of a transaction or event or series of transactions or events of the type described in subsection 112(2.5).

17.None of the issued shares referred to herein (including the shares to be issued as described in the proposed transactions) is or will be subject to a dividend rental arrangement.

ADDITIONAL INFORMATION

18. XXXXXXXXXX

has disposed of its shares in these corporations to Mr. B and other shareholders in the corporations.

19.In XXXXXXXXXX, Distributorco's XXXXXXXXXX operations were discontinued, and the XXXXXXXXXX and equipment used in the operations were sold. The proceeds from the sale of the XXXXXXXXXX and equipment of the XXXXXXXXXX operations were reinvested in the XXXXXXXXXX business which Distributorco had been carrying on for a number of years.

20.XXXXXXXXXX may be sold in the near future. This business has incurred significant losses and has continued its operations from funds provided by its shareholders. The fair market value of XXXXXXXXXX will probably not exceed its debts owing to its shareholder investors. In the event that the fair market value of XXXXXXXXXX is more than 10% of the fair market value, at the time of the Butterfly Transfer, of the properties received by Shareholderco 2, the dividend received by Shareholderco 2 from Distributorco on the purchase for cancellation of the XXXXXXXXXX Class XXXXXXXXXX common voting shares and the XXXXXXXXXX Class XXXXXXXXXX common non-voting shares, as described in paragraph 26 below, will be subject to the provisions of paragraph 55(3.1)(c).

PROPOSED TRANSACTIONS

21.XXXXXXXXXX acquired a debt obligation of a predecessor of Distributorco ("XXXXXXXXXX"), with a principal amount of $XXXXXXXXXX from the arm's-length creditor for $XXXXXXXXXX. The debt will be settled for no payment to XXXXXXXXXX and extinguished. The provisions of section 80 will apply to Distributorco in respect to the forgiven amount that arises on the extinguishment of the debt.

22.Shareholderco 2 will incorporate a new corporation under the ABCA ("Newco"). Newco will be a private corporation and a taxable Canadian corporation.

23.The authorized share capital of Newco will consist of common shares ("Newco Common Shares") and redeemable and retractable preferred shares ("Newco Preferred Shares").

The Newco Preferred Shares will have the following attributes:

(a) each Newco Preferred Share will be redeemable, subject to applicable law, at any time at the option of the issuer for an aggregate amount ("Redemption Amount") equal to the fair market value of the property received for the issuance of the shares, net of any liabilities assumed, by the issuer at the time of issuance;

(b) each Newco 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 Redemption Amount;

(c) the holder of each Newco 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 the issuer if the resulting realizable value of the net assets of the issuer after payment of the dividends would be less than the aggregate of the Redemption Amounts of all of the Preferred Shares then outstanding;

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

(e) the holder of each Newco Preferred Share will not be entitled to vote at meetings of shareholders of the issuer, other than as provided under the ABCA.

Shareholderco 2 will subscribe for one Newco Common Share on incorporation for $XXXXXXXXXX.

24.Distributorco will sell at fair market value to Newco cash or near-cash property and business property which consists of all the shares of, advances to, or interests in, as the case may be, of the following:

XXXXXXXXXX

and XXXXXXXXXX% of Distributorco's interest in XXXXXXXXXX and a certain amount of cash or near-cash property and business property.

As a result of such transfers, the net fair market value of the cash or near cash property and business property received by Newco (after allocating and deducting, in the manner described in paragraph 12 above, the assumed liabilities of Distributorco) will be equal to the proportion of the net fair market value of the cash or near-cash property and business property, respectively, of Distributorco, immediately before the transfer, that:

(i) the aggregate of the fair market value, immediately before the transfer, of all shares of the capital stock of Distributorco owned by Shareholderco 2 at that time

		is of

(ii) the fair market value immediately before the transfer of all of the issued shares of the capital stock of Distributorco at that time (the "Butterfly Proportion").

In consideration for such transfer Newco will assume liabilities of Distributorco and will issue to Distributorco Newco Preferred Shares, having an aggregate redemption and retraction amount and fair market value equal to the amount by which the fair market value of the transferred properties that will be received by Newco exceeds the fair market value of the liabilities assumed by Newco.

Although the proportion of the fair market value of Distributorco's cash or near-cash and business property transferred to Newco may not be exactly equal to the Butterfly Proportion, it will be approximately equal to the Butterfly Proportion. Any difference between the fair market value of the cash or near cash property and business property transferred to Newco from Distributorco and the Butterfly Proportion of the cash or near-cash property and business property will not exceed 1% of the Butterfly Proportion of the fair market value of the cash or near-cash property or the business property, as the case may be.

25.Distributorco will jointly elect with Newco in prescribed form and within the time referred to in subsection 85(6), to have the provisions of subsection 85(1) apply to the transfer of each eligible property transferred to Newco as described in paragraph 24 above. The agreed amount in respect of each of the eligible properties transferred will be as follows:

(a) in the case of capital property (other than depreciable property of a prescribed class) and inventory, an amount equal to the least of the amounts described in subparagraphs 85(1)(c.1)(i) and (ii);

(b) in the case of depreciable property of a prescribed class, an amount equal to the least of the amounts described in subparagraphs 85(1)(e)(i), (ii) and (iii);

(c) in the case of eligible capital property, an amount equal to the least of the amounts described in subparagraphs 85(1)(d)(i), (ii) and (iii), however, the amount elected in respect of any particular property will not be less than $XXXXXXXXXX.

For the purposes of each joint election described in this paragraph, 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 fair market value to the taxpayer of the property of that class transferred is of the fair market value to the taxpayer of all property of the class.

The fair market value of each eligible property transferred will exceed or be equal to the agreed amount.

Newco will add an amount to its stated capital account in respect of the Newco Preferred Shares so issued equal to the aggregate of the cost amounts of the property transferred from Distributorco less the amount of the fair market value of the liabilities of Distributorco assumed by Newco.

The liabilities assumed will be allocated to specific properties transferred. The amount of liabilities to be allocated to a property transferred pursuant to subsection 85(1) will not exceed the elected amount in respect of that property. The amount of liabilities allocated to property other than a property transferred pursuant to subsection 85(1) will not exceed the fair market value in respect of that property.

26.Immediately after the transfer of the assets to Newco, Newco will redeem its Newco Preferred Shares held by Distributorco and will issue to Distributorco a non-interest-bearing demand promissory note (the "Newco Note") having a principal amount and fair market value equal to the redemption price of the Newco Preferred Shares.

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

28.Following the wind-up of Newco as described in paragraph 25 above, Distributorco will purchase for cancellation the XXXXXXXXXX Class XXXXXXXXXX common voting shares and the XXXXXXXXXX Class XXXXXXXXXX common non-voting shares held by Shareholderco 2. Distributorco will issue to Shareholderco 2 a non-interest-bearing demand promissory note (the "Distributorco Note") having a principal amount and fair market value equal to the fair market value of the shares so purchased.

29.Each of Distributorco, Shareholderco 1 and Shareholderco 2 has the financial capacity to honour, upon presentation for payment, the amount payable under the Newco Note or Distributorco Note, as the case may be.

30.The Newco Note will be set off against the Distributorco Note and they will be cancelled.

PURPOSE OF THE PROPOSED TRANSACTIONS

29.The purpose of the proposed transactions is to provide for the division of the assets of Distributorco. Mr. B and Mrs. A wish to carry on the Farming Business and the XXXXXXXXXX Business as separate businesses independent of each other.

Mr. B's objective is to pursue only the XXXXXXXXXX Business and Mrs. A's objective is to acquire control of the Farming Business which she may pass on to her sons who currently carry on a farming business.

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, subject to the application of subsections 85(4), 85(5.1) and 69(11), to the transfer by Distributorco of its properties that are eligible properties to Newco described in paragraph 24 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).

For greater certainty, paragraph 85(1)(e.2) will not apply to the transfer.

B.On the redemption of the Newco Preferred Shares held by Distributorco as described in paragraph 26 above, the amount, if any, by which the amount paid to redeem the particular shares exceeds the paid-up capital of the particular 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; and

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

C.On the purchase for cancellation of the shares of Distributorco held by Shareholderco 2 described in paragraph 28 above, the amount, if any, by which the amount paid to purchase the particular shares exceeds the paid-up capital of the particular 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; and

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

D.The dividends referred to Rulings B and C above:

(i) will be deductible by each recipient pursuant to subsection 112(1) and the provisions of subsections 112(2.1) to 112(2.4) will not apply to deny the subsection 112(1) deduction in respect of such dividends;

(ii) by virtue of the application of paragraph (j) of the definition "proceeds of disposition" in section 54, the amount of a deemed dividend described in Rulings B and C above, will be excluded from the proceeds of disposition of the shares, and any loss arising from the disposition of those shares will be reduced by the amount of such dividends pursuant to subsection 112(3);

(v) no taxes under Part IV.1 will be payable by a holder in respect of a dividend referred to in Rulings B and C above, as each such dividend will be an excepted dividend by virtue of paragraph (b) of the definition thereof in section 187.1;

(v) no taxes under Part VI.1 will be payable by an issuer of the preferred shares in respect of a dividend referred to in Rulings B and C above, as each such dividend will be an excluded dividend by virtue of paragraph (a) of the definition thereof in subsection 191(1); and

(vi) no taxes under Part IV will be payable in respect of a dividend referred to in Rulings B and C above, except to the extent provided in paragraph 186(1)(b).

E.The provisions of subsection 55(2) will not apply to the dividends described in Ruling C above, by virtue of the application of paragraph 55(3)(b) provided that, as part of the series of transactions that includes the proposed transactions described herein, there is no:

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

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

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

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

which has not been described herein.

F.The extinguishment of the Newco Note and the Distributorco Note described in paragraph 30 above will not give rise to a "forgiven amount".

G.The Newco Preferred Shares will be capital property for the purposes of the proposed transactions described herein.

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

I.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 currently 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 reintroduced and enacted in substantially the same form as proposed in Bill C-69 which received first reading on December 2, 1996; and

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

(iv) 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 B 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.There will be an acquisition of control, for the purposes of subsection 13(24), section 37, subsections 66(11), (11.4) and (11.5), 66.5(3), 66.7(10) and (11), 85(1.2), 87(2.1) and (2.11), 88(1.1) and (1.2) and 89(1.1), sections 111 and 127 and subsection 249(4), of Distributorco, as a result of the transaction described in paragraph 28 above.

Yours truly,

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