30 November 1996 Ruling 9727413 - XXXXXXXXXX BUTTERFLY (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:

This was a "spin-off" net-equity consolidated look-through butterfly. The distributing corporation rolled the assets of a particular division into a new subsidiary ("New Subco") and then butterflied the shares of New Subco to a Newco.

Position:

There were several property classification issues and consolidated look-through issues consistent with these type of butterflies.

Reasons:

All classification issues were resolved as business properties as reasonable arguments were put forth by the taxpayer.

XXXXXXXXXX							972741
XXXXXXXXXX

Attention: XXXXXXXXXX

XXXXXXXXXX, 1997

Dear Sirs:

Re: XXXXXXXXXX
Advance Income Tax Ruling

We are writing in response to your letter of XXXXXXXXXX wherein you requested an advance income tax ruling on behalf of the above-referenced taxpayers. In your letters of XXXXXXXXXX you provided additional information in respect of the facts and proposed transactions described in your original letter. We also acknowledge the information provided during our various telephone conversations (XXXXXXXXXX).

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

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

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

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

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

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

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

(a) "adjusted cost base" ("ACB") has the meaning assigned to that term in section 54 of the Act;

(b) XXXXXXXXXX;

(c) "capital property" has the meaning assigned to that term in section 54 of the Act;

(d) XXXXXXXXXX;

(e) "cost amount" has the meaning assigned to that term in subsection 248(1) of the Act;

(f) "DC" means XXXXXXXXXX and is more fully described at paragraphs 3 to 5 hereof;

(g) "depreciable property" has the meaning assigned to that term in subsection 13(21) of the Act;

(h) "eligible capital property" has the meaning assigned to that term in section 54 of the Act;

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

(j) "Holdco 1" means XXXXXXXXXX and is more fully described at paragraph 2 hereof;

(k) "Holdco 2" means XXXXXXXXXX and is more fully described in paragraph 5(vi) hereof;

(l) XXXXXXXXXX;

(m) "paid-up capital" ("PUC") has the meaning assigned to that term by subsection 89(1) of the Act;

(n) "Parentco" means XXXXXXXXXX and is more fully described in paragraph 1 hereof;

(o) "Partnership" means XXXXXXXXXX, a partnership which was owned XXXXXXXXXX% by DC and XXXXXXXXXX% by Subco 1;

(p) "public corporation" has the meaning assigned to that term in subsection 89(1) of the Act;

(q) "specified financial institution" ("SFI") has the meaning assigned to that term by subsection 248(1) of the Act;

(r) "specified investment business" ("SIB") has the meaning assigned to that term by subsection 125(7) of the Act;

(s) "Subco 1" means XXXXXXXXXX and is more fully described in paragraph 6 hereof;

(t) "Subco 2" means XXXXXXXXXX and is more fully described in paragraph 7 hereof;

(u) "Subco 3" means XXXXXXXXXX and is more fully described in paragraph 7 hereof;

(v) "Subco 4" means XXXXXXXXXX and is more fully described in paragraph 8 hereof;

(w) "Subco 5" means XXXXXXXXXX and is more fully described in paragraph 9 hereof;

(x) "Subco 6" means XXXXXXXXXX and is more fully described in paragraph 10 hereof;

(y) "Subco 7" means XXXXXXXXXX and is more fully described in paragraph 11 hererof;

(z) "Subco 8" means XXXXXXXXXX and is more fully described in paragraph 11 hereof;

(aa) "Subco 9" means XXXXXXXXXX and is more fully described in paragraph 4(iii) hereof;

(bb) "Subco 10" means XXXXXXXXXX and is more fully described in paragraph 4(v) hererof;

(cc) "Subco 11" means XXXXXXXXXX and is more fully described in paragraph 4(vi) hererof;

(dd) "taxable Canadian corporation" ("TCC") has the meaning assigned to that term by subsection 89(1) of the Act; and

(ee) "taxable dividend" has the meaning assigned to that term by subsection 89(1) of the Act.

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

FACTS

1. Parentco, a company formed by amalgamation on XXXXXXXXXX, is a public corporation and a TCC. Parentco owns all the issued and outstanding Common shares and XXXXXXXXXX Preferred shares of DC and controls DC.

2. Holdco 1, a corporation incorporated on XXXXXXXXXX, is a TCC. All the common shares of Holdco 1 are owned by Parentco and were acquired by Parentco from treasury for a nominal amount. Holdco 1's only assets consist of preferred shares of DC as is more fully described in paragraph 3 below.

3. DC, a corporation formed by an amalgamation XXXXXXXXXX, is a TCC. As at XXXXXXXXXX the issued and outstanding share capital of DC was as follows:

	Number		Description				Book Value

XXXXXXXXXX

XXXXXXXXXX

4. DC provides

XXXXXXXXXX

XXXXXXXXXX

XXXXXXXXXX

5. During recent months, certain transactions, which have resulted in property becoming property of DC and/or its Operating Subsidiaries, have occurred. The transactions described below did not occur in contemplation of the proposed transactions, but rather as part of DC's general business plans.

i) During the week ending XXXXXXXXXX Parentco, DC, Subco 1 and Holdco 1 completed the following transactions:

a) Parentco made loans bearing interest at XXXXXXXXXX% per annum and aggregating $XXXXXXXXXX to Holdco 1.

b) Holdco 1 used the proceeds of the loans from Parentco to invest in an aggregate of $XXXXXXXXXX of XXXXXXXXXX Preferred Shares of DC.

c) DC borrowed $XXXXXXXXXX under its bank line facility.

d) DC used the proceeds from the bank borrowing together with the proceeds from the issue of XXXXXXXXXX Preferred Shares of its capital stock and cash on hand to make loans aggregating $XXXXXXXXXX to Subco 1. These loans bear interest at XXXXXXXXXX%.

e) Subco 1 used the proceeds of the loans from DC to invest in an aggregate of $XXXXXXXXXX of XXXXXXXXXX Preferred Shares of Holdco 1.

f) Holdco 1 used $XXXXXXXXXX from the issuance of XXXXXXXXXX Preferred Shares of its capital stock to repay loans aggregating $XXXXXXXXXX from Parentco and invested the remaining $XXXXXXXXXX in additional XXXXXXXXXX Preferred Shares of DC.

g) DC repaid its $XXXXXXXXXX bank loan.

These transactions did not occur in contemplation of the proposed transactions but rather to provide additional interest deductions to Subco 1.

ii) On XXXXXXXXXX all of the shares of Subco 4 were transferred by DC to Subco 1 pursuant to subsection 85(1) of the Act. As consideration for the shares of Subco 4, Subco 1 issued a promissory note in the amount of $XXXXXXXXXX and XXXXXXXXXX Preferred shares of its capital stock having a redemption price of $XXXXXXXXXX. This transaction did not occur in contemplation of the proposed transactions but rather to provide additional interest deductions to Subco 1.

XXXXXXXXXX

iii) XXXXXXXXXX

The promissory notes were repaid, in accordance with their terms, on or about XXXXXXXXXX.

iv) XXXXXXXXXX

v) Pursuant to an agreement of purchase and sale dated XXXXXXXXXX, DC, Subco 1, Subco 2 and the Partnership agreed to sell

XXXXXXXXXX

XXXXXXXXXX

The proceeds from the sale of the assets of the Partnership were distributed to DC and Subco 1 in relation to their respective ownership interests. DC and its Subsidiaries used the proceeds from the sale to Aco for capital expenditures and general corporate purposes. The distribution of the sale proceeds of the Partnership and its dissolution on XXXXXXXXXX did not occur in contemplation of the proposed transactions and would have occurred in any event because, XXXXXXXXXX, the Partnership no longer carried on any business.

vi) On XXXXXXXXXX Parentco made a loan of $XXXXXXXXXX to Subco 1. The loan bears interest at a rate of XXXXXXXXXX% per annum and is due on demand. Subco 1 used the proceeds of this loan to invest in XXXXXXXXXX Preferred shares of Holdco 2. The Holdco 2 XXXXXXXXXX preferred shares are redeemable for $XXXXXXXXXX per share and carry rights to cumulative dividends at a rate of XXXXXXXXXX% per annum. On XXXXXXXXXX Holdco 2 used the $XXXXXXXXXX proceeds from the issue of its XXXXXXXXXX Preferred shares to invest in XXXXXXXXXX shares of Parentco having a redemption amount of $XXXXXXXXXX. The loan from Parentco to Subco 1 and subsequent share investment by Subco 1 allowed Subco 1 to access group losses.

All of the common shares of Holdco 2 are owned by Parentco and were acquired by Parentco from treasury for a nominal amount. Various wholly-owned direct and indirect subsidiaries of Parentco (including Subco 1) have borrowed from Parentco (or a related company) and have used the borrowed funds to invest in preferred shares of Holdco 2. Generally, these arrangements enable the borrowing companies to access losses of a related company. Holdco 2's only assets consist of preferred shares issued by Parentco.

vii) DC and its Subsidiaries frequently make inter-company advances for capital expenditures and general corporate purposes. In addition, DC has in recent years received substantial advances from Parentco which advances have been used for capital expenditures and general corporate purposes. None of the advances from Parentco and none of the inter-company advances has occurred in contemplation of the proposed transactions.

6. Subco 1, a corporation formed by amalgamation XXXXXXXXXX, is a TCC. Subco 1 is in the business of XXXXXXXXXX.

Subco 1 owns all of the issued and outstanding shares of Subco 2 and Subco 4. The assets of Subco 1 also include XXXXXXXXXX Preferred shares of Holdco 1 (the terms of which are described in paragraph 5 above), XXXXXXXXXX Preferred shares of Holdco 1 and XXXXXXXXXX Preferred shares of Holdco 2 (the terms of which are described in paragraph 5 above). The purchase of the Holdco 1 XXXXXXXXXX Preferred shares was financed by a demand loan from DC bearing interest at XXXXXXXXXX% per annum. The Holdco 1 XXXXXXXXXX Preferred shares are redeemable for $XXXXXXXXXX per share and carry rights to cumulative dividends at a rate of XXXXXXXXXX% per annum. The purchase of the Holdco 1 XXXXXXXXXX Preferred shares was financed by a demand loan from DC bearing interest at XXXXXXXXXX%.

As at XXXXXXXXXX DC owned XXXXXXXXXX Preferred shares of Subco 1. On XXXXXXXXXX Preferred shares of Subco 1 were redeemed for $XXXXXXXXXX by set off against inter-company indebtedness owing from DC to Subco 1. The redemption of these XXXXXXXXXX Preferred shares did not occur in contemplation of the proposed transactions.

7. Subco 2 is a corporation formed by amalgamation XXXXXXXXXX. Subco 2 is in the business of XXXXXXXXXX. Subco 2 owns shares, representing a XXXXXXXXXX% equity interest in Subco 3 (XXXXXXXXXX). All of Subco 3's assets represent business property. The assets of Subco 2 also include XXXXXXXXXX Preferred shares of Holdco 1 (the terms of which are described in paragraph 5 above). The purchase of the Holdco 1 XXXXXXXXXX Preferred Shares was financed by a demand loan from DC bearing interest at XXXXXXXXXX%.

8. Subco 4 was incorporated on XXXXXXXXXX. Effective XXXXXXXXXX, Subco 4 changed its name to XXXXXXXXXX. Effective XXXXXXXXXX Subco 4 further changed its name to XXXXXXXXXX. The shares of Subco 4 were acquired by DC on XXXXXXXXXX from Parentco. The Subco 4 shares were transferred by DC to Subco 1 on XXXXXXXXXX as described in paragraph 5. Subco 4 is in the business of XXXXXXXXXX. The assets of Subco 4 also include XXXXXXXXXX Preferred shares of Holdco 1 (the terms of which are described in paragraph 5 above). The purchase of the Holdco 1 XXXXXXXXXX Preferred shares was financed by a demand loan from DC bearing interest at XXXXXXXXXX%.

9. XXXXXXXXXX.

10. Subco 6, a corporation formed by amalgamation XXXXXXXXXX is a TCC. Subco 6 XXXXXXXXXX. In XXXXXXXXXX, Subco 6 acquired the assets of a XXXXXXXXXX business XXXXXXXXXX for approximately $XXXXXXXXXX. This acquisition did not occur in contemplation of the proposed transactions but rather as part of Subco 6's general expansion plans.

The assets of Subco 6 also include XXXXXXXXXX Preferred shares of Holdco 1 (the terms of which are described in paragraph 5 above). The purchase of the Holdco 1 XXXXXXXXXX Preferred shares was financed by a demand loan from DC bearing interest at XXXXXXXXXX% per annum.

11. Subco 7 is a XXXXXXXXXX company which owns all the shares of Subco 8. Subco 8 XXXXXXXXXX.

12. All non-current assets of DC, Subco 1 through Subco 11 and Zco that are not specifically described above are business property.

13. As noted above, each of Subco 1, Subco 2, Subco 4 and Subco 6 has borrowed from DC and invested in XXXXXXXXXX Preferred shares of Holdco 1. Generally, these arrangements enable the borrowing companies to access DC's non-capital losses by having them borrow from DC to acquire preferred shares of a related company. All the common shares of Holdco 1 are owned by Parentco and were acquired by Parentco from treasury for a nominal amount. Holdco 1's only assets are the preferred shares of DC.

14. Prior to the proposed transactions set out below, Parentco's investment in DC will consist of the following:

XXXXXXXXXX.

15. On XXXXXXXXXX DC caused a company, XXXXXXXXXX ("New Subco"), to be incorporated XXXXXXXXXX. New Subco is a TCC. The authorized capital of New Subco consists of an unlimited number of Class XXXXXXXXXX Voting shares and an unlimited number of Class XXXXXXXXXX Non-Voting shares. No shares were issued upon incorporation. On XXXXXXXXXX one Class XXXXXXXXXX Voting share was issued to DC in connection with the organization of New Subco.

16. On XXXXXXXXXX Parentco caused a company, XXXXXXXXXX ("Newco"), to be incorporated XXXXXXXXXX. Newco is a TCC and a subsidiary wholly-owned corporation of Parentco. The authorized capital of Newco consists of the following:

	Number of Shares	Description

	Unlimited			Class XXXXXXXXXX Voting shares

	Unlimited			Class XXXXXXXXXX Non-Voting shares

	Unlimited			XXXXXXXXXX Preferred shares, redeemable, and retractable at an amount equal to the fair market value of the property for which they are issued, non-voting, and entitled to non-cumulative dividends at the discretion of the directors.

Under the terms of the XXXXXXXXXX Preferred shares, the redemption/retraction price per share is determined by dividing the aggregate fair market value of the property for which they were issued by the number of shares so issued. As such, the redemption/retraction amount per share adjusts automatically in the event that there is an adjustment to the value of the property for which the preferred shares were issued. On XXXXXXXXXX one Class XXXXXXXXXX Voting share was issued to DC in connection with the organization of Newco.

PROPOSED TRANSACTIONS

17. Immediately before the transfer of property described in paragraph 18 below, Holdco 2 will redeem its XXXXXXXXXX Preferred shares owned by Subco 1 at their aggregate redemption price (the "Holdco 2 Redemption Price"). As sole consideration for the Holdco 2 Redemption Price, Holdco 2 will assign to Subco 1 a demand promissory note initially issued by Parentco to Holdco 2 (the "Parentco Note") which has a principal amount and fair market value equal to $XXXXXXXXXX (which is also equal to the Holdco 2 Redemption Price). Parentco and Subco 1 will set-off, against each other, the Parentco Note and the promissory note which was issued by Subco 1 (the "Subco 1 Note") in respect of its loan to acquire the XXXXXXXXXX Preferred Shares of Holdco 2. The principal amount and fair market value of the Subco 1 Note is $XXXXXXXXXX. The Parentco Note and the Subco 1 Note will be cancelled.

Parentco loaned Subco 1 $XXXXXXXXXX on XXXXXXXXXX and Subco 1 used the borrowed funds to acquire the XXXXXXXXXX Preferred Shares of Holdco 2, as described in more detail in paragraph 5(vi) above. It was subsequently determined that the structure would only remain in place until XXXXXXXXXX as the desired amount of deductions would have been obtained by Subco 1 by that date. Accordingly, the unwinding of the XXXXXXXXXX transactions, as proposed herein, would have been carried out at XXXXXXXXXX regardless of the proposed butterfly transactions described below.

18. DC will transfer the assets related to the Target Division, XXXXXXXXXX, to New Subco in consideration for common shares of New Subco and the assumption by New Subco of certain liabilities of DC. For greater certainty, the assets related to the Target Division include the Zco shares, the Dco Note and the Dco Option. DC and New Subco will jointly elect in prescribed form and within the time referred to in subsection 85(6) of the Act, to have the provisions of subsection 85(1) of the Act apply to the transfers of any eligible property of DC to New Subco as part of the transfer of the Target Division assets, and will elect an amount not less than:

(i) in the case of each property that is inventory or capital property (other than depreciable property of a prescribed class), the cost amount of each property;

(ii) in the case of each property that is a depreciable property of a prescribed class, the least of the amounts calculated for subparagraphs 85(1)(e)(i) through (iii) of the Act; and

(iii) in the case of each property that is eligible capital property, the least of the amounts calculated for subparagraphs 85(1)(d)(i) through (iii) of the Act;

except that in no case shall the amount determined under paragraphs (i) through (iii) above be less than $1 in respect of any eligible property. For greater certainty, the agreed amount for any eligible property included in the subsection 85(1) elections referred to herein will not be greater than the fair market value, at the time of the disposition, of such property, nor will it be less than the amount of any liabilities assumed by New Subco as consideration for the transfer of such property.

New Subco will add an amount to its stated capital in respect of its common shares issued to DC equal to the amount by which the aggregate cost of the property transferred to New Subco (determined pursuant to subsection 85(1) of the Act where relevant) exceeds the amount of liabilities assumed by New Subco as consideration therefor.

19. DC will enter into an XXXXXXXXXX with New Subco under which certain XXXXXXXXXX will be made available to New Subco and DC will receive a one-time fair market value payment from New Subco as consideration for the XXXXXXXXXX.

20. DC will file Articles of Amendment to create a new class of common shares ("Class XXXXXXXXXX Common shares") and a new class of preferred shares ("Class XXXXXXXXXX Preferred shares"). The Class XXXXXXXXXX Common shares and the Class XXXXXXXXXX Preferred shares are collectively referred to as the "New Shares". The Class XXXXXXXXXX Common shares XXXXXXXXXX. The Class XXXXXXXXXX Preferred shares will be non-voting and redeemable and retractable for an aggregate amount for such class, determined by way of formula, equal to the portion of the FMV of all of the issued shares of DC immediately prior to the exchange of common shares contemplated in paragraph 21 below that the net fair market value of the business property of DC, as represented by the fair market value of the shares of New Subco, at that time, is of the fair market value, at that time, of all of the net business property of DC, both as determined in accordance with the guidelines in paragraphs 23 and 24 below. An unlimited number of Class XXXXXXXXXX Common shares and XXXXXXXXXX Class XXXXXXXXXX Preferred shares will be authorized.

21. Parentco will exchange all of its Common shares of DC for XXXXXXXXXX Class XXXXXXXXXX Common shares and XXXXXXXXXX Class XXXXXXXXXX Preferred shares. The aggregate of the amounts to be credited to the stated capital accounts of the Class XXXXXXXXXX Common shares and the Class XXXXXXXXXX Preferred shares so issued will equal the aggregate PUC of the Common shares of DC exchanged and will be allocated between the Class XXXXXXXXXX Common shares and the Class XXXXXXXXXX Preferred shares based on the proportion that the fair market value of the Class XXXXXXXXXX Common shares and the Class XXXXXXXXXX Preferred shares, as the case may be, is of the fair market value of all New Shares issued. As a result of the exchange of shares no Common shares of DC will be outstanding and the authorized and unissued Common shares of DC will be cancelled.

22. Immediately after the share for share exchange described in paragraph 21 above, Parentco will transfer its Class XXXXXXXXXX Preferred shares of DC to Newco. As sole consideration for such transfer, Newco will issue Class XXXXXXXXXX Voting shares having an aggregate fair market value equal to the fair market value of the Class XXXXXXXXXX Preferred shares transferred. Parentco and Newco will jointly elect in prescribed form and within the time referred to in subsection 85(6) to have the provisions of subsection 85(1) of the Act, apply with respect to the transfer of the Class XXXXXXXXXX Preferred shares, so that the amount agreed upon in such election will be equal to the cost amount of the Class XXXXXXXXXX Preferred shares to Parentco. For greater certainty, the agreed amount for such property in the subsection 85(1) election referred to herein will not be greater than the fair market value, at the time of the disposition, of such property. Newco will add an amount to its stated capital in respect of its Class XXXXXXXXXX Voting shares issued to Parentco equal to the agreed amount in respect of the Class XXXXXXXXXX Preferred shares acquired.

23. Immediately before the transfers of property described in paragraph 25 below, the property of DC will be determined on a consolidated look-through basis by including the appropriate pro rata share of the assets of any corporation over which DC has the ability to exercise significant influence. Any corporation over which DC exercises significant influence which in turn exercises significant influence over another corporation will also look-through that other corporation in the same manner. This look-through approach will be applied to every tier of corporations as long as "significant influence" is being exercised. DC and such corporations over which significant influence is exercised, as described herein, will hereinafter be referred to as the "DC Group". The assets of DC determined on a consolidated basis as described herein will be classified into three types of property for the purposes of the definition of "distribution" in subsection 55(1) of the Act, as follows:

(a) cash or near cash property, comprising all of the current assets of the DC Group, including any cash, deposits, marketable securities, trade accounts receivable, inventories of any property which are held for resale, and rights arising from prepaid expenses (hereinafter referred to as "prepaid expenses"). For greater certainty, inventories of maintenance materials XXXXXXXXXX, and amounts receivable from employees relating to employee incentive plans which are not due within one year will be classified as business properties and not cash or near cash;

(b) investment property, comprising all of the assets of the DC 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; and

(c) business property, comprising all of the assets of the DC 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).

For greater certainty, any tax accounts, such as the balance of any refundable dividend tax on hand ("RDTOH"), as that term is defined in subsection 129(3) of the Act, of the DC Group, will not be considered property for purposes of the proposed transactions described herein.

For the purposes of this paragraph, the following corporations have significant influence over the other:

i) DC will be considered to have significant influence over Subco 1, Subco 5, Subco 6, Subco 7, Subco 9, Subco 10, Subco 11 and Zco;

ii) Subco 1 will be considered to have significant influence over Subco 2, Subco 4 and Holdco 1;

iii) Subco 2 will be considered to have significant influence over Subco 3 and Holdco 1;

iv) Subco 4 will be considered to have significant influence over Holdco 1;

v) Subco 6 will be considered to have significant influence over Holdco 1;

vi) Subco 7 will be considered to have significant influence over Subco 8; and

vii) Holdco 1 will be considered to have significant influence over DC.

Consequently, each of the corporations referred to in subparagraph i) to vii) above will form part of the DC Group.

For greater certainty, the fair market value of the shares of any corporation over which any of the above mentioned corporations has the ability to exercise significant influence and of any indebtedness receivable by any such corporation from a corporation over which it has significant influence (e.g. the $XXXXXXXXXX receivable owing to DC from Subco 1 as described in paragraph 5 above) will be allocated between the three types of property by multiplying the fair market value of the shares of the particular corporation or amount receivable from the particular corporation, as the case may be, by the proportion that the net fair market value of each type of property owned by the particular corporation (as determined in this paragraph and paragraph 24 below) is of the aggregate net fair market value of all the property owned by such corporation. Where there is a circularity issue with respect to the consolidated look-through, for example, as a consequence of the in-house loss utilization transactions described in paragraph 5 above, the shares of a particular corporation will not be looked-through twice. For example, in determining the types of property that the shares of Holdco 1 held by Subco 1, Subco 2, Subco 4 and Subco 6 represent for this purpose, the look-through approach will be used with respect to the shares of DC held by Holdco 1 but when we look-through the shares of Subco 1 and Subco 6 held by DC and the shares of Subco 2 and Subco 4 held by Subco 1, we will ignore the shares of Holdco 1 that are held by Subco 1, Subco 2, Subco 4 and Subco 6.

For greater certainty, the property described below will be categorized as follows for the purposes of the definition of "distribution" in subsection 55(1) of the Act;

i) the Aco Shares and the Aco Note owned by DC, as described in paragraph 4(i) above, will be categorized as business property and cash or near cash property, respectively;

ii) the shares of XXXXXXXXXX owned by DC, as described in paragraph 4(ii) above, will be categorized as business property;

iii) the real property owned by Subco 9, as described in paragraph 4(iii) above, will be categorized as business property;

iv) the real property owned by Subco 10, as described in paragraph 4(v) above, will be categorized as business property;

v) the real property owned by Subco 11, as described in paragraph 4(vi) above, will be categorized as business property;

vi) the shares of Bco owned by DC, as described in paragraph 4(vii), will as a result of the close relationship between DC and Bco resulting from the transaction and related share ownership which allow DC to further its business objectives, be classified as business property;

vii) the shares of Cco owned by DC, as described in paragraph 4(viii) above, will be categorized as business property;

viii) the Dco Note owned by DC, as described in paragraph 4(ix) above, will be categorized as cash or near cash property. The Dco Option owned by DC, as described in paragraph 4(ix) above, will be classified as business property; and

ix) the XXXXXXXXXX held by New Subco with respect to certain XXXXXXXXXX, as described in paragraph 19 above, will be categorized as business property.

24. In determining, on a consolidated basis, the net fair market value of each type of property of DC immediately before the transfers described in paragraph 25 below, the liabilities of DC and any corporation over which DC exercises significant influence will be allocated to, and be deducted in the calculation of, the net fair market value of each such type of property of such corporation in the following manner:

(a) In determining the net fair market value of each type of property of a corporation over which another corporation in the DC Group exercises significant influence (the "Shareholder"), immediately before the transfers described in paragraph 25 below, the liabilities of that particular corporation (other than any amount owing by such corporation to the Shareholder) will be allocated to, and be deducted in the calculation of, the net fair market value of each type of property of the particular corporation in the following manner:

(i) Current liabilities of such corporation will be allocated to the cash or near cash property (including trade accounts receivable, inventory of property held for resale and prepaid expenses) of such corporation in the proportion that the fair market value of each such property is of the fair market value of all cash or near cash property owned by the particular corporation. To the extent that the allocation of current liabilities as described herein exceeds the aggregate fair market value of the cash or near cash property of the particular corporation, such corporation will be considered to have a negative amount of cash or near cash property;

(ii) Liabilities, other than current liabilities, of such corporation that relate to a particular property, will then be allocated to the particular property (and effectively to the type to which the particular property belongs) to the extent of its fair market value. Liabilities, other than current liabilities, that pertain to a type of property but not to a particular property will then be allocated to that type of property. To the extent that the allocation of liabilities that pertain to a particular type of property as described herein exceeds the aggregate fair market value of all that particular type of property of the particular corporation, the particular corporation will be considered to have a negative amount of that type of property;

(iii) Any liabilities, other than current liabilities, of such corporation which do not relate to a particular type of property will then be allocated to the cash or near cash property, investment property, and business property of such corporation based on the relative net fair market value of each type of property prior to the allocation of such liabilities, but after the allocation of the liabilities described in subparagraphs (a)(i) and (ii) above.

(b) In determining, on a consolidated basis, the net fair market value of each type of property of DC immediately before the transfers of property described in paragraph 25 below, DC will include the appropriate pro-rata share of the net fair market value of each type of property of any corporation over which DC exercises significant influence, as determined in accordance with paragraph (a) herein, and any liabilities of DC will then be allocated to, and be deducted in the calculation of, the net fair market value of each type of property of DC in the following manner:

(i) Current liabilities of DC will be allocated to cash or near cash property (including trade accounts receivable, inventory of properties held for resale and prepaid expenses) of DC 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 of DC. The allocation of current liabilities as described herein will not exceed the aggregate fair market value of the cash or near cash property of DC;

(ii) Liabilities of DC, 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 fair market value. Liabilities, other than current 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;

(iii) If any liabilities remain after the allocations described in steps (b)(i) and (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 DC based on the relative net fair market value of each type of property prior to the allocation of such excess unallocated liabilities, but after the allocation of the liabilities described in subparagraphs (b) (i) and (ii) above.

Following the allocation of liabilities as described in paragraph (b) above, DC will, on a consolidated basis, own only business property for the purposes of the definition of "distribution" in subsection 55(1) of the Act.

25. Immediately following the transfer of shares as described in paragraph 22 above and the determination of the net fair market value of each type of property of DC as described in paragraphs 23 and 24 above, DC will transfer its shares of New Subco to Newco in exchange for XXXXXXXXXX Preferred shares of Newco (the "Newco Preferred Shares") having, in the aggregate, a redemption and retraction price and fair market value equal to the aggregate fair market value of the shares of New Subco. DC and Newco will jointly elect in prescribed form and within the time referred to in subsection 85(6), to have the provisions of subsection 85(1) of the Act apply with respect to the transfer of the New Subco shares so that the amount agreed upon in such election will be equal to the cost amount of the New Subco shares to DC. For greater certainty, the agreed amount with respect to the subsection 85(1) election referred to herein will not be greater than the fair market value, at the time of the disposition, of the shares of Newco. Newco will add to its stated capital in respect of the Newco Preferred Shares issued to DC, an amount equal to the agreed amount in respect of the New Subco shares.

26. As a result of the transfer described in paragraph 25 above, the net fair market value of each type of property of DC received by Newco, determined in the manner described in paragraph 23 above (after allocating and deducting liabilities, in the manner described in paragraph 24 above), will be equal to the proportion of the net fair market value of that type of property owned by DC, determined in the manner described in paragraph 23 above (after allocating and deducting liabilities, in the manner described in paragraph 24 above), immediately before such transfers, that:

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

		is of

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

27. Newco will redeem the Newco Preferred Shares issued to DC as described in paragraph 25 above at their aggregate redemption price (the "Newco Redemption Price") and as payment of the Newco Redemption Price will issue to DC a demand promissory note (the "Newco Note") having a principal amount and fair market value equal to the Newco Redemption Price. DC will accept the Newco Note as full payment for the Newco Redemption Price of the Newco Preferred Shares so redeemed.

28. DC will redeem its Class XXXXXXXXXX Preferred shares owned by Newco at their aggregate redemption price (the "DC Redemption Price") and as payment of the DC Redemption Price will issue to Newco a demand promissory note (the "DC Note") having a principal amount and fair market value equal to the DC Redemption Price. Newco will accept the DC Note as full payment for the DC Redemption Price of the Class XXXXXXXXXX Preferred shares so redeemed.

29. DC and Newco will set-off, against each other, the DC Note and the Newco Note. The DC Note and the Newco Note will be cancelled.

30. Immediately following the transfer described in paragraph 25 above, the redemption of the Class XXXXXXXXXX Preferred shares of DC as described in paragraph 28 and the redemption of the Newco Preferred Shares as described in paragraph 27 above, the net fair market value of each type of property retained by DC, determined in the manner described in paragraphs 23 and 24 above, will be equal to that proportion of the aggregate net fair market value of that type of property of DC immediately before the transfer described in paragraph 25 above that,

(a) the aggregate fair market value, immediately before the transfer described in paragraph 25 above, of all of the issued and outstanding Class XXXXXXXXXX Common Shares, XXXXXXXXXX Preferred shares, XXXXXXXXXX Preferred shares and XXXXXXXXXX Preferred shares of DC owned by Parentco and Holdco 1, as the case may be,

		is of

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

ADDITIONAL INFORMATION

31. Other than in the ordinary course of business or as described in this letter, no liabilities have been or will be incurred by, and no assets have been or will be acquired by or disposed of by DC or a corporation controlled by DC in contemplation of and before the proposed transfers described in paragraph 25 above.

32. None of the shares of DC, Parentco or Newco has been or will be, at any time during the implementation of the proposed transactions described herein:

(a) the subject of any undertaking that is referred to in subsection 112(2.2) of the Act as a "guarantee agreement";

(b) a share that is issued or acquired as part of a transaction, event or series of transactions or events of the type described in subsection 112(2.5) of the Act; or

(c) the subject of a dividend rental arrangement as that term is defined in subsection 248(1) of the Act.

33. (a) Neither DC nor Newco is a SFI.

(b) DC and each member of the DC Group is a subject corporation as that term is defined in subsection 186(3) of the Act. At the end of its taxation year in which the proposed transactions described herein are carried out, neither DC nor Newco will have any RDTOH.

34. The proposed transactions are not part of a series of transactions that includes a disposition, other than as described herein, of a share of DC or Newco or property 10% or more of the fair market value of which was, at any time during the course of the series, derived from one or more such shares by a specified shareholder of DC or Newco to a partnership or to a person (other than the vendor) who was not related to the vendor or, as part of the series, ceased to be related to the vendor.

35. The proposed transactions are not part of a series of transactions that includes an acquisition of control of DC or Newco. For greater certainty, although it is contemplated that Newco may issue additional shares to persons who are not related to either DC or Parentco, such share issues will not result in any person acquiring control of Newco.

PURPOSE OF THE PROPOSED TRANSACTIONS

36. The purpose for the proposed transactions can be summarized as follows:

XXXXXXXXXX

XXXXXXXXXX

RULINGS GIVEN

Provided that the above statements constitute a complete and accurate disclosure of all of the relevant facts, proposed transactions and purpose of the proposed transactions, and that the proposed transactions are carried out as set forth herein, the following rulings are given:

A. Provided that joint elections are filed pursuant to subsection 85(1) of the Act, within the time set forth in subsection 85(6) of the Act, the provisions of subsection 85(1) of the Act will apply to:

(i) the transfer of each eligible property by DC to New Subco as described in paragraph 18 above,

(ii) the transfer of the Class XXXXXXXXXX Preferred shares of DC by Parentco to Newco as described in paragraph 22 above, and

(ii) the transfer of the shares of New Subco by DC to Newco as described in paragraph 25 above,

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

B. Provided the shares of DC held by Parentco are capital property, the provisions of section 86 of the Act, other than subsection 86(2) of the Act, will apply to the exchange of shares described in paragraph 21 above.

C. As a result of the redemption by Newco of the Newco Preferred Shares held by DC as described in paragraph 27 above and the redemption by DC of the Class XXXXXXXXXX Preferred shares held by Newco as described in paragraph 28 above:

(a) By virtue of paragraphs 84(3)(a) and 84(3)(b) of the Act:

(i) Newco will be deemed to have paid, and DC will be deemed to have received, a taxable dividend equal to the amount by which the amount paid in respect of the redemption of the Newco Preferred Shares exceeds the PUC thereof; and

(ii) DC will be deemed to have paid, and Newco will be deemed to have received, a taxable dividend equal to the amount by which the amount paid in respect of the redemption of the Class XXXXXXXXXX Preferred shares of DC exceeds the PUC thereof;

(b) The taxable dividends deemed to have been received by DC and Newco as a result of the redemptions referred to in paragraph (a) herein will be included in computing their respective incomes pursuant to paragraph 12(1)(j) of the Act and be deductible by each of them in computing its respective taxable income pursuant to subsection 112(1) of the Act. For greater certainty, the provisions of subsections 112(2.1), (2.2) (2.3) and (2.4) of the Act will not apply to deny the subsection 112(1) deduction in respect of such dividends;

(c) The taxable dividends deemed to have been received by DC and Newco as a result of the redemption of shares referred to in paragraph (a) herein will be excluded from the proceeds of disposition of the shares by virtue of paragraph (j) of the definition of "proceeds of disposition" in section 54 of the Act and any loss in respect of the disposition of those shares will be reduced by the amount of those dividends pursuant to subsection 112(3) of the Act;

(d) By virtue of subsection 186(2) and paragraph 186(4)(a) of the Act, Newco will be connected with DC and DC will be connected with Newco. Consequently, provided that neither of DC nor Newco is entitled to a dividend refund (within the meaning of subsection 129(1) of the Act) in respect of its taxation year in which it is deemed to pay the dividends referred to in (a)(i) or (ii) herein, neither of DC nor Newco will be subject to Part IV tax under subsection 186(1) of the Act in respect of such dividend;

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

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

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

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

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

which has not been described herein, then by virtue of paragraph 55(3)(b) of the Act, subsection 55(2) of the Act will not apply to the taxable dividends referred to in the rulings given in subparagraph C(a) 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.

E. By virtue of the definition of "substantial interest" as set out under paragraph 191(2)(a) of the Act, DC will have a substantial interest in Newco immediately before the redemption of the Newco Preferred Shares as described in paragraph 27 above and Newco will have a substantial interest in DC immediately before the redemption of the Class XXXXXXXXXX Preferred shares of DC as described in paragraph 28 above. Consequently, no tax will be payable under either section 187.2 or section 191.1 of the Act in respect of:

(i) the dividend deemed to be paid by Newco to DC upon the redemption of the Newco Preferred Shares since such dividend will be an "excepted dividend" within the meaning assigned by paragraph (b) of the definition of "excepted dividend" in section 187.1 of the Act in the capacity of DC as the recipient of the particular dividend, and shall be an "excluded dividend" within the meaning of paragraph (a) of the definition of "excluded dividend" in subsection 191(1) of the Act in the capacity of Newco as the payer of the particular dividend, or

(ii) the dividend deemed to have been paid by DC to Newco upon the redemption of the Class XXXXXXXXXX Preferred shares of DC since such dividend will be an "excepted dividend" within the meaning assigned by paragraph (b) of the definition of "excepted dividend" in section 187.1 of the Act in the capacity of Newco as the recipient of the particular dividend, and shall be an "excluded dividend" within the meaning of paragraph (a) of the definition of "excluded dividend" in subsection 191(1) of the Act in the capacity of DC as the payer of the particular dividend.

F. The set-off and cancellation of the Parentco Note and the Subco 1 Note as described in paragraph 17 above and the set-off and cancellation of the DC Note and the Newco Note, as described in paragraph 29 above, will not give rise to a "forgiven amount" within the meaning of subsection 80(1) or 80.01(1) of the Act.

G. The cost of the Parentco Note issued to Subco 1 by Parentco as described in paragraph 17 above and the cost of the DC Note and the Newco Note as described in paragraphs 27 and 28 above will equal their principal amounts.

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

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

The above rulings are given subject to the limitations and qualifications set out in Information Circular 70-6R3 dated December 31, 1996 and are binding on Revenue Canada provided that the proposed transactions are completed by XXXXXXXXXX.

The above rulings are based on the law as it presently reads and do not take into account any proposed amendments to the Act which, if enacted into law, could have an effect on the rulings provided herein.

COMMENTS

1. You have informed us, in paragraph 16 above, that the redemption/retraction amount of the Newco Preferred shares and the DC Class XXXXXXXXXX Preferred shares, described more fully in paragraph 20 above, will adjust automatically if there is an adjustment to the value of the property for which such shares were issued.

Nothing in this letter should be interpreted as confirming that,

(a) for purposes of the Act, any adjustment made pursuant to any such price adjustment clause in respect of a transaction subsequent to the time of such transaction will be effective, retroactively, to the time of such transaction,

(b) for the purposes of the Act, any amount paid pursuant to any such price adjustment clause, in respect of a transaction subsequent to the time of such transaction will be an additional payment of the redemption or purchase price of any shares redeemed or repurchased, or

(c) in the event that any adjustment is made pursuant to any such price adjustment clause, the proposed transactions referred to above will be considered to have been carried out as described herein, in particular, for the purposes of ruling D above.

The operation of a price adjustment clause is not a proposed transaction and, consequently, advance rulings are not given by the Department in respect thereof. The Department's general position with respect to price adjustment clauses in agreements is set out in Interpretation Bulletin IT-169 dated August 6, 1974.

2. Nothing in this ruling should be construed as implying that Revenue Canada has agreed to or reviewed:

(a) the determination of the fair market value or ACB of any particular asset or the PUC of any shares referred to herein; and

(b) any tax consequences relating to the facts and proposed transactions described herein other than those specifically described in the rulings given above. For greater certainty, we are not commenting on any of the tax consequences, other than those affecting Ruling D above, with respect to the transaction involving the issuance of the XXXXXXXXXX as described in paragraph 19 above.

OPINIONS

Provided that our understanding of the facts and proposed transactions described herein is correct and further provided that the proposed amendments relating to subsections 55(3.1), (3.2) and (3.3) of the Act are enacted in substantially the same form as proposed in article 96.(6), (7), (8) and (9) of Bill C-28 which received first reading on December 10, 1997, it is our opinion that provided that as part of the series of transactions or events that includes the proposed transactions described herein, there is not:

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

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

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

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

which has not been described herein, 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 subparagraph C(a) 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.

Yours truly,

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