30 November 1997 Ruling 9812833 - ADJUSTED COST BASE

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.

XXXXXXXXXX
XXXXXXXXXX 981283
XXXXXXXXXX

Attention: XXXXXXXXXX

XXXXXXXXXX, 1998

Dear Sirs:

Re: XXXXXXXXXX ("Canco") - 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-noted taxpayer. We also acknowledge receipt of your correspondence of XXXXXXXXXX and the information provided during our meetings and telephone conversations.

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

(i) dealt with in an earlier return of the taxpayer or a related person;

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

(iv) subject to a ruling previously issued by the Income Tax Rulings & Interpretations Directorate; or

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

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

(a) "Act" means the Income Tax Act, R.S.C. 1985 (5th Supp.) c.1, as amended to the date hereof, and, unless otherwise stated, every reference herein to a Part, section, subsection, paragraph or subparagraph is a reference to the relevant provision of the Act;

(b) "adjusted cost base" (also referred to as "ACB") has the meaning assigned by section 54;

(c) "amount" has the meaning assigned by subsection 248(1) and, unless otherwise stated, any amount referred to herein is in Canadian dollars;

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

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

(f) "proceeds of disposition" has the meaning assigned by the Act;

(g) "public corporation" has the meaning assigned by subsection 89(1);

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

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

Facts

1. Canco is a Canadian corporation, public corporation and taxable Canadian corporation. Canco's shares are listed and posted for trading on XXXXXXXXXX.

2. XXXXXXXXXX ("Targetco") is a United States corporation incorporated under and governed by the laws of XXXXXXXXXX. The shares of Targetco are listed and posted for trading on XXXXXXXXXX.

3. On XXXXXXXXXX, Canco incorporated a corporation ("Subco") under the laws of the state of XXXXXXXXXX and subscribed for one common share of Subco at a subscription price of $XXXXXXXXXX (U.S.).

4. Canco, Subco and Targetco entered into a merger agreement (the "Merger Agreement") under XXXXXXXXXX law dated as of XXXXXXXXXX. According to the terms of the Merger Agreement:

(a) Subco will merge "into" Targetco at the effective time (the "Effective Time"). The Effective Time is defined, subject to the satisfaction or waiver of conditions set forth in Article XXXXXXXXXX of the Merger Agreement, as that time on the third business day after the last of the conditions set forth in Section XXXXXXXXXX of the Merger Agreement have been satisfied or waived or such other date as the parties may agree to in writing.

(b) All of the assets and undertakings of Subco will be transferred to, and all of the liabilities of Subco will be assumed by, Targetco as a result of the merger.

(c) At the Effective Time, Subco will cease to exist as a separate corporation.

(d) At the Effective Time, Targetco will continue to exist as the same legal entity as existed before the merger (the merged entity is hereafter referred to as "New Targetco").

(e) At the Effective Time, all of the issued and outstanding shares of Targetco owned by its shareholders (other than shares held by Targetco or any wholly-owned subsidiary of Targetco or held by Canco or any wholly-owned subsidiary of Canco) prior to the merger will be converted into XXXXXXXXXX Canco common shares for each Targetco share so converted (the "Exchange Ratio").

(f) No fractional shares of Canco will be issued in the merger, instead Canco will pay to each holder of Targetco shares who would otherwise be entitled to a fractional share an amount of cash in lieu of such fractional share.

(g) Each Targetco stock option outstanding immediately prior to the Effective time will be assumed by Canco and deemed to constitute an option to acquire shares of Canco on the same terms and conditions, except that the number of common shares of Canco to be issued upon the exercise and the exercise price of such options will be adjusted to reflect the Exchange Ratio.

(h) At the Effective Time, the Subco common share (held by Canco) will be converted into one newly issued, fully-paid and non-assessable preferred share of New Targetco with a redemption amount and fair market value equal to $XXXXXXXXXX (U.S.).

(i) At the Effective Time, New Targetco will issue common shares (the "XXXXXXXXXX Shares") to Canco in consideration for Canco's issuing its common shares to the Targetco shareholders. The number of XXXXXXXXXX Shares issued to Canco will be equal to the number of Targetco common shares outstanding immediately before the Effective Time.

(j) The fair market value of the Canco common shares issued by Canco to the former Targetco shareholders under the terms of the merger will be an amount equal to the fair market value of the XXXXXXXXXX Shares issued by New Targetco to Canco (that is, an amount equal to the fair market value of the Targetco common shares outstanding immediately before the Effective Time) less any amounts paid by Canco to the former Targetco shareholders in lieu of the issuance of fractional shares.

(k) Canco will add to the stated capital account of the Canco common shares issued to the former Targetco shareholders an amount equal to the fair market value of the XXXXXXXXXX Shares acquired by Canco under the terms of the merger less any amounts paid by Canco to such shareholders in lieu of the issuance of fractional shares.

(l) At the Effective Time, certain convertible debt of a wholly-owned subsidiary of Targetco will, pursuant to its terms, become convertible into common shares of Canco on the same terms and conditions except that the number of common shares of Canco to be issued on the conversion will be adjusted to reflect the Exchange Ratio.

Proposed Transactions

5. The following transactions or events must be completed or occur prior to the consummation of the merger:

(a) The shareholders of Targetco must approve the merger in accordance with the laws of XXXXXXXXXX.

(b) All regulatory approvals required to consummate the transactions contemplated by the Merger Agreement must be obtained.

(c) The shares of Canco which are to be issued in the merger and, if required, on the exercise of the outstanding stock options, must be listed for trading on XXXXXXXXXX stock exchanges.

(d) Various conditions set out in the Merger Agreement as a precondition to the consummation of the merger must be fulfilled or waived.

6. Subject to paragraph 5, Subco will merge into Targetco pursuant to the terms of the Merger Agreement described in paragraph 4, at the Effective Time.

7. Immediately following the merger, Canco will be the sole shareholder of New Targetco and the former shareholders of Targetco will be shareholders of Canco.

Purpose Of The Proposed Transactions

8. The purpose of the proposed transactions is to facilitate the acquisition of Targetco by Canco by means of a "reverse triangular merger". The form of reorganization is intended, among other things, to permit a deferral of U.S. taxation for the shareholders of Targetco to the extent such shareholders receive shares of Canco.

Rulings Given

Provided that the preceding statements constitute a complete and accurate disclosure of all of the relevant facts, proposed transactions and the purpose of the proposed transactions, and provided that the proposed transactions are undertaken in the manner described above, our rulings are as set forth below.

A. For the purposes of computing the ACB of the XXXXXXXXXX Shares issued to Canco, as described in paragraph 4(i), the cost of such shares to Canco will include an amount equal to the aggregate of:

(a) an amount equal to the fair market value, at the Effective Time, of the Canco common shares issued to the shareholders of Targetco;

(b) an amount equal to the amount paid by Canco to the shareholders of Targetco in lieu of the issuance of fractional shares; and

(c) an amount equal to the costs incurred by Canco for the purpose of acquiring the XXXXXXXXXX Shares to the extent that such costs are not deductible by Canco in the year or any subsequent year in computing its income for purposes of the Act.

B. For the purposes of computing the ACB of the New Targetco preferred share, as described in paragraph 4(h), the cost of such share to Canco immediately after the Effective Time will be an amount equal to the ACB to Canco of the Subco common share immediately before the Effective Time.

C. For the purpose of computing the cost of the Canco common shares issued by Canco to the former shareholders of Targetco, as described in paragraph 4(e), the cost of such shares to a particular shareholder will be an amount equal to the fair market value, at the Effective Time, of the Canco common shares issued to that particular shareholder.

The rulings provided herein are:

(a) subject to the limitations and qualifications set out in Information Circular 70-6R3 dated December 30, 1996 and are binding on Revenue Canada Customs, Excise and Taxation provided that the proposed transactions are completed by XXXXXXXXXX; and

(b) 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.

Caveat

Nothing in this ruling should be construed as implying that Revenue Canada, Customs, Excise and Taxation has agreed to or reviewed:

(a) the determination of the fair market value of any particular asset or the paid-up capital of any shares referred to herein;

(b) the application of the law of any foreign jurisdiction; or

(c) the 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