30 November 1997 Ruling 9813073 - BUTTERFLY

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: No new issues.

Position:

Reasons:

XXXXXXXXXX
XXXXXXXXXX 							3-981307
XXXXXXXXXX 

Attention: XXXXXXXXXX

XXXXXXXXXX, 1998

Dear Sirs:

Re: XXXXXXXXXX
Advance Income Tax Ruling Request

This is in reply to your letter of XXXXXXXXXX in which you requested various advance income tax rulings on behalf of the above-noted taxpayer. We also acknowledge the additional information in your letters of XXXXXXXXXX.

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

XXXXXXXXXX files its tax returns at the XXXXXXXXXX Taxation Centre and is audited by the XXXXXXXXXX Tax Services Office. The corporate tax account number of XXXXXXXXXX. The address of XXXXXXXXXX.

XXXXXXXXXX files its tax returns at the XXXXXXXXXX Taxation Centre and is audited by the XXXXXXXXXX Tax Services Office. The corporate tax account number of XXXXXXXXXX. The address of XXXXXXXXXX.

XXXXXXXXXX files its tax returns at the XXXXXXXXXX Taxation Centre and is audited by the XXXXXXXXXX Tax Services Office. The corporate tax account number of XXXXXXXXXX. The address of XXXXXXXXXX.

1. DEFINITIONS

In this letter unless otherwise expressly stated:

(a) XXXXXXXXXX

(b) “Act” means the Income Tax Act, R.S.C. 1985, c.1 (5th Supp.), as amended as at 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;

(c) “adjusted cost base” has the meaning assigned by section 54;

(c.1) “approximate the proportion” means, for the purposes of Paragraph XXXXXXXXXX, a discrepancy from that proportion, if any, that would not exceed XXXXXXXXXX%, determined as a percentage of the FMV of each type of property which Newco has received (or XXXXXXXXXX has retained) as compared to what Newco would have received (or XXXXXXXXXX would have retained) if it had received (or retained) its appropriate pro rata share of the FMV of that type of property;

(d) “capital gain” has the meaning assigned by section 39;

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

(f) “CBCA” means the Canada Business Corporations Act;

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

(h) “fair market value” means the highest price available in an open and unrestricted market between informed prudent parties acting at arm's length and under no compulsion to act and contracting for a taxable purchase and sale;

(i) “fiscal period” has the meaning assigned by subsection 249.1(1);

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

(k) “net capital loss” has the meaning assigned by subsection 111(8);

(l) “New XXXXXXXXXX Common Shares” means the common shares of XXXXXXXXXX issued as a result of the reorganization of the XXXXXXXXXX share capital referred to in Paragraph XXXXXXXXXX;

(m) “Newco” means, depending on the context, either the corporation to be incorporated under the CBCA, as described in Paragraph XXXXXXXXXX or the company formed on the amalgamation described in Paragraph XXXXXXXXXX;

(n) “Newco Common Shares” means the common shares of Newco;

(o) “Newco Preferred Shares” means a class of preferred shares of Newco as described in Paragraph XXXXXXXXXX;

(p) XXXXXXXXXX;

(q) “paid-up capital” has the meaning assigned by subsection 89(1);

(r) “Paragraph” means a numbered paragraph in this letter;

(s) “Participant” means each holder of an XXXXXXXXXX Common Share at the time of the exchange described in Paragraph XXXXXXXXXX, other than a holder who dissents to the Plan of Arrangement;

(t) “permitted exchange” has the meaning assigned by subsection 55(1);

(u) “Plan of Arrangement” means a plan of arrangement under the CBCA to effect the Proposed Transactions;

	(u.1)	“Proposed Transactions” means the transactions described in Paragraphs XXXXXXXXXX;

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

(w) “RDTOH” means refundable dividend tax on hand within the meaning of subsection 129(3);

(x) XXXXXXXXXX;

(y) “XXXXXXXXXX Common Shares” means the XXXXXXXXXX issued and outstanding common shares of XXXXXXXXXX having a paid-up capital of $XXXXXXXXXX;

(z) “XXXXXXXXXX Transactions” means the transactions whereby XXXXXXXXXX transferred property to XXXXXXXXXX and XXXXXXXXXX acquired the shares of XXXXXXXXXX from XXXXXXXXXX as described in Paragraph XXXXXXXXXX;

(aa) “XXXXXXXXXX” means, depending on the context, either XXXXXXXXXX, a corporation subject to the CBCA and resulting from the merger XXXXXXXXXX or the corporation formed on the amalgamation of XXXXXXXXXX as part of the XXXXXXXXXX Transactions;

(bb) “XXXXXXXXXX Common Shares” means the XXXXXXXXXX issued and outstanding Class A common shares of XXXXXXXXXX;

(cc) “XXXXXXXXXX Debt” means the indebtedness owing by XXXXXXXXXX to XXXXXXXXXX and described in Paragraph XXXXXXXXXX;

	(cc.1)	“XXXXXXXXXX Group” has the meaning set out in Paragraph XXXXXXXXXX;

(dd) “XXXXXXXXXX Preferred Shares” means the XXXXXXXXXX issued and outstanding cumulative redeemable preference shares of XXXXXXXXXX redeemable at $XXXXXXXXXX per share;

(ee) “XXXXXXXXXX Special Shares” means a class of preferred shares of XXXXXXXXXX as described in Paragraph XXXXXXXXXX;

(ff) “XXXXXXXXXX” means XXXXXXXXXX, a corporation incorporated under the CBCA on XXXXXXXXXX;

(gg) XXXXXXXXXX;

(hh) XXXXXXXXXX means XXXXXXXXXX, a corporation incorporated under the CBCA on XXXXXXXXXX;

(ii) “XXXXXXXXXX Common Shares” means the XXXXXXXXXX issued and outstanding common shares of XXXXXXXXXX;

(jj) “Special Share Redemption Amount” means an amount equal to the aggregate fair market value of all issued and outstanding XXXXXXXXXX Common Shares immediately prior to the share exchange referred to in Paragraph XXXXXXXXXX multiplied by the proportion that the net fair market value of the Transferred Property immediately before the distribution referred to in Paragraph XXXXXXXXXX is of the net fair market value of all XXXXXXXXXX property immediately before such distribution, in both cases determined using the rules and principles in Paragraphs XXXXXXXXXX, divided by the number of XXXXXXXXXX Special Shares;

(jj.1) “specified investment business” has the meaning assigned by subsection 125(7);

(kk) “specified shareholder” has the meaning assigned by subsection 248(1);

(ll) XXXXXXXXXX;

(ll.1) “tax shield amounts” means any tax attribute (such as undepreciated capital cost, non-capital losses, cumulative eligible capital and resource pools) that would affect the fair market value of the shares of a corporation or the fair market value of the assets of a corporation;

(mm) XXXXXXXXXX;

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

(oo) “Transferred Property” means the property that is all of the issued and outstanding shares of XXXXXXXXXX which is to be transferred by XXXXXXXXXX to Newco on the distribution in exchange for the issuance of the Newco Preferred Shares, as described in Paragraph XXXXXXXXXX;

(pp) “Treaty” means the Convention as defined in XXXXXXXXXX; and

(qq) “wholly-owned corporation” has the meaning assigned by subsection 85(1.3).

II. FACTS

XXXXXXXXXX

1. XXXXXXXXXX is not a taxable Canadian corporation. For the purposes of the Treaty, XXXXXXXXXX is a resident of XXXXXXXXXX owns the XXXXXXXXXX Common Shares and acquired them on XXXXXXXXXX as part of transactions for which an advance income tax ruling was obtained XXXXXXXXXX is a specified shareholder of XXXXXXXXXX.

2. XXXXXXXXXX is a taxable Canadian corporation. The fiscal period of XXXXXXXXXX ends on XXXXXXXXXX in each year. XXXXXXXXXX is a wholly-owned corporation of XXXXXXXXXX.

3. XXXXXXXXXX is a public corporation and a taxable Canadian corporation. XXXXXXXXXX amalgamated with XXXXXXXXXX. It is anticipated that the fiscal period of XXXXXXXXXX will end on XXXXXXXXXX and subsequent years. XXXXXXXXXX is engaged in the business of XXXXXXXXXX owns all the issued and outstanding shares of XXXXXXXXXX. As at XXXXXXXXXX owed XXXXXXXXXX approximately $XXXXXXXXXX of interest-bearing debt.

The stated capital, as that term is used in the CBCA, and the paid-up capital of the XXXXXXXXXX Common shares is $XXXXXXXXXX. The XXXXXXXXXX Preferred Shares meet the requirements set out in the definition of “specified class” in subsection 55(1).

4. To the best of the knowledge of XXXXXXXXXX as at the date hereof, no person or related group of persons (other than XXXXXXXXXX owns, directly or indirectly, 10% or more of the issued and outstanding XXXXXXXXXX Common Shares.

5. XXXXXXXXXX is a taxable Canadian corporation. The fiscal period of XXXXXXXXXX ends on XXXXXXXXXX of each year. XXXXXXXXXX carries on the business of XXXXXXXXXX is a wholly-owned corporation of XXXXXXXXXX.

6. XXXXXXXXXX became the successor to the business of XXXXXXXXXX and is a taxable Canadian corporation and a private corporation. XXXXXXXXXX carries on the business of XXXXXXXXXX is a wholly-owned corporation of XXXXXXXXXX. The stated capital, as that term is used in the CBCA, and the paid-up capital of the XXXXXXXXXX Common Shares is $XXXXXXXXXX.

7. As described in advance income tax ruling 3-980576, the business of XXXXXXXXXX was transferred to XXXXXXXXXX following which the shares of XXXXXXXXXX were acquired by XXXXXXXXXX for cash and XXXXXXXXXX were amalgamated. As at XXXXXXXXXX owed approximately $XXXXXXXXXX of interest bearing debt to XXXXXXXXXX and XXXXXXXXXX owed approximately $XXXXXXXXXX of interest bearing debt to XXXXXXXXXX. As part of these transactions, these intercompany debts owing by XXXXXXXXXX were refinanced with a borrowing from XXXXXXXXXX. The proceeds of the borrowing were used by XXXXXXXXXX to repay the amount of these intercompany debts. XXXXXXXXXX presently owes approximately $XXXXXXXXXX directly to XXXXXXXXXX. At the time of the XXXXXXXXXX Transactions, XXXXXXXXXX had no liabilities or assets other than tax shield amounts.

7.1 The XXXXXXXXXX Transactions are not in the same series of transactions as the Proposed Transactions for the following reasons:

(a) the XXXXXXXXXX Transactions were motivated by bona fide business reasons to maximize the use of tax losses in the XXXXXXXXXX Group;

(b) the XXXXXXXXXX Transactions are similar to transactions that have occurred in the past between XXXXXXXXXX in order to maximize the use of tax losses in the XXXXXXXXXX Group;

(c) the XXXXXXXXXX Transactions and the Proposed Transactions are factually independent of each other and the former were completed whether or not the Proposed Transactions are to be concluded and the implementation of the Proposed Transactions is independent of whether or not the XXXXXXXXXX Transactions were to be completed; and

(d) the Proposed Transactions are motivated in order to accomplish corporate structural objectives of XXXXXXXXXX.

Significant Transactions

8. The following significant transactions will be completed prior to, but as part of the same series of transactions, as the Proposed Transactions:

(a) XXXXXXXXXX will distribute the receivable owing to it under the XXXXXXXXXX Debt, less the amount of the net cash required to be retained by XXXXXXXXXX, under the principles in Paragraphs XXXXXXXXXX (approximately $XXXXXXXXXX as at XXXXXXXXXX), to XXXXXXXXXX as a reduction of XXXXXXXXXX stated capital and paid-up capital and/or as a dividend (if XXXXXXXXXX has sufficient “income earned or realized” within the meaning of subsection 55(5)); and

(b) XXXXXXXXXX will transfer its XXXXXXXXXX assets located in XXXXXXXXXX will jointly elect pursuant to subsection 85(1), in prescribed form and within the time permitted by the Act in respect of the disposition of the properties. As sole consideration for such transfer, XXXXXXXXXX will issue to XXXXXXXXXX common shares having an aggregate stated capital not exceeding the agreed amount for the transferred properties. Specifically, the agreed amount will not be less than the least of:

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

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

(iii) the amounts specified in subparagraphs 85(1)(c.1)(i) and (ii) in the case of capital property or inventory.

In each case, the agreed amount will not exceed the fair market value of the related property and will not be less than the amount permitted by paragraph 85(1)(b).

9. The following constitute all of the significant transactions in addition to those described in Paragraph XXXXXXXXXX which involve the XXXXXXXXXX Group and are intended to be completed in the series of transactions which includes the Proposed Transactions:

(a) prior to the Proposed Transactions, the transactions described in advance income tax ruling 982177 XXXXXXXXXX will be completed; and

(b) immediately subsequent to the Proposed Transactions, the transactions described in advance income tax ruling 981328 XXXXXXXXXX will be completed.

III. PROPOSED TRANSACTIONS

Subject to the receipt of this letter, the following transactions will be undertaken pursuant to the Plan of Arrangement:

1. XXXXXXXXXX will cause Newco to be incorporated under the CBCA. Newco will be a taxable Canadian corporation and will have an authorized share capital consisting of Newco Common Shares and Newco Preferred Shares. The Newco Preferred Shares will be:

(a) non-voting;

(b) entitled to annual dividends equal to XXXXXXXXXX% of the amount paid thereon; and

(c) redeemable by Newco and retractable by the holder at any time for an amount equal to the fair market value of the Transferred Property.

XXXXXXXXXX will subscribe for 1 Newco Common Share for aggregate consideration of $XXXXXXXXXX.

2. XXXXXXXXXX will amend its Articles of Amalgamation by filing Articles of Amendment pursuant to the CBCA to create the XXXXXXXXXX Special Shares. The XXXXXXXXXX Special Shares will be:

(a) non-voting;

(b) entitled to annual dividends equal to XXXXXXXXXX% of the amount paid thereon; and

(c) redeemable by XXXXXXXXXX and retractable by the holder at any time for an amount per share equal to the Special Share Redemption Amount.

3. Immediately before the distribution by XXXXXXXXXX to Newco, referred to in Paragraph XXXXXXXXXX, the net fair market value of the property of XXXXXXXXXX will be determined on a consolidated basis by including the pro rata share of the net fair market value of the property of each corporation over which XXXXXXXXXX has significant influence (directly or indirectly) within the meaning of section 3050 of the CICA Handbook (referred to as the “XXXXXXXXXX Group”). For this purpose, the property of each relevant corporation will be classified into three types of property for purposes of the definition of “distribution” in subsection 55(1), as follows:

(a) cash or near cash property, comprising all of the current assets of that corporation, including any cash, certificates of deposit, marketable securities, term deposits, accounts receivable, inventories and rights arising from prepaid expenses (“prepaid expenses”);

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

4. In determining, on a consolidated basis, the net fair market value of each type of property of the XXXXXXXXXX Group immediately before the distribution, the liabilities of the XXXXXXXXXX Group will be allocated to and deducted from 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 XXXXXXXXXX exercises significant influence, the liabilities of that particular corporation will be allocated to, and will 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 (including the current portion of long-term debt) will be allocated to each cash or near cash property (including accounts receivable, inventories 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 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) following the allocation of current liabilities to each cash or near cash property in paragraph (i) above, any remaining net fair market value of any accounts receivable, inventories and prepaid expenses of such corporation will be reclassified as business property and excluded from cash or near cash property, to the extent that such property will be collected, sold or used by the XXXXXXXXXX Group in the ordinary course of the business to which such property relates;

(iii) liabilities (other than current liabilities) of such corporation that relate to a particular property will then be allocated to that particular property (and effectively to the type of property to which the particular property belongs) to the extent of the property's fair market value. Any excess of such liabilities over the fair market value of such particular property will be allocated to the type of property to which the particular property relates. 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 to a particular property as described herein exceeds the aggregate fair market value of all property of that particular type of the particular corporation, the particular corporation will be considered to have a negative net fair market value for that type of property; and

(iv) 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 remaining net fair market value of each type of property determined prior to the allocation of such liabilities, but after the allocation of the liabilities described in (a)(i) and (a)(iii) above and the reallocation of amounts described in (a)(ii) above.

5. For greater certainty, in determining the consolidated net fair market value of the property of the XXXXXXXXXX Group, as described in Paragraphs XXXXXXXXXX, the following principles will apply:

(a) any tax-related amounts in any corporation (such as tax shield amounts, inherent tax liabilities pertaining to unrealized income or capital gains and deferred income taxes) will be ignored;

(b) the amount of any liability that will be deducted is the principal amount, rather than the fair market value, of the indebtedness;

(c) no amount will be considered to be a liability unless it represents a true legal liability which is capable of quantification;

(d) deferred revenue which represents revenue received in the ordinary course of business, the recognition of which has been deferred due to the legal obligation of the recipient either to provide services or deliver goods to the customer from which such revenue was received, will be treated as a liability for purposes of the Proposed Transactions, to the extent the amount of such deferred revenue gives rise to a legal obligation to pay such amount should the services not be provided or the goods not be delivered. The amount of any deferred revenue which does not represent such a legal obligation will not be considered a liability for the purposes of the Proposed Transactions;

(e) any amounts recorded as a current liability by XXXXXXXXXX to another corporation in the XXXXXXXXXX Group will be classified as cash or near cash property of the creditor and a current liability of the debtor, while the remaining portion of any such amounts will be classified as a non-current asset of the creditor or non-current liability of the debtor; and

(f) the shares of the following corporations will be treated as business property and not investment property because, although XXXXXXXXXX does not have significant influence over them, these corporations conduct business operations that are an integral part of the business operations conducted by XXXXXXXXXX. The percentage ownership of XXXXXXXXXX and business of these corporations is as follows:

		XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX 

XXXXXXXXXX

XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX

XXXXXXXXXX

		XXXXXXXXXX 

XXXXXXXXXX

XXXXXXXXXX

XXXXXXXXXX

6. {Reserved}

7. As a result of the classification of properties and the allocation of liabilities of XXXXXXXXXX, determined on a consolidated basis, for the purposes of the distribution of property by XXXXXXXXXX to Newco, described in Paragraph XXXXXXXXXX, XXXXXXXXXX will have business property and cash or near cash property, but will not have investment property.

8. Each XXXXXXXXXX Common Share held by a Participant will be exchanged for 1 New XXXXXXXXXX Common Share and 1 XXXXXXXXXX Special Share, and the exchanged XXXXXXXXXX Common Shares will be cancelled. Each shareholder of XXXXXXXXXX will be entitled to dissent from the Plan of Arrangement in accordance with the provisions of the CBCA. Each dissenting shareholder (a “Dissenting Shareholder”) will cease to be a shareholder of XXXXXXXXXX immediately prior to the transactions undertaken in this Paragraph XXXXXXXXXX pursuant to the Plan of Arrangement, such that the XXXXXXXXXX Common Shares held by the Dissenting Shareholder will no longer be considered to be outstanding. After the completion of the Proposed Transactions which are included in the Plan of Arrangement, each Dissenting Shareholder will be entitled to be paid the fair market value of his XXXXXXXXXX Common Shares, determined on the last business day before the day upon which the shareholder vote in relation to the Plan of Arrangement takes place.

9. The aggregate stated capital of the New XXXXXXXXXX Common Shares and the XXXXXXXXXX Special Shares will equal the aggregate paid-up capital of the XXXXXXXXXX Common Shares immediately before the share exchange referred to in Paragraph XXXXXXXXXX and will be apportioned between these two classes as follows:

(a) the addition to the stated capital of the XXXXXXXXXX Special Shares will equal that proportion of the aggregate paid-up capital of the XXXXXXXXXX Common Shares immediately before the share exchange that the fair market value of the XXXXXXXXXX Special Shares is of the total fair market value of the New XXXXXXXXXX Common Shares and the XXXXXXXXXX Special Shares; and

(b) the addition to the stated capital of the New XXXXXXXXXX Common Shares will equal that proportion of the aggregate paid-up capital of the XXXXXXXXXX Common Shares immediately before the share exchange that the fair market value of the New XXXXXXXXXX Common Shares is of the total fair market value of the New XXXXXXXXXX Common Shares and the XXXXXXXXXX Special Shares.

10. Newco will acquire all of the issued XXXXXXXXXX Special Shares of each Participant in exchange for one Newco Common Share for each XXXXXXXXXX Special Share which is acquired by Newco. Immediately after the share-for-share exchange referred to in this Paragraph, the fair market value of the shares of the capital stock of Newco acquired by each Participant will equal or approximate the amount determined by the formula

(A X B )+ D
C

as found in paragraph (b)(iii) of the definition of permitted exchange. In addition, immediately after the share-for-share exchange referred to in this Paragraph, no person who is not a Participant will own any shares of Newco.

11. Newco will execute a joint election as permitted under subsection 85(1), in the prescribed form and within the time permitted by the Act, in respect of the disposition by XXXXXXXXXX or by any requesting Participant, of XXXXXXXXXX Special Shares in exchange for Newco Common Shares on the share-for-share exchange referred to in Paragraph XXXXXXXXXX. The agreed amount in respect of any such election will not be less than the lesser of the amounts specified in subparagraphs 85(1)(c.1)(i) and (ii) and will not exceed the fair market value of the XXXXXXXXXX Special Shares.

12. The aggregate stated capital of the Newco Common Shares will equal the paid-up capital of the XXXXXXXXXX Special Shares immediately before the share-for-share exchange referred to in Paragraph XXXXXXXXXX.

13. XXXXXXXXXX will transfer the Transferred Property to Newco (the “distribution”) such that, immediately after the transfer, the net fair market value of each of the cash or near cash property and the business property owned by XXXXXXXXXX will approximate the proportion of the net fair market value of all of that type of property of XXXXXXXXXX, in both cases calculated as described in Paragraphs XXXXXXXXXX, determined immediately before the transfer referred to herein, that:

(a) the aggregate fair market value, immediately before the transfer, of the XXXXXXXXXX Special Shares;

is of

(b) the aggregate fair market value of all the issued and outstanding shares of XXXXXXXXXX immediately before the transfer,

and the net fair market value of each type of property, if any, retained by XXXXXXXXXX, calculated as described in Paragraphs XXXXXXXXXX will approximate that proportion of the net fair market value of each such type of property of XXXXXXXXXX immediately before the transfer that

(a) the aggregate fair market value, immediately before the transfer, of the New XXXXXXXXXX Common Shares and XXXXXXXXXX Preferred Shares;

		is of

(b) the aggregate fair market value of all of the issued and outstanding shares of XXXXXXXXXX immediately before the transfer.

As sole consideration for such transfer, Newco will issue, to XXXXXXXXXX, Newco Preferred Shares having an aggregate stated capital not exceeding the agreed amount, as described in Paragraph XXXXXXXXXX below, for the Transferred Property and an aggregate redemption amount and fair market value equal to the fair market value of the Transferred Property.

14. XXXXXXXXXX and Newco will jointly elect pursuant to subsection 85(1), in prescribed form and within the time permitted by the Act, with respect to the disposition of the Transferred Property. Specifically, the agreed amount in respect of such election will not be less than the least of the amounts specified in subparagraphs 85(1)(c.1)(i) and (ii).

In each case the agreed amount will not exceed the fair market value of the related property and will not be less than the amount permitted by paragraph 85(1)(b).

15. {Reserved}

16. XXXXXXXXXX will redeem all of its XXXXXXXXXX Special Shares and will issue to Newco in consideration therefor a demand promissory note (the “XXXXXXXXXX note”) in an amount equal to the Special Share Redemption Amount, with interest payable only from the date of demand for payment by the holder to the date of payment at a rate equal to the average monthly prime rate of a Canadian chartered bank. Newco will accept the note as full and absolute payment of the redemption amount in respect of all XXXXXXXXXX Special Shares redeemed.

17. Newco will redeem all of the Newco Preferred Shares and will issue to XXXXXXXXXX in consideration therefor a demand promissory note (the “Newco note”) with a principal amount and fair market value equal to the fair market value of the Transferred Property, with interest payable only from the date of demand for payment by the holder to the date of payment at a rate equal to the average monthly prime rate of a Canadian chartered bank. XXXXXXXXXX will accept the note as full and absolute payment of the redemption amount in respect of all Newco Preferred Shares redeemed.

18. XXXXXXXXXX and Newco will amalgamate in a short-form vertical amalgamation pursuant to subsection 178(1) of the CBCA, such that:

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

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

(c) all of the shareholders (except any predecessor corporation) who own shares of any predecessor corporation immediately before the merger will receive, or will be deemed by subsection 87(1.1) to have received, shares of the amalgamated corporation because of the merger.

19. XXXXXXXXXX and Newco will pay the principal amounts of their respective notes by way of set-off.

20. Upon completion of the foregoing transactions:

(a) each of XXXXXXXXXX and Newco will operate as separate entities. In the course of such operations, Newco may enter into one or more agreements with XXXXXXXXXX or another corporation within the XXXXXXXXXX Group for the purpose of providing or receiving goods or services in the ordinary course of business; and

(b) Newco may transfer certain items of property to XXXXXXXXXX.

21. An application will be made to list the Newco Common Shares for trading on one or more prescribed stock exchanges, and upon such listing, which will be shortly after the share-for-share exchange described in Paragraph XXXXXXXXXX and on or before its filing due date for its first taxation year within the meaning of the definition of “public corporation” in subsection 89(1), Newco will become a public corporation. Newco will make an election, as contemplated in the last paragraph of the definition of “public corporation” in subsection 89(1), in the income tax return for its taxation year which will end XXXXXXXXXX, to be deemed to have been a public corporation from the date of its incorporation until the day on which the Newco Common Shares are listed on a prescribed stock exchange.

IV. ADDITIONAL INFORMATION

1. No property has or will become property of the XXXXXXXXXX Group and no liabilities have been or will be incurred by the XXXXXXXXXX Group in contemplation of and before the distribution of property by XXXXXXXXXX to Newco as described in Paragraph XXXXXXXXXX, otherwise than on a basis which would not cause the provisions of paragraph 55(3.1)(a) to operate to deny the exception in paragraph 55(3)(b) to the dividends resulting from the transactions in Paragraph XXXXXXXXXX.

2. None of XXXXXXXXXX, Newco or XXXXXXXXXX has any specific intention to dispose of any of its assets which it presently owns to an unrelated person following the Proposed Transactions or will dispose of any of its assets as part of a series of transactions which includes the Proposed Transactions, otherwise than on a basis which would not cause the provisions of paragraph 55(3.1)(c) and (d) to operate to deny the exception in paragraph 55(3)(b) to the dividends resulting from the transactions described in Paragraph XXXXXXXXXX.

3. Except as described herein, no shares in the capital stock of XXXXXXXXXX or Newco will be disposed of by XXXXXXXXXX and no shares in the capital stock of XXXXXXXXXX will be disposed of by XXXXXXXXXX, as part of the series of transactions or events in which the dividends resulting from the transactions referred to in Paragraphs XXXXXXXXXX are received, other than on a permitted exchange.

4. XXXXXXXXXX may make a corporate share acquisition in exchange for its treasury shares following the completion of the Proposed Transactions. Any such acquisition would not cause the provisions of paragraph 55(3.1)(b) to operate to deny the exception in paragraph 55(3)(b) to the dividends resulting from the transactions in Paragraph XXXXXXXXXX.

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

6. None of XXXXXXXXXX, Newco or XXXXXXXXXX has, or will have, entered into a “dividend rental arrangement”, as defined in subsection 248(1), in respect of any of the shares to be redeemed as part of the Proposed Transactions.

7. Neither the XXXXXXXXXX Special Shares nor the Newco Preferred Shares will be issued or acquired as part of a series of transactions of the type described in subsection 112(2.5).

8. Neither XXXXXXXXXX nor Newco will be a corporation described in any of Paragraphs (a) to (f) of the definition of “financial intermediary corporation” in subsection 191(1).

V. PURPOSE OF THE PROPOSED TRANSACTIONS

XXXXXXXXXX

XXXXXXXXXX

VI. RULINGS

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

1. Where a Participant holds XXXXXXXXXX Common Shares as capital property, the provisions of subsection 86(1) will apply to the exchange of XXXXXXXXXX Common Shares for New XXXXXXXXXX Common Shares and XXXXXXXXXX Special Shares, such that each such Participant will be deemed:

(a) to have disposed of all of the XXXXXXXXXX Common Shares of such Participant for proceeds of disposition equal to the aggregate adjusted cost base of such shares to such Participant immediately before the share exchange; and

(b) to have acquired the New XXXXXXXXXX Common Shares and XXXXXXXXXX Special Shares which are received by such Participant on the share exchange at a cost, in each case, equal to the aggregate adjusted cost base of all of the XXXXXXXXXX Common Shares of such Participant multiplied by the proportion that the fair market value, in each case, of the New XXXXXXXXXX Common Shares and the XXXXXXXXXX Special Shares of such Participant immediately after the share exchange, is of the aggregate fair market value of all of the New XXXXXXXXXX Common Shares and XXXXXXXXXX Special Shares of such Participant, immediately after the share exchange.

2. No dividend will be deemed to arise by virtue of either of subsections 84(1) or (3), as a result, or in respect, of the exchange of XXXXXXXXXX Common Shares for New XXXXXXXXXX Common Shares and XXXXXXXXXX Special Shares.

3. The paid-up capital of the New XXXXXXXXXX Common Shares and the XXXXXXXXXX Special Shares which are issued on the share exchange referred to in Paragraph XXXXXXXXXX, will be equal to the stated capital of each such class of shares, respectively.

4. Where a Participant holds XXXXXXXXXX Common Shares otherwise than as capital property, such Participant will, as a result of the exchange of XXXXXXXXXX Common Shares for New XXXXXXXXXX Common Shares and Special Shares, be considered to have disposed all of such XXXXXXXXXX Common Shares for an amount equal to the aggregate fair market value of the New XXXXXXXXXX Common Shares and XXXXXXXXXX Special Shares which are received by such Participant on the exchange and to have acquired such New XXXXXXXXXX Common Shares and XXXXXXXXXX Preferred Shares at a cost equal to the respective fair market value of each such class of shares.

5. Where a Participant (other than XXXXXXXXXX and any other Participant electing under subsection 85(1)) holds XXXXXXXXXX Special Shares as capital property, and none of paragraphs 85.1(2)(a) to (d) apply, the provisions of subsection 85.1(1) will apply to the exchange of XXXXXXXXXX Special Shares for Newco Common Shares, such that:

(a) each such Participant will be deemed, (except where such Participant has, in such Participant’s return of income for the year in which the share-for-share exchange occurs, included in computing such Participant’s income for that year any portion of the gain or loss otherwise determined, from the disposition of the XXXXXXXXXX Special Shares)

(i) to have disposed of all of the XXXXXXXXXX Special Shares of such Participant for proceeds of disposition equal to the aggregate adjusted cost base of such shares immediately before the exchange; and

(ii) to have acquired the Newco Common Shares which are received by such Participant on the exchange at a cost equal to the aggregate adjusted cost base of all of the XXXXXXXXXX Special Shares of such Participant immediately before the exchange; and

(b) the cost to Newco of each XXXXXXXXXX Special Share acquired on the exchange will be deemed to be the lesser of the fair market value and paid-up capital of each such XXXXXXXXXX Special Share.

6. Provided that the requisite election is made and filed within the time permitted by the Act, with respect to the transfer by XXXXXXXXXX and the other Participants electing subsection 85(1) treatment of the XXXXXXXXXX Special Shares to Newco, the provisions of subsection 85(1) will apply to each such transfer with the result that the agreed amount in respect of each such property will be deemed to be the proceeds of disposition thereof to XXXXXXXXXX and the electing Participant and the cost amount thereof to Newco.

7. The paid-up capital of the Newco Common Shares which are issued on the exchange of XXXXXXXXXX Special Shares for Newco Common Shares will be an amount equal to the stated capital of such Newco Common Shares, subject to the adjustments, if any, which may be required by either of subsections 85.1(2.1) or 85(2.1).

8. Provided that the requisite election is made and filed within the time permitted by the Act with respect to the transfer of the Transferred Property by XXXXXXXXXX to Newco, as described in Paragraph XXXXXXXXXX, the provisions of subsection 85(1) will apply to such transfer with the result that the agreed amount in respect of the XXXXXXXXXX Common Shares will be deemed to be the proceeds of disposition thereof to XXXXXXXXXX and the cost amount thereof to Newco.

9. The paid-up capital of the Newco Preferred Shares issued on the transfer of the Transferred Property by XXXXXXXXXX to Newco, as described in Paragraph XXXXXXXXXX, will be an amount equal to the agreed amount described in Paragraph XXXXXXXXXX, subject to the adjustment, if any, which may be required by subsection 85(2.1).

10. On the redemption by XXXXXXXXXX of the XXXXXXXXXX Special Shares held by Newco, as described in Paragraph XXXXXXXXXX:

(a) paragraphs 84(3)(a) and (b) will apply to deem XXXXXXXXXX to have paid and Newco to have received, on a separate class of shares comprising the redeemed XXXXXXXXXX Special Shares, a dividend equal to the amount by which the principal amount of the XXXXXXXXXX note issued in payment of the redemption price of the redeemed XXXXXXXXXX Special Shares exceeds the paid-up capital of such shares immediately prior to their redemption; and

(b) in computing the capital gain realized by Newco on the disposition of the XXXXXXXXXX Special Shares which will occur as a result of the redemption of such shares by XXXXXXXXXX, paragraph (j) of the definition of “proceeds of disposition” in section 54 will apply to exclude the amount of such deemed dividend from the proceeds of disposition which Newco would otherwise be considered to have received as a result of such redemption.

11. On the redemption by Newco of the Newco Preferred Shares held by XXXXXXXXXX, as described in Paragraph XXXXXXXXXX:

(a) paragraphs 84(3)(a) and (b) will apply to deem Newco to have paid and XXXXXXXXXX to have received, on a separate class of shares comprising the redeemed Newco Preferred Shares, a dividend equal to the amount by which the principal amount of the Newco note issued in payment of the redemption price of the redeemed Newco Preferred Shares exceeds the paid-up capital of such shares immediately prior to their redemption; and

(b) in computing the capital gain realized by XXXXXXXXXX on the disposition of the Newco Preferred Shares which will occur as a result of the redemption of such shares by Newco, paragraph (j) of the definition of “proceeds of disposition” in section 54 will apply to exclude the amount of such deemed dividend from the proceeds of disposition which XXXXXXXXXX would otherwise be considered to have received as a result of such redemption.

12. The cost amount to XXXXXXXXXX of the Newco note described in Paragraph XXXXXXXXXX, and the cost amount to Newco of the XXXXXXXXXX note described in Paragraph XXXXXXXXXX will, in each case, be equal to the principal amount of each such note.

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

(a) a disposition of property in 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); or

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

which has not been described herein, then by virtue of paragraph 55(3)(b), subsection 55(2) will not be applicable with respect to the deemed dividends referred to in Paragraphs XXXXXXXXXX, and for greater certainty, subsection 55(3.1) will not be applicable to deny the exemption under paragraph 55(3)(b).

14. The Proposed Transactions will not negatively affect advance income tax ruling 980576 obtained by XXXXXXXXXX, dated XXXXXXXXXX, 1998.

15. The set-off of the Newco note and the XXXXXXXXXX note, as described in Paragraph XXXXXXXXXX, will not result in the application of either of sections 80 or 15.

16. The dispositions of the Newco note and the XXXXXXXXXX note which will occur on the payment of each such note, as described in Paragraph XXXXXXXXXX, will not result in any income, gain or loss, for the purposes of the Act, to either of XXXXXXXXXX or Newco.

17. The full amount of each of the deemed dividends referred to in Paragraphs XXXXXXXXXX and VI.11:

(a) will be a taxable dividend that will, by virtue of subparagraph 82(1)(a)(ii) and paragraph 12(1)(j), be included in computing the income of the recipient for the year in which it is received;

(b) will, by virtue of subsection 112(1), be deductible in computing the income of the recipient in the year in which it is received and, for greater certainty, such deduction will not be prohibited by any of subsections 112(2.1), (2.2), (2.3) and (2.4);

(c) will not be subject to tax under Part IV.1 or Part VI.1 by virtue of the fact that XXXXXXXXXX and Newco are related corporations at all times during the series of transactions that includes the Proposed Transactions; and

(d) will not be subject to tax under Part IV.

18. Subsections 15(1), 56(2), 56(4) and 246(1) will not be applied as a result of the implementation of the transactions described in Paragraphs XXXXXXXXXX. Whether any of those subsections will apply to the transactions described in Paragraph XXXXXXXXXX will depend on the facts surrounding the relevant agreements or transfers of property referred to in that Paragraph.

19. Subsection 245(2) will not be applied as a result of the Proposed Transactions, in and of themselves, to redetermine the tax consequences described herein.

20. The provisions of section 87 will apply with respect to the amalgamation of Newco and XXXXXXXXXX, as described in Paragraph XXXXXXXXXX.

21. Provided that Newco makes the election to be a public corporation, as described in Paragraph XXXXXXXXXX, and such election is filed within the time permitted by the Act, Newco will be deemed to be a public corporation from and after the date of its incorporation.

22. Provided that the XXXXXXXXXX Common Shares constitute capital property to a Participant immediately prior to the commencement of the Proposed Transactions, the Proposed Transactions will not, in and by themselves, cause the New XXXXXXXXXX Common Shares and the XXXXXXXXXX Special Shares which are received by such Participant as a result of the Proposed Transactions, not to be capital property to such Participant. Furthermore, the Proposed Transactions will not, in and by themselves, cause the Newco Preferred Shares which are received by XXXXXXXXXX as a result of the Proposed Transactions, or the XXXXXXXXXX Special Shares which are to be received by Newco as a result of the Proposed Transactions, not to be capital property of XXXXXXXXXX or Newco.

These rulings are given subject to the limitations and qualifications set out in Information Circular 70-6R3 dated December 30, 1996 provided that the Proposed Transactions are completed by 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.

Nothing in this letter should be construed as confirmation of the tax consequences of any of the transactions described in this letter other than as specifically described. In addition, nothing in this letter should be construed as confirmation, express or implied, of the fair market value of any property.

Comment

We make no comment as to whether the XXXXXXXXXX Special Shares will be excluded property within the meaning of subsection 116(6).

Yours truly,

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