30 November 1997 Ruling 9821773 - 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: Is "commited cash" business property?

Position: Yes.

Reasons: Position supported by Finance in spin-off butterfly situations.

XXXXXXXXXX
XXXXXXXXXX 						3-982177
XXXXXXXXXX 

Attention: XXXXXXXXXX

XXXXXXXXXX, 1998

Dear Sirs:

Re: XXXXXXXXXX
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 Taxation 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 Taxation Services Office. The corporate tax account number of XXXXXXXXXX. The address of XXXXXXXXXX.

XXXXXXXXXX files its tax returns at the XXXXXXXXXX Taxation Centre. It has not been subject to audit but it will be under the jurisdiction of the XXXXXXXXXX Taxation Services Office. The corporate tax number of XXXXXXXXXX. The address of XXXXXXXXXX.

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

I. 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;

(d) “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 XXXXXXXXXX Newco has received (or XXXXXXXXXX has retained) as compared to what XXXXXXXXXX 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;

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

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

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

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

(i) “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;

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

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

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

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

(n) XXXXXXXXXX;

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

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

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

(r) “Proposed Transactions” means the transactions described in Paragraphs XXXXXXXXXX;

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

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

(u) XXXXXXXXXX;

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

(w) “XXXXXXXXXX Newco” means a corporation to be incorporated under the CBCA, as described in Paragraph XXXXXXXXXX;

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

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

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

(aa) “XXXXXXXXXX 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 XXXXXXXXXX Transferred Property immediately before the distribution referred to in Paragraph XXXXXXXXXX is of the net fair market value of all XXXXXXXXXX property immediately before the distribution, in both cases determined using the rules and principles in Paragraphs XXXXXXXXXX below, divided by the number of XXXXXXXXXX Special Shares;

(bb) “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;

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

(dd) XXXXXXXXXX;

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

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

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

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

(ii) XXXXXXXXXX;

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

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

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

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

(ll.1) “specified investment business” has the meaning set out in subsection 125(7);

(mm) XXXXXXXXXX;

(nn) XXXXXXXXXX;

(oo) “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 share of a corporation or the fair market value of the assets of a corporation;

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

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

(rr) “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. The stated capital, as that term is used in the CBCA, and the paid-up capital of the XXXXXXXXXX Common shares is $XXXXXXXXXX. As at XXXXXXXXXX owed XXXXXXXXXX approximately $XXXXXXXXXX of interest-bearing debt.

4. {Reserved}.

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 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.

Significant Transactions

8. The following constitute all of the significant transactions involving the XXXXXXXXXX which are intended to be completed in the series of transactions which includes the Proposed Transactions:

(a) subsequent to the Proposed Transactions, the transactions described in advance income tax ruling 981307 XXXXXXXXXX including those in paragraph XXXXXXXXXX thereof, will be completed, and;

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

9. 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 designed to accomplish corporate structural objectives of XXXXXXXXXX.

III. PROPOSED TRANSACTIONS

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

Organization of XXXXXXXXXX Newco

1. XXXXXXXXXX will cause XXXXXXXXXX Newco to be incorporated under the CBCA. XXXXXXXXXX Newco will be a taxable Canadian corporation and will have an authorized share capital consisting of XXXXXXXXXX Newco Common Shares and XXXXXXXXXX Newco Preferred Shares. The XXXXXXXXXX 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 XXXXXXXXXX Newco and retractable by the holder at any time for an amount equal to the fair market value of the XXXXXXXXXX Transferred Property.

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

Amendment of Articles

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 XXXXXXXXXX Special Share Redemption Amount.

Distributions - General

3. Immediately before the distribution by XXXXXXXXXX described in Paragraph XXXXXXXXXX, the net fair market value of each type of property of XXXXXXXXXX will be determined on a consolidated basis. For greater certainty, in making this determination, where the property of XXXXXXXXXX is shares of, or any debt owing from, a corporation over which XXXXXXXXXX has significant influence (directly or indirectly) within the meaning of section 3050 of the CICA Handbook (the “XXXXXXXXXX Group”), the fair market value of such debt or shares of that particular corporation will be multiplied by the proportion that the net fair market value of that type of that particular corporation’s property is of the net fair market value of all of the corporation’s property (determined in accordance with the principles in Paragraphs XXXXXXXXXX). 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 theXXXXXXXXXX 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 (other than an amount owing by such corporation to XXXXXXXXXX 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 (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, investment 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 and 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 amount recorded as a current liability by XXXXXXXXXX to another corporation in the XXXXXXXXXX Group and by one corporation in the XXXXXXXXXX Group to another corporation, other than XXXXXXXXXX in such 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.

(f) the shares of the following corporations are to 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

6. To the extent a portion of the cash or near cash property of the XXXXXXXXXX Group, determined on a consolidated basis, is committed by XXXXXXXXXX in order to fund the acquisition of business property, (that is to be acquired in the ordinary course of business regardless of whether XXXXXXXXXX distributes property to XXXXXXXXXX Newco), such cash or near cash property will be classified as business property. XXXXXXXXXX

Either XXXXXXXXXX will contribute cash to XXXXXXXXXX or XXXXXXXXXX will pay a dividend to XXXXXXXXXX in order that the cash owned by XXXXXXXXXX, at the time of the distribution described in Paragraph XXXXXXXXXX, will satisfy the requirements set out in Paragraph XXXXXXXXXX.

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 XXXXXXXXXX Newco, XXXXXXXXXX will have business property and cash or near cash property, but will not have investment property.

Share Exchange - XXXXXXXXXX

8. Each XXXXXXXXXX Common Share held by XXXXXXXXXX will be exchanged for 1 New XXXXXXXXXX Common Share and 1 XXXXXXXXXX Special Share, and the exchanged XXXXXXXXXX Common Shares will be cancelled. XXXXXXXXXX will obtain a certificate under subsection 116(2) in respect of the disposition of its XXXXXXXXXX Common Shares.

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 and will be apportioned between these 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.

Share-For-Share Exchange - XXXXXXXXXX

10. XXXXXXXXXX Newco will acquire all of the issued XXXXXXXXXX Special Shares held by XXXXXXXXXX in exchange for 1 XXXXXXXXXX Newco Common Share for each XXXXXXXXXX Special Share which is acquired by XXXXXXXXXX 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 XXXXXXXXXX Newco acquired by XXXXXXXXXX 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, XXXXXXXXXX will own all the shares of XXXXXXXXXX Newco.

11. XXXXXXXXXX Newco and XXXXXXXXXX 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 of XXXXXXXXXX Special Shares in exchange for XXXXXXXXXX Newco Common Shares on the share-for-share exchange. The agreed amount in respect of any such election will be equal to the fair market value of the XXXXXXXXXX Special Shares. XXXXXXXXXX will obtain a certificate under subsection 116(2) with respect to its disposition of its XXXXXXXXXX Special Shares.

12. The aggregate stated capital of the XXXXXXXXXX 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.

Distribution - XXXXXXXXXX

13. XXXXXXXXXX will transfer to XXXXXXXXXX Newco at fair market value the XXXXXXXXXX Transferred Property (the “distribution”) such that, immediately after the transfer, the net fair market value of each of the cash or near cash property and business property owned by XXXXXXXXXX Newco 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 the 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;

is of

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

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

14. XXXXXXXXXX and XXXXXXXXXX Newco will jointly elect pursuant to subsection 85(1), in the prescribed form and within the time permitted by the Act, in respect of the disposition of the XXXXXXXXXX Transferred Property. Specifically, the agreed amount in respect of such election will not be less than the lesser of the amounts specified in subparagraphs 85(1)(c.1)(i) or (ii). 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. XXXXXXXXXX will redeem all of its XXXXXXXXXX Special Shares and will issue to XXXXXXXXXX Newco in consideration therefor a demand promissory note (the “XXXXXXXXXX note”) in an amount equal to the XXXXXXXXXX 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. XXXXXXXXXX Newco will accept the note as full and absolute payment of the redemption amount in respect of all XXXXXXXXXX Special Shares redeemed.

16. XXXXXXXXXX Newco will redeem all of the XXXXXXXXXX Newco Preferred Shares and will issue to XXXXXXXXXX in consideration therefor a demand promissory note (the “XXXXXXXXXX Newco note”) with a principal amount and fair market value equal to the fair market value of the XXXXXXXXXX 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 XXXXXXXXXX Newco Preferred Shares redeemed.

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

18. Upon completion of the foregoing transactions:

(a) each of XXXXXXXXXX and XXXXXXXXXX Newco will operate as separate entities. In the course of such operations, XXXXXXXXXX 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) XXXXXXXXXX Newco may transfer certain items of property to XXXXXXXXXX after the distribution to XXXXXXXXXX.

19. XXXXXXXXXX will transfer all of the issued and outstanding shares of XXXXXXXXXX Newco to XXXXXXXXXX for shares of XXXXXXXXXX will obtain a certificate under subsection 116(2) with respect to the disposition of its shares of XXXXXXXXXX Newco. XXXXXXXXXX will be related to XXXXXXXXXX and the XXXXXXXXXX Group at the time of the transfer and will not cease to be related as part of the series of transactions or events that include the Proposed Transactions.

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 XXXXXXXXXX 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 described in Paragraphs XXXXXXXXXX.

2. None of XXXXXXXXXX or XXXXXXXXXX Newco has any specific intention to dispose of any of its assets which it presently owns to an unrelated person following the Proposed Transactions, nor do they have any intention of disposing of any of their assets as part of a series of transactions which would cause the provisions of paragraphs 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 Paragraphs XXXXXXXXXX.

3. Except as described herein, no shares in the capital stock of XXXXXXXXXX, or XXXXXXXXXX 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.

3.1 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 described in Paragraphs XXXXXXXXXX.

4. 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 either of the XXXXXXXXXX Special Shares or the XXXXXXXXXX Newco Preferred Shares.

5. Neither XXXXXXXXXX nor XXXXXXXXXX Newco 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.

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

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

8. XXXXXXXXXX represents that if it were to dispose of the shares of XXXXXXXXXX immediately before, or the shares of XXXXXXXXXX Newco immediately after, the time of implementation of the Proposed Transactions, any capital gain arising from either disposition would be exempt from tax in Canada by virtue of XXXXXXXXXX.

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:

Share Exchange - XXXXXXXXXX

1. 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 XXXXXXXXXX will be deemed:

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

(b) to have acquired the New XXXXXXXXXX Common Shares and the XXXXXXXXXX Special Shares which are received by XXXXXXXXXX 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 XXXXXXXXXX multiplied by the proportion that the fair market value, in each case, of the New XXXXXXXXXX Common Shares and the XXXXXXXXXX Special Shares of XXXXXXXXXX immediately after the share exchange, is of the aggregate fair market value of all of the New XXXXXXXXXX Common Shares and the XXXXXXXXXX Special Shares of XXXXXXXXXX, 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 will be equal to the stated capital of each such class of shares, respectively, as described in Paragraph XXXXXXXXXX.

Share-For-Share Exchange - XXXXXXXXXX.

4. Provided that the requisite election is made and filed within the time permitted by the Act with respect to the transfer of the XXXXXXXXXX Special Shares by XXXXXXXXXX to XXXXXXXXXX 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 each such property will be deemed to be the proceeds of disposition thereof to XXXXXXXXXX and the cost amount thereof to XXXXXXXXXX Newco.

5. The paid-up capital of the XXXXXXXXXX Newco Common Shares which are issued on the exchange of XXXXXXXXXX Special Shares for XXXXXXXXXX Newco Common Shares, as described in Paragraph XXXXXXXXXX, will be an amount equal to the stated capital of such XXXXXXXXXX Newco Common Shares, subject to the adjustments, if any, which may be required by subsection 212.1(1).

Distribution - XXXXXXXXXX

6. Provided that the requisite election is made and filed within the time permitted by the Act, with respect to the transfer of the XXXXXXXXXX Transferred Property by XXXXXXXXXX to XXXXXXXXXX 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 each such property will be deemed to be the proceeds of disposition thereof to XXXXXXXXXX and the cost amount thereof to XXXXXXXXXX Newco.

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

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

(a) paragraphs 84(3)(a) and (b) will apply to deem XXXXXXXXXX to have paid and XXXXXXXXXX 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 XXXXXXXXXX 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 XXXXXXXXXX Newco would otherwise be considered to have received as a result of such redemption.

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

(a) paragraphs 84(3)(a) and (b) will apply to deem XXXXXXXXXX Newco to have paid and XXXXXXXXXX to have received, on a separate class of shares comprising the redeemed XXXXXXXXXX Newco Preferred Shares, a dividend equal to the amount by which the principal amount of the XXXXXXXXXX Newco note issued in payment of the redemption price of the redeemed XXXXXXXXXX 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 XXXXXXXXXX Newco Preferred Shares which will occur as a result of the redemption of such shares by XXXXXXXXXX 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.

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

11. 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).

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

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

14. The dispositions of the XXXXXXXXXX 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 XXXXXXXXXX Newco.

15. The full amount of each of the deemed dividends referred to in Paragraphs XXXXXXXXXX:

(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; and

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

16. Subsections 15(1), 56(2), 56(4) and 246(1) will not be applied as a result of the implementation of the Proposed Transactions.

17. 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.

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

Paragraph 55(3)(b) will not exempt the dividend referred to in Paragraph XXXXXXXXXX from the application of subsection 55(2).

Yours truly,

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