1998 Ruling 9824483 - CORPORATE REORGANIZATION

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CRA.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ARC.

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the Department.

Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle du ministère.

Principal Issues: See Issue Sheet

Position: See Issue Sheet

Reasons: See Issue Sheet

XXXXXXXXXX
XXXXXXXXXX 3-982448
XXXXXXXXXX

Attention: XXXXXXXXXX

XXXXXXXXXX, 1998

Dear Sirs:

Re: XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX
Advance Income Tax Ruling

This is in reply to your letter of XXXXXXXXXX in which you requested various advance income tax rulings. We also acknowledge your letters of XXXXXXXXXX and our various telephone conversations.

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

Definitions

Non-Statutory Terms

In this letter unless otherwise expressly stated:

(a) "accumulated profits" means retained earnings computed in accordance with Canadian generally accepted accounting principles, except that the computation:

(i) is made on an unconsolidated basis with investments computed on a cost basis; and

(ii) does not include any appraisal surplus or profits resulting from non-arm's-length transactions which transform appraisal surplus into profits on a non-taxable or tax-deferred basis;

(b) XXXXXXXXXX;

(c) XXXXXXXXXX as described in paragraph 13;

(d) XXXXXXXXXX as described in paragraph 9;

(e) XXXXXXXXXX as described in paragraph 14;

(f) XXXXXXXXXX as described in paragraph 15;

(g) XXXXXXXXXX as described in paragraph 8;

(h) XXXXXXXXXX as described in paragraph 16;

(i) XXXXXXXXXX as described in paragraph 1;

(j) XXXXXXXXXX as described in paragraph 25;

(k) XXXXXXXXXX;

(l) XXXXXXXXXX;

(m) XXXXXXXXXX as described in paragraph 17;

(n) XXXXXXXXXX as described in paragraph 19;

(o) XXXXXXXXXX as described in paragraph 18; and

(p) XXXXXXXXXX as described in paragraph 25.

Statutory Terms

In this letter unless otherwise expressly stated:

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

(b) "adjusted cost base" has the meaning assigned by section 54;

(c) "agreed amount" has the meaning assigned by subsection 85(1);

(d) "CBCA" means Canada Business Corporation Act;

(e) "controlled foreign affiliate" has the meaning assigned by subsection 95(1);

(f) "dividend rental arrangement" has the meaning assigned in subsection 248(1);

(g) "guarantee agreement" has the meaning assigned in subsection 112(2.2);

(h) XXXXXXXXXX;

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

(j) "public corporation" has the meaning assigned in subsection 89(1);

(k) "related persons" has the meaning assigned by subsection 251(2);

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

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

(n) "stated capital" means "stated capital" as that expression is used in the CBCA or XXXXXXXXXX, as the case may be;

(o) "tax benefit" has the meaning assigned by subsection 245(1);

(p) "taxable Canadian corporation" has the meaning assigned by subsection 89(1); and

(q) "taxable dividend" has the meaning assigned by subsection 89(1).

The names, addresses, corporate account numbers and the tax centres of the taxpayers are as follows:

NAME ADDRESS Account No. Tax Office

XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX

XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX

XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX

XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX

XXXXXXXXXX
XXXXXXXXXX

XXXXXXXXXX
XXXXXXXXXX

FACTS

1. XXXXXXXXXX was incorporated under the laws of XXXXXXXXXX and is the parent of the XXXXXXXXXX group of companies (the "XXXXXXXXXX Group"). It is a publicly listed company whose shares are traded on the XXXXXXXXXX.

2. XXXXXXXXXX functions as the corporate head office only, and provides certain centralized services for the XXXXXXXXXX Group, such as legal, finance and human resource functions.

3.

XXXXXXXXXX

4.

XXXXXXXXXX

5.

XXXXXXXXXX

6.

XXXXXXXXXX

7.

XXXXXXXXXX

8. XXXXXXXXXX is a holding company resident in the XXXXXXXXXX that essentially functions as a conduit for the receipt of income of the XXXXXXXXXX Group for XXXXXXXXXX foreign tax credit purposes. XXXXXXXXXX holds shares in most of XXXXXXXXXX operations outside of the XXXXXXXXXX is an indirect subsidiary of XXXXXXXXXX.

9. XXXXXXXXXX was incorporated under the CBCA. XXXXXXXXXX is a taxable Canadian corporation and a private corporation. XXXXXXXXXX is a wholly-owned subsidiary of XXXXXXXXXX.

XXXXXXXXXX share capital consists of an unlimited number of common shares and an unlimited number of non-voting preferred shares, redeemable at $XXXXXXXXXX per share, bearing a non-cumulative dividend of $XXXXXXXXXX per share. XXXXXXXXXX has XXXXXXXXXX common shares outstanding which are held by XXXXXXXXXX.

The fair market value of the XXXXXXXXXX common shares is not derived principally from non-moveable property located in Canada.

10. XXXXXXXXXX

XXXXXXXXXX

XXXXXXXXXX

XXXXXXXXXX

XXXXXXXXXX

XXXXXXXXXX

XXXXXXXXXX

The undepreciated capital cost of the depreciable assets used in the XXXXXXXXXX business have been maintained in separate pools from those depreciable assets used in the XXXXXXXXXX businesses within XXXXXXXXXX. While the eligible capital expenditures pool has not been separately disclosed, it can be segregated between the two business streams.

The fair market value of XXXXXXXXXX assets which will be transferred to New XXXXXXXXXX, as described in paragraph 37, is approximately $XXXXXXXXXX.

11. XXXXXXXXXX had non-capital loss carryovers as at XXXXXXXXXX of approximately $XXXXXXXXXX. It is anticipated that XXXXXXXXXX will continue to incur losses in the foreseeable future.

12.

XXXXXXXXXX

13.

XXXXXXXXXX

14. XXXXXXXXXX was incorporated under the CBCA and is a taxable Canadian corporation and private corporation. XXXXXXXXXX is a wholly-owned subsidiary of XXXXXXXXXX. Currently, XXXXXXXXXX acts as an undisclosed agent in the conduct of the XXXXXXXXXX business conducted by XXXXXXXXXX in Canada.

XXXXXXXXXX share capital consists of an unlimited number of common shares of which one is issued and outstanding.

15.

XXXXXXXXXX

16. XXXXXXXXXX is wholly-owned directly and indirectly by XXXXXXXXXX functions as a financing company in the XXXXXXXXXX Group.

17. XXXXXXXXXX was incorporated under the CBCA and is a taxable Canadian corporation and private corporation. XXXXXXXXXX is a wholly-owned subsidiary of XXXXXXXXXX. Currently, XXXXXXXXXX acts as an undisclosed agent for XXXXXXXXXX on sales of XXXXXXXXXX outside of Canada. In Canada, the XXXXXXXXXX business is operated as a division of XXXXXXXXXX. It is a separate business, acquired in XXXXXXXXXX.

XXXXXXXXXX share capital consists of an unlimited number of common shares of which one is issued and outstanding.

18. XXXXXXXXXX was incorporated under the CBCA and is a taxable Canadian corporation and private corporation. XXXXXXXXXX is a wholly-owned subsidiary of XXXXXXXXXX.

XXXXXXXXXX was a manufacturer and distributor of XXXXXXXXXX. On XXXXXXXXXX transferred its net operating assets to XXXXXXXXXX in exchange for common shares of XXXXXXXXXX is currently a holding company only.

XXXXXXXXXX share capital consists of an unlimited number of common shares and an unlimited number of redeemable non-voting preferred shares, bearing a non-cumulative dividend of $XXXXXXXXXX per share.

19.

XXXXXXXXXX

20. XXXXXXXXXX is in the business of manufacturing and distributing a variety of

XXXXXXXXXX

XXXXXXXXXX taxable income for the year ended XXXXXXXXXX was approximately $XXXXXXXXXX and it is expected that XXXXXXXXXX will continue to earn income in the current pattern for the foreseeable future.

21. On the acquisition of XXXXXXXXXX, an agreement was entered into by XXXXXXXXXX providing for the acquisition of the remaining shareholdings in XXXXXXXXXX from the XXXXXXXXXX companies over a XXXXXXXXXX period (the "Original Agreement"). The Original Agreement allows for XXXXXXXXXX to assign the rights to purchase the XXXXXXXXXX shares to any member of the XXXXXXXXXX Group.

XXXXXXXXXX

The purchase price for the XXXXXXXXXX shares still held by the XXXXXXXXXX companies is set by a formula based on the operating profit (defined as business income before interest charges and taxes) of an entity referred to as "XXXXXXXXXX" less the fair market value of the U.S. operations to be acquired from the XXXXXXXXXX Companies. This purchase price is subject to both a "cap" and a "floor". XXXXXXXXXX includes XXXXXXXXXX as well as additional U.S. operations currently owned by both the XXXXXXXXXX companies and the XXXXXXXXXX Group, which operationally report to XXXXXXXXXX.

22. Under the terms of the Original Agreement, XXXXXXXXXX is required to pay out XXXXXXXXXX% of its profit after taxes to its shareholders under the Original Agreement.

23.

XXXXXXXXXX

24. XXXXXXXXXX are all related.

25. XXXXXXXXXX were all incorporated under the XXXXXXXXXX and are all Canadian-controlled private corporations.

XXXXXXXXXX is controlled by XXXXXXXXXX.

XXXXXXXXXX is controlled by XXXXXXXXXX with XXXXXXXXXX% of the shares. The remaining XXXXXXXXXX% is held by XXXXXXXXXX.

XXXXXXXXXX only shareholder isXXXXXXXXXX and the XXXXXXXXXX shares are owned entirely by his spouse XXXXXXXXXX.

XXXXXXXXXX is owned equally by XXXXXXXXXX.

XXXXXXXXXX are all Canadian residents.

26. XXXXXXXXXX are all related by virtue of paragraph 251(2)(c).

ADDITIONAL INFORMATION

27.

XXXXXXXXXX

In XXXXXXXXXX was advised that XXXXXXXXXX had non-capital losses and would continue to have such losses and that XXXXXXXXXX was generating taxable income. In XXXXXXXXXX, other options were proposed to deal with the utilization of XXXXXXXXXX non-capital losses including the restructuring of XXXXXXXXXX Canadian operations into separate legal entities. The separation into different legal entities would provide for a means by which different operational units could be measured on a "Value Based Management" basis. It was at this time that the payment of cash dividends by XXXXXXXXXX was raised, as part of a number of alternatives.

On XXXXXXXXXX forwarded an outline of the proposed transactions to the advisers of the XXXXXXXXXX Companies. This was the first time that the payment of dividends by XXXXXXXXXX, as part of a Related Group Loss Utilization scheme, to the XXXXXXXXXX Companies and other shareholders of XXXXXXXXXX was proposed to the XXXXXXXXXX Companies.

28.

XXXXXXXXXX

The sale of such assets will result in income that would fully utilize the accumulated non-capital losses of XXXXXXXXXX. However, while an agreement has been reached, the sale transaction is still subject to regulatory approval by the authorities in the various countries where the XXXXXXXXXX carries on its XXXXXXXXXX business.

XXXXXXXXXX will proceed with the proposed transactions to utilize the accumulated non-capital losses of XXXXXXXXXX in the manner described herein.

29. None of the issued shares referred to herein (including the shares to be issued as described in the proposed transactions) is or will be the subject of a guarantee agreement.

30. None of the preferred shares issued as part of the proposed transactions described herein will be the subject of a dividend rental arrangement.

31. There will not be any guarantees, covenants or agreements as referred to in paragraph 112(2.4)(a) to purchase or repurchase any of the preferred shares issued as part of the proposed transactions described herein. The consideration for which any of the shares issued will not include an obligation of an unrelated investor to make payments, any portion of which, would be required to be included in computing the income of the issuer nor will it include any right to receive payments or property that may revert to the investor.

PROPOSED TRANSACTIONS

32. XXXXXXXXXX and the XXXXXXXXXX companies will revise the Original Agreement to allow for the proposed transactions described herein.

33. XXXXXXXXXX will borrow funds from XXXXXXXXXX to pay a cash dividend on its common shares not to exceed the amount of XXXXXXXXXX accumulated profits, subject to legal solvency tests. The funds borrowed will be evidenced by directors' resolutions of XXXXXXXXXX, authorizing the creation of the indebtedness and entries into intercompany ledgers or records of account by both creditor and debtor. Such indebtedness will bear a market value interest rate.

The transaction is undertaken to increase debt and interest expense in XXXXXXXXXX and provide XXXXXXXXXX with interest income with which to utilize its accumulated non-capital losses.

34. XXXXXXXXXX will incorporate a new corporation under the XXXXXXXXXX ("Subco"). Subco will be a taxable Canadian corporation and a private corporation.

The authorized share capital of Subco will consist of an unlimited number of common shares.

35. XXXXXXXXXX and Subco (referred to in this paragraph as "predecessor corporations") will amalgamate under the provisions of the XXXXXXXXXX to form a new corporation ("Amalco") in such a manner that:

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

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

(c) all the shareholders (except any predecessor corporation) of the predecessor corporations before the merger will receive shares of the capital stock of Amalco by virtue of the merger in the following manner:

(i) XXXXXXXXXX will receive for each of its common shares of XXXXXXXXXX one Class A share of Amalco having a fair market value equal to the fair market value of a common share of XXXXXXXXXX, immediately before the merger;

(ii) XXXXXXXXXX will receive for each of its common shares of XXXXXXXXXX one Class B share of Amalco having a fair market value equal to the fair market value of a common share of XXXXXXXXXX, immediately before the merger;

(iii) XXXXXXXXXX will receive for each of its common shares of XXXXXXXXXX one Class A share of Amalco having a fair market value equal to the fair market value of a common share of XXXXXXXXXX, immediately before the merger;

(iv) XXXXXXXXXX will receive for each of its common shares of XXXXXXXXXX one Class A share of Amalco having a fair market value equal to the fair market value of a common share of XXXXXXXXXX, immediately before the merger; and

(v) XXXXXXXXXX will receive for each of its common shares of XXXXXXXXXX one Class A share of Amalco having a fair market value equal to the fair market value of a common share of XXXXXXXXXX, immediately before the merger.

The stated capital of the shares of Amalco, immediately after the issue of such shares on the merger, will not exceed the aggregate of the paid-up capital of the shares of the predecessor corporations immediately before the merger (excluding the paid-up capital in respect of shares held by any other predecessor corporation) in the amount of $XXXXXXXXXX.

XXXXXXXXXX will include in the stated capital account of the Class B shares issued to XXXXXXXXXX on the merger an amount of $XXXXXXXXXX and will include in the stated capital accounts of the Class A shares issued to XXXXXXXXXX amount of $XXXXXXXXXX.

The purpose of the merger is to reallocate the paid-up capital of Amalco. The amount of $XXXXXXXXXX to be added to the stated capital account of the Class B shares issued to XXXXXXXXXX is equal to the amount that was included in the stated capital account of the common shares of XXXXXXXXXX issued as consideration for the transfer of XXXXXXXXXX net operating assets in XXXXXXXXXX described in paragraph 18 above.

36. XXXXXXXXXX will incorporate a new corporation under the CBCA ("New XXXXXXXXXX"). New XXXXXXXXXX will be a taxable Canadian corporation and a private corporation.

The authorized share capital of New XXXXXXXXXX will consist of an unlimited number of common shares.

37. XXXXXXXXXX will sell, at fair market value, its XXXXXXXXXX assets, all its shares of XXXXXXXXXX to New XXXXXXXXXX. In consideration for such transfers, New XXXXXXXXXX will assume liabilities, relating to the XXXXXXXXXX business, of XXXXXXXXXX and issue to XXXXXXXXXX common shares with a fair market value equal to the amount by which the fair market value of the transferred properties that will be received by New XXXXXXXXXX exceeds the fair market value of the liabilities assumed by New XXXXXXXXXX at the time of the transfer.

38. In connection with the transfer of properties described in paragraph 37 above, XXXXXXXXXX and New XXXXXXXXXX will jointly elect in prescribed form within the time limit referred to in subsection 85(6), to have the provisions of subsection 85(1) apply to the transfer. The agreed amount in respect of each eligible property so transferred will be as follows:

(a) for capital property, other than depreciable property of a prescribed class, an amount not less than the lesser of the fair market value at the time of the transfer and the adjusted cost base to XXXXXXXXXX at that time, and not exceeding the fair market value of the property at the time of the transfer;

(b) for depreciable property of a prescribed class, an amount not less than the least of the amounts referred to in subparagraphs 85(1)(e)(i), (ii) and (iii), and not exceeding the fair market value of the property at the time of the transfer; and

(c) for eligible capital property, an amount not less than the least of the amounts referred to in subparagraphs 85(1)(d)(i), (ii) and (iii), and not exceeding the fair market value of the property at the time of the transfer.

As a result of the agreed amounts elected on, taxable income may be generated to utilize the accumulated non-capital losses of XXXXXXXXXX.

The amount of liabilities allocated to a property in respect of which an election under subsection 85(1) will be made will not exceed the elected amount in such election in respect of the particular property.

New XXXXXXXXXX will add to the stated capital account maintained for its common shares an amount not exceeding the aggregate of the agreed amounts in respect of eligible property and the fair market value of all other properties transferred less the fair market value of the liabilities of XXXXXXXXXX assumed by New XXXXXXXXXX.

39. XXXXXXXXXX and New XXXXXXXXXX will elect pursuant to subsection 22(1) in respect to the transfer of the accounts receivable relating to the XXXXXXXXXX business from XXXXXXXXXX to New XXXXXXXXXX.

40. XXXXXXXXXX will continue to act as undisclosed agent in the conduct of the XXXXXXXXXX business conducted by New XXXXXXXXXX in Canada, as will XXXXXXXXXX for business conducted by New XXXXXXXXXX outside of Canada.

41. XXXXXXXXXX will sell, at fair market value, all its shares of XXXXXXXXXX to Amalco. In consideration for such transfer, the directors of Amalco will authorize the creation of an indebtedness, bearing a market value interest rate, with a principal amount denominated in U.S. dollars of $XXXXXXXXXX (the "Amalco Indebtnedness") and issue preferred shares that are redeemable and retractable in the aggregate at an amount equal to the fair market value, at the time of the transfer, of the shares of XXXXXXXXXX transferred to Amalco less the fair market value of the Amalco Indebtedness.

The purpose for the transfer of the shares of XXXXXXXXXX to Amalco is to allow for additional debt to be assumed by Amalco. The additional debt will assist in the utilization of losses within the related group of XXXXXXXXXX corporations in Canada.

XXXXXXXXXX are both passive investments of XXXXXXXXXX and may be transferred to any member of the XXXXXXXXXX corporations in Canada without regard to the separate business streams in XXXXXXXXXX.

42. In connection with the transfer of shares of XXXXXXXXXX described in paragraph 41 above, XXXXXXXXXX and Amalco will jointly elect in prescribed form within the time limit referred to in subsection 85(6), to have the provisions of subsection 85(1) apply to the transfer. The agreed amount in respect of each eligible property so transferred will be an amount equal to the cost amount of the property at the time of the transfer. The agreed amount will not exceed the fair market value of the property at the time of the transfer. The aggregate of the agreed amounts will not be less than the fair market value of the Amalco Indebtedness.

Amalco will add to the stated capital account maintained for its preferred shares an amount not exceeding the aggregate of the agreed amounts in respect of eligible property less the fair market value of the Amalco Indebtedness.

43. Amalco will reduce the paid-up capital of its preferred shares held by XXXXXXXXXX and its Class B shares held by XXXXXXXXXX.

Amalco will borrow funds from XXXXXXXXXX to reduce the paid-up capital of its preferred shares held by XXXXXXXXXX and its Class B shares held by XXXXXXXXXX. The funds borrowed will be evidenced by directors' resolutions of Amalco and XXXXXXXXXX, authorizing the creation of the indebtedness and entries into intercompany ledgers or records of account by both creditor and debtor. Such indebtedness will bear a market value interest rate.

This debt will be incurred to increase debt and interest expense in Amalco and provide XXXXXXXXXX with interest income with which to utilize its accumulated non-capital losses.

44. XXXXXXXXXX will file articles of amendment under the CBCA to reorganize its capital. The share capital of XXXXXXXXXX will be reorganized by converting all its common shares held by XXXXXXXXXX into New Common Shares and Preferred Shares.

The Preferred Shares will be redeemable and retractable for an amount equal to the fair market value of XXXXXXXXXX shares of Amalco less an amount equal to the fair market value of the XXXXXXXXXX preferred shares to be subscribed for by XXXXXXXXXX, described in paragraph 45 below.

The aggregate of the amounts to be credited to the stated capital accounts of the New Common Shares and Preferred shares will be equal to the amount of the paid-up capital of the common shares immediately before the exchange. The stated capital of the outstanding New Common Shares and Preferred Shares will be allocated between the New Common Shares and Preferred Shares based on the proportion that the fair market value of the New Common Shares and the Preferred Shares, as the case may be, is of the fair market value of all new shares issued.

Elections under subsection 85(1) will not be filed with respect to the exchange of shares described herein.

XXXXXXXXXX will comply with the provisions of section 116 to obtain from the Minister a certificate in prescribed form in respect of the disposition of the shares of XXXXXXXXXX.

45. XXXXXXXXXX will subscribe for redeemable and retractable preferred shares of XXXXXXXXXX with the cash it received on the reduction of paid-up capital of its Class B shares described in paragraph 43 above.

46. XXXXXXXXXX will file articles of amendment to create a new class of preferred shares that will be redeemable and retractable for an amount equal to the fair market value of the property for which the shares will be issued.

47. XXXXXXXXXX will sell, at fair market value, all its Class A shares and preferred shares of Amalco to XXXXXXXXXX. In consideration for such transfer XXXXXXXXXX will issue preferred shares that are redeemable and retractable in the aggregate at an amount equal to the fair market value, at the time of the transfer, of the Amalco shares transferred to XXXXXXXXXX.

48. In connection with the transfer of shares of Amalco from XXXXXXXXXX to XXXXXXXXXX described in paragraph 47 above, XXXXXXXXXX will jointly elect in prescribed form within the time limit referred to in subsection 85(6), to have the provisions of subsection 85(1) apply to the transfer. The agreed amount in respect of such transfer will be an amount equal to the cost amount of the property at the time of the transfer. The agreed amount will not exceed the fair market value of the property at the time of the transfer.

XXXXXXXXXX will add to the stated capital account maintained for its preferred shares an amount not exceeding the agreed amount in respect of the transfer.

49. XXXXXXXXXX will sell, at fair market value, all its preferred shares of XXXXXXXXXX to XXXXXXXXXX. In consideration for such transfer XXXXXXXXXX will issue common shares with a fair market value equal to the fair market value of the XXXXXXXXXX preferred shares transferred to XXXXXXXXXX at the time of the transfer.

XXXXXXXXXX will comply with the provisions of section 116 to obtain from the Minister a certificate in prescribed form in respect of the disposition of the preferred shares of XXXXXXXXXX.

50. In connection with the transfer of the preferred shares of XXXXXXXXXX from XXXXXXXXXX to XXXXXXXXXX described in paragraph 49 above, XXXXXXXXXX will jointly elect in prescribed form within the time limit referred to in subsection 85(6), to have the provisions of subsection 85(1) apply to the transfer. The agreed amount in respect of such transfer will be an amount equal to the cost amount of the property at the time of the transfer. The agreed amount will not exceed the fair market value of the property at the time of the transfer.

XXXXXXXXXX will add to the stated capital account maintained for its common shares an amount not exceeding the paid-up capital of the XXXXXXXXXX preferred shares transferred.

51. XXXXXXXXXX will redeem all of its preferred shares held by XXXXXXXXXX by issuing a demand promissory note bearing a market value interest with a principal amount equal to the redemption amount of such shares (the "XXXXXXXXXX Note").

52. XXXXXXXXXX will redeem its preferred shares held by XXXXXXXXXX by issuing a demand promissory note bearing a market value interest with a principal amount equal to the redemption amount of such shares (the "XXXXXXXXXX Note").

53. The XXXXXXXXXX Note will be set off against the XXXXXXXXXX Note and they will be cancelled.

54. XXXXXXXXXX will acquire from XXXXXXXXXX its note receivable of US$XXXXXXXXXX from XXXXXXXXXX for a demand promissory note of US$XXXXXXXXXX. The demand promissory note issued by XXXXXXXXXX to XXXXXXXXXX will bear a market value interest rate that will be less than the interest rate payable by XXXXXXXXXX on its debt to XXXXXXXXXX.

This transaction is undertaken to match the debt owing to XXXXXXXXXX with the equity in Amalco held by XXXXXXXXXX and will not result in any tax benefit.

55. XXXXXXXXXX will incorporate a new corporation under the XXXXXXXXXX ("XXXXXXXXXX Acquisitions"). XXXXXXXXXX Acquisitions will be a taxable Canadian corporation and a private corporation.

The authorized share capital of XXXXXXXXXX Acquisitions will consist of an unlimited number of common shares.

56. XXXXXXXXXX will sell, at fair market value, all its Class A shares, Class B shares and preferred shares of Amalco to XXXXXXXXXX Acquisitions. In consideration for such transfer, XXXXXXXXXX Acquisitions will issue common shares with a fair market value equal to the aggregate of the fair market value, at the time of the transfer, of the Class A shares, Class B shares and preferred shares of Amalco transferred to XXXXXXXXXX Acquisitions.

57. In connection with the transfer of the Class A shares, Class B shares and preferred shares of Amalco to XXXXXXXXXX Acquisitions described in paragraph 56 above, XXXXXXXXXX and XXXXXXXXXX Acquisitions will jointly elect in prescribed form within the time limit referred to in subsection 85(6), to have the provisions of subsection 85(1) apply to the transfer. The agreed amount in respect of such transfer will be an amount equal to the cost amount of the property at the time of the transfer. The agreed amount will not exceed the fair market value of the property at the time of the transfer.

XXXXXXXXXX Acquisitions will add to the stated capital account maintained for its common shares an amount not exceeding the paid-up capital of the Class A shares, Class B shares and preferred shares of Amalco transferred from XXXXXXXXXX.

58. XXXXXXXXXX Acquisitions will incorporate a new corporation under the XXXXXXXXXX ("Newco"). Newco will be a taxable Canadian corporation and a private corporation.

The authorized share capital of Newco will consist of an unlimited number of voting Class A common shares, an unlimited number of voting Class B common shares voting and an unlimited number of voting Class C common shares.

59. XXXXXXXXXX Acquisitions will sell, at fair market value, all its Class A shares and Class B shares of Amalco to Newco. In consideration for such transfer Newco will issue Class A common shares, Class B common shares and Class C common shares with an aggregate fair market value equal to the aggregate of the fair market value, at the time of the transfer, of the Class A shares and Class B shares of Amalco transferred to Newco.

60. In connection with the transfer of the Class A shares and Class B shares of Amalco to Newco described in paragraph 59 above, XXXXXXXXXX Acquisitions and Newco will jointly elect in prescribed form within the time limit referred to in subsection 85(6), to have the provisions of subsection 85(1) apply to the transfer. The agreed amount in respect of such transfer will be an amount equal to the cost amount of the property at the time of the transfer. The agreed amount will not exceed the fair market value of the property at the time of the transfer.

Newco will add to the stated capital account maintained for its Class A common shares, Class B common shares and Class C common shares an aggregate amount not exceeding the aggregate of the paid-up capital of the Class A shares and Class B shares of Amalco transferred from XXXXXXXXXX Acquisitions.

61. XXXXXXXXXX will sell, at fair market value, all its Class A shares of Amalco to Newco. In consideration for such transfer Newco will issue Class A common shares with an aggregate fair market value equal to the fair market value, at the time of the transfer, of the Class A shares of Amalco transferred to Newco.

62. In connection with the transfer of the Class A shares of Amalco to Newco described in paragraph 61 above, XXXXXXXXXX and Newco will jointly elect in prescribed form within the time limit referred to in subsection 85(6), to have the provisions of subsection 85(1) apply to the transfer. The agreed amount in respect of such transfer will be an amount equal to the cost amount of the property at the time of the transfer. The agreed amount will not exceed the fair market value of the property at the time of the transfer.

Newco will add to the stated capital account maintained for its Class A common shares an amount not exceeding the paid-up capital of the Class A shares of Amalco transferred from XXXXXXXXXX.

63. XXXXXXXXXX will sell, at fair market value, all its Class A shares of Amalco to Newco. In consideration for such transfer Newco will issue Class B common shares with an aggregate fair market value equal to the fair market value, at the time of the transfer, of the Class A shares of Amalco transferred to Newco.

64. In connection with the transfer of the Class A shares of Amalco to Newco described in paragraph 63 above, XXXXXXXXXX and Newco will jointly elect in prescribed form within the time limit referred to in subsection 85(6), to have the provisions of subsection 85(1) apply to the transfer. The agreed amount in respect of such transfer will be an amount equal to the cost amount of the property at the time of the transfer. The agreed amount will not exceed the fair market value of the property at the time of the transfer.

Newco will add to the stated capital account maintained for its Class B common shares an amount not exceeding the paid-up capital of the Class A shares of Amalco transferred from XXXXXXXXXX.

65. XXXXXXXXXX will sell, at fair market value, all its Class A shares of Amalco to Newco. In consideration for such transfer Newco will issue Class C common shares with an aggregate fair market value equal to the fair market value, at the time of the transfer, of the Class A shares of Amalco transferred to Newco.

66. In connection with the transfer of the Class A shares of Amalco to Newco described in paragraph 65 above, XXXXXXXXXX and Newco will jointly elect in prescribed form within the time limit referred to in subsection 85(6), to have the provisions of subsection 85(1) apply to the transfer. The agreed amount in respect of such transfer will be an amount equal to the cost amount of the property at the time of the transfer. The agreed amount will not exceed the fair market value of the property at the time of the transfer.

Newco will add to the stated capital account maintained for its Class C common shares an amount not exceeding the paid-up capital of the Class A shares of Amalco transferred from XXXXXXXXXX.

67. The transactions described in paragraphs 55 to 66 above are being undertaken to consolidate the ownership of XXXXXXXXXX in a single corporation, Newco, and to facilitate the acquisition of a minority interest in XXXXXXXXXX from the XXXXXXXXXX Companies. The use of Newco is to keep the proposed transactions confidential from the employees of XXXXXXXXXX. The transactions will not result in any tax benefit, other than the substantial interest exception in subsection 191(2).

The result of the transactions described in paragraphs 61, 63 and 65 is that the XXXXXXXXXX Companies will hold in aggregate a number of Class A common shares, Class B common shares and Class C common shares of Newco equal to the aggregate percentage of their holdings in XXXXXXXXXX immediately before the proposed transactions described herein (XXXXXXXXXX%).

68. XXXXXXXXXX will incorporate a new corporation under the XXXXXXXXXX ("XXXXXXXXXX Holdco"). XXXXXXXXXX Holdco will be a taxable Canadian corporation and a private corporation.

The authorized share capital of XXXXXXXXXX Holdco will consist of an unlimited number of common shares.

69. XXXXXXXXXX will sell to XXXXXXXXXX Holdco, at fair market value, XXXXXXXXXX of its Class C common shares in Newco. In consideration for such transfer, XXXXXXXXXX Holdco will issue common shares with a fair market value equal to the fair market value, at the time of the transfer, of the Class C common shares in Newco transferred to XXXXXXXXXX Holdco.

70. In connection with the transfer of the Class C common shares of Newco from XXXXXXXXXX to XXXXXXXXXX Holdco described in paragraph 69 above, XXXXXXXXXX and XXXXXXXXXX Holdco will jointly elect in prescribed form within the time limit referred to in subsection 85(6), to have the provisions of subsection 85(1) apply to the transfer. The agreed amount in respect of such transfer will be an amount equal to the cost amount of the property at the time of the transfer. The agreed amount will not exceed the fair market value of the property at the time of the transfer.

XXXXXXXXXX Holdco will add to the stated capital account maintained for its common shares an amount not exceeding the paid-up capital of the Class C common shares of Newco transferred.

71. Newco will add to the stated capital account maintained by it in respect of each one of its Class A common shares, Class B common shares and Class C common shares an amount equal to the amount that the fair market value of each Class A common share, Class B common share or Class C common share, as the case may be, exceeds the adjusted cost base to XXXXXXXXXX, as the case may be, of that share at time of the addition.

The result of this increase is to cause the deemed payment of dividends pursuant to subsection 84(1) to each of the holders of the Class A common shares, Class B common shares and Class C common shares of an amount equal to the amount of the increase in paid-up capital as described herein and an increase in the adjusted cost base of such shares to its holders pursuant to paragraph 53(1)(b).

The increase in the paid-up capital of Newco's Class A common shares, Class B common shares and Class C common shares will result in the payment of Part IV tax on the deemed dividends received by each of XXXXXXXXXX.

72. XXXXXXXXXX Acquisitions will borrow funds from XXXXXXXXXX and will use the funds to acquire the Class A common shares, Class B common shares and Class C common shares of Newco from XXXXXXXXXX, respectively.

73. Newco, by means of a special shareholders' resolution, will reduce the stated capital of its Class A common shares, Class B common shares and Class C common shares, without payment, by an aggregate amount equal to the amount of the increase in the stated capital of the shares of Newco held by XXXXXXXXXX at the time of the transaction described in paragraph 71 above. The purpose of this transaction is to eliminate any potential benefit derived by XXXXXXXXXX Acquisitions as a result of the transactions described in paragraph 71 above.

74. Following the acquisition of the Class A common shares, Class B common shares and Class C common shares of Newco, described in paragraph 72 above, XXXXXXXXXX Acquisitions, Newco and Amalco (referred to in this paragraph as "predecessor corporations") will amalgamate under the provisions of the XXXXXXXXXX to form a new corporation ("New Amalco") in such a manner that:

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

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

(c) all the shareholders (except XXXXXXXXXX Acquisitions and Newco) of the predecessor corporations immediately before the merger will receive shares of the capital stock of New Amalco held by virtue of the merger in the following manner:

(i) XXXXXXXXXX will receive for each of its common shares of XXXXXXXXXX Acquisitions one common share of New Amalco; and

(ii) the stated capital of the shares of New Amalco, immediately after the issue of such shares on the merger, will not exceed the aggregate paid-up capital of the shares of the predecessor corporations immediately before the merger (excluding the paid-up capital in respect of shares held by XXXXXXXXXX Acquisitions and Newco).

PURPOSES OF PROPOSED TRANSACTIONS

75. The purposes for the proposed transactions are:

(a) the separation of the XXXXXXXXXX business and XXXXXXXXXX business into distinct legal entities to be consistent with the structure of the XXXXXXXXXX in other countries. This consistency will facilitate the management reporting within the streams and the implementation of the VBM evaluation system;

(b) the utilization of XXXXXXXXXX non-capital losses to offset taxable income in XXXXXXXXXX; and

(c) to allow the XXXXXXXXXX Companies to avoid the application of subsection 55(2) to the deemed dividends arising on the increase in paid-up capital of the Newco Class A shares, Class B shares and Class C shares, as described in paragraph 71 above on the portion of the dividends subject to the payment of a tax under Part IV.

RULINGS

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

A. On the redemption of the XXXXXXXXXX preferred shares held by XXXXXXXXXX, as described in paragraph 51 above, and the redemption of the XXXXXXXXXX preferred shares held by XXXXXXXXXX, as described in paragraph 52 above, the amount if any, by which the amount paid to redeem the particular shares, exceeds the paid-up capital of the particular shares immediately before the redemption:

(i) will be deemed pursuant to paragraph 84(3)(a) to be a dividend paid by the issuer of such shares and will be deemed pursuant to paragraph 84(3)(b) to be a dividend received by the holder of such shares; and

(ii) will be taxable dividends, that will, pursuant to subsection 112(1), be deductible in computing the taxable income of the recipient for the year in which the dividend is received.

B. Part VI.1 of the Act will not apply to the deemed dividends described in Ruling A above because the dividends will be excluded dividends pursuant to paragraph (a) of the definition of "excluded dividend" in subsection 191(1).

C. Provided that none of the purposes of the payment of the cash dividend on the XXXXXXXXXX common shares, described in paragraph 33 above, is to effect a significant reduction in the portion of the capital that, but for the dividend, would have been realized on a disposition at fair market value of any share of capital stock immediately before the dividend, subsection 55(2) will not apply to the dividend described in paragraph 33 above.

D. Provided that XXXXXXXXXX has a legal obligation to pay interest on the funds borrowed from XXXXXXXXXX, as described in paragraph 33 above, and the dividends paid by XXXXXXXXXX do not exceed the amount of XXXXXXXXXX accumulated profits at the time of the borrowing, XXXXXXXXXX may, subject to the provisions of subsection 18(4), deduct the lesser of interest paid or payable or a reasonable amount in respect of the year on such borrowings (depending on the method regularly followed by XXXXXXXXXX in computing its income for purposes of the Act) pursuant to paragraph 20(1)(c).

E. Provided that Amalco has a legal obligation to pay interest on the funds borrowed from XXXXXXXXXX, as described in paragraph 43 above, and the amount of the borrowing does not exceed the paid-up capital of Amalco's preferred shares held by XXXXXXXXXX and the paid-up capital of the Class B shares of Amalco held by XXXXXXXXXX at the time of the borrowing, Amalco may, subject to the provisions of subsection 18(4), deduct the lesser of interest paid or payable or a reasonable amount in respect of the year on such borrowings (depending on the method regularly followed by Amalco in computing its income for purposes of the Act) pursuant to paragraph 20(1)(c).

F. The provisions of section 80 will not apply to the settlement by way of set off of the XXXXXXXXXX Note and the XXXXXXXXXX Note described in paragraph 53 above.

G. The provisions of subsection 15(1) and 246(1) will not apply to the amalgamation of XXXXXXXXXX and Subco, described in paragraph 35, in and by itself.

H. The provisions of subsection 245(2) will not be applied to the amalgamation of XXXXXXXXXX and Subco, described in paragraph 35, in and by itself, to redetermine the tax consequences described in that paragraph.

I. The provisions of subsection 55(2) will not apply in respect of the dividends deemed to be received by XXXXXXXXXX on their Class A common shares, Class B common shares and Class C common shares of Newco, as described in paragraph 71 above, provided that there is no payment of a dividend by XXXXXXXXXX to a corporation where such payment is part of the series of transactions or events described herein. It will be a question of fact whether the payment of a dividend is part of the series of transactions or events described herein.

J. Taxes under Part IV of the Act will be payable in respect of the dividends deemed to be received by XXXXXXXXXX on their Class A common shares, Class B common shares and Class C common shares of Newco, as described in paragraph 71 above.

K. The provisions of subsection 245(2) will not be applied to the increase of paid-up capital in respect of Newco's Class A common shares, Class B common shares and Class C common shares, described in paragraph 71, in and by itself, to redetermine the tax consequences described in that paragraph.

L. By virtue of paragraph 55(3)(a), the provisions of subsection 55(2) will not apply to the taxable dividends described in Ruling A above, provided that as part of the series of transactions or events as part of which the dividends were received, there is no disposition or significant increase in interest as described in subparagraphs 55(3)(a)(i) to (v) which has not been described herein as a proposed transaction.

M. Part VI.1 of the Act will not apply to the deemed dividends described in paragraph 71 above because the dividends will be excluded dividends pursuant to paragraph (a) of the definition of "excluded dividend" in subsection 191(1).

These rulings are given subject to the limitations and qualifications set out in Information Circular 70-6R3 dated December 30, 1996 issued by Revenue Canada and are binding provided that the proposed transactions are completed before XXXXXXXXXX.

These rulings are based on the Act as it currently reads and do not take into account any future amendments, whether currently proposed or not, to the Act.

COMMENTS

1. Nothing in this letter should be construed as confirmation that Revenue Canada has reviewed or accepted

(a) the determination of the fair market value or adjusted cost base of any property referred to herein, or the paid-up capital of any shares, or

(b) any tax consequences arising from the facts or proposed transactions described herein other than those specifically confirmed in the rulings given.

2. Without restricting the generality of the foregoing, we are not confirming that the proviso set out in ruling C above will be satisfied or that proposed subsection 212.2(1), as announced in the special release from the Department of Finance dated December 15, 1998, will not apply to the proposed transactions described herein.

Yours truly,

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

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