1999 Ruling 9826003 - BUTTERFLY 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 982600
XXXXXXXXXX

Attention: XXXXXXXXXX

XXXXXXXXXX, 1999

Dear Sirs:

Re: XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX
Advance Income Tax Ruling

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

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

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

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

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

(iv) before the courts, and there is no judgement that has been issued in which the time limit for appeal to a higher court has not expired; or

(v) the subject of a ruling previously issued by the Income Tax Rulings and Interpretations Directorate.

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

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

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

(b) "agreed amount" in respect of a property means the amount that the transferor and the transferee of the property have agreed upon in their election under subsection 85(1);

(c) "BCA" means the Business Corporations Act (XXXXXXXXXX) and, where applicable, its predecessor statutes;

(d) "Canadian-controlled private corporation" ("CCPC") has the meaning assigned to that term by subsection 125(7) of the Act;

(e) "capital dividend account" ("CDA") has the meaning assigned to that term by subsection 89(1) of the Act;

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

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

(h) "dividend refund" has the meaning assigned to that term by subsection 129(1) of the Act;

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

(j) "forgiven amount" has the meaning assigned to that term by subsection 80(1) and 80.01(1) of the Act;

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

(l) "refundable dividend tax on hand" ("RDTOH") has the meaning assigned to that term by subsection 129(3) of the Act;

(m) "restricted financial institution" has the meaning assigned to that term by subsection 248(1) of the Act;

(n) "series of transactions or events" has the meaning assigned to that term by subsection 248(10) of the Act;

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

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

(q) "stated capital account" has the meaning assigned to that term by section 26 of the BCA;

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

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

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

FACTS

1. XXXXXXXXXX ("Opco") is a CCPC and a TCC incorporated on XXXXXXXXXX, and governed by the provisions of the BCA. Opco carries on a XXXXXXXXXX farming business and a XXXXXXXXXX business in XXXXXXXXXX. Opco reports income from its farming business in accordance with the cash method referred to in subsection 28(1). Its taxation year end is XXXXXXXXXX. All of the issued and outstanding shares of Opco are owned by four persons, namely XXXXXXXXXX ("Mr. T"), his wife XXXXXXXXXX ("Mrs. T") and their two adult sons, XXXXXXXXXX ("Son 1") and XXXXXXXXXX ("Son 2") (collectively, the "T Family"). Each of these individuals is resident in Canada for the purposes of the Act.

2. Opco's authorized share capital consists of :

(a) an unlimited number of Class "A", B", "C" and "D" common, voting shares without par value;

(b) an unlimited number of Class "E", "F", "G" and "H" preferred, voting, non-participating, redeemable and retractable shares with rights to be determined by the Board of Directors at issuance;

(c) an unlimited number of Class "I", "J", "K", "L" and "M" non-voting, redeemable and retractable shares with rights to be determined by the Board of Directors at issuance;

(d) an unlimited number of Class "N" and "O" preferred, non-voting, redeemable at option of corporation only, with rights to be determined by the Board of Directors at issuance;

(e) an unlimited number of Class "P" preferred, non-voting, redeemable and retractable shares with rights to be determined by the Board of Directors at issuance;

(f) XXXXXXXXXX Class "Q" preferred, non-voting, redeemable and retractable, non-cumulative shares with rights to be determined by the Board of Directors at issuance;

(g) an unlimited number of Class "R" voting, preferred, non-participating, redeemable and retractable shares with rights to be determined by the Board of Directors at issuance; and

(h) an unlimited number of Class "S" non-voting, preferred, participating, redeemable and retractable shares with rights to be determined by the Board of Directors at issuance.

3. Opco's issued and outstanding shares and the owners of such shares are as follows :

(a) XXXXXXXXXX Class A common shares having a total PUC of $XXXXXXXXXX. Mr. T owns XXXXXXXXXX of these shares and Son 1 and Son 2 each own XXXXXXXXXX;

(b) XXXXXXXXXX Class E preferred shares having a total PUC of $XXXXXXXXXX and owned by Mr. T;

(c) XXXXXXXXXX Class P preferred shares having a total PUC of $XXXXXXXXXX. Mr. T owns XXXXXXXXXX of these shares, Mrs. T owns XXXXXXXXXX of these shares, while Son 1 and Son 2 each own, respectively, XXXXXXXXXX and XXXXXXXXXX of these shares;

(d) XXXXXXXXXX Class Q preferred shares having a total PUC of $XXXXXXXXXX. Mr. T and Mrs. T own, respectively, XXXXXXXXXX and XXXXXXXXXX of these shares; and

(e) XXXXXXXXXX Class S preferred shares having a total PUC of $XXXXXXXXXX. Son 1 and Son 2 own, respectively, XXXXXXXXXX and XXXXXXXXXX of these shares.

The issued and outstanding share capital of Opco and the identity of the shareholders has remained unchanged since XXXXXXXXXX, except that, on XXXXXXXXXX Class P preferred shares were redeemed from Mr. T and the Class P preferred shares have been periodically redeemed from Mrs. T.

The shares in Opco are capital property to each of Mr. T, Mrs. T, Son 1 and Son 2. By virtue of his ownership of the Class E shares referred to in (b) above, Mr. T controls Opco.

4. The assets of Opco include cash and accounts receivable, prepaid expenses, inventory, undistributed patronage allocations, stock investments which relate to the farming business of Opco, automotive equipment, buildings, land, machinery, and small tools. The liabilities of Opco include accounts payable and accrued liabilities, a bank loan, loans payable to shareholders, and long-term debt secured by a mortgage over land and buildings.

5. As at XXXXXXXXXX, Opco had loans payable to its shareholders of $XXXXXXXXXX. The loans are non-interest bearing, carry no specific provision for repayment (i.e., they are demand loans) and are unsecured.

6. As at XXXXXXXXXX, Opco had a nil balance of RDTOH and a CDA balance of $XXXXXXXXXX. Opco will not have a balance in its RDTOH account immediately before the end of its taxation year in which the proposed transactions are implemented.

7. Opco withdrew its funds from the net income stabilization account ("NISA") program several years ago and does not currently have a NISA.

8. Prior to XXXXXXXXXX, the T Family carried on a XXXXXXXXXX farming business in partnership. On that date, the assets related to that business, as well as other farm assets, were transferred into Opco. In XXXXXXXXXX, the T Family decided to cause Opco to sell the XXXXXXXXXX operations and expand its XXXXXXXXXX farming operations.

XXXXXXXXXX

The only other significant transaction that was completed prior to the time of submission of this ruling request was the dissolution of XXXXXXXXXX ("Aco") in XXXXXXXXXX. Opco owned one third of the outstanding shares of Aco, which carried on a XXXXXXXXXX business. The business was unsuccessful and Aco was dissolved. Opco recovered its investment in Aco but there were no profits to distribute to Opco or any of Aco's other shareholders. None of these transfers or transactions were made in contemplation of the proposed distribution described below.

9. Each of Son 1 and Son 2 has caused the incorporation of a new corporation, respectively XXXXXXXXXX ("Transferee 1") and XXXXXXXXXX ("Transferee 2"), both of which corporations are governed by the BCA. Neither Transferee 1 nor Transferee 2 (collectively, the "Transferee Corporations") has issued any shares. Each of these corporations will be a TCC and a CCPC.

10. The authorized share capital of the Transferee Corporations consists of:

(a) an unlimited number of Class A voting common shares which entitle the holder to one vote per share at all shareholders' meetings;

(b) an unlimited number of Class B non-voting common shares; and

(c) an unlimited number of Class C and Class D preferred shares, each having the following attributes:

(i) redeemable and retractable for a redemption amount equal to the fair market value of the property received therefor (net of liabilities assumed) by the corporation at the time of issuance;

(ii) the Class C preferred shares are entitled to a non-cumulative dividend at a fixed rate of XXXXXXXXXX% per annum (or such greater amount as may be set by the directors of the corporation from time to time, not to exceed XXXXXXXXXX% per annum) of the redemption amount and the Class D preferred shares are entitled to a non-cumulative dividend at a fixed rate of XXXXXXXXXX% per annum of the redemption amount;

(iii) entitled to a prior return of the redemption amount on a liquidation, dissolution, or winding-up of the corporation;

(iv) may be purchased, redeemed or cancelled by the corporation in the manner provided in the BCA at the option of either the corporation or the holder for a price not less than the lesser of:

(A) the aggregate redemption amount of such shares to be purchased at the particular time; and

(B) the realizable value of the net assets of the corporation immediately before such purchase;

(v) provide that any preference, right, condition or limitation attaching to the preferred shares can only be amended by a special resolution of the holders of each class of shares of the corporation each voting separately as a class;

(vi) restrict the payment of dividends on other classes of shares so that no such dividends may be paid on any other class of shares of the corporation so as to reduce the value of the preferred shares then outstanding; and

(vii) the holders of the Class C preferred shares will be entitled to one vote per share at all meetings of the shareholders. The Class D preferred shares will be non-voting.

The articles of incorporation of the Transferee Corporations will also provide that, subject to the provisions of paragraph (c)(vi) herein, dividends may be declared and paid on any class of shares of the corporation to the exclusion of any other class of shares of the corporation.

PROPOSED TRANSACTIONS

11. Transferee 1 will issue to Son 1 and Transferee 2 will issue to Son 2 XXXXXXXXXX Class A common shares at a total subscription price and with a total PUC of $XXXXXXXXXX.

12. Son 1 will transfer all of his shares in Opco to Transferee 1 and Son 2 will transfer all of his shares in Opco to Transferee 2. As sole consideration for the shares so transferred, Transferee 1 will issue to Son 1 and Transferee 2 will issue to Son 2 XXXXXXXXXX Class D preferred shares having a redemption price and a fair market value equal to the fair market value of the shares of Opco so transferred to them. Each Transferee Corporation will add to its stated capital account maintained for the Class D preferred shares an amount equal to the total PUC of the shares of Opco so transferred to it. Son 1 and Transferee 1 and Son 2 and Transferee 2 will each jointly elect in prescribed form and within the time period referred to in subsection 85(6) of the Act to have the provisions of subsection 85(1) of the Act apply to the foregoing transfers of shares of Opco to the Transferee Corporations. The agreed amount specified in each election will be equal to the ACB to Son 1 or Son 2, as the case may be, of the shares of Opco immediately before the transfer, and will not exceed the fair market value of those shares.

13. Immediately before the proposed transfer of property described in paragraph 15 below, the property of Opco will be classified into the following three types of property for the purposes of the distribution to be made pursuant to paragraph 55(3)(b):

(a) cash or near cash property, comprising all of the current assets of Opco, including cash, accounts receivable, inventories and rights arising from any prepaid expenses;

(b) business property, comprising all of the assets of Opco, other than cash or near cash property, any income from which would, for purposes of the Act, be income from an active business carried on by Opco (other than a specified investment business); and

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

For the purposes of this distribution, patronage reserves relating to dividends receivable on purchases made by Opco from the XXXXXXXXXX will be categorized as business property.

For greater certainty, any tax accounts, such as the balance of any non-capital losses, RDTOH or CDA of Opco, will not be considered property for purposes of the proposed transactions described herein.

14. In determining the net fair market value of each type of property owned by Opco immediately before the proposed transfers of property described in paragraph 15 below, the liabilities of Opco will be allocated to, and deducted in the calculation of, the net fair market value of each type of property of Opco as follows:

(a) current liabilities of Opco (including the current portion of any long-term debt and loans to shareholders) will be allocated to cash or near cash property (including any accounts receivable, inventory and prepaid expenses) of Opco in the proportion that the fair market value of each such property is of the fair market value of all cash or near cash property of Opco. The allocation of current liabilities of Opco as described herein will not exceed the aggregate fair market value of the cash or near cash property of Opco;

(b) any accounts receivable, inventory and prepaid expenses of Opco that are initially classified in accordance with paragraph 14(a) as cash or near cash property, that will relate to a business that will be carried on by Opco or Transferee 1 or Transferee 2, as the case may be, and that will be collected, sold or consumed by such corporation in the ordinary course of that business, will then be reclassified as business property and the net fair market value thereof, determined after the allocation of current liabilities described in (a) herein, will be included in the net fair market value of business property and will not be included in the net fair market value of cash or near cash property;

(c) liabilities of Opco, other than current liabilities, that relate to a particular property will then be allocated to the particular property (and effectively to the type to which the particular property belongs) to the extent of its fair market value. The liabilities that pertain to a type of property, but not to a particular property will then be allocated to that type of property, but not in excess of the net fair market value of such type of property after the allocation of liabilities to a particular property, as described herein;

(d) if any liabilities remain after the allocations described in steps (a) and (c) above are made (hereinafter referred to as "excess unallocated liabilities"), such excess unallocated liabilities will then be allocated to the cash or near cash property, business property and investment property of Opco based on the relative net fair market value of each type of property prior to the allocation of such excess unallocated liabilities.

For the purpose of calculating the net fair market value of the types of property of Opco, deferred taxes, if any, will be ignored.

15. Opco will then transfer to each Transferee Corporation a portion of its cash or near cash property, business property and investment property at fair market value. Each Transferee Corporation will receive a specified portion of the property of Opco such that the net fair market value of each type of property so received by each Transferee Corporation, determined immediately following the series of transactions described herein, will be equal to the proportion of the net fair market value of each type of property of Opco as determined by the formula in paragraph 20 below.

As consideration for the property so transferred, Transferee 1 and Transferee 2 will each:

(a) assume liabilities of Opco in an amount not exceeding the total of the amounts agreed upon by Opco and the particular Transferee Corporation in their respective elections described in paragraph 16 below, in respect of the transferred properties, and

(b) as the balance of the consideration for the transferred properties, issue XXXXXXXXXX Class C preferred shares to Opco, having an aggregate fair market value and redemption amount equal to the amount by which the aggregate fair market value of the property transferred to the particular Transferee Corporation exceeds the amount of the liabilities assumed by such corporation as described in (a) above.

The Transferee Corporations will each add to the stated capital account in respect of the Class C preferred shares it issues an amount equal to the cost to it (as determined under section 85 of the Act, where relevant) of the property so transferred to it less any liabilities assumed by it.

16. In respect of the transfers described in paragraph 15 above, Opco and each Transferee Corporation will elect, jointly and in prescribed form and within the time limits referred to in subsection 85(6) of the Act, to have the rules in subsection 85(1) of the Act apply to the transfer of each asset of Opco that is an eligible property to such Transferee Corporation as described herein. The agreed amount specified in such elections in respect of each eligible property so transferred will be:

(a) where the particular property is capital property (other than depreciable property of a prescribed class), an amount equal to the lesser of the amounts described in subparagraphs 85(1)(c.1)(i) and (ii) of the Act;

(b) where the particular property is depreciable property of a prescribed class, an amount equal to the least of the amounts described in subparagraphs 85(1)(e)(i), (ii) and (iii) of the Act;

(c) where the particular property is eligible capital property, an amount equal to the least of the amounts described in subparagraphs 85(1)(d)(i), (ii) and (iii) of the Act; and

(d) where the particular property is inventory, the amount determined under paragraph 85(1)(c.2).

In each case, the agreed amount will not exceed the fair market value of the particular property transferred, nor will it be less than the amount of any liabilities assumed by the Transferee Corporation with respect to the particular property, as consideration for the transfer of the property.

The subsection 85(1) elections referred to herein will exclude any cash, accounts receivable and prepaid expenses.

17. The Transferee Corporations will redeem their Class C preferred shares held by Opco at their fair market value and will pay the respective redemption price by (i) assuming some of the remaining liabilities of Opco ( but only if such liabilities could not otherwise be assumed on the transfers described in paragraph 15 above because such assumptions would offend subparagraph (a) of that paragraph), and (ii) issuing to Opco a non-interest-bearing promissory note payable on demand (the "Transferee 1 Note" and the "Transferee 2 Note"- collectively, the "Transferee Notes") having a principal amount and fair market value equal to the fair market value of the shares so redeemed less the amount of the liabilities of Opco, if any, so assumed by the particular Transferee Corporation. Opco will accept the assumptions of liabilities, if any, and the Transferee Notes as full payment for the shares so redeemed.

Both Transferee 1 and Transferee 2 will, immediately before such share redemption, be related to Opco within the meaning of subsection 251(2) and will be connected with Opco within the meaning assigned by subsections 186(2) and 186(4) of the Act.

18. Immediately following the foregoing preferred share redemptions, Opco will purchase for cancellation all of the Class A common shares and redeem all of the Class P and Class S preferred shares of Opco held by the Transferee Corporations at their fair market value. Opco will pay the purchase or redemption price, as the case may be, for such shares by issuing to each of the Transferee Corporations a non-interest-bearing promissory note payable on demand (respectively, "Opco Note 1" and "Opco Note 2"- collectively, the "Opco Notes") having a principal amount and fair market value equal to the fair market value of the shares so purchased or redeemed. The Transferee Corporations will accept the Opco Notes as full payment for the shares so purchased or redeemed.

Opco will, immediately before such share purchase/redemption, be related to both Transferee 1 and Transferee 2 within the meaning of subsection 251(2) and will be connected with both such companies within the meaning assigned by subsections 186(2) and 186(4) of the Act.

19. Immediately following the issuance of the promissory notes described in paragraphs 17 and 18 above, Opco will demand payment of the Transferee Notes, and the Transferee Corporations will each satisfy their respective obligations under Transferee Note 1 and Transferee Note 2 by transferring Opco Note 1 and Opco Note 2 to Opco for cancellation.

20. Any liabilities of Opco which are assumed by the Transferee Corporations in the course of the series of transactions described herein but which are not assumed by the Transferee Corporations on the transfers described in paragraph 15 above, will be assumed by the Transferee Corporations on the redemption of the Class C preferred shares, as described in paragraph 17 above, in such proportions that, immediately following the transactions described in paragraphs 17, 18 and 19 above, the net fair market value of each type of property transferred to Transferee 1 or Transferee 2, as the case may be, as described in paragraph 15 above, determined in the manner described in paragraph 13 above (after allocating and deducting liabilities, in the manner described in paragraph 14 above), will be equal to the proportion of the net fair market value of all of the property of Opco of that type, determined in the manner described in paragraph 13 above (after allocating and deducting liabilities, in the manner described in paragraph 14 above), immediately before such transfers, that:

(a) the fair market value, immediately before the transfers described in paragraph 15 above, of all the issued shares of the capital stock of Opco owned by Transferee 1 or Transferee 2, as the case may be, at that time

is of

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

21. Immediately following the transactions described in paragraphs 17, 18 and 19 above, the net fair market value of each type of property retained by Opco, determined in the manner described in paragraph 13 above (after allocating and deducting liabilities, in the manner described in paragraph 14 above), will be equal to the proportion of the net fair market value of all of the property of Opco of that type, determined in the manner described in paragraph 13 above (after allocating and deducting liabilities, in the manner described in paragraph 14 above), immediately before the transfers described in paragraph 15 above, that:

(a) the fair market value, immediately before the transfers described in paragraph 15 above, of all the issued shares of the capital stock of Opco owned by Mr. T and Mrs. T at that time

is of

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

Opco will use the assets retained by it to carry on scaled down farming operations on land owned personally by Mr. T and Mrs. T and using land which it has rented for several years.

ADDITIONAL INFORMATION

22. No assets have been or will be acquired or disposed of by and no liabilities have been or will be incurred by Opco in contemplation of and before the proposed transfers of property described in paragraph 15 above, except in the ordinary course of business or as described in this letter.

23. It is not contemplated that any of the parties will sell or transfer any property to a partnership or person who is not related to the vendor or transferor as part of the series of transactions or events described herein, except as described herein or in the ordinary course of business. Also, no significant transactions are anticipated to be undertaken after the completion of the proposed transactions.

24. None of the corporations referred to herein is, or will be at the time of the proposed transactions, a specified financial institution or a restricted financial institution.

25. None of the shares of Opco or the Transferee Corporations is or will be, at any time during the implementation of the proposed transactions described herein:

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

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

(c) the subject of a dividend rental arrangement referred to in subsection 112(2.3) of the Act as that term is defined in subsection 248(1) of the Act.

26. Opco, Transferee 1 and Transferee 2 will each have the financial capacity to honour, upon presentation for payment, the amount payable under the promissory note issued by it as part of the proposed transactions.

27. The Common shares of Opco referred to herein are not and will not, as a result of the proposed transactions, be taxable preferred shares within the meaning assigned by subsection 248(1).

28. None of the parties is contemplating an acquisition of control of Opco or of any of the corporations referred to herein, except as described in the proposed transactions.

29. The proposed transactions will have no effect on any outstanding tax liabilities of any of the parties hereto.

PURPOSE OF THE PROPOSED TRANSACTIONS

30. For a number of years, Son 1 and Son 2 have been actively involved in Opco's farming business but, because they now have different business and personal objectives with respect to such business, wish to segregate their notional interests in the assets of Opco into their own separate corporations. In addition, Mr. T and Mrs. T wish to reduce their day-to-day involvement in the farming business of Opco.

RULINGS GIVEN

Provided that the preceding statements constitute a complete and accurate disclosure of all of the relevant facts, proposed transactions and purpose of the proposed transactions, and provided that the proposed transactions are completed in the manner described above, our rulings are as follows:

A. Subject to the application of the provisions of subsection 69(11) of the Act and subsections 20(1.2) and 26(5) of the Income Tax Application Rules and to the application of subsection 13(21.2) of the Act as it may apply to the transfer referred to in (ii) herein, the provisions of subsection 85(1) of the Act will apply to:

(i) the transfer of the shares of Opco held by Son 1 and Son 2 to the Transferee Corporations as described in paragraph 12 above, and

(ii) the transfer of each eligible property by Opco to the Transferee Corporations which is the subject of an election under subsection 85(1), as described in paragraphs 15 and 16 above,

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

For the purpose of the joint elections described in paragraph 16 above, the reference to "the undepreciated capital cost to the taxpayer of all the property of that class immediately before the disposition..." in subparagraph 85(1)(e)(i) will be read as "the proportion of the undepreciated capital cost to the taxpayer of all property of that class that the fair market value of the property immediately before the disposition is of the fair market value of all property of that class immediately before the disposition."

B. As a result of the redemptions by the Transferee Corporations of their Class C preferred shares held by Opco as described in paragraph 17 above, and the purchase for cancellation of the Class A common shares and the redemption of the Class P and Class S preferred shares of Opco held by the Transferee Corporations as described in paragraph 18 above:

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

(i) Transferee 1 and Transferee 2 will each be deemed to have paid, and Opco will be deemed to have received, a taxable dividend equal to the amount by which the amount paid in respect of the redemption of the Transferee 1 or Transferee 2 Class C preferred shares, as the case may be, exceeds the PUC thereof; and

(ii) Opco will be deemed to have paid, and Transferee 1 and Transferee 2 will each be deemed to have received, a taxable dividend equal to the amount by which the amount paid in respect of the purchase for cancellation of the Opco common shares or the redemption of the Opco Class P and Class S preferred shares, as the case may be, exceeds the PUC thereof;

(b) By virtue of subsections 186(2) and 186(4), the Transferee Corporations will each be connected with Opco, and Opco will be connected with each of the Transferee Corporations. Provided that none of Opco, Transferee 1 or Transferee 2 is entitled to a dividend refund in respect of the taxation year in which it is deemed to pay the dividend referred to in (a)(i) or (ii) herein, none of Opco, Transferee 1 or Transferee 2 will be subject to Part IV tax under subsection 186(1) of the Act in respect of such dividend;

(c) The taxable dividends deemed to have been received by Opco, Transferee 1 and Transferee 2 as a result of the redemptions and purchase for cancellation referred to in (a)(i) or (ii) herein will be deductible by each of them in computing its respective taxable income pursuant to subsection 112(1) of the Act. For greater certainty, the subsection 112(1) deduction in respect of such dividends will not be denied by the provisions of subsections 112(2.1), (2.2), (2.3) or (2.4) of the Act;

(d) By virtue of paragraph (j) of the definition of "proceeds of disposition" in section 54 of the Act, the amount of the deemed dividends described in (a)(i) or (ii) herein will be excluded from the proceeds of disposition of the shares, and any loss arising from the disposition of those shares will be reduced by the amount of such dividends pursuant to subsection 112(3); and

(e) The deemed dividends referred to in (a) above will not be subject to tax under Parts IV.1 or VI.1 of the Act.

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

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

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

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

(d) an acquisition of property in the circumstances described in paragraphs 55(3.1)(c) or 55(3.1)(d),

which has not been described herein, then by virtue of paragraph 55(3)(b) of the Act, subsection 55(2) of the Act will not apply to the taxable dividends referred to in the rulings given in subparagraph B(a) above and, for greater certainty, subsection 55(3.1) of the Act will not apply to deny the exemption under paragraph 55(3)(b) of the Act.

D. The settlement and cancellation of the Transferee Notes and Opco Notes described in paragraph 19 above will not give rise to a "forgiven amount" within the meaning of subsection 80(1) or 80.01(1) of the Act.

E. The provisions of subsections 15(1) and 56(2) of the Act will not apply to the proposed transactions, in and by themselves.

F. Subsection 245(2) of the Act will not be applied to the proposed transactions, in and by themselves, to redetermine the tax consequences confirmed in the rulings given.

The above rulings are given subject to the limitations and qualifications set out in Information Circular 70-6R3 dated December 30, 1996 and are binding on Revenue Canada, Customs, Excise and Taxation provided that the proposed transactions are completed byXXXXXXXXXX.

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

COMMENTS

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

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

(b) any tax consequences relating to the facts and proposed transactions described herein other than those specifically described in the rulings given above.

Yours truly,

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

??

16

.../cont'd

.../cont'd