1998 Ruling 9830573 - 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: Butterfly transfer - see issue sheet

Position: see issue sheet

Reasons: see issue sheet

XXXXXXXXXX
XXXXXXXXXX 3-983057
XXXXXXXXXX

Attention: XXXXXXXXXX

XXXXXXXXXX, 1998

Dear Sirs:

Re: XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX
Advance Income Tax Rulings

We are writing in response to your letter of XXXXXXXXXX in which you requested advance income tax rulings on behalf of the above-noted taxpayers. We also acknowledge your letters of XXXXXXXXXX and our telephone conversations in connection herewith.

To the best of your knowledge, and that of the taxpayers named herein, none of the issues involved in this advance income tax ruling request is under objection or appeal or is being considered by any tax services office or taxation centre of Revenue Canada in connection with any income tax return already filed.

Definitions

Non-Statutory Terms

In this letter unless otherwise expressly stated:

(a) "XXXXXXXXXX" means XXXXXXXXXX, a corporation incorporated under the CBCA by certificate of incorporation dated XXXXXXXXXX, all of the issued and outstanding shares of which are owned by XXXXXXXXXX;

(b) "XXXXXXXXXX" means XXXXXXXXXX, a corporation incorporated under the Canada Corporations Act by letters patent dated XXXXXXXXXX and continued under the CBCA by certificate of continuance dated XXXXXXXXXX, as amended by certificates of amendment dated XXXXXXXXXX, of which XXXXXXXXXX % of its issued and outstanding shares are owned individually by XXXXXXXXXX as to 33 1/3% each;

(c) "XXXXXXXXXX" means XXXXXXXXXX, a corporation incorporated under the CBCA by certificate of incorporation dated XXXXXXXXXX, all of the issued and outstanding shares of which are owned by XXXXXXXXXX; and

(d) "XXXXXXXXXX" means XXXXXXXXXX, a corporation incorporated under the CBCA by certificate of incorporation dated XXXXXXXXXX, all of the issued and outstanding shares of which are owned by XXXXXXXXXX.

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 or subparagraph is a reference to the relevant provision of the Act;

(b) "ACB" means the expression "adjusted cost base" as the term is defined in section 54;

(c) "Canadian-controlled private corporation" has the meaning assigned by subsection 125(7);

(d) "capital dividend account" has the meaning assigned by subsection 89(1);

(e) "capital gain" has the meaning assigned by paragraph 39(1)(a);

(f) "capital loss" has the meaning assigned by paragraph 39(1)(b);

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

(h) CBCA" means the Canada Business Corporations Act;

(i) "eligible property" has the meaning assigned by subsection 85(1.1);

(j) "forgiven amount" has the meaning assigned by subsections 80(1) and 80.01(1);

(k) "ITAR" means the Income Tax Application Rules;

(l) "pre-1972 CSOH" means "pre-1972 contributed surplus on hand" as that expression is defined in subsection 88(2.1);

(m) "private corporation" has the meaning assigned by subsection 89(1);

(n) "PUC" means "paid-up capital" as that expression is defined in subsection 89(1);

(o) "RDTOH" means "refundable dividend tax on hand" as that expression is defined in subsection 129(3);

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

(q) "specified investment business" has the meaning assigned by subsection 248(1);

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

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

Unless otherwise indicated in this letter, all dollar amounts referred to herein are in Canadian dollars.

FACTS

1. XXXXXXXXXX are siblings and are residents of Canada for purposes of the Act.

2. XXXXXXXXXX is a corporation incorporated under the CBCA and is a Canadian-controlled private corporation and a taxable Canadian corporation. XXXXXXXXXX income tax returns are filed with the XXXXXXXXXX taxation centre and its Business Account Number is XXXXXXXXXX.

3. XXXXXXXXXX issued XXXXXXXXXX common shares to each of XXXXXXXXXX on its incorporation on XXXXXXXXXX.

4. The issued and outstanding share capital of XXXXXXXXXX is owned, and the PUC and ACB attributable to such shares is, as follows:

Shareholder Number of Shares PUC ACB

			XXXXXXXXXX 

			XXXXXXXXXX 

			XXXXXXXXXX 

The common shares of XXXXXXXXXX constitute capital property to each of the shareholders. The ACB of the XXXXXXXXXX common shares to each shareholder, computed in accordance with the provisions of ITAR 26(3), is greater than the paid-up capital of such shares and the fair market value of the XXXXXXXXXX common shares to each shareholder will be greater than their ACB at the time of the transfers described in paragraphs 13, 15 and 17 below.

5. The fiscal year-end of XXXXXXXXXX is XXXXXXXXXX.

6. XXXXXXXXXX is a holding company with cash and capital property made up of marketable securities, investment in a limited partnership and loans receivable from affiliated corporations. The only material liabilities of XXXXXXXXXX are loans payable to shareholders in the amount of approximately $XXXXXXXXXX.

7. As at XXXXXXXXXX year-end, it had RDTOH of approximately $XXXXXXXXXX, pre-1972 CSOH of approximately $XXXXXXXXXX and a nominal amount in its capital dividend account. It is not anticipated that these amounts will be substantially changed at the time of the transfer of property described in paragraph 21 below (the "Butterfly Transfer").

8. The authorized share capital of each of XXXXXXXXXX includes the following classes of shares:

(a) an unlimited number of voting, fully participating common shares (the "class A common shares"); and

(b) an unlimited number of voting, redeemable and retractable preferred shares with a non-cumulative monthly dividend of XXXXXXXXXX % (the "class C preferred shares").

9. Upon its organization, XXXXXXXXXX issued one (1) class A common share to XXXXXXXXXX, representing the sole issued and outstanding share in the capital of XXXXXXXXXX, for cash consideration of $XXXXXXXXXX.

Upon its organization, XXXXXXXXXX issued one (1) class A common share to XXXXXXXXXX, representing the sole issued and outstanding share in the capital of XXXXXXXXXX for cash, consideration of $XXXXXXXXXX.

Upon its organization, XXXXXXXXXX issued one (1) class A common share to XXXXXXXXXX, representing the sole issued and outstanding share in the capital of XXXXXXXXXX, for cash consideration of $XXXXXXXXXX.

10. Each of XXXXXXXXXX is a Canadian-controlled private corporation and a taxable Canadian corporation.

11. The fiscal year-ends of XXXXXXXXXX have not yet been determined.

PROPOSED TRANSACTIONS

12. Each of XXXXXXXXXX will make a contribution of capital to XXXXXXXXXX. The property contributed will consist of the amount owing by XXXXXXXXXX to each of XXXXXXXXXX. As a result of contribution, the indebtedness of XXXXXXXXXX to each of XXXXXXXXXX of $XXXXXXXXXX will then be settled and extinguished.

13. XXXXXXXXXX will sell, at fair market value, all of his common shares of XXXXXXXXXX to XXXXXXXXXX. As sole consideration for such transfer, XXXXXXXXXX will issue to XXXXXXXXXX class A common shares with a fair market value equal to the fair market value of the common shares of XXXXXXXXXX transferred to XXXXXXXXXX.

XXXXXXXXXX will add to the stated capital account maintained for its class A common shares an amount not to exceed the paid-up capital of the common shares of XXXXXXXXXX.

14. 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 the shares so transferred will be equal to their cost amount to XXXXXXXXXX, immediately before the transfer, which amount will be equal to or less than the fair market value of such shares.

15. XXXXXXXXXX will sell, at fair market value, all of her common shares of XXXXXXXXXX to XXXXXXXXXX. As sole consideration for such transfer, XXXXXXXXXX will issue to XXXXXXXXXX class A common shares with a fair market value equal to the fair market value of the common shares of XXXXXXXXXX transferred to XXXXXXXXXX.

XXXXXXXXXX will add to the stated capital account maintained for its class A common shares an amount not to exceed the paid-up capital of the common shares of XXXXXXXXXX.

16. 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 the shares so transferred will be equal to their cost amount to XXXXXXXXXX, immediately before the transfer, which amount will be equal to or less than the fair market value of such shares.

17. XXXXXXXXXX will sell, at fair market value, all of her common shares of XXXXXXXXXX to XXXXXXXXXX. As sole consideration for such transfer, XXXXXXXXXX will issue to XXXXXXXXXX class A common shares with a fair market value equal to the fair market value of the common shares of XXXXXXXXXX transferred to XXXXXXXXXX.

XXXXXXXXXX will add to the stated capital account maintained for its class A common shares an amount not to exceed the paid-up capital of the common shares of XXXXXXXXXX.

18. 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 the shares so transferred will be equal to their cost amount to XXXXXXXXXX, immediately before the transfer, which amount will be equal to or less than the fair market value of such shares.

19. XXXXXXXXXX, by means of a special shareholders' resolution, will reduce the stated capital of its issued and outstanding common shares by an aggregate amount of $XXXXXXXXXX. XXXXXXXXXX will make no payment or distribution of its assets or property as a result of the reduction of its stated capital.

20. Immediately before the Butterfly Transfer, the property owned by XXXXXXXXXX will be classified into three types of property for the purposes of paragraph 55(3)(b) of the Act, as follows:

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

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

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

XXXXXXXXXX will not have any business property at the time of the Butterfly Transfer. For greater certainty, any tax accounts, such as the balance of RDTOH, pre-1972 CSOH or capital dividend account of XXXXXXXXXX, will not be considered property for purposes of the proposed transactions described herein.

21. Immediately following the determination of the fair market value of its cash or near cash property and investment property, as described in paragraph 20 above, XXXXXXXXXX will transfer to each of XXXXXXXXXX (a "particular transferee") a pro-rata share (33 1/3%) of all of its cash or near cash property and investment property in a manner such that the fair market value of the cash or near cash property and investment property so transferred to a particular transferee will be equal to that proportion of the fair market value of all the cash or near cash property and investment property of XXXXXXXXXX, immediately before the transfer, that:

(a) the aggregate fair market value, immediately before the Butterfly Transfer, of the XXXXXXXXXX shares owned by the particular transferee,

is of

(b) the fair market value, immediately before the Butterfly Transfer of all the issued shares of the capital stock of XXXXXXXXXX.

For greater certainty, the Butterfly Transfer will be made on a gross fair market value basis. Each particular transferee will have received a pro-rata share (33 1/3%) of each type of property of XXXXXXXXXX, as described above. Similarly, each particular transferee will assume the same pro-rata share of each liability of XXXXXXXXXX, as more particularly described in paragraph 22 below.

22. As consideration for the property so transferred on the Butterfly Transfer each particular transferee will:

(a) assume a pro-rata share of each of the liabilities of XXXXXXXXXX (the "Assumed Liabilities") provided, however, that the Assumed Liabilities will not exceed the aggregate of the amounts determined under paragraph 23 below, and

(b) will issue to XXXXXXXXXX one (1) class C preferred share of its capital stock having an aggregate redemption price and an aggregate fair market value equal to the amount by which the aggregate fair market value of the cash or near cash property and investment property so transferred exceeds the Assumed Liabilities.

Each particular transferee will add to the stated capital account maintained for its class C preferred shares an amount equal to the aggregate of the cost amounts of the properties transferred less the amount of the liabilities assumed by the particular transferee.

23. XXXXXXXXXX and each particular transferee 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 of each property of XXXXXXXXXX that is an eligible property transferred to a particular transferee. The agreed amount in respect of such property so transferred will be an amount equal to the ACB of the property at the time of the transfer to the particular transferee. The agreed amount in each case will not exceed the fair market value of the property at the time of the transfer.

24. Each of XXXXXXXXXX will redeem its respective class C preferred share owned by XXXXXXXXXX at the aggregate redemption price thereof, which amount will be equal to their respective fair market values. The redemption price will be paid and satisfied by the issuance of a non-interest-bearing demand promissory note by each of XXXXXXXXXX (the "XXXXXXXXXX Note", the "XXXXXXXXXX Note", and the "XXXXXXXXXX Note"), each of which will have a fair market value and principal amount equal to the redemption price of the class C preferred share issued by each of XXXXXXXXXX, respectively. XXXXXXXXXX will accept each such Note in full payment of the respective redemption price.

25. At the end of the day on which the redemption of its respective class C preferred share occurs, each of XXXXXXXXXX will cause its first taxation year to end.

26. On the following business day, the shareholders of XXXXXXXXXX will, by special resolution, resolve to wind up and dissolve XXXXXXXXXX pursuant to subsection 210(3) of the CBCA. The shareholders of XXXXXXXXXX will then enter into a share purchase agreement under the terms of which XXXXXXXXXX will purchase for cancellation from each of XXXXXXXXXX their respective common shares in the capital of XXXXXXXXXX. As consideration therefor, XXXXXXXXXX will distribute to each of XXXXXXXXXX the XXXXXXXXXX Note, the XXXXXXXXXX Note, and the XXXXXXXXXX Note, respectively, in consequence of which the said promissory notes will be settled and extinguished.

In the event that XXXXXXXXXX has a balance in its capital dividend account at the time of the aforesaid purchase for cancellation, XXXXXXXXXX will elect, pursuant to subsection 83(2), in prescribed manner and prescribed form, that the full amount of any resulting dividend referred to in subparagraph 88(2)(b)(ii) be deemed to be a capital dividend.

27. The common shares of XXXXXXXXXX will be cancelled at the time of the purchase for cancellation described in paragraph 26 above. Immediately after that time, each of XXXXXXXXXX will subscribe for one (1) class C preferred share in the capital of XXXXXXXXXX for a subscription price of $XXXXXXXXXX per share. Articles of dissolution will be filed pursuant to subsection 210(4) of the CBCA following receipt of the dividend refund to which XXXXXXXXXX will be entitled as a consequence of the purchase for cancellation transactions described in paragraph 26 above and upon the issuance of a certificate of dissolution XXXXXXXXXX will be formally dissolved. One-third (1/3) of any dividend refund received by XXXXXXXXXX will be paid over to each of XXXXXXXXXX.

PURPOSE OF THE PROPOSED TRANSACTIONS

28. The purpose of the proposed transactions is to separate the interests of XXXXXXXXXX in XXXXXXXXXX into three separate companies belonging to XXXXXXXXXX, respectively. The proposed transactions will allow XXXXXXXXXX to acquire direct and beneficial ownership of a pro-rata interest in the net assets of XXXXXXXXXX, thereby allowing each of them to implement their own investment strategy with respect to such assets.

ADDITIONAL INFORMATION

29. The share provisions relating to each of the class C preferred shares of XXXXXXXXXX will provide that in the event that it is subsequently held or determined by a final judgment of any competent administrative tribunal or court or by a negotiated settlement with any revenue authority that the aggregate net fair market value of any property that is relevant to the determination of the redemption price of such share is different than the fair market value assigned thereto, the redemption price of such shares shall be automatically adjusted as at the date of issuance of such shares, nunc pro tunc, to reflect the aggregate net fair market value so held or determined.

30. Except as described in this letter, no liabilities have been or will be incurred by, and no assets have been or will be acquired by or disposed of by XXXXXXXXXX in contemplation of or before the Butterfly Transfer.

31. Except as described in this letter, no property transferred to any corporation in the course of the reorganization contemplated herein will, thereafter, be transferred directly or indirectly, in the course of that reorganization to any person.

32. None of the shares of XXXXXXXXXX has been or will be, at any time during the implementation of the proposed transactions described herein:

(a) the subject of any undertaking that is referred to in subsection 112(2.2) 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); or

(c) the subject of a dividend rental arrangement as that term as defined in subsection 248(1).

33. None of XXXXXXXXXX is, or will be at the time of the proposed transactions, a specified financial institution.

RULINGS

Provided that the preceding statements constitute a complete and accurate disclosure of all the relevant facts, proposed transactions, additional information and the 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 26(5) of the ITAR to the transfers, the provisions of subsection 85(1) will apply to:

(i) the transfer of the common shares of XXXXXXXXXX, as described in paragraph 13 above;

(ii) the transfer of the common shares of XXXXXXXXXX, as described in paragraph 15 above; and

(iii) the transfer of the common shares of XXXXXXXXXX, as described in paragraph 17 above

such that the amounts agreed upon in respect of each transfer will be deemed to be the transferor's proceeds of disposition and the transferee's cost thereof pursuant to paragraph 85(1)(a).

For greater certainty, paragraph 85(1)(e.2) of the Act will not apply to the transfers described herein.

B. The application of paragraph 84.1(1)(a) of the Act to:

(i) the transfer of the common shares of XXXXXXXXXX, as described in paragraph 13 above;

(ii) the transfer of the common shares of XXXXXXXXXX, as described in paragraph 15 above;

(iii) the transfer of the common shares of XXXXXXXXXX, as described in paragraph 17 above

will not result in a reduction of the PUC of the class A common shares of XXXXXXXXXX issued to XXXXXXXXXX, in the reduction of the PUC of the class A common shares of XXXXXXXXXX issued to XXXXXXXXXX, or in the reduction of the PUC of the class A common shares of XXXXXXXXXX issued to XXXXXXXXXX.

C. The provisions of subsection 85(1) will apply, subject to the application of subsection 69(11) and of subsection 26(5) of the ITAR, to the transfer of eligible property by XXXXXXXXXX to each of XXXXXXXXXX as described in paragraph 21 above, with the result that the agreed amounts in respect of each transfer will be deemed pursuant to paragraph 85(1)(a) to be the proceeds of disposition of that property to XXXXXXXXXX and the cost of that property to the respective transferee.

For greater certainty paragraph 85(1)(e.2) will not apply to such transfers.

D. The provisions of subsection 85(2.1) will not apply to reduce the paid-up capital of the class C preferred share to be issued to XXXXXXXXXX by a particular transferee as described in paragraph 21 above.

E. As a result of the redemption by XXXXXXXXXX of their class C preferred share held by XXXXXXXXXX, as described in paragraph 24 above, the purchase for cancellation of the common shares XXXXXXXXXX, as described in paragraph 26 above, and the consequential cancellation of the class C preferred shares of XXXXXXXXXX on its winding-up and dissolution, as described in paragraph 27:

(i) by virtue of paragraphs 84(3)(a) and 84(3)(b), each of XXXXXXXXXX will be deemed to have paid, and XXXXXXXXXX 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 class C preferred shares of XXXXXXXXXX, as the case may be, exceeds the aggregate PUC thereof;

(ii) (A) pursuant to paragraph 88(2)(b) and subsection 84(2), but subject to (B) to (E) below, each particular transferee referred to in paragraph 21 will be deemed to have received a dividend (the "winding-up dividend") on its common shares and class C preferred share of XXXXXXXXXX equal to the amount by which the aggregate of the fair market value of the promissory note distributed to the particular transferee, as described in paragraph 26 above, and the amount of dividend refund distributed to the particular transferee, as described in paragraph 27 above, by XXXXXXXXXX exceeds the amount by which the PUC of the common shares and class C preferred share of XXXXXXXXXX held by the particular transferee is reduced by such distribution;

(B) pursuant to subparagraph 88(2)(b)(i), such portion of the winding-up dividend referred to (ii)(A) as does not exceed XXXXXXXXXX capital dividend account determined immediately before the payment of the winding-up dividend will be deemed, for the purposes of the subsection 83(2) election referred to in paragraph 26 above to be the full amount of a separate dividend;

(C) pursuant to subparagraph 88(2)(b)(ii), the portion of the winding-up dividend that is equal to the lesser of:

(a) XXXXXXXXXX pre-1972 CSOH as determined immediately before the payment of the winding-up dividend and,

(b) the amount by which the winding-up dividend exceeds the portion thereof in respect of which XXXXXXXXXX will elect under subsection 83(2)

will be deemed not to be a dividend;

(D) pursuant to subparagraph 88(2)(b)(iii), the winding-up dividend, to the extent that it exceeds the portion referred to in (C) above that is deemed not to be a dividend, will be deemed to be a separate dividend that is a taxable dividend;

(iii) by virtue of subsection 186(2) and paragraph 186(4)(a), each of XXXXXXXXXX will be connected with XXXXXXXXXX. Consequently, provided that none of XXXXXXXXXX is entitled to a dividend refund in respect of its taxation year in which it is deemed to pay the dividend referred to in (i) above, XXXXXXXXXX will not be subject to Part IV tax under subsection 186(1) in respect of the dividend referred to in (i) above;

(iv) by virtue of subsection 186(2) and paragraph 186(4)(a), XXXXXXXXXX will be connected with XXXXXXXXXX. Consequently, each of XXXXXXXXXX will be subject to Part IV tax pursuant to paragraph 186(1)(b) in respect of the taxable dividend referred to in (ii)(D);

(v) the dividends referred to in (i) and (ii) will be deductible by each recipient pursuant to subsection 112(1). For greater certainty, the provisions of subsections 112(2.1), 112(2.2), 112(2.3) and 112(2.4) will not apply to deny the subsection 112(1) deduction in respect of such dividends; and

(vi) by virtue of the application of paragraph (j) of the definition of "proceeds of disposition" in section 54, the amount of a deemed dividend referred to in (i) and (ii) 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) of the Act.

F. By virtue of the provisions of paragraph 55(3)(b), the provisions of subsection 55(2) will not apply to the deemed dividends described in Ruling E above, provided that, as part of the series of transactions that includes the proposed transactions described herein, there is no:

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

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

(iii) acquisition of property in the circumstances described in paragraph 55(3.1)(c); or

(iv) acquisition of property in the circumstances described in paragraph 55(3.1)(d)

which has not been described herein.

G. Part IV.1 of the Act will not apply to the deemed dividends described in Ruling E above because the dividends will be excepted dividends pursuant to paragraph (b) of the definition of "excepted dividend" in section 187.1.

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

I. The extinguishment of the XXXXXXXXXX Note, the XXXXXXXXXX Note and the XXXXXXXXXX Note, as described in paragraph 26 above, will not give rise to a forgiven amount. None of XXXXXXXXXX will realize any gain or incur any loss as a result of the transfer and assignment to XXXXXXXXXX of the XXXXXXXXXX Note, the XXXXXXXXXX Note and the XXXXXXXXXX Note by XXXXXXXXXX and the resultant extinguishment and cancellation of such notes as described in paragraph 26 above.

J. Provided that the fair market value of the common shares of XXXXXXXXXX held by each of XXXXXXXXXX is increased by the amount of the debt owing to each holder at the time of the settlement, described in paragraph 12 above, the settlement of the debts of XXXXXXXXXX to each holder will not give rise to a forgiven amount by virtue of paragraph 80(2)(g.1).

K. By virtue of paragraph 53(1)(c), in computing the ACB to XXXXXXXXXX of their XXXXXXXXXX common shares, the contribution to the capital of XXXXXXXXXX by each of them, described in paragraph 12 above, will increase the cost (determined in accordance with subsection 26(3) of the ITAR) to each holder of the XXXXXXXXXX common shares, provided that the fair market value of the XXXXXXXXXX common shares held by each holder, is increased by the respective amount of the debt owing to each holder at the time of the contribution.

L. The provisions of subsections 15(1), 56(2), 56(4), 69(4) and 246(1) will not apply as a result of the proposed transactions described herein, in and by themselves.

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

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 implying that Revenue Canada has agreed to 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 above other than those specifically confirmed in the rulings given.

2. You have advised in paragraph 27 above, that, as part of a price adjustment clause with respect to any property the fair market value of which is relevant to the redemption price of the class C preferred shares of XXXXXXXXXX, described in paragraph 8 above, the share provisions relating to such shares will provide for an automatic adjustment, where necessary, to the redemption price of the class C preferred shares of XXXXXXXXXX.

Nothing in this letter should be construed as confirming that, for the purposes of any of the rulings given herein, any adjustment to the fair market value of the properties transferred and redemption amount of the class C preferred shares of XXXXXXXXXX issued as consideration pursuant to a price adjustment clause referred in paragraph 27 above, will be effective retroactively to the time of the transfer and issuance of shares. In addition, any such adjustment could affect the ruling given in Ruling F above. Furthermore, the rulings in this letter are not intended to apply to the operation of a price adjustment clause, since its coming into effect will be due to circumstances that do not constitute proposed transactions that are seriously contemplated. The general position of the Department with respect to price adjustment clauses is as stated in Interpretation Bulletin IT-169.

Yours truly,

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

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