1998 Ruling 9830603 - SUPP.BUTTERFLY RULING(980097)

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 Ruling (Supp. Ruling to 980097) which contains several issues.

Position: (See Statement of Principal Issues attached with Supp. Ruling)

Reasons: (See Statement of Principal Issues attached with Supp. Ruling)

XXXXXXXXXX
XXXXXXXXXX 1-983060
XXXXXXXXXX

Attention: XXXXXXXXXX

XXXXXXXXXX, 1998

Dear Sirs:

Re: XXXXXXXXXX
Advance Income Tax Ruling 980097 dated XXXXXXXXXX, 1998

We are writing in response to your letter of XXXXXXXXXX wherein you advised us of certain amendments to the facts and proposed transactions described in advance income tax ruling 980097 which was issued on XXXXXXXXXX, 1998 (the "Ruling Letter"). We also acknowledge the information provided during our telephone conversations.

As requested the following amendments are hereby made to the Ruling Letter:

1. The sixth sentence of paragraph 6 of the Ruling Letter is replaced by:

XXXXXXXXXX

Holders of these exchangeable shares have rights (the "Ancillary Rights") granted by XXXXXXXXXX to a trustee on behalf of such holders:

(i) to vote with the common stock of XXXXXXXXXX through a special voting share which has nominal value, and

(ii) to exchange the exchangeable shares for common stock of XXXXXXXXXX upon the insolvency of XXXXXXXXXX.

By virtue of its ownership of these exchangeable shares and the Ancillary Rights, DC has significant influence over both XXXXXXXXXX.

2. The following is added as paragraph 10.1 of the Ruling Letter:

Subco2 has entered into an agreement to sell XXXXXXXXXX to an arm's length purchaser for cash proceeds of $XXXXXXXXXX (hereinafter referred to as the Subco2 Proceeds). This sale is scheduled to close on XXXXXXXXXX. Subco2 has entered into unconditional commitments to use the Subco2 Proceeds to acquire specific business properties, including a XXXXXXXXXX.

3. The last sentence in paragraph 12 of the Ruling Letter which is immediately following subparagraph (d) thereof is replaced by:

The Transferee1 Common Shares will be listed on a prescribed stock exchange in Canada. Since the articles of incorporation of Transferee1 require that its directors own shares thereof to qualify as directors, XXXXXXXXXX Transferee1 Common Shares will be issued to the directors of Transferee1 prior to the transaction described in paragraph 21 below.

4. The following is added immediately following subparagraph (d) of paragraph 13 of the Ruling Letter:

The Transferee2 Common Shares will be listed on a prescribed stock exchange in Canada.

5. The following is added immediately following the last paragraph of paragraph 17 of the Ruling Letter:

The DCAmalco Class A Preferred Shares and the DCAmalco Class B Preferred Shares will be listed on a prescribed stock exchange in Canada.

6. The fourth paragraph of paragraph 19 of the Ruling Letter is replaced by the following:

Since DCAmalco and Subco2 have commitments to spend the Sale Proceeds and the Subco2 Proceeds, respectively, to acquire business property, the Sale Proceeds and the Subco2 Proceeds will be classified as business property for the purpose of the proposed transactions described below.

7. The first paragraph of paragraph 23 of the Ruling Letter is replaced by the following:

In accordance with the Plan of Arrangement, and prior to the transfer described in paragraphs 26 and 29 below, the DCAmalco Shareholders will transfer each of their DCAmalco Class B Preferred Shares to Transferee2 in exchange for XXXXXXXXXX Transferee2 Common Share. Any fractional interest in a Transferee2 Common Share resulting from this exchange will be rounded up to the nearest whole Transferee2 Common Share.

8. The reference in paragraph 25 of the Ruling Letter to "subparagraph (c)(i) of the definition of "public corporation" in subsection 89(1) of the Act" is replaced by a reference to "subparagraph (b)(i) of the definition of "public corporation" in subsection 89(1) of the Act".

9. The following paragraph is added as paragraph 25.1 of the Ruling Letter:

25.1. Immediately prior to the transfers described in paragraphs 26 and 29 below, any and all agency agreements between DCAmalco and Subco3 will be terminated.

10. Subparagraph 26(f) of the Ruling Letter is replaced by:

(f) assume debt of DCAmalco not to exceed the aggregate of the agreed amounts in the joint elections under subsection 85(1) described in paragraph 27 below; and

11. Paragraph 29 of the Ruling Letter is amended to:

(i) replace the preamble thereof by:

Contemporaneously with the transfers described in paragraph 26 above, DCAmalco will transfer to Transferee2 at fair market value all of its business property relating to Business 3 and certain of its cash or near cash property and investment property, if any, such that, immediately after the transfer, the net fair market value (after allocating and deducting, in the manner described in paragraph 20 above, the liabilities of DCAmalco which are to be assumed by Transferee2 as described below) of the cash or near cash property, business property and investment property, if any, of DCAmalco transferred to Transferee2, as described herein, will approximate that proportion of the net fair market value of all of that type of property of DCAmalco determined immediately before the transfer referred to herein that :

(ii) replace subparagraph (c) thereof by:

(c) assume debt of DCAmalco not to exceed the aggregate of the agreed amounts in the joint elections under subsection 85(1) described in paragraph 30 below; and

12. The following is added immediately following subparagraph (d) of paragraph 35 of the Ruling Letter:

On the amalgamation of Transferee1 and Subco2, each Transferee1 Common Share will be converted into XXXXXXXXXX NewTransferee1 Common Share, each Subco2 Common Share will be converted into XXXXXXXXXX NewTransferee1 Common Share and each Subco2 Preferred Share will be converted into one NewTransferee1 Preferred Share. In addition, pursuant to the amalgamation agreement between Transferee1 and Subco2, a holder of Transferee1 Common Shares will not be entitled to be registered on the books of NewTransferee1 in respect of a fraction of a NewTransferee1 Common Share resulting from the conversion of Transferee1 Common Shares into NewTransferee1 Common Shares, but such holders will be entitled to receive a cheque from NewTransferee1 for an amount equal to the product obtained by multiplying such fraction by an amount equal to the simple average of the closing price per share for a board lot of Subco2 common shares for each of the business days on which there was a sale price falling not more than 20 business days before the Transaction Date.

13. The following paragraph is added as paragraph 35.1 of the Ruling Letter:

35.1. As part of the Plan of Arrangement, Subco3 and Transferee2 will be amalgamated pursuant to the XXXXXXXXXX to form NewTransferee2 in such manner that

(a)(i) all of the property (except amounts receivable from any predecessor corporation or shares of the capital stock of any predecessor corporation) of Subco3 and Transferee2 immediately before the merger will become property of NewTransferee2 by virtue of the merger;

(ii) all of the liabilities (except amounts payable to any predecessor corporation) of Subco3 and Transferee2 immediately before the merger will become liabilities of NewTransferee2 by virtue of the merger; and

(b) the shares of Transferee2 immediately before the merger will become shares of NewTransferee2 by virtue of the merger.

For greater certainty, the amalgamation of Subco3 and Transferee2 will occur on the same date as control of Subco3 is acquired by Transferee2 as described in paragraph 29 above. No time will be specified in the certificate of amalgamation as the effective time of the amalgamation.

14. Paragraph 36 of the Ruling Letter is replaced by the following:

Upon completion of the foregoing transactions, each of DCAmalco, NewTransferee1 and NewTransferee2 will operate as separate entities. The NewTransferee1 Common Shares, the NewTransferee1 Preferred Shares and the NewTransferee2 Common Shares will be listed for trading on one or more of the prescribed stock exchanges in Canada.

15. Paragraph 38 of the Ruling Letter is replaced by the following:

Except as outlined herein, DCAmalco does not have any specific intention of disposing of any assets currently owned by it to an unrelated person following the proposed transactions and none of DCAmalco, Transferee1, NewTransferee1, Transferee2 or NewTransferee2 will dispose of any assets as part of a series of transactions which includes the proposed transactions.

16. The following is added as subparagraph (c) of ruling H:

(c) provided that any cash received by a holder of Transferee1 Common Shares in lieu of any fractional shares in NewTransferee1 does not exceed $200, a holder of Transferee1 Common Shares who receives a cash payment in lieu of a fractional NewTransferee1 Common Share will have the option of recognizing the capital gain or capital loss, as the case may be, arising on such disposition in computing income for the taxation year in which the exchange occurs, or, alternatively, of reducing the adjusted cost base of the holder's NewTransferee1 Common Shares by the amount of cash received.

17. The following is added as ruling H.1:

H1. With respect to the amalgamation of Transferee2 and Subco3 described in paragraph 35A above:

(a) the provisions of subsection 87(1) will apply; and

(b) subsection 87(1.1) will, for the purposes of paragraph 87(1)(c) and the Income Tax Application Rules, deem the Transferee2 Common Shares to be NewTransferee2 Common Shares received by the shareholder as consideration for the disposition of the Transferee2 Common Shares.

18. The comments under that portion of the Ruling Letter entitled Opinion are replaced by:

Provided that no election pursuant to subsection 256(9) of the Act is filed with respect to the acquisition of control of Subco2 or Subco3 as described in paragraphs 26 and 29 above, respectively, and no time is specified in the certificates of amalgamation described in paragraphs 35 and 35A above and, in the case of Subco2 both the transactions described in paragraphs 26 and 35 are executed on the same day and in the same sequence as described, and in the case of Subco3 both the transactions described in paragraphs 29 and 35A are executed on the same day and in the same sequence as described, each of Subco2 and Subco3 will have only one deemed year end as a result of the acquisition of control of Subco2 by Transferee1 and the amalgamation of Transferee1 and Subco2 and as a result of the acquisition of control of Subco3 by Transferee2 and the amalgamation of Transferee2 and Subco3, as the case may be.

19. Comment 1 is replaced by:

1. We make no comment as to whether the Transferee1 Common Shares, the Transferee2 Common Shares, the DCAmalco Class A Preferred Shares and the DCAmalco Class B Preferred Shares will be "excluded property" within the meaning of subsection 116(6) of the Act.

Notwithstanding the above changes to the facts, proposed transactions and additional information described in the Ruling Letter, we confirm that, subject to the conditions set out therein, the rulings given in the Ruling Letter, as hereby amended, will continue to be binding on Revenue Canada in accordance with the practice outlined in Information Circular 70-6R3, dated December 30, 1996, provided that the proposed transactions, as amended herein, are completed in the manner described in the Ruling Letter, as amended herein, by XXXXXXXXXX.

Yours truly,

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

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