1999 Ruling 9831333 - PUBLIC BUTTERFLY

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

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

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

Principal Issues: Public butterfly. Routine

Position: n/a

Reasons: n/a

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xxxxxxxxxx 983133
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Attention: xxxxxxxxxx

XXXXXXXXXX, 1999

Dear Sir:

Re: XXXXXXXXXX ("ACO")

This is in reply to your letters of XXXXXXXXXX, wherein you requested an advance income tax ruling on behalf of the above-noted taxpayer.

We understand that to the best of your knowledge and that of the taxpayer involved, none of the issues involved in this ruling request:

a) is in an earlier return of the taxpayer or a related person;

b) is being considered by a tax services office or taxation centre in connection with a previously filed tax return of the taxpayer or a related person;

c) is under objection by the taxpayer or a related person;

d) is before the courts or, if a judgment has been issued, the time limit for appeal to a higher court has not expired;

e) is the subject of a ruling previously issued by the Rulings and Interpretations Directorate of Revenue Canada.

DEFINITIONS

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

(a) "Act" means the Income Tax Act (Canada) R.S.C. 1985, 5th supp. c.1 as amended. Unless otherwise indicated, all statutory references are to the Act;

(b) "ACB" means adjusted cost base as that expression is defined in section 54 and subsection 248(1);

(c) "agreed amount" has the meaning assigned by subsection 85(1). All agreed amounts referred to in this letter will be expressed in dollars;

(d) “ACO" means xxxxxxxxxx;

(e) "approximate that proportion" as used in Paragraphs 23 and 27 means that the discrepancy from that proportion, if any, would not exceed 1%, determined as a percentage of the FMV of each type of property which Newco has received (or ACo has retained) as compared to what Newco would have received (or ACO would have retained) had it received (or retained) its appropriate pro rata share of the FMV of that type of property;

(f) "arm's length" has the meaning assigned by section 251;

(g) "BCo" means XXXXXXXXXX;

(h) "Canadian-controlled private corporation" has the meaning assigned by the definition in subsection 125(7)

(i) "capital property" has the meaning assigned in section 54;

(j) "cost amount" has the meaning assigned by subsection 248(1);

(k) "FMV" means fair market value;

(l) '4FCo" means XXXXXXXXXX;

(m) "NCIB" means normal course issuer bid;

(n) "Newco Share Exchange" means the exchange of ACO Special shares and Special Preferred shares for Newco Common shares and Class A Preferred shares described in Paragraph 18;

(o) "Paragraph" refers t~ a numbered paragraph in this letter;

(p) "prepaid expenses" means rights arising from prepaid expenses;

(q) "proceeds of disposition" has the meaning assigned by section 54;

(r) "proposed transactions" means the transactions described in Paragraphs 13 to 28 below;

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

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

(u) "related person" has the meaning assigned by section 251;

(v) "Reorganization" means the proposed reorganization to effect the transactions described in Paragraphs 16 - 27 hereof;

(w) "series of transactions" has the meaning assigned by subsection 248(10),

(x) "Share Exchange" refers to the exchange of ACo Common and Preferred shares for ACO Common shares, New ACO Preferred shares, Special shares and ACO Special Preferred shares described in Paragraph 17;

(y) "significant influence" has the meaning set out in section 3050 of the CICA Handbook;

(z) "specified investment business" ("SIB") has the meaning assigned by the definition in subsection 125(7);

(aa) "stated capital" means stated capital as that expression is used in the XXXXXXXXXX Business Corporations Act;

(bb) "taxable Canadian corporation" has the meaning assigned in subsection 89(1);

(cc) "taxable dividend" has the meaning assigned by subsection 89(1);

(dd) "Transaction Date" means the date on which the Proposed Transactions will occur, which will be the date on which the Reorganization is effective; and

(ee) XXXXXXXXXX.

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

FACTS

1. ACo is a public corporation and a taxable Canadian corporation with its head office at XXXXXXXXXX. ACO was incorporated as XXXXXXXXXX.

2. ACo's authorized capital stock includes XXXXXXXXXX common and XXXXXXXXXX preferred shares. As of XXXXXXXXXX ACO had XXXXXXXXXX common and XXXXXXXXXX preferred shares issued and outstanding.

By means of a NCIB which commenced XXXXXXXXXX and ending XXXXXXXXXX, ACo may purchase up to XXXXXXXXXX of its issued common shares. The shares acquired through the NCIB will be cancelled upon the expiry of the NCIB. As at XXXXXXXXXX, ACO had purchased XXXXXXXXXX shares under the NCIB.

3. To the best of the knowledge of the directors and senior officers of ACO, as of the date hereof, no person or related group of persons beneficially owns, directly or indirectly, more than 10% of either class of the issued and outstanding shares of ACo, other than XXXXXXXXXX, an individual resident in Canada ("XXXXXXXXXX") and persons related to him. Such holdings are as follows:

Shares

Common Preferred
Shareholder Number % Number

xxxxxxxxxx
xxxxxxxxxx
xxxxxxxxxx
xxxxxxxxxx
xxxxxxxxxx

xxxxxxxxxx

4. ACo has granted certain rights under a stock option plan under which certain directors and management personnel of ACO are entitled to acquire common shares of ACo at specified exercise prices. During XXXXXXXXXX common shares were issued under the stock option plan for total cash consideration of $XXXXXXXXXX. The options were not exercised in contemplation of the Proposed Transactions described below and would have been exercised regardless of whether the Proposed Transactions were to be implemented.

Senior executives and directors of ACo hold stock options to acquire XXXXXXXXXX common shares, as follows.

No. Of
				Shares
				Under	Option	Grant	Expiry
Optionee Name	Option	Price	Date		Date

xxxxxxxxxx		xxxxxxxx  xxxxxx	xxxxxx	xxxxxx
xxxxxxxxxx		xxxxxxxx  xxxxxx	xxxxxx	xxxxxx
xxxxxxxxxx		xxxxxxxx  xxxxxx	xxxxxx	xxxxxx
xxxxxxxxxx		xxxxxxxx  xxxxxx	xxxxxx	xxxxxx
xxxxxxxxxx		xxxxxxxx  xxxxxx	xxxxxx	xxxxxx
xxxxxxxxxx		xxxxxxxx  xxxxxx	xxxxxx	xxxxxx

Any exercise of these options will not be in contemplation of the Proposed Transactions.

5. ACo's assets may be summarized as follows:

(a) certain cash or near-cash property, including accounts receivable and prepaid expenses;

(b) certain fixed assets used in ACO's business operations;

(c) approximately XXXXXXXXXX% of the issued shares of BCo;

(d) XXXXXXXXXX% of the shares of XXXXXXXXXX;

(e) XXXXXXXXXX;

(f) advances to FCO, the Partnership and xxxxxxxxxx; and

(g) Receivables

i) From XXXXXXXXXX, arising from ACo's disposition of real property. Quarterly payments are due of $XXXXXXXXXX plus xxxxxxxxxx % interest, with the mortgage maturing in xxxxxxxxxx;

ii) From XXXXXXXXXX, on account of the sale of ACO's interest inXXXXXXXXXX. Monthly payments of $XXXXXXXXXX are due and interest is charged at XXXXXXXXXX;

iii) From XXXXXXXXXX. The note is due XXXXXXXXXX and is non-interest-bearing. The note represents the monies that ACo had provided xxxxxxxxxx prior to the sale; and

iv) From XXXXXXXXXX, a company unrelated to ACo, and which mortgage matured on XXXXXXXXXX and is in the process of being paid out.

ACo's liabilities include accounts payable, accrued liabilities, and long-term debt.

ACo also has recorded amounts in respect of financing costs on its balance sheet.

6. There have not been nor will there be any acquisitions or dispositions of property by ACo in contemplation of the Proposed Transactions.

While no significant arm's-length acquisitions or dispositions of property by ACo are currently under negotiation, it is conceivable such may occur at any time as circumstances change or as opportunities may arise. However, no such acquisition or disposition will occur in contemplation of the Proposed Transactions.

7. The most recent fiscal year end for ACO was XXXXXXXXXX.

8. BCO is a public corporation and a taxable Canadian corporation with its head office at XXXXXXXXXX. BCO was incorporated in xxxxxxxxxx.

9. BCO's authorized capital stock includes an unlimited number of common shares and XXXXXXXXXX Class B non-voting xxxxxxxxxx% non-cumulative convertible shares. As of XXXXXXXXXX, BCO had XXXXXXXXXX common and XXXXXXXXXX Class B shares issued and outstanding. By means of a NCIB which commenced XXXXXXXXXX, BCO was permitted to purchase up to XXXXXXXXXX of its issued capital. The acquired shares are to be cancelled upon expiry of the NCIB. BCO acquired XXXXXXXXXX of its own shares pursuant to the NCIB. BCo has applied to the XXXXXXXXXX Stock Exchange for renewal of its NCIB which commenced XXXXXXXXXX and will terminate xXXXXXXXXX, during which period BCO would be permitted to purchase up to XXXXXXXXXX of its issued common shares.

10. ACO owns XXXXXXXXXX common shares of BCO, being approximately XXXXXXXXXX% of the issued BCO common shares. Neither ACO nor BCo will have any cash or investment property as defined in Paragraph 22 on the Transaction Date.

11. XXXXXXXXXX is a taxable Canadian corporation with its head office at XXXXXXXXXX was incorporated on XXXXXXXXXX.

12. FCO is a taxable Canadian company, with its head office at

XXXXXXXXXX.FCo was incorporated in XXXXXXXXXX.

PROPOSED TRANSACTIONS

13. A newly created corporation ("Newco") will be incorporated under the XXXXXXXXXX Business Corporations Act. Newco will be a taxable Canadian corporation. Prior to the transactions described in Paragraphs 16 to 28, Newco will not have had any assets, liabilities or issued any outstanding shares. Newco's articles of incorporation will provide that its authorized capital will include an unlimited number of common shares, XXXXXXXXXX Class A preferred shares and XXXXXXXXXX Class B preferred shares. The common shares will be fully participating and will be entitled to one vote per share. The Class A preferred shares will have the attributes as set out in the schedule that you attached. The Class B preferred shares of Newco will have the following attributes:

(a) each Class B preferred share will be redeemable, subject to applicable law, at any time at the option of Newco at an amount equal to the aggregate FMV of the shares that will be transferred by ACO to Newco, divided by the number of Class B preferred shares of Newco issued as consideration therefor (the "Newco Redemption Amount") plus any declared but unpaid dividends;

(b) each Class B preferred share will be retractable, subject to applicable law, at any time at the option of the holder at a retraction amount equal to the Newco Redemption Amount plus any declared but unpaid dividends;

(c) the holder of each Class B preferred share will be entitled to a non-cumulative cash dividend as and when declared by the Board of Directors from time to time, which dividend need not also be declared on any other class of shares of Newco;

(d) if Newco is liquidated, dissolved or wound-up or its assets are otherwise distributed among the shareholders by way of repayment of capital, whether voluntary or involuntary, the holders of the Class B preferred shares shall be entitled to receive, before any distribution of any assets of Newco among the holders of the Class A preferred shares and the common shares, an amount in respect of each Class B preferred share held, equal to the Newco Redemption Amount plus any declared but unpaid dividends; and

(e) the holder of each Class B preferred share will not be entitled to vote at meetings of shareholders of Newco, other than as provided under the XXXXXXXXXX Business Corporations Act.

14. Subject to, among other things, the appropriate shareholder, court and regulatory approvals, the transactions described in Paragraphs 16 to 28 will be undertaken and designated to occur on the Transaction Date in the order set out below. The Transaction Date will be a date that will be subsequent to the date of this letter.

15. Each ACO common shareholder will be entitled to dissent in respect of the Reorganization pursuant to the provisions of the XXXXXXXXXX Company Act. A shareholder who dissents will cease to be a shareholder of ACo on the Transaction Date, and the ACO common shares held by such shareholder will no longer be considered to be outstanding as common shares for the purpose of the transactions comprising the Reorganization. Each such dissenting shareholder will be entitled to be paid the fair value of the ACO common shares in respect of which the right of dissent is exercised.

16. ACo's articles of incorporation will be amended in such a manner that, in addition to any other shares that may be authorized for issue, its share capital will be comprised of at least four additional classes of shares, being new ACO common shares, ACo special shares, new ACo preferred shares and ACO special preferred shares. These four classes of shares will have the following attributes.

(a) each new ACO common share will be a fully participating voting share with the holder thereof entitled to one vote at meetings of shareholders of ACo;

(b) each new ACO preferred share will have the rights and restrictions set out in the schedule that you attached;

(c) each ACO special share and each ACO special preferred share will be redeemable, subject to applicable law, at any time at the option of ACO at the ACo Aggregate Special Share Redemption Amount I ACo Aggregate Special Preferred Share Redemption Amount which will equal the ACO Aggregate Redemption Amount, as defined in Paragraph 18(b), divided by the number of ACO special shares I ACO special preferred shares issued on the Share Exchange plus any declared but unpaid dividends;

(d) each ACo special share and each ACo special preferred share will be retractable, subject to applicable law, at any time at the option of the holder at a retraction amount equal to the ACO Aggregate Special Share Redemption Amount I ACO Aggregate Special Preferred Share Redemption Amount, as the case may be, plus any declared but unpaid dividends;

(e) the holders of the new ACO common shares and of the ACo special shares shall be entitled to non-cumulative dividends as and when declared by the directors. No dividends shall be declared or paid on the common shares or the special shares unless simultaneously a dividend is declared and paid on both such classes of shares.

(f) if the corporation is liquidated, dissolved or wound-up or its assets are otherwise distributed among the shareholders by way of repayment of capital, whether voluntary or involuntary, the holders of the ACo special preferred shares and in turn the holders of the ACo special shares shall be entitled to receive, before any distribution of any assets of the corporation among the holders of the new ACO common shares and the new ACO preferred shares, an amount in respect of each ACO special preferred and special share held, equal to the ACO Aggregate Special Share Redemption Amount I ACO Aggregate Special Preferred Share Redemption Amount, as the case may be, plus any declared but unpaid dividends; and

(g) the holder of each ACO special share will be entitled to one vote for every ACo special share held.

17. Each ACO common share held by an ACO shareholder will be exchanged for one New ACO common share and one ACo special share (excepting shares held by a shareholder who dissents to the Reorganization) and each ACo preferred share held by an ACO shareholder will be exchanged for one new ACO preferred share and one ACO special preferred share (such exchanges referred to hereinafter as the "Share Exchange"). As a result:

(a) the Aggregate Redemption Amount of the ACO special shares and ACO special preferred shares issued on the Share Exchange will be equal to a proportion (the 44BCo Proportion") of the FMV of all of the issued ACo common and preferred shares immediately before the Share Exchange. The BCO Proportion is the proportion that:

(i) the net FMV of the business property of ACo as represented by the BCO shares, is of

(ii) the net FMV of all of the business property of ACO determined immediately before the transfer of the BCO shares as described in Paragraph 23 and by applying the rules in Paragraphs 21 and 22;

(b) (i) The ACo Aggregate Special Share Redemption Amount be equal to the aggregate Redemption Amount of the special shares and ACo special preferred shares as calculated in Paragraph 17(a) multiplied by the proportion that the FMV of the ACo special shares is of the aggregate FMV of the AGo special shares and AGo special preferred shares immediately before the Share Exchange;

(ii) The ACo Aggregate Special Preferred Share Redemption Amount will be equal to the aggregate Redemption Amount of the ACO special shares and ACo special preferred shares as calculated in Paragraph 17(a) multiplied by the proportion that the FMV of the ACo special preferred shares is of the aggregate FMV of the ACO special shares and ACo special preferred shares immediately before the Share Exchange.

(c) the aggregate stated capital of the New ACO common shares and the ACo special shares will not exceed the aggregate PUG of the common shares and the aggregate stated capital of the ACo preferred shares and the ACo special preferred shares will not exceed the aggregate PUG of the ACo preferred shares, and

(i) the addition to the stated capital of the New Aco common shares will equal that portion of the aggregate PUG of the New AGo common shares that the FMV of the New ACO common shares is of the total FMV of the New AGo common shares and ACO special shares;

(ii) the addition to the stated capital of the ACo special shares will equal that portion of the aggregate PUC of the ACO common shares that the FMV of the ACO special shares is of the total FMV of the New ACo common shares and the ACo special shares;

(iii) the addition to the stated capital of the new ACO preferred shares will equal that portion of the aggregate PUC of the new ACO preferred shares that the FMV of the new ACO preferred shares is of the total FMV of the new ACO preferred shares and ACO special preferred shares; and

(iv) the addition to the stated capital of the ACO special preferred shares will equal that portion of the aggregate PUC of the ACO preferred shares that the FMV of the ACo special preferred shares is of the total FMV of the new ACO preferred shares and the ACO special preferred shares;

(d) each issued ACO common and preferred share will be cancelled.

The employees who currently hold ACo stock options ("Old ACo stock options") will exchange their rights under those stock options for rights under a new stock option plan of ACO to acquire New ACO Common shares ("New ACO stock options") and for rights under a stock option plan of Newco to acquire common shares of Newco ("Newco stock options"). Under each of the New ACO stock options and Newco stock options issued to a particular employee, the total FMV of the New ACO Common and Newco Common shares issuable thereunder may exceed the total amount payable by the option holder to acquire the New ACo Common shares or the Newco Common shares under the relevant stock option. However, such excess, if any, will not exceed the amount by which the total FMV, on the Transaction Date, of the ACo Common shares issuable under the Old ACO stock option exceeds the exercise price payable by the option holder to acquire the ACo Common shares under the Old ACO stock options.

18. Newco will acquire from the ACO shareholders all of the issued ACO special shares in exchange for its issuing an identical number of Newco common shares to those shareholders and Newco will acquire from the ACO shareholders all of the issued ACo special preferred shares in exchange for its issuing an identical number of Newco Class A preferred shares to those shareholders (the "Newco Share Exchange") . The certificates for the ACo special shares and ACO special preferred shares which otherwise would be delivered to the ACO shareholders on the Share Exchange instead will be delivered directly to Newco

Immediately before the transfer of property described in Paragraph 23, the FMV of each ACO shareholder's shares of the capital stock of Newco will be equal to or approximate the amount determined by the formula as found in subparagraph (b)(iii) of the definition of "permitted exchange" in subsection 55(1). In addition, no person who is not an ACO shareholder will own any shares of Newco.

19. If requested by a particular ACo shareholder, Newco will execute a joint election as permitted under subsection 85(1) in respect of the disposition by that shareholder of ACO special shares for Newco common shares and of ACO special preferred shares for Newco Class A preferred shares. It is anticipated that XXXXXXXXXX and persons related to him who will own ACO special shares and ACO special preferred shares will jointly elect with Newco pursuant to subsection 85(1), in prescribed form and within the time referred to in subsection 85(6) in respect of the disposition of ACO special and ACo special preferred shares. The agreed amount in respect of each such election will not be less than the lesser of the amounts specified in sub-paragraphs 85(1)(c.1)(i) or (ii). In each case the agreed amount will not exceed the FNV of the ACO special shares and ACO special preferred shares, as the case may be.

20. The addition to the stated capital of the Newco common shares will equal the aggregate PUC of the ACo special shares and the addition to the stated capital of the Newco Class A preferred shares will equal the aggregate PUC of the ACO special preferred shares.

21. Immediately before the transfer of property described in Paragraph 23, the property of ACo will be determined on a consolidated basis by including the appropriate pro-rata share of the assets of any corporation or partnership over which ACO has the ability to exercise significant influence, being BCO, XXXXXXXXXX, FCO and the Partnership (ACO and such entities will hereinafter be referred to as the "ACo Group"), which assets will be classified into three types of property for the purposes of the definition of "distribution" in subsection 55(1), as follows:

(a) cash or near-cash property, comprising all of the current assets of the ACO Group;

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

(c) investment property, comprising all of the assets of the ACO Group, other than cash or near-cash property, any income from which would, for purposes of the Act, be income from property or a SIB.

For greater certainty, any tax accounts, such as the balance of any non-capital losses of the ACO Group, will not be considered property for purposes of the Proposed Transactions.

For the purposes of this Paragraph and Paragraph 22, ACO will be considered to have significant influence over a corporation or partnership if it has significant influence over that corporation or partnership or over any other corporation or partnership that has significant influence over that corporation or partnership. ACo will have significant influence over BCO, XXXXXXXXXX, FCO and the Partnership.

For greater certainty, the FMV of the shares of any corporation over which ACO has the ability to exercise significant influence, partnership interest and of any amount receivable by ACo from such a corporation or partnership will be allocated between the types of property described above by multiplying the FMV of the shares of the particular corporation, partnership interest or amount of indebtedness receivable from the particular corporation or partnership, as the case may be, by the proportion that the net FMV of each type of property owned by the particular corporation (as determined in this Paragraph and Paragraph 22) is of the aggregate net FMV of all of the property owned by such corporation.

22. In determining, on a consolidated basis, the net FMV of each type of property of ACO immediately before the transfer described in Paragraph 23, the liabilities of ACO, also determined on a consolidated basis by including the appropriate pro rata share of the liabilities of each member of the ACO Group ( other than any amount owing to a member of the ACo Group to ACO or to any other member of the ACO Group ) will be deducted in the calculation of, the net FMV of each such type of property of such corporation in the following manner:

(a) current liabilities of ACo determined on a consolidated basis, will be allocated to cash or near-cash property in the proportion that the FMV of each such property is of the FMV of all cash or near-cash property. The allocation of current liabilities as described herein will not exceed the aggregate of all the cash or near-cash property of ACO;

(b) any accounts receivable, inventories and prepaid expenses of such corporation, initially classified in accordance with Paragraph 21(a) as cash or near-cash property, that will relate to a business that will be carried on by the ACO Group or that will be carried on by BCo following the transfer described in Paragraph 23 and that will be collected, sold or consumed by the ACo Group or BCO in the ordinary course of that particular business, will then be reclassified as business property and the net FMV thereof, determined after the allocation of the current liabilities described in Paragraph 22(a) will be included in the net FMV of business property and will not be included in the net FMV of cash or near-cash property;

(c) liabilities of ACO, determined on a consolidated basis, 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 FMV. Liabilities that pertain to a type of property but not to a particular property will then be allocated to that type of property; and

(d) any liabilities ("excess unallocated liabilities"), determined on a consolidated basis, that remain after the allocations above will then be allocated to the cash or near-cash property and business property of ACO based on the relative net FMV of each type of property prior to the allocation of such excess unallocated liabilities.

For greater certainty, the amount to be paid to any ACO dissenting shareholders for their interest in the common shares of ACO will represent a current liability of ACO.

For the purposes of this Paragraph, and for the purposes of the Proposed Transactions described herein, no amount will be considered to be a liability unless it represents a true legal liability which is capable of quantification.

After the allocation of liabilities as described in this Paragraph, neither ACo nor BCo will have any cash or investment property on the Transaction Date.

23. ACo will transfer to Newco at FMV all of the BCo shares such that, immediately after the transfer, the net FMV of the cash or near-cash property, business property and investment property of ACo, calculated as described in Paragraphs 21 and 22, which is represented by the BCO shares transferred to Newco as described herein, will approximate that proportion of the net FMV of all of that type of property of ACo, determined immediately before the transfer referred to herein that:

(a) the aggregate FMV of the ACO special shares and ACO special preferred shares immediately before the transfer, is of

(b) the aggregate FMV of all the issued and outstanding shares of ACO immediately before the transfer.

As sole consideration for such transfer, Newco will issue to ACo Newco Class B preferred shares having an aggregate stated capital not exceeding the agreed amount for the BCo shares, and an aggregate redemption amount and FMV equal to the FMV of the BCo shares.

ACO and Newco will jointly elect, in prescribed form and within the time referred to in subsection 85(6), in respect the disposition of the BCO shares. The agreed amount in respect of such election will not be less than the lesser of the amounts specified in subparagraphs 85(1)(c.1)(i) or (ii) and will not exceed the FMV of the BCo shares.

24. ACO will redeem from Newco all of its ACO special shares and all of its ACO special preferred shares for an amount equal to the ACO Aggregate Special Share Redemption Amount and the ACO Aggregate Special Preferred Share Redemption Amount (as defined in Paragraph 17(b)) (hereinafter referred to as the "ACO Redemption Amounts") and will issue to Newco in consideration therefor a demand promissory note (hereinafter referred to as the "ACO Redemption Note") with a principal amount and FMV equal to the ACO Redemption Amounts. Newco will accept such ACo Redemption Note as full payment of the ACO Redemption Amounts in respect of the redeemed ACo special shares and ACO special preferred shares with the risk of the note being dishonoured.

Newco will redeem from ACo all of its Class B preferred shares for an amount equal to the aggregate of the Newco Redemption Amounts (as defined in Paragraph 13(a)) of all the Class B preferred shares (hereinafter referred to as the "Newco Redemption Amounts") so redeemed and will issue to ACO in consideration therefor a demand promissory note (hereinafter referred to as the "Newco Redemption Note") with a principal amount and FMV equal to the aggregate of the foregoing Newco Redemption Amounts. ACo will accept such note as full and absolute payment of the Newco Redemption Amounts in respect of the redeemed Class B preferred shares of Newco with the risk of the note being dishonoured.

25. Each of the ACo Redemption Note and the Newco Redemption Note will be a demand promissory note with interest payable only from the date of demand for payment by the holder to the date of payment of the amount owing under the particular note at a rate equal to the prime rate of the XXXXXXXXXX, as set from time to time.

26. The ACO Redemption Note issued by ACo and the Newco Redemption Note issued by Newco will be set off by each holder and issuer of the particular demand note and accepted as full payment by each of them. The ACo Redemption Note and the Newco Redemption Note will both thereupon be marked paid in full and cancelled.

27. Immediately following the Proposed Transactions, the net FMV of each of the types of property retained by ACO, determined in the manner described in Paragraphs 21 and 22, will approximate that proportion of the aggregate FMV of that type of property of ACO immediately before the transfer of property described in Paragraph 23 that:

(a) the aggregate FMV, immediately before the transfer of property described in Paragraph 23, of the New ACo common shares and New ACO preferred shares, is of

(b) the aggregate FMV, immediately before such transfer of property, of all of the issued and outstanding shares of ACO.

28. Newco and BCo will be amalgamated under the provisions of the XXXXXXXXXX Business Corporations Act to form a new corporation (“Amalco") such that:

(a) all of the property (except amounts receivable from 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 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 of the shareholders (except any predecessor corporation) who owned shares of the capital stock of any predecessor corporation immediately before the merger, receive shares of the capital stock of Amalco by virtue of the merger.

The authorized and issued capital of Amalco will be as follows:

• unlimited number of common shares, of which XXXXXXXXXX will be held by XXXXXXXXXX will be held by the unrelated shareholders of Newco and XXXXXXXXXX will be held by the unrelated shareholders of BCO.
• XXXXXXXXXX Class A Preferred shares, issued to the shareholders of Newco at XXXXXXXXXX share for each Newco Class B preferred share, of which XXXXXXXXXX will be held by XXXXXXXXXX and XXXXXXXXXX will be held by the unrelated shareholders of Newco; and
• XXXXXXXXXX Class B Preferred shares, issued at XXXXXXXXXX share for each Class B preferred shares of BCo to the shareholders of BCo.

ADDITIONAL INFORMATION

29. No significant transactions have been completed by the taxpayer prior to the time of submission of this ruling request, or may be undertaken after the completion of the proposed transactions, which may be part of the series of transactions. ACO's wholly owned subsidiary XXXXXXXXXX has issued $XXXXXXXXXX of XXXXXXXXXX% convertible debentures to finance the development of its business. BCo intends to declare common share and preferred share dividends to its shareholders, which may occur prior or subsequent to the Reorganization.

30. There are not, and will not be at any time prior to the completion of the Proposed Transactions, any agreements or undertakings which constitute or include a "guarantee agreement", as defined in subsection 112(2.2), in respect of any of the ACo special shares or ACo special preferred shares or Newco Class B preferred shares.

31. Neither ACO nor Newco has, or will have, entered into a "dividend rental arrangement", as defined in subsection 248(1), in respect of any of the shares to be redeemed as part of the Proposed Transactions.

32. None of the ACo special shares or ACO special preferred shares or the Newco Class B preferred shares will be issued or acquired as part of a series of transactions of the type described in subsection 112(2.5).

33. Neither ACO nor Newco will be a corporation described in any of Paragraphs (a) to (f) of the definition of "financial intermediary corporation" in subsection 191(1).

34. Each of ACO and Newco will have the financial capacity to honour, upon presentation for payment, the amount payable under its respective promissory note issued as part of the Proposed Transactions.

PURPOSE OF THE PROPOSED TRANSACTIONS

35. The purpose of the.Proposed Transactions can be summarized as follows:

(a) The economics of the XXXXXXXXXX business are unrelated to the financial services business and, accordingly, it would be preferable to give the shareholders of ACo the choice to make independent investment decisions in respect of their holdings in each business.

(b) The shares of ACO trade at a significant discount when compared to the value of the shares of BCO held by ACo and the value of the XXXXXXXXXX business. The separation of ACO into two separate independent corporations will make it easier for the capital markets to effectively value these two new corporations when comparing them to more specific industry benchmarks and performance criteria.

(c) The separation of ACo and BCO will enhance the ability of management to focus on their respective businesses, pursue independent expansion strategies and raise capital.

RULINGS

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

A. Subject to the application of subsection 55(2) of the Act, a holder of ACO common shares who dissents to the Reorganization and who is given rights of dissent pursuant to the XXXXXXXXXX Company Act, will be deemed by paragraph 84(3) (b) of the Act to have received a taxable dividend equal to the amount by which the consideration received by such dissenting shareholder from ACo for such shareholder's ACO common shares exceeds the PUC thereof. Pursuant to paragraph (j) of the definition of "proceeds of disposition" in section 54 of the Act, subject to subsection 55(2) of the Act, the proceeds of disposition in respect of such ACo common shares received by such dissenting shareholder will be reduced by the amount of the dividend deemed to have been received;

B. Provided that a particular ACO shareholder holds ACO common or preferred shares, as the case may be, as capital property, the provisions of subsection 86(1) will apply, and the provisions of subsection 86(2) will not apply, to the Share Exchange, such that:

(a) the cost of the new ACO common shares and ACo special shares received on the Share Exchange will be deemed by paragraph 86(1)(b) to be an amount equal to that proportion of the ACB to the particular ACO shareholder, immediately before the Share Exchange, of that shareholder's ACo common shares, that

(i) the fair market value, immediately after the Share Exchange, of the new ACO common shares or ACO special shares, as the case may be, is of

(ii) the fair market value, immediately after the Share Exchange, of all of the shares of ACO received by the particular ACo shareholder for that shareholder1s common shares of ACO;

(b) the cost of the new ACO preferred shares and ACO special preferred shares received on the Share Exchange will be deemed by paragraph 86(1)(b) to be an amount equal to that proportion of the ACB to the particular ACo shareholder, immediately before the Share Exchange, of that shareholder's ACO preferred shares, that

(i) the fair market value, immediately after the Share Exchange, of the new ACO preferred shares or ACO special preferred shares, as the case may be, is of

(ii) the fair market value, immediately after the Share Exchange, of all of the shares of ACo received by the particular ACO shareholder for the preferred shares of ACo;

(c) pursuant to paragraph 86(1)(c), a particular ACO shareholder will be deemed to have disposed of that shareholder's ACO common shares for proceeds of disposition equal to the cost to the particular ACo shareholder of the new ACo common shares and ACo special shares determined in (a) above; and

(d) pursuant to paragraph 86(1)(c), a particular ACo shareholder will be deemed to have disposed of that shareholder's ACo preferred shares for proceeds of disposition equal to the cost to the particular ACO shareholder of the new ACo preferred shares and ACo special preferred shares determined in (b) above.

C. Provided that an ACO shareholder who, immediately after the Share Exchange, owns ACo special shares and/or ACO special preferred shares,

(a) holds those shares as capital property;

(b) deals at arm's length with Newco immediately before the Newco Share Exchange;

(c) does not include any portion of the gain or loss otherwise determined, from the disposition of those shares,in computing that shareholder's income for the taxation year in which the exchange takes place;

(d) does not file an election under subsection 85(1) or 85(2) with Newco with respect to those shares; and

(e) does not receive any consideration other than Newco common shares or Class A preferred shares in exchange for those shares;

and further provided that immediately after the Newco Share Exchange;

(f) no such shareholder or any person or persons with whom the shareholder does not deal at arm's length, or no such shareholder together with any person or persons with whom the shareholder does not deal at arm's length, will

(i) control Newco, or

(ii) beneficially own shares of Newco having a FMV of more than 50% of the FMV of all of the outstanding shares of Newco, then,

pursuant to paragraph 85.1(1)(a), such shareholder will be deemed:

(g) to have disposed of that shareholder's ACo special shares or ACo special preferred shares for proceeds of disposition equal to the ACB to that shareholder of those shares immediately before the Newco Share Exchange; and

(h) to have acquired the Newco common shares or Class A preferred shares at a cost to that shareholder equal to the ACB to that shareholder of the ACO special shares or ACO special preferred shares immediately before the Newco Share Exchange.

D. Subject to the application of subsections 69(11) as it may apply to the transfers referred to herein, the provisions of subsection 85(1) will apply to:

(a)the transfer of all AGo special shares and ACO special preferred shares to Newco by any ACO shareholder; and

(b)the transfer by ACo of all of the shares of BCo to Newco as described in paragraph 23,

such that the agreed amount in respect of each transfer will be deemed to be the proceeds of disposition to the transferor and the cost thereof to the transferee provided that the transferor and transferee jointly elect in prescribed form and within the time determined under subsection 85(6). For greater certainty, paragraph 85(1)(e.2) will not apply to the transfers referred to herein.

E. For the purposes of subparagraph (b)(iii) of the definition of PUC in subsection 89(1), the PUG of the:

(a) New ACO common shares, ACo special shares, new ACo preferred shares and ACo special preferred shares issued to the ACo shareholders as described in Paragraph 17;

(b) Newco common shares and Class A preferred shares issued to the ACo shareholders as described in Paragraph 18; and

(c) Newco Class B preferred shares issued to ACO as described in Paragraph 23;

computed without reference to the Act, will be equal to their stated capital as determined for purposes of the XXXXXXXXXX Business Corporations Act or their share capital as determined for purposes of the XXXXXXXXXX Company Act, as appropriate.

In computing the PUC of the New ACO common shares and new ACo preferred shares, subsection 86(2.1) will be applicable. In computing the PUC of the Newco Class A and B preferred shares subsections 85.1(2.1) and 85(2.1), as the case may be, will be applicable.

F. Subsection 84(3) will apply on the redemption:

(a) as described in Paragraph 24, of the ACo special shares and ACo special preferred shares held by Newco, to deem ACO to have paid and Newco to have received; and

(b) as described in Paragraph 24, of the Newco Class B preferred shares issued to ACo, to deem Newco to have paid and ACo to have received

a dividend on such shares equal to the amount, if any, by which the aggregate amount paid upon such redemption exceeds the aggregate PUC in respect of such shares immediately before such redemption, and any such dividend

(c) will be included in computing the income, pursuant to subsection 82(1) and paragraph 12(1)(j), of the person deemed to have received such dividend;

(d) will be deductible by the recipient pursuant to subsection 112(1) in computing its taxable income for the year in which such dividend is deemed to have been received, and such deduction will not be prohibited by any of subsections 112(2.1), (2.2), (2.3) or (2.4);

(e) will be excluded in determining the proceeds of disposition to the recipient of the shares so redeemed or purchased pursuant to paragraph (j) of the definition of "proceeds of disposition" in section 54;

(f) will only be subject to tax under Part IV pursuant to paragraph 186(1)(b) of the Act as Newco will be connected with ACo in respect of the dividend deemed to have been received by Newco and because ACo will be connected with Newco in respect of the dividend deemed to have been received by it;

(g) will not be subject to tax under Parts IV.1 and VI.1 of Act because they will be dividends deemed by paragraph 191(4)(d) to be "excluded dividends" as defined in subsection 191(1) and "excepted dividends" as defined in section 187.1.

G. The provisions of subsection 112(3) will apply to reduce any loss which otherwise would be determined for Newco and ACo as a result of the redemption of shares described in Paragraph 24.

H. The cost to Newco of the ACo Redemption Note and the cost to ACO of the Newco Redemption Note will in each case, upon the issuance thereof, be equal to the principal amount of the particular note. Accordingly, no amount will be included in the income of Newco or ACO upon payment of the principal amount of the particular note.

I. Subsection 7(1.4) will apply to the exchange, described in Paragraph 17, by the option holder, of that option holder's Old ACO stock option for a New ACO stock option and a Newco stock option (the New ACo stock option and Newco stock option collectively referred to hereinafter as the "New Options") provided that, on the Effective Date; the amount by which:

(a) the total value of the shares issuable to the option holder under the New Options

exceeds

(b) the total amount payable by the option holder to acquire those shares under the New Options

does not exceed the amount by which

(c) the total value of the ACo common shares issuable under that option holder's Old ACO stock option

exceeds

(d) the total amount payable by the option holder to acquire those ACo common shares under the Old ACo stock option.

such that the option holder will be deemed not to have disposed of the Old ACo stock options and not to have acquired the New Options, and the New Options will be deemed to be the same options as, and a continuation of, the Old ACo stock options.

For greater certainty, to the extent that subsection 7(1.4) is applicable to the exchange of Old ACo stock options, paragraph 7(1)(b) will not apply in respect of such an exchange.

J. The payment of the ACO Redemption Note held by Newco and the Newco Redemption Note held by ACo, as described in Paragraph 26, will not give rise to a "forgiven amount" within the meaning of subsections 80(1) or 80.01(1). Neither Newco nor ACO will realize any gain nor incur any loss as a result of the payment and cancellation of the ACO Redemption Note and the Newco Redemption Note.

K. Provided the ACo common shares and preferred shares constitute capital property to a particular ACo shareholder immediately prior to the commencement of the Proposed Transactions, the Proposed Transactions will not, in and by themselves, cause the New ACo common shares, ACo special shares, new ACo preferred shares and ACo special preferred shares to be received by that shareholder as a result of the Proposed Transactions not to be capital property of that shareholder, Furthermore, the Proposed Transactions will not, in and by themselves, cause the Newco Class B preferred shares to be received by ACo not to be capital property of ACo.

L. 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 shares in the circumstances described in subparagraph 55(3.1)(b)(iii);

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

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

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

M. The provisions of subsections 15(1), 56(2), 56(4) and 246(1) will not apply to any of the Proposed Transactions, in and of themselves.

N. The provisions of subsection 87(1) will apply in respect of the amalgamation of BCo and Newco described in paragraph 28.

0. Subsection 245(2) will not be applied as a result of the Proposed Transactions, in and of themselves, to redetermine the tax consequences confirmed in the rulings given.

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

The above rulings are based on the Act in its present form and do not take into account any proposed amendments to the Act, which if enacted, could have an effect on the rulings provided herein.

COMMENTS

Nothing in this ruling should be construed as implying that Revenue Canada has reviewed, accepted or otherwise agreed to:

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

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

Yours truly,

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