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: Rules Governing Butterfly Reorganizations
Position: See Issue Sheet
Reasons: See Issue Sheet
XXXXXXXXXX
XXXXXXXXXX 990013
XXXXXXXXXX
Attention: XXXXXXXXXX
XXXXXXXXXX, 1999
Dear Sirs:
Re: XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX
Advance Income Tax Ruling
We are writing in response to your letter of XXXXXXXXXX, wherein you requested an advance income tax ruling on behalf of the above-referenced taxpayers. We acknowledge receipt of your correspondence dated XXXXXXXXXX and the information provided to us during our telephone conversations.
To the best of your knowledge, and that of the taxpayers involved, none of the issues contained herein is:
(i) dealt with in an earlier return of the taxpayers or a related person;
(ii) being considered by a tax services office or taxation centre in connection with a previously filed tax return of the taxpayers or a related person;
(iii) under objection by the taxpayers or a related person;
(iv) subject to a ruling previously issued by the Income Tax Rulings & Interpretations Directorate; or
(v) before the courts or, if a judgement has been issued, the time limit for appeal to a higher court has not expired.
In this letter, the following terms have the meanings specified:
(a.1) "Act" means the Income Tax Act, R.S.C. 1985 c.1 (5th Supp.) 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.1) "Aco" means XXXXXXXXXX;
(c.1) XXXXXXXXXX;
(d.1) "XXXXXXXXXX Shares" means the new shares of XXXXXXXXXX with the terms and conditions described in Paragraph 79;
(e.1) "XXXXXXXXXX Shares" means the new shares of XXXXXXXXXX with the terms and conditions described in Paragraph 79;
(f.1) "adjusted cost base" (also "ACB") has the meaning assigned in section 54 and subsection 248(1);
(g.1) "BCA" means the Business Corporations Act (XXXXXXXXXX);
(h.1) "Business Proportion" has the meaning assigned in Paragraph 96;
(i.1) "CA" means the Canada Business Corporations Act;
(j.1) XXXXXXXXXX;
(k.1) "XXXXXXXXXX Business" means the XXXXXXXXXX business carried on by certain members of the DC2 Group and certain of the XXXXXXXXXX Corporations as described in Paragraphs 14 to 20;
(l.1) "Cco" means XXXXXXXXXX;
(m.1) "Cco Shares" means all of the common shares of Cco owned by Xco;
(n.1) "XXXXXXXXXX Interest" means the interest formerly held directly or indirectly by Xco as described in Paragraph 38;
(o.1) "XXXXXXXXXX Preferred Shares" means the XXXXXXXXXX preferred shares of DC2 which have been redeemed or cancelled;
(p.1) "DC1" means XXXXXXXXXX;
(q.1) "DC1 Amalco" means the amalgamated XXXXXXXXXX company formed on the amalgamation of DC1 and DC1 XXXXXXXXXX ;
(r.1) "DC1 Note" means the promissory note to be issued by DC1 in satisfaction of the purchase of certain DC1 shares as described in Paragraph 67;
(s.1) "DC1 Partnership" means the general partnership XXXXXXXXXX;
(t.1) "DC1 XXXXXXXXXX " means the new XXXXXXXXXX company to be incorporated and subsequently amalgamated with DC1;
(u.1) "DC2" means XXXXXXXXXX;
(v.1) "DC2 A Special Shares" means the Class A non-voting preferred shares of DC2 with the attributes described in Paragraph 90;
(w.1) "DC2 B Special Shares" means the Class B non-voting preferred shares of DC2 with the attributes described in Paragraph 91;
(x.1) "DC2 Group" means DC2 and all of those corporations in which DC2 has a significant influence and any partnerships in which a member of the DC2 Group has a direct or indirect interest;
(y.1) "DC2 Redemption Note" means a promissory note to be issued in satisfaction of the redemption of the DC2 A Special Shares and the DC2 B Special Shares, as described in Paragraph 101;
(z.1) "DC2 Stock Options" means the existing stock options of DC2 described in Paragraph 4;
(a.2) "Eco" means XXXXXXXXXX;
(b.2) "Eco Partnership" means XXXXXXXXXX Partnership;
(c.2) "eligible property" has the meaning assigned by subsection 85(1.1);
(d.2) "Existing A Shares" means the outstanding Class A XXXXXXXXXX shares of DC2;
(e.2) "Existing B Shares" means the outstanding Class B XXXXXXXXXX shares of DC2;
(f.2) "FMV" means fair market value;
(g.2) "ITAR" means the Income Tax Application Rules;
(h.2) "XXXXXXXXXX" has the meaning assigned in Paragraph 23(e);
(i.2) "XXXXXXXXXX Business" means the XXXXXXXXXX business carried on by certain members of the DC2 Group and certain of the XXXXXXXXXX Corporations as described in Paragraph 12(d) and Paragraphs 21 to 26;
(j.2) "New A Shares" means the new Class A XXXXXXXXXX shares of DC2 with the terms and conditions described in Paragraph 89;
(k.2) "New B Shares" means the new Class B XXXXXXXXXX shares of DC2 with the terms and conditions described in Paragraph 89;
(l.2) "Newco" means a newly-created taxable Canadian corporation incorporated under the CA as described in Paragraph 83;
(m.2) "Newco Common Shares" means the fully participating voting common shares of Newco issued to DC2 in consideration for the Transferred Assets as described in Paragraph 86;
(n.2) "Newco Note" means the demand, non-interest bearing promissory note described in Paragraph 97(a);
(o.2) "Non-Current Debt" means the debt obligations of a corporation other than current liabilities;
(p.2) "Paragraph" refers to a numbered paragraph in this letter;
(q.2) "Plan of Arrangement" means the proposed plan of arrangement under the BCA to effect the divisive reorganization of DC2;
(r.2) "Preferred Securities" means the preferred securities of DC2 described in Paragraph 3;
(s.2) "Proposed Transactions" means the proposed transactions described herein;
(t.2) "public corporation" has the meaning assigned in subsection 89(1);
(u.2) "PUC" means "paid-up capital" as that expression is defined in subsection 89(1);
(v.2) "Q1 Amalco" means the amalgamated XXXXXXXXXX company formed on the amalgamation of Q1 Ltd. and Q1 XXXXXXXXXX;
(w.2) "Q1 Ltd." means XXXXXXXXXX;
(x.2) "Q1 XXXXXXXXXX " means the new XXXXXXXXXX company to be incorporated and subsequently amalgamated with Q1 Ltd.;
(y.2) "Q2 Ltd." means XXXXXXXXXX;
(z.2) "Q2 Amalco" means the amalgamated XXXXXXXXXX company formed on the amalgamation of Q2 Ltd. and Q2 XXXXXXXXXX;
(a.3) "Q2 XXXXXXXXXX" means a new XXXXXXXXXX company to be incorporated and subsequently amalgamated with Q2 Ltd.;
(b.3) "Q3 Ltd." means XXXXXXXXXX, a wholly owned subsidiary of DC2;
(c.3) "Q3 Amalco" means the amalgamated XXXXXXXXXX company formed on the amalgamation of Q3 Ltd. and Q3XXXXXXXXXX;
(d.3) "Q3 XXXXXXXXXX " means the new XXXXXXXXXX company to be incorporated and subsequently amalgamated with Q3 Ltd.;
(e.3) "Q4 Ltd." means XXXXXXXXXX;
(f.3) "Q4 Amalco" means the amalgamated XXXXXXXXXX company formed on the amalgamation of Q4 Ltd. and Q4 XXXXXXXXXX;
(g.3) "Q4 XXXXXXXXXX " means the new XXXXXXXXXX company to be incorporated and subsequently amalgamated with Q4 Ltd.;
(h.3) "RDTOH" means "refundable dividend tax on hand" as defined in subsection 129(3);
(i.3) "related" has the meaning assigned by subsection 251(2);
(j.3) "related group" has the meaning assigned by subsection 251(4);
(k.3) "Ruling Request" means the request for advance income tax rulings contained in this letter;
(l.3) "XXXXXXXXXX Business" means the XXXXXXXXXX business carried on by the DC2 Group as described in Paragraph 30;
(m.3) "XXXXXXXXXX Preferred Shares" means the previously outstanding XXXXXXXXXX preferred shares of DC2;
(n.3) "significant influence" has the meaning assigned by section 3050 of the CICA Handbook and for purposes of this letter, a corporation will be considered to have significant influence over a corporation if it has significant influence over that corporation or over any other corporation that has significant influence over that corporation;
(o.3) "specified financial institution" has the meaning assigned in subsection 248(1);
(p.3) "specified investment business" has the meaning assigned by subsection 125(7);
(q.3) "specified shareholder" has the meaning assigned by subsection 248(1), as modified by subsections 55(3.2), (3.3) and (5);
(r.3) XXXXXXXXXX;
(s.3) "stated capital" has the meaning assigned by the BCA or CA, as the case may be;
(t.3) "XXXXXXXXXX Corporations" means those corporations in which DC2 or a member of the DC2 Group has an interest, other than a significant interest, and which carry on a business or businesses which are the same as, or complementary to, a business or businesses carried on by the DC2 Group and, where any such corporation carries on a business or businesses complementary to the XXXXXXXXXX Business, all of the shares and debt of such corporation owned by a member of the DC2 Group will be owned directly or indirectly by TC2 immediately following the Proposed Transactions;
(u.3) "subject corporation" has the meaning assigned by subsection 186(3);
(v.3) "TC1" means a new BCA corporation to which the TC1 Transferred Assets will be transferred;
(w.3) "TC1 Business Proportion" has the meaning assigned in Paragraph 60;
(x.3) "TC1 Note" means the promissory note to be issued by TC1 in satisfaction of the redemption of the TC1 Special Shares as described in Paragraph 68;
(y.3) "TC1 Special Shares" means the non-voting preferred shares of TC1 with the terms and conditions described in Paragraph 56;
(z.3) "TC1 Transferred Assets" means those assets of DC1 to be transferred by DC1 to TC1, as described in Paragraph 63;
(a.4) "TC2" means a new corporation to which the Newco Common Shares will be transferred;
(b.4) "TC2 A Shares" means the Class A XXXXXXXXXX shares of TC2 as described in Paragraph 84;
(c.4) "TC2 B Shares" means the Class B XXXXXXXXXX shares of TC2 as described in Paragraph 84;
(d.4) "TC2 Redemption Note" means the promissory note to be issued in satisfaction of the redemption of the TC2 Special Shares as described in Paragraph 100;
(e.4) "TC2 Special Shares" means the non-voting preferred shares of TC2 with the terms and conditions described in Paragraph 84;
(f.4) "taxable Canadian corporation" has the meaning assigned in subsection 89(1);
(g.4) "Tco" means XXXXXXXXXX;
(h.4) "XXXXXXXXXX Business" means the XXXXXXXXXX business carried on by certain members of the DC2 Group as described in Paragraphs 27 and 28;
(i.4) "Transferred Assets" means those assets of DC2 to be transferred by DC2 to Newco as described in Paragraph 85;
(j.4) "Uco" means XXXXXXXXXX, a corporation all of the common shares of which are owned by DC1;
(k.4) "Vco" means XXXXXXXXXX;
(l.4) "Wco" means XXXXXXXXXX;
(m.4) "wholly owned corporation" has the meaning assigned in subsection 85(1.3);
(n.4) "Xco" means XXXXXXXXXX;
(o.4) "Xco A Shares" means the outstanding Class A voting shares of Xco;
(p.4) "Xco B Shares" means the outstanding Class B non-voting shares of Xco;
(q.3) "Yco" means XXXXXXXXXX;
(r.4) "Z1 Inc." means XXXXXXXXXX;
(s.4) "Z2 Inc." means XXXXXXXXXX;
(t.4) "Z3 Inc." means XXXXXXXXXX;
(u.4) "Z4 Inc." means XXXXXXXXXX;
(v.4) "Z5 Inc." means XXXXXXXXXX; and
(w.4) "Z6 Inc." means XXXXXXXXXX, a corporation controlled by DC2.
Our understanding of the facts, Proposed Transactions and purpose of the Proposed Transactions is as set forth below.
Facts
1. DC2 is a public corporation, a taxable Canadian corporation and a subject corporation with its head office in XXXXXXXXXX. It was incorporated under the laws of XXXXXXXXXX on XXXXXXXXXX and was continued under the BCA on XXXXXXXXXX. DC2 is a XXXXXXXXXX.
2. DC2 is authorized to issue an unlimited number of Existing A Shares, Existing B Shares, XXXXXXXXXX Preferred Shares issuable in series and XXXXXXXXXX Preferred Shares issuable in series. The Existing Class A Shares are listed on XXXXXXXXXX Stock Exchange and the Existing Class B Shares are listed on XXXXXXXXXX.
3. As ofXXXXXXXXXX, DC2 had the following issued and outstanding share capital:
Class
Number Outstanding
Existing A Shares
XXXXXXXXXX
Existing B Shares
XXXXXXXXXX
The PUC of the Existing B Shares is approximately $XXXXXXXXXX.
XXXXXXXXXX.
DC2 has issued and outstanding approximately $XXXXXXXXXX of Preferred Securities with maturity dates of XXXXXXXXXX years. These Preferred Securities are debt instruments, repayable at the option of DC2, XXXXXXXXXX years after their date of issuance. However, they are accounted for as share capital in the financial statements of DC2. Each series of Preferred Securities bears interest at approximately XXXXXXXXXX% per annum which interest may be deferred for specified periods and may be satisfied by the issuance of Existing B Shares. The Preferred Securities are Non-Current Debt of DC2.
4. DC2 has obligations relating to stock options under which certain employees of DC2 and other corporations in the DC2 Group are entitled to acquire XXXXXXXXXX Shares at specified exercise prices.
5. During its XXXXXXXXXX fiscal period, DC2 redeemed all of its issued and outstanding XXXXXXXXXX Preferred Shares. DC2 also redeemed or cancelled all of its outstanding XXXXXXXXXX Preferred Shares. The decision to redeem or cancel the XXXXXXXXXX Preferred Shares and the XXXXXXXXXX Preferred Shares occurred prior to the decision to undertake the Proposed Transactions. The redemption of the XXXXXXXXXX Preferred Shares and the redemption or cancellation of the XXXXXXXXXX Preferred Shares was implemented to "clean-up" DC2's share capital by eliminating all classes of outstanding shares other than the Existing A Shares and the Existing B Shares. The redemption of the XXXXXXXXXX Preferred Shares and the redemption or cancellation of XXXXXXXXXX Preferred Shares was not in contemplation of, or part of the series of transactions that includes, the Proposed Transactions and would have occurred whether or not the Proposed Transactions are implemented. In addition, there is no connection between the decision to redeem or cancel the XXXXXXXXXX Preferred Shares and the XXXXXXXXXX Preferred Shares and the issuance of XXXXXXXXXX Existing B Shares as described in Paragraph 6.
6. On XXXXXXXXXX, DC2 issued XXXXXXXXXX Shares.
XXXXXXXXXX.
7. DC2 is controlled by a related group of persons which includes XXXXXXXXXX, individuals related to them and various corporations controlled by one or more of them (referred to hereafter as the "XXXXXXXXXX"). To the best of the knowledge of the directors and senior officers of DC2, as of the date hereof, no person beneficially owns, or is deemed to own, for the purposes of determining whether that person is a specified shareholder, more than 10% of the outstanding Existing A Shares or Existing B Shares, other than XXXXXXXXXX and other members of the XXXXXXXXXX.
XXXXXXXXXX.
8. DC1 has two classes of shares outstanding: common shares and Class B voting preferred shares. DC2 owns all of the outstanding common shares of DC1 which it holds as capital property. On XXXXXXXXXX, the Class B preferred shares were owned as follows:
Holder
Holder
Number Held
Aggregate Redemption Amount
Aggregate ACB
Q1 Ltd.
XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX
Wco
XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX.
9. DC2 owns all of the outstanding common shares of Q1 Ltd. Uco owns all the preferred shares of Q1 Ltd. which it recently acquired from DC1. The preferred shares of Q1 Ltd. have an aggregate redemption amount of $XXXXXXXXXX and an aggregate ACB of $XXXXXXXXXX.
10. DC2 owns all of the outstanding common shares of Z4 Inc. DC1 owns all the preferred shares of Z4 Inc. The preferred shares of Z4 Inc. have an aggregate redemption amount of $XXXXXXXXXX and an aggregate ACB of $XXXXXXXXXX.
11. Z4 Inc. owns all of the outstanding common shares of Wco. Uco owns all of the outstanding preferred shares of Wco. The preferred shares of Wco have an aggregate redemption amount of $XXXXXXXXXX and an aggregate ACB of $XXXXXXXXXX. Uco also owns all the preferred shares of Q1 Ltd., all of the preferred shares of Q2 Ltd. and all of the preferred shares of Q4 Ltd. each of which has an aggregate redemption amount and PUC equal to its aggregate ACB.
XXXXXXXXXX.
12. Historically, the DC2 Group has grown through a combination of internally generated expansion and the acquisition of assets or interests in other corporations which complement existing business operations or facilitate the achievement of corporate objectives. Similarly, from time to time, assets or corporate interests have been sold or rationalized where continued ownership is inconsistent with current business operations or corporate objectives. The most recent acquisitions or proposed acquisitions of significance within the DC2 Group, with the exception of the acquisition of the interest in Xco (described in detail in Paragraphs 31-33), are the following:
(a) XXXXXXXXXX.
(b) XXXXXXXXXX.
(c) XXXXXXXXXX.
(d) XXXXXXXXXX.
(e) XXXXXXXXXX.
(f) XXXXXXXXXX.
(g) XXXXXXXXXX.
All of the acquisitions or proposed acquisitions described above have occurred or will occur as part of DC2's normal business operations and have not or will not be undertaken in contemplation of, or as part of the series of transactions that includes, the Proposed Transactions.
13. The most recent dispositions of significance within the DC2 Group are the following:
(a) XXXXXXXXXX.
(b) XXXXXXXXXX.
(c) XXXXXXXXXX.
(d) XXXXXXXXXX.
(e) XXXXXXXXXX.
(f) XXXXXXXXXX.
Other than as described in this letter, no significant arm's length acquisitions or dispositions of shares or assets by a member of the DC2 Group are currently under negotiation; however, it is conceivable such may occur at any time as circumstances change or as opportunities may arise.
All of the dispositions and proposed dispositions described in this Paragraph occurred or will occur in the normal course of the business of the transferor and did not, or will not occur, in contemplation of, or as part of the Proposed Transactions. The Cco/Yco transaction will proceed, XXXXXXXXXX, irrespective of whether the Proposed Transactions will occur.
14. XXXXXXXXXX.
15. XXXXXXXXXX.
16. XXXXXXXXXX.
17. XXXXXXXXXX.
18. XXXXXXXXXX.
19. The XXXXXXXXXX Business is carried on in:
(a) DC1 Partnership, a general partnership the partners of which are DC1, Q2 Ltd., Q3 Ltd. and Q4 Ltd.; and
(b) XXXXXXXXXX Partnership, a general partnership in which DC1 has a XXXXXXXXXX% interest. There are two other partners, each of whom deals with DC2 at arm's length.
20. The DC2 Group owns shareholdings in a number of corporations which are a strategic and integral part of the XXXXXXXXXX Business, details of which are as follows:
Corporation
Owned By
Number of Shares Owned
% of Outstanding Shares
Approximate FMV
XXXXXXXXXX
XXXXXXXXX
XXXXXXXXX
XXXXXXXX
XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXX
XXXXXXXXX
XXXXXXXX
XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXX
XXXXXXXXX
XXXXXXXX
XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXX
XXXXXXXXX
XXXXXXXX
XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXX
XXXXXXXX
XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXX
XXXXXXXXX
XXXXXXXX
XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXX
XXXXXXXX
XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXX
XXXXXXXX
XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXX
XXXXXXXXX
XXXXXXXX
XXXXXXXXXX
21. XXXXXXXXXX.
22. XXXXXXXXXX.
23. XXXXXXXXXX.
(a) XXXXXXXXXX
(b) XXXXXXXXXX
(c) XXXXXXXXXX
(d) XXXXXXXXXX
(e) XXXXXXXXXX
(f) XXXXXXXXXX
24. XXXXXXXXXX.
25. XXXXXXXXXX.
26. XXXXXXXXXX.
27. XXXXXXXXXX.
28. XXXXXXXXXX.
29. XXXXXXXXXX.
30. XXXXXXXXXX.
31. XXXXXXXXXX.
32. XXXXXXXXXX.
33. XXXXXXXXXX.
34. XXXXXXXXXX.
35. XXXXXXXXXX.
36. XXXXXXXXXX.
37. XXXXXXXXXX.
38. XXXXXXXXXX.
39. XXXXXXXXXX.
40. XXXXXXXXXX.
41. XXXXXXXXXX.
42. XXXXXXXXXX.
43. The fiscal year end for DC1, DC2 and each corporation in the DC2 Group is XXXXXXXXXX. It is anticipated that, at the end of the taxation year in which the Proposed Transactions are carried out, DC2 will have a RDTOH balance, but DC1 will not have a RDTOH balance.
44. No property has or will become property of any member of the DC2 Group and no liabilities have been or will be incurred by any member of the DC2 Group in contemplation of and before the Proposed Transactions, except in the ordinary course of business, or as described herein.
45. Except as outlined herein, no member of the DC2 Group has any specific intention of disposing of any assets to a partnership or to an unrelated person following the Proposed Transactions and no such corporation will dispose of any of its assets as part of the series of transactions or events which includes the Proposed Transactions, other than in the ordinary course of business, or as described herein.
46. XXXXXXXXXX.
47. No member of the XXXXXXXXXX will, as part of the series of transactions or events which includes the Proposed Transactions:
(a) dispose of any shares of DC2 or TC2, or any property more than 10% of the FMV of which at any time during the course of the series of transactions which includes the Proposed Transactions is derived from one or more shares of DC2 or TC2, except where such shares are acquired by a person related to the vendor for the purposes of paragraph 55(3.1)(b); or
(b) acquire any shares of DC2 in contemplation of the Proposed Transactions, except where that person acquires such shares from a person related to the acquiror for the purposes of paragraph 55(3.1)(b).
48. 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 outstanding shares of DC1, DC2, TC1 or TC2.
49. None of DC1, DC2, TC1 or TC2 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 purchased or redeemed as part of the Proposed Transactions.
50. None of the shares issued by DC1, DC2, TC1 or TC2 will be issued or acquired as part of a series of transactions of the type described in subsection 112(2.5).
51. All of the corporations described herein, with the exception of some of the XXXXXXXXXX Corporations, are taxable Canadian corporations. In addition, no member of the DC2 Group, including TC1 and TC2, will be a corporation described in any of paragraphs (a) to (f) of the definition of "financial intermediary corporation" in subsection 191(1).
52. Each of DC1, DC2, TC1 and TC2 will have the financial capacity to honour, upon presentation for payment, the amount payable under the promissory note issued by it as part of the Proposed Transactions.
53. XXXXXXXXXX.
Proposed Transactions
54. Immediately after the declaration and payment of accrued dividends, DC2 will acquire at FMV all of the outstanding Class B preferred shares of DC1 from Q2 Ltd., Q3 Ltd. and Wco (or any corporation in the DC2 Group which owns such shares) such that all of the shares of DC1 will be owned by DC2. The consideration payable by DC2 to each transferor will be a reduction (i.e., a repayment by the particular transferor) of amounts owing from the particular transferor to DC2 or by the creation of an amount payable by DC2 to the transferor equal to the FMV of the Class B preferred shares so acquired.
55. Immediately after the declaration and payment of accrued dividends, Uco will transfer to DC2 at FMV all the preferred shares of Q1 Ltd., Q2 Ltd. and Wco and will transfer to DC1 at FMV all of the preferred shares of Q4 Ltd. The consideration payable by DC1 and DC2 to Uco will be the creation of an amount payable by DC1 or DC2 to Uco (which amount will not be convertible into other property) having a FMV equal to the FMV of the preferred shares so acquired. The consideration payable by DC1 to Uco will consist of:
(a) the reduction of any intercompany payable owing by Uco to DC1;
(b) the creation of an amount payable by DC1 to Uco (which amount will not be convertible into other property); or
(c) a combination of amounts referred to in (a) or (b) above.
The aggregate of the amounts referred to in (a) to (c) above will have a FMV equal to the FMV of the preferred shares of Q4 Ltd. so acquired by DC1.
56. TC1 will be a taxable Canadian corporation incorporated by DC2 under the BCA. Prior to the transactions relating hereto, TC1 will not have had, at any time, any assets, liabilities or outstanding shares. TC1's Articles of Incorporation will provide that its authorized capital will include common shares, each of which will be a fully participating voting common share with the holder thereof entitled to one vote at meetings of shareholders of TC1. TC1's authorized capital also will include the TC1 Special Shares having the following attributes:
(a) each TC1 Special Share will be redeemable, subject to applicable law, at any time at the option of TC1 at a redemption amount equal to the aggregate FMV of the TC1 Transferred Assets transferred by DC1 to TC1, divided by the number of TC1 Special Shares issued as consideration therefor (plus any declared but unpaid dividends);
(b) each TC1 Special Share will be retractable, subject to applicable law, at any time at the option of the holder at a retraction amount equal to the redemption amount described in subparagraph (a);
(c) the holder of each TC1 Special 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 TC1;
(d) there will be a provision restricting the payment of dividends on other classes of shares so that no such dividends may be paid on any other class of shares of TC1 if the resulting realizable value of the net assets of TC1 after payment of the dividends would be less than the aggregate of the redemption amounts of all of the TC1 Special Shares then outstanding;
(e) the holder of each TC1 Special Share will be entitled, upon the liquidation, dissolution or winding-up of TC1, to a payment in priority to all other classes of shares of TC1 of an amount equal to the redemption amount thereof to the extent of the amount or value of property available under applicable law for payment to the shareholders upon dissolution, but will be entitled to no more than the amount of that payment; and
(f) the holder of each TC1 Special Share will not be entitled to vote at meetings of shareholders of TC1, other than as provided under the BCA.
57. Immediately before the transfer described in Paragraph 63, the property of DC1 will be determined on a consolidated basis by including the appropriate pro rata share of the assets of any corporation over which DC1 has the ability to exercise significant influence (DC1 and such corporations will hereinafter be referred to as the "DC1 Group") which assets will be classified into three types of property:
(a) cash or near cash property, comprising all of the current assets of the DC1 Group including any cash, liquid investments, prepaid expenses, inventory and accounts receivable;
(b) business property, comprising all of the assets of the DC1 Group, other than cash or near cash property, any income from which would be income from a business (other than a specified investment business); and
(c) investment property, comprising all of the assets of the DC1 Group, other than cash or near cash property, any income from which would constitute income from property or from a specified investment business.
It is anticipated that the DC1 Group will not have any investment property immediately before the transfer of property described in Paragraph 63.
An interest in any of the XXXXXXXXXX Corporations by any member of the DC1 Group will be considered business property for the purposes of the Proposed Transactions described herein.
For the purpose of calculating the net FMV of the types of property of DC1, any particular corporation in the DC1 Group will be considered to own its respective partnership share of each property owned by any partnership of which such corporation is a partner.
For greater certainty, the FMV of the shares (including warrants to acquire shares) of any corporation over which a corporate shareholder has the ability to exercise significant influence and of any indebtedness receivable by the corporate shareholder from such a corporation will be allocated between the three types of property described above by multiplying the FMV of the shares (or warrants) of the particular corporation or the amount receivable from the particular corporation, 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 Paragraphs 58 and 59) is of the aggregate net FMV of all of the property owned by such corporation.
58. In determining, on a consolidated basis, the net FMV of each type of property of DC1 immediately before the transfer described in Paragraph 63, the liabilities of DC1 and any corporation over which DC1 exercises significant influence will be allocated to, and will be deducted in the calculation of, the net FMV of each type of property of such corporation in the following manner:
(a) in determining the net FMV of each type of property of a corporation over which DC1 exercises significant influence, immediately before the transfer described in Paragraph 63, the liabilities of that particular corporation will be allocated to, and will be deducted in the calculation of, the net FMV of each type of property of the particular corporation in the following manner:
(i) current liabilities of such corporation will be allocated to the cash or near cash property (including any cash, accounts receivable, inventory and prepaid expenses) of such corporation in the proportion that the FMV of each such property is of the FMV of all cash or near cash property owned by the particular corporation. To the extent that the allocation of current liabilities as described herein exceeds the aggregate FMV of the cash or near cash property of the particular corporation, such corporation will be considered to have a negative amount of cash or near cash property;
(ii) any accounts receivable, inventory and prepaid expenses of the particular corporation that are initially classified in accordance with (i) above as cash or near cash property, that will relate to a business that will be carried on by it and that will be collected, sold or consumed by that particular corporation in the ordinary course of that business, will then be classified as business property and the net FMV thereof, determined after the allocation of current liabilities described in (i) above, 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;
(iii) liabilities, other than current liabilities, of such corporation 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. To the extent that the allocation of liabilities that pertain to a particular type of property as described herein exceeds the aggregate FMV of all that particular type of property of the particular corporation, the particular corporation will be considered to have a negative amount of that type of property;
(iv) any liabilities, other than current liabilities, of such corporation which do not relate to a particular type of property will then be allocated to the cash or near cash property, business property and investment property, if any, of such corporation based on the relative net FMV of each type of property prior to the allocation of such liabilities, but after the allocation of the liabilities described in subparagraphs (a)(i) and (a)(iii) above.
(b) In determining, on a consolidated basis, the net FMV of each type of property of DC1 immediately before the transfers of property described in Paragraph 63, DC1 will include the appropriate pro rata share of the net FMV of each type of property of any corporation over which DC1 exercises significant influence, as determined in accordance with subparagraph (a) herein, and any liabilities of DC1 will then be allocated to, and be deducted in the calculation of, the net FMV of each type of property of DC1 in the following manner:
(i) current liabilities of DC1 will be allocated to the cash or near cash property (including any cash, accounts receivable, inventory and prepaid expenses) of DC1 in the proportion that the FMV of each such property is of the FMV of all cash or near cash property owned by it. The allocation of current liabilities as described herein will not exceed the aggregate FMV of the cash or near cash property of DC1;
(ii) any accounts receivable, inventory and prepaid expenses of DC1 that are initially classified in accordance with (i) above as cash or near cash property, that relate to a business carried on by DC1 and that will be collected, sold or consumed by DC1 or TC1, as the case may be, in the ordinary course of that business, will then be classified as business property and the net FMV thereof, determined after the allocation of current liabilities described in (i) above, 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;
(iii) liabilities of DC1, other than current liabilities, that relate to a particular property will be allocated to the particular property (and effectively to the type to which the particular property belongs) to the extent of its FMV. The liabilities that pertain to a type of property, but not to a particular property, then will be allocated to that type of property, but not in excess of the net FMV of such type of property after the allocation of liabilities to a particular property as described herein; and
(iv) if any liabilities remain after the allocations described in steps (b)(i) and (b)(iii) above are made ("excess unallocated liabilities"), such excess unallocated liabilities will then be allocated to the cash or near cash property, business property and investment property, if any, of DC1, based on the relative net FMV of each type of property prior to the allocation of such excess unallocated liabilities.
59. For greater certainty, in determining the consolidated net FMV of each type of property of DC1, as described in Paragraphs 57 and 58, the following principles will apply:
(a) any tax-related accounts in any corporation (such as deferred income taxes, tax shield amounts and inherent tax liabilities pertaining to unrealized income or capital gains) will be ignored;
(b) the amount of any liability will be the principal amount;
(c) no amount will be considered to be a liability unless it represents a true legal liability which is capable of quantification;
(d) deferred revenue which represents revenue received in the ordinary course of business, the recognition of which has been deferred due to the legal obligation of the recipient either to provide services or deliver goods to the customer from which such revenue was received, will be treated as a liability, to the extent the amount of such deferred revenue gives rise to a legal obligation to pay such amount should the services not be provided or the goods not be delivered. The amount of any deferred revenue which does not represent such a legal obligation will not be considered a liability;
(e) the portion of the long-term debt due within one year will be treated as current liabilities and the balance of the long-term debt will constitute the Non-Current Debt; and
(f) the liabilities of any particular member of the DC1 Group will include its respective partnership share of each liability of any partnership of which such member is a partner.
60. DC2 will transfer to TC1 that number of DC1 common shares with an aggregate FMV equal to a proportion ("TC1 Business Proportion") of the aggregate FMV of all DC1 shares outstanding at that time. As sole consideration for the transfer, TC1 will issue common shares to DC2. The TC1 Business Proportion is the proportion that:
(a) the net FMV of the business property of DC1 that will be transferred to TC1 as described in Paragraph 63,
is of
(b) the net FMV of all of the business property of DC1,
determined immediately before the transfer to TC1 and by applying the rules in Paragraphs 57-59.
61. DC2 and TC1 will jointly elect, in prescribed form and within the time determined under subsection 85(6), for the provisions of subsection 85(1) to apply to the transfer of the DC1 shares to TC1. The agreed amount will be the ACB to DC2 of the DC1 shares transferred, which amount will not exceed the FMV of those shares.
62. Pursuant to section 26(3) of the BCA, the addition to the stated capital of TC1 in respect of the issuance of its common shares to DC2 will not exceed the agreed amount under subsection 85(1) in respect of the transfer of the DC1 shares to TC1.
63. DC1 will transfer to TC1 at FMV the following assets ("TC1 Transferred Assets"):
(a) all of the common shares of Eco that DC1 owns (i.e., all of the XXXXXXXXXX% shareholding), all of its XXXXXXXXXX% interest in the Eco Partnership and all of the preferred shares of Z4 Inc.;
(b) certain cash or near cash, if any, owned by DC1; and
(c) certain investment property, if any, owned by DC1
such that, immediately after the transfer the net FMV of the cash or near cash property, the business property and the investment property, respectively, of TC1, calculated in accordance with the rules in Paragraphs 57-59, will be equal to the TC1 Business Proportion of the net FMV of the cash or near cash property, the business property and the investment property, respectively, of DC1 determined immediately before the transfer, calculated in accordance with the rules in Paragraphs 57-59.
Immediately following the settlement of the TC1 Note referred to in Paragraph 71, the net FMV of the cash or near cash property, the business property and the investment property retained by DC1 calculated in accordance with the rules in Paragraphs 57-59, will be equal to 1 - TC1 Business Proportion of the net FMV of the cash or near cash property, the business property and the investment property, respectively, of DC1 determined immediately before the transfer.
64. As consideration for the transfer of the TC1 Transferred Assets to TC1, TC1 will assume liabilities of DC1 and issue TC1 Special Shares to DC1. The aggregate redemption amount of the TC1 Special Shares will equal the amount by which the aggregate FMV of the TC1 Transferred Assets exceeds any consideration other than shares of TC1 received by DC1.
65. DC1 and TC1 will jointly elect, in prescribed form and within the time determined under subsection 85(6), for the provisions of subsection 85(1) to apply to the transfer to TC1 of each capital property (other than depreciable property of a prescribed class) included in the TC1 Transferred Assets. Specifically, the amount agreed upon in each joint election will not be less than the lesser of the amounts described in paragraph 85(1)(c.1), will not exceed the FMV of the respective property and will not be less than the minimum amount specified under paragraph 85(1)(b).
66. Pursuant to section 26(3) of the BCA, the addition to the stated capital of TC1 in respect of the issuance of the TC1 Special Shares will not exceed the amount by which the aggregate of the agreed amounts under subsection 85(1) in respect of the TC1 Transferred Assets exceeds any liabilities assumed by TC1 as consideration for the transfer.
67. DC1 will purchase for cancellation all of the DC1 shares owned by TC1 for an amount equal to the aggregate FMV of those shares and DC1 will issue to TC1 in consideration therefor the DC1 Note, being a demand promissory note with a face amount and a principal amount equal to the aggregate purchase price of the DC1 shares purchased from TC1. TC1 will accept the DC1 Note as full payment of the amount owing by DC1 on the purchase of the DC1 shares, with the risk of the note being dishonoured.
68. TC1 will redeem from DC1 all of its TC1 Special Shares for an amount equal to the aggregate of the redemption amounts of the shares so redeemed and will issue to DC1 the TC1 Note, being a demand promissory note with a face amount and principal amount equal to the aggregate of the foregoing redemption amounts. DC1 will accept such note as full payment of the redemption amounts of the TC1 Special Shares, with the risk of the note being dishonoured.
69. Each of the DC1 Note and the TC1 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 average monthly prime rate of a Canadian chartered bank.
70. DC1 will pay the principal amount of the DC1 Note by transferring to TC1 the TC1 Note which will be accepted by TC1 in full payment of DC1's obligation.
71. TC1 will pay the principal amount of the TC1 Note by transferring to DC1 the DC1 Note which will be accepted by DC1 in full payment of TC1's obligation. The DC1 Note and the TC1 Note will both thereupon be marked paid in full and cancelled.
72. Each of DC1, Q1 Ltd., Q2 Ltd., Q3 Ltd. and Q4 Ltd. will be XXXXXXXXXX .
73. Each of DC1 XXXXXXXXXX, Q1 XXXXXXXXXX, Q2 XXXXXXXXXX, Q3 XXXXXXXXXX and Q4 XXXXXXXXXX will be a taxable Canadian corporation and XXXXXXXXXX. Prior to the transactions relating hereto, none of these corporations will have any assets or liabilities. Each of DC1, Q1 Ltd., Q2 Ltd., Q3 Ltd., and Q4 Ltd. will subscribe, on incorporation, for one share of DC1 XXXXXXXXXX, Q1 XXXXXXXXXX, Q2 XXXXXXXXXX, Q3 XXXXXXXXXX and Q4 XXXXXXXXXX, respectively.
74. Under the applicable provisions of the XXXXXXXXXX Act (XXXXXXXXXX), DC1 will be amalgamated with DC1 XXXXXXXXXX to form DC1 Amalco, with the result that DC1 Amalco will be a XXXXXXXXXX. Q1 Ltd. will be amalgamated with Q1 XXXXXXXXXX to form Q1 Amalco, with the result that Q1 Amalco will be a XXXXXXXXXX. Q2 Ltd. will be amalgamated with Q2 XXXXXXXXXX to form Q2 Amalco, with the result that Q2 Amalco will be a XXXXXXXXXX. Q3 Ltd. will be amalgamated with Q3 XXXXXXXXXX to form Q3 Amalco, with the result that Q3 Amalco will be a XXXXXXXXXX. Q4 Ltd. will be amalgamated with Q4 XXXXXXXXXX to form Q4 Amalco, with the result that Q4 Amalco will be a XXXXXXXXXX. With respect to DC1 Amalco, Q1 Amalco, Q2 Amalco and Q3 Amalco, in each case DC2 will receive all of the outstanding common shares of the particular amalgamated corporation issued as a consequence of the amalgamation. With respect to Q4 Amalco, DC1 Amalco will receive all of the Q4 Amalco common shares and preferred shares issued as a consequence of the amalgamation. DC2 will receive preferred shares of DC1 Amalco, Q1 Amalco and Q2 Amalco in exchange for the preferred shares of DC1, Q1 Ltd. and Q2 Ltd., respectively, owned immediately prior to the amalgamations.
75. For greater certainty, under the terms of each amalgamation described in Paragraph 74:
(a) all the property (except amounts receivable from any predecessor corporation or shares of the capital stock of any predecessor corporation) of a particular predecessor corporation immediately before the amalgamation will become property of the amalgamated corporation by virtue of the amalgamation;
(b) all the liabilities (except amounts payable to any predecessor corporation) of a particular predecessor corporation will become liabilities of the amalgamated corporation by virtue of the amalgamation;
(c) all of the shareholders (except any predecessor corporation) of the predecessor corporations immediately before the merger will receive shares of the capital stock of the new corporation because of the amalgamation; and
(d) the FMV of the shares of the amalgamated corporation immediately after the amalgamation received by a shareholder of a predecessor corporation will be equal to the aggregate FMV of the shares of each predecessor corporation owned by the shareholder immediately before the amalgamation.
76. The sole purpose of the conversion of DC1, Q1 Ltd., Q2 Ltd., Q3 Ltd., and Q4 Ltd., to XXXXXXXXXX is to XXXXXXXXXX.
77. DC2 will transfer all of the Xco A Shares and the Xco B Shares that it owns to XXXXXXXXXX in consideration of XXXXXXXXXX issuing common shares to DC2.
78. DC2 and XXXXXXXXXX will jointly elect, in prescribed form and within the time determined under subsection 85(6), for the provisions of subsection 85(1) to apply to the transfer of the Xco A Shares and the Xco B Shares to XXXXXXXXXX. The amount agreed upon in each joint election will be the ACB to DC2 of the particular shares transferred, and in each case the agreed amount will not exceed the FMV of the particular property.
79. XXXXXXXXXX will amend its Articles of Incorporation to provide that its authorized capital will include XXXXXXXXXX Shares and XXXXXXXXXX Shares having the following attributes:
XXXXXXXXXX.
80. DC2 will exchange each common share of XXXXXXXXXX that it owns for one XXXXXXXXXX Share and one XXXXXXXXXX Share.
81. Pursuant to section 26(3) of the BCA, the aggregate addition to the stated capital of XXXXXXXXXX in respect of the issuance of the XXXXXXXXXX Shares and the XXXXXXXXXX Shares will not exceed the aggregate PUC of the common shares of XXXXXXXXXX exchanged therefor and will be allocated as follows:
(a) the addition to the stated capital of the XXXXXXXXXX Shares will equal that proportion of the aggregate PUC of the common shares of XXXXXXXXXX immediately before the share exchange that the FMV of the XXXXXXXXXX Shares is of the aggregate FMV of the XXXXXXXXXX Shares and the XXXXXXXXXX Shares, and
(b) the addition to the stated capital of the XXXXXXXXXX Shares will equal that proportion of the aggregate PUC of the common shares of XXXXXXXXXX immediately before the share exchange that the FMV of the XXXXXXXXXX Shares is of the aggregate FMV of the XXXXXXXXXX Shares and the XXXXXXXXXX Shares.
82. Pursuant to section 25 of the BCA, DC2 will convert into stated capital in respect of the XXXXXXXXXX Shares, an amount not exceeding the contributed surplus that arose after XXXXXXXXXX on the issuance of XXXXXXXXXX Shares or shares of another class for which the XXXXXXXXXX Shares were substituted, other than on any issuance to which section 51, 66.3, 84.1, 85, 85.1, 86 or 87, subsection 192(4.1) or 194(4.1) or section 212.1 applied ("Tax Contributed Surplus").
83. Newco will be a newly-created taxable Canadian corporation incorporated by DC2 under the CA. Prior to the transactions relating hereto, Newco will not, at any time, have had any assets, liabilities or outstanding shares. Newco's Articles of Incorporation will provide that its authorized capital will include Newco Common Shares, each of which will be a fully participating voting common share with the holder thereof entitled to one vote at meetings of the shareholders of Newco.
84. TC2 will be a newly-created taxable Canadian corporation incorporated under the CA. Prior to the transactions relating hereto, TC2 will not have had any assets, liabilities, or outstanding shares. TC2's Articles of Incorporation will provide that its authorized capital will include:
(a) TC2 A Shares, each of which will be a fully participating voting common share with the holder thereof entitled to one vote at meetings of shareholders of TC2, and which have other terms which parallel the terms of the New A Shares;
(b) TC2 B Shares, each of which will be a fully participating non-voting common share, and which have other terms which parallel the terms of the New B Shares; and
(c) TC2 Special Shares having the following attributes:
(i) each TC2 Special Share will be redeemable, subject to applicable law, at any time at the option of TC2 at a redemption amount equal to the amount by which the aggregate FMV of the XXXXXXXXXX Newco Common Shares to be transferred by DC2 to TC2, as described in Paragraph 85 exceeds the FMV of the Newco Note, divided by the number of TC2 Special Shares issued as consideration therefor (plus any declared but unpaid dividends),
(ii) each TC2 Special Share will be retractable, subject to applicable law, at any time at the option of the holder at a retraction amount equal to the redemption amount described in subparagraph (c)(i),
(iii) the holder of each TC2 Special 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 TC2,
(iv) there will be a provision restricting the payment of dividends on other classes of shares so that no such dividends may be paid on any other class of shares of TC2 if the resulting realizable value of the net assets of TC2 after payment of the dividends would be less than the aggregate of the redemption amounts of all of the TC2 Special Shares then outstanding,
(v) the holder of each TC2 Special Share will be entitled, upon the liquidation, dissolution or winding-up of TC2, to a payment in priority to all other classes of shares of TC2 of an amount equal to the redemption amount therefor to the extent of the amount or value of property available under applicable law for payment to shareholders upon dissolution, but will be entitled to no more than the amount of that payment, and
(vi) the holder of each TC2 Special Share will not be entitled to vote at meetings of shareholders of TC2, other than as provided under the CA.
85. DC2 will transfer to Newco the following assets ("Transferred Assets"):
(a) all of its interest in the XXXXXXXXXX Business comprised of:
(i) XXXXXXXXXX;
(ii) XXXXXXXXXX;
(iii) XXXXXXXXXX;
(iv) XXXXXXXXXX;
(v) XXXXXXXXXX;
(vi) XXXXXXXXXX;
(vii) XXXXXXXXXX;
(viii) XXXXXXXXXX;
(ix) XXXXXXXXXX;
(x) XXXXXXXXXX;
(xi) XXXXXXXXXX;
(xii) XXXXXXXXXX;
(xiii) certain cash or near cash; and
(xiv) certain of the investment property, including the shares of XXXXXXXXXX referred to in Paragraph 12(g),
at their FMV determined immediately before the transfer.
86. As sole consideration for the Transferred Assets, Newco will issue XXXXXXXXXX Newco Common Shares to DC2 having an aggregate stated capital equal to the aggregate of the agreed amounts under subsection 85(1) in respect of the transfer.
87. DC2 and Newco will jointly elect, in prescribed form and within the time determined under subsection 85(6), for the provisions of subsection 85(1) to apply to the transfer to Newco of each capital property (other than depreciable property of a prescribed class) included in the Transferred Assets. Specifically, the amount agreed upon in each joint election will not be less than the cost amount of the particular property and will not exceed the FMV of the respective property, nor will it be less than the amount permitted under paragraph 85(1)(b).
88. Subject to, among other things, the appropriate shareholder and court approvals, the transactions described in Paragraphs 89 to 104 will be undertaken pursuant to a plan of arrangement ("Plan of Arrangement") under XXXXXXXXXX the BCA. With the exception of the filing of any elections under the Act, these transactions will occur by virtue of the Plan of Arrangement and will be designated in the Plan of Arrangement to occur on the date on which the Plan of Arrangement is effective and in the order set out below. The effective date of the Plan of Arrangement will be on a date that will be subsequent to the date of this letter and is currently anticipated to be XXXXXXXXXX.
Each holder of XXXXXXXXXX Shares or XXXXXXXXXX Shares will be entitled to dissent from the Plan of Arrangement. Where a shareholder so dissents, such dissenting shareholder will cease to be a shareholder of DC2 on the date on which the Plan of Arrangement is effective, and the shares of DC2 held by such a shareholder no longer will be considered to be outstanding as shares for the purpose of the corporate law transactions comprising the Plan of Arrangement. After the completion of the transactions comprising the Plan of Arrangement, each such dissenting shareholder will be entitled to be paid the fair value of its shares of DC2 in respect of which the right of dissent is exercised. The obligation to pay FMV to a dissenting shareholder will represent a current liability of DC2.
89. Pursuant to the Plan of Arrangement:
(a) DC2's Articles of Incorporation will be amended to create four new classes of shares as follows:
(i) New A Shares, each of which will be a fully participating voting common share with the holder thereof entitled to one vote at meetings of shareholders of DC2. The terms of the New A Shares will differ from those of the Existing A Shares in respect of the restrictions applicable to the transfer and ownership of such shares and in respect of certain coattail provisions applicable thereto, but otherwise will parallel the terms of the Existing A Shares. The New A Shares will rank junior to the DC2 A Special Shares and DC2 B Special Shares upon the liquidation, dissolution or winding-up of DC2;
(ii) New B Shares, each of which will be a XXXXXXXXXX share. XXXXXXXXXX. The terms of the New B Shares will also differ from those of the Existing B Shares in respect of the restrictions applicable to the transfer and ownership of such shares and in respect of certain coattail provisions applicable thereto, but otherwise parallel the terms of the Existing B Shares with the exception that the conversion provisions will provide for conversion into New A Shares rather than Existing A Shares. The New B Shares will rank junior to the DC2 A Special Shares and DC2 B Special Shares upon the liquidation, dissolution or winding-up of DC2;
(iii) DC2 A Special Shares with the attributes described in Paragraph 90; and
(iv) DC2 B Special Shares with the attributes described in Paragraph 91;
(b) XXXXXXXXXX;
(c) each holder of an Existing A Share will, in consideration of each Existing A Share held, receive one New A Share and one DC2 A Special Share with an aggregate FMV equal to the FMV of the Existing A Share immediately before the exchange;
(d) each holder of an Existing B Share will, in consideration of each Existing B Share held, receive one New B Share and one DC2 B Special Share with an aggregate FMV equal to the FMV of the Existing B Share immediately before the exchange;
(e) (i) the aggregate redemption amount of the DC2 A Special Shares issued on the reorganization of capital in each case will be equal to the aggregate FMV of all of the outstanding Existing A Shares immediately before the reorganization of capital described herein (other than those shares held by dissenting shareholders) multiplied by the Business Proportion; and
(ii) the aggregate redemption amount of the DC2 B Special Shares issued on the reorganization of capital in each case will be equal to the aggregate FMV of all of the outstanding Existing B Shares immediately before the reorganization of capital described herein (other than those shares held by dissenting shareholders) multiplied by the Business Proportion;
(f) the additions to the stated capital of the New A Shares and the DC2 A Special Shares in aggregate will not exceed the aggregate PUC of the Existing A Shares immediately prior to the reorganization of capital and will be apportioned between these classes as follows:
(i) the addition to the stated capital of the DC2 A Special Shares will equal that proportion of the aggregate PUC of the Existing A Shares immediately before the share exchange that the aggregate FMV of the DC2 A Special Shares is of the aggregate FMV of the New A Shares and the DC2 A Special Shares, and
(ii) the addition to the stated capital of the New A Shares will equal that proportion of the aggregate PUC of the Existing A Shares immediately before the share exchange that the aggregate FMV of the New A Shares is of the aggregate FMV of the New A Shares and the DC2 A Special Shares; and
(g) the additions to the stated capital of the New B Shares and the DC2 B Special Shares in aggregate will not exceed the aggregate PUC of the Existing B Shares immediately prior to the reorganization of capital and will be apportioned between these classes as follows:
(i) the addition to the stated capital of the DC2 B Special Shares will equal that proportion of the aggregate PUC of the Existing B Shares immediately before the share exchange that the aggregate FMV of the DC2 B Special Shares is of the aggregate FMV of the New B Shares and the DC2 B Special Shares, and
(ii) the addition to the stated capital of the New B Shares will equal that proportion of the aggregate PUC of the Existing B Shares immediately before the share exchange that the aggregate FMV of the New B Shares is of the aggregate FMV of the New B Shares and the DC2 B Special Shares.
90. DC2's Articles of Amendment, made pursuant to the Plan of Arrangement, will provide that its authorized capital will include DC2 A Special Shares having the following attributes:
(a) each DC2 A Special Share will be redeemable, subject to applicable law, at any time at the option of DC2 at a redemption amount equal to the aggregate redemption amount of all of the DC2 A Special Shares issued on the reorganization of capital, as described in Paragraph 89, divided by the number of DC2 A Special Shares issued on the reorganization of capital (plus any declared but unpaid dividends);
(b) each DC2 A Special Share will be retractable, subject to applicable law, at any time at the option of the holder at a retraction amount equal to the redemption amount described in subparagraph (a);
(c) the holder of each DC2 A Special 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 DC2;
(d) there will be a provision restricting the payment of dividends on other classes of shares so that no such dividends may be paid on any other class of shares of DC2 if the resulting realizable value of the net assets of DC2 after payment of the dividends would be less than the aggregate of the redemption amounts of all of the DC2 A Special Shares then outstanding;
(e) the holder of each DC2 A Special Share will be entitled, upon the liquidation, dissolution or winding-up of DC2, to a payment, pro rata with the DC2 B Special Shares and otherwise in priority to all other classes of shares of DC2, of an amount equal to the redemption amount thereof to the extent of the amount or value of property available under applicable law for payment to shareholders upon dissolution, but will be entitled to no more than the amount of that payment; and
(f) the holder of each DC2 A Special Share will not be entitled to vote at meetings of shareholders of DC2, other than as provided under the BCA.
91. DC2's Articles of Amendment, made pursuant to the Plan of Arrangement, will provide that its authorized capital will include the DC2 B Special Shares having the following attributes:
(a) each DC2 B Special Share will be redeemable, subject to applicable law, at any time at the option of DC2 at a redemption amount equal to the aggregate redemption amount of all of the DC2 B Special Shares issued on the reorganization of capital, as described in Paragraph 89, divided by the number of DC2 B Special Shares issued on the reorganization of capital (plus any declared but unpaid dividends);
(b) each DC2 B Special Share will be retractable, subject to applicable law, at any time at the option of the holder at a retraction amount equal to the redemption amount described in subparagraph (a);
(c) the holder of each DC2 B Special 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 DC2;
(d) there will be a provision restricting the payment of dividends on other classes of shares so that no such dividends may be paid on any other class of shares of DC2 if the resulting realizable value of the net assets of DC2 after payment of the dividends would be less than the aggregate of the redemption amounts of all of the DC2 B Special Shares then outstanding;
(e) the holder of each DC2 B Special Share will be entitled, upon the liquidation, dissolution or winding-up of DC2, to a payment, pro rata with the DC2 A Special Shares and otherwise in priority to all other classes of shares of DC2, of an amount equal to the redemption amount thereof to the extent of the amount or value of property available under applicable law for payment to shareholders upon dissolution, but will be entitled to no more than the amount of that payment; and
(f) the holder of each DC2 B Special Share will not be entitled to vote at meetings of shareholders of DC2, other than as provided under the BCA.
92. In accordance with the Plan of Arrangement:
(a) the holders of DC2 A Special Shares will all transfer each of their DC2 A Special Shares to TC2 in exchange for XXXXXXXXXX a TC2 A Share; and
(b) the holders of DC2 B Special Shares will all transfer each of their DC2 B Special Shares to TC2 in exchange for XXXXXXXXXX a TC2 B Share.
Under the Plan of Arrangement, a holder of TC2 A Shares or TC2 B Shares will not be entitled to be registered on the books of TC2 in respect of a fraction of a TC2 A Share or a TC2 B Share resulting from the share exchanges described in (a) or (b), but such holders will be entitled to receive a cheque from TC2 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 reported by XXXXXXXXXX Stock Exchange for the TC2 B Shares on each of the first five trading days after the effective date.
The certificates for the DC2 A Special Shares and the DC2 B Special Shares which otherwise would be delivered to the holders of Existing A Shares and Existing B Shares, respectively, will be delivered directly to TC2. Immediately following the effective date of the Plan of Arrangement, the TC2 A Shares and the TC2 B Shares will be listed for trading on XXXXXXXXXX Stock Exchange.
Immediately after the share exchanges described herein, the FMV of the shares of TC2 owned by each holder of TC2 shares will be equal to or approximate the amount determined by the formula:
(A x B/C) + D
as found in subparagraph (b)(iii) of the definition of "permitted exchange" in subsection 55(1). In addition, no person who is not a shareholder of DC2 will own any shares of TC2.
Immediately following the acquisition of the DC2 A and B Special Shares by TC2 and the issuance of the TC2 A and B Shares, TC2 will be controlled by the XXXXXXXXXX and, therefore, will be a subject corporation.
93. If requested by a particular shareholder of DC2, TC2 will execute a joint election under subsection 85(1) in respect of the disposition by that shareholder of DC2 A Special Shares or DC2 B Special Shares, as the case may be, for TC2 A Shares or TC2 B Shares, respectively. The amount agreed upon in each joint election will not be less than the lesser of the amounts described in paragraph 85(1)(c.1), will not exceed the FMV of the shares and will not be less than the minimum amount specified under paragraph 85(1)(b). The election will be made in prescribed form and will be filed within the time limit set out in subsection 85(6). It is expected that each member of the XXXXXXXXXX will file an election in respect of the disposition by the particular member of DC2 A Special Shares or DC2 B Special Shares, as the case may be, for TC2 A Shares or TC2 B Shares, respectively.
94. Pursuant to the Plan of Arrangement and section 26(3) of the CA, the addition to the stated capital of TC2 in respect of:
(a) the issuance of the TC2 A Shares will not exceed the aggregate PUC of the DC2 A Special Shares transferred to TC2; and
(b) the issuance of the TC2 B Shares will not exceed the aggregate PUC of the DC2 B Special Shares transferred to TC2.
95. Immediately before the transfer described in Paragraph 96, the property of DC2 will be determined on a consolidated basis by including the appropriate pro rata share of the assets of any corporation over which DC2 has the ability to exercise significant influence (DC2 and such corporations will hereinafter be referred to as the "DC2 Group") which assets will be classified into three types of property:
(a) cash or near cash property, comprising all of the current assets of the DC2 Group including any cash, liquid investments and prepaid expenses, inventory and accounts receivable (other than those described below);
(b) business property, comprising all of the assets of the DC2 Group, other than cash or near cash property, any income from which would be income from a business (other than a specified investment business); and
(c) investment property, comprising all of the assets of the DC2 Group, other than cash or near cash property, any income from which would constitute income from property or from a specified investment business.
Any accounts receivable, inventory and prepaid expenses of a member of the DC2 Group (or a partnership of which a member of the DC2 Group is a partner) that relate to a business carried on by that corporation (or partnership) and that will be collected, sold or consumed by such corporation (or partnership) in the ordinary course of that business, will be classified as business property for the purposes of determining the types of property described herein.
An interest in any of the XXXXXXXXXX Corporations by any member of the DC2 Group will be considered business property for the purposes of the Proposed Transactions described herein. The XXXXXXXXXX will also be treated as business property. For greater certainty, the shares of XXXXXXXXXX referred to in paragraph 12(g) will not represent an interest in a XXXXXXXXXX Corporation and will, therefore, be classified as investment property.
For the purpose of calculating the FMV of the types of property of DC2, any particular corporation in the DC2 Group will be considered to own its respective partnership share of each property owned by any partnership of which such corporation is a partner.
For greater certainty, the FMV of the shares (including warrants to acquire shares) of any corporation over which a corporate shareholder has the ability to exercise significant influence and of any indebtedness receivable by the corporate shareholder from such a corporation will be allocated between the three types of property described above by multiplying the FMV of the shares of the particular corporation or the amount receivable from the particular corporation, as the case may be, by the proportion that the FMV of each type of property owned by the particular corporation is of the aggregate FMV of all of the property owned by such corporation.
96. DC2 will transfer to TC2 all of its XXXXXXXXXX Newco Common Shares at their FMV determined immediately before the transfer. As a result of such transfer, the FMV, determined immediately after the transfer, of the cash or near cash property, the business property and the investment property, respectively, of TC2, calculated in accordance with the rules in Paragraph 95, will be equal to the Business Proportion of the FMV of the cash or near cash property, the business property and the investment property, respectively, of DC2 immediately before the transfer. The Business Proportion is the proportion that:
(a) the aggregate FMV of the DC2 A Special Shares and the DC2 B Special Shares owned by TC2, immediately before the transfer,
is of
(b) the aggregate FMV of all of the issued and outstanding shares of DC2, immediately before the transfer.
97. In consideration for the transfer of the XXXXXXXXXX Newco Common Shares, TC2 will:.
(a) issue a demand, non-interest bearing, promissory note (the "Newco Note") to DC2 with a principal amount and FMV equal to an amount calculated by multiplying the total outstanding liabilities of DC2 immediately before the transfer of the Transferred Assets by the Business Proportion; and
(b) issue to DC2, TC2 Special Shares which will have an aggregate redemption amount and FMV equal to the FMV of the XXXXXXXXXX Newco Common Shares acquired by TC2 from DC2 less the FMV of the Newco Note.
98. DC2 and TC2 will jointly elect, in prescribed form and within the time determined under subsection 85(6), for the provisions of subsection 85(1) to apply to the transfer of the XXXXXXXXXX Newco Common Shares to TC2. The agreed amount will be the ACB to DC2 of the XXXXXXXXXX Newco Common Shares transferred, which will not exceed the FMV of those shares.
99. Pursuant to section 26(3) of the CA, the addition to the stated capital of TC2 in respect of the issuance of the TC2 Special Shares to DC2 will not exceed the lesser of:
(a) the agreed amount under subsection 85(1) in respect of the transfer of the XXXXXXXXXX Newco Common Shares to TC2 less the amount of the Newco Note; and
(b) the aggregate additions to the Stated Capital of the DC2 A Special Shares and DC2 B Special Shares.
100. TC2 will redeem from DC2 all of its TC2 Special Shares for an amount equal to the aggregate of the redemption amounts of the TC2 Special Shares so redeemed and will issue to DC2 in consideration therefor the TC2 Redemption Note, being a demand promissory note with a face amount and principal amount equal to the aggregate of the foregoing redemption amounts. DC2 will accept such note as full and absolute payment of the redemption amount in respect of each TC2 Special Share and will accept the risk of the note being dishonoured.
101. DC2 will redeem from TC2 all of its DC2 A Special Shares and DC2 B Special Shares, in each case for an amount equal to the aggregate of the redemption amounts of the particular class of shares so redeemed, and will issue to TC2 in consideration therefor the DC2 Redemption Note, being a demand promissory note with a face amount and a principal amount equal to the aggregate of the foregoing redemption amounts. TC2 will accept such DC2 Redemption Note as full payment of the aggregate redemption amounts in respect of each class of shares and will accept the risk of the note being dishonoured.
102. Each of the DC2 Redemption Note and the TC2 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 average monthly prime rate of a Canadian chartered bank.
103. DC2 will pay the principal amount of the DC2 Redemption Note by transferring to TC2 the TC2 Redemption Note which will be accepted by TC2 in full payment of DC2's obligations. TC2 will pay the principal amount of the TC2 Redemption Note by transferring to DC2 the DC2 Redemption Note which will be accepted by DC2 in full payment of TC2's obligations. The DC2 Redemption Note and the TC2 Redemption Note will be marked paid in full and cancelled.
104. Newco will be wound-up into TC2 under the applicable provisions of the CA, such that TC2 will receive all of the assets of Newco and will assume all of the liabilities of Newco. Following the distribution of all its property, Newco will be dissolved.
105. Immediately following the Proposed Transactions, there will be no further holders of DC2 Stock Options and no further options will be issued under the DC2 Stock Option Plan as it now exists. A new stock option plan will be implemented in DC2 in respect of services rendered by employees of DC2 following the transaction date. Similarly, a new stock option plan will be implemented in TC2 for its employees in respect of services rendered after the effective date.
106. TC2 will borrow funds from an arm's length lender ("New Loan")
XXXXXXXXXX.
107. XXXXXXXXXX.
108. DC2 and TC2 will enter into a voting trust or some other arrangement whereby DC2 will have the right for a certain period of time to vote all of the XXXXXXXXXX Shares beneficially owned by TC2.
109. Following the foregoing transactions, DC2 may assist in financing TC2, if required, by means of DC2 lending TC2 up to $XXXXXXXXXX. In addition, it is expected that TC2 will sell back to DC2 the shares of XXXXXXXXXX which were transferred to Newco as described in Paragraph 85(xiv) for FMV consideration.
110. DC2 and TC2 will be related at all times and will not be deemed not to be related for the purposes of section 55 by virtue of paragraph 55(5)(e).
Purpose of the Proposed Transactions
111. DC2 believes that it is in the best interests of the DC2 shareholders that DC2 transfer its XXXXXXXXXX Business to TC2 for the following reasons:
(a) the creation of TC2 will increase shareholder value because the XXXXXXXXXX Business will achieve a higher valuation as a stand alone business;
(b) the separation of DC2's business assets into TC2 and DC2 will enhance the ability of each such corporation to pursue its independent corporate objectives and strategies;
(c) it is preferable to give the DC2 shareholders a choice to make an independent investment decision in respect of their investment in the XXXXXXXXXX, on the one hand, and the XXXXXXXXXX Business on the other;
(d) the "spin off" will allow the separate businesses to access capital for growth on the merits of their individual visions and strategies. XXXXXXXXXX; and(e) XXXXXXXXXX.
112. XXXXXXXXXX.
Rulings Given
Provided that the preceding statements constitute a complete and accurate disclosure of all of the relevant facts, proposed transactions and the purpose of the proposed transactions, and provided that the proposed transactions are undertaken in the manner described above, our rulings are as set forth below.
A. With respect to:
(i) the amalgamation of DC1 and DC1 XXXXXXXXXX to form DC1 Amalco;
(ii) the amalgamation of Q1 Ltd. and Q1XXXXXXXXXX to form Q1 Amalco;
(iii) the amalgamation of Q2 Ltd. and Q2 XXXXXXXXXX to form Q2 Amalco;
(iv) the amalgamation of Q3 Ltd. and Q3 XXXXXXXXXX to form Q3 Amalco; and
(v) the amalgamation of Q4 Ltd. and Q4XXXXXXXXXX to form Q4 Amalco
all as described in Paragraphs 74 and 75,
(a) the provisions of subsection 87(1) will apply;
(b) subsection 87(2.1) will apply such that for the purpose of determining the non-capital loss of each amalgamated corporation for any taxation year, the amalgamated corporation will be deemed to be the same corporation as, and the continuation of, each predecessor corporation;
(c) provided that the interests in the DC1 Partnership held by each of DC1, Q2 Ltd., Q3 Ltd. and Q4 Ltd. represents capital property to its holder, paragraph 87(2)(e.1) will apply and subsection 100(2.1) will not apply to deem any such predecessor corporation to have disposed of its interest in the DC1 Partnership. For greater certainty, each amalgamation referred to above, in and of itself, will not result in a realization of, or an income inclusion in respect of, any negative ACB of such predecessor corporation in respect of its interest in the DC1 Partnership; and
(d) subsection 87(4), other than paragraphs 87(4)(c), (d) and (e) thereof, will apply to each holder of shares of the predecessor corporations who holds its shares as capital property for purposes of the Act.
B. Provided that:
(a) DC2 holds the common shares of XXXXXXXXXX as capital property for purposes of the Act, and
(b) DC2 and XXXXXXXXXX do not file an election under subsection 85(1) in respect of the share exchange,
the provisions of subsection 86(1) will apply to the disposition by DC2 of each common share of XXXXXXXXXX for one XXXXXXXXXX Share and one XXXXXXXXXX Share issued by XXXXXXXXXX as described in Paragraph 80.
C. Provided that:
(a) a particular shareholder of DC2 who, immediately before the share exchange described in Paragraph 89, holds Existing A Shares or Existing B Shares, as the case may be, as capital property for purposes of the Act, and
(b) the particular shareholder and DC2 do not file an election under subsection 85(1) in respect of the particular share exchange,
the provisions of subsection 86(1) will apply to the disposition of each Existing A Share by the holder thereof for one New A Share and one DC2 A Special Share, and the disposition of each Existing B Share by each holder thereof for one New B Share and one DC2 B Special Share issued by DC2 as described in Paragraph 89.
D. Subject to the provisions of subsection 26(26) of the ITAR and provided that a particular shareholder of DC2 who, immediately before the share exchange described in Paragraph 92, holds DC2 A Special Shares or DC2 B Special Shares,
(a) holds such shares as capital property for purposes of the Act;
(b) deals at arm's length with TC2, immediately before the exchange;
(c) does not file an election under subsection 85(1) or 85(2) with TC2 in respect of the exchange;
(d) does not include any portion of the gain or loss otherwise determined from the disposition of the DC2 A Special Shares or DC2 B Special Shares, as the case may be, in computing the shareholder's income for the taxation year in which the share exchange takes place except in accordance with subparagraph (i); and
(e) does not receive any consideration (excluding cash in lieu of a fractional share) other than the TC2 A Shares or the TC2 B Shares, as the case may be, in exchange for such shares,
and further provided that immediately after the exchange:
(f) no such shareholder or any person or persons with whom such shareholder does not deal at arm's length, or no such shareholder together with any person or persons with whom such shareholder does not deal at arm's length, will
(i) control TC2, or
(ii) beneficially own shares of TC2 having a FMV in excess of 50% of the FMV of all the outstanding shares of TC2 immediately after the exchange,
then, pursuant to paragraph 85.1(1)(a) such holder shall be deemed, subject to subparagraph (i):
(g) to have disposed of the DC2 Special A Shares or DC2 Special B Shares, as the case may be, for proceeds of disposition equal to the ACB of those shares immediately before the share exchange;
(h) to have acquired the TC2 A Shares or TC2 B Shares, as the case may be, at a cost equal to the ACB of the DC2 Special A Shares or DC2 Special B Shares so exchanged, as the case may be, immediately before the share exchange, and
(i) provided that any cash received by a holder of DC2 A Special Shares and DC2 B Special Shares in lieu of any fractional shares in TC2 does not exceed $XXXXXXXXXX, a holder of DC2 A Special Shares and DC2 B Special Shares who receives a cash payment in lieu of a fractional 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 TC2 A Shares or TC2 B Shares, whatever the case may be, by the amount of cash received.
E. Subject to the application of subsections 20(1.2) and 26(5) of the ITAR, to the application of paragraph 88(2.2)(b), which applies for the purpose stated in the preamble to subsection 88(2.2), and subject also to the application of subsection 13(21.2) as it may apply to the transfers referred to in (b) and (d) below, the provisions of subsection 85(1) will apply to:
(a) the transfer by DC2 of certain of its DC1 shares to TC1 as described in Paragraphs 60 and 61;
(b) the transfer by DC1 of each capital property (other than depreciable property of a prescribed class) included in the TC1 Transferred Assets transferred to TC1 as described in Paragraphs 63, 64 and 65;
(c) the transfer by DC2 of all of the Xco A Shares and the Xco B Shares that it owns to XXXXXXXXXX as described in Paragraphs 77 and 78;
(d) the transfer by DC2 of each capital property (other than depreciable property of a prescribed class) included in the Transferred Assets transferred to Newco as described in Paragraphs 85, 86 and 87;
(e) the transfer by DC2 of the XXXXXXXXXX Newco Common Shares to TC2 as described in Paragraphs 96, 97 and 98;
(f) the transfer by any holder of DC2 A Special Shares (including a member of the XXXXXXXXXX) of such shares to TC2 as described in Paragraph 92 who jointly files an election with TC2 pursuant to subsection 85(1) in respect of such transfer as described in Paragraph 93; and
(g) the transfer by any holder of DC2 B Special Shares (including a member of the XXXXXXXXXX) of such shares to TC2 as described in Paragraph 92 who jointly files an election with TC2 pursuant to subsection 85(1) in respect of such transfer as described in Paragraph 93,
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. For greater certainty, paragraph 85(1)(e.2) will not apply to the transfers referred to herein.
F. Subsection 84(3) will apply:
(a) on the purchase for cancellation, as described in Paragraph 67, of the DC1 shares owned by TC1, to deem DC1 to have paid and TC1 to have received;
(b) on the redemption, as described in Paragraph 68, of the TC1 Special Shares owned by DC1, to deem TC1 to have paid and DC1 to have received;
(c) on the redemption, as described in Paragraph 100, of the TC2 Special Shares owned by DC2, to deem TC2 to have paid and DC2 to have received; and
(d) on the redemption, as described in Paragraph 101, of the DC2 A Special Shares and the DC2 B Special Shares owned by TC2, to deem DC2 to have paid and TC2 to have received, a dividend on such shares equal to the amount, if any, by which the aggregate amount paid upon such purchase or redemption exceeds the aggregate PUC in respect of such shares immediately before such purchase or redemption, and any such dividend,
(e) will be included, pursuant to subsection 82(1) and paragraph 12(1)(j), in computing the income of the corporation deemed to have received such dividend;
(f) 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);
(g) will be excluded, pursuant to paragraph (j) of the definition of "proceeds of disposition" in section 54, in determining the proceeds of disposition to the recipient corporation of the shares so purchased or redeemed;
(h) in the case of the deemed dividends described in subparagraphs (a) and (b) will not be subject to tax under Part IV except as provided in paragraph 186(1)(b);
(j) will not be subject to tax under Parts IV.1 or VI.1 on the basis that such dividends will be "excepted dividends" by virtue of paragraph (b) of the definition of "excepted dividend" in section 187.1 and excluded dividends by virtue of paragraph (a) of the definition of "excluded dividend" in subsection 191(1); and
(k) the provisions of subsection 112(3) will apply to reduce any loss which otherwise would be determined for the particular holder as a result of the redemptions and purchases of shares described in the Proposed Transactions.
G. Provided that the addition to the stated capital of the XXXXXXXXXX Shares does not exceed the Tax Contributed Surplus in respect of those shares, subsection 84(1) will not apply to deem DC2 to have paid a dividend or deem a holder of an XXXXXXXXXX Share to receive a dividend as a consequence of the conversion described in Paragraph 82.
H. Provided that the cost to DC1 of the TC1 Note and the cost to TC1 of the DC1 Note will in each case, upon the issuance thereof, be equal to the principal amount of the particular note, no amount will be included in the income of DC1 or TC1 upon payment of the principal amount of the particular note.
I. Provided that the cost to TC2 of the DC2 Redemption Note and the cost to DC2 of the TC2 Redemption Note will in each case, upon the issuance thereof, be equal to the principal amount of the particular note, no amount will be included in the income of TC2 or DC2 upon payment of the principal amount of the particular note.
J. The repayment of the TC1 Note held by DC1 and the DC1 Note held by TC1 as described in Paragraphs 70 and 71 will not, in and of itself, result in a forgiven amount within the meaning of either subsection 80(1) or section 80.01.
K. The repayment of the DC2 Redemption Note held by TC2 and the TC2 Redemption Note held by DC2 as described in Paragraph 103 will not, in and of itself, result in a forgiven amount within the meaning of either subsection 80(1) or section 80.01.
L. An amount, not in excess of a reasonable amount, paid in the year or payable in respect of the year by TC2 (depending on the method regularly followed by TC2) pursuant to a legal obligation to pay interest on the money borrowed under the New Loan as described in Paragraph 106 will, pursuant to paragraph 20(1)(c) and subsection 20(3), be deductible by TC2 in computing its income for that year provided that the property acquired by TC2 on the winding up of Newco is acquired for the purpose of earning income from a business or property (other than property the income from which would be exempt or for property that is an interest in a life insurance policy) and continues to be used by TC2 for the purpose of earning income from such business or property.
M. Provided that as part of the series of transactions or events that includes the Proposed Transactions, 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 paragraph 55(3)(b), subsection 55(2) will not apply to the taxable dividends referred to in ruling F, above. For greater certainty, subsection 55(3.1) will not apply to preclude the application of paragraph 55(3)(b) to the transactions as proposed herein.
N. The Proposed Transactions, in and of themselves, will not result in the application of subsections 15(1), 56(2), 56(4) or 246(1).
O. 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 above.
The above rulings are based on the law as it presently reads and do not take into account any proposed amendments to the Act which, if enacted into law, could affect the rulings provided herein.
The above rulings are given subject to the limitations and qualifications set out in Information Circular 70-6R3 dated December 30, 1996 and are binding on Revenue Canada Customs, Excise and Taxation provided that the Proposed Transactions are completed by XXXXXXXXXX.
Caveat
Nothing in this ruling should be construed as implying that Revenue Canada, Customs, Excise and Taxation has agreed to or reviewed:
(a) the determination of the cost, adjusted cost base or FMV of any particular asset;
(b) the determination of the PUC of any shares referred to herein;
(c) the balance of refundable dividend tax on hand of any corporation;
(d) whether the Preferred Securities described in Paragraph 3 constitute debt of DC2 and not shares of the capital stock of the corporation;
(e) whether the DC2 A Special Shares or the DC2 B Special Shares will be "excluded property" within the meaning of subsection 116(1); or
(f) any tax consequences relating to the facts and proposed transactions described herein other than those specifically described in the rulings given above.
Yours truly,
for Director
Reorganizations and International Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch
37
.. ./cont'd
.../cont'd
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