1999 Ruling 9918313 - REORGANIZATION

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

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

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

Principal Issues: standard ruling

Position:

Reasons:

XXXXXXXXXX
XXXXXXXXXX 3-991831
XXXXXXXXXX

Attention: XXXXXXXXXX

XXXXXXXXXX, 1999

Dear Sirs:

Re: Advance income tax ruling
XXXXXXXXXX

We are writing in response to your letter of XXXXXXXXXX wherein you requested an advance income tax ruling in respect of the above taxpayer. We also acknowledge your letters of XXXXXXXXXX.

To the best of your knowledge, and that of the parties to this ruling, none of the issues contained in this advance income tax ruling:

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

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

3. is under objection by the taxpayer or a related person;

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

5. is the subject of a ruling previously issued by this Directorate.

NON-STATUTORY TERMS

In this letter, unless otherwise expressly stated:

(a) "Canco 1" means XXXXXXXXXX, a corporation amalgamated under the XXXXXXXXXX by articles of amalgamation datedXXXXXXXXXX, of which XXXXXXXXXX common shares are held by USCo 1 (as hereinafter defined), and XXXXXXXXXX Class A shares are held by USCo 2 (as hereinafter defined), and is more fully described at paragraph 7 hereof;

(b) "USCo 1" means XXXXXXXXXX, a corporation organized under the laws of the State of XXXXXXXXXX, being one of the United States of America, by certificate of incorporation dated XXXXXXXXXX, all the issued and outstanding shares of which are owned by U.S. Parent (as hereinafter defined);

(c) "USCo 2" means XXXXXXXXXX, a corporation organized under the laws of the State of XXXXXXXXXX, being one of the United States of America, by certificate of incorporation dated XXXXXXXXXX, all the issued and outstanding shares of which are owned by U.S. Parent;

(d) "USCo 3" means XXXXXXXXXX, a corporation incorporated in XXXXXXXXXX under the laws of the State of XXXXXXXXXX, being one of the United States of America, all the shares of which are owned by U.S. Parent;

(e) "U.S. Parent" means XXXXXXXXXX, a corporation incorporated in XXXXXXXXXX under the laws of the State of XXXXXXXXXX, being one of the United States of America, as the successor to a business founded in XXXXXXXXXX. The widow of the late XXXXXXXXXX and her family own, directly or indirectly, shares representing approximately XXXXXXXXXX% of the votes of U.S. Parent, as more particularly described at paragraph 4 below;

STATUTORY TERMS

In this letter, unless otherwise expressly stated, the following terms have the meanings specified:

(a) "Act" means the Income Tax Act, R.S.C. 1985, (5th Supp.) c. 1, as amended to the date hereof, and unless otherwise stated, every reference herein to a part, section, subsection, paragraph or subparagraph is a reference to the relevant provision of the Act;

(b) "ACB" has the meaning assigned to the expression "adjusted cost base" in section 54;

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

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

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

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

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

(h) XXXXXXXXXX;

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

(j) "public corporation" has the meaning assigned by subsection 89(1);

(k) "PUC" has the meaning assigned to the expression "paid-up capital" by subsection 89(1);

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

(m) "series of transactions or events" has the extended meaning assigned by subsection 248(10);

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

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

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

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

The relevant facts, proposed transactions and the purpose(s) of the proposed transactions are as follows.

FACTS

1. U.S. Parent carries on the following principal businesses through its subsidiary corporations:

(a) XXXXXXXXXX - carried on by U.S. Parent through U.S. Parent's subsidiary corporations including its wholly-owned Canadian subsidiary, Canco 1; and

(b) XXXXXXXXXX - carried on by U.S. Parent through U.S. Parent's subsidiary corporations including its wholly-owned Canadian subsidiary, Canco 1.

U.S. Parent, directly or through its subsidiaries, has continuously and actively conducted the XXXXXXXXXX business since its incorporation in XXXXXXXXXX and has continuously and actively conducted the XXXXXXXXXX business since XXXXXXXXXX. It does not have a permanent establishment within the meaning of Article V of the Canada-U.S. Income Tax Convention (1980) (the "Canada - U.S. Treaty") in Canada nor does it carry on business in Canada.

Canco 1 has continuously and actively conducted the Canadian XXXXXXXXXX business since U.S. Parent's acquisition of its predecessor in XXXXXXXXXX and its Canadian XXXXXXXXXX business has been continuously and actively conducted by it or a predecessor corporation owned by U.S. Parent since XXXXXXXXXX.

2. U.S. Parent has outstanding two classes of equity securities: common stock and Class B common stock. U.S. Parent is authorized to issue XXXXXXXXXX shares of preferred stock; however, no shares have been issued. The common stock is listed on the XXXXXXXXXX Stock Exchange. No established public trading market exists for the Class B common stock. The common stock has one vote per share; the Class B common stock has XXXXXXXXXX votes per share and is convertible at any time on a share-for-share basis into common stock. Both classes of stock carry the same dividend rate. The Class B common stock is subject to significant restrictions on sale. Each share of Class B common stock is entitled to share in dividends and liquidation proceeds on an equal basis with each share of common stock. Upon the transfer of any share of Class B common stock to those other than "permitted transferees" - in general, members of the holder's family and trusts for the benefit of such holders - such stock is automatically converted into a share of common stock.

3.

XXXXXXXXXX

4. As of XXXXXXXXXX, the issued and outstanding shares of U.S. Parent consisted of XXXXXXXXXX shares of common stock and XXXXXXXXXX shares of Class B common stock.

XXXXXXXXXX

XXXXXXXXXX

Each of XXXXXXXXXX are resident in the United States of America.

5.

XXXXXXXXXX

XXXXXXXXXX

XXXXXXXXXX

6.

XXXXXXXXXX

7. Canco 1 is a corporation resulting from articles of amalgamation dated XXXXXXXXXX. The predecessor to Canco 1, being

XXXXXXXXXX

Canco 1 is a taxable Canadian corporation, a private corporation, and is not a specified financial institution for purposes of the Act. The taxation year of Canco 1 ends on XXXXXXXXXX.

Canco 1 carries on directly the XXXXXXXXXX businesses throughout Canada.

Canco 1 does not have any RDTOH and it does not expect to have any at the end of its taxation year in which the proposed transactions described herein are implemented.

The authorized share capital of Canco 1 consists of an unlimited number of common shares, designated "common shares", and an unlimited number of preferred shares, designated "Class A shares". As of the date hereof, the issued and outstanding share capital of Canco 1 is comprised of XXXXXXXXXX common shares, registered in the name of USCo 1, and XXXXXXXXXX Class A shares, registered in the name of USCo 2.

The Class A shares are non-voting. The aggregate redemption value of the XXXXXXXXXX Class A shares is $XXXXXXXXXX and the holder of such shares is entitled to receive the redemption amount thereof on a liquidation, winding-up or dissolution of Canco 1 in priority to the holders of the common shares. The Class A shares were issued by Canco 1 to USCo 2 on XXXXXXXXXX.

The aggregate PUC of the XXXXXXXXXX Class A shares is $XXXXXXXXXX and the ACB of such shares is $XXXXXXXXXX. The Class A shares of Canco 1 represent capital property to USCo 2. The PUC and ACB of the common shares is less than the fair market value thereof. The common shares represent capital property to USCo 1.

8. As at XXXXXXXXXX, Canco 1's assets were comprised of cash, accounts receivable, rights arising from the prepayment of certain expenses ("prepaid expenses"), other current assets, computer hardware and software, furniture and fixtures and leasehold improvements.

There has not been any material change in the composition of Canco 1's assets between XXXXXXXXXX and the date hereof.

These assets are used by Canco 1 in carrying on theXXXXXXXXXX business and XXXXXXXXXX business in Canada and will be classified as business property for purposes of paragraph 55(3)(b).

9. Among the liabilities of Canco 1 as ofXXXXXXXXXX are unpaid assessed or reassessed taxes which will be treated as a current liability of Canco 1 (or any particular corporation over which Canco 1 exercises significant influence) and thus the full amount thereof will be deducted from the net fair market value of the cash or near cash property of Canco 1 (or any particular corporation over which Canco 1 exercises significant influence) for purposes of paragraph 55(3)(b) in accordance with the provisions of paragraphs 17 and 18 below. Any refunds of taxes, and interest thereon, actually receivable will be treated as cash or near cash property for purposes of paragraph 55(3)(b). Any potential refunds of taxes, and interest thereon, will, due to their contingent nature, be ignored for purposes of determining the types of property of Canco 1 (or any particular corporation over which Canco 1 exercises significant influence) for purposes of paragraph 55(3)(b).

PROPOSED TRANSACTIONS:

Butterfly of XXXXXXXXXX Business

10. USCo 1 and USCo 2 will cause a new corporation ("Canco 2") to be incorporated under the provisions of the XXXXXXXXXX. Canco 2 will be a taxable Canadian corporation. The authorized share capital of Canco 2 will include the following classes of shares:

(a) an unlimited number of common shares (the "Canco 2 Common Shares"). The holder of Canco 2 Common Shares will be entitled to one (1) vote for each Canco 2 Common Share so held; and

(b) one (1) non-voting, redeemable and retractable preferred share which shall be entitled to receive, as and when declared from time to time by the board of directors, non-cumulative dividends not exceeding an amount equal to XXXXXXXXXX % per annum calculated on the Canco 2 Special Share Redemption Amount (as hereinafter defined) (the "Canco 2 Special Share"). The Canco 2 Special Share shall be redeemable and retractable for an amount (the "Canco 2 Special Share Redemption Amount") equal to the fair market value of the consideration received by Canco 2 upon the issuance of such share. The holder of the Canco 2 Special Share will be entitled to receive on the dissolution or winding-up of Canco 2 a distribution of the net assets of Canco 2 in an amount equal to the Canco 2 Special Share Redemption Amount in priority to any distribution to be made to holders of the Canco 2 Common Shares.

XXXXXXXXXX

11. In order to have Canco 2 approve the transactions described in paragraphs 19 to 27 below, upon organization one (1) Canco 2 Common Share will be issued by Canco 2 to each of USCo 1 and USCo 2 for cash consideration of $XXXXXXXXXX per share. No other shares will be issued by Canco 2 upon its organization.

12. The articles of incorporation of Canco 1 will be amended by:

(a) creating XXXXXXXXXX new common shares (the "Canco 1 New Common Shares"), which class of shares will have the same attributes as the existing common shares (the "Canco 1 Old Common Shares").

(b) creating a new class of share to be designated as the "Class A Reorganization Share". The said Class A Reorganization Share will be non-voting, redeemable and retractable for an amount equal to the Class A Reorganization Share Redemption Amount (as hereinafter defined), together with all declared and unpaid dividends thereon. The Class A Reorganization Share Redemption Amount will be equal to the amount determined XXXXXXXXXX The holder of the Class A Reorganization Share will be entitled to receive, as and when declared from time to time by the board of directors, non-cumulative dividends not exceeding an amount equal to XXXXXXXXXX% per annum calculated on the Class A Reorganization Share Redemption Amount and will be entitled to receive on the dissolution or winding-up of Canco 1, ratably with the Class B Reorganization Share, but in preference and in priority to any distribution of property or assets of the Corporation to be made to the holders of the Class A shares and the common shares or any other shares ranking junior to the Class A Reorganization Share with respect to the distribution of property or assets of the Corporation, a distribution of the net assets of Canco 1 in an amount equal to the Class A Reorganization Share Redemption Amount. XXXXXXXXXX;

(c) changing all of the issued and outstanding Canco 1 common shares into one (1) Class A Reorganization Share and that same number of Canco 1 New Common Shares;

(d) creating XXXXXXXXXX new Class A shares (the "Canco 1 New Class A Shares") which class of shares will have the same attributes as the existing Class A shares (the "Canco 1 Old Class A shares");

(e) creating a new class of share to be designated as the "Class B Reorganization Share". The said Class B Reorganization Share will be non-voting, redeemable and retractable for an amount equal to the Class B Reorganization Share Redemption Amount (as hereinafter defined), together with all declared and unpaid dividends thereon. The Class B Reorganization Share Redemption Amount will be the amount determined when the fair market value of the issued and outstanding Class A shares of Canco 1, immediately prior to the exchange of common shares and Class A shares contemplated in subparagraphs 12(c) and 12(f) hereof, is multiplied by a fraction, the numerator of which is the aggregate net fair market value of the business property of Canco 1 for purposes of paragraph 55(3)(b) to be transferred to Canco 2 as described in paragraph 21 below and the denominator of which is the net fair market value of all business property of Canco 1 for purposes of paragraph 55(3)(b) immediately before the transfers of property described in paragraph 21 below. The holder of the Class B Reorganization Share will be entitled to receive, as and when declared from time to time by the board of directors, non-cumulative dividends not exceeding an amount equal to XXXXXXXXXX% per annum calculated on the Class B Reorganization Share Redemption Amount and will be entitled to receive on the dissolution or winding-up of Canco 1, ratably with the Class A Reorganization Share, but in preference and in priority to any distribution of property or assets of the Corporation to be made to the holders of the Class A shares and the common shares or any other shares ranking junior to the Class B Reorganization Share with respect to the distribution of property or assets of the Corporation, a distribution of the net assets of Canco 1 in an amount equal to the Class B Reorganization Share Redemption Amount. XXXXXXXXXX.

(f) changing all of the issued and outstanding Canco 1 Class A Shares into one (1) Class B Reorganization Share and that same number of Canco 1 New Class A Shares.

USCo 1 will comply with the provisions of section 116 to obtain from the Minister a certificate in the prescribed form in respect of the disposition of the Canco 1 common shares. USCo 2 will comply with the provisions of section 116 to obtain from the Minister a certificate in the prescribed form in respect of the disposition of the Class A shares.

13. The aggregate of the amounts to be credited to the stated capital accounts of the Class A Reorganization Share and the Canco 1 New Common Shares will be equal to the amount of the PUC of the Canco 1 Old Common Shares immediately before the reorganization. The PUC of the outstanding Canco 1 Old Common Shares will be allocated between the Class A Reorganization Share and the Canco 1 New Common Shares based on the proportion that the fair market value of the Class A Reorganization Share and the Canco 1 New Common Shares, as the case may be, is of the fair market value of all new shares issued to USCo 1.

14. The aggregate of the amounts to be credited to the stated capital accounts of the Class B Reorganization Share and the Canco 1 New Class A Shares will be equal to the amount of the PUC of the Canco 1 Old Class A Shares immediately before the reorganization. The PUC of the outstanding Canco 1 Old Class A Shares will be allocated between the Class B Reorganization Share and the Canco 1 New Class A Shares based on the proportion that the fair market value of the Class B Reorganization Share and the Canco 1 New Class A Shares, as the case may be, is of the fair market value of all new shares issued to USCo 2.

15. Canco 1 will cancel each of the Canco 1 Old Common Shares received as a result of the exchange as described in subparagraph 12(c) above. The stated capital account being maintained for the Canco 1 Old Common Shares will be decreased by an amount equal to the aggregate stated capital, immediately prior thereto, of such Canco 1 Old Common Shares so cancelled by Canco 1 immediately prior thereto.

16. Canco 1 will cancel each of the Canco 1 Old Class A Shares received as a result of the exchange as described in subparagraph 12(f) above. The stated capital account being maintained for the Canco 1 Old Class A Shares will be decreased by an amount equal to the aggregate stated capital, immediately prior thereto, of such Canco 1 Old Class A Shares so cancelled by Canco 1 immediately prior thereto.

17. Immediately before the transfers of property described in paragraph 21 below, the property owned by Canco 1 will be classified into three types of property for the purposes of paragraph 55(3)(b), as follows:

(a) cash or near cash property, comprising all of the current assets of Canco 1, including any cash, deposits, marketable securities, accounts receivable, inventories and prepaid expenses;

(b) investment property, comprising all of the assets of Canco 1, other than any cash or near cash property and business property, any income from which would, for purposes of the Act, be income from property or a specified investment business; and

(c) business property, comprising all of the assets of Canco 1, other than cash or near cash property, any income from which would, for the purposes of the Act, be income from a business carried on by Canco 1 (other than a specified investment business).

18. In determining the net fair market value of each type of property of Canco 1, immediately before the transfers of property described in paragraph 21 below, the liabilities of Canco 1 will be allocated to, and be deducted in the calculation of, the net fair market value of each type of property of Canco 1 in the following manner:

(a) Current liabilities of Canco 1 will be allocated to the cash or near cash property (including any cash, accounts receivable, inventory and prepaid expenses) of Canco 1 in the proportion that the fair market value of each such property is of the fair market value of all cash or near cash property of Canco 1. The allocation of current liabilities as described herein will not exceed the aggregate fair market value of the cash or near cash property of Canco 1.

(b) Provided that the amount of Canco 2's current assets exceed its current liabilities, any accounts receivable, inventories and prepaid expenses of Canco 1, initially classified in accordance with subparagraph (a) herein as cash or near cash property, that relates to a business of Canco 1 that will be carried on by either Canco 1 or Canco 2 following the transfer described in paragraph 21 below, that will be collected, sold or consumed in the ordinary course of that business, will then be reclassified as business property and the net fair market value thereof, determined after the allocation of the current liabilities described in subparagraph (a) herein will be included in the net fair market value of Canco 1's business property and will not be included in the net fair market value of Canco 1's cash or near cash property.

(c) Liabilities, other than current liabilities, of Canco 1 that relate to a particular property, will then be allocated to the particular property (and effectively to the type to which the particular property belongs) to the extent of its fair market value. The liabilities that pertain to a type of property but not to a particular property will then be allocated to that type of property, but not in excess of the net fair market value of such type of property after the allocation of liabilities to a particular property as described herein.

(d) If any liabilities remain after the allocations described in steps (a) and (c) above are made ("excess unallocated liabilities"), such excess unallocated liabilities will then be allocated to the cash or near cash property, investment property, and business property, if any, of Canco 1 based on the relative net fair market value of each type of property prior to the allocation of such excess unallocated liabilities, but after the allocation of the liabilities described in steps (a) and (c) above.

Following the allocation of liabilities as described above, Canco 1 will own only business property for the purposes of the definition of "distribution" in subsection 55(1).

19. USCo 1 and USCo 2 will transfer the Class A Reorganization Share and the Class B Reorganization Share, respectively, to Canco 2 and as sole consideration therefor Canco 2 will issue to USCo 1 and USCo 2, respectively, Canco 2 Common Shares of its capital having a fair market value equal to the Class A Reorganization Share Amount and the Class B Reorganization Share Amount, as the case may be.

The Class A Reorganization Share and the Class B Reorganization Share will not derive their value principally from real property situated in Canada or from an interest in a partnership, trust or estate, the value of which is derived principally from real property situated in Canada, within the meaning of subparagraphs 3(b)(ii) and (iii) of Article XIII of the Canada - U.S. Treaty.

Each of USCo 1 and USCo 2 will comply with the provisions of section 116 to obtain from the Minister a certificate in the prescribed form in respect of the disposition of the Class A Reorganization Share and the Class B Reorganization Share.

20. The amount to be added to the stated capital account of the Canco 2 Common Shares which are issued as described in paragraph 13 above will be equal to the aggregate of the stated capitals of the Class A Reorganization Share and Class B Reorganization Share, as determined in accordance with paragraph 13 above.

21. Immediately following the determination of the net fair market value of its cash or near cash property, its business property and its investment property, if any, as described in paragraphs 17 and 18 above, Canco 1 will transfer to Canco 2 all of its assets and property used in carrying on the XXXXXXXXXX business (hereinafter referred to as the "Targeted Assets"). As consideration for the property so transferred, Canco 2 will:

(a) assume a portion of Canco 1's liabilities (the "assumed liabilities") in an amount such that the net fair market value of each type of property that will be transferred from Canco 1 to Canco 2 will be equal to that proportion of the net fair market value of the cash or near cash property, business property and investment property of Canco 1, immediately before the transfer, that:

(i) the aggregate fair market value, immediately before the transfer, of the Class A Reorganization Share and Class B Reorganization Share of Canco 1 owned by Canco 2x
is of

(ii) the fair market value, immediately before the transfer, of all the issued shares of the capital stock of Canco 1; and

(b) issue to Canco 1 the Canco 2 Special Share having an aggregate redemption price and an aggregate fair market value equal to the amount by which the aggregate fair market value of the Targeted Assets exceeds the assumed liabilities.

22. Canco 1 and Canco 2 will elect jointly in prescribed form and within the time limits referred to in subsection 85(6), to have the rules of subsection 85(1) apply to the transfer of property described in paragraph 21 above so that the amount agreed upon in such election in respect of each of the transferred properties that is an eligible property will be equal to the cost amount of such property to Canco 1 immediately before the transfer. The amount to be added to the stated capital account of the Canco 2 Special Share will not exceed the amount by which the aggregate of the cost amounts of the Targeted Assets exceeds the assumed liabilities.

23. Immediately after the transfer of the Targeted Assets described in paragraph 21 above, Canco 1 will redeem the issued and outstanding Class A Reorganization Share and the Class B Reorganization Share held by Canco 2 at the aggregate fair market value thereof which amount will be equal to the aggregate of the Class A Reorganization Share Redemption Amount and the Class B Reorganization Share Redemption Amount, and, in consideration therefor, Canco 1 will issue a non-interest-bearing demand promissory note (the "Canco 1 Note") in favour of Canco 2 having a principal amount equal to the aggregate of the Class A Reorganization Share Redemption Amount and the Class B Reorganization Share Redemption Amount. The Canco 1 Note will be assignable by the holder thereof. Canco 2 will accept the Canco 1 Note as full payment for the redemption price of the Class A Reorganization Share and the Class B Reorganization Share so redeemed.

24. Immediately after the redemption of the Class A Reorganization Share and the Class B Reorganization Share as described in paragraph 23 above, Canco 2 will redeem its Canco 2 Special Share held by Canco 1 at its fair market value being an amount equal to the Canco 2 Special Share Redemption Amount and such redemption price will be paid in full by Canco 2 by the transfer and assignment to Canco 1 of the Canco 1 Note referred to in paragraph 23 above. Canco 1 will accept the Canco 1 Note as full payment for the redemption price of the Canco 2 Special Share so redeemed. The Canco 1 Note will thereupon be extinguished and cancelled notwithstanding that the mutual indebtedness of Canco 1 and Canco 2 resulting from the redemptions described in paragraph 23 and in this paragraph may not be of identical amounts.

25. Immediately following the transfer of property described in paragraph 21 above, the redemption of the Class A Reorganization Share and the Class B Reorganization Share as described in paragraph 23 above and the redemption of the Canco 2 Special Share as described in paragraph 24 above, the net fair market value of each type of property retained by Canco 1, determined in accordance with the guidelines described in paragraphs 17 and 18 above, will be equal to that proportion of the aggregate net fair market value of that type of property of Canco 1 immediately before the transfer of property described in paragraph 21 above that,

(a) the aggregate fair market value of all of the issued and outstanding Canco 1 New Common Shares and Canco 1 New Class A Shares immediately before the transfer described in paragraph 21 above,

is of

(b) the aggregate fair market value of all of the issued shares of Canco 1 immediately before such transfer.

26. After the completion of the proposed transactions described in paragraphs 10 to 25 above, the articles of incorporation, as amended, of Canco 1 will be further amended to delete the common shares, the Class A shares, the Class A Reorganization Share and the Class B Reorganization Share as shares which Canco 1 is authorized to issue, to delete the rights, privileges, restrictions and conditions attaching to such shares, to change the designation of the Canco 1 New Common Shares to common shares and the Canco 1 New Class A Shares to Class A shares, and to accordingly renumber the parts, articles, sections, subsections and other portions of (and references to such parts, articles, sections, subsections and other portions thereof) the rights, privileges, restrictions and conditions attaching to the shares which Canco 1 is authorized to issue. The purpose of this transaction is to eliminate the changes that were undertaken to effect the reorganization described above.

27. The articles of incorporation, as amended, of Canco 1 will be restated and such restated articles of incorporation will be filed by Canco 1, pursuant to the relevant corporate laws.

SUBSEQUENT TRANSACTIONS

28. Following the completion of the proposed transactions described in paragraphs 10 to 27 above, it is proposed that:

(a) USCo 1 and USCo 2 will distribute to U.S. Parent, by way of dividend in kind, all of the shares of Canco 1.

(b) Thereafter U.S. Parent will contribute to the capital of USCo 3 all of its shares of USCo 1 and USCo 2. For greater certainty, no consideration will be issued by USCo 3 on this transaction.

(c) U.S. Parent will then distribute to its shareholders, by way of dividend in kind, all of its shares of USCo 3. The fair market value of the USCo 3 shares attributable to its USCo 1 and USCo 2 shares will not be more than 10% of the fair market value of the USCo 3 shares at any time during the course of the series of transactions described herein.

(d) The shares of USCo 3 will be listed on the XXXXXXXXXX Stock Exchange.

ADDITIONAL INFORMATION

29. The share provisions relating to each of the Class A Reorganization Share, the Class B Reorganization Share and the Canco 2 Special Share will provide that in the event that it is subsequently held or determined by a final judgment of any competent administrative tribunal or court or by a negotiated settlement with any revenue authority that the aggregate net fair market value of any property that is relevant to the determination of the redemption price of such share is different than the fair market value assigned thereto, the redemption amounts of such shares will be automatically adjusted retroactively, nunc pro tunc, to reflect the aggregate net fair market value so held or determined.

30. Except as described in this letter, no liabilities have been or will be incurred by, and no assets have been or will be acquired by or disposed of by Canco 1, Canco 2 or a corporation controlled by one of them in contemplation of or before the proposed transfers of properties described in paragraph 21 above.

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

32. None of the parties is contemplating an acquisition of control of any of the corporations referred to above.

33. None of the shares of Canco 1 or Canco 2 has been, or will be, at any time during the implementation of the proposed transactions described herein:

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

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

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

34. Neither Canco 1 nor Canco 2 is, or will be at the time of the proposed transactions described herein, a specified financial institution.

PURPOSE OF THE PROPOSED TRANSACTIONS

The purpose of the proposed transactions as described herein is to effect a tax-deferred reorganization of Canco 1 pursuant to which the XXXXXXXXXX business will be transferred to Canco 2, thereby separating the XXXXXXXXXX business from the XXXXXXXXXX business. Canco 2 will be transferred to USCo 3 and U.S. Parent will then distribute the shares of USCo 3, and accordingly, the underlying investment in Canco 2, to its shareholders.

RULINGS:

Provided that the preceding statements constitute a complete and accurate disclosure of all the relevant facts and proposed transactions and the purposes of the proposed transactions, we confirm the following:

A. The provisions of subsection 86(1) will apply, and the provisions of subsection 86(2) will not apply, to the exchange of shares described in paragraph 12 above, such that:

(a) the cost to USCo 1 of the Canco 1 New Common Shares or the Class A Reorganization Share, as the case may be, will be deemed by paragraph 86(1)(b) to be that proportion of the aggregate adjusted cost base to USCo 1, immediately before the share exchange described in subparagraph 12(c) above, of the existing common shares of Canco 1 held by USCo 1, that

(i) the fair market value, immediately after the share exchange, of all of the Canco 1 New Common Shares or the Class A Reorganization Share, as the case may be

is of

(ii) the aggregate fair market value, immediately after the share exchange, of all of the Canco 1 New Common Shares and the Class A Reorganization Share receivable by USCo 1 for the existing common shares of Canco 1;

(b) the cost to USCo 2 of the Canco 1 New Class A Shares or the Class B Reorganization Share, as the case may be, will be deemed by paragraph 86(1)(b) to be that proportion of the aggregate adjusted cost base to USCo 2 immediately before the share exchange described in subparagraph 12(f) above, of the existing Class A shares of Canco 1 held by USCo 2, that

(i) the fair market value, immediately after the share exchange, of all of the Canco 1 New Class A Shares or the Class B Reorganization Share, as the case may be

is of

(ii) the aggregate fair market value, immediately after the share exchange, of all of the Canco 1 New Class A Shares and the Class B Reorganization Share receivable by USCo 2 for the existing Class A shares of Canco 1;

(c) USCo 1 will be deemed by paragraph 86(1)(c) to have disposed of its existing common shares of Canco 1 for proceeds of disposition equal to the aggregate cost to USCo 1 of all the Canco 1 New Common Shares and the Class A Reorganization Share receivable by USCo 1 on the exchange of its existing common shares of Canco 1; and

(d) USCo 2 will be deemed by paragraph 86(1)(c) to have disposed of its existing Class A shares of Canco 1 for proceeds of disposition equal to the aggregate cost to USCo 2 of all the Canco 1 New Class A Shares and the Class B Reorganization Share receivable by USCo 2 on the exchange of its existing Class A shares of Canco 1.

B. The provisions of subsections 84(1) and 84(3) will not apply to deem USCo 1 and USCo 2 to have received a dividend as a result of the share exchanges described in subparagraph 12(c) and 12(f) above, respectively.

C. Provided that Canco 1 and Canco 2 jointly file an election pursuant to subsection 85(1), in the prescribed form and within the prescribed time, in respect of the transfer of property by Canco 1 to Canco 2 as described in paragraph 21 above, the provisions of subsection 85(1) will apply to the transfer of each eligible property such that the agreed amount in respect of each such transfer will be deemed to be the proceeds of disposition to Canco 1 and the cost thereof to Canco 2 pursuant to paragraph 85(1)(a). For greater certainty, the provisions of paragraph 85(1)(e.2) will not apply to the transfers described herein.

D. The provisions of subsection 212.1(1) will not apply to deem USCo 1 and USCo 2 to have received a dividend from Canco 2 and will not result in a reduction of the PUC of the Canco 2 Common Shares issued by Canco 2 to each of USCo 1 and USCo 2 as described in paragraph 19 above.

E. The provisions of subsection 85(2.1) will not apply to reduce the PUC of the Canco 2 Special Share to be issued to Canco 1 by Canco 2 as described in paragraph 21 above.

F. As a result of the redemption by Canco 1 of the Class A Reorganization Share and the Class B Reorganization Share as described in paragraph 23 above and the redemption of the Canco 2 Special Share as described in paragraph 24 above:

(a) By virtue of paragraphs 84(3)(a) and 84(3)(b),

(i) Canco 1 will be deemed to have paid, and Canco 2 will be deemed to have received, a taxable dividend equal to the amount by which the amount paid in respect of the redemptions of the Class A Reorganization Share and the Class B Reorganization Share exceeds the aggregate PUC thereof; and

(ii) Canco 2 will be deemed to have paid, and Canco 1 will be deemed to have received, a taxable dividend equal to the amount by which the amount paid in respect of the redemption of the Canco 2 Special Share exceeds the PUC thereof.

(b) The taxable dividends deemed to have been received by Canco 2 and Canco 1 as described respectively in rulings F(a)(i) and F(a)(ii) above will be included in computing their respective incomes pursuant to paragraph 12(1)(j) and be deductible by each of them in computing their respective taxable incomes pursuant to subsection 112(1). For greater certainty, the provisions of subsections 112(2.1), (2.2), (2.3) and (2.4) will not apply to deny the subsection 112(1) deduction in respect of such dividends.

(c) Pursuant to paragraph (j) of the definition of "proceeds of disposition" in section 54, the proceeds of disposition in respect of the redemption of the Class A Reorganization Share and the Class B Reorganization Share held by Canco 2, and in respect of the redemption of the Canco 2 Special Share held by Canco 1 will be reduced by the amount of the dividend deemed by paragraph 84(3)(b) to be received by the holder of the particular share.

(d) By virtue of subsection 186(2) and paragraph 186(4)(a), Canco 1 will be connected with Canco 2. Consequently, provided that neither Canco 1 nor Canco 2 is entitled to a dividend refund (within the meaning of subsection 129(1)) in respect of its taxation year in which it is deemed to pay the dividends referred to respectively in rulings F(a)(i) and F(a)(ii), neither of Canco 1 nor Canco 2 will be subject to Part IV tax under subsection 186(1) in respect of such dividend.

G. 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 paragraph 55(3)(b), subsection 55(2) will not apply to the taxable dividends referred to in the rulings given in subparagraphs F(a) and F(b) and, for greater certainty, subsection 55(3.1) will not apply to deny the exemption under paragraph 55(3)(b).

H. By virtue of the definition of the "substantial interest" as set out under paragraph 191(2)(a), Canco 1 will have a substantial interest in Canco 2 immediately before the redemption of the Class A Reorganization Share and the Class B Reorganization Share as described in paragraph 23 above. Consequently, no tax will be payable under either section 187.2 of Part IV.1 or section 191.1 of Part VI.1 in respect of:

(a) the dividend deemed to be paid by Canco 2 to Canco 1 upon the redemption of the Canco 2 Special Share since such dividend will be an "excepted dividend" within the meaning assigned by paragraph (b) of the definition of "excepted dividend" in section 187.1 in the capacity of Canco 1 as the recipient of the particular dividend, and will be an "excluded dividend" within the meaning of paragraph (a) of the definition of "excluded dividend" in subsection 191(1) in the capacity of Canco 2 as the payer of the particular dividend,

or

(b) the dividends deemed to be paid by Canco 1 to Canco 2 upon the redemption of the Class A Reorganization Share and the Class B Reorganization Share since each of such dividends will be an "excepted dividend" within the meaning assigned by paragraph (b) of the definition of "excepted dividend" in section 187.1 in the capacity of Canco 2 as recipient of the particular dividend, and will be an "excluded dividend" within the meaning of paragraph (a) of the definition of "excluded dividend" in subsection 191(1) in the capacity of Canco 1 as the payer of the particular dividend.

I. The extinguishment of the Canco 1 Note as described in paragraph 24 above, will not give rise to a "forgiven amount" within the meaning of subsection 80(1) or 80.01(1). Neither Canco 1 nor Canco 2 will realize any gain or incur any loss as a result of the transfer and assignment to Canco 1 of the Canco 1 Note by Canco 2 and the resultant extinguishment and cancellation of the Canco 1 Note as described in paragraph 24 above.

J. Subsection 256(7) will apply with respect to the proposed acquisitions, redemption and cancellation of shares described in the proposed transactions described above, with the result that no person or group of persons will be regarded as having acquired control of Canco 1 or Canco 2 for purposes of the provisions of the Act referred to in the preamble to such subsection.

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

L. Subsection 245(2) will not be applied as a result of the proposed transactions, in and by themselves, to redetermine the tax consequences confirmed herein.

The above rulings are based on the Act in its present form and do not take into account any proposed amendments to the Act.

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 the Canada Customs and Revenue Agency (the CCRA) provided the proposed transactions described herein are completed by XXXXXXXXXX.

Comments

1. Nothing in this ruling should be construed as implying that the CCRA has agreed to or reviewed the determination of the adjusted cost base or fair market value of any property or the paid-up capital of any shares referred to herein.

2. Nothing in this ruling should be construed as implying that the CCRA has agreed to or reviewed any tax consequences relating to the facts and proposed transactions described herein other than those specifically described in the rulings given above.

3. In the event of a subsequent disposition of any shares of any of the companies referred to herein, nothing in this ruling should be construed as implying that the transactions described herein will not, for the purposes of subsection 55(3.1), be considered to be part of a series of transactions or events which includes such subsequent disposition of shares.

4. You have advised in paragraph 29 above, that, as part of a price adjustment clause with respect to any property the fair market value of which is relevant to the redemption price of the Class A Reorganization Share, the Class B Reorganization Share and the Canco 2 Special Share, the share provisions relating to such shares will provide for an automatic retroactive adjustment, where necessary, to the redemption price of those shares.

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

Yours truly,

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