2015 Ruling 2015-0604051R3 - Internal 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.

Principal Issues: 1. Whether paragraph 55(3)(a) will apply in the context of an internal spin-off reorganization.
2. Whether subsection 245(2) will apply with respect to the internal spin-off reorganization.

Position: 1. Subsection 55(2) will not apply because the exemption in paragraph 55(3)(a) applies.
2. Subsection 245(2) will apply with respect to the ACB of the Canco1 Class A common shares held by USco3 and XXXXXXXXXXco1 after the reorganization.

Reasons: 1. There is no transaction described in subparagraphs 55(3)(a)(i) to (v) as part of the series of transactions as part of which the deemed dividends will be received.
2. The high ACB represents a tax benefit that may, due to the stock dividend, generate a loss if the shares constitute taxable Canadian property. Furthermore, the loss would not be reduced by the application of subsection 112(3) or any other similar stop-loss rule.

XXXXXXXXXX						2015-060405

XXXXXXXXXX, 2015

Sir,

Re: Advance Income Tax Ruling
XXXXXXXXXX

This is in reply to your letters of XXXXXXXXXX, in which you requested certain advance income tax rulings regarding the proposed transactions described herein. We also acknowledge the information provided in various emails and telephone conversations.

To the best of the knowledge of the taxpayers, none of the issues involved in this ruling, as they apply specifically to such respective parties:

(i) is in an earlier return of the taxpayers or a related person;

(ii) is 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) is under objection by the taxpayers or a related person;

(iv) is before the courts or, if a judgment has been issued, the time limit for appeal to a higher court has expired; or is the subject of a previously issued ruling, except as provided in the advance tax ruling issued on XXXXXXXXXX.

Legal Entity Definitions

The transactions described in this ruling request involve the following entities:

(a) “Amalco” means a corporation to be formed pursuant to the amalgamation of Canco4 and Canco3, as described in paragraph 26 below;

(b) “Canco1” means XXXXXXXXXX, a Canadian subsidiary wholly-owned corporation of XXXXXXXXXXco1 (as a result of the merger described in Paragraph 8), continued under the laws of the province of XXXXXXXXXX on XXXXXXXXXX. Canco1 is a taxable Canadian corporation and its business number is XXXXXXXXXX;

(c) “Canco2” means XXXXXXXXXX, a Canadian subsidiary wholly-owned corporation of Canco1, incorporated under the laws of the province of XXXXXXXXXX. Canco2 is a taxable Canadian corporation and its business number is XXXXXXXXXX;

(d) “Canco3” means XXXXXXXXXX, a Canadian subsidiary wholly-owned corporation of Canco2, continued under the laws of the province of XXXXXXXXXX on XXXXXXXXXX. Canco3 is a taxable Canadian corporation and its business number is XXXXXXXXXX;

(e) “Canco4” means XXXXXXXXXX, a Canadian subsidiary wholly-owned corporation of USco3, incorporated as an unlimited liability company under the laws of the province of XXXXXXXXXX. Canco4 is a taxable Canadian corporation and its business number is XXXXXXXXXX;

(f) “XXXXXXXXXXco1” means XXXXXXXXXX, a corporation (XXXXXXXXXX) formed under the laws of XXXXXXXXXX that is a subsidiary wholly-owned corporation of Parent;

(g) “XXXXXXXXXXco2” means XXXXXXXXXX, a corporation (XXXXXXXXXX) formed under the laws of XXXXXXXXXX that is a subsidiary wholly-owned corporation of Parent;

(h) “XXXXXXXXXXco3” means XXXXXXXXXX, a corporation (XXXXXXXXXX) formed under the laws of XXXXXXXXXX, the shares of which are owned by XXXXXXXXXXco2 as to XXXXXXXXXX%;

(i) “XXXXXXXXXXco4” means XXXXXXXXXX, a corporation (XXXXXXXXXX) formed under the laws of XXXXXXXXXX that is wholly-owned by a direct or indirect wholly-owned subsidiary of Parent;

(j) “Parent” means XXXXXXXXXX, a XXXXXXXXXX corporation (XXXXXXXXXX), the shares of which are publicly traded on the XXXXXXXXXX and the XXXXXXXXXX;

(k) “USco1” means XXXXXXXXXX, a U.S. subsidiary wholly-owned corporation of Canco3, incorporated under the laws of the state of XXXXXXXXXX;

(l) “USco2” means XXXXXXXXXX, a U.S. corporation incorporated under the laws of the state of XXXXXXXXXX, the voting and participating shares of which are held by XXXXXXXXXXco1 (as a result of the merger described in Paragraph 8) as to XXXXXXXXXX% and USco1 as to XXXXXXXXXX%; and

(m) “USco3” means XXXXXXXXXX, a U.S. corporation incorporated under the laws of the state of XXXXXXXXXX that is a subsidiary wholly-owned corporation of XXXXXXXXXXco1.

Definitions

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

(a) “Act” means the Income Tax Act, RSC 1985 (5th supp.), c.1, as amended to the date hereof, and, unless otherwise indicated, all statutory references are to the Act;

(b) “adjusted cost base” or “ACB” has the meaning assigned by section 54;

(c) “CAD” means Canadian dollar;

(d) “Canco1 Class A Common Shares” has the meaning ascribed in paragraph 9 below;

(e) “Canco1 Class B Common Shares” has the meaning ascribed in paragraph 14 below;

(f) “Canco2 Class A Common Shares” has the meaning ascribed in paragraph 18 below;

(g) “Canco2 Preferred Shares” has the meaning ascribed in paragraph 18 below;

(h) “Canco3 Promissory Note” means the promissory note described in paragraph 17;

(i) “CRA” means Canada Revenue Agency;

(j) “First Dividend” has the meaning ascribed in paragraph 17 below;

(k) “FMV” means fair market value;

(l) “paid-up capital” or “PUC” has the meaning assigned by subsection 89(1);

(m) “principal amount” has the meaning assigned by subsection 248(1);

(n) “Proposed Transactions” means the transactions described below, in paragraphs 14 to 26;

(o) “Second Dividend” has the meaning ascribed in paragraph 20 below;

(p) “SFI” or “specified financial institution” has the meaning assigned by subsection 248(1);

(q) “subsidiary wholly-owned corporation” has the meaning assigned by subsection 248(1);

(r) “taxable Canadian corporation” has the meaning assigned by subsection 89(1);

(s) “taxable Canadian property” has the meaning assigned by subsection 248(1);

(t) “Third Dividend” has the meaning ascribed in paragraph 25 below; and

(u) “USD” means US dollar.

Facts

1. Parent, with its subsidiaries and affiliated corporations (the “Group”), is a XXXXXXXXXX

2. From inception in XXXXXXXXXX, Parent significantly grew through acquisition and investment in various XXXXXXXXXX.

3. As of XXXXXXXXXX, the principal shareholders of Parent are as follows:

• Public (XXXXXXXXXX% of the shares representing XXXXXXXXXX% of the voting rights);
• XXXXXXXXXX (XXXXXXXXXX% of the shares representing XXXXXXXXXX% of the voting rights); and
• Employees of the group (XXXXXXXXXX% of the shares representing XXXXXXXXXX% of the voting rights).

Parent is not aware of any other shareholder owning, directly or indirectly, more than XXXXXXXXXX% of the shares or voting rights of its capital stock.

4. Canco2 is the Canadian operating entity of the XXXXXXXXXX of the Group. It is involved in the XXXXXXXXXX in Canada for domestic and international markets. With more than XXXXXXXXXX employees in Canada, including XXXXXXXXXX. Canco2 also owns the shares of the capital stock of Canco3.

5. USco2 is the U.S. operating entity of the XXXXXXXXXX of the Group. It is also involved in the XXXXXXXXXX for U.S. and international markets. It employs more than XXXXXXXXXX individuals throughout the U.S.

6. Canco1, Canco3 and USco1 are holding companies. The only material assets of these entities are the shares of the capital stock of Canco2, USco1 and USco2, respectively, and cash on hand.

7. Prior to the Proposed Transactions, XXXXXXXXXXco4 incorporated Canco4 as an unlimited liability company under the laws of the province of XXXXXXXXXX and subscribed for XXXXXXXXXX common share of the capital stock of Canco4 for CAD XXXXXXXXXX. On XXXXXXXXXX, XXXXXXXXXXco4 sold its XXXXXXXXXX common share of the capital stock of Canco4 to USco3 for CAD XXXXXXXXXX. Canco4 is a holding company with no material assets.

On XXXXXXXXXX, XXXXXXXXXXco3 sold its XXXXXXXXXX common shares of the capital stock of XXXXXXXXXXco4 to XXXXXXXXXX, a corporation (XXXXXXXXXX) formed under the laws of XXXXXXXXXX that is a direct or indirect wholly-owned subsidiary of Parent, for XXXXXXXXXX.

8. On XXXXXXXXXX, XXXXXXXXXXco2 and XXXXXXXXXXco3 merged with and into XXXXXXXXXXco1, with XXXXXXXXXXco1 being the surviving corporation.

The Canco1 shares will not constitute taxable Canadian property and, therefore, no notice to the Minister under section 116 will be sent in connection with the disposition of the shares of the capital stock of Canco1 by XXXXXXXXXXco3.

9. The authorized and issued share capital of Canco1, Canco2, Canco3 and Canco4 described above are as follows:

A. Canco1

(i) Authorized: unlimited number of voting and participating Common Shares (the “Canco1 Class A Common Shares”) with no par value and XXXXXXXXXX Class A Preferred Shares having a par value of CAD XXXXXXXXXX per share;

(ii) Issued: XXXXXXXXXX Canco1 Class A Common Shares.

B. Canco2

(i) Authorized: XXXXXXXXXX First Preference shares (non-voting), XXXXXXXXXX Second Preference shares (non-voting), XXXXXXXXXX Third Preference shares and XXXXXXXXXX voting, participating common shares with no par value;

(ii) Issued: XXXXXXXXXX common shares.

C. Canco3

(i) Authorized: unlimited number of voting and participating common shares;

(ii) Issued: XXXXXXXXXX common shares.

D. Canco4

(i) Authorized: unlimited number of voting and participating common shares;

(ii) Issued: XXXXXXXXXX common share.

10. The ACB and the PUC of the shares of the capital stock of Canco3 held by Canco2 is as follows:

ACB: CAD XXXXXXXXXX
PUC: CAD XXXXXXXXXX

The ACB of the shares of the capital stock of Canco2 held by Canco1 is approximately equal to CAD XXXXXXXXXX and the PUC of such shares is CAD XXXXXXXXXX.

11. Based on the most recent information, it is currently estimated that the FMV of the relevant entities on a “standalone” basis (i.e. excluding the value of the lower-tier subsidiaries) and on a consolidated basis would be as follows:

A. USco1: CAD XXXXXXXXXX, which represents the “standalone” XXXXXXXXXX value of USco1 of CAD XXXXXXXXXX and XXXXXXXXXX% of the value of USco2 (CAD XXXXXXXXXX);

B. Canco3: CAD XXXXXXXXXX which represents the “standalone” value of Canco3 of CAD XXXXXXXXXX and the value of USco1 (CAD XXXXXXXXXX);

C. Canco2: CAD XXXXXXXXXX, which represents the “standalone” value of Canco2 of CAD XXXXXXXXXX and the value of Canco3 (CAD XXXXXXXXXX); and

D. Canco1: CAD XXXXXXXXXX, which represents the “standalone” value of Canco1 of CAD XXXXXXXXXX and the value of Canco2 (CAD XXXXXXXXXX).

The FMV of these entities will be updated if necessary prior to the Proposed Transactions and those updated FMV amounts will be the amounts used to effect the Proposed Transactions.

12. Over the years, Canco1 has reduced the amount of its legal capital account to approximately CAD XXXXXXXXXX by way of multiple distributions in cash. As a result, at the time of the Proposed Transactions, the PUC and ACB of the shares of the capital stock of Canco1 held by XXXXXXXXXXco1 (as a result of the merger described in Paragraph 8) will be approximately CAD XXXXXXXXXX. In addition, there is no amount of contributed surplus on the balance sheet of Canco1 that arose in connection with transactions or events described in subparagraphs 84(1)(c.3)(i), (ii) or (iii).

13. The shares of the capital stock of Canco1 and Canco4 do not constitute taxable Canadian property.

Proposed Transactions

14. Canco1 will alter its Notice of Articles to modify its capital stock to (i) reclassify the existing “common shares” as “Class A Common Shares”, (ii) authorize that an unlimited number of Class B Common Shares be issued (the “Canco1 Class B Common Shares”) and (iii) eliminate the Class A Preferred Shares. The Canco1 Class B Common Shares will be identical to the Canco1 Class A Common Shares but will have a par value of CAD XXXXXXXXXX per share.

15. Canco1 will convert into an unlimited liability company under the laws of XXXXXXXXXX. As a result, Canco1 will become disregarded for U.S. tax purposes.

16. Canco3 will undertake a stock subdivision of its common shares in the ratio of XXXXXXXXXX common shares for each issued and outstanding common share. Further to the stock subdivision, Canco3 will have XXXXXXXXXX common shares issued and outstanding with an aggregate legal stated capital of CAD XXXXXXXXXX and a FMV of approximately CAD XXXXXXXXXX per share.

17. Canco3 will repurchase for cancellation all but one of its common shares held by Canco2 (representing XXXXXXXXXX% of the shares held by Canco2) for proceeds equal to their FMV. The repurchase price will be satisfied by the issuance of a promissory note (the “Canco3 Promissory Note”) that will be non-interest bearing, payable on demand and denominated in CAD. The repurchase for cancellation will trigger a deemed dividend (the “First Dividend”) under subsection 84(3) equal to the amount by which the repurchase price exceeds the PUC of the Canco3 common shares repurchased. The principal amount of the Canco3 Promissory Note will be equal to the FMV of all but one of the issued and outstanding shares of the capital stock of Canco3 immediately before the repurchase for cancellation of the common shares. The Canco3 Promissory Note will represent full and final payment of the share repurchase and Canco2 will issue a receipt acknowledging that the repurchase price has been paid in full.

18. Canco2 will amend its share capital in order to be authorized to issue a class of new common shares (the “Canco2 Class A Common Shares”) which have identical rights and attributes to the existing common shares except that each Canco2 Class A Common Shares will be entitled to XXXXXXXXXX votes per share and one class of preferred shares (the “Canco2 Preferred Shares”), which will have the following terms and conditions:

(a) Non-voting;

(b) No dividend entitlement;

(c) On a liquidation, dissolution or winding-up of Canco2, each Canco2 Preferred Shares will be entitled to an amount equal to the aggregate FMV of the remaining common share of Canco3 and of the Canco3 Promissory Note, divided by the number of issued Canco2 Preferred Shares; and

(d) Redeemable and retractable for an amount equal to the amount described in (c) above.

19. Canco2 will reduce the amount of its legal capital account to CAD XXXXXXXXXX (without any distribution and without any cancellation or disposition of shares) and Canco1 will exchange, by way of share exchange agreement pursuant to section 51 or 86, its common shares of the capital stock of Canco2 for XXXXXXXXXX Canco2 Class A Common Shares and XXXXXXXXXX Canco2 Preferred Shares. The FMV of the Canco2 Preferred Shares will be equal to the total of the FMV of the issued and outstanding common share of the capital stock of Canco3 and the FMV of the Canco3 Promissory Note.

20. Canco2 will redeem all the Canco2 Preferred Shares held by Canco1 and will pay the redemption price by delivering the common share of the capital stock of Canco3 and the Canco3 Promissory Note. The redemption will trigger a deemed dividend (the “Second Dividend”) under subsection 84(3) equal to the amount by which the redemption price exceeds the PUC of the Canco2 Preferred Shares.

21. Canco3 will convert into an unlimited liability company under the laws of XXXXXXXXXX. As a result, Canco3 will become disregarded for U.S. tax purposes.

The transactions described in paragraphs 22 to 25 below will occur pursuant to a binding legal commitment of all parties.

22. XXXXXXXXXXco1 will transfer a portion of its XXXXXXXXXX Canco1 Class A Common Shares to USco3 in exchange for additional ordinary shares of the capital stock of USco3.

The number of Canco1 Class A Common Shares transferred to USco3 will be determined by the following formula:

(A/B) x C,

where

A = the FMV of Canco1’s investment in Canco3 (which is the total of the FMV of the common share it holds in Canco3 and the FMV of the Canco3 Promissory Note);

B = the FMV of all the issued and outstanding shares of the capital stock of Canco1; and

C = the aggregate number of issued and outstanding common shares in the capital stock of Canco1.

The Canco1 Class A Common Shares will not constitute taxable Canadian property and, therefore, no notice to the Minister under section 116 will be sent in connection with the disposition of the shares of the capital stock of Canco1 by XXXXXXXXXXco1.

23. Canco1 will declare and pay a stock dividend on its Canco1 Class A Common Shares. The dividend will be paid by issuing XXXXXXXXXX Canco1 Class B Common Shares (i.e. XXXXXXXXXX). An aggregate amount of CAD XXXXXXXXXX will be credited to the capital account maintained for the Canco1 Class B Common Shares. As a result, XXXXXXXXXXco1 and USco3 will receive Canco1 Class B Common Shares in proportion to their respective ownership of Canco1 Class A Common Shares. The number of Canco1 Class B Common Shares so issued is such that the value of the existing Canco1 Class A Common Shares will become immaterial. The FMV of the Canco1 Class B Common Shares received by USco3 will be equal to the FMV of the Canco1 Class A Common Shares held by USco3 before the payment of the stock dividend.

XXXXXXXXXXco1 and USco3 will be subject to Canadian withholding tax under subsection 212(2) in respect of the “amount” of the stock dividend paid by Canco1 (i.e. CAD XXXXXXXXXX).

24. USco3 will transfer the Canco1 Class B Common Shares received in the previous step to Canco4 in exchange for additional common shares of the capital stock of Canco4. In accordance with the provisions of the XXXXXXXXXX, Canco4 will add to its capital account for the common shares an amount equal to the PUC of the Canco1 Class B Common Shares owned by USco3 immediately before the transfer.

The Canco1 Class B Common Shares will not constitute taxable Canadian property and, therefore, no notice to the Minister under section 116 will be sent in connection with the disposition of the shares of the capital stock of Canco1 by USco3.

25. The Canco1 Class B Common Shares held by Canco4 will be repurchased for cancellation for proceeds equal to their FMV. The repurchase price will be paid by Canco1 by delivering the remaining issued and outstanding share of the capital stock of Canco3 to Canco4 and by delivering the Canco3 Promissory Note. The repurchase of the shares will give rise to a deemed dividend under subsection 84(3) equal to the amount by which the repurchase price exceeds the PUC of the Canco1 Class B Common Shares (the “Third Dividend”).

26. Canco3 and Canco4 will amalgamate to form Amalco. Subsection 87(11) will apply with respect to the amalgamation. The Canco3 Promissory Note will be extinguished as the qualities of creditor (Canco4) and debtor (Canco3) under the promissory note will be united in Amalco.

No amount will be designated under paragraph 88(1)(d) with respect to the non-depreciable capital property of Canco3. As there was no acquisition of control from an arm’s length person, the amount described in subparagraph 88(1)(d)(ii) would be nil because the FMV of any eligible property at the time Canco4 last acquired control of Canco3 (pursuant to paragraph 88(1)(d.2)) would be limited to the historical tax cost of such property to Canco3.

Amalco will be disregarded for U.S. federal income tax purposes.

The Canco4 shares will not constitute taxable Canadian property and, therefore, no notice to the Minister under section 116 will be sent in connection with the disposition of the shares of the capital stock of Canco4 by USco3.

Additional Information

27.

a) Canco1, Canco2 and Canco4 are SFIs pursuant to paragraph (g) of the definition of SFI. However, none of the shares on which the First Dividend, Second Dividend and Third Dividend are paid will be acquired in the ordinary course of their respective businesses.

b) The issued shares of the capital stock of Canco1, Canco2 and Canco3 (being the payor of, respectively, the Third Dividend, the Second Dividend and the First Dividend) will not be, at any time during the course of the series of transactions that includes the Proposed Transactions:

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

B. the subject of a “dividend rental arrangement” (as defined in subsection 248(1)), whether as that term is currently defined in the Act or as that term will be defined if the Legislative Proposals relating to the Income Tax Act and Regulations released on July 31, 2015 are enacted in their current form);

C. the subject of any secured undertaking of the type described in paragraph 112(2.4)(a);

D. issued for consideration that is or includes:

(i) an obligation of the type described in subparagraph 112(2.4)(b)(i), other than an obligation of a corporation that is, immediately before the issuance, related (otherwise than by reason of a right referred to in paragraph 251(5)(b)) to Canco1, Canco2 or Canco3, as the case may be, or

(ii) any right of the type described in subparagraph 112(2.4)(b)(ii); or

E. issued or acquired as part of a transaction or event or series of transactions or events of the type described in subsection 112(2.5).

28. The Proposed Transactions will not be subject to any specific public disclosure. It is not anticipated that the Proposed Transactions will have any material impact on Parent’s share price. The public trading of the capital stock of Parent will not be in any way facilitated or motivated by the Proposed Transactions.

29. Discussions with the XXXXXXXXXX tax authorities with respect to the Proposed Transactions have been held and the XXXXXXXXXX tax authorities have issued a specific ruling (XXXXXXXXXX) with respect to the Proposed Transactions.

30. It is not anticipated that the shares of the capital stock of Amalco will ever be considered taxable Canadian property after the reorganization.

Purposes of the Proposed Transactions

31. The purpose of the Proposed Transactions is to align on a country-by-country basis the activities of the Group which were previously aligned along business lines. As a result of the historical structure, the U.S. operations are currently carried on through separate subsidiaries, but those entities have substantial shared services and common management. In addition, the proposed transactions are intended to segregate the U.S. XXXXXXXXXX operating business out from under the Canadian operating business, thus allowing U.S. business profits to flow from the U.S. to XXXXXXXXXX via Canada without those U.S. earnings flowing through the Canadian operating business entity (and, thus, without those earnings being potentially exposed to the creditors of the Canadian operating entity). Finally, the proposed transactions will also create a unified tax consolidated group in the U.S. for all XXXXXXXXXX.

32. The purpose of the proposed amalgamation of Canco4 and Canco3 described in paragraph 26 above is to (i) simplify the corporate structure and (ii) eliminate the tax basis in the Canco3 Promissory Note. Accordingly, the shares of the capital stock of Amalco (the Canadian entity owned by USco3) will have a PUC equal to the same amount as was inherent in the Canco1 shares acquired by Canco4 in paragraph 24 above (which will be a nominal amount).

Rulings Given

Provided that the preceding statements constitute complete and accurate disclosure of all the relevant facts, proposed transactions, additional information and purposes of the proposed transactions, and provided that the Proposed Transactions are completed in the manner described above, our rulings are as follows:

A. By virtue of paragraph 55(3)(a), the provisions of subsection 55(2) will not apply to the First Dividend, Second Dividend and Third Dividend, provided there is not a disposition of property or an increase in interest described in any of subparagraphs 55(3)(a)(i) to (v) which is part of the series of transactions or events that includes the Proposed Transactions. For greater certainty, the Proposed Transactions, in and by themselves, will not be considered to result in any disposition to, or increase in interest by, an unrelated person described in subparagraphs 55(3)(a)(i) to (v).

B. The amount of the First Dividend, Second Dividend and Third Dividend will be deductible pursuant to subsection 112(1) in computing the taxable income of their recipients (being Canco2, Canco1 and Canco4, respectively) and for greater certainty, such deduction will not be precluded by any of subsections 112(2.1), (2.2), (2.3) or (2.4).

C. The amount of the First Dividend will, by virtue of the provisions of subsection 112(3), apply to reduce any loss arising from the repurchase of the common shares of the capital stock of Canco3 held by Canco2 which would otherwise be determined; the amount of the Second Dividend will, by virtue of the provisions of subsection 112(3), apply to reduce any loss arising from the redemption of the Canco2 Preferred Shares held by Canco1 which would otherwise be determined; the amount of the Third Dividend will, by virtue of the provisions of subsection 112(3), apply to reduce any loss arising from the repurchase of the Canco1 Class B Common shares held by Canco4 which would otherwise be determined;

D. As a result of the repurchase for cancellation of all but one of the common shares of Canco3 and the issuance of the Canco3 Promissory Note described in paragraph 17 above, the ACB of the Canco3 Promissory Note will be equal to the FMV of the common shares repurchased for cancellation such that the aggregate ACB of the common share that Canco2 holds in Canco3 and of the Canco3 Promissory Note will be approximately equal to the FMV of the common shares that Canco2 held in Canco3 immediately before the repurchase for cancellation described in paragraph 17.

E. For the purposes of subsection 212(2), the amount of the stock dividend received by XXXXXXXXXXco1 and USco3 in paragraph 23 above will be determined, pursuant to paragraph (c) of the definition of “amount” in subsection 248(1), as the amount by which the PUC of the Canco1 Class B Common Shares is increased by reason of the payment of the dividend.

F. Subsection 15(1.1) will not apply to the stock dividend described in paragraph 23 above.

G. Subsection 212.3(2) will not apply to any of the Proposed Transactions, provided that, with respect to the acquisition of the Canco3 common share in paragraph 20, the acquisition of the Canco1 Class B Common Shares described in paragraph 24 and the acquisition of the Canco3 common share described in paragraph 25

a) none of Canco1, Canco2, Canco3, Canco4 and USco3 deal at arm’s length with any of Parent, XXXXXXXXXXco1, XXXXXXXXXXco2, XXXXXXXXXXco3, XXXXXXXXXXco4 and USco3 at any time that is

(i) during the series of transactions or events that includes the Proposed Transactions, and

(ii) in the case of

1. the acquisition of the Canco3 common share by Canco1 that is described in paragraph 20, before that acquisition,

2. the acquisition of the Canco 1 Class B Common Shares by Canco4 that is described in paragraph 24, before that acquisition, and

3. the acquisition of the Canco3 common share by Canco4 that is described in paragraph 25, before that acquisition, and

b) there are no other non-resident corporations that participate in the series.

H. Provided that there is no change in the PUC of the common shares of the capital stock of Canco3, or in the interest, rights or privileges of Canco2 in the common shares of the capital stock of Canco3 on the stock subdivision described in paragraph 16 above:

(i) Canco2 will not be regarded as having disposed of its common shares; and

(ii) the aggregate ACB of the subdivided common shares will be equal to the aggregate ACB of such shares held by Canco2 immediately before the stock subdivision.

I. Pursuant to the provisions of subsection 80.01(3), the settlement of the Canco3 Promissory Note upon the amalgamation of Canco3 and Canco4, described in paragraph 26, will not result in a “forgiven amount” (within the meaning of subsection 80(1)), provided that the cost amount of the Canco3 Promissory Note to Canco4 is equal to the principal amount of the Canco3 Promissory Note. Such cost amount will be equal to the FMV of the Canco1 Class B Common Shares held by Canco4 that are repurchased for cancellation, as described in paragraph 25, less the FMV of the remaining Canco3 common share that is transferred to Canco4 upon the repurchase.

J. Subsection 245(2) will not be applicable as a result of the Proposed Transactions, in and by themselves, to re-determine the tax consequences confirmed in the rulings given. However, subsection 245(2) will apply as a result of the Proposed Transactions to deny the tax benefit arising from the ACB, to USco3 and XXXXXXXXXXco1, of the Canco1 Class A common shares.

The above rulings are given subject to the limitations and qualifications set forth in Information Circular 70-6R6 dated August 19, 2014. They are binding on the CRA provided that the Proposed Transactions are completed before XXXXXXXXXX and provided that, after the implementation of the Proposed Transactions:

• A notice of determination is sent pursuant to subsection 152(1.11) to USco3 and XXXXXXXXXXco1 to reduce the ACB, to USco3 and XXXXXXXXXXco1, of the Canco1 Class A common shares to a nominal amount; and
• USco3 and XXXXXXXXXXco1 waive in writing the right of objection or appeal relative to such determination pursuant to subsections 165(1.2) and 169(2.2).

The above rulings will be binding on the CRA when the time limit for objection to or appealing from the determination made under subsection 152(1.11) has expired.

The above rulings are based on the law as it presently reads and do not take into account any proposed amendments to the Act and the Regulations which, if enacted, could have an effect on the rulings provided herein.

Opinions

1. Provided that the preceding statements constitute a complete and accurate disclosure of all of the relevant facts, proposed transactions, additional information and purposes of the proposed transactions, provided that the Proposed Transactions are undertaken in the manner described above, and provided that the proposed amendments to the Act to add subsection 55(2.1), modify the portion of paragraph 55(3)(a) of the Act that is before subparagraph 55(3)(a)(i), modify subsection 112(2.3) and modify subsection 248(1) as contained in the Legislative Proposals relating to the Income Tax Act and Regulations released on July 31, 2015 are enacted in substantially the same form as proposed,

A. By virtue of proposed paragraph 55(3)(a), proposed subsection 55(2) will not apply to the First Dividend, Second Dividend and Third Dividend, provided there is not a disposition of property or an increase in interest described in any of subparagraphs 55(3)(a)(i) to (v) which is part of the series of transactions or events that includes the Proposed Transactions. For greater certainty, the Proposed Transactions, in and by themselves, will not be considered to result in any disposition to, or increase in interest by, an unrelated person described in subparagraphs 55(3)(a)(i) to (v).

B. Proposed subsection 112(2.3) will not apply in respect of the dividends described in Ruling B above.

The foregoing opinions are not rulings and, as noted in paragraph 19f) of Information Circular 70-6R6, are not binding on the CRA.

Comments

Unless otherwise confirmed, nothing in this letter should be construed as implying that the CRA has confirmed, reviewed, made any determination, or accepted any method for the determination in respect of:

(a) the PUC of any share or the ACB or FMV of any property referred to herein, or the outstanding balance of various tax accounts for any of the corporate entities described herein;

(b) the characterization of any share or other property as taxable Canadian property;

(b.1) the availability of treaty benefits with respect to the stock dividend in paragraph 23, or in respect of any future dividends from Canco1 or Amalco to USco3; or

(c) any other tax consequence relating to the Facts, Proposed Transactions or any transaction or event taking place either prior to the Proposed Transactions or subsequent to the Proposed Transactions, whether described in this letter or not, other than those specifically described in the rulings given above.

Nothing in this letter should be construed as a confirmation, express or implied, that, for the purpose of any of the rulings given above, any adjustment to the FMV of the properties transferred or the redemption amount of the shares issued as consideration, whether pursuant to a price adjustment clause or otherwise, will be effective retroactively to the time of the transfer and issuance of shares. Furthermore, none of the rulings given in this letter are intended to apply to or in the event of the operation of a price adjustment clause, since such adjustment will be due to circumstances that do not constitute proposed transactions that are seriously contemplated. The general position of the CRA with respect to price adjustment clauses is stated in Income Tax Folio S4-F3-C1, Price Adjustment Clauses, which replaces and cancels Interpretation Bulletin IT-169.

An invoice for our fees in connection with this ruling request will be forwarded to you under separate cover.

Yours truly,

XXXXXXXXXX
for Division Director
Reorganizations Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch