2011 Ruling 2010-0380621R3 - Public company spin-off butterfly

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

Principal Issues: Whether proposed transaction is exempt from subsection 55(2)

Position: Yes

Reasons: Proposed transaction meets the requirements of paragraph 55(3)(b)

XXXXXXXXXX
									2010-038062
									XXXXXXXXXX 

Attention: XXXXXXXXXX

XXXXXXXXXX , 2011

Dear Sirs/ Mesdames:

Re: Advance Income Tax Ruling
XXXXXXXXXX , XXXXXXXXXX TSO, XXXXXXXXXX Tax Centre)

We are writing in response to your letters of XXXXXXXXXX, (and related emails) in which you requested an advance income tax ruling on behalf of the above-referenced taxpayer (the "Taxpayer"). The documents submitted as part of your request are part of this document only to the extent described herein.

You have advised us that to the best of your knowledge, and that of the Taxpayer, none of the issues contained herein is:

(a) in an earlier return of the Taxpayer or any related person;

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

(c) under objection by the Taxpayer or any related person;

(d) before the courts or, if a judgment has been issued, the time limit for appeal to a higher court has expired; or

(e) the subject of a ruling previously considered by the Directorate.

Unless otherwise indicated all references to monetary amounts are in Canadian dollars.

DEFINITIONS:

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

"A CO" means XXXXXXXXXX , a non-resident corporation established under the laws of XXXXXXXXXX ;

"Acquiror" has the meaning assigned in the definition of "specified corporation" in subsection 55(1);

"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, subparagraph or clause is a reference to the relevant provision of the Act;

"adjusted cost base" has the meaning assigned by section 54;

"agreed amount" in respect of a property means the amount that the transferor and the transferee of the property have agreed upon in an election under subsection 85(1);

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

"B CO" means XXXXXXXXXX , a non-resident corporation established under the laws of XXXXXXXXXX ;

XXXXXXXXXX ;

"Butterfly Proportion" means the fraction A/B where:

A is the net fair market value of the Spin-off Property determined immediately before the transfer described in Paragraph 29 on a consolidated look-through basis; and

B is the net fair market value of all property owned by DC, determined on a consolidated look-through basis immediately before the transfer of the Spin-off Property to Spinco as described in Paragraph 29;

"C CO" means XXXXXXXXXX , a non-resident corporation established under the laws of XXXXXXXXXX ;

"capital property" has the meaning assigned by section 54;

"CBCA" means the Canada Business Corporations Act;

"CDA" means "capital dividend account" as that term is defined by subsection 89(1);

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

"CRA" means the Canada Revenue Agency;

"D CO" means XXXXXXXXXX ;

"DC" means XXXXXXXXXX . DC has a XXXXXXXXXX fiscal and taxation year-end. DC is the corporation resulting from the amalgamation on XXXXXXXXXX under the XXXXXXXXXX of D CO and E CO;

"DC Butterfly Share Redemption Amount" means the aggregate fair market value of all of the DC Common Shares outstanding immediately before the exchange of DC Common Shares described in Paragraph 26, multiplied by the Butterfly Proportion, then divided by the number of issued and outstanding DC Butterfly Shares, plus any declared but unpaid dividends thereon;

"DC Butterfly Shares" means the new class of preferred shares in the capital of DC described in Paragraph 24;

"DC Common Shares" means the common shares issued and outstanding in the capital of DC;

"DC New Common Shares" means the New Common Shares of DC described in Paragraph 24;

"DC Convertible Debentures" has the meaning set forth in Paragraph 16.3;

"DC Redemption Note" means the promissory note to be issued by DC as described in Paragraph 33;

"DC Shareholder" means a holder of a DC Common Share, a DC Butterfly Share or a Spinco Common Share;

"DC Stock Option" means a right to acquire one DC Common Share under the DC Stock Option Plan;

"DC Stock Option Holder" means a person who holds a DC Stock Option;

"DC Stock Option Plan" means the stock option plan for directors, officers, employees and consultants of DC. Under the terms of the DC Stock Option Plan, qualifying individuals are entitled to acquire a DC Common Share at a price that
cannot be lower than the closing price of such share on the XXXXXXXXXX Exchange on the trading day immediately preceding the day on which the particular DC Stock Option was granted;

"designated stock exchange" has the meaning assigned by subsection 248(1);

"disposition" has the meaning assigned by subsection 248(1);

"Dissenting Shareholder" means a shareholder of DC who dissents from the Plan of Arrangement, as described in Paragraph 23;

"distribution" has the meaning assigned by subsection 55(1);

"E CO" means XXXXXXXXXX ;

"Effective Date" means the effective date of the Plan of Arrangement;

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

"Exercise Price Proportion" means the fraction A/B where:

A is the volume-weighted average trading price of one Spinco Common Share on the XXXXXXXXXX Exchange on the first day following completion of the transactions described in the Plan of Arrangement that Spinco Common Shares trade on the XXXXXXXXXX Exchange and DC New Common shares trade on the XXXXXXXXXX Exchange, and

B is the aggregate of (i) the average volume-weighted trading price on such day of one Spinco Common Share on the XXXXXXXXXX Exchange, and (ii) the average volume-weighted trading price on such day of one DC New Common Share on the XXXXXXXXXX Exchange on such day;

"F CO" means XXXXXXXXXX , a corporation established under the laws of XXXXXXXXXX ;

"fair market value" means the highest price available in an open and unrestricted market between informed prudent parties acting at arm's length and under no compulsion to act, expressed in terms of cash;

"flow-through share" has the meaning assigned by subsection 66(15);

"G CO" means XXXXXXXXXX ;

"GRIP" means "general rate income pool" as that term is defined by subsection 89(1);

"In The Money Amount" means, in relation to a particular stock option or warrant, the situation in which the fair market value of the shares that are the subject of the particular option or warrant is greater than the exercise price of such option or warrant;

"Merger" means the XXXXXXXXXX merger in XXXXXXXXXX under the laws of XXXXXXXXXX s between G CO and XXXXXXXXXX to form D CO. Shareholders of G CO received shares of E CO on the merger. Subsequent to the merger, D CO was continued into Canada under the XXXXXXXXXX ;

"New DC Stock Options" has the meaning assigned by Paragraph 28;

"Out Of The Money" means, in relation to a particular stock option or warrant, the situation in which the amount by which the fair market value of the shares that are the subject of the particular option or warrant is less than the exercise price of such option or warrant;

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

"Paragraph" refers to a numbered paragraph in this advance income tax ruling;

"paragraph" refers to a paragraph of the Act;

"Parent Debt" of B CO or C CO, as applicable, means all amounts owing by such company or by any company controlled by such company to DC at such time;

"Participant" means a DC Shareholder, other than a Dissenting Shareholder;

"Plan of Arrangement" means the proposed plan of arrangement under the XXXXXXXXXX to effect the divisive reorganization described in Paragraphs 21 to 34;

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

"Proposed Transactions" means the transactions referred to in Paragraphs 20 to34;

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

"RDTOH" means "refundable dividend tax on hand" as that term is defined by subsection 129(3);

"Regulations" refers to the Income Tax Regulations;

"related person" has the meaning assigned by subsection 251(2);

"restricted financial institution" has the meaning assigned by subsection 248(1);

"short-term preferred share" has the meaning assigned by subsection 248(1);

"specified financial institution" has the meaning assigned by subsection 248(1);

"specified shareholder" has the meaning assigned by subsection 248(1) as modified by subsections 55(3.2) and (3.3);

"Spinco" means XXXXXXXXXX , a corporation incorporated on XXXXXXXXXX , under the CBCA;

"Spinco Common Shares" means fully participating voting common shares of Spinco;

"Spinco Redemption Note" means the promissory note to be issued by Spinco as described in Paragraph 32;

"Spinco Reorganization Shares" means the class of preferred shares in the capital of Spinco as described in Paragraph 25;

"Spinco Stock Options" has the meaning assigned by Paragraph 28;

"Spinco Reorganization Share Redemption Amount" means the aggregate fair market value of the Spin-off Property at the time of its transfer to Spinco as described in Paragraph 29 less the aggregate fair market value as at the Effective Date of the Spinco Stock Options, divided by the number of Spinco Reorganization Shares issued as consideration therefor, plus any declared but unpaid dividends thereon;

"Spin-off Property" means all of the issued and outstanding shares and Parent Debt of B CO and C CO immediately before the transfer referred to in Paragraph 29 plus a portion (currently estimated to be XXXXXXXXXX %) of the available cash and cash equivalents of DC at the time of such transfer;

"stated capital" means, as applicable, "capital" as defined in the XXXXXXXXXX or "stated capital" as defined in the CBCA;

"Stock Exchange" means in respect of DC, the XXXXXXXXXX Exchange and, in respect of Spinco, the XXXXXXXXXX Exchange;

"subject corporation" has the meaning assigned by subsection 186(3);

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

"taxable Canadian property" has the meaning assigned by subsection 248(1);

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

"taxable preferred share" has the meaning assigned by subsection 248(1); and

"term preferred share" has the meaning assigned by subsection 248(1).

STATEMENT OF FACTS

Facts Relating to DC

1. DC is a public corporation and a taxable Canadian corporation and is governed by the XXXXXXXXXX . DC is not a subject corporation. Neither DC nor any predecessor of DC has been an Acquiror in respect of a distribution occurring within the preceding three years.

2. DC is a "principal business corporation" as defined in subsection 66(15) in that its principal business consists of XXXXXXXXXX through its various subsidiary corporations and other investee corporations. DC has indirect interests in various XXXXXXXXXX properties in XXXXXXXXXX . DC has made an election under section 261 to use the US dollar as its functional currency commencing with its XXXXXXXXXX tax year.

3. A CO is a direct wholly-owned subsidiary of DC established to serve as a holding company for the XXXXXXXXXX projects. A CO holds: (i) XXXXXXXXXX % of the shares of F CO, which indirectly holds interests in the XXXXXXXXXX project in XXXXXXXXXX and in XXXXXXXXXX ; (ii) XXXXXXXXXX % of the shares of XXXXXXXXXX , a corporation established under the laws of XXXXXXXXXX , which indirectly holds interests in certain XXXXXXXXXX properties in XXXXXXXXXX ; and (iii) XXXXXXXXXX % of the shares of XXXXXXXXXX , a corporation established under the laws of XXXXXXXXXX which indirectly holds interests in certain XXXXXXXXXX properties in XXXXXXXXXX (including the XXXXXXXXXX project).

4. B CO is a direct wholly-owned subsidiary of DC. DC holds its shares of B CO as capital property.

4.1 XXXXXXXXXX was created in XXXXXXXXXX to hold and develop various XXXXXXXXXX properties in XXXXXXXXXX . A number of financings were completed by XXXXXXXXXX over the next XXXXXXXXXX years resulting in a gradual dilution of
B CO's interest in XXXXXXXXXX . As at XXXXXXXXXX , XXXXXXXXXX was approximately XXXXXXXXXX % owned by DC through B CO.

4.2 In XXXXXXXXXX , XXXXXXXXXX completed a reverse take over with XXXXXXXXXX . XXXXXXXXXX is the resulting entity. XXXXXXXXXX is listed on the XXXXXXXXXX Exchange in XXXXXXXXXX . DC currently holds through B CO an approximate XXXXXXXXXX % interest in the common shares of XXXXXXXXXX . The principal properties of XXXXXXXXXX consist of XXXXXXXXXX properties located in XXXXXXXXXX and XXXXXXXXXX , including XXXXXXXXXX properties and XXXXXXXXXX properties that XXXXXXXXXX in XXXXXXXXXX .

4.3 The reverse take-over involving XXXXXXXXXX was completed in XXXXXXXXXX . Under the reverse take-over, the common shareholders of XXXXXXXXXX , including B CO, exchanged their shares of XXXXXXXXXX for shares of XXXXXXXXXX , and XXXXXXXXXX became a subsidiary of XXXXXXXXXX . As part of this transaction, certain outstanding convertible loan notes issued by XXXXXXXXXX in XXXXXXXXXX , amounting to approximately $XXXXXXXXXX (including $XXXXXXXXXX held by DC) plus accrued interest were converted into shares and warrants of Stellar. DC directed the shares and warrants otherwise issuable to it to be issued to B CO.

5. C CO is a direct wholly-owned subsidiary of DC. DC holds its shares of C CO as capital property. C CO holds the shares of various subsidiary corporations holding various XXXXXXXXXX properties located principally in XXXXXXXXXX , XXXXXXXXXX and XXXXXXXXXX . The XXXXXXXXXX property consists of the XXXXXXXXXX which is XXXXXXXXXX property in XXXXXXXXXX .

6. D CO was the corporation that resulted from the Merger. The Merger was not entered into in contemplation of the Proposed Transactions. DC holds its shares of D CO as capital property.

7. [Reserved]

8. Based on the closing price of DC Common Shares on XXXXXXXXXX , of $XXXXXXXXXX , the market capitalization of DC is approximately $XXXXXXXXXX . DC's management believes that the diversity of the various XXXXXXXXXX properties owned by it has led to complexity when trying to value the shares of DC. In particular, DC considers that the value of its interests in XXXXXXXXXX properties held through its shares in C CO, and its investment in XXXXXXXXXX , is not adequately reflected in its current market capitalization and it proposes to split these properties off into a separate public corporation as described herein, while retaining its interest in its XXXXXXXXXX properties.

9. The DC Common Shares represent all the issued shares of DC. The DC Common Shares are listed on the XXXXXXXXXX Exchange and the XXXXXXXXXX Exchange. The DC Common Shares are not short-term preferred shares, taxable preferred shares or term preferred shares.

10. The directors and senior management of DC are not aware of any person or related group of persons that beneficially owns, directly or indirectly, XXXXXXXXXX % or more of the issued and outstanding DC Common Shares.

11. Under the terms of the DC Stock Option Plan, the number of DC Stock Options that may be granted cannot exceed XXXXXXXXXX % of the issued and outstanding DC Common Shares. As at XXXXXXXXXX , DC had outstanding XXXXXXXXXX DC Stock Options, exercisable at prices varying from $XXXXXXXXXX per share to $XXXXXXXXXX per share.

12. The DC Stock Option Holders deal at arm's length with DC for purposes of the Act and will continue to do so during and after the Proposed Transactions.

13. [Reserved]

14. [Reserved]

15. [Reserved]

16. In XXXXXXXXXX DC completed a private placement to raise approximately $XXXXXXXXXX by issuing XXXXXXXXXX DC Common Shares. This placement was entered into to fund ongoing projects of DC for at least the next XXXXXXXXXX months.

16.1 In XXXXXXXXXX DC granted a total of XXXXXXXXXX options under the DC Stock Option Plan. XXXXXXXXXX options were issued to various directors and the remaining options were issued to other employees. The options had a XXXXXXXXXX year term and their exercise price is $XXXXXXXXXX (which exceeded the then 21-day trailing average closing price of $XXXXXXXXXX ).

16.2 In XXXXXXXXXX XXXXXXXXXX completed a private placement whereby it raised approximately £XXXXXXXXXX in exchange for the issuance of common shares and warrants. DC and B CO did not participate in this placement, resulting in the further dilution of their interest in XXXXXXXXXX to about XXXXXXXXXX %.

16.3 DC had outstanding convertible debentures in the amount of £XXXXXXXXXX (ie. the DC Convertible Debentures). In XXXXXXXXXX , the DC Convertible Debentures were converted resulting in the issuance of XXXXXXXXXX additional DC Common Shares. The conversion of the DC Convertible Debentures was carried out by DC in the ordinary course of its business and was undertaken independently of the Proposed Transactions.

16.4 Recent increases in XXXXXXXXXX prices created an unexpected opportunity for DC to raise funds that will be needed for DC's projects in both its XXXXXXXXXX and XXXXXXXXXX divisions. On XXXXXXXXXX DC issued XXXXXXXXXX common shares for gross proceeds of approximately £XXXXXXXXXX pursuant to a placement arrangement with XXXXXXXXXX . The newly issued shares are listed on the XXXXXXXXXX and XXXXXXXXXX Exchanges in the same manner as previously outstanding DC Common Shares. The directors and senior management of DC understand that the new shares were acquired by a wide group of investors and that no shareholder of DC became, or otherwise is, a specified shareholder as a result of this issuance of common shares or the placement arrangement with XXXXXXXXXX .

16.5 In XXXXXXXXXX , DC granted a total of XXXXXXXXXX options under the DC Stock Option Plan to its officers and directors. The options have a XXXXXXXXXX year term and their exercise price is $XXXXXXXXXX (which exceeded the 21-day trailing average closing price of $XXXXXXXXXX).

16.6 Subject to approval of the XXXXXXXXXX shareholders, it is expected that XXXXXXXXXX will raise further funds by issuing additional common shares on or about XXXXXXXXXX , as a result of which the interest of DC is XXXXXXXXXX will be reduced to approximately XXXXXXXXXX %. DC is not intending to directly or indirectly acquire any shares of XXXXXXXXXX under this offering.

17. DC, through its various subsidiaries, is and will be continuing to carry out ongoing XXXXXXXXXX activities.

18. The transactions described in Paragraph(s) 15 to 17 above have been, or will be, carried out by DC in the ordinary course of its business or as part of the ongoing management of DC's portfolio of assets. These transactions have been, or will be, undertaken regardless of whether the Proposed Transactions are implemented. Similarly, the Proposed Transactions would have been undertaken regardless of such transactions. For greater certainty, none of these transactions has been or will be undertaken in contemplation of the Proposed Transactions.

PROPOSED TRANSACTIONS

19. [Reserved].

20. Spinco is a taxable Canadian corporation and its authorized share capital consists of an unlimited number of Spinco Common Shares. Spinco will also be authorized to grant options. No shares of Spinco will be issued on incorporation or prior to the issuance of Spinco Common Shares described in Paragraph 27.

21. DC and Spinco entered into an agreement to implement the Plan of Arrangement, subject to shareholder, regulatory and court approvals, as of XXXXXXXXXX . The Plan of Arrangement must be approved by the holders of at least XXXXXXXXXX of the DC Common Shares voting at a meeting of the holders of DC Shares to approve the Plan of Arrangement.

22. Subject to the applicable conditions and approvals, the Proposed Transactions described in Paragraphs 23 to 34 will be undertaken pursuant to the Plan of Arrangement in the sequence set forth below. 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 Effective Date and in the order set out below. The Effective Date of the Plan of Arrangement will be a date that will be subsequent to the date of this letter.

Dissent Right

23. Each DC Shareholder will be entitled to dissent from the Plan of Arrangement in accordance with the provisions of the Plan of Arrangement and the XXXXXXXXXX . For the purposes of the Proposed Transactions comprising the Plan of Arrangement, any Dissenting Shareholder will be considered to have ceased to be a shareholder of DC, immediately prior to the Effective Date, such that the DC Common Shares held by the Dissenting Shareholder will no longer be considered to be outstanding 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 DC in respect of which the right of dissent is exercised.

Reorganization of DC's Share Capital

24. The articles of DC will be amended to create and authorize the issuance of an unlimited number of DC New Common Shares and an unlimited number of DC Butterfly Shares and to increase the voting rights of the DC Common Shares to two votes per share. The purpose of increasing such voting rights is to create a distinction between the DC Common Shares and the DC New Common Shares in order to support their treatment as a separate class under the XXXXXXXXXX .

Each DC New Common Share will be a fully participating voting common share with the holder thereof entitled to one vote at meetings of shareholders of DC. The terms of the DC New Common Shares will be identical to the terms of the existing DC Common Shares.

The DC Butterfly Shares will have the following attributes:

(a) each DC Butterfly Share will be redeemable, subject to applicable law, at any time at the option of DC at a redemption amount equal to the DC Butterfly Share Redemption Amount;

(b) each DC Butterfly Share will be retractable, subject to applicable law, at any time at the option of the holder at a retraction amount equal to the DC Butterfly Share Redemption Amount;

(c) the holder of each DC Butterfly 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 DC;

(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 DC if the resulting realizable value of the net assets of DC after payment of the dividends would be less than the aggregate of the DC Butterfly Share Redemption Amount relating to all of the DC Butterfly Shares then outstanding;

(e) for the purpose of subsection 191(4), the amount specified in respect of each DC Butterfly Share for which such share is to be redeemed, acquired or cancelled, shall be the amount specified by a director or officer of DC in a certificate that is made (i) effective concurrently with the issuance of such DC Butterfly Share; and (ii) pursuant to a resolution of the board duly passed and evidenced in writing authorizing the issuance of such DC Butterfly Share, such amount to be expressed as a dollar amount (and not expressed as a formula), such amount to be not subject to change thereafter, and such amount to be equal to the fair market value of the consideration for which such DC Butterfly Share is issued;

(f) the holder of each DC Butterfly Share will be entitled, upon the liquidaton, dissolution or winding-up of DC, to a payment in priority to all other classes of shares of DC of an amount equal to the DC Butterfly Share Redemption Amount to the extent of the amount of value of property available under applicable law for payment to shareholders upon such liquidation, dissolution or winding-up, but will be entitled to no more than the amount of that payment; and

(g) the holder of each DC Butterfly Share will be entitled to one vote at meetings of shareholders of DC.

Creation of Spinco Reorganization Shares

25. Under the Plan of Arrangement, the Articles of Spinco will be amended to create the Spinco Reorganization Shares, which will have the following attributes:

(a) each Spinco Reorganization Share will be redeemable, subject to applicable law, at any time at the option of Spinco at a redemption amount equal to the Spinco Reorganization Share Redemption Amount.

(b) each Spinco Reorganization Share will be retractable, subject to applicable law, at any time at the option of the holder at a retraction amount equal to the Spinco Reorganization Share Redemption Amount;

(c) the holder of each Spinco Reorganization 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 Spinco;

(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 Spinco if the resulting realizable value of the net assets of Spinco after payment of the dividends would be less than the aggregate of the Spinco Reorganization Share Redemption Amount relating to all of the Spinco Reorganization Shares then outstanding;

(e) for the purpose of subsection 191(4), the amount specified in respect of each Spinco Reorganization Share for which such share is to be redeemed, acquired or cancelled, shall be the amount specified by a director or an officer of Spinco in a certificate that is made: (i) effective concurrently with the issuance of such Spinco Reorganization Share; and (ii) pursuant to a resolution of the board duly passed and evidenced in writing authorizing the issuance of such Spinco Reorganization Share, such amount to be expressed as a dollar amount (and not expressed as a formula), such amount to be not subject to change thereafter, and such amount to be equal to the fair market value of the consideration for which such Spinco Reorganization Share is issued;

(f) the holder of each Spinco Reorganization Share will be entitled, upon the liquidation, dissolution or winding-up of Spinco, to a payment in priority to all other classes of shares of Spinco of an amount equal to the Spinco Reorganization Share Redemption Amount to the extent of the amount of value of property available under applicable law for payment to shareholders upon such liquidation, dissolution or winding-up, but will be entitled to no more than the amount of that payment; and

(g) the holder of each Spinco Reorganization Share will not be entitled to vote at meetings of shareholders of Spinco, other than as provided by the CBCA.

Exchange of DC Common Shares

26. Each Participant will transfer all such Participant's DC Common Shares to DC in exchange for DC New Common Shares and DC Butterfly Shares. As sole consideration for the DC Common Shares transferred to it, DC will issue to each Participant only one DC New Common Share and one DC Butterfly Share for each DC Common Share transferred by the particular Participant. In connection with the exchange,

(a) the DC Common Shares so exchanged will be cancelled;

(b) the aggregate addition to the stated capital in respect of the DC New Common Shares and the DC Butterfly Shares issued by DC on the exchange described in this Paragraph will not exceed the paid-up capital of the DC Common Shares (excluding any DC Common Shares owned by the Dissenting Shareholders) immediately before the exchange. For greater certainty, the aggregate paid-up capital of the DC Common Shares will be allocated between the DC New Common Shares and the DC Butterfly Shares based on the proportion that the fair market value of the DC New Common Shares or the DC Butterfly Shares, as the case may be, is of the fair market value of all new shares issued by DC on the exchange; and

(c) [Reserved]

(d) the DC New Common Shares will be listed for trading on the XXXXXXXXXX Exchange.

Other than as set out in this letter, there will not be any agreement in respect of the DC Butterfly Shares in respect of any matters referred to in any of subparagraphs (b)(i) to (iv) of the definition of taxable preferred share or in any of paragraphs (a), (b), (f) or (h) of the definition of short-term preferred share in subsection 248(1).

Transfer of DC Butterfly Shares to Spinco

27. Each Participant will transfer all such Participant's DC Butterfly Shares to Spinco. As sole consideration for each Butterfly Share transferred to it, Spinco will issue to each Participant one Spinco Common Share.

The fair market value, immediately before the transfer described in Paragraph 29, of each Participant's shares of the capital stock of Spinco will be equal to the amount determined by the formula:

(A x B/C) + D where:

A: is the fair market value, immediately before the distribution, of all the shares of the capital stock of Spinco then outstanding (other than shares issued to Participants in consideration for shares of a specified class all the shares of which were acquired by Spinco on the exchange),

B: is the fair market value, immediately before the exchange, of all the shares of the capital stock of DC (other than shares of a specified class none or all of the shares of which were acquired by the acquiror on the exchange) owned at that time by the Participant,

C: is the fair market value, immediately before the exchange, of all the shares (other than shares of a specified class none or all of the shares of which were acquired by Spinco on the exchange and shares to be redeemed, acquired or cancelled by DC pursuant to the exercise of a statutory right of dissent by the holder of the share) of the capital stock of DC outstanding immediately before the exchange, and

D: is the fair market value, immediately before the distribution, of all the shares issued to the Participant by Spinco in consideration for shares of a specified class all of the shares of which were acquired by Spinco on the exchange.

Pursuant to the XXXXXXXXXX , the amount to be added to the stated capital of the Spinco Common Shares on the transfer will be an amount equal to the aggregate paid-up capital of the transferred DC Butterfly Shares.

If requested by a particular Participant, Spinco and the particular Participant will jointly elect, in prescribed form and within the time limit referred to in subsection 85(6), to have the provisions of subsection 85(1) apply to the transfer of DC Butterfly Shares by the particular Participant to Spinco.

Replacement of Existing DC Stock Options

28. Immediately after the transfer of the DC Butterfly Shares to Spinco described in Paragraph 27, each holder of a DC Stock Option will dispose of such DC Stock Option to each of DC and Spinco in consideration for the issuance to the particular holder of a New DC Stock Option granted by DC to acquire a DC New Common Share and a Spinco Stock Option granted by Spinco to acquire a Spinco Common Share in such a manner that:

(a) the particular holder will receive no consideration for the exchange of such DC Stock Option other than a New DC Stock Option and Spinco Stock Option;

(b) the original exercise price of a holder's DC Stock Option will be allocated to the New DC Stock Option and the Spinco Stock Option acquired by such holder on the exchange such that an amount equal to the Exercise Price Proportion of such original exercise price will be payable to Spinco on exercise of the Spinco Stock Option and an amount equal to the remainder of the original exercise price will be payable to DC on exercise of the New DC Stock Option;

(c) the expiry date of a New DC Stock Option and a Spinco Stock Option will, aside from certain differences in termination provisions, be the same as that of the corresponding DC Stock Option;

(d) the other material commercial terms and conditions of the New DC Stock Options and the Spinco Stock Options will generally parallel those of the DC Stock Options, but there will be certain differences in recognition of the fact that DC is listed on the XXXXXXXXXX Exchange and Spinco will be listed on the XXXXXXXXXX Exchange; and

(e) the DC Stock Options will be cancelled upon the foregoing transfers.

The issuance by Spinco of the Spinco Stock Options will be in anticipation of the transfer of the Spin-off Property as described in Paragraph 29 and will form part of the non-share consideration relating to such transfer.

Transfer of Spin-off Property to Spinco

29. DC will transfer the Spin-off Property to Spinco. As consideration for the transfer of the Spin-off Property, Spinco will:

(a) have issued the Spinco Stock Options as described in Paragraph 28; and

(b) issue Spinco Reorganization Shares to DC, having an aggregate fair market value and redemption amount equal to the excess of the fair market value, at the time of the transfer, of the Spin-off Property over the aggregate fair market value at such time of the Spinco Stock Options so issued by Spinco.

30. DC will jointly elect with Spinco, in prescribed form and within the time referred to in subsection 85(6), to have the provisions of subsection 85(1) apply to the transfer of the Spin-off Property. The agreed amount will not exceed the fair market value of the particular eligible property, nor will it be less than the amount permitted under paragraph 85(1)(b).

The amount to be added to the stated capital of the Spinco Reorganization Shares to be issued by Spinco to DC as described herein will be equal to the aggregate agreed amounts for the Spin-off Property, less the value of any non-share consideration.

31. Immediately after the transfer described in Paragraph 29, the fair market value of the Spin-off Property, determined on a net fair market value look-through basis, will be equal to or approximate that proportion of the net fair market value of all the property of DC on a net-fair market value look-through basis, determined immediately before that transfer, that:

(a) the aggregate fair market value of the DC Butterfly Shares owned by Spinco, immediately before that transfer, is of

(b) the aggregate fair market value of all the issued and outstanding shares of DC immediately before that transfer.

For this purpose, the fair market value of the property of DC will be determined as though there was only one type of property, as contemplated by subsection 55(3.02), on a net fair market value look-through basis. For greater certainty:

(c) any tax accounts, such as the balance of any non-capital losses, net capital losses and tax pools, will not be considered to be property of DC for the purposes of determining the net fair market value of the property of DC on a net fair market value look-through basis as described herein, and

(d) no amount will be considered to be a liability of DC unless it represents a true legal liability which is capable of quantification.

For purposes of this paragraph, the expression "approximate that proportion" means that the discrepancy from that proportion, if any, would not exceed XXXXXXXXXX percent (XXXXXXXXXX %) determined as a percentage of the fair market value of the property that Spinco receives on the transfer described in Paragraph 29 compared to what it would have received had it received its appropriate pro rata share of DC's property.

Elimination of Cross Shareholdings

32. Spinco will redeem all of the Spinco Reorganization Shares held by DC and will issue to DC, as payment therefor, the Spinco Redemption Note, a non-interest-bearing demand note having a principal amount and fair market value equal to the aggregate of the Spinco Reorganization Share Redemption Amounts of the Spinco Reorganization Shares redeemed. DC will accept the Spinco Redemption Note as full payment of the Spinco Reorganization Share Redemption Amounts of the Spinco Reorganization Shares so redeemed, with the risk of the Spinco Redemption Note being dishonoured.

33. DC will redeem the DC Butterfly Shares held by Spinco and will issue to Spinco, as payment therefor, the DC Redemption Note, a non-interest-bearing demand note having a principal amount and fair market value equal to the aggregate DC Butterfly Share Redemption Amounts of the DC Butterfly Shares so redeemed. Spinco will accept the DC Redemption Note as full payment of the DC Butterfly Share Redemption Amounts of the DC Butterfly Shares so redeemed, with the risk of the DC Redemption Note being dishonoured.

Set-off of Notes

34. DC will satisfy its obligations under the DC Redemption Note by transferring the Spinco Redemption Note to Spinco and Spinco will accept the Spinco Redemption Note in full satisfaction of DC's obligations under the DC Redemption Note. Similarly, Spinco will satisfy its obligations under the Spinco Redemption Note by transferring the DC Redemption Note to DC and DC will accept the DC Redemption Note in full satisfaction of Spinco's obligations under the Spinco Redemption Note. The DC Redemption Note and the Spinco Redemption Note will both be marked paid in full and cancelled.

34.1. XXXXXXXXXX

ADDITIONAL INFORMATION

35. Spinco may raise additional capital to finance its activities by issuing additional shares of its capital stock. In addition, DC will continue to raise capital to finance its ongoing activities. However, it is not expected that any person or group of persons will acquire control of either Spinco or DC as a consequence of any of these potential financing activities. The Plan of Arrangement is not being undertaken to facilitate any proposed or contemplated acquisition of control of either DC or Spinco.

36. [Reserved]

37. The Proposed Transactions will occur in the order presented unless otherwise indicated, with the exception of the filing of any applicable election forms, which will be filed by the applicable due date following the completion of the Proposed Transactions.

38. Each of the DC Common Shares, DC New Common Shares and Spinco Common Shares will be listed on the respective Stock Exchange for DC or Spinco as applicable. Spinco will, pursuant to the post-amble in the definition of 'public corporation' in subsection 89(1), make the election in its return of income for its first taxation year to have been a public corporation from the beginning of such taxation year.

39. Neither DC nor Spinco is, or will be at any time during the Proposed Transactions, a specified financial institution or a restricted financial institution.

40. No person who is a specified shareholder of DC has or will have acquired any DC Common Shares in contemplation of the Proposed Transactions.

41. Except as described herein, no debts have been or will be incurred or paid and no property has been or will be acquired by DC or any corporation controlled by DC in contemplation of the distribution described in this letter, other than in a transaction described in subparagraphs 55(3.1)(a)(i) to (iv).

42. Neither DC nor Spinco will sell or transfer any property as part of a series of transactions or events that includes the Proposed Transactions to an unrelated person or partnership subsequent to the Proposed Transactions.

43. None of the shares of DC or Spinco described herein is or will be, at any time during the implementation of the Proposed Transactions:

(a) the subject of any undertaking or agreement 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, event or series of transactions or events of the type described in subsection 112(2.5); or

(c) the subject of a "dividend rental arrangement" referred to in subsection 112(2.3) as that term is defined in subsection 248(1).

44. Following completion of the Proposed Transactions, certain management services will be provided by DC to Spinco at cost plus XXXXXXXXXX percent, which the parties believe represents fair market value.

PURPOSE OF THE PROPOSED TRANSACTIONS

DC considers that the distribution of its XXXXXXXXXX and XXXXXXXXXX properties as described herein is in the best interests of the DC Common Shareholders. The Proposed Transactions will separate these properties from DC's other properties with the expectation that this will enhance the ability of each of DC and Spinco to pursue its independent corporate objectives, strategies and financing which will maximize the value to the current DC Shareholders.

RULINGS

Provided that the above Statements of Facts, Proposed Transactions, and Purpose of the Proposed Transactions, are accurate and constitute complete disclosure of all relevant facts, our rulings are as follows:

A. The amendment to the terms of the DC Common Shares to increase the voting rights, as described in Paragraph 24, will not result in a disposition of the DC Common Shares, in and of itself.

B. On the exchange of DC Common Shares by a Participant, as described in Paragraph 26, the provisions of subsection 86(1) will apply and the provisions of subsection 86(2) will not apply to the disposition of each DC Common Share by a Participant for one DC New Common Share and one DC Butterfly Share provided that:

(a) the particular Participant holds the DC Common Shares as capital property; and

(b) the particular Participant and DC do not file an election under subsection 85(1) or (2) in respect of the exchange,

such that

(c) the Participant will be deemed by paragraph 86(1)(b) to have acquired the DC New Common Shares and the DC Butterfly Shares at a cost equal to the (c) proportion of the adjusted cost base to the Participant of such DC Common Shares immediately before the exchange that

(i) the fair market value, immediately after the exchange, of the DC New Common Shares or of the DC Butterfly Shares, as the case may be, received by the particular Participant

is of

(ii) the fair market value, immediately after the exchange, of all the shares of DC acquired by the Participant on the exchange;

(d) pursuant to paragraph 86(1)(c), such Participant will be deemed to have disposed of the Participant's DC Common Shares for aggregate proceeds of disposition equal to the aggregate cost to the Participant of the DC New Common Shares and DC Butterfly Shares received by the Participant as determined in (c) above; and

C. Provided that a Participant holds the DC Common Shares as capital property, the share exchanges described in Paragraph 26 or Paragraph 27 will not, in and by themselves, cause the DC Butterfly Shares or the DC New Common Shares not to be capital property to that Participant immediately after such exchange.

D. Provided that a particular Participant who, immediately before the exchange of DC Butterfly Shares for an identical number of Spinco Common Shares as described in Paragraph 27,

(a) holds such DC Butterfly Shares as capital property;

(b) does not receive any consideration other than the Spinco Common Shares in exchange for the DC Butterfly Shares;

(c) deals at arm's length with Spinco immediately before the exchange;

(d) does not file an election under subsection 85(1) or subsection 85(2) with respect to the exchange; and

(e) does not include any portion of the gain or loss otherwise determined in computing his or her income for that year;

(f) is not a person described in paragraph 85.1(2)(e) who has included any portion of the gain or loss in computing its foreign accrual property income (as defined in subsection 95(1)) for that year;

and further provided that immediately after such exchange:

(g) such Participant or persons with whom such Participant does not deal at arm's length, or such Participant together with any other person or persons with whom such Participant does not deal at arm's length, will not control Spinco or beneficially own shares of Spinco having an aggregate fair market value representing more than 50% of the aggregate fair market value of all of the outstanding shares of Spinco;

then pursuant to paragraph 85.1(1)(a):

(h) such Participant will be deemed to have disposed of such DC Butterfly Shares for proceeds of disposition equal to the aggregate adjusted cost base of such DC Butterfly Shares to such Participant immediately before the exchange; and

(i) such Participant will be deemed to have acquired such Spinco Shares at an aggregate cost equal to the aggregate adjusted cost base of such Participant's DC Butterfly Shares immediately before the exchange;

and pursuant to paragraph 85.1(1)(b):

(j) the cost to Spinco of each DC Butterfly Share acquired from each such Participant will be deemed to be the lesser of its fair market value immediately before the exchange and the paid-up capital of such DC Butterfly Share immediately before the exchange.

E. Subject to the application of subsection 69(11) and provided that the transferor and transferee jointly elect in prescribed form and within the time determined under subsection 85(6), and that each Spin-off Property so transferred is an eligible property in respect of which shares have been issued as full or partial consideration therefore, the provisions of subsection 85(1) will apply to the transfer of the Spin-off Property by DC to Spinco as described in Paragraph 29, such that the agreed amount in respect of each transfer of eligible property will be deemed to be the transferor's proceeds of disposition and the transferee's cost thereof pursuant to paragraph 85(1)(a). For greater certainty, paragraph 85(1)(e.2) will not apply to such transfers.

F. The provisions of subsection 7(1.4) will apply with respect to each exchange by a holder of DC Stock Options that are subject to the provisions of subsection 7(1) for New DC Stock Options and Spinco Stock Options, as described in Paragraph 28, provided that the aggregate In The Money Amount of the New DC Stock Options and the Spinco Stock Options received by the holder on the exchange does not exceed the aggregate In The Money Amount of the DC Stock Options that were so exchanged by the holder, with the result that for the purposes of section 7:

(a) such holder will be deemed (other than for the purposes of
subparagraph 7(9)(d)(ii)) not to have disposed of such holder's DC Stock Options and not to have acquired such holder's New DC Stock Options and Spinco Stock Options;

(b) the New DC Stock Options and Spinco Stock Options will be deemed to be the same as, and a continuation of the corresponding DC Stock Options; and

Spinco will be deemed in respect of such stock options to be the same person as, and a continuation of, DC.

G. As a result of the redemption by Spinco of the Spinco Reorganization Shares described in Paragraph 32:

(a) Spinco will be deemed by paragraph 84(3)(a) to have paid, and DC will be deemed by paragraph 84(3)(b) to have received, a dividend equal to the amount by which the fair market value of the Spinco Redemption Note issued in satisfaction of such redemption exceeds the paid-up capital of the Spinco Reorganization Shares;

(b) the amount of such deemed dividend will be included in DC's income pursuant to subsection 82(1) and paragraph 12(1)(j);

(c) the amount of such deemed dividend will be excluded, pursuant to paragraph (j) of the definition of "proceeds of disposition" in section 54, in determining DC's proceeds of disposition for the Spinco Reorganization Shares;

(d) DC will be entitled, pursuant to subsection 112(1), to deduct the amount of such deemed dividend in computing its taxable income for the taxation year in which such dividend is deemed to be received and, for greater certainty, the provisions of subsection 112(2.1), (2.2), (2.3) or (2.4) will not apply to deny the deduction of such deemed dividend;

(e) to the extent that the amount paid by Spinco to DC on the redemption of the Spinco Reorganization Shares does not exceed the amount specified in respect of those shares for the purposes of subsection 191(4), the deemed dividend referred to in (a) will not be subject to tax under Part IV.1 or Part VI.1 on the basis that the dividend will be deemed to be an excepted dividend and an excluded dividend, as the case may be, pursuant to subsection 191(4); and

(f) the provisions of subsection 112(3) will apply to reduce any loss that would otherwise be realized by DC as a result of the redemption of the Spinco Reorganization Shares.

H. As a result of the redemption by DC of the DC Butterfly Shares held by Spinco described in Paragraph 33:

(a) DC will be deemed by paragraph 84(3)(a) to have paid, and Spinco will be deemed by paragraph 84(3)(b) to have received, a dividend equal to the amount by which the fair market value of the DC Redemption Note issued in satisfaction of such redemption exceeds the paid-up capital of the DC Butterfly Shares;

(b) the amount of such deemed dividend will be included in Spinco's income pursuant to subsection 82(1) and paragraph 12(1)(j);

(c) the amount of such deemed dividend will be excluded, pursuant to paragraph (j) of the definition of "proceeds of disposition" in section 54, in determining Spinco's proceeds of disposition of the DC Butterfly Shares;

(d) Spinco will be entitled, pursuant to subsection 112(1), to deduct the amount of such deemed dividend in computing its taxable income for the taxation year in which such dividend is deemed to be received and, for greater certainty, the provisions of subsections 112(2.1), (2.2), (2.3) or (2.4) will not apply to deny the deduction of such deemed dividend;

(e) to the extent that the amount paid by DC to Spinco on the redemption of the DC Butterfly Shares does not exceed the amount specified in respect of those shares for the purposes of subsection 191(4), the deemed dividend referred to in (a) will not be subject to tax under Part IV.1 or under Part VI.1 in respect of such deemed dividend on the basis that the dividend will be deemed to be an excepted dividend and an excluded dividend, as the case may be, pursuant to subsection 191(4); and

(f) the provisions of subsection 112(3) will apply to reduce any loss that would otherwise be realized by Spinco as a result of the redemption of the DC Butterfly Shares.

I. Provided that:

(a) there is not a distribution by DC to a corporation that is not an Acquiror before the day that is three years after the Effective Date; and

(b) there is not a distribution by Spinco before the day that is three years after the Effective Date;

and as part of the series of transactions or events that includes the Proposed Transactions, there is not:

(c) a disposition of property in the circumstances described in subparagraph 55(3.1)(b)(i);

(d) an acquisition of control in the circumstances described in subparagraph 55(3.1)(b)(ii);

(e) an acquisition of any shares of DC in contemplation of the distribution in the circumstances described in subparagraph 55(3.1)(b)(iii); or

(f) an acquisition of property in the circumstances described in paragraphs 55(3.1)(c) or (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 Rulings G and H above and for greater certainty, subsection 55(3.1) will not apply to deny the exemption under paragraph 55(3)(b).

J. The cost to Spinco of the DC Redemption Note issued to Spinco as described in Paragraph 33 and the cost to DC of the Spinco Redemption Note issued to DC as described in Paragraph 32 will in each case, upon the issuance thereof be equal to its principal amount and, as such, neither Spinco nor DC will realize any gain or incur any loss therefrom as a result of the payment and cancellation described in Paragraph 34.

K. The payment and cancellation of the Spinco Redemption Note and the DC Redemption Note described in Paragraph 34 will not, in either case, give rise to a "forgiven amount" within the meaning thereof in subsection 80(1) or 80.01(1).

L. With regard to the payment by DC in respect of existing DC Common Shares held by a Dissenting Shareholder as described in Paragraph 23:

(a) subject to the application of subsection 55(2), the Dissenting Shareholder will be deemed by paragraph 84(3)(b) to have received a dividend equal to the amount by which any payment from DC to the Dissenting Shareholder in respect of the purchase of such Dissenting Shareholder's DC Common Shares exceeds the paid-up capital of such shares immediately prior to their purchase;

(b) subsections 212(2) and 215(1) will apply (subject to the provisions of any applicable income tax convention) to require DC to withhold and remit 25% of the amount of any dividend deemed to have been paid as described in (a) to a Dissenting Shareholder who is a non-resident of Canada; and

(c) paragraph (j) of the definition of "proceeds of disposition" in section 54 will apply to exclude the amount of the deemed dividend described in (a) from the proceeds of disposition of the DC Common Shares recognized by the Dissenting Shareholder as a result of such purchase of the DC Common Shares by DC, provided that the shares were held as capital property by the Dissenting Shareholder.

M. The DC Butterfly Shares and the Spinco Common Shares will, provided that Spinco makes the election to be a public corporation as described in Paragraph 38, be "qualified investments" pursuant to paragraph 4900(1)(b) of the Regulations for:

(a) a deferred profit sharing plan by virtue of paragraph (h) of the definition "qualified investment" in section 204;

(b) a registered retirement savings plan by virtue of paragraph (d) of the definition "qualified investment" in subsection 146(1);

(c) a registered retirement income fund by virtue of paragraph (c) of the definition "qualified investment" in subsection 146.3(1);

(d) a registered education savings plan by virtue of paragraph (e) of the definition "qualified investment" in subsection 146.1(1);

(e) a "registered disability savings plan" by virtue of paragraph (d) of the definition of "qualified investment" in subsection 205(1); and

(f) a tax-free savings account by virtue of paragraph (c) of the definition of "qualified investment" in subsection 207.01(1).

N. The provisions of subsections 15(1), 56(2), 56(4), 69(4) and 246(1) will not be applied as a result of the Proposed Transactions, in and by themselves.

O. The provisions of subsection 245(2) will not be applied as a result of the Proposed Transactions, in and by themselves, to re-determine the tax consequences confirmed in the Rulings given.

These Rulings are subject to the limitations and qualifications set out in Information Circular 70-6R5 dated May 17, 2002 and are binding on CRA provided that the Proposed Transactions are completed no later than XXXXXXXXXX months of the date of this letter. The 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 into law, could have an effect on the rulings provided herein.

OTHER COMMENTS

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

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

(b) the balance of CDA, RDTOH, or GRIP of any corporation;

(c) any other tax consequence relating to the facts, Proposed Transactions or any transaction or event taking place, prior to, during, or subsequent to the Proposed Transactions, whether described in this letter or not, other than those specifically described in the rulings given above, including whether any of the Proposed Transactions would also be included in a series of transactions or events that include other transactions or events that are not described in this letter;

(d) whether section 7 or section 9 applies to stock options issued to consultants of DC or Spinco;

(e) whether XXXXXXXXXX , or any other investment manager or fund manager who holds shares of DC or Spinco owns such shares for the purpose of determining whether it is a specified shareholder of DC or Spinco; or

(f) the legal relationships between any of the parties referred to herein.

Yours truly,

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