2010 Ruling 2009-0335441R3 - 55(3)(b) cross-border butterfly 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: Whether the proposed cross-border butterfly reorganization meets the requirements of paragraph 55(3)(b).

Position: Yes

Reasons: Meets the requirements of the law.

XXXXXXXXXX
									2009-033544
									XXXXXXXXXX
									XXXXXXXXXX 

XXXXXXXXXX , 2010

Dear XXXXXXXXXX :

Re: XXXXXXXXXX
Advance Income Tax Ruling Request

This is in reply to your letter of XXXXXXXXXX in which you requested an advance income tax ruling on behalf of the above-noted taxpayer. In your subsequent letters and emails you provided additional information concerning the facts and proposed transactions described in your original letter. We also acknowledge the information provided during our various telephone conversations (XXXXXXXXXX).

To the best of your knowledge, and that of the taxpayer involved, none of the issues involved in this ruling request is

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

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

(iii) under objection by the taxpayer or a related person;

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

(v) the subject of a ruling previously issued by the Income Tax Rulings Directorate.

Except as otherwise stated, a reference in this letter to a part, section, subsection, paragraph or subparagraph is a reference to the relevant provision of the Act.

Definitions

1. In this letter, the following terms have the meanings specified and, where the circumstances so require, the singular should be read as plural and vice versa:

"Act" means the Income Tax Act (Canada), RSC 1985, C.1 (Fifth Supp.), as amended;

"ACB" means adjusted cost base, as defined in section 54;

"agreed amount" means the amount agreed on by the transferor and transferee in respect of the transfer of an eligible property in a joint election filed pursuant to subsection 85(1);

"arm's length" has the meaning assigned by subsection 251(1);

"Butterfly Percentage" means the proportion, expressed as a percentage, that the net FMV of the business property owned by DC that relates to the Canadian Spin-off Businesses is of the net FMV of all of the business property of DC, determined in the manner described in Paragraphs 24 and 25 immediately before the transfer of property by DC to TC described in Paragraph 26;

"Canadian Spin-off Assets" means the assets owned and used by DC in carrying out the Canadian Spin-off Businesses, as described in Paragraph 8(a);

"Canadian Spin-off Businesses" means the portion of the Spin-off Businesses that are conducted by DC in Canada, as described in Paragraph 8;

"Canadian Spin-off Liabilities" means the liabilities of DC incurred by DC in carrying out the Canadian Spin-off Businesses, as described in Paragraph 8(b);

"CDA" means capital dividend account which has the meaning assigned by subsection 89(1);

"Capital Reorganization" has the meaning set out in Paragraph 16;

"CBCA" means the Canada Business Corporations Act, R.S.C. 1985;

"CRA" means the Canada Revenue Agency;

"DC" means XXXXXXXXXX ;

"DC Common Shares" means the common shares which DC is currently authorized to issue, as described in Paragraph 7;

"DC New Common Shares" means the common shares which DC will be authorized to issue, as described in Paragraph 16;

"DC Purchase Note" means the demand promissory note in the principal amount of the aggregate DC Redemption Amount issued by DC in favour of TC, as described in Paragraph 31;

"DC Redemption Amount" has the meaning set out in Paragraph 16(b)(i);

"DC Retained Assets" means the assets owned and used by DC in carrying on the DC Retained Businesses, as described in Paragraph 9(a);

"DC Retained Businesses" means the Canadian portion of the Retained Businesses operated by DC, as described in Paragraph 9;

"DC Retained Liabilities" means the liabilities incurred by DC in carrying on the DC Retained Businesses, as described in Paragraph 9(b);

"DC Shares" means the DC New Common Shares and the DC Special Shares collectively, as described in Paragraph 16;

"DC Special Shares" means the special shares which DC will be authorized to issue, as described in Paragraph 16;

XXXXXXXXXX ;

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

"Distribution Property" has the meaning assigned in Paragraph 26;

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

"FMV" means fair market value, being the highest price available in an open and unrestricted market between informed prudent parties acting at arm's length and without compulsion to act, expressed in terms of cash;

"Foreign Pubco" means XXXXXXXXXX , a corporation governed by the laws of the State of XXXXXXXXXX , as described in Paragraph 2;

"Foreign Spinco" means XXXXXXXXXX , as described in Paragraph 4;

"Foreign Spinco Common Shares" means common shares in the capital of Foreign Spinco, being the only authorized share capital of Foreign Spinco;

"Foreign Spinco Sub" means XXXXXXXXXX , as described in Paragraph 5;

"Foreign Spinco Sub Common Shares" means common shares in the capital of Foreign Spinco Sub, being the only authorized share capital of Foreign Spinco Sub;

"forgiven amount" has the meaning assigned by subsection 80(1) or 80.01(1);

"Fund" means XXXXXXXXXX , a limited liability corporation incorporated under the laws of XXXXXXXXXX , as described in Paragraph 10;

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

"Paragraph" means a numbered paragraph in this letter;

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

"Proposed Transactions" means the transactions described in Paragraphs 13 to 33, inclusive;

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

"RDTOH" means refundable dividend tax on hand, within the meaning of subsection 129(3);

"Regulations" means the Income Tax Regulations, C.R.C. 1978, c. 945, as amended;

"related person" means, in relation to a particular person, another person who is related to the particular person by virtue of subsection 251(2), as modified for the purposes of section 55 by paragraph 55(5)(e);

"Retained Businesses" means Segment #3 and Segment #4;

"Segment #1" has the meaning set out in Paragraph 3(a);

"Segment #2" has the meaning set out in Paragraph 3(b);

"Segment #3" has the meaning set out in Paragraph 3(c);

"Segment #4" has the meaning set out in Paragraph 3(d);

"Segment #4 Business 1" has the meaning set out in Paragraph 3(d);

"Segment #4 Business 2" has the meaning set out in Paragraph 3(d);

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

"Spin-off" has the meaning set out in Paragraph 18;

"Spin-off Businesses" means Segment #1 and Segment #2;

"stated capital" has, in relation to DC and TC, the meaning assigned by the CBCA;

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

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

"TC" means XXXXXXXXXX , a Canadian corporation incorporated pursuant to the CBCA on XXXXXXXXXX ;

"TC Common Shares" means the common shares which TC will be authorized to issue, as described in Paragraph 12(a);

"TC Preferred Shares" means the special shares which TC will be authorized to issue, as described in Paragraph 12(b);

"TC Redemption Amount" has the meaning set out in Paragraph 12(b)(i);

"TC Redemption Note" means the demand promissory note in the principal amount of the aggregate TC Redemption Amount issued by TC in favour of DC, as described in Paragraph 30;

"TC Shares" means the TC Common Shares and TC Preferred Shares collectively;

"Three-Party Share Exchange" has the meaning described in Paragraph 19;

"Units" means undivided interests in the Fund, as described in Paragraph 10;

"Xco" means XXXXXXXXXX , an indirect wholly-owned subsidiary of Foreign Pubco, as described in Paragraph 11;

"Yco" means XXXXXXXXXX , as described in Paragraph 11.

Our understanding of the facts, Proposed Transactions and purposes of the Proposed Transactions is as follows:

Facts

Foreign Pubco's Corporate Structure and Business Segments

2. Foreign Pubco is a corporation governed by the laws of XXXXXXXXXX . The outstanding common stock of Foreign Pubco is publicly traded and listed on the XXXXXXXXXX . Currently, there are XXXXXXXXXX common shares of Foreign Pubco issued and outstanding. As of the close of business on XXXXXXXXXX , the market capitalization of Foreign Pubco was approximately US$XXXXXXXXXX . Foreign Pubco is widely held, and, to the best of Foreign Pubco's knowledge, no one shareholder or group of related shareholders of Foreign Pubco owns XXXXXXXXXX % or more of the common stock of Foreign Pubco.

3. Foreign Pubco is engaged, directly and through its subsidiaries, primarily in the following business segments:

(a) XXXXXXXXXX ("Segment #1"), XXXXXXXXXX The net sales of Segment #1 in XXXXXXXXXX represented XXXXXXXXXX % of Foreign Pubco's consolidated net sales.

(b) XXXXXXXXXX ("Segment #2"), XXXXXXXXXX . The net sales of Segment #2 in XXXXXXXXXX represented XXXXXXXXXX % of Foreign Pubco's consolidated net sales.

(c) XXXXXXXXXX ("Segment #3"), XXXXXXXXXX . The net sales of Segment #3 in XXXXXXXXXX represented XXXXXXXXXX % of Foreign Pubco's consolidated net sales.

(d) XXXXXXXXXX ("Segment #4"), XXXXXXXXXX . Customers of Segment #4 include XXXXXXXXXX (the "Segment #4 Business 1") and XXXXXXXXXX customers (the "Segment #4 Business 2"). The net sales of Segment #4 in XXXXXXXXXX represented XXXXXXXXXX% of Foreign Pubco's consolidated net sales.

Segment #1 and Segment #2 are collectively referred to hereinafter as the "Spin-off Businesses". Segment #3 and Segment #4 are collectively referred to hereinafter as the "Retained Businesses".

The Spin-off Businesses and the Retained Businesses are operated XXXXXXXXXX through Foreign Pubco and its subsidiaries, including DC.

4. Foreign Pubco owns all of the issued and outstanding common shares of XXXXXXXXXX ("Foreign Spinco"), being XXXXXXXXXX Foreign Spinco Common Shares. Foreign Spinco was incorporated under the laws of XXXXXXXXXX on XXXXXXXXXX as XXXXXXXXXX . Foreign Spinco is not a limited liability company. The only shares that Foreign Spinco is authorized to issue are common shares ("Foreign Spinco Common Shares").

Foreign Spinco currently owns no assets and has conducted no business. XXXXXXXXXX

5. Foreign Pubco owns all of the issued and outstanding common shares of XXXXXXXXXX . ("Foreign Spinco Sub"), being XXXXXXXXXX Foreign Spinco Sub Common Shares. Foreign Spinco Sub was incorporated under the laws of XXXXXXXXXX on XXXXXXXXXX , as XXXXXXXXXX . Foreign Spinco Sub is not a limited liability corporation. The only shares that Foreign Spinco Sub is authorized to issue are common shares ("Foreign Spinco Sub Common Shares").

Foreign Spinco Sub was originally established by Foreign Pubco as a shell company to complete future acquisitions, but was never needed or used. Foreign Spinco Sub has not carried on any business activities since its incorporation. Foreign Pubco has elected to use Foreign Spinco Sub in respect of the Proposed Transactions rather than incorporate a new entity.

Canadian Businesses

6. DC is a corporation incorporated pursuant to the laws of Canada and is a taxable Canadian corporation and a private corporation for the purposes of the Act. The registered and head office of DC is situated at XXXXXXXXXX . The corporate tax number of DC is XXXXXXXXXX .

DC files its annual income tax return at the XXXXXXXXXX Taxation Centre. DC is audited by the XXXXXXXXXX Tax Services Office. DC's financial year end is XXXXXXXXXX .

DC does not own any shares of, or any debt instruments issued by, any other corporations.

7. DC is authorized to issue an unlimited number of common shares (the "DC Common Shares"). Currently, there are XXXXXXXXXX DC Common Shares issued and outstanding, each of which is entitled to one vote per share. All of the issued and outstanding DC Common Shares are owned by Foreign Pubco.

DC was formed as a result of a series of amalgamations with a number of predecessor corporations. None of these amalgamations occurred as part of a series of transactions that will include any of the Proposed Transactions.

8. DC operates in Canada the Canadian portions of Segment #1 and Segment #2, which portions are collectively referred to hereinafter as the "Canadian Spin-off Businesses". The FMV of the Canadian Spin-off Businesses immediately prior to the Proposed Transactions described in Paragraph 26 will equal approximately XXXXXXXXXX % to XXXXXXXXXX % of the FMV of the Spin-off Businesses.

(a) The assets used by DC to carry on the Canadian Spin-off Businesses (the "Canadian Spin-off Assets") principally consist of:

(i) trade receivables;

(ii) finished goods inventories, supplies and repair parts;

(iii) prepaid expenses and other current assets;

(iv) furniture, office equipment, computers and test equipment;

(v) a lease of certain premises;

(vi) the benefits under certain foreign exchange hedging and forward contracts (i.e. contracts that are "in the money"); and

(vii) customer contracts, purchase orders, and other commitments (the phrase "other commitments" refers to any other commitments with customers which does not take the form of a contract or purchase order).

(b) The liabilities of DC relating to the Canadian Spin-off Businesses (the "Canadian Spin-off Liabilities") principally consist of:

(i) trade and accounts payable;

(ii) accrued liabilities including those owing to customers and employees; and

(iii) the liabilities under certain foreign exchange hedging and forward contracts (i.e. contracts that are "out of the money").

The contracts referred to in (a)(vi) and (b)(iii) above are foreign exchange hedging and forward contracts that are related to Segment #1. DC hedges its foreign exchange risk on the sales of XXXXXXXXXX purchased from Foreign Pubco in XXXXXXXXXX and sold to Canadian XXXXXXXXXX in Canadian dollars. All of these contracts will be settled by XXXXXXXXXX .

Other than offers of employment from TC to certain current employees of DC and agreements relating to the transfer of such employees, there are no agreements that will be entered into by DC in contemplation of the Proposed Transactions.

The "lease of certain premises" used by DC as described in this Paragraph (a)(v) above refers to XXXXXXXXXX , which premises are used by DC exclusively in carrying on the Canadian Spin-off Businesses. This lease will be assigned subject to the consent of the landlord as part of the Proposed Transactions described in Paragraph 26. DC also leases premises at XXXXXXXXXX , which premises are used by DC in carrying on both the DC Retained Businesses and the Canadian Spin-off Businesses.

9. DC also operates in Canada the Canadian portions of (i) Segment #3; and (ii) the portions of Segment #4 relating to the Segment #4 Business 1 and the XXXXXXXXXX side of the Segment #4 Business 2. These portions are collectively referred to hereinafter as the "DC Retained Businesses".

(a) The assets used by DC to carry on the DC Retained Businesses (the "DC Retained Assets") principally consist of:

(i) trade receivables;

(ii) finished goods inventories, supplies and repair parts;

(iii) prepaid expenses and other current assets;

(iv) leasehold improvements, furniture, office equipment, computers and test equipment;

(v) leases of certain premises;

(vi) the benefits under certain foreign exchange hedging and forward contracts; and

(vii) customer contracts, purchase orders, and other commitments.

(b) The liabilities of DC relating to the DC Retained Businesses (the "DC Retained Liabilities") principally consist of:

(i) trade and accounts payable;

(ii) accrued liabilities including those owing to customers and employees; and

(iii) the liabilities under certain foreign exchange hedging and forward contracts.

10. DC does not own any property (other than property that should be classified as cash or near cash property) the income from which, for purposes of the Act, would be income from property or income from a specified investment business.

In this respect, prior to XXXXXXXXXX , DC held units ("Units") representing undivided interests in the XXXXXXXXXX ("Fund"), which were analogous to a short-term deposit or marketable security and were treated as such by DC for financial statement purposes. Only Foreign Pubco and its affiliates are permitted to purchase Units and make capital contributions to the Fund, with any such contribution being invested in XXXXXXXXXX debt obligations suitable for a money market fund under XXXXXXXXXX securities law.

As of XXXXXXXXXX , DC had redeemed all of its Units at their FMV for cash consideration. Such redemption was for operational purposes and to fund ongoing business liabilities of DC. It is anticipated that DC will invest any excess cash before the Proposed Transactions in a short-term bank account rather than make additional contributions to the Fund. Accordingly, DC will have no Units in the Fund immediately before the Proposed Transactions described in Paragraph 26.

11. The remaining Canadian portion of the Retained Businesses that are not carried on by DC, being the XXXXXXXXXX side of the Segment #4 Business 2, is operated by a related company, XXXXXXXXXX ("Xco"). DC does not own any shares of Xco. Xco is an indirect wholly-owned subsidiary of XXXXXXXXXX ("Yco") which was acquired by Foreign Pubco in XXXXXXXXXX .

Xco will not be involved in the Proposed Transactions. Other than DC and Xco there are no other Canadian subsidiaries within the Foreign Pubco corporate group that carry on or have carried on any business activities.

12. XXXXXXXXXX ("TC") was incorporated under the provisions of the CBCA on XXXXXXXXXX on behalf of Foreign Pubco and DC by an officer of DC. TC is a private corporation and a taxable Canadian corporation. TC currently has no assets, no liabilities and has not issued any shares. TC will not issue any shares prior to the Proposed Transactions described in Paragraph 19.

TC is authorized to issue:

(a) common shares (the "TC Common Shares"), each of which is a fully participating voting common share with the holder thereof being entitled to one vote at each meeting of the shareholders of TC;

(b) preferred shares (the "TC Preferred Shares") having the following attributes:

(i) each TC Preferred Share is redeemable, subject to applicable law, at any time at the option of TC at a redemption amount (the "TC Redemption Amount") equal to the amount by which the aggregate FMV of the Distribution Property at the time of its transfer to TC as described in Paragraph 26, exceeds the FMV of the non-share consideration to be provided by TC in exchange for the Distribution Property, divided by the number of TC Preferred Shares issued as consideration for such transfer, plus the amount of all declared but unpaid dividends thereon;

(ii) each TC Preferred Share is retractable, subject to applicable law, at any time at the option of the holder thereof for an amount equal to the TC Redemption Amount, plus the amount of all declared but unpaid dividends thereon;

(iii) the holder of each TC Preferred Share is entitled to non-cumulative cash dividends as and when declared by the directors of TC from time to time, which dividends need not also be declared on any other class of shares of TC, at a rate not exceeding XXXXXXXXXX % per annum of the TC Redemption Amount per TC Preferred Share;

(iv) there is a provision restricting (i) the payment of dividends on other classes of shares; (ii) payments to purchase, redeem or otherwise acquire, or on the reduction of capital in respect of, other classes of shares; and (iii) the provision of financial assistance by means of a loan, guarantee or otherwise, so that no such dividends, payments or distributions may be paid on any other class of shares of TC and no such financial assistance may be provided if the realizable value of the net assets of TC after such dividends, payments, distributions or financial assistance would be less than
the aggregate of (I) the liabilities of TC; and (II) the aggregate TC Redemption Amount of all of the TC Preferred Shares then outstanding;

(v) the holder of each TC Preferred Share is entitled, upon the liquidation, dissolution or winding-up of TC, to a payment in priority to all other classes of shares of TC of an amount per TC Preferred Share equal to the TC Redemption Amount plus the amount of all declared but unpaid dividends thereon to the extent of the amount of value of property available under applicable law for the payment to the shareholders of TC upon liquidation, dissolution or winding-up, but will not be entitled to any additional amount; and

(vi) the holder of each TC Preferred Share is not entitled to vote at any meeting of the shareholders of TC, other than as provided under applicable law.

Proposed Transactions

Canadian "Butterfly" Restructuring

13. [Reserved]

14. [Reserved]

15. [Reserved]

16. Pursuant to the CBCA, DC will reorganize its capital by amending its articles of incorporation to create a new class of common shares (the "DC New Common Shares") and a new class of special shares (the "DC Special Shares") and will change each issued and outstanding DC Common Share into one DC New Common Share and one DC Special Share (the "Capital Reorganization"). Such shares will have the rights and conditions as described below:

(a) each DC New Common Share will be a fully participating voting common share with the holder thereof entitled to XXXXXXXXXX votes at each meeting of the shareholders of DC; and

(b) the DC Special Shares will have the following attributes:

(i) each DC Special Share will be redeemable, subject to applicable law, at any time at the option of DC at an amount equal to the amount (such amount being the "DC Redemption Amount") obtained by multiplying the aggregate fair market value of the
outstanding DC Common Shares immediately prior to the Capital Reorganization by the Butterfly Percentage and then dividing such product by the number of DC Special Shares issued on the Capital Reorganization, plus the amount of all declared but unpaid dividends thereon;

(ii) each DC Special Share will be retractable, subject to applicable law, at any time at the option of the holder thereof at the DC Redemption Amount plus the amount of all declared but unpaid dividends thereon;

(iii) the holder of each DC Special Share will be entitled to such non-cumulative cash dividends as are declared by the directors of DC from time to time, which dividends need not also be declared on any other class of shares of DC, at a rate not exceeding XXXXXXXXXX % per annum of the DC Redemption Amount per DC Special Share;

(iv) there is a provision restricting (i) the payment of dividends on other classes of shares; (ii) payments to purchase, redeem or otherwise acquire, or payments on the reduction of capital in respect of, other classes of shares; and (iii) the provision of financial assistance by means of a loan, guarantee or otherwise, so that no such dividends, payments or distributions may be paid on any other class of shares of DC and no such financial assistance may be provided if the realizable value of the net assets of DC after such dividends, payments, distributions or financial assistance would be less than the aggregate of (I) the liabilities of DC; and (II) the aggregate DC Redemption Amount of all of the DC Special Shares then outstanding;

(v) the holder of each DC Special Share will be entitled, upon liquidation, dissolution or winding-up of DC, to a payment in priority to all other classes of shares of DC of an amount per DC Special Share equal to the DC Redemption Amount plus the amount of all declared but unpaid dividends thereon to the extent of the amount or value of property available under applicable law for payment to shareholders of DC upon such liquidation, dissolution or winding-up, but will not be entitled to any additional amount; and

(vi) the holder of each DC Special Share will not be entitled to vote at any meeting of the shareholders of DC, other than as provided under applicable law.

The aggregate FMV of the DC New Common Shares and DC Special Shares immediately following the Capital Reorganization will be equal to the aggregate FMV of the DC Common Shares immediately before the Capital Reorganization.

Foreign Pubco holds the DC Common Shares as capital property. No subsection 85(1) elections will be filed in respect of the Capital Reorganization.

17. The aggregate addition to the stated capital in respect of the DC New Common Shares and the DC Special Shares issued by DC on the Capital Reorganization described in Paragraph 16 will not exceed the aggregate PUC of the DC Common Shares at the time of the Capital Reorganization. Such aggregate stated capital will be apportioned between the DC New Common Shares and the DC Special Shares in proportion to the relative aggregate FMV of such shares.

Global Structure of the Spin-Off

18. The global reorganization of Foreign Pubco will result in the creation of a new independent multinational group, the parent entity of which, Foreign Spinco, will be a XXXXXXXXXX corporation with a class of publicly traded securities listed on a stock exchange in XXXXXXXXXX . The global reorganization will involve the following general steps (collectively, the "Spin-off"):

(a) The Spin-off Businesses and the Retained Businesses will be separated into distinct legal entities, including the direct and indirect transfer of the Spin-off Businesses (and shares of subsidiaries engaged in the Spin-off Businesses) to Foreign Spinco Sub. These transfers to Foreign Spinco Sub will occur on a "rolling basis".

On XXXXXXXXXX Spin-off Businesses will be transferred to Foreign Spinco Sub. Following these transactions, but still on XXXXXXXXXX , Foreign Pubco, TC and Foreign Spinco Sub will enter into the "Three-Party Share Exchange" described in Paragraph 19 and then DC will carry out the transfer of the Canadian Spin-off Businesses to TC described in Paragraph 26. The actual time on XXXXXXXXXX at which the various transactions will take place will be set out in the relevant agreements. Further, certain other global transfers will occur after XXXXXXXXXX.

(b) Foreign Pubco will contribute all of its Foreign Spinco Sub Common Shares to Foreign Spinco as described in Paragraph 33.

(c) Foreign Pubco will distribute all of its Foreign Spinco Common Shares to its stockholders as a dividend-in-kind as described in Paragraph 33.

Transfer of DC Special Shares to TC

19. In the context of a three-party transfer agreement (the "Three-Party Share Exchange") among Foreign Pubco, Foreign Spinco Sub, and TC (which will be effective after the transfer of various other international Spin-off Businesses to Foreign Spinco Sub as described in Paragraph 18(a)):

(a) TC will agree to pay the purchase price for the DC Special Shares transferred to it by Foreign Pubco as described in Paragraph 19(b) by issuing TC Common Shares to Foreign Spinco Sub having an aggregate FMV at that time equal to the aggregate FMV of the DC Special Shares so transferred by Foreign Pubco to it. TC and Foreign Spinco Sub both will agree that the TC Common Shares will be issued to Foreign Spinco Sub in respect of and by virtue of the disposition by Foreign Pubco of the DC Special Shares to TC;

(b) Foreign Pubco will agree to pay the purchase price for the Foreign Spinco Sub Common Shares issued to it by Foreign Spinco Sub as described in Paragraph 19(c) by transferring all of the DC Special Shares to TC having an aggregate FMV at that time equal to the aggregate FMV of the Foreign Spinco Sub Common Shares so issued by Foreign Spinco Sub to it; and

(c) Foreign Spinco Sub will agree to pay the purchase price for the TC Common Shares issued to it by TC as described in Paragraph 19(a) by issuing Foreign Spinco Sub Common Shares to Foreign Pubco having an aggregate FMV at that time equal to the aggregate FMV of the TC Common Shares so issued by TC to it.

The purchase price that TC paid for Foreign Pubco's DC Special Shares is equal to the aggregate FMV of those shares at the time of their transfer to TC as described in Paragraph 19(a) and is the amount that an arm's length person would pay for those shares.

20. Pursuant to the CBCA, the stated capital of the TC Common Shares will be increased by an amount that will not exceed the aggregate PUC of the DC Special Shares immediately before the time they are transferred by Foreign Pubco to TC as described in Paragraph 19(b).

21. The DC Common Shares and the DC Special Shares will not constitute taxable Canadian property and, therefore, no notice to the Minister under section 116 will be sent in connection with the dispositions of the DC Common Shares and the DC Special Shares by Foreign Pubco.

22. Following the transactions described in Paragraph 19, Foreign Spinco Sub will own all of the issued and outstanding shares of TC. No other person will acquire
shares of TC (except for the TC Preferred Shares which are issued by TC to DC as described in Paragraph 28 and redeemed as described in Paragraph 30) as part of a series of transactions that includes the transfer of the Canadian Spin-off Businesses to TC described in Paragraph 26.

23. Immediately before the transfer of property by DC to TC described in Paragraph 26, the aggregate FMV of the Foreign Spinco Sub Common Shares owned by Foreign Pubco will be equal to the amount determined by the following formula, on the assumption that Foreign Pubco is the participant, DC is the distributing corporation, Foreign Spinco Sub is the acquiror and the distribution is the transfer of property described in Paragraph 26,

(A x B/C) + D

as found in subparagraph (b)(iii) of the definition of "permitted exchange" in subsection 55(1).

24. Immediately before the transfer of property by DC to TC described in Paragraph 26, the property of DC will be classified into the following three types of property for the purposes of the definition of "distribution" in subsection 55(1), as follows:

(a) Cash or near-cash property, comprising all of the current assets of DC, including cash, marketable securities, accounts receivable, trade receivables, inventory, prepaid expenses and the benefits under certain foreign exchange hedging and forward contracts described in Paragraph 8(a)(vi);

(b) Business property, comprising all of the assets of DC, other than cash or near-cash property, any income from which would, for purposes of the Act, be income from an active business (other than a specified investment business), including goodwill; and

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

For greater certainty, for purposes of this distribution:

(d) Any tax accounts such as the balance of any non-capital losses of DC or the balance of any RDTOH or CDA of DC, if any, will not be considered property; and

(e) Advances to any person that are due and receivable within a year will be considered cash or near-cash property.

25. In determining the net FMV of the three types of property of DC immediately before the transfers of property described in Paragraph 26, the liabilities of DC will be allocated to, and will be deducted in the calculation of the net FMV of, each type of property of DC, in the following manner:

(a) Current liabilities of DC, including the liabilities under certain foreign exchange hedging and forward contracts described in Paragraph 8(b)(iii), will be allocated to each cash or near-cash property of DC in the proportion that the FMV of each such property is of the FMV of all cash or near-cash property owned by DC. The allocation of current liabilities as described herein will not exceed the FMV of all the cash or near-cash property of DC;

(b) Following the allocation of current liabilities to cash or near-cash property as described in Paragraph 25(a), any remaining net FMV of any accounts receivable, trade receivables, inventories and prepaid expenses of DC will be reclassified as business property of DC and excluded from the net FMV of the cash-or near cash property, to the extent that such property will be collected, sold, used or consumed in the ordinary course of business to which such property relates;

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

(d) If any liabilities remain after the allocations described in (a) and (c) above are made, such excess unallocated liabilities will then be allocated to the cash or near-cash property, investment property and business property of DC, based on the relative net FMV of each type of property prior to the allocation of such excess unallocated liabilities.

For greater certainty, for purposes of this distribution:

(e) The amount of any deferred income tax will not be considered a liability because such amount does not represent a legal obligation;

(f) Any amounts owing to any person that are due and payable within a year will be considered current liabilities;

(g) Income and other taxes due and payable within a year will be classified as current liabilities; and

(h) Current liabilities will include amounts normally classified as current liabilities, including accounts payable, bonuses payable, and the current portion of any long term debt.

DC's long term liabilities are limited to its liability for post-retirement medical and dental benefits to eligible DC former and present employees who qualify prior to the distribution by Foreign Pubco of the Foreign Spinco Common Shares as a dividend-in-kind as described in Paragraph 33. It is not anticipated that DC will transfer any of these long-term liabilities to TC in connection with the transfer of property described in Paragraph 26.

Based on the above, DC will only have cash or near cash property and business property at the time of the transfer of property described in Paragraph 26.

Transfer of Canadian Spin-off Businesses to TC

26. DC will transfer a percentage of each type of its property (as described in Paragraph 24) to TC (the "Distribution Property") such that immediately following such transfer, the net FMV of each type of property so transferred to TC will approximate that proportion of the net FMV of all property of DC of that type (after allocating liabilities, in the manner described in Paragraph 25), determined immediately before such transfer that:

(a) the aggregate FMV, immediately before the transfer, of all the DC Special Shares owned by TC at that time;

is of

(b) the aggregate FMV, immediately before the transfer, of all the issued and outstanding DC Shares.

For greater certainty, the Distribution Property transferred by DC to TC will include the Canadian Spin-off Businesses and a portion of its cash or near cash property.

The transfers of DC's Segment #1 foreign exchange hedging and forward contracts (described in Paragraph 8) to TC will be carried out by way of assignment by DC; mechanically, the financial institution will change the name on these contracts from DC to TC. Foreign Pubco's Corporate Treasury has already made arrangements to substitute TC for DC on these contracts once the transfer of property described in this Paragraph is completed.

Following the transfer of property described in this Paragraph, DC and TC will enter into a sub-lease agreement with respect to the XXXXXXXXXX premises in XXXXXXXXXX , used by DC as described in Paragraph 8, pursuant to which TC will be permitted to continue to carry on the Canadian Spin-off Businesses through these premises.

27. The expression "approximate that proportion" described in Paragraph 26 means that the discrepancy from that proportion, if any, would not exceed XXXXXXXXXX %, determined as a percentage of the net FMV of each type of property which TC has received (or DC has retained) as compared to what TC would have received (or DC would have retained) had it received (or retained) its appropriate pro-rata share of the net FMV of that type of property.

28. As consideration for the transfer of the Distribution Property, TC will:

(a) assume the Canadian Spin-off Liabilities; and

(b) issue TC Preferred Shares to DC having an aggregate FMV at that time equal to the aggregate FMV of the Distribution Property transferred to TC that exceeds the amount of the liabilities assumed by TC described in (a) above.

29. DC and TC will jointly elect, in prescribed form and within the time determined under subsection 85(6), for the provisions of subsection 85(1) to apply to the transfer of eligible property by DC to TC described in Paragraph 26. The agreed amounts in respect of each election will be as follows:

(a) in the case of capital property (other than depreciable property of a prescribed class) and inventory, an amount not less than the lesser of the amounts described in subparagraphs 85(1)(c.1)(i) and (ii);

(b) in the case of depreciable property of a prescribed class, an amount not less than the least of the amounts described in subparagraphs 85(1)(e)(i), (ii) and (iii); and

(c) in the case of eligible capital property, an amount not less than the least of the amounts described in subparagraphs 85(1)(d)(i), (ii) and (iii).

In each case, the agreed amount will not exceed the FMV of the respective property transferred, nor will it be less than the amount permitted under paragraph 85(1)(b). The amount of liabilities to be allocated to the property that is the subject of an election under subsection 85(1) will not exceed the total of the agreed amounts elected for that property.

The amount that will be added under the CBCA to the stated capital account of the TC Preferred Shares issued by TC as described in Paragraph 28(b) will not
exceed the amount by which the aggregate of the cost amounts of the property transferred by DC to TC (determined under subsection 85(1) where applicable) exceed the amount of the Canadian Spin-off Liabilities assumed by TC as described in Paragraph 28(a).

DC and TC will file a joint election in the prescribed form and within the prescribed time period under section 22 in respect of any accounts receivable owing to DC that are included in the property transferred to TC described in Paragraph 26.

Further, DC and TC may elect within the prescribed time period to have the rules in subsection 20(24) apply to any amounts paid by TC for undertaking future obligations of DC.

Cross-Redemption

30. TC will redeem from DC all of the issued and outstanding TC Preferred Shares for an amount equal to the aggregate TC Redemption Amount and will issue to DC in consideration therefor a demand, non-interest bearing promissory note in the principal amount equal to the aggregate TC Redemption Amount (the "TC Redemption Note"). DC will accept the TC Redemption Note as full and absolute payment of the aggregate TC Redemption Amount with the risk of the note being dishonoured.

31. DC will redeem from TC all of the issued and outstanding DC Special Shares owned by TC for the amount equal to the aggregate DC Redemption Amount and will issue to TC in consideration therefore a demand, non-interest bearing promissory note in the principal amount of the aggregate DC Redemption Amount (the "DC Purchase Note"). TC will accept the DC Purchase Note as full and absolute payment of the aggregate DC Redemption Amount with the risk of the note being dishonoured.

Set-Off

32. Immediately following the transactions described in Paragraphs 30 and 31, the principal amount owing by DC under the DC Purchase Note and the principal amount owing by TC under the TC Redemption Note will be set off in full against each other and each such note will be marked paid in full and cancelled.

Spin-Off

33. Following the Proposed Transaction described in Paragraph 32, Foreign Pubco will contribute all of its Foreign Spinco Sub Common Shares to Foreign Spinco. XXXXXXXXXX .

XXXXXXXXXX , Foreign Pubco will distribute all of its Foreign Spinco Common Shares pro rata to its shareholders as a dividend-in-kind.

Additional Information

34. No property has or will become property of DC, and no liabilities have been or will be incurred by DC, in contemplation of and before the transfers described in Paragraph 26, otherwise than as described herein or as part of the ordinary course of business.

35. None of the shares of DC or TC has been or will be, at any time prior to the completion 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, 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.

36. Neither DC nor TC is or will be, at any time prior to the completion of the Proposed Transactions described herein:

(a) a corporation described in any of paragraphs (a) to (f) of the definition of "financial intermediary corporation" in subsection 191(1);

(b) a "restricted financial institution" as defined in subsection 248(1); or

(c) a "specified financial institution" as defined in subsection 248(1).

37. Each of DC and TC will have the financial capacity to honour, upon presentation for payment, the amount payable under the promissory note issued by it as part of the Proposed Transactions.

38. The Proposed Transactions will not result in DC or a related person described herein being unable to pay its existing tax liabilities.

39. At no time, during the course of a series of transactions that includes the dividends described in Ruling C, will

(a) XXXXXXXXXX % or more of the FMV of the Foreign Spinco Sub Common Shares be derived from the DC Special Shares owned by TC or the TC Common Shares issued to Foreign Spinco Sub; or

(b) XXXXXXXXXX % or more of the FMV of the Foreign Spinco Common Shares be derived from the TC Common Shares issued to Foreign Spinco Sub.

For greater certainty, the Proposed Transactions constitute a series of transactions.

40. XXXXXXXXXX

Purposes of the Proposed Transactions

41.

(a) DC believes that the Spin-off, including the transfer of the Canadian Spin-off Businesses to TC on the basis outlined in Paragraphs 13 to 33, inclusive, is in the best interests of the Foreign Pubco shareholders.

DC further believes that the separation of the DC Retained Businesses and the Canadian Spin-off Businesses in such manner, as part of the Spin-off, will enhance the ability of each of Foreign Pubco and Foreign Spinco to pursue independent corporate objectives and strategies and to focus and improve on their respective businesses.

(b) The shares of Foreign Spinco will be distributed pro rata to the shareholders of Foreign Pubco in XXXXXXXXXX

(c) There is no tax motivation for, or tax benefit associated with, the insertion of Foreign Spinco into the Proposed Transactions.

XXXXXXXXXX

XXXXXXXXXX

XXXXXXXXXX

Rulings

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

A.

(a) The provisions of paragraph 212.1(1)(a) or subsection 84(1) will not apply to deem a dividend to be paid by TC or to be received by Foreign Spinco Sub as a result of the Three-Party Share Exchange described in Paragraph 19; and

(b) the aggregate ACB to TC of the DC Special Shares that TC acquired from Foreign Pubco on the Three-Party Share Exchange described in Paragraph 19 will be equal to the aggregate FMV of those shares at the time of their acquisition.

B. The provisions of subsection 85(1) will apply to the transfer by DC of eligible property to TC described in Paragraph 26 such that the agreed amount in respect of each eligible property will be deemed to be the transferor's proceeds of disposition and the transferee's cost thereof by virtue of paragraph 85(1)(a). For greater certainty, the provisions of paragraph 85(1)(e.2) will not apply to such transfer.

For the purposes of the transfer described above, the reference in subparagraph 85(1)(e)(i) to "the undepreciated capital cost to the taxpayer of all property of that class immediately before the disposition" shall be interpreted to mean the portion of the undepreciated capital cost of all property of that class immediately before the transfer that the fair market value of the assets of that class transferred to TC is of the fair market value of all assets of that class.

C. Subsection 84(3) will apply:

(a) on the redemption, as described in Paragraph 30, of the TC Preferred Shares owned by DC, to deem TC to have paid, and DC to have received; and

(b) on the redemption, as described in Paragraph 31, of the DC Special Shares owned by TC, to deem DC to have paid, and TC to have received; a dividend on the TC Preferred Shares and the DC Special Shares, respectively, equal to the amount, if any, by which the aggregate amount paid upon such redemption exceeds the aggregate PUC, in respect of the shares redeemed, immediately before such redemption, and any such dividend:

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

(d) will be deductible, pursuant to subsection 112(1), by the corporation deemed to have received such dividend;

(e) will not be a dividend to which any of subsections 112(2.1), (2.2), (2.3) or (2.4) apply to deny the subsection 112(1) deduction described in (d) above;

(f) will be excluded, pursuant to paragraph (j) of the definition of "proceeds of disposition" in section 54, in determining the proceeds of disposition to the recipient corporation of the shares which are redeemed;

(g) will not be subject to tax under Part IV, except as provided in paragraph 186(1)(b); and

(h) will not be subject to tax under Parts IV.1 or VI.1.

D. The provisions of subsection 112(3) will apply to reduce any loss which would otherwise be determined for the particular holder as a result of the redemption of the DC Special Shares and the redemption of the TC Preferred Shares described in Ruling C.

E. By virtue of the provisions of 55(3)(b), subsection 55(2) will not apply to the taxable dividends referred to in Ruling C, provided that:

(a) XXXXXXXXXX % or more of the FMV of the Foreign Spinco Sub Common Shares was not, at any time during the course of a series of transactions or events that includes the dividends described in Ruling C, derived from the DC Special Shares or the TC Common Shares;

(b) XXXXXXXXXX % or more of the FMV of the Foreign Spinco Common Shares was not, at any time during the course of a series of transactions or events that includes the dividends described in Ruling C, derived from the TC Common Shares; and

(c) as part of a series of transactions or events that includes the dividends described in Ruling C, there is not:

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

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

(iii) an acquisition of shares in the capital stock of DC in the circumstances described in subparagraph 55(3.1)(b)(iii); or

(iv) an acquisition of property in the circumstances described in subparagraph 55(3.1)(c) or 55(3.1)(d), which has not been described herein.

For greater certainty, subsection 55(3.1) will not apply to deny the exemption under paragraph 55(3)(b).

F. The set-off and cancellation of the DC Purchase Note held by TC and the TC Redemption Note held by DC, described in Paragraph 32, will not give rise to a forgiven amount and neither DC nor TC will realize any gain or incur any loss therefrom.

G. The provisions of subsections 15(1), 56(2), 56(4), 69(4) and 246(1) will not apply to any of the Proposed Transactions, in and of themselves.

H. The provisions of subsection 245(2) will not be applied as a result of the Proposed Transactions, in and of themselves, to redetermine the tax consequences confirmed in the rulings given above.

The above rulings are given subject to the limitations and qualifications set out in Information Circular 70-6R5 dated May 17, 2002 and are binding on the CRA provided that the Proposed Transactions are completed before XXXXXXXXXX .

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 into law, could have an effect on the rulings provided herein.

Comments

1. We make no comment as to whether the DC Common Shares or the DC Special Shares owned by Foreign Pubco would or would not constitute taxable Canadian property.

2. Unless otherwise confirmed, nothing in this letter should be construed as implying that 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

(b) 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.

Yours truly,

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