2008 Ruling 2008-0265041R3 - 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: Standard butterfly ruling.

XXXXXXXXXX 							2008-026504

XXXXXXXXXX , 2008

Dear Sir:

Re: XXXXXXXXXX Tax Services Office and XXXXXXXXXX Taxation Centre)

We are writing in response to your letter of XXXXXXXXXX and subsequently amended XXXXXXXXXX , wherein you requested an advance income tax ruling on behalf of the above-referenced taxpayer. We also acknowledge receipt of your emails.

To the best of your knowledge and that of the above-referenced taxpayer, none of the issues involved in this ruling is:

(a) in an earlier return of the above-referenced taxpayer or a related person;
(b) being considered by a tax services office or taxation centre in connection with a previously filed tax return of the above-referenced taxpayer or a related person;
(c) under objection by the above-referenced taxpayer or a related person;
(d) before the courts; or
(e) the subject of a ruling previously issued by the Income Tax Rulings Directorate.

The above-referenced taxpayer has confirmed that the proposed transactions described herein will not affect its ability to pay any of its outstanding tax liabilities.

All statutory references herein are to provisions or parts of the Income Tax Act (Canada), R.S.C. 1985 (5th Supp.), c. 1, as amended to the date hereof (the "Act") and all references to monetary amounts are in Canadian dollars.

DEFINITIONS

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

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

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

"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;

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

A is the net fair market value of the Spin-off Property to be transferred by Pubco 1 to Newco as described in the Proposed Transactions determined immediately before such transfer; and

B is the net fair market value of all property owned by Pubco 1 immediately before the transfer of the Spin-off Property to Newco as described in the Proposed Transactions;

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

"CRA" means the Canada Revenue Agency;

"Dissenting Shareholder" means a Pubco 1 Shareholder who dissented from the Plan of Arrangement by giving notice to Pubco 1 on or before XXXXXXXXXX ;

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

"Effective Date" means the date on which the Plan of Arrangement becomes effective;

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

"First Act" means the Business Corporations Act XXXXXXXXXX ;

"First Transfer" means the transfer by Pubco 1 of its XXXXXXXXXX project to Pubco 2, XXXXXXXXXX . Pubco 1 received in consideration approximately $XXXXXXXXXX in cash and XXXXXXXXXX shares of Pubco 2, which at the time of the sale represented a XXXXXXXXXX % shareholding interest in Pubco 2. The transaction was subject to a successful initial public offering of Pubco 2, which closed on XXXXXXXXXX with gross proceeds of $XXXXXXXXXX . Prior to the initial public offering, Pubco 2 completed a $XXXXXXXXXX private placement;

"Newco" means XXXXXXXXXX , a corporation incorporated under the First Act. The authorized share capital of Newco will consist of an unlimited number of Newco Common Shares and an unlimited number of Newco Preferred Shares;

"Newco Commitment" means the covenant of Newco, pursuant to the Plan of Arrangement, to issue one Newco Stock Option to each Pubco 1 Stock Option Holder for each Pubco 1 Stock Option held on the Effective Date;

"Newco Common Shares" means the Common shares in the capital of Newco. It is expected that as soon as possible following the Plan of Arrangement the Newco Common Shares will be listed for trading on the XXXXXXXXXX ;

"Newco Note" means a non-interest-bearing and non-convertible demand promissory note issued by Newco to Pubco 1 having a principal amount and fair market value equal to the aggregate of the Newco Preferred Share Redemption Amount in respect of all Newco Preferred Shares redeemed as described in the Proposed Transactions;

"Newco Preferred Shares" means the preferred shares in the capital of Newco. Each Newco Preferred Share has the following attributes: (a) redeemable, subject to applicable law, at any time at the option of Newco at the Newco Preferred Share Redemption Amount; (b) retractable, subject to applicable law, at any time at the option of the holder, at a retraction amount equal to the Newco Preferred Share Redemption Amount; (c) the directors of Newco are required, at the time of the issuance of a Newco Preferred Share, to specify a Specified Amount in respect of the issuance of the Newco Preferred Share; (d) the holder of each Newco Preferred Share is 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 Newco; (e) 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 Newco if the resulting realizable value of the net assets of Newco after payment of the dividends would be less than the aggregate of the Newco Preferred Share Redemption Amount for all of the Newco Preferred Shares then outstanding; (f) the holder of each Newco Preferred Share is entitled, upon the liquidation, dissolution or winding-up of Newco, to a payment in priority to all other classes of shares of Newco of an amount equal to the Newco Preferred 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 is entitled to no more than the amount of that payment; and (g) the holder of each Newco Preferred Share is not entitled to vote at meetings of shareholders of Newco, other than as provided by the First Act. For the purposes of subsection 191(4), the terms and conditions of the Newco Preferred Shares will specify a Specified Amount in respect of each such share. The amount specified in respect of such share, at the time of the issuance thereof, will be expressed as a fixed dollar amount that will not be determined by formula or subject to change thereafter and will not exceed the fair market value of the consideration for which the share is issued. None of the Newco Preferred Shares will be issued for consideration that includes a taxable preferred share;

"Newco Preferred Share Redemption Amount" in respect of a Newco Preferred Share means the aggregate fair market value of the Spin-off Property at the time of its transfer to Newco net of the fair market value of the Newco Commitment at the time of the transfer, divided by the number of Newco Preferred Shares issued as consideration therefore, plus any declared but unpaid dividends thereon;

"Newco Stock Option" means a right to acquire one Newco Common Share at a price determined under the Newco Stock Option Plan;

"Newco Stock Option Plan" means the stock option plan of Newco providing for the issuance and exercise of the Newco Stock Options;

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

"Paragraph" refers to a numbered paragraph in this letter;

"Participant" means a Pubco 1 Shareholder, other than a Dissenting Shareholder;

"Plan of Arrangement" means the plan of arrangement proposed under the First Act to effect the "butterfly" reorganization of Pubco 1 as described in the Proposed Transactions;

"prescribed stock exchange" has the meaning assigned by sections 3200 and 3201 of the Regulations to the Act;

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

"Proposed Transactions" means the transactions described in the Proposed Transactions section of this letter;

"Pubco 1" means XXXXXXXXXX , a corporation incorporated under the First Act. The taxation year of Pubco 1 ends on XXXXXXXXXX . Pubco 1's Canadian head office is located at XXXXXXXXXX . Pubco 1 is a Canadian XXXXXXXXXX company active in Canada XXXXXXXXXX . Pubco 1 focuses on the XXXXXXXXXX . Pubco 1's authorized share capital consists of an unlimited number of First Preferred shares, an unlimited number of Second Preferred shares and an unlimited number of Pubco 1 Common Shares;

"Pubco 1 Butterfly Shares" means the Class B Common shares in the capital of Pubco 1. Each Pubco 1 Butterfly Share will have the following attributes: (a) redeemable, subject to applicable law, at any time at the option of Pubco 1 at a redemption amount equal to the Pubco 1 Butterfly Share Redemption Amount; (b) each Pubco 1 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 Pubco 1 Butterfly Share Redemption Amount; (c) the directors of Pubco 1 will be required, at the time of the issuance of a Pubco 1 Butterfly Share, to a specify a Specified Amount in respect of the Pubco 1 Butterfly Shares; (d) the holder of each Pubco 1 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 Pubco 1; (e) 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 Pubco 1 if the resulting realizable value of the net assets of Pubco 1 after payment of the dividends would be less than the aggregate of the Pubco 1 Butterfly Share Redemption Amount for all of the Pubco 1 Butterfly Shares then outstanding; (f) the holder of each Pubco 1 Butterfly Share will be entitled, upon the liquidation, dissolution or winding-up of Pubco 1, to a payment in priority to all other classes of shares of Pubco 1 of an amount equal to the Pubco 1 Butterfly Share Redemption Amount, to the extent of the 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 Pubco 1 Butterfly Share will be entitled to one vote at meetings of shareholders of Pubco 1. None of the Pubco 1 Butterfly Shares will be issued for consideration that includes a taxable preferred share;

"Pubco 1 Butterfly Shares Redemption Amount" in respect of a Pubco 1 Butterfly Share means the aggregate fair market value of all of the Pubco 1 Old Common Shares outstanding immediately before the exchange of the Pubco 1 Old Common Shares as described in the Proposed Transactions, multiplied by the Butterfly Proportion, then divided by the number of issued and outstanding Pubco 1 Butterfly Shares, plus any declared but unpaid dividends thereon;

"Pubco 1 Common Shares" means the Common shares in the capital of Pubco 1. The Pubco 1 Common Shares are listed for trading on the XXXXXXXXXX . Each Pubco 1 Common Share entitles the holder to one vote at all meetings of shareholders. As of XXXXXXXXXX , there were approximately XXXXXXXXXX Pubco 1 Common Shares issued and outstanding. The Pubco 1 Common Shares are not short-term preferred shares, taxable preferred shares or term preferred shares;

"Pubco 1 New Common Shares" means the new Common shares of Pubco 1 described in Paragraph 8. The terms of the Pubco 1 New Common Shares will be identical to the terms of the existing Pubco 1 Common Shares;

"Pubco 1 Note" means a non-interest-bearing and non-convertible demand promissory note issued by Pubco 1 having a principal amount and fair market value equal to the aggregate of the Pubco 1 Redemption Amount in respect of all the Pubco 1 Butterfly Shares purchased for cancellation as described in the Proposed Transactions;

"Pubco 1 Old Common Share" means a Class A Common share of Pubco 1;

"Pubco 1 Shareholders" means the holders of Pubco 1 Common Shares, some of which holders are non-residents of Canada for purposes of the Act;

"Pubco 1 Specified Shareholder" means XXXXXXXXXX , which owns XXXXXXXXXX % of the issued and outstanding shares of Pubco 1;

"Pubco 1 Stock Option" means a right to acquire one Pubco 1 Common Share under the Pubco 1 Stock Option Plan. As of XXXXXXXXXX , XXXXXXXXXX stock options were outstanding, exercisable at an average price of $XXXXXXXXXX per share. Under the terms of the Pubco 1 Stock Option Plan, in the event of any change respecting Pubco 1 which affects the Pubco 1 Common Shares, the board of directors of Pubco 1 shall make such adjustments, as deemed necessary or equitable by the board to properly reflect such event, and such adjustments shall be binding for all purposes of the Pubco 1 Stock Option Plan;

"Pubco 1 Stock Option Holder" means a person who holds a Pubco 1 Stock Option;

"Pubco 1 Stock Option Plan" means the existing stock option plan of Pubco 1 providing for the issuance and exercise of the Pubco 1 Stock Options;

"Pubco 2" means XXXXXXXXXX the shares of which are listed for trading on the XXXXXXXXXX . Pubco 2 is a XXXXXXXXXX company primarily engaged in the XXXXXXXXXX ;

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

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

"Retained Property" means XXXXXXXXXX common shares of Pubco 2 and the amount of $XXXXXXXXXX ;

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

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

"Specified Amount" has the meaning assigned by subsection 191(4). The amount specified in respect of a share at the time of its issuance will be expressed as a fixed dollar amount that will not be determined by formula or subject to change thereafter and will not exceed the FMV of the consideration for which the share is issued;

"specified shareholder" has the meaning assigned to that term by subsection 248(1) for the purpose of Paragraph 3 and has the meaning assigned to that term by subsection 248(1) when read in conjunction with paragraph 55(3.2)(a) and subsection 55(3.3) for all other Paragraphs;

"Spin-off Property" means all of the Property of Pubco 1, other than the Retained Property;

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

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

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

XXXXXXXXXX ; and

XXXXXXXXXX .

Facts

1. Pubco 1 is a taxable Canadian corporation and a public corporation.

2. Pubco 1 acquired approximately XXXXXXXXXX % of the issued and outstanding shares in Pubco 2 on the First Transfer, which percentage has now been reduced to approximately XXXXXXXXXX %. The First Transfer was not connected to the Proposed Transactions.

3. To the best of the knowledge of the directors and senior officers of Pubco 1, the only specified shareholder of Pubco 1 is the Pubco 1 Specified Shareholder. The Pubco 1 Specified Shareholder represented in writing that it does not have any intention of disposing of all or any portion of its shareholdings in either Pubco 1 or Newco at any time either prior to or following the Plan of Arrangement, except for the transfers described in Paragraphs 9 and 11.

4. The Pubco 1 Shareholders approved the Plan of Arrangement at a shareholders' meeting that was held on XXXXXXXXXX .

5. On XXXXXXXXXX Pubco 1 raised $XXXXXXXXXX pursuant to a private placement by way of notes that are not convertible into other property. This financing enabled Pubco 1 to continue operating its ordinary business operations and is unrelated to the proposed butterfly reorganization.

6. Pubco 1 has incorporated Newco, which is a taxable Canadian corporation. There are no issued and outstanding shares of Newco. On XXXXXXXXXX , Pubco 1 and Newco entered into an agreement to implement the Plan of Arrangement, subject to the appropriate court and regulatory approvals.

Proposed Transactions

Subject to the appropriate court and regulatory approvals, the Proposed Transactions will occur pursuant to the Plan of Arrangement in the order presented, with the exception of the filing of the applicable election forms, which will be filed by the applicable due date.

7. Under the Plan of Arrangement, Dissenting Shareholders will be considered to have ceased to be a shareholder of Pubco 1 at the Effective Date, but immediately before any other transactions that will occur under the Plan of Arrangement. Accordingly, the Pubco 1 Common Shares held by a Dissenting Shareholder will be considered to have been purchased by Pubco 1 pursuant to the exercise of a statutory right of dissent by the Dissenting Shareholder and will no longer be considered to be outstanding for the purpose of the remaining corporate law transactions under the Plan of Arrangement. After the completion of the Plan of Arrangement, each such Dissenting Shareholder will be entitled to be paid the fair value of its Pubco 1 Common Shares in respect of which the right of dissent was exercised.

8. Pubco 1's articles will be amended:

(a) to re-designate the Pubco 1 Common Shares as Pubco 1 Old Common Shares; and

(b) to create and authorize the issuance of an unlimited number of Pubco 1 New Common Shares and Pubco 1 Butterfly Shares.

9. According to the Plan of Arrangement:

(a) Each Participant will exchange each of his Pubco 1 Old Common Shares for consideration consisting of one Pubco 1 New Common Share and one Pubco 1 Butterfly Share for each exchanged Pubco 1 Old Common Share. Pubco 1 will not file a joint election under the provisions of subsection 85(1) with any Participant in respect of this share exchange. The aggregate fair market value of the Pubco 1 New Common Share and the Pubco 1 Butterfly Share issued to each holder will be equal to the fair market value of the Pubco 1 Old Common Share immediately before the exchange. Participants will not be required to tender their existing Pubco 1 Common Share certificate and that share certificate will be regarded as representing ownership of a Pubco 1 New Common Share;

(b) The aggregate addition to the stated capital in respect of the Pubco 1 New Common Shares and the Pubco 1 Butterfly Shares issued by Pubco 1 on the exchange described in this Paragraph will not exceed the paid-up capital of the Pubco 1 Old Common Shares immediately before the exchange. The aggregate paid-up capital of the Pubco 1 Old Common Shares will be allocated between the Pubco 1 New Common Shares and the Pubco 1 Butterfly Shares based on the proportion that the fair market value of the Pubco 1 New Common Shares or the Pubco 1 Butterfly Shares, as the case may be, is of the fair market value of all new shares issued on the exchange; and

(c) Each exchanged Pubco 1 Old Common Share will be cancelled. The Pubco 1 New Common Shares will be listed for trading on the XXXXXXXXXX immediately following the Effective Date.

10. Newco will put in place the Newco Stock Option Plan. Each Pubco 1 Stock Option Holder will be granted a Newco Stock Option for every Pubco 1 Stock Option that he owns in anticipation of the Newco Commitment. The exercise price of each Newco Stock Option will be equal to the Butterfly Proportion of the exercise price of the corresponding Pubco 1 Stock Option. Pubco 1 will then reduce the exercise price of every Pubco 1 Stock Option by the exercise price of the corresponding Newco Stock Option.

11. Each Participant will transfer all of his Pubco 1 Butterfly Shares to Newco in exchange for an equal number of Newco Common Shares. The addition to the stated capital in respect of the issuance of Newco Common Shares issued as consideration for that transfer will not exceed the aggregate paid-up capital of the Pubco 1 Butterfly Shares. The fair market value, immediately before the transfer of the Spin-off Property described in Paragraph 12, of each Participant's shares of the capital stock of Newco will be equal to the amount determined by the formula: (A x B/C) + D as set out in subparagraph (b)(iii) of the definition of "permitted exchange" in subsection 55(1).

12. Pubco 1 will transfer the Spin-off Property to Newco in exchange for the Newco Commitment and Newco Preferred Shares having an aggregate fair market value equal to the aggregate fair market value of the transferred property net of the fair market value of the Newco Commitment at the moment of the transfer.

Pubco 1 will jointly elect with Newco 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 by Pubco 1 to Newco. The agreed amount in respect of such transfer will be an amount that will not exceed the fair market value of the Spin-off Property so transferred by Pubco 1 and that is not less than (i) the least of the amounts described in subparagraphs 85(1)(d)(i), (ii) and (iii) in the case of any eligible capital property; (ii) the lesser of the amounts described in subparagraphs 85(1)(c.1)(i) and (ii) in the case of property described in paragraph 85(1)(c.1); and (iii) the least of the amounts specified in subparagraphs 85(1)(e)(i), (ii) and (iii) in the case of depreciable property of a prescribed class.

The agreed amount in respect of a property will not be less than the fair market value of the portion of the Newco Commitment given as consideration by Newco for that property.

Pursuant to the Plan of Arrangement and the provisions of the First Act, the addition to the stated capital in respect of the Newco Preferred Shares issued by Newco as consideration for the transfer of the Spin-off Property will not exceed the aggregate of the agreed amount under subsection 85(1) in respect of such transfer, less the fair market value of the Newco Commitment.

13. Immediately after the transfer of Spin-off Property described in Paragraph 12, the fair market value of all the property owned by Newco at that time will equal the proportion of the net fair market value of all the property owned by Pubco 1 determined immediately before the transfer of the Spin-off Property described in Paragraph 12, that:

(a) the aggregate fair market value of the Pubco 1 Butterfly Shares owned by Newco determined immediately before the transfer of Spin-off Property described in Paragraph 12,

is of

(b) the aggregate fair market value of all the issued and outstanding shares of Pubco 1 owned by its shareholders determined immediately before the transfer of Spin-off Property described in Paragraph 12.

14. Pubco 1 will purchase for cancellation from Newco all of the Pubco 1 Butterfly Shares issued by it, in consideration for the issuance by Pubco 1 to Newco of the Pubco 1 Note. Newco will accept the Pubco 1 Note as full payment of the purchase price in respect of such shares.

15. Newco will redeem the Newco Preferred Shares held by Pubco 1 in consideration for the issuance of the Newco Note. Pubco 1 will accept the Newco Note as full payment of the redemption price in respect of such shares.

16. Pubco 1 will pay the principal amount of the Pubco 1 Note by transferring to Newco the Newco Note, which will be accepted by Newco as full payment, satisfaction and discharge of Pubco 1's obligations under the Pubco 1 Note, and simultaneously Newco will pay the principal amount of the Newco Note by transferring to Pubco 1 the Pubco 1 Note, which will be accepted by Pubco 1 as full payment, satisfaction and discharge of Newco's obligations under the Newco Note. The Pubco 1 Note and the Newco Note will both thereupon be cancelled.

17. Newco will, pursuant to the post-amble in the definition of "public corporation" in subsection 89(1), elect in its return of income for its first taxation year to have been a public corporation from the beginning of such year.

18. Pubco 1's articles will be amended to eliminate the Pubco 1 Old Common Shares and the Pubco 1 Butterfly Shares, none of which will be issued and outstanding at that time. The articles of Pubco 1 will then be restated and filed in accordance with the First Act.

Additional Information

19. Neither Pubco 1 nor Newco is, or will be at the time of the Proposed Transactions described herein, a specified financial institution, as that term is defined in section 248(1).

20. Except as described herein, none of the shares of Pubco 1 or Newco has been, or will be, at any time during the implementation of the Proposed Transactions described herein:

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

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

(c) issued for consideration that is or includes:

(i) an obligation of the type described in subparagraph 112(2.4)(b)(i), other than an obligation of a corporation that is related (otherwise than by reason of a right referred to in paragraph 251(5)(b)); or

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

(d) 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

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

21. No property has or will become property of Pubco 1 or any corporation controlled by Pubco 1 in contemplation of and before the Proposed Transactions and no liabilities have been, or will be, incurred or discharged by Pubco 1 or any corporation controlled by Pubco 1 in contemplation of and before the Proposed Transactions. Moreover, except as specifically outlined herein, there is no expectation or intention of Pubco 1, Newco or any corporation controlled by them to dispose of any property owned by it as part of the series of transactions that includes the Proposed Transactions, other than in the ordinary course of business.

There are no other transactions, other than those disclosed herein, that form part of the series of transactions and events connected with this reorganization.

Other than the part of the Plan of Arrangement that calls for the purchase for cancellation of the Pubco 1 Butterfly shares at fair market value, there will not be any agreement in respect of the Pubco 1 Butterfly Shares in respect of any matters referred to in any of subparagraphs b(i) to (iv) of the definition "taxable preferred share" or any of paragraphs (a), (b), (f) or (h) of the definition "short-term preferred share" in subsection 248(1).

Purpose of the Proposed Transactions

The XXXXXXXXXX project owned by Pubco 2 has XXXXXXXXXX and no longer meets Pubco 1's strategy of focusing on XXXXXXXXXX . As a result, Pubco 1 sold the project to Pubco 2 but maintained a significant equity position in Pubco 2. Pubco 1 now wishes to spin-off most of its property to a new corporation that can maintain its strategic focus on XXXXXXXXXX .

In doing so, Pubco 1 hopes to enhance shareholders' value. Due to significant growth in the trading price of the Pubco 2 shares, there is currently a significant discount in the trading price of the Pubco 1 Common Shares as compared to Pubco 1's net asset value. This means that Pubco 1's other assets are not being accorded any value in the market. By spinning off its exploration properties to a new corporation, Pubco 1 hopes the market will value its assets more accurately.

Pubco 1 therefore considers that the spin-off of most of its XXXXXXXXXX properties as described herein is in the best interests of the Pubco 1 Shareholders. The Proposed Transactions will enhance the ability of each of Pubco 1 and Newco to pursue its independent corporate objectives and strategies, and in a manner which will maximize value to the Pubco 1 Shareholders.

The purpose for the revision of the stock option plan to reprice the stock options and the creation of the Newco option plan is to put Pubco 1 Stock Option Holders in the same relative aggregate economic position respecting their options following the Plan of Arrangement that they were in prior thereto.

Rulings

Provided that the above statements of facts, Proposed Transactions and purposes thereof are accurate and constitute complete disclosure of all relevant facts and Proposed Transactions, our rulings are as follows:

A. With regard to the purchase by Pubco 1 of existing Pubco 1 Common Shares from a Dissenting Shareholder as described in Paragraph 7:

(a) subject to the application of subsection 55(2), Pubco 1 will be deemed by paragraph 84(3)(a) to have paid, and the Dissenting Shareholder will be deemed by paragraph 84(3)(b) to have received, a dividend equal to the amount, if any, by which any payment from Pubco 1 to the Dissenting Shareholder (exclusive of any interest awarded by the court) in respect of the purchase of such Dissenting Shareholder's Pubco 1 Common Shares exceeds the amount of paid-up capital attributable to such shares immediately before their purchase;

(b) the amount of any such dividend will be included in computing such Dissenting Shareholder's income under subsection 82(1) and paragraph 12(1)(j); and

(c) subsections 212(2) and 215(1) will apply (subject to the provisions of any applicable income tax convention) to require Pubco 1 to withhold and remit 25% of the amount of each such dividend deemed to have been paid to a Dissenting Shareholder who does not reside in Canada.

B. Provided that a Participant holds a Pubco 1 Old Common Share as capital property and that the Participant and Pubco 1 do not file an election under subsection 85(1) or (2) in respect of the exchange of that Pubco 1 Old Common Share for a Pubco 1 New Common Share and a Pubco 1 Butterfly Share, as described in Paragraph 9, the provisions of subsection 86(1) will apply (and the provisions of subsection 86(2) and (2.1) will not apply) to the disposition of the Pubco 1 Old Common Shares such that:

(a) the Participant will be deemed by paragraph 86(1)(b) to have acquired the Pubco 1 New Common Share and the Pubco 1 Butterfly Share at a cost equal to the proportion of the ACB to the Participant of such Pubco 1 Old Common Share immediately before the exchange that:

(i) the fair market value, immediately after the exchange, of the Pubco 1 New Common Shares or the Pubco 1 Butterfly Share, as the case may be, received by the Participant,

is of

(ii) the fair market value, immediately after the exchange, of the Pubco 1 New Common Share and a Pubco 1 Butterfly Share acquired by the Participant on the exchange; and

(b) pursuant to paragraph 86(1)(c), the Participant will be deemed to have disposed of the Participant's Pubco 1 Old Common Share for proceeds of disposition equal to the aggregate cost to the Participant of the Pubco 1 New Common Share and the Pubco 1 Butterfly Share received by the Participant, as determined in (a) above.

C. Provided that a Participant who, immediately before the exchange of Pubco 1 Butterfly Shares for Newco Common Shares as described in Paragraph 11:

(a) holds such Pubco 1 Butterfly Shares as capital property;

(b) deals at arm's length with Newco immediately before the exchange;

(c) does not include any portion of a gain or loss resulting from the disposition of the Pubco 1 Butterfly Shares in computing his income for the taxation year in which the share exchange takes place;

(d) does not file an election under subsection 85(1) or (2) in respect of the exchange;

(e) does not receive any consideration, other than the Newco Common Shares, on the exchange;

(f) is not a foreign affiliate of a taxpayer resident in Canada, at the end of its taxation year in which the exchange occurred, that has included any portion of the gain or loss, otherwise determined, from the disposition of the exchanged shares in computing its "foreign accrual property income" as defined in subsection 95(1) for its taxation year in which the exchange occurred;

and further, provided that immediately after the exchange,

(g) such person, together with all other persons with whom the particular person does not deal at arm's length, will not:

(i) control Newco; or

(ii) beneficially own shares in the capital of Newco having a fair market value of more than XXXXXXXXXX % of the fair market value of all the outstanding shares in the capital of Newco;

then, pursuant to paragraph 85.1(1)(a), such person will be deemed:

(h) to have disposed of his Pubco 1 Butterfly Shares for proceeds of disposition equal to the ACB to such person of the Pubco 1 Butterfly Shares immediately before the exchange;

(i) to have acquired the Newco Common Shares at a cost to such person equal to the ACB to such person of the Pubco 1 Butterfly Shares immediately before the exchange; and

(j) pursuant to paragraph 85.1(1)(b), the cost to Newco of each Pubco 1 Butterfly Share acquired by Newco as a result of the exchange will be deemed to be the lesser of its fair market value immediately before the exchange and its paid-up capital immediately before the exchange.

D. Provided that Pubco 1 holds the Spin-off Property as "eligible property" as defined in subsection 85(1.1) immediately before the transfer described in Paragraph 12, and provided that Pubco 1 and Newco jointly file an election pursuant to subsection 85(1) in the prescribed form and manner and within the time specified in subsection 85(6) and subject to the application of subsection 69(11), the provisions of subsection 85(1), other than paragraph 85(1)(e.2), will apply to the transfer of the Spin-off Property by Pubco 1 to Newco as described in Paragraph 12, such that the agreed amount in respect of the transfer of the Spin-off Property will be deemed to be Pubco 1's proceeds of disposition and Newco's cost of the Spin-off Property pursuant to paragraph 85(1)(a).

E. On the purchase for cancellation of the Pubco 1 Butterfly Shares held by Newco, as described in Paragraph 14 and on the redemption of the Newco Preferred Shares held by Pubco 1 as described in Paragraph 15:

(a) pursuant to paragraphs 84(3)(a) and 84(3)(b):

(i) Pubco 1 will be deemed to have paid, and Newco will be deemed to have received taxable dividends at that time equal to the amount, if any, by which the amount paid in respect of the purchase for cancellation of the Pubco 1 Butterfly Shares exceeds the paid-up capital of those shares immediately before the purchase;
(ii) Newco will be deemed to have paid, and Pubco 1 will be deemed to have received taxable dividends at that time equal to the amount, if any, by which the amount paid in respect of the redemption of all of the Newco Preferred Shares exceeds the paid-up capital of those shares immediately before the redemption; and

(b) the taxable dividends deemed to have been received by each of Pubco 1 and Newco in (a) above will:

(i) be included in the recipient's income pursuant to section 82 and paragraph 12(1)(j);

(ii) be deductible in computing the taxable income of the recipient for the year in which the dividends are deemed to have been received pursuant to subsection 112(1) and such deductions will not be denied by any of the provisions of subsections 112(2.1), (2.2), (2.3) or (2.4);

(iii) be excluded in determining the proceeds of disposition to the recipient pursuant to paragraph (j) of the definition of "proceeds of disposition" in section 54 in respect of the shares so purchased for cancellation or redeemed;

(iv) by virtue of the provisions of subsection 112(3), reduce any loss that would otherwise be realized by Pubco 1 or Newco as a result of such purchase for cancellation or redemption;

(v) not be subject to tax under Part IV; and

(vi) not be subject to tax under Part IV.1 or Part VI.1 to the extent that the amount paid on such purchase for cancellation or redemption does not exceed the Specified Amount in respect of those shares.

F. Provided that:

(a) there is not a distribution by Pubco 1 to a corporation that is not an acquiror before the day that is XXXXXXXXXX years after the Effective Date; and

(b) there is not a distribution by Newco before the day that is XXXXXXXXXX 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 Pubco 1 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 Ruling E above and, for greater certainty, subsection 55(3.1) will not apply to deny the exemption under paragraph 55(3)(b).

G. The settlement and cancellation of the Pubco 1 Note held by Newco and the Newco Note held by Pubco 1 will not give rise to a "forgiven amount" within the meaning of subsections 80(1) or 80.01(1). Neither Newco nor Pubco 1 will realize any gain or incur any loss as a result of the repayment and resultant cancellation of the Newco Note and the Pubco 1 Note.

H. Provided that the Pubco 1 New Common Shares and the Newco Common Shares become listed for trading on the XXXXXXXXXX or the XXXXXXXXXX , as the case may be, the Pubco 1 New Common Shares and the Newco Common Shares will be a "qualified investment" pursuant to paragraph 4900(1)(b) of the Regulations:

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

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

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

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

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

J. Subsection 245(2) will not be applied as a result of the Proposed Transactions, in and of themselves, to redetermine any of the tax consequences confirmed in the rulings given herein.

Comments

Nothing in this ruling should be construed as implying that the CRA has agreed to or reviewed:

(a) the determination of the fair market value or ACB of any particular asset or the paid-up capital in respect of any share referred to herein; or

(b) any tax consequences relating to the facts and proposed transactions described herein other than those specifically described in the rulings given above.

Yours truly,

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