2006 Ruling 2006-0182211R3 - Public company spin-off

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 butterfly reorganization satisfies the requirements of paragraph 55(3)(b)

Position: Yes

Reasons: Complies with provisions of the legislation

XXXXXXXXXX 									2006-018221

XXXXXXXXXX, 2006

Dear XXXXXXXXXX:

Re: XXXXXXXXXX
Advance Income Tax Ruling

This is in reply to your letter of XXXXXXXXXX, wherein you requested an advance income tax ruling on behalf of the above-noted taxpayer. We also acknowledge the additional information and submissions provided in your subsequent correspondence.

To the best of your knowledge, and that of the taxpayers involved, none of the issues involved in this advance ruling is:

(i) dealt with 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 not expired, or

(v) the subject of a ruling previously issued by this Directorate.

DEFINITIONS

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

• "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);
• "Aggregate Spinco Redemption Amount" means the product obtained by multiplying the number of then outstanding Spinco Special Shares by the Spinco Redemption Amount;
• "Aggregate DC Redemption Amount" means the product obtained by multiplying the number of then outstanding DC Special Shares by the DC Redemption Amount;
• "arm's length" has the meaning assigned by section 251;
• "BCA" means the Business Corporations Act (XXXXXXXXXX);
• XXXXXXXXXX;
• "capital property" has the meaning assigned by section 54;
• "cost amount" has the meaning assigned by subsection 248(1);
• "CRA" means the Canada Revenue Agency;
• "Capital Reorganization" means the exchange of each DC Common Share for one New DC Common Share and XXXXXXXXXX of a DC Special Share as described in Paragraph 52;
• XXXXXXXXXX;
• XXXXXXXXXX;
• "cumulative eligible capital" has the meaning assigned by subsection 14(5);
• "DC Common Shares" means the common shares which DC is currently authorized to issue as described in Paragraph 2;
• "DC Redemption Amount" means the amount obtained by multiplying the aggregate fair market value of the DC Common Shares immediately prior to the Capital Reorganization by the Transfer Percentage and then dividing such product by the number of then outstanding DC Special Shares;
• "DC Redemption Note" means the demand promissory note with a principal amount equal to the Aggregate DC Redemption Amount to be issued by DC in favour of Spinco as described in Paragraph 64;
• "DC Stock Options" means all options existing at the Effective Date which are exercisable for DC Common Shares;
• "DC Shares" means the DC Common Shares, the New DC Common Shares and the DC Special Shares collectively;
• "DC Special Shares" means the special shares which DC will be authorized to issue as described in Paragraph 51;
• "DC Shareholders" means all of the holders of DC Common Shares immediately before the Effective Date;
• "depreciable property" has the meaning assigned by subsection 13(21);
• "disposition" has the meaning assigned by subsection 248(1);
• "Dissenting Shareholder" means a DC Shareholder who exercises the right to dissent under the Plan of Arrangement;
• "distribution" has the meaning assigned by subsection 55(1);
• "Effective Date" means the date on which the Plan of Arrangement becomes effective, which is currently expected to be on or about XXXXXXXXXX;
• "eligible capital property" has the meaning assigned by section 54;
• "eligible property" has the meaning assigned by subsection 85(1.1);
• "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;
• New DC Common Shares" means the new common shares which DC will be authorized to issue as described in Paragraph 51;
• "paid-up capital" has the meaning assigned by subsection 89(1);
• "Paragraph" refers to a numbered paragraph in this advance income tax ruling;
• "Participant" means a DC Shareholder other than a Dissenting Shareholder;
• "Plan of Arrangement" means the plan of arrangement under the BCA to effect the divisive reorganization described in the "Proposed Transactions";
• "proceeds of disposition" has the meaning assigned by section 54;
• "Proposed Transactions" means the transactions described in Paragraphs 48 to 68, inclusive;
• "public corporation" has the meaning assigned to that term by subsection 89(1);
• "related person" has the meaning assigned by subsection 251(2);
• "restricted financial institution" has the meaning assigned by subsection 248(1);
• "Retained DC Assets" means the XXXXXXXXXX, cash assets, securities and other financial instruments and other assets owned by DC described in Paragraphs 11 to 21, inclusive;
• "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 Common Shares means the common shares which Spinco is authorized to issue as described in Paragraph 47;
• "Spinco Commitment" means the covenant of Spinco to issue Spinco Common Shares to the holders of DC Stock Options who exercise their rights thereunder on or after the Effective Date and are entitled pursuant to the corporate reorganization provisions of the DC Stock Option Plan to receive New DC Common Shares and Spinco Common Shares as more fully described in Paragraphs 44, 54 and 61;
• "Spinco Shares" means the Spinco Common Shares and Spinco Special Shares, collectively;
• "Spinco Special Shares" means the special shares which Spinco is authorized to issue as described in Paragraph 47;
• "Spinco Redemption Amount" means the quotient obtained by dividing the fair market value of the Spin-off Assets, determined immediately before the Spin-off as described in Paragraph 59, less the amount of any non share consideration paid to DC as consideration for the Spin-off Assets, by the number of Spinco Special Shares issued as consideration for the Spin-off Assets;
• "Spinco Redemption Note" means the demand promissory note with a principal amount equal to the Aggregate Spinco Redemption Amount issued by Spinco in favour of DC as described in Paragraph 65;
• "Spinco" means the newly incorporated corporation incorporated for the purposes of completing the Plan of Arrangement as described in Paragraph 46;
• "Spin-off" means the transfer by DC to Spinco of the Spin-off Assets as described in Paragraph 59;
• "Spin-off Assets" means the XXXXXXXXXX, cash assets, securities and other assets owned by DC described in Paragraphs 23 to 40, inclusive;
• "stated capital" has the meaning assigned by the BCA;
• "Stock Exchange" means the XXXXXXXXXX;
• "Stock Option Plan" means the stock-based compensation plan pursuant to which the DC Stock Options were granted;
• "Subco" refers to XXXXXXXXXX, a corporation incorporated under the XXXXXXXXXX as more fully described in Paragraph 25;
• "Subco Property" refers to the XXXXXXXXXX;
• "taxable Canadian corporation" has the meaning assigned to that term by subsection 89(1);
• "Transfer Percentage" means the number, expressed as a percentage, which the net fair market value of the Spin-off Assets represents of the net fair market value of all of the assets of DC, determined immediately before the Spin-off as described in Paragraph 59;
• "taxable dividend" 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);
• "undepreciated capital cost" has the meaning assigned by subsection 13(21);
• "Xco" means XXXXXXXXXX;
• "Xco Acquisition", "Xco Assets", "Xco Interests" "Xco Property 1", "Xco Property 2", "Xco Property 3", XXXXXXXXXX have the meanings assigned by Paragraph 8.

Our understanding of the facts, proposed transactions and purposes of the proposed transactions is as follows:

STATEMENT OF FACTS

1. DC was incorporated under the BCA on XXXXXXXXXX. The registered and head office of DC is situated at XXXXXXXXXX. DC is a taxable Canadian corporation and a public corporation. The corporate tax number of DC is XXXXXXXXXX and DC files its annual income tax return at the XXXXXXXXXX Taxation Centre. DC's financial year-end is XXXXXXXXXX.

2. DC is authorized to issue an unlimited number of common shares ("DC Common Shares"). As at XXXXXXXXXX, there were outstanding XXXXXXXXXX DC Common Shares. The DC Common Shares are not short-term preferred shares, taxable preferred shares or term preferred shares.

3. The DC Common Shares are listed on the Stock Exchange under the symbol "XXXXXXXXXX". The closing price of the DC Common Shares on XXXXXXXXXX was $XXXXXXXXXX.

4. DC has a stock-based compensation plan (the "Stock Option Plan") that provides for the granting of stock options to directors, officers, employees and consultants of DC or affiliates of DC designated as such for purposes of the Stock Option Plan. Under the terms of the Stock Option Plan, qualifying individuals may become entitled to acquire DC Common Shares at a price per share which cannot be less than the closing price of the DC Common Shares on the Stock Exchange on the last trading day immediately preceding the date the relevant DC Stock Options are granted. As at XXXXXXXXXX, DC Stock Options exercisable for an aggregate of XXXXXXXXXX DC Common Shares were outstanding, of which DC Stock Options exercisable for an aggregate of XXXXXXXXXX DC Common Shares were fully vested.

5. DC is engaged in the business XXXXXXXXXX. DC holds various interests in XXXXXXXXXX properties located in XXXXXXXXXX.

6. DC has one wholly-owned subsidiary, Subco, which owns the Subco Property, as more fully described in Paragraph 25.

7. To the best of the knowledge of the senior officers of DC, as of the date hereof, other than Xco, no person or related group of persons beneficially owns, directly or indirectly, or has control or direction over, more than ten per cent of the outstanding DC Common Shares. Xco holds XXXXXXXXXX DC Common Shares, representing approximately XXXXXXXXXX% of the outstanding DC Common Shares as of XXXXXXXXXX, such that Xco is a specified shareholder of DC.

8. On XXXXXXXXXX , DC completed the acquisition (the "Xco Acquisition") from Xco of a XXXXXXXXXX per cent interest in the Xco Property 1 and a XXXXXXXXXX per cent interest in each of the Xco Property 2 and the Xco Property 3 located in XXXXXXXXXX and certain other XXXXXXXXXX (collectively the "Xco Interests") together with the XXXXXXXXXX assets associated therewith and located thereon (together with the Xco Interests referred to as the "Xco Assets") for consideration consisting of XXXXXXXXXX DC Common Shares.

XXXXXXXXXX.

The Xco Acquisition was made as part of DC's strategy to build its portfolio of XXXXXXXXXX assets in XXXXXXXXXX. DC's decision to implement the Proposed Transactions would have proceeded irrespective of the Xco Acquisition, and the Xco Acquisition would have been entered into irrespective of the Proposed Transactions. Neither the structure nor the timing of the Xco Acquisition was affected by the Proposed Transactions.

Corporate Organization

9. As more fully described in this letter under the heading "Proposed Transactions", the purpose of the transactions described in this letter is to transfer to a new public corporation ("Spinco"), to be owned by the then holders of DC Common Shares, the XXXXXXXXXX located in the XXXXXXXXXX, the assets associated with XXXXXXXXXX and the cash assets and securities owned by DC as of the Effective Date as described in paragraphs 22 to 40, inclusive, in this letter (collectively the "Spin-off Assets"). As at XXXXXXXXXX, the Spin-off Assets represented approximately XXXXXXXXXX% of the net book value of DC's total assets.

Retained DC Assets

10. XXXXXXXXXX.
11. XXXXXXXXXX.
12. XXXXXXXXXX.
13. XXXXXXXXXX.
14. XXXXXXXXXX.
15. XXXXXXXXXX.
16. XXXXXXXXXX.
17. XXXXXXXXXX.
18. XXXXXXXXXX.
19. XXXXXXXXXX.
20. XXXXXXXXXX.
21. XXXXXXXXXX.

Spin-off Assets

22. XXXXXXXXXX.
23. XXXXXXXXXX.
24. XXXXXXXXXX.
25. XXXXXXXXXX.
26. XXXXXXXXXX.
27. XXXXXXXXXX.
28. XXXXXXXXXX.
29. XXXXXXXXXX.
30. XXXXXXXXXX.
31. XXXXXXXXXX.
32. XXXXXXXXXX.
33. XXXXXXXXXX.
34. XXXXXXXXXX
35. XXXXXXXXXX.
36. XXXXXXXXXX.
37. XXXXXXXXXX.
38. XXXXXXXXXX.
39. XXXXXXXXXX.
40. XXXXXXXXXX.
41. XXXXXXXXXX.
42. XXXXXXXXXX.

Stock Option Plan

43. The Stock Option Plan is administered by the directors of DC, who approve the granting of stock options. The Stock Option Plan provides that the maximum number of DC Common Shares that may be subject to issue under the Stock Option Plan may not exceed 10% of the number of then outstanding DC Common Shares, determined on a non-diluted basis and excluding DC Common Shares issued over the preceding one-year period under any compensation or incentive mechanism involving the issue of securities of DC.

44. The Stock Option Plan contains a provision that, if there is a statutory amalgamation or arrangement of DC with or into another corporation, or the separation of the business of DC into two or more entities, upon the exercise of an option under the Stock Option Plan, the holder of the option will be entitled to receive the securities, property or cash which the holder would have received if the holder had exercised the option immediately prior to the effective date of such event, unless the directors of DC otherwise determine the basis upon which the option will be exercisable.

XXXXXXXXXX Tax Pools

45. XXXXXXXXXX

Spinco Incorporation

46. Spinco was incorporated under the provisions of the BCA on XXXXXXXXXX as XXXXXXXXXX. Prior to the completion of the Proposed Transactions, Spinco will not have any assets and will have no liabilities. No shares of Spinco were issued on its incorporation and no shares will be issued prior to the issuance of the Spinco Common Shares described in Paragraph 56.

47. The authorized capital of Spinco includes the following classes of shares:

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

(b) special shares ("Spinco Special Shares") having the following attributes:

(i) each Spinco Special Share will be redeemable, subject to applicable law, at any time at the option of Spinco for the amount equal to the quotient (such quotient being the "Spinco Redemption Amount") obtained by dividing the aggregate fair market value of the Spin-off Assets determined immediately before the Spin-off less the amount of any non-share consideration paid by Spinco, including the Spinco Commitment, as consideration for the Spin-off Assets by the number of Spinco Special Shares issued as consideration for the Spin-off Assets,

(ii) each Spinco Special Share will be retractable, subject to applicable law, at any time at the option of the holder thereof at the Spinco Redemption Amount,

(iii) the holder of each Spinco Special Share will be entitled to such non-cumulative cash dividends as are declared by the directors of Spinco from time to time, which dividends need not also be declared on any other class of shares of Spinco,

(iv) the payment of dividends on other classes of shares of Spinco will be restricted so that no such dividend may be paid on any other class of shares of Spinco if the realizable value of the net assets of Spinco after payment of the dividend would be less than the product (such product being the "Aggregate Spinco Redemption Amount") obtained by multiplying the number of then outstanding Spinco Special Shares by the Spinco Redemption Amount,

(v) the holder of each Spinco Special 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 per Spinco Special Share equal to the Spinco Redemption Amount to the extent of the amount or value of property available under applicable law for payment to the shareholders of Spinco upon such liquidation, dissolution or winding-up, but will not be entitled to any additional amount, and

(vi) the holder of each Spinco Special Share will not be entitled to vote at any meeting of the shareholders of Spinco, other than as provided under applicable law,
and for the purpose of subsection 191(4) of the Act, each Spinco Special Share will, at the time of issue, have specified an amount in respect thereof and the amount to be so specified in respect of each Spinco Special Share will

A) be pursuant to a resolution of the directors of Spinco,

B) be expressed as a dollar amount,

C) not be determined by a formula, and

D) not exceed the fair market value of the property received by Spinco in consideration for its issue.

PROPOSED TRANSACTIONS

Reorganization of DC Share Capital

48. A management information circular dated XXXXXXXXXX was prepared and mailed to holders of DC Common Shares in contemplation of a meeting of those holders to, among other things, approve the Plan of Arrangement. The management information circular contained "prospectus level disclosure" regarding DC, the DC Shares, Spinco and the Spinco Shares and will be filed with appropriate securities administrators. The proposed Plan of Arrangement was approved by the holders of DC Common Shares at the annual and special meeting of DC Shareholders held on XXXXXXXXXX.

49. Subject to, among other things, final court approval (an interim order of the court was granted on XXXXXXXXXX and proceedings for the final court approval are scheduled for XXXXXXXXXX), the Proposed Transactions generally will be undertaken pursuant to, and in accordance with, the Plan of Arrangement. With the exception of the filing of elections under the Act, certain transactions involving DC Stock Options and the listing of the Spinco Common Shares on the Stock Exchange, it is contemplated that the Proposed Transactions described in Paragraphs 51 to 67, inclusive, will occur pursuant to the Plan of Arrangement and will be designated in the Plan of Arrangement to occur on the Effective Date in the order set out in Paragraphs 51 to 67, inclusive.

50. Each DC Shareholder will be entitled to dissent from the Plan of Arrangement pursuant to the provisions of the Plan of Arrangement. For the purposes of the transactions which occur pursuant to, and in accordance with, the Plan of Arrangement, any Dissenting Shareholder who ultimately is entitled to be paid the fair market value of the DC Common Shares held by the Dissenting Shareholder will be deemed, pursuant to the Plan of Arrangement, to have transferred such DC Common Shares to DC and such DC Common Shares will be deemed to have been cancelled by DC as at XXXXXXXXXX on the Effective Date.

51. The articles of DC will be amended to create, inter alia, the following new classes of shares:

(a) common shares ("New DC Common Shares"), each of which will be a fully participating voting common share with the holder thereof entitled to one vote at each meeting of the shareholders of DC and the attributes of which will be slightly different than the DC Common Shares, but which otherwise will have attributes the same as the DC Common Shares; and

(b) special shares ("DC Special Shares") with 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 Transfer Percentage and then dividing such product by the number of then outstanding DC Special Shares,

(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,

(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,

(iv) the payment of dividends on other classes of shares of DC will be restricted so that no such dividend 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 dividend would be less than the product (such product being the "Aggregate DC Redemption Amount") obtained by multiplying the number of then outstanding DC Common Shares by the DC Redemption Amount,

(v) the holder of each DC Special Share will be entitled, upon the 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 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,
and for the purpose of subsection 191(4) of the Act, each DC Special Share will, at the time of issue, have specified an amount in respect thereof and the amount to be specified in respect of each DC Special Share will

A) be pursuant to a resolution of the directors of DC,

B) be expressed as a dollar amount,

C) not be determined by a formula, and

D) not exceed the fair market value of the property received by DC in consideration for its issue.

52. Each Participant will, in exchange for each DC Common Share held, receive one New DC Common Share and XXXXXXXXXX of a DC Special Share (the "Capital Reorganization"). No fractional DC Special Shares will be issued and no additional consideration will be received by a Participant in lieu of a fraction of a DC Special Share. Each Participant will receive that number of DC Special Shares rounded down to the nearest whole number. The DC Common Shares so exchanged will be cancelled

53. The aggregate addition to the stated capital in respect of the New DC Common Shares and the DC Special Shares issued by DC on the Capital Reorganization described in Paragraph 52 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 New DC Common Shares and the DC Special Shares based on the proportion that the fair market value of the New DC Common Shares or the DC Special Shares, as the case may be, is of the fair market value of all new shares issued on the Capital Reorganization.

54. Pursuant to the provisions of the Stock Option Plan and as a result of the Plan of Arrangement, immediately after the Plan of Arrangement becomes effective, each holder of a DC Stock Option will be entitled to receive upon the exercise of the DC Stock Option the number of New DC Common Shares and the number of Spinco Common Shares which such holder would have been entitled to receive if such holder had been the holder of the number of DC Common Shares issuable under the DC Stock Option at the Effective Date.

Transfer of DC Special Shares to Spinco

55. It is contemplated that the Stock Exchange will have conditionally listed the Spinco Common Shares to be issued pursuant to, and in accordance with, the Plan of Arrangement prior to the Effective Date, subject to Spinco fulfilling the usual requirements of the Stock Exchange. It is anticipated that the listing of the Spinco Common Shares will become effective on the Effective Date.

56. Each Participant will transfer to Spinco the DC Special Shares owned by the Participant and, in full consideration therefor, Spinco will issue the same number of Spinco Common Shares to the Participant. The certificate representing the DC Special Shares which otherwise would be delivered to the Participant will be delivered to Spinco.

The fair market value, immediately before the Spin-off described in Paragraph 59, 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 as set out in subparagraph (b)(iii) of the definition "permitted exchange" in subsection 55(1).

Pursuant to the BCA, the addition to the stated capital of Spinco in respect of the issue of the Spinco Common Shares will not exceed the aggregate paid-up capital of the DC Special Shares transferred to Spinco.

57. If requested by a Participant, Spinco will execute a joint election, in prescribed form and within the time determined under subsection 85(6) of the Act, to have the provisions of subsection 85(1) apply in respect of the exchange by the Participant of DC Special Shares for Spinco Common Shares. The agreed amount in respect of each such election will not exceed the fair market value of such DC Special Shares at the time of the transfer and will not be less than the lesser of:

(a) the cost amount of the DC Special Shares to the particular Participant, and

(b) the fair market value of the particular DC Special Shares at that time.

Transfer of Spin-off Assets to Spinco

58. Immediately before the transfer of property described in Paragraph 59 below, 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 basis. For greater certainty:

(a) 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 as described herein, and

(b) no amount will be considered to be a liability of DC unless it represents a true legal liability which is capable of quantification. For greater certainty, the contingent obligations of DC in respect of the DC Stock Options will not be considered a liability of DC for these purposes.

59. DC will transfer to Spinco (the "Spin-off") all of the Spin-off Assets at their fair market value determined immediately before the Spin-off.

60 Immediately after the Spin-off described in Paragraph 59, the aggregate net fair market value of

(a) the Spin-off Assets acquired by Spinco on the Spin-off will equal the proportion of the net fair market value of all of the property of DC determined immediately before the Spin-off, that

(i) the aggregate fair market value of the DC Special Shares owned by Spinco immediately before the Spin-off,
is of

(ii) the aggregate fair market value of all of the outstanding DC Shares immediately before the Spin-off, and

(b) the Retained DC Assets owned by DC will equal the proportion of the net fair market value of all of the property of DC determined immediately before the Spin-off, that

(iii) the aggregate fair market value of the New DC Common Shares owned by the Participants immediately before the Spin-off,
is of

(iv) the aggregate fair market value of all of the outstanding DC Shares immediately before the Spin-off.

61. As consideration for the Spin-off of the Spin-off Assets to Spinco, Spinco will issue Spinco Special Shares to DC which will have an aggregate fair market value and redemption amount equal to the fair market value, at the time of the Spin-off, of the Spin-off Assets less the amount of the non-share consideration (including any liabilities assumed by Spinco and the Spinco Commitment) paid by Spinco as consideration for the Spin-off Assets, being an amount equal to the Aggregate Spinco Redemption Amount. Spinco will agree to issue Spinco Common Shares to holders of DC Stock Options, if required, in order to fulfill any other obligations described in Paragraph 44 (the "Spinco Commitment"). Under the terms of the Spinco Commitment, on the issue of Spinco Common Shares to a holder of a DC Stock Option, Spinco will not be entitled to any additional consideration, including any allocation of the exercise price paid to DC on the exercise of the particular DC Stock Option.

62. DC and Spinco will jointly elect, in prescribed form and within the time determined under subsection 85(6) of the Act, for the provisions of subsection 85(1) to apply to each eligible property included in the Spin-off Assets transferred to Spinco on the Spin-off. The agreed amount for each such eligible property will be:

(a) for each capital property (other than a depreciable property), the lesser of

(i) the adjusted cost base to DC of the property, and

(ii) the fair market value of the property at the time of the Spin-off;

(b) for each property that is a depreciable property of a prescribed class, the least of

(i) the undepreciated capital cost to DC of all property of that class immediately before the Spin-off,

(ii) the cost to DC of the property, and

(iii) the fair market value of the property at the time of the Spin-off;

(c) for each property XXXXXXXXXX , the lesser of

(i) the amount equal to that proportion of the book value of the property that the aggregate of the XXXXXXXXXX of DC immediately before the Spin-off is of the book value of all of the XXXXXXXXXX of DC immediately before the Spin-off, and

(ii) the fair market value of the property at the time of the Spin-off;

(d) for property that is inventory, the lesser of

(i) the cost amount of the property to DC, and

(ii) the fair market value of the property at the time of the Spin-off; and

(e) for property which is eligible capital property, the least of

(i) the cost thereof to DC,

(ii) the fair market value thereof at the time of the Spin-off, and

(iii) 4/3 of DC's cumulative eligible capital in respect thereof.

For greater certainty, the agreed amount for any eligible property will not be less than $XXXXXXXXXX or less than the amount permitted under paragraph 85(1)(b).

63. Pursuant to the BCA, the addition to the stated capital of the Spinco Special Shares in respect of the issue of the Spinco Special Shares to DC will not exceed the aggregate of:

(a) in respect of those properties for which an election under subsection 85(1) is made, an amount equal to the aggregate agreed amounts for such properties, and

(b) in any other case, the aggregate fair market value of the properties so transferred to Spinco
less the amount of the non-share consideration (including any liabilities assumed by Spinco and the Spinco Commitment) paid by Spinco as consideration for the Spin-off Assets.

Cross-Redemption

64. DC will redeem from Spinco all of the outstanding DC Special Shares for an amount equal to their aggregate fair market value, being the Aggregate DC Redemption Amount and will issue to Spinco in consideration therefor a demand promissory note having a fair market value and principal amount equal to the Aggregate DC Redemption Amount (the "DC Redemption Note"). Spinco will accept the DC Redemption Note as full and absolute payment of the Aggregate DC Redemption Amount with the risk of the note being dishonoured.

65. Spinco will redeem from DC all of the outstanding Spinco Special Shares for an amount equal to the Aggregate Spinco Redemption Amount and will issue to DC in consideration therefor a demand promissory note having a fair market value and principal amount equal to the Aggregate Spinco Redemption Amount (the "Spinco Redemption Note"). DC will accept the Spinco Redemption Note as full and absolute payment of the Aggregate Spinco Redemption Amount with the risk of the note being dishonoured.

66. Each of the DC Redemption Note and the Spinco Redemption Note will have interest payable only from the date of demand for payment by the holder thereof to the date of payment of the amount owing under the DC Redemption Note and the Spinco Redemption Note, respectively, at a rate equal to the average monthly prime rate of a Canadian chartered bank.

Set-Off

67. DC will repay the principal amount of the DC Redemption Note by assigning to Spinco the Spinco Redemption Note, which will be accepted by Spinco in full payment of the DC Redemption Note. Spinco will repay the principal amount of the Spinco Redemption Note by assigning to DC the DC Redemption Note, which will be accepted by DC in full payment of the Spinco Redemption Note. To the extent that the DC Redemption Note and the Spinco Redemption Note are for different amounts, any remaining balance will be settled and extinguished for no additional consideration. Each of the DC Redemption Note and the Spinco Redemption Note will thereupon be marked paid in full and cancelled.

68. Spinco will, on or before its filing-due date for its first taxation year, elect in its return for that year to be deemed to have been a public corporation from the beginning of its first taxation year until the time that the Spinco Common Shares were listed for trading on the Stock Exchange.

SUBSEQUENT TRANSACTIONS

69. In order to raise capital for use in the ordinary course of its operations, Spinco may complete one or more financing transactions.

ADDITIONAL INFORMATION

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

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

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

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

(d) issued for consideration that is or includes:

(i) an obligation of the type described in subparagraph 112(2.4)(b)(i); or

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

71. No property has or will become property of either DC or any corporation controlled by DC in contemplation of and before the Spin-off, except as described herein, and no liabilities have been, or will be, incurred or discharged by DC or any corporation controlled by DC in contemplation of the Spin-off except as described herein.

72. No person who is a specified shareholder of DC at any time during the series of transactions that includes the Proposed Transactions
(a) has acquired or will acquire any DC Common Shares in contemplation of the Proposed Transactions; or
(b) has disposed or will dispose of any shares of either DC or Spinco (other than as described in the Proposed Transactions) as part of a series of transactions or events that includes the Proposed Transactions.

73. Except as specifically outlined herein, there is no expectation or intention of DC, Spinco or any corporation controlled by DC or Spinco to dispose of any property in the foreseeable future, other than in the ordinary course of business.

74. None of DC, Spinco or any corporation that is a related person of either of them is, or will be, at any time during the series of transactions described herein
(a) a corporation described in any of paragraphs (a) to (f) of the definition "financial intermediary corporation" in subsection 191(1), or
(b) a specified financial institution or a restricted financial institution.

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

PURPOSES OF THE PROPOSED TRANSACTIONS

76. DC believes that the "Spin-off" of the Spin-off Assets to Spinco on the basis outlined in Paragraphs 48 to 67 is in the best interests of the DC Shareholders. DC further believes that the separation of the Retained DC Assets and the Spin-off Assets in such manner will enhance the ability of each of DC and Spinco to pursue independent corporate objectives and strategies and will maximize value to the DC Shareholders.

RULINGS

Provided that the preceding statements constitute a complete and accurate disclosure of all the relevant facts, Proposed Transactions, purposes of the Proposed Transactions and additional information and that all of the Proposed Transactions are completed as described herein, we confirm the following:

A. On the purchase by DC of the outstanding DC Common Shares held by a Dissenting Shareholder as described in Paragraph 50

(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 the DC Common Shares held by such Dissenting Shareholder exceeds the paid-up capital of such DC Common Shares immediately prior to the 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 per cent of the amount of any dividend deemed to have been paid as described in (a) to a Dissenting Shareholder who is a non-resident person, 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 the purchase of the DC Common Shares held by the Dissenting Shareholder by DC provided that the DC Common Shares were held as capital property by the Dissenting Shareholder.

B. The provisions of subsection 86(1) will apply and the provisions of subsection 86(2) will not apply to the Capital Reorganization pursuant to which each Participant's DC Common Shares will be exchanged for New DC Common Shares and DC Special Shares, as described in Paragraph 52, provided that

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

(b) the Participant and DC do not file an election under subsection 85(1) in respect of the Capital Reorganization,
such that

(c) the cost of the New DC Common Shares and DC Special Shares received on the Capital Reorganization by the Participant will be deemed by paragraph 86(1)(b) to be an amount equal to that portion of the aggregate adjusted cost base of the DC Common Shares to the Participant immediately before the Capital Reorganization that the fair market value of the New DC Common Shares or the DC Special Shares, as the case may be, received by the Participant for the DC Common Shares of the Participant immediately after the Capital Reorganization, is of the fair market value of all of the New DC Common Shares and DC Special Shares received by the Participant for the DC Common Shares of the Participant, and

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

C. Provided that a Participant who, immediately before the exchange of DC Special Shares for the same number of Spinco Common Shares as described in Paragraph 56,

(a) holds the DC Special Shares as capital property,

(b) deals at arm's length with Spinco immediately before the exchange,

(c) does not file an election under subsection 85(1) with respect to the exchange, and

(d) does not include any portion of the gain or loss otherwise determined in computing the income, or foreign accrual property income, of the Participant for the year in hich the exchange occurs, and further provided that immediately after such exchange

(e) neither the Participant nor any person with whom the Participant does not deal at arm's length, nor the Participant together with any other person or persons with whom the Participant does not deal at arm's length, will

(i) control Spinco, or

(ii) beneficially own Spinco Shares having a fair market value of more than 50 per cent of the fair market value of all of the then outstanding Spinco Shares,
then pursuant to paragraph 85.1(1)(a) the Participant will be deemed

(f) to have disposed of the DC Special Shares of the Participant for proceeds of disposition equal to the adjusted cost base of the Participant of such DC Special Shares immediately before the exchange, and

(g) to have acquired the Spinco Common Shares of the Participant at a cost to the Participant equal to the adjusted cost base of the Participant of such DC Special Shares immediately before the exchange.

D. The cost to Spinco of each DC Special Share acquired from each Participant will be deemed to be the lesser of the fair market value thereof and the paid-up capital thereof, in both cases determined immediately before the exchange of the DC Special Shares of the Participant for Spinco Common Shares as described in Paragraph 56.

E. Provided that the requisite joint elections are filed in prescribed form and within the prescribed time period and subject to the application of subsection 69(11), the provisions of subsection 85(1) will apply to

(a) the Spin-off by DC to Spinco, as described in Paragraph 59, of each of the Spin-off Assets that is an eligible property, such that the agreed amount, as described in Paragraph 62, in respect of each transfer of eligible property will be deemed to be DC's proceeds of disposition for each such Spin-off Asset and Spinco's cost thereof pursuant to paragraph 85(1)(a), and

(b) the exchange of DC Special Shares for Spinco Common Shares by each Participant who elects pursuant to subsection 85(1) in respect of the transfer of the DC Special Shares of the Participant to Spinco as described in Paragraphs 56 and 57 such that the agreed amount in respect of each such election will be deemed to be the proceeds of disposition for the DC Special Shares to the Participant pursuant to paragraph 85(1)(a) and the cost to the Participant for the Spinco Common Shares pursuant to paragraph 85(1)(h).

F. For the purposes of subparagraph (b)(iii) of the definition of paid-up capital in subsection 89(1), the paid-up capital of

(a) the New DC Common Shares and DC Special Shares issued to the DC Shareholders as described in Paragraphs 52 and 53,

(b) the Spinco Common Shares issued to holders of DC Special Shares in exchange therefor as described in Paragraph 56, and

(c) the Spinco Special Shares issued to DC as described in Paragraphs 61 and 63,

computed without reference to the Act will be equal to the stated capital thereof as determined for purposes of the BCA.

G. Subsection 84(3) will apply

(a) on the redemption, as described in Paragraph 64, of the DC Special Shares owned by Spinco, to deem DC to have paid, and Spinco to have received, and

(b) on the redemption, as described in Paragraph 65, of the Spinco Special Shares owned by DC, to deem Spinco to have paid, and DC to have received,
a dividend on the DC Special Shares and the Spinco Special Shares, as the case may be, equal to the amount, if any, by which the aggregate amount paid upon such redemption exceeds the aggregate paid-up capital in respect of the DC Special Shares and the Spinco Special Shares, as the case may be, 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 Spinco and DC, as the case may be,

(d) will be deductible pursuant to subsection 112(1) in computing the taxable income of Spinco and DC, as the case may be,

(e) will not be a dividend to which any of subsections 112(2.1), (2.2), (2.3) or (2.4) will apply,

(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 Spinco and DC, as the case may be, of the DC Special Shares or Spinco Special Shares so redeemed,

(g) will not be subject to tax under Parts IV.1 or VI.1, but only to the extent that the amount paid by DC or Spinco, as the case may be, on the redemption of the DC Special Shares or the Spinco Special Shares does not exceed the amount specified in respect of those shares for the purposes of subsection 191(4), and

(h) will not be subject to tax under Part IV.

H. 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;

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

(c) as part of the series of transactions or events that includes the Proposed Transactions, 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 any shares of DC in contemplation of the Spin-off in the circumstances described in subparagraph 55(3.1)(b)(iii); or

(iv) an acquisition of property in the circumstances described in paragraphs 55(3.1)(c) or (d),

which has not been described in any of Paragraphs 1 to 67, then by virtue of paragraph 55(3)(b), subsection 55(2) will not apply to the taxable dividends referred to in Ruling G above and for greater certainty, subsection 55(3.1) will not apply to deny the exemption under paragraph 55(3)(b).

I. The cost to Spinco of the DC Redemption Note and the cost to DC of the Spinco Redemption Note will, upon the issue thereof, be equal to the principal amount of the particular note and accordingly, no amount will be included in the income of:

(a) Spinco upon the repayment of the principal amount of the DC Redemption Note as described in Paragraph 67, or

(b) DC upon the repayment of the principal amount of the Spinco Redemption Note as described in Paragraph 67.

J. The repayment of each of the DC Redemption Note held by Spinco and of the Spinco Redemption Note held by DC as described in Paragraph 67 will not, in and of itself, give rise to a "forgiven amount" within the meaning assigned by subsection 80(1) or 80.01(1);

K. Provided that the DC Common Shares constitute capital property to a Participant prior to the commencement of the Proposed Transactions, the Proposed Transactions will not, in and by themselves, cause the New DC Common Shares, the DC Special Shares or the Spinco Common Shares to be received by the Participant as a result of the Proposed Transactions not to be capital property of the Participant.

L. The Proposed Transactions, in and of themselves, will not result in the application of subsections 15(1), 56(2), 56(4) or 246(1).

M. The Proposed Transactions, in and of themselves, will not result in a disposition by a holder of DC Stock Options of rights under the Stock Option Plan or the disposition of DC Stock Options for the purposes of paragraph 7(1)(b) or under the definition of "disposition" in subsection 248(1) of the Act.

N. Subsection 245(2) will not be applied to the Proposed Transactions, in and by themselves, to redetermine the tax consequences confirmed in the rulings given.

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

The above rulings are based on the Act in its present form and do not take into account any proposed amendments to the Act which, if enacted, could have an effect on the rulings provided 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, adjusted cost base or paid-up capital of any shares referred to herein; or

(b) any other tax consequences relating to the facts, Proposed Transactions or any other transaction or event taking place either prior to or subsequent to the Proposed Transactions, whether or not described in this letter, other than those specifically described in the rulings given above, including

(i) whether any of the Proposed Transactions would also be included in a series of transactions or events that includes other transactions or events whether or not described in this letter, and

(ii) whether any acquisition or disposition of DC Common Shares, DC New Common Shares or Spinco Common Shares by Xco would be included as part of the series of transactions or events that includes the Proposed Transactions described in this letter.

Yours truly,

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