2005 Ruling 2004-0093021R3 - Split-up 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: Split-up of assets of a XXXXXXXXXX controlled holding corporation to avoid application of subsection 55(2).

Position: The split-up is acceptable.

Reasons: Consistent with the law.

XXXXXXXXXX 		2004-009302

XXXXXXXXXX, 2005

Dear XXXXXXXXXX:

Re: XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX
Advance Income Tax Ruling

We are writing in response to your letter of XXXXXXXXXX wherein you requested an advance income tax ruling on behalf of the above-referenced taxpayers. We also acknowledge receipt of your facsimiles and emails as well as the information provided in various telephone conversations.

Throughout this letter, the following corporations will be referred to as follows:

XXXXXXXXXX Cco
XXXXXXXXXX Dco
XXXXXXXXXX Holdco
XXXXXXXXXX Amco
XXXXXXXXXX Opco
XXXXXXXXXX Interco
XXXXXXXXXX Uco

XXXXXXXXXX Mr. C

XXXXXXXXXX Cinvestco
XXXXXXXXXX C Family Trust

XXXXXXXXXX Mr. D

XXXXXXXXXX Dinvestco

Cco, Dco, Holdco, Amco and Opco (the "taxpayers") file their corporate income tax returns at the XXXXXXXXXX Taxation Centre and their tax affairs are administered by the XXXXXXXXXX Tax Services Office. The taxpayers are resident in Canada for the purposes of the Act.

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

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

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

(iii) under objection by any of the taxpayers or a related person;

(iv) before the courts; or

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

The taxpayers have represented that the transactions described herein will not affect their ability to pay any of their outstanding tax liabilities.

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

DEFINITIONS

In this letter, unless otherwise expressly stated, the following terms have the meanings specified:

(a) "Act" means the Income Tax Act (Canada), R.S.C. 1985, c.1 (5th Supp.), as amended to the date hereof, and unless otherwise stated, every reference herein to a part, section, subsection, paragraph or subparagraph is a reference to the relevant provision of the Act;

(b) "adjusted cost base" ("ACB") has the meaning assigned by section 54;

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

(d) "Canadian-controlled private corporation" ("CCPC") has the meaning assigned by subsection 125(7);

(e) "CBCA" means the Canada Business Corporations Act and, where applicable, its predecessor statutes;

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

(g) "CRA" means the Canada Revenue Agency;

(h) "dividend rental arrangement" has the meaning assigned by subsection 248(1);

(i) "forgiven amount" has the meaning assigned by subsections 80(1) and 80.01(1);

(j) "FMV" means fair market value;

(k) "guarantee agreement" has the meaning assigned by subsection 112(2.2);

(l) "net capital loss" has the meaning assigned by subsection 111(8);

(m) "non-capital loss" has the meaning assigned by subsection 111(8);

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

(o) "Paragraph" means a numbered paragraph in this advance income tax ruling;

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

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

(r) "proposed transactions" means the transactions described in Paragraphs 43 to 66 below;

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

(t) "refundable dividend tax on hand" ("RDTOH") has the meaning assigned by subsection 129(3);

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

(v) "safe-income determination time" has the meaning assigned by subsection 55(1);

(w) "safe income on hand" in respect of a particular share of a corporation at a particular time means the portion of the unrealized gain inherent in such share of the corporation at that time that cannot reasonably be considered to be attributable to anything other than income earned or realized (as determined pursuant to paragraph 55(5)(b), (c) or (d), as the case may be), to the extent that it is on hand, by any corporation after 1971 and before the safe-income determination time for the transaction, event, or series of transactions or events that includes the proposed transactions;

(x) "series of transactions or events" includes the transactions or events referred to in subsection 248(10);

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

(z) "TA Business" means the XXXXXXXXXX business of Opco described in Paragraph 31 below;

(a.1) "TB Business" means the XXXXXXXXXX business of Amco described in Paragraph 32 below;

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

(c.1) "taxable dividend" has the meaning assigned by subsection 89(1);

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

(e.1) "VAT" means value-added tax.

Our understanding of the facts, proposed transaction and purpose of the proposed transaction is as follows:

FACTS

Facts Relating to Cco

1. Cco is a taxable Canadian corporation and a CCPC incorporated under the CBCA.

2. Cco's issued share capital is comprised of:

(a) XXXXXXXXXX common shares having a total PUC of $XXXXXXXXXX and a total ACB of $XXXXXXXXXX;

(b) XXXXXXXXXX Class A preferred shares having a total PUC of $XXXXXXXXXX and a total ACB of $XXXXXXXXXX; and

(c) XXXXXXXXXX Class B preferred share having a total PUC of $XXXXXXXXXX and a total ACB of $XXXXXXXXXX.

3. The sole shareholder of Cco is Cinvestco, an investment holding company held by Mr. C and the C Family Trust.

4. Cco's taxation year-end is XXXXXXXXXX.

5. The shares of Cco are capital property to Cinvestco.

Facts Relating to Dco

6. Dco is a taxable Canadian corporation and a CCPC incorporated under the CBCA.

7. Dco's issued share capital is comprised of:

(a) XXXXXXXXXX common shares having a total PUC of $XXXXXXXXXX and a total ACB of $XXXXXXXXXX; and

(b) XXXXXXXXXX Class A preferred shares having a total PUC of $XXXXXXXXXX and a total ACB of $XXXXXXXXXX.

8. The sole shareholder of Dco is Dinvestco, an investment holding company of which Mr. D is the sole shareholder.

9. Dco's taxation year-end is XXXXXXXXXX.

10. The shares of Dco are capital property to Dinvestco.

Facts Relating to Holdco

11. Holdco is a taxable Canadian corporation and a CCPC incorporated under the CBCA. Holdco is an investment holding company whose primary asset is an investment in Opco.

12. Holdco's issued share capital is comprised of:

(a) XXXXXXXXXX common shares; and

(b) XXXXXXXXXX Class C preferred shares.

13. The shareholders of Holdco are:

(a) Cco: XXXXXXXXXX common shares having a total PUC of $XXXXXXXXXX and a total ACB of $XXXXXXXXXX. The common shares held by Cco represent XXXXXXXXXX% of the issued and outstanding common shares of Holdco;

(b) Dco: XXXXXXXXXX common shares having a total PUC of $XXXXXXXXXX and a total ACB of $XXXXXXXXXX. The common shares held by Dco represent XXXXXXXXXX% of the issued and outstanding common shares of Holdco;

(c) Cco: XXXXXXXXXX Class C preferred shares having a total PUC of $XXXXXXXXXX and a total ACB of $XXXXXXXXXX. The Class C preferred shares held by Cco represent XXXXXXXXXX% of the issued and outstanding Class C preferred shares of Holdco; and

(d) Dco: XXXXXXXXXX Class C preferred shares having a total PUC of $XXXXXXXXXX and a total ACB of $XXXXXXXXXX. The Class C preferred shares held by Cco represent XXXXXXXXXX% of the issued and outstanding Class C preferred shares of Holdco.

14. Holdco's taxation year-end is XXXXXXXXXX .

15. The shares of Holdco are capital property to its shareholders.

Facts Relating to Opco

16. Opco is a taxable Canadian corporation and a CCPC incorporated under the CBCA. Opco is an operating company whose principal business activity is XXXXXXXXXX. In addition, it currently has three wholly-owned subsidiaries: Amco, Interco and Uco.

17. All of the issued shares of Opco are held by Holdco.

18. Opco's issued share capital is comprised of:

(a) XXXXXXXXXX common shares having a total PUC of $XXXXXXXXXX and a total ACB of $XXXXXXXXXX; and

(b) XXXXXXXXXX preferred shares having a total PUC of $XXXXXXXXXX and a total ACB of $XXXXXXXXXX.

19. Opco's taxation year-end is XXXXXXXXXX. As at XXXXXXXXXX, Opco had approximately $XXXXXXXXXX of net capital losses available for carry forward.

20. The shares of Opco are capital property to Holdco.

Facts Relating to Amco

21. Amco is a wholly-owned subsidiary of Opco and is a taxable Canadian corporation and a CCPC incorporated under the CBCA. Amco's principal business activity is also the XXXXXXXXXX

22. Amco's issued share capital is comprised of:

(a) XXXXXXXXXX common shares having a total PUC of $XXXXXXXXXX and a total ACB of $XXXXXXXXXX;

(b) XXXXXXXXXX Class A preferred shares having a total PUC of $XXXXXXXXXX and a total ACB of $XXXXXXXXXX; and

(c) XXXXXXXXXX Class B preferred shares having a total PUC of $XXXXXXXXXX and a total ACB of $XXXXXXXXX.

23. Amco's taxation year-end is XXXXXXXXXX .

24. The shares of Amco are capital property to Opco and there are no dividends in arrears payable on the Class A and Class B preferred shares.

Facts Relating to Interco

25. Interco is a wholly-owned subsidiary of Opco.

26. Interco is a corporation that is not resident in Canada.

27. XXXXXXXXXX.

Facts Relating to Uco

28. Uco is a wholly-owned subsidiary of Opco.

29. Uco is a corporation that is not resident in Canada.

30. XXXXXXXXXX.

Facts Relating to the TA Business

31. The XXXXXXXXXX business (the "TA Business") is a business of Opco that sells XXXXXXXXXX.

Facts Relating to the TB Business

32. The XXXXXXXXXX Business (the "TB Business") is a business of Amco that XXXXXXXXXX.

Additional Facts

33. Mr. C is an employee of Opco and Amco.

34. Mr. D is an employee of Opco and Amco.

35. Mr. C and Mr. D are not related persons for purposes of the Act.

36. In respect of the proposed divisive reorganization, it has been agreed that Cco will retain the business of Opco and that Amco will be spun off to Dco.

The current assets of both Opco and Amco are comprised of accounts receivable, inventory, prepaid expenses and other short-term assets such as taxes recoverable.

The current liabilities of both Opco and Amco are comprised of bank indebtedness, accounts payable, accrued liabilities, current portion of long-term debt and taxes payable.

37. At the time of the commencement of the proposed transactions, excluding the TA Business, the TB Business and the shares of Interco and Uco, it is expected that approximately XXXXXXXXXX% of the total fair market value of Holdco will be attributable to Opco's business assets and the remaining XXXXXXXXXX% will be attributable to Amco's business assets. Neither Opco nor Amco owns property that could be considered investment property. As described in Paragraph 60 below, Dco2 would obtain, in addition to the shares of Amco, New Opco Preferred Shares with an aggregate redemption price equal to the amount required to respect the Butterfly Proportion, described in Paragraph 61 below.

Preliminary Transactions

38. XXXXXXXXXX.

39. In XXXXXXXXXX, Amco declared and paid a total bonus of $XXXXXXXXXX to its employees, Mr. C and Mr. D.

40. As at XXXXXXXXXX, the financial statements of Opco and Amco had an aggregate accrued bonus of $XXXXXXXXXX payable to Mr. C and Mr. D. In XXXXXXXXXX, Amco paid a $XXXXXXXXXX bonus to Mr. C. The remaining $XXXXXXXXXX bonus will be paid to Mr. D on or before the date of the transfer described in Paragraph 60 below, but no later than XXXXXXXXXX. Amco will also pay an additional bonus to Mr. C and Mr. D for the period from XXXXXXXXXX to the commencement of the proposed transactions.

41. Before the proposed transactions are implemented, intercompany debts, if any, between Amco and Opco will be settled.

42. It is expected that immediately before the divisive reorganization, in order to respect the Butterfly Proportion, described in Paragraph 61 below, Amco will, as a preliminary transaction, pay a dividend to Opco. This dividend will reduce Amco's safe income on hand.

PROPOSED TRANSACTIONS

43. Opco will incorporate a new taxable Canadian corporation ("New Opco"). The authorized share capital of New Opco will include an unlimited number of common shares ("New Opco Common Shares") and an unlimited number of preferred shares ("New Opco Preferred Shares"). The New Opco Preferred Shares will be non-voting, non-participating, entitled to a reasonable cumulative dividend yield and redeemable at the option of the issuer for an amount equal to the fair market value of the consideration received on issuance.

44. Opco will subscribe for XXXXXXXXXX New Opco Common Shares for a total consideration of $XXXXXXXXXX. The fair market value, adjusted cost base and paid-up capital of the XXXXXXXXXX New Opco Common Shares will be $XXXXXXXXXX.

45. Opco will transfer all of its business assets, excluding the assets used in its TA Business, to New Opco for consideration comprised of the assumption by New Opco of Opco's liabilities and the issuance of New Opco Common Shares and New Opco Preferred Shares. Opco and New Opco will jointly elect in prescribed form and within the time required by subsection 85(6) to have the rules in subsection 85(1) apply to the transfer. The agreed amount specified in the election in respect of each transferred property will be equal to the cost amount of the property. For greater certainty, the FMV of each transferred property will be greater than its cost amount and its cost amount will be greater than the liabilities assumed. The amount added to the PUC of the shares issued as consideration will be computed according to subsection 85(2.1).

46. Opco will transfer the assets used in its TA Business to its wholly-owned subsidiary, Interco. The transaction will be completed on a taxable basis. As consideration for the transfer, Interco will either issue additional shares to Opco or non-share consideration.

47. Opco and Holdco will amalgamate to form Mergeco. Pursuant to the amalgamation agreement:

(a) all of the property (except amounts receivable from any predecessor corporation or shares of the capital stock of any predecessor corporation) of the predecessor corporations immediately before the merger will become property of Mergeco by virtue of the merger;

(b) all of the liabilities (except amounts payable to any predecessor corporation) of the predecessor corporations immediately before the merger will become liabilities of Mergeco by virtue of the merger;

(c) the shares of Opco will be cancelled without any repayment of capital in respect of those shares; and

(d) the shares of Holdco will not be cancelled on the merger and no shares of the capital stock of Mergeco will be issued by Mergeco in connection with the amalgamation.

Following the amalgamation, Cco and Dco will respectively own XXXXXXXXXX% and XXXXXXXXXX% of Mergeco. New Opco, Amco, Interco and Uco will be wholly-owned subsidiaries of Mergeco.

48. Mergeco will incorporate a new subsidiary ("Newco"). Newco will be a taxable Canadian corporation. At the time of incorporation, Mergeco will subscribe for all of the voting, non-participating shares of Newco for a nominal amount.

49. Simultaneously with the issuance of the voting, non-participating shares of Newco, as described in Paragraph 48 above, Amco will transfer the TB Business (i.e., a patent and related goodwill) to Newco for consideration consisting of non-voting, participating shares of Newco having a FMV equal to the FMV of the assets transferred to Newco. Amco and Newco will jointly elect in prescribed form and within the time required by subsection 85(6) to have the rules in subsection 85(1) apply to the transfer. The agreed amount specified in the election in respect of each transferred property will be equal to the cost amount of the property. For greater certainty, the FMV of each transferred property will be greater than its cost amount. The aggregate amount added to the PUC of the shares issued as consideration will be computed according to subsection 85(2.1).

50. Mergeco will exchange its XXXXXXXXXX Class A preferred shares and XXXXXXXXXX Class B preferred shares of Amco for an additional XXXXXXXXXX common shares of Amco. Following the exchange, Mergeco will own XXXXXXXXXX common shares of Amco which will represent all of the issued and outstanding shares of Amco.

51. Amco will increase the PUC of its common shares by an amount equal to the balance of its safe income on hand. This increase will be effected through a series of resolutions whereby each successive increase in PUC will result in a successive dividend pursuant to subsection 84(1). As a result, the ACB of the Amco shares held by Mergeco will be increased, pursuant to paragraph 53(1)(b), by an amount equal to the total of the successive dividends.

52. Amco will amend its articles of incorporation to provide for two additional classes of shares: Class I and Class II shares. The Class I shares will be new common shares and will be entitled to XXXXXXXXXX votes per share. The Class II shares will be non-voting shares and their value will "track" the value of the Newco non-voting, participating shares held by Amco, described in Paragraph 49 above. These tracking rights will entitle the Class II shares to receive dividends equal to XXXXXXXXXX% of the total dividends paid by Newco on its non-voting, participating shares held by Amco, as well as special dividends equal to XXXXXXXXXX% of the net after-tax gains realized should Amco dispose of its non-voting, participating shares of Newco.

53. All of Amco's issued and outstanding shares held by Mergeco will be exchanged for Class I common shares, Class II (tracking) shares and a non-interest-bearing note. The principal amount of the note will be equal to the safe income on hand attached to the Amco common shares. Amco will elect in prescribed form and within the time required by subsection 85(6) to have the rules in subsection 85(1) apply to the exchange. The agreed amount specified in the election will be equal to the cost amount of the disposed shares. For greater certainty, the FMV of the disposed shares will be greater than their cost amount which will not be less than the amount of the non-interest-bearing note. The aggregate amount added to the PUC of the shares issued in exchange for the disposed shares will not exceed the difference between the aggregate PUC of the disposed shares and the fair market value of the non-interest-bearing note. Subsequent to the share exchange, Mergeco will use the note to subscribe for additional Class I common shares of Amco.

54. Dco will incorporate a new taxable Canadian corporation ("Dco2"). The authorized share capital of Dco2 will include an unlimited number of common shares (the "Dco2 Common Shares") and an unlimited number of non-voting, non-participating preferred shares, redeemable at the option of the holder for an amount equal to the consideration received on issuance (the "Dco2 Preferred Shares").

55. Dco will subscribe for XXXXXXXXXX Dco2 Common Shares for a total consideration of $XXXXXXXXXX. The FMV, ACB and PUC of the XXXXXXXXXX Dco2 Common Shares issued will be $XXXXXXXXXX.

56. Dco will transfer all of its shares of Mergeco to Dco2 for consideration consisting of additional Dco2 Common Shares. Dco and Dco2 will jointly elect in prescribed form and within the time required by subsection 85(6) to have the rules in subsection 85(1) apply to the transfer. The agreed amount specified in the election will be equal to the cost amount of the transferred shares. For greater certainty, the FMV of the transferred shares will be greater than their cost amount. The aggregate amount added to the PUC of the shares issued as consideration will not exceed the aggregate PUC of the shares acquired by Dco2 and will be computed according to subsection 85(2.1).

57. Immediately before the transfer of property described in Paragraph 60 below, the property owned by Mergeco will be determined on a consolidated look-through basis by including the appropriate pro-rata share of the assets of any corporation over which Mergeco has the ability to exercise significant influence (specifically, Amco, Interco, Uco, New Opco and Newco), and all such property will be classified into the following three types of property for the purposes of a distribution pursuant to paragraph 55(3)(b), as follows:

(a) cash or near-cash property, comprising all of the current assets of Mergeco, including any cash, deposits, marketable securities, accounts receivable, inventories, and rights arising from prepaid expenses;

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

(c) business property, comprising all of the assets of Mergeco, other than cash or near-cash property, any income from which would, for the purposes of the Act, be income from an active business carried on by Mergeco (other than a specified investment business).

For greater certainty, any tax accounts will not be considered property for the purposes of the proposed transactions.

Mergeco will be considered to have significant influence over a corporation if it has significant influence over that corporation or over any other corporation that has significant influence over that corporation.

For greater certainty, the fair market value of the shares of a particular corporation over which Mergeco has the ability to exercise significant influence, and of any indebtedness receivable by Mergeco from such a corporation, will be allocated among the three types of property of Mergeco by multiplying the fair market value of the shares of the particular corporation or amount of indebtedness receivable from the particular corporation, as the case may be, by the proportion that the net fair market value of each type of property owned by the particular corporation (as determined in this Paragraph and Paragraph 58 below) is of the total net fair market value of all the property owned by the particular corporation.

58. In determining, on a consolidated look-through basis, the net fair market value of each type of property of Mergeco immediately before the transfer of property described in Paragraph 60 below, the liabilities of Mergeco and of any corporation over which Mergeco has the ability to exercise significant influence (specifically, Amco, Interco, Uco, New Opco and Newco), other than any amount owing to Mergeco, will be allocated to, and deducted in the calculation of, the net fair market value of each type of property of the particular corporation in the following manner:

(a) Current liabilities of the particular corporation will be allocated to the cash or near-cash property of that corporation in the proportion that the fair market value of each such property is of the fair market value of all cash or near-cash property owned by that corporation. To the extent that the total current liabilities so allocated exceed the total fair market value of all cash or near-cash property of that particular corporation, that corporation will be considered to have a negative amount of cash or near-cash property;

Provided that the net fair market value of the cash or near-cash property of the particular corporation is positive, the net fair market value of all accounts receivable, inventories and prepaid expenses of the particular corporation that are initially classified in accordance with Paragraph 57(a) above as cash or near-cash property that will relate to a business that will be carried on by the Opco group of companies and that will be collected or consumed in the ordinary course of that business will then be reclassified as business property where the net fair market value is positive. Consequently, the resulting net fair market value of all cash or near-cash property will be reduced by the total net fair market value (where it is positive) of such accounts receivable, inventories and prepaid expenses;

(b) Liabilities, other than current liabilities, of the particular corporation that relate to a particular property will then be allocated to the particular property (and effectively to the type of property to which the particular property belongs) to the extent of its fair market value. Liabilities that pertain to a type of property but not to a particular property will then be allocated to that type of property. To the extent that the allocation of liabilities to a type of property, as described herein, exceeds the total fair market value of that type of property of that particular corporation, that corporation will be considered to have a negative amount of that type of property; and

(c) Any other remaining liabilities of the particular corporation will then be allocated to the cash or near-cash property, investment property and business property of that corporation based on the relative net fair market value of each type of property prior to the allocation of such remaining liabilities, but after the allocation of the liabilities described in Paragraphs 58(a) and (b) above. However, where a particular corporation is considered to have a negative amount of a type of property as a result of the application of Paragraph 58(a) and (b) above, for the purposes of allocating those remaining liabilities, the net fair market value of that type of property will be deemed to be nil resulting in none of those remaining liabilities being allocated to that type of property.

59. Mergeco will declare and pay a dividend of up to $XXXXXXXXXX to its shareholders, Cco and Dco2. This dividend will reduce Mergeco's safe income on hand account.

60. Mergeco will transfer all of its Class I common shares of Amco, XXXXXXXXXX% of its Class II (tracking) shares of Amco, XXXXXXXXXX% of its interest in each of Interco and Newco, XXXXXXXXXX% of its beneficial interest in Uco, and all of its New Opco Preferred Shares to Dco2 for consideration consisting of Dco2 Preferred Shares having a fair market value equal to the fair market value of the assets transferred to Dco2. Mergeco and Dco2 will jointly elect in prescribed form and within the time required by subsection 85(6) to have the rules in subsection 85(1) apply to the transfer. The agreed amount specified in the election will be equal to the lesser of the cost amount and the FMV of the transferred shares. For greater certainty, the FMV of the transferred shares (excluding the interests in Interco and Uco) will be greater than their cost amount. The aggregate amount added to the PUC of the shares issued as consideration will not exceed the aggregate PUC of the shares acquired by Dco2 and will be computed according to subsection 85(2.1).

61. As a result of the payment of the dividend described in Paragraph 59 above, and the transfer described in Paragraph 60 above, the net fair market value of the cash or near-cash property, investment property and business property received by Dco2 (after allocating and deducting, in the manner described in Paragraph 58 above, the liabilities of Mergeco and of any corporation over which Mergeco has the ability to exercise significant influence) will be equal to the proportion of the net fair market value of the cash or near-cash property, investment property and business property, respectively, of Mergeco, immediately before the transfer, that the aggregate fair market value, immediately before the transfer, of all the shares of the capital stock of Mergeco owned by Dco2 at that time is of the aggregate fair market value, immediately before the transfer, of all the issued shares of the capital stock of Mergeco at that time (the "Butterfly Proportion").

62. Dco2 will redeem all of the Dco2 Preferred Shares held by Mergeco for consideration comprised of a non-interest-bearing demand promissory note (the "Dco2 Note") having a principal amount equal to the aggregate redemption amount of the shares so redeemed.

63. Mergeco will purchase for cancellation all of its shares held by Dco2 for consideration consisting of a non-interest-bearing demand promissory note (the "Mergeco Note") having a principal amount equal to the purchase price of the shares so purchased.

64. The Mergeco Note and the Dco2 Note will be offset and cancelled simultaneously.

65. Once the above transactions are completed, Cinvestco will be the sole shareholder of Cco, Cco will be the sole shareholder of Mergeco, and Mergeco will own:

(e) XXXXXXXXXX% of the New Opco Common Shares;

(f) XXXXXXXXXX% of the Class II (tracking) shares of Amco;

(g) XXXXXXXXXX% of the voting, non-participating shares of Newco;

(h) XXXXXXXXXX% of Interco; and

(i) XXXXXXXXXX% of the beneficial interest in Uco.

66. Dco and Dco2 will amalgamate to form New Dco. Pursuant to the amalgamation agreement:

(a) all of the property (except amounts receivable from any predecessor corporation or shares of the capital stock of any predecessor corporation) of the predecessor corporations immediately before the merger will become property of New Dco by virtue of the merger;

(b) all of the liabilities (except amounts payable to any predecessor corporation) of the predecessor corporations immediately before the merger will become liabilities of New Dco by virtue of the merger;

(c) the shares of Dco2 will be cancelled without any repayment of capital in respect of those shares; and

(d) the shares of Dco will not be cancelled on the merger and no shares of the capital stock of New Dco will be issued by New Dco in connection with the amalgamation.

Following the amalgamation, Dinvestco will be the sole shareholder of New Dco and New Dco will own:

(e) XXXXXXXXXX% of the New Opco Preferred Shares;

(f) XXXXXXXXXX% of the Class I common shares of Amco;

(g) XXXXXXXXXX% of the Class II (tracking) shares of Amco;

(h) XXXXXXXXXX% of the voting, non-participating shares of Newco;

(i) XXXXXXXXXX% of Interco; and

(j) XXXXXXXXXX% of the beneficial interest in Uco.

ADDITIONAL INFORMATION

67. None of the corporations involved in the proposed transactions are specified financial institutions.

68. None of the issued shares referred to herein (including the shares to be issued as described in the proposed transactions) are or will be, at any time during the implementation of the proposed transactions described above:

(a) the subject of any undertaking that is a guarantee agreement;

(b) the subject of a dividend rental arrangement; or

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

69. The avoidance or limitation of the application of Part IV.1 or Part VI.1 tax is not the principal purpose of any share acquisition or redemption described herein nor is it one of the main purposes of any series of transactions or events that includes any such share acquisition or redemption.

70. There has not been nor will there be any acquisition of property or dividend paid in contemplation of the proposed transactions except for the preliminary transactions described above.

71. The preliminary transactions and proposed transactions described above represent a complete description of the significant transactions and no other significant transaction was completed prior to these transactions or is contemplated after the completion of the proposed transactions which may be part of the series of transactions described above.

PURPOSE OF THE PROPOSED TRANSACTIONS

72. The purpose of the proposed transactions is to separate the interests held by Cco and Dco in the Opco group of companies. The core assets of the Opco group are the business assets of Opco and Amco, which operate different businesses. The proposed transactions will divide these two businesses between Cco and Dco and thus facilitate each company's future business plans. The investments in Interco, Uco and the TB Business currently represent a non-material fraction of the Opco group's value. The proposed transactions are being implemented as a consequence of differing opinions between the shareholders with regard to future business orientations.

RULINGS GIVEN

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

A. As a result of the redemption by Dco2 of the Dco2 Preferred Shares held by Mergeco, as described in Paragraph 62 above, and the purchase for cancellation by Mergeco of all of its shares held by Dco2, as described in Paragraph 63 above:

(a) by virtue of paragraphs 84(3)(a) and 84(3)(b):

(i) Dco2 will be deemed to have paid, and Mergeco will be deemed to have received, a taxable dividend equal to the amount by which the amount paid to redeem the Dco2 Preferred Shares exceeds the PUC thereof, immediately before such redemption; and

(ii) Mergeco will be deemed to have paid, and Dco2 will be deemed to have received, a taxable dividend equal to the amount by which the amount paid to purchase the Mergeco shares held by Dco2 exceeds the PUC thereof, immediately before such purchase;

(b) the taxable dividends deemed to be received by Mergeco and Dco2 as a result of the redemption and purchase for cancellation referred to in Ruling A(a) above will be included in each corporation's income pursuant to paragraph 12(1)(j), and will be deductible by each corporation in computing its taxable income pursuant to subsection 112(1), respectively;

(c) by virtue of paragraph 186(4)(a) and subsection 186(2), Dco2 will be connected with Mergeco, and Mergeco will be connected with Dco2. Provided that neither Dco2 nor Mergeco is entitled to a dividend refund in respect of its taxation year in which it is deemed to pay the dividends referred to in Ruling A(a) above, neither Dco2 nor Mergeco will be subject to Part IV tax under subsection 186(1) in respect of such dividend; and

(d) neither Dco2 nor Mergeco will be subject to Part IV.1 tax under section 187.2 or to Part VI.1 tax under section 191.1 in respect of the dividends referred to in Ruling A(a) above.

B. The set-off and cancellation of the Dco2 Note against the Mergeco Note, as described in Paragraph 64 above, will not give rise to a forgiven amount.

C. Provided that, as part of the series of transactions or events that includes the proposed transactions described herein, there is not:

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

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

(c) an acquisition of property in the circumstances described in subparagraph 55(3.1)(b)(iii); or

(d) an acquisition of property in the circumstances described in paragraphs 55(3.1)(c) or 55(3.1)(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 the rulings given in Ruling A(a) above and, for greater certainty, subsection 55(3.1) will not apply to deny the exemption from subsection 55(2) provided by paragraph 55(3)(b).

D. Any losses of Uco and Interco will reduce the safe income on hand in respect of the issued shares of Opco. Consequently, any unrealized losses inherent in the shares of Uco and Interco held by Opco will not reduce the safe income on hand in respect of the shares of Opco a second time.

E. The taxable dividends received by Cco and Dco2, as described in Paragraph 59 above, to the extent that such dividends do not exceed the safe income on hand of Cco and Dco2 in respect of the shares of Mergeco that they each hold:

(a) will be included in each corporation's income pursuant to paragraph 12(1)(j), and will be deductible by each corporation in computing its taxable income pursuant to subsection 112(1); and

(b) will not be deemed by subsection 55(2) not to be a dividend.

F. As a result of the successive increases in the PUC of the Amco common shares held by Mergeco, as described in Paragraph 51 above, and to the extent that the aggregate of such successive PUC increases does not exceed the safe income on hand in respect of the Amco common shares held by Mergeco:

(a) by virtue of subsection 84(1), Amco will be deemed to have paid, and Mergeco will be deemed to have received, a taxable dividend equal to the amount of each successive PUC increase;

(b) the taxable dividends deemed to be received by Mergeco referred to in Ruling F(a) above:

(i) will be included in Mergeco's income pursuant to paragraph 12(1)(j), and will be deductible by Mergeco in computing its taxable income pursuant to subsection 112(1);

(ii) will, pursuant to paragraph 53(1)(b), increase the ACB of the Amco common shares held by Mergeco by the amount referred to in Ruling F(b)(i) above; and

(iii) will not be deemed by subsection 55(2) not to be a dividend.

G. At the time of the purchase for cancellation by Mergeco of all of its shares held by Dco2, as described in Paragraph 63 above, Cco will acquire control of Mergeco, and consequently:

(a) any capital loss of Opco or Holdco that had, before that time, been deemed by paragraph 40(3.4)(a) to be nil, will be deemed to be a capital loss of Mergeco at the time determined by subparagraph 40(3.4)(b)(iii);

(b) in computing the ACB to Mergeco at and after that time of each capital property, other than a depreciable property, owned by Mergeco immediately before that time, there will be deducted, pursuant to paragraph 111(4)(c), the amount, if any, by which the ACB to Mergeco of the property immediately before that time exceeds its FMV immediately before that time;

(c) by virtue of paragraph 111(4)(a), no amount in respect of a net capital loss for a taxation year ending before that time, including any net capital loss arising from the application of subparagraph 40(3.4)(b)(iii) and paragraph 111(4)(c), as described in Ruling G(a) and (b) above, will be deductible in computing Mergeco's taxable income for a taxation year ending after that time; and

(d) where Mergeco designates the XXXXXXXXXX New Opco Common Shares owned by it pursuant to paragraph 111(4)(e), Mergeco will be deemed to have disposed of the New Opco Common Shares for proceeds of disposition equal to the lesser of:

(i) the FMV of the New Opco Common Shares immediately before that time; and

(ii) the greater of the ACB of the New Opco Common Shares to Mergeco immediately before the disposition and such amount as is designated by Mergeco in respect of the property;

and will be deemed to have reacquired the New Opco Common Shares at that time at a cost equal to the proceeds of disposition thereof.

H. Provided that an election pursuant to section 22 is properly filed, the provisions of section 22 will apply to the transfer of Opco's accounts receivable to New Opco, as described in Paragraph 45 above.

I. Paragraph 85(1)(e.2) will not apply to:

(a) the transfer of Opco's business assets to New Opco, as described in Paragraph 45 above;

(b) the transfer of the TB Business by Amco to Newco, as described in Paragraph 49 above;

(c) the exchange of the issued and outstanding shares of Amco held by Mergeco, as described in Paragraph 53 above;

(d) the transfer by Dco of all of its shares of Mergeco to Dco2, as described in Paragraph 56 above; and

(e) the transfer by Mergeco of all of its Class I common shares of Amco, XXXXXXXXXX% of its Class II (tracking) shares of Amco, XXXXXXXXXX% of its interest in each of Interco and Newco, XXXXXXXXXX% of its beneficial interest in Uco, and all of its New Opco Preferred Shares to Dco2, as described in Paragraph 60 above.

J. The provisions of subsections 15(1), 56(2) and 246(1) will not apply to the proposed transactions described herein, in and by themselves.

K. Subsection 245(2) will not be applied to the proposed transactions, in and by themselves, to re-determine the tax consequences confirmed in the rulings given.

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 Canada Revenue Agency provided that the proposed transactions are completed by 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 which, if enacted, could have an effect on the rulings provided herein.

COMMENTS

1. Nothing in this ruling letter should be construed as implying that the Canada Revenue Agency has agreed to, reviewed or has made any determination in respect of:

(a) the fair market value or adjusted cost base of any property, or the paid-up capital or safe income on hand in respect of any shares referred to herein;

(b) the amount of any non-capital loss, net capital loss or any other amount of any corporation referred to herein;

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

(d) without limiting the generality of Comment 1(c) above, any tax consequences relating to the continuation of Uco in the XXXXXXXXXX, as described in Paragraph 38 above, the transfer of the TA Business and issuance of shares by Interco, as described in Paragraph 46 above, and the transactions described in Paragraphs 39 to 42 above.

2. The Class II (tracking) shares of Amco will be taxable preferred shares. Accordingly, Amco will be subject to Part VI.1 tax under section 191.1 in respect of taxable dividends paid by Amco on the Class II (tracking) shares in a taxation year.

Yours truly,

for Director
Reorganizations and Resources Division
Income Tax Rulings Directorate
Policy and Planning Branch

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