2005 Ruling 2004-0104851R3 - Single-wing Spilt-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: Single-wing Split-up Butterfly - Mostly Standard Issues. Pre-butterfly sale of some shares of a public corporation that were owned by DC before the butterfly on a taxable basis for cash consideration. Other shares of the particular public corporation will be distributed to the transferee corporation on the butterfly distribution.

Position: Negative 55(3)(b) ruling given since paragraphs 55(3.1)(c) and (d) will apply as a result of the above described taxable sale. The Department of Finance has issued a comfort letter to the taxpayer advising that they will recommend amending the law to allow for such taxable sales for cash.

Reasons: The law.

XXXXXXXXXX 2004-010485

XXXXXXXXXX , 2005

Dear XXXXXXXXXX:

Re: XXXXXXXXXX
XXXXXXXXXX - Advance Income Tax Ruling Request

This is in reply to your letter of XXXXXXXXXX, as modified by your other correspondence, wherein you requested an advance income tax ruling on behalf of the above-noted taxpayers. You have advised us that to the best of your knowledge and that of the taxpayers involved none of the issues involved in this ruling request are:

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

(ii) being considered by a tax services office ("TSO") or taxation centre ("TC") 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, if a judgment has been issued, the time limit for appeal to a higher court has expired; or

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

The taxpayers have also represented that the proposed transactions described herein will not result in any of the taxpayers described herein being unable to pay its existing outstanding tax liabilities.

DEFINITIONS

In this letter, the following terms or expressions have the meaning specified:

(a) "Act" means the Income Tax Act, R.S.C. 1985 (5th Supp.) c.1, as amended from time to time and consolidated to the date of this letter and, unless otherwise expressly stated, every reference herein to a part, section or subsection, paragraph or subparagraph and clause or subclause is a reference to the relevant provision, and the Income Tax Regulations thereunder are referred to as the "Regulations";

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

(c) "agreed amount" means the amount agreed on in respect of a property in an election filed pursuant to subsection 85(1);

(d) "Amalco-1" means the corporation formed on the amalgamation of DC and DC-Sub-1 pursuant to Paragraph 30;

(e) "Amalco-2" means the corporation formed on the amalgamation of Transferee2 and DC-Sub-2 pursuant to Paragraph 31;

(f) "BCA" means the Canada Business Corporations Act, R.S.C., 1985, c. C-44 and where applicable, its predecessor statutes;

(g) "BN" refers to the Business Number assigned to a corporation, trust or estate by CRA;

(h) "capital property" has the meaning assigned by section 54;

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

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

(k) "DC" means XXXXXXXXXX;

(l) "DC-Sub-1" means a corporation to be incorporated under the BCA as described in Paragraph 12;

(m) "DC-Sub-2" means a corporation to be incorporated under the BCA as described in Paragraph 12;

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

(o) "dividend refund" has the meaning assigned by subsection 129(1);

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

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

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

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

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

(u) "Holdco1" means XXXXXXXXXX;

(v) "Holdco2" means XXXXXXXXXX;

(w) "Holdco3" means XXXXXXXXXX;

(x) "Individual A" means XXXXXXXXXX;

(y) "Individual B" means XXXXXXXXXX;

(z) "Individual C" means XXXXXXXXXX;

(aa) "Individual D" means XXXXXXXXXX;

(bb) "Individual E" means XXXXXXXXXX;

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

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

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

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

(gg) "Proposed Transactions" means the transactions described in Paragraphs 12 to 31;

(hh) "Pubco" means XXXXXXXXXX;

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

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

(kk) "related persons" or "persons related to each other" has the meaning assigned by subsection 251(2);

(ll) "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 subsection 55(5)), 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 described herein;

(mm) "safe income determination time" has the meaning assigned to that term by subsection 55(1);

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

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

(pp) "significant influence" has the meaning described in section 3050 of the CICA Handbook;

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

(rr) "stated capital" means the amount of capital determined in respect of a class or series of shares in accordance with the relevant corporate statute;

(ss) "Subco" means a corporation to be incorporated under the BCA as described in Paragraph 14;

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

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

(vv) "taxation year" has the meaning assigned by subsection 249(1);

(ww) "Transferee1" means XXXXXXXXXX;

(xx) "Transferee2" means XXXXXXXXXX; and

(yy) "Transferee2-Sub" means a corporation to be incorporated under the BCA as described in Paragraph 21.

FACTS

1. DC is a taxable Canadian corporation and a private corporation that was formed as a result of the amalgamation of two predecessor corporations (XXXXXXXXXX) on XXXXXXXXXX. The taxation year of DC ends on XXXXXXXXXX and its Head Office is located at XXXXXXXXXX. DC files its federal income tax returns with the XXXXXXXXXX TC and otherwise deals with the XXXXXXXXXX TSO.

2. The authorized share capital of DC consists of an unlimited number of:

Common shares ("Common Shares");

Class A voting shares ("Class A Shares") with the right to a cumulative preferential annual dividend of $XXXXXXXXXX per share, after payment of which, ranking pari passu with the common shares;

Class B non-voting redeemable retractable shares with a XXXXXXXXXX% non-cumulative annual dividend entitlement; and

Class C non-voting redeemable retractable shares ("Class C Shares") at $XXXXXXXXXX per share with a XXXXXXXXXX% non-cumulative annual dividend entitlement.

3. The issued and outstanding shares of DC are held as follows:

Shareholder
Number & Class of Shares

Transferee1
XXXXXXXXXX Class A Shares
Transferee1
XXXXXXXXXX Class C Shares
Transferee2
XXXXXXXXXX Class C Shares
Transferee1
XXXXXXXXXX Common Shares
Transferee2
XXXXXXXXXX Common Shares

Transferee1 controls DC by virtue of its XXXXXXXXXX Class A Shares and XXXXXXXXXX Common Shares. There is no shareholder agreement between the shareholders of DC. None of the issued and outstanding Common Shares of DC is a taxable preferred share or a short-term preferred share. The Class C Shares of DC were issued on the amalgamation of its two predecessor corporations on XXXXXXXXXX, as described in Paragraph 1. No changes have been made to the Class C Shares that would cause such shares to be issued after XXXXXXXXXX, such that none of the Class C Shares are taxable preferred shares or short-term preferred shares.

4. Transferee1 is a taxable Canadian corporation and a private corporation that was incorporated on XXXXXXXXXX. Transferee1 is a holding corporation that is ultimately controlled by Individual A and Individual B. The XXXXXXXXXX issued and outstanding common shares of Transferee1 are held equally by Holdco1, Holdco2 and Holdco3. In addition, Individual A and Individual B each own XXXXXXXXXX of the XXXXXXXXXX issued and outstanding voting Class A shares of Transferee1. The shares of Holdco1 are owned by Individual A while the shares of Holdco2 are owned by Individual B. The shares of Holdco3 are owned by Individual A, Individual B and indirectly by Individual E. Individual A and Individual B control Holdco3. Individual A, Individual B and Individual E are XXXXXXXXXX. The taxation year of Transferee1 ends on XXXXXXXXXX and its Head Office is located at XXXXXXXXXX. Transferee1 files its federal income tax returns with the XXXXXXXXXX TC and is serviced by the XXXXXXXXXX TSO.

5. Transferee2 is a taxable Canadian corporation and a private corporation that was incorporated on XXXXXXXXXX. Transferee2 is a holding corporation that is ultimately controlled by Individual C and Individual D who are XXXXXXXXXX. The taxation year of Transferee2 ends on XXXXXXXXXX and its Head Office is located at XXXXXXXXXX. Transferee2 files its federal income tax returns with the XXXXXXXXXX TC and is serviced by the XXXXXXXXXX TSO.

6. Each of Individual A, Individual B, Individual C, Individual D and Individual E is a resident of Canada for the purposes of the Act. Individual A, Individual B and Individual E are not related to either Individual C or Individual D for the purposes of the Act. Transferee2 is not related to either Transferee1 or DC for the purposes of the Act.

7. The only assets of DC are cash, temporary investments, XXXXXXXXXX non-voting participating shares of Pubco (the "Non-voting Pubco Shares") and XXXXXXXXXX common voting shares of Pubco (the "Voting Pubco Shares"). The Non-voting Pubco Shares and Voting Pubco Shares will be collectively referred to as the "Pubco Shares". Currently, DC has no liabilities and is not expected to have any liabilities at the time the Proposed Transactions are undertaken. None of the temporary investments is a share of the capital stock of a corporation that would be a taxable preferred share or short-term preferred share.

8. Pubco is a public corporation and its shares are listed on the XXXXXXXXXX Stock Exchange. Pubco carries on the business of XXXXXXXXXX. The fair market value of the Pubco Shares owned by DC is approximately $XXXXXXXXXX. Currently, DC owns XXXXXXXXXX% of all the Voting Pubco Shares and as such has, and will have, significant influence over Pubco and over any entity Pubco has significant influence over, immediately before the commencement of the Proposed Transactions. None of the Pubco Shares is a taxable preferred share or a short-term preferred share. XXXXXXXXXX. You maintain that the declaration and payment of this XXXXXXXXXX dividend by Pubco was not undertaken in contemplation of the Proposed Transactions and would have taken place in the same manner regardless of whether or not the Proposed Transactions are undertaken and that the Proposed Transactions would have been undertaken regardless of whether the XXXXXXXXXX dividend was paid.

9. Transferee1 currently owns XXXXXXXXXX Non-voting Pubco Shares and XXXXXXXXXX Voting Pubco Shares. Holdco1 currently owns XXXXXXXXXX Non-voting Pubco Shares and Holdco2 currently owns XXXXXXXXXX Non-voting Pubco Shares. All the Pubco Shares currently owned by Transferee1, Holdco1 and Holdco2 will be collectively referred to as the "Excluded Shareholder Holdings".

10. Transferee2 currently owns XXXXXXXXXX Non-voting Pubco Shares and XXXXXXXXXX Voting Pubco Shares (collectively referred to as the "Excluded Transferee2 Holdings").

11. The cumulative preferential dividend of $XXXXXXXXXX per share (or $XXXXXXXXXX in total) on the Class A Shares of DC has been paid annually since at least XXXXXXXXXX and possibly prior to that time. The cumulative preferential annual dividend of $XXXXXXXXXX in total in respect of the DC's taxation year ending XXXXXXXXXX on the Class A Shares of DC has been paid to Transferee1 in cash. The dividend on the Class A Shares of DC is an ordinary dividend that has been paid in accordance with the terms and conditions of those shares irrespective of whether or not the Proposed Transactions are completed and the Proposed Transactions will be undertaken regardless of whether the dividend on the Class A Shares is paid.

PROPOSED TRANSACTIONS

12. DC will incorporate DC-Sub-1 and DC-Sub-2 under the BCA. DC will subscribe for XXXXXXXXXX common shares of DC-Sub-1 for $XXXXXXXXXX in the aggregate and one common share of DC-Sub-2 for $XXXXXXXXXX in the aggregate.

13. Reserved.

14. DC-Sub-1 and DC-Sub-2 will incorporate Subco under the BCA. DC-Sub-1 will subscribe for XXXXXXXXXX common shares of Subco and DC-Sub-2 will subscribe for one common share of Subco, each for $XXXXXXXXXX per share.

15. Contemporaneously with the transfer of shares described in Paragraph 16, DC will transfer XXXXXXXXXX of its Non-voting Pubco shares ("DC-Sub-1 Pubco Shares") to DC-Sub-1. As consideration for the transfer of the DC-Sub-1 Pubco Shares, DC-Sub-1 will issue XXXXXXXXXX common shares having an aggregate fair market value equal to the aggregate fair market value of the DC-Sub-1 Pubco Shares received on the transfer.

DC and DC-Sub-1 will jointly elect in prescribed form, within the time referred to in subsection 85(6), to have the rules in subsection 85(1) apply to the transfer of the DC-Sub-1 Pubco Shares. Specifically, the agreed amount in respect of the DC-Sub-1 Pubco Shares acquired by DC-Sub-1 from DC will be equal to the aggregate adjusted cost base of such shares to DC immediately prior to such transfer and for greater certainty, will be an amount equal to the lesser of the two amounts described in subparagraphs 85(1)(c.1)(i) and (ii).

For the purposes of the BCA, the amount to be added to the stated capital of the common shares of DC-Sub-1 that are issued as consideration for the DC-Sub-1 Pubco Shares shall not exceed the aggregate cost of the DC-Sub-1 Pubco Shares to DC-Sub-1 determined, where applicable, under the rules of section 85.

16. Contemporaneously with the transfer of shares described in Paragraph 15, DC will transfer XXXXXXXXXX of its Non-voting Pubco shares ("DC-Sub-2 Pubco Shares") to DC-Sub-2. As consideration for the transfer of the DC-Sub-2 Pubco Shares, DC-Sub-2 will issue XXXXXXXXXX common shares having an aggregate fair market value equal to the aggregate fair market value of the DC-Sub-2 Pubco Shares received on the transfer.

DC and DC-Sub-2 will jointly elect in prescribed form, within the time referred to in subsection 85(6), to have the rules in subsection 85(1) apply to the transfer of the DC-Sub-2 Pubco Shares. Specifically, the agreed amount in respect of the DC-Sub-2 Pubco Shares acquired by DC-Sub-2 from DC will be equal to the aggregate adjusted cost base of such shares to DC immediately prior to such transfer and for greater certainty, will be an amount equal to the lesser of the two amounts described in subparagraphs 85(1)(c.1)(i) and (ii).

For the purposes of the BCA, the amount to be added to the stated capital of the common shares of DC-Sub-2 that are issued as consideration for the DC-Sub-2 Pubco Shares shall not exceed the aggregate cost of the DC-Sub-2 Pubco Shares to DC-Sub-2 determined under the rules of section 85.

17. Contemporaneously with the transfer of shares described in Paragraph 18, DC-Sub-1 will transfer the DC-Sub-1 Pubco Shares to Subco. As consideration for the transfer of the DC-Sub-1 Pubco Shares, Subco will issue XXXXXXXXXX common shares having an aggregate fair market value equal to the aggregate fair market value of the DC-Sub-1 Pubco Shares received on the transfer.

DC-Sub-1 and Subco will jointly elect in prescribed form, within the time referred to in subsection 85(6), to have the rules in subsection 85(1) apply to the transfer of the DC-Sub-1 Pubco Shares. Specifically, the agreed amount in respect of the DC-Sub-1 Pubco Shares acquired by Subco from DC-Sub-1 will be equal to the aggregate adjusted cost base of such shares to DC-Sub-1 immediately prior to such transfer and for greater certainty, will be an amount equal to the lesser of the two amounts described in subparagraphs 85(1)(c.1)(i) and (ii).

For the purposes of the BCA, the amount to be added to the stated capital of the common shares of Subco that are issued as consideration for the DC-Sub-1 Pubco Shares shall not exceed the aggregate cost of the DC-Sub-1 Pubco Shares to Subco determined under the rules of section 85.

18. Contemporaneously with the transfer of shares described in Paragraph 17, DC-Sub-2 will transfer the DC-Sub-2 Pubco Shares to Subco. As consideration for the transfer of the DC-Sub-2 Pubco Shares, Subco will issue XXXXXXXXXX common shares.

DC-Sub-2 and Subco will jointly elect in prescribed form, within the time referred to in subsection 85(6), to have the rules in subsection 85(1) apply to the transfer of the DC-Sub-2 Pubco Shares. Specifically, the agreed amount in respect of the DC-Sub-2 Pubco Shares acquired by Subco from DC-Sub-2 will be equal to the aggregate adjusted cost base of such shares to DC-Sub-2 immediately prior to such transfer and for greater certainty, will be an amount equal to the lesser of the two amounts described in subparagraphs 85(1)(c.1)(i) and (ii).

For the purposes of the BCA, the amount to be added to the stated capital of the common shares of Subco that are issued as consideration for the DC-Sub-2 Pubco Shares shall not exceed the aggregate cost of the DC-Sub-2 Pubco Shares to Subco determined under the rules of section 85.

19. Subco will prepare a series of resolutions to increase the stated capital on its XXXXXXXXXX issued and outstanding common shares, which are held by DC-Sub-1 (XXXXXXXXXX) and DC-Sub-2 (XXXXXXXXXX), by an aggregate amount that will not exceed the safe income on hand that is attributable to such common shares of Subco.

20. DC-Sub-1 and DC-Sub-2 will each sell all of its common shares of Subco for their respective fair market value to an arm's-length person. DC-Sub-1 and DC-Sub-2 will each only receive cash from the third party as consideration therefor.

The disposition of the DC-Sub shares will result in a capital gain to DC-Sub-1 and DC-Sub-2 and thus an income tax liability will arise in each corporation. Each of DC-Sub-1 and DC-Sub-2, as the case may be, may invest the cash consideration it received from the sale of the common shares of Subco. If such investments are made, each of DC-Sub-1 and DC-Sub-2 will ensure they acquire and hold exactly the same type of property in proportion to the cash consideration received by each such corporation until the implementation of all the Proposed Transactions is complete. For greater certainty, such investments will only consist of indebtedness that is not convertible into any other property.

21. Transferee2 will incorporate Transferee2-Sub under the BCA. The share structure of Transferee2-Sub will include voting common shares, non-voting common shares, non-voting redeemable and retractable preferred shares and at least one class of voting, redeemable retractable preferred shares (the "Transferee2-Sub Preferred Shares"). Transferee2 will subscribe for XXXXXXXXXX common voting shares of Transferee2-Sub for $XXXXXXXXXX.

For the purposes of subsection 191(4), the terms and conditions of the Transferee2-Sub Preferred Shares will specify an amount (the "Redemption Amount") in respect of each share for which the share is to be redeemed, acquired or cancelled. The Redemption Amount in respect of each share, at the time of issuance thereof, will be expressed as a fixed dollar amount that will not be determined by formula or subject to change thereafter and will not exceed the fair market value of the consideration for which such share is issued. None of the Transferee2-Sub Preferred Shares will be issued for consideration that includes a taxable preferred share.

22. Immediately before the transfers of DC's property described in Paragraph 23, all the property owned by DC will be classified into three types of property (on a gross fair market value basis) for the purposes of the definition of "distribution" in subsection 55(1), as follows:

(a) cash or near-cash property, consisting of all the current assets of DC (i.e. cash and temporary investments);

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

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

For greater certainty, for purposes of this distribution:

(d) any tax accounts such as the balance of any RDTOH of DC, will not be considered property;

(e) no amount will be considered to be a liability unless it represents a true legal liability which is capable of quantification; and

(f) the amount of any deferred income tax will not be considered a liability for the purposes of the proposed transactions described herein because such amount does not represent a legal obligation of DC.

Excluding the shares of DC-Sub-1, DC-Sub-2, the XXXXXXXXXX Non-voting Pubco Shares and the XXXXXXXXXX Voting Pubco Shares held by DC, DC will not own any other property immediately before the transfer of property described in Paragraph 23 that could be classified as investment property or business property. DC has significant influence over Pubco, DC-Sub-1 and DC-Sub-2, such that DC would be required to use the consolidated look-through method for determining the appropriate proportion of each of the three types of property that such shares would represent. However, since Transferee2 will, as described in Paragraph 23, receive its pro-rata share (i.e. XXXXXXXXXX) of the Pubco Shares held by DC and receive all the shares of DC-Sub-2 (that will represent Transferee2's pro-rata share of the cash or near cash property generated from the sale of the common shares of Subco by DC-Sub-1 and DC-Sub-2 as described in Paragraph 20), the consolidated look-through method will not actually be undertaken for the purposes of this distribution. As a result, for the purposes of this distribution, DC will only be considered to have cash and near-cash property (which will include the common shares of DC-Sub-1 and DC-Sub-2) and the types of property represented by the Pubco Shares held by DC immediately before the proposed distribution.

23. Immediately following the classification of DC's three types of property as described in Paragraph 22, DC will transfer to Transferee2-Sub, Transferee2's pro-rata share (i.e. XXXXXXXXXX) of its cash or near-cash property, investment property, and business property owned by DC at that time (determined on a gross fair market value basis).

Specifically, in respect of Transferee2's pro-rata share of the cash or near-cash property owned by DC, Transferee2-Sub will receive the all of the common shares of DC-Sub-2 and its appropriate pro-rata share of DC's cash or near cash property (other than the common shares of DC-Sub-1 and DC-Sub-2).

In respect of the Pubco Shares owned by DC, Transferee2-Sub will receive a number of Non-voting Pubco Shares (the "Transferee2 Pubco Shares") having an aggregate fair market value that is equal to or that approximates Transferee2's appropriate pro-rata share of the aggregate fair market value of all the Pubco Shares owned by DC at that time.

The property to be transferred to Transferee2-Sub as described in this Paragraph shall be collectively referred to as the "Transferred Assets".

As consideration for the Transferred Assets, Transferee2-Sub will issue XXXXXXXXXX Transferee2-Sub Preferred Shares to DC having an aggregate fair market value and aggregate Redemption Amount equal to the aggregate fair market value of the Transferred Assets.

DC and Transferee2-Sub will jointly elect in prescribed form, within the time referred to in subsection 85(6), but prior to the final dissolution of Transferee2-Sub, to have the rules in subsection 85(1) apply to each transfer of property, described in this Paragraph, that is eligible property. Specifically, the agreed amount in respect of the Transferee2 Pubco Shares and the shares of DC-Sub-2 acquired by Transferee2-Sub from DC will be equal to the aggregate adjusted cost base of such shares to DC immediately prior to such transfer and for greater certainty, will be an amount equal to the lesser of the two amounts described in subparagraphs 85(1)(c.1)(i) and (ii). There will be no price adjustment clause in respect of the transfer of the Transferred Assets to Transferee2-Sub.

For the purposes of the BCA, the amount to be added to the stated capital of the Transferee2-Sub Preferred Shares that are issued as consideration for the Transferred Assets shall not exceed the aggregate cost of the Transferred Assets to Transferee2-Sub determined, where applicable, under the rules of section 85.

24. Immediately following the transfer of the Transferred Assets as described in Paragraph 23, the gross fair market value of each type of property acquired by Transferee2-Sub from DC at that time will be equal to or will approximate that proportion of the gross fair market value of all the property of that type owned by DC immediately before such transfers of property described herein that:

(a) the aggregate fair market value, immediately before the transfer, of all of the shares of the capital stock of DC owned by Transferee2, is of

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

For the purpose of this Paragraph the expression "approximate that proportion" means the discrepancy from that proportion, if any, that would not exceed one percent (1%) determined as a percentage of the gross fair market value of each type of property that Transferee2-Sub received compared to what Transferee2-Sub would have received had Transferee2-Sub received its appropriate pro-rata share of the gross fair market value of that type of property.

25. Transferee1, Transferee2, Transferee2-Sub and DC will jointly enter into an agreement (the "Escrow Agreement") under which:

(a) both the Transferee2 Pubco Shares that are acquired by Transferee2-Sub as described in Paragraph 23, or by Transferee2 on the wind-up of Transferee2-Sub, as described in Paragraph 27, and the Pubco Shares that are retained by DC (the "DC Pubco Shares"), will be held in escrow;

(b) the Escrow Agreement will outline specifically the conditions under which each of Transferee2-Sub and Transferee2 may dispose of its Transferee2 Pubco Shares or DC may dispose of its DC Pubco Shares; and

(c) the Escrow Agreement will not govern the Excluded Shareholder Holdings or the Excluded Transferee2 Holdings.

The purpose of having each of the above parties enter into the Escrow Agreement is to ensure that no dispositions of Transferee2 Pubco Shares or DC Pubco Shares will be allowed to occur as part of the series of transactions or events that includes the Proposed Transactions in excess of what is permitted by paragraphs 55(3.1)(c) and (d).

26. Transferee2-Sub will redeem all of the Transferee2-Sub Preferred Shares held by DC for an amount equal to their aggregate Redemption Amount and fair market value. As consideration therefor, Transferee2-Sub will issue to DC a demand promissory note ("Note1") having a principal amount and fair market value equal to the aggregate Redemption Amount and fair market value of the Transferee2-Sub Preferred Shares so redeemed. DC will accept the Note1 issued by Transferee2-Sub as full payment for the aggregate Redemption Amount of the Transferee2-Sub Preferred Shares along with any risk of Note1 being dishonoured.

27. Immediately after the redemption by Transferee2-Sub of the Transferee2-Sub Preferred Shares held by DC as described in Paragraph 26, and contemporaneously with the transaction described in Paragraph 28, Transferee2-Sub will by special resolution, resolve to wind-up and dissolve into Transferee2 pursuant to the relevant provisions of the BCA. As a consequence of the wind-up, all of the property of Transferee2-Sub, including the Transferee2 Pubco Shares and shares of DC-Sub-2, will be transferred to Transferee2. In the course of winding-up, Transferee2 will assume Transferee2-Sub's obligation to DC under Note1. For greater certainty, a request for a Certificate of Dissolution under the BCA will be filed at a later time and not during the implementation of these Proposed Transactions.

28. Contemporaneously with the passing of the resolution to wind-up of Transferee2-Sub described in Paragraph 27, DC will redeem or purchase for cancellation, as the case may be, the XXXXXXXXXX Class C Shares and XXXXXXXXXX common shares of DC held by Transferee2. For greater certainty, the XXXXXXXXXX Class C Shares will be redeemed contemporaneously with, or immediately before, the common shares of DC are purchased for cancellation. As consideration therefor, DC will issue to Transferee2 a demand promissory note ("Note2") having a principal amount and fair market value equal to the aggregate redemption amount and fair market value of such number and class of DC shares so redeemed or purchased for cancellation. Transferee2 will accept the Note2 issued by DC as full payment for the redemption or purchase for cancellation of such DC shares along with any risk of Note2 being dishonoured.

29. The principal amount owing by Transferee2 to DC under Note1 and the principal amount owing by DC to Transferee2 under Note2 will then be set off in full against each other and each such note will be cancelled.

30. Following the completion of the transactions described above, and contemporaneously with the transaction described in Paragraph 31, under the applicable provisions of the BCA, DC will undergo a short-form amalgamation with DC-Sub-1, its subsidiary wholly-owned corporation, to form a new corporate entity ("Amalco-1) such that:

(a) all of the property (except amounts receivable from any predecessor corporation or shares of the capital stock of any predecessor corporation) of DC and DC-Sub-1 immediately before the amalgamation will become property of Amalco-1 by virtue of the amalgamation;

(b) all of the liabilities (except amounts payable to any predecessor corporation) of DC and DC-Sub-1 will become liabilities of Amalco-1 by virtue of the amalgamation; and

(c) the common shares of DC-Sub-1 owned by DC immediately prior to the amalgamation will be cancelled on the amalgamation and the Class A Shares, Class C Shares and Common Shares of DC owned prior to the amalgamation by the Transferee1 will remain outstanding as Amalco-1 Class A Shares, Amalco-1 Class C Shares and Amalco-1 Common Shares, respectively.

31. Contemporaneously with the transaction described in Paragraph 30, Transferee2 will undergo a short-form amalgamation under the applicable provisions of the BCA with DC-Sub-2, its subsidiary wholly-owned corporation, to form a new corporate entity ("Amalco-2) such that:

(a) all of the property (except amounts receivable from any predecessor corporation or shares of the capital stock of any predecessor corporation) of Transferee2 and DC-Sub-2 immediately before the amalgamation will become property of Amalco-2 by virtue of the amalgamation;

(b) all of the liabilities (except amounts payable to any predecessor corporation) of Transferee2 and DC-Sub-2 will become liabilities of Amalco-2 by virtue of the amalgamation; and

(c) the common shares of DC-Sub-2 owned by Transferee2 immediately prior to the amalgamation will be cancelled on the amalgamation and the existing issued and outstanding shares of Transferee2 owned prior to the amalgamation by the shareholders of Transferee2 will remain outstanding as shares of Amalco-2.

PURPOSE OF THE PROPOSED TRANSACTIONS

32. The intent of the Proposed Transactions is to permit the divisive reorganization of DC pursuant to paragraph 55(3)(b). This divisive reorganization will: (i) allow the two separate XXXXXXXXXX groups of ultimate shareholders of DC to further separate their respective interests from each other; (ii) facilitate succession planning for each such XXXXXXXXXX group; and (iii) provide each such XXXXXXXXXX group the ability to pursue different and independent courses of action with respect to the Pubco Shares currently held by DC, all while preserving the current voting influence over the Pubco Shares that is currently indirectly held by Transferee1 and its shareholders.

The purpose of incorporating DC-Sub-1, DC-Sub-2 and Subco, is to allow the tax liability that would otherwise be incurred by DC if DC directly sold the Pubco Shares described in Paragraphs 15 and 16, to be incurred in DC-Sub-1 and DC-Sub-2 when each corporation sells its common shares of Subco as described in Paragraph 20. This allows each of DC-Sub-1 and DC-Sub-2 to become liable for its appropriate pro-rata share of the tax liability arising from the sale of the Non-voting Pubco Shares described in Paragraphs 15 and 16 and therefore avoids the necessity of DC having to enter into formal assumption agreements with its shareholders (i.e. Transferee1 and Transferee2). This will also allow each transferee group to control the timing of any taxable or capital dividends that each would otherwise be ultimately entitled to receive from DC on the after-tax proceeds generated from the sale of these Non-voting Pubco Shares prior to the butterfly distribution. The incorporation of Subco also allows each transferee group to access its proportionate amount of safe income on hand that is attributable to the Non-voting Pubco Shares described in Paragraphs 15 and 16 before the common shares of Subco are sold as described in Paragraph 20.

ADDITIONAL INFORMATION

33. Unless otherwise specified, the Proposed Transactions will occur in the order in which they are set out above and will commence on the date agreed to by the parties, with the exception of filing the applicable election forms, as described in Paragraphs 15, 16, 17, 18 and 23, which will be filed within the applicable due date following the completion of the Proposed Transactions.

34. None of DC, DC-1-Sub, DC-2-Sub, Subco, Transferee1 and Transferee2 or Transferee2-Sub is, or will be, at any time during the series of transactions or events that includes the Proposed Transactions, a specified financial institution.

35. None of the shares of DC, DC-1-Sub, DC-2-Sub, Subco, Transferee1 and Transferee2 or Transferee2-Sub have been, or will be, at any time during the series of transactions or events that includes the Proposed Transactions described herein:

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

(b) a share that is issued or acquired as part of series of transactions of the type described in subsection 112(2.5); or

(c) the subject of a dividend rental arrangement.

36. No property has or will become property of DC or any corporation controlled by DC or by a predecessor corporation of any such corporation, and no liabilities have been or will be incurred by DC or any corporation controlled by DC or a predecessor corporation of any such corporation, in contemplation of and before the implementation of the Proposed Transactions otherwise than as described herein.

37. It is possible that either during the implementation of the Proposed Transactions or shortly after the completion of the Proposed Transactions Transferee1, Holdco1 and/or Holdco2 may sell or dispose of some or all of their Pubco Shares that are included in the Excluded Shareholder Holdings and, in conjunction with such sale, the share capital of Transferee1 may be reorganized XXXXXXXXXX (the "Excluded Shareholder Transactions"). However, you advise there are presently no agreements of any nature in place with any third party nor have there been any discussions with any third party respecting any sale of the Excluded Shareholder Holdings.

Notwithstanding the above, you maintain, that if the Excluded Shareholder Transactions do take place, such transactions would have been undertaken in the same manner regardless of whether the Proposed Transactions had been undertaken and that the Proposed Transactions would have taken place in the same manner regardless whether or not the Excluded Shareholder Transactions are undertaken. Accordingly, in your view, the Excluded Shareholder Transactions, if such transactions actually take place, should not be considered to take place as part of the same series of transactions or events that include the Proposed Transactions.

38. It is your understanding that Transferee2 has no current intention to dispose of its Excluded Transferee2 Holdings. However, you note that Transferee2 has a history of selling its shares of Pubco from time to time. Notwithstanding your understanding, you maintain, that if a sale of all or a portion of the Excluded Transferee2 Holdings did take place, that such sale could take place in a manner similar to those described in Paragraph 36 and as such, in your view, any subsequent sale of the Excluded Transferee2 Holdings should not be considered to take place as part of the same series of transactions or events that include the Proposed Transactions.

39. Following the completion of the Proposed Transactions, Amalco-1 and Amalco-2 may pay dividends out of the cash consideration received in Paragraph 20 and the income earned thereon to its common shareholders, who in turn may pay dividends to their shareholders. Such dividends may include capital dividends and taxable dividends.

RULINGS

Provided that the preceding statements constitute a complete and accurate disclosure of all of the relevant facts, proposed transactions and the purpose of the Proposed Transactions, and provided that the Proposed Transactions are completed in the manner described above, our rulings are as set forth below.

A. Subject to the application of subsection 69(11), and provided the appropriate joint elections are filed in the prescribed form and manner within the time specified in subsection 85(6), the provisions of subsection 85(1) will apply to:

(a) the transfer by DC of its DC-Sub-1 Pubco Shares to DC-Sub-1 as described in Paragraph 15;

(b) the transfer by DC of its DC-Sub-2 Pubco Shares to DC-Sub-2 as described in Paragraph 16;

(c) the transfer by DC-Sub-1 of its DC-Sub-1 Pubco Shares to Subco as described in Paragraph 17;

(d) the transfer by DC-Sub-2 of its DC-Sub-2 Pubco Shares to Subco as described in Paragraph 18; and

(e) the transfer by DC of the Transferred Assets to Transferee2-Sub as described in Paragraph 23, to the extent that each property included in the Transferred Assets is an eligible property;

such that the agreed amount in respect of each such transfer of eligible property will be deemed to be the transferor's proceeds of disposition of the particular property and the transferee's cost thereof pursuant to paragraph 85(1)(a). For greater certainty, paragraph 85(1)(e.2) will not apply to the transfers referred to herein.

B. Subsection 84(3) will apply on the redemption or purchase for cancellation, as the case may be, of:

(a) the Transferee2-Sub Preferred Shares owned by DC described in Paragraph 26, to deem Transferee2-Sub to have paid and DC to have received;

(b) the XXXXXXXXXX common shares of DC owned by Transferee2 described in Paragraph 28, to deem DC to have paid and Transferee2 to have received;

(c) the XXXXXXXXXX Class C shares of DC owned by Transferee2 described in Paragraph 28, to deem DC to have paid and Transferee2 to have received;

a dividend on such shares equal to the amount, if any, by which the aggregate amount paid upon such redemption or purchase for cancellation, as the case may be, exceeds the aggregate paid-up capital in respect of such shares immediately before such redemption or purchase for cancellation, and subject to Ruling D, any such dividend to the extent that it is a taxable dividend:

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

(e) will be deductible by each recipient of such dividend in computing its respective taxable income pursuant to subsection 112(1) and, for greater certainty, the provisions of subsections 112 (2.1), (2.2), (2.3) or (2.4) will not apply to deny the subsection 112(1) deduction in respect of such dividend;

(f) will be excluded from the proceeds of disposition of the shares by virtue of paragraph (j) of the definition of "proceeds of disposition" in section 54 of the Act;

(g) by virtue of subsection 112(3), will reduce the loss, if any, in respect of the disposition of the shares on which the dividend is deemed to be received; and

(h) will not be subject to tax under Part IV.1 and Part VI.1.

C. The corporation that is deemed to have received a dividend in Ruling B will be subject to tax under subsection 186(1) only to the extent that the particular corporation that is deemed to have paid such dividend is entitled to a dividend refund in respect of its taxation year in which it is deemed to pay that dividend and then only to the extent of the amount calculated in paragraph 186(1)(b).

D. Subsection 55(2) will apply to the taxable dividends referred to in Ruling B. However, without considering the sale of the common shares of Subco as described in Paragraph 20 and provided that as part of the series of transactions or events that includes the Proposed Transactions, there is not:

(a) an acquisition of property in the circumstances described in paragraph 55(3.1)(a);

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

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

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

(e) an acquisition of property in the circumstances described in paragraph 55(3.1)(c) (other than as described in Paragraph 20); and

(f) an acquisition of property in the circumstances described in paragraph 55(3.1)(d) (other than as described in Paragraph 20);

which has not been described in the Proposed Transactions, paragraph 55(3)(b) would have applied, and subsection 55(2) would not have applied, to the taxable dividends referred to in Ruling B.

E. Subsection 129(1.2) will not apply to deem the dividends referred to in Rulings B(a) and (c) not to be taxable dividends.

F. The set-off and cancellation of Note1 against Note2 as described in Paragraph 29 will not give rise to a forgiven amount.

G. The amalgamation of DC and DC-Sub-1 to form Amalco-1 as described in Paragraph 30 will be considered to be an amalgamation within the meaning of subsection 87(1).

H. The amalgamation of Transferee2 and DC-Sub-2 to form Amalco-2 as described in Paragraph 31 will be considered to be an amalgamation within the meaning of subsection 87(1).

I. The provisions of subsections 15(1), 56(2), 69(4), 83(2.1) and 246(1) will not apply to any of the Proposed Transactions described herein, in and by themselves.

J. Subsection 245(2) will not apply to the Proposed Transactions, in and by themselves, to re-determine the tax consequences confirmed herein.

The above Rulings are subject to the limitations and qualifications set out in Information Circular 70-6R5 dated May 17, 2002 and are binding on CRA provided that the Proposed Transactions are completed 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 and the Regulations which, if enacted into law, could have an effect on the rulings provided herein.

OTHER COMMENTS

With respect to Ruling D, we understand that the Department of Finance has issued you a comfort letter on June 8, 2005, indicating that it was prepared to recommend to the Minister of Finance that paragraphs 55(3.1)(c) and (d) be amended to prevent such paragraphs from applying where transactions such as those described in Paragraph 20, are carried out before a distribution. If such an amendment is ever enacted and is effective for the period in which these Proposed Transactions take place, it is possible that subsection 55(2) may not apply to the dividends described in Ruling B.

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

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

(b) any other tax consequence relating to the facts, Proposed Transactions or any transaction or event taking place, prior to, during, or subsequent to the Proposed Transactions, whether described in this letter or not, other than those specifically described in the rulings given above, including whether any of the Proposed Transactions would also be included in a series of transactions or events that include other transactions or events that are not described in this letter, and for greater certainty, any other tax consequence relating to the Excluded Shareholder Transactions described in Paragraph 37, the possible transactions described in Paragraph 38 and the dividends described in Paragraph 39, including whether such transactions would be included in a series of transactions or events that includes the Proposed Transactions.

Yours truly,

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