30 November 1996 Ruling 9711073 - BUTTERFLY RULING

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.

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the Department.

Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle du ministère.

Principal Issues:

This was a double-wing butterfly. There were several minor issues that arose all of which were routine to butterfly rulings.

Position:

See Statement of Principal Issues.

Reasons:

XXXXXXXXXX							971107
XXXXXXXXXX

Attention: XXXXXXXXXX

XXXXXXXXXX, 1997

Dear Sirs:

Re: 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 taxpayer. In your letters of XXXXXXXXXX you provided additional information in respect of the facts and proposed transactions described in your original letter. We also acknowledge the information provided during our various telephone conversations (XXXXXXXXXX).

To the best of your knowledge, and that of the taxpayers involved, none of the issues contained herein:

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

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

(iii)is under objection by the taxpayers or a related person; and

(iv) is before the courts or, if a judgement has been issued, the time limit for appeal to a higher court has not expired.

Unless otherwise stated all references to a statute are to the Income Tax Act R.S.C. 1985 (5th Supp.), c.1, as amended, (the "Act").

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

(a)"adjusted cost base" ("ACB") has the meaning assigned to that term in section 54 of the Act;

(b)"BCA" means the Business Corporations Act (XXXXXXXXXX) and, where applicable, its predecessor statutes;

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

(d)"Canco" means XXXXXXXXXX, a company that files its tax returns at the XXXXXXXXXX Taxation Centre. Its head office is within the area served by the XXXXXXXXXX Taxation Services Office;

(e)"capital dividend" has the meaning assigned to that term in subsection 83(2) of the Act;

(f)"capital dividend account" ("CDA") has the meaning assigned by subsection 89(1) of the Act;

(g)"capital loss" has the meaning assigned to that term under paragraph 39(1)(b) of the Act;

(h)"capital property" has the meaning assigned to that term in section 54 of the Act;

(i)"cost amount" has the meaning assigned to that term in subsection 248(1) of the Act;

(j)"dividend refund" has the meaning assigned to that term in subsection 129(1) of the Act;

(k)"Mr. X" means XXXXXXXXXX, a resident of Canada;

(l)"paid-up capital" ("PUC") has the meaning assigned to that term by subsection 89(1) of the Act;

(m)"private corporation" has the meaning assigned to that term in subsection 89(1) of the Act;

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

(o)"specified financial institution" ("SFI") has the meaning assigned to that term by subsection 248(1) of the Act;

(p)"specified investment business" has the meaning assigned to that term by subsection 125(7) of the Act;

(q)"taxable Canadian corporation" ("TCC") has the meaning assigned to that term by subsection 89(1) of the Act; and

(r)"taxable dividend" has the meaning assigned to that term by subsection 89(1) of the Act.

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

FACTS

1.Canco is a CCPC and a TCC. Canco was formed XXXXXXXXXX by the amalgamation of XXXXXXXXXX ("Predecessor 1") and XXXXXXXXXX ("Predecessor 2") under the provisions of the BCA. At that time both Predecessor 1 and Predecessor 2 were investment holding companies.

Prior to the amalgamation, Mr. X was the sole shareholder of Predecessor 1 and also owned XXXXXXXXXX common shares of Predecessor 2. Predecessor 1 owned the balance of the common shares of Predecessor 2.

2.The authorized share capital of Canco includes an unlimited number of common shares.

3.The issued share capital of Canco consists of XXXXXXXXXX common shares. These shares are all owned by Mr. X and are held by him as capital property. These shares currently have an aggregate stated capital of $XXXXXXXXXX and an aggregate PUC of $XXXXXXXXXX.

4.Canco's assets consist of investments, made up of publicly traded Canadian and U.S. stocks and bonds, other financial instruments and a relatively small amount of cash. The Investment Managers responsible for the portfolio investments have been instructed to keep the portfolio fully invested in publicly traded stocks or bonds at all times. Canco's cash at any point in time thus represents dividends received, interest received or the proceeds from sales of securities which are in the process of being reinvested in new securities.

In XXXXXXXXXX Canco acquired shares in a CCPC. The shares were acquired from Mr. X and were the subject of a subsection 85(1) election. As consideration for the shares of the CCPC, Canco issued a note to Mr. X in the amount of $XXXXXXXXXX and common shares of its capital stock. The amount added to the stated capital of Canco's common shares as a result of the transfer was $XXXXXXXXXX. Canco held less than a 10% interest in the CCPC. The acquisition of the shares of the CCPC, as described herein, was not done in contemplation of the proposed butterfly described below nor does it form part of the series of transactions or events proposed below.

On XXXXXXXXXX Canco exchanged all the shares that it held at that time in the CCPC for shares in a Canadian subsidiary of a U.S. public company listed on the NASDAQ exchange. The shares Canco presently holds in the Canadian subsidiary are exchangeable for shares of the U.S. public company without any additional consideration. It is expected that Canco will exercise its right to exchange the shares. The reason for the interim step of acquiring shares in the Canadian subsidiary was to provide for the deferral of Canadian tax until the shares acquired by Canco and certain other CCPC shareholders are released from the escrow conditions. The exchange of shares described herein was not done in contemplation of the proposed butterfly described below nor does it form part of the series of transactions or events proposed below. Once Canco exchanges its current shares in the Canadian subsidiary for shares in its U.S. parent, Canco will hold less than a XXXXXXXXXX% interest in the U.S. public company.

The marketable securities and the shares currently held in the Canadian subsidiary described above are capital property to Canco and represent portfolio investments of Canco as it does not have significant influence, within the meaning of section 3050 of the CICA Handbook, over any corporation in which it holds shares.

The liabilities of Canco include a note payable to Mr. X in the amount of $XXXXXXXXXX, which includes the note payable to Mr. X for $XXXXXXXXXX described herein, and income tax liabilities and accrued professional fees which result from the ongoing operations of Canco.

5.The aggregate fair market value as at XXXXXXXXXX of Canco's assets (before deducting Canco's debts) is approximately $XXXXXXXXXX and the aggregate ACB of such assets is approximately $XXXXXXXXXX.

6.The aggregate capital losses accrued on certain securities (i.e. "loss properties") held at XXXXXXXXXX is approximately $XXXXXXXXXX. It is not expected that the accrued capital losses on loss properties held at the date of transfer will be materially different than this amount.

7.It is expected that the RDTOH of Canco at XXXXXXXXXX, the end of its XXXXXXXXXX fiscal year, will be approximately $XXXXXXXXXX. The exact amount will be determined when Canco's XXXXXXXXXX tax return has been completed.

8.As at XXXXXXXXXX Canco had a balance in its CDA of approximately $XXXXXXXXXX.

PROPOSED TRANSACTIONS

9.Canco will pay the note payable to Mr. X, as described in paragraph 4 above, of $XXXXXXXXXX. This amount will be repaid in kind by Canco transferring to Mr. X bonds, shares and cash having an aggregate fair market value equal to the face amount of the debt. The bonds or shares transferred to Mr. X may, to the extent necessary, involve bonds or shares which will have a fair market value at the date of transfer in excess of their cost amount. This will be done to absorb the losses that will arise in the hands of Canco as a result of the transfer of the loss properties as described below.

10.Pursuant to the terms of the BCA, the directors of Canco will pass a special resolution authorizing Canco to reduce the stated capital of its issued and outstanding common shares by $XXXXXXXXXX. On the reduction of Canco's stated capital, Canco will make a payment to Mr. X of $XXXXXXXXXX. The payment will be made by Canco transferring to Mr. X bonds, shares and cash having an aggregate fair market value equal to $XXXXXXXXXX. The bonds or shares transferred to Mr. X may, to the extent necessary, involve bonds or securities which will have a value at the date of transfer in excess of their cost amount. Again, this will be done to absorb the losses that will arise in the hands of Canco as a result of the transfer of the loss properties described below.

It is presently the intention of Mr. X that the properties received by him from Canco as a consequence of the return of stated capital described herein will not be transferred to any other corporation in the course of the reorganization proposed herein.

At this point, the aggregate fair market value and ACB of the assets held by Canco will be approximately $XXXXXXXXXX, respectively. Following the reduction of stated capital described herein, the PUC of Canco's issued and outstanding common shares will be $XXXXXXXXXX.

11.Mr. X will cause to be incorporated under the BCA four new corporations: Childco 1, Childco 2, Childco 3 and Childco 4. Each of these new corporations will be a TCC and a private corporation.

The share capital of each Childco will consist of:

a)a class of common shares, and

b)two classes of preferred shares, designated as Class XXXXXXXXXX preferred shares and Class XXXXXXXXXX preferred shares. The Class XXXXXXXXXX preferred shares and the Class XXXXXXXXXX preferred shares will be:

i)non-cumulative,

ii)voting,

iii)with a maximum annual dividend, not to exceed XXXXXXXXXX% per annum, to be paid at the discretion of the directors,

iv)redeemable and retractable at a redemption price equal to the consideration for which they are issued, and

v)the stated capital of these preferred shares will be determined on the date of issuance.

No shares of any of these corporations will be issued on incorporation.

12.Mr. X will transfer XXXXXXXXXX% of his common shares of Canco, being XXXXXXXXXX shares, to each of Childco 1, Childco 2, Childco 3 and Childco 4. As sole consideration for such transfer, each of Childco 1, Childco 2, Childco 3 and Childco 4 will issue to Mr. X Class XXXXXXXXXX preferred shares of its capital stock having an aggregate redemption value and fair market value equal to the fair market value at that time of the common shares of Canco transferred to such Childco. The common shares of Canco will be capital property to each of Childco 1, Childco 2, Childco 3 and Childco 4.

Mr. X and each of Childco 1, Childco 2, Childco 3 and Childco 4 will elect, jointly and in prescribed form and within the time limits referred to in subsection 85(6) of the Act, to have the rules in subsection 85(1) of the Act apply in respect of each such transfer. The amount agreed upon in each election will be equal to the lesser of the amounts described in subparagraph 85(1)(c.1)(i) and (ii) of the Act.

Each of Childco 1, Childco 2, Childco 3 and Childco 4 will add to the stated capital account maintained for its Class XXXXXXXXXX preferred shares an amount not exceeding the aggregate of the PUC of the common shares of Canco transferred to each of Childco 1, Childco 2, Childco 3 and Childco 4, as the case may be.

Each such transfer will be subject to a price adjustment clause.

13.Mr. X has four children (XXXXXXXXXX) all of whom are residents of Canada and all of whom are over the age of 18. Following the transaction described in paragraph 12 above, each of Mr. X's four Children will subscribe for one common share of one of Childco 1, Childco 2, Childco 3 or Childco 4, as the case may be, for consideration of $XXXXXXXXXX. Following these share subscriptions, Mr. X will continue to control Childco 1, Childco 2, Childco 3 and Childco 4.

14.Immediately before the transfers of property as described in paragraph 15 below, the property of Canco will be classified into three types of property for the purposes of the definition of "distribution" in subsection 55(1), as follows:

(a) cash or near cash property, comprising all of the current assets of Canco, including any cash, bank deposits, term deposits, marketable securities (other than portfolio investments) and similar instruments;

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

For these purposes Canco will only have cash or near cash property and investment property. Furthermore, the shares held by Canco in the Canadian subsidiary of the U.S. public company, as described in paragraph 4 above, will be classified as investment property.

For greater certainty, any tax accounts, such as the balance of any RDTOH account or CDA, will not be considered property of Canco for purposes of the proposed transactions described herein.

15.Canco will transfer to each of Childco 1, Childco 2, Childco 3 and Childco 4 at fair market value one-quarter of its:

(a) cash or near cash property;

(b) loss properties; and

(c) other investment property.

The transfer will be done in a manner so that the unrealized gains on such properties will be transferred proportionately to Childco 1, Childco 2, Childco 3 and Childco 4.

As consideration for the property so transferred, each of Childco 1, Childco 2, Childco 3 and Childco 4 will assume one-quarter of Canco's liabilities (including income taxes payable by Canco), if any, and will each issue to Canco that number of its Class XXXXXXXXXX preferred shares having a fair market value and aggregate redemption amount equal to the amount by which the fair market value of the assets of Canco transferred to Childco 1, Childco 2, Childco 3 and Childco 4, as the case may be, as described herein exceeds the amount of the liabilities, if any, assumed by Childco 1, Childco 2, Childco 3 and Childco 4, as the case may be, as described herein.

The Class XXXXXXXXXX preferred shares of Childco 1, Childco 2, Childco 3 and Childco 4 will represent capital property to Canco.

16.Canco and each of Childco 1, Childco 2, Childco 3 and Childco 4 will elect, jointly and in prescribed form and within the time limits referred to in subsection 85(6) of the Act, to have the provisions of subsection 85(1) of the Act apply to the transfer of each property of Canco that is a capital property and is transferred to each of Childco 1, Childco 2, Childco 3 and Childco 4. The amount agreed upon in such elections in respect of each capital property so transferred will be equal to the lesser of the amounts described in subparagraphs 85(1)(c.1)(i) and (ii) of the Act.

For greater certainty the agreed amount for any capital property included in the subsection 85(1) elections referred to herein will not be less than the amount of any liabilities assumed by Childco 1, Childco 2, Childco 3 and Childco 4, as the case may be, as consideration for the transfer of such property and will not exceed the fair market value of each such property.

Each of Childco 1, Childco 2, Childco 3 and Childco 4 will add to the stated capital account maintained for its Class XXXXXXXXXX preferred shares an amount equal to the amount by which the aggregate of the cost of the properties transferred to that transferee (determined pursuant to subsection 85(1) of the Act, where relevant) exceeds the amount of liabilities assumed, if any, by that transferee as consideration therefor.

17.Each of Childco 1, Childco 2, Childco 3 and Childco 4 will redeem all of its Class XXXXXXXXXX preferred shares issued to Canco for an amount equal to their fair market value (the "Redemption Price") and as payment of the Redemption Price will issue to Canco a non-interest bearing promissory note (the "Childco 1 Note", "Childco 2 Note", "Childco 3 Note" and "Childco 4 Note") payable on demand having a principal amount and fair market value equal to the Redemption Price. Canco will accept the Childco 1 Note, Childco 2 Note, Childco 3 Note and Childco 4 Note, as the case may be, as full payment for the Redemption Price of the Class XXXXXXXXXX preferred shares of Childco 1, Childco 2, Childco 3 and Childco 4 so redeemed.

At the end of the day on which the Class XXXXXXXXXX preferred shares of each of Childco 1, Childco 2, Childco 3 and Childco 4 are redeemed, each of Childco 1, Childco 2, Childco 3 and Childco 4 will cause its first taxation year to end.

18.On the day following the redemption of the Class XXXXXXXXXX preferred shares of Childco 1, Childco 2, Childco 3 and Childco 4 as described in paragraph 17 above, the shareholders of Canco, will, by special resolution, resolve to wind up and dissolve Canco under the applicable provisions of the BCA. In connection with the winding-up, Canco will distribute to Childco 1, Childco 2, Childco 3 and Childco 4, respectively, the Childco 1 Note, Childco 2 Note, Childco 3 Note and the Childco 4 Note.

Prior to the distribution of such notes, Canco will elect, pursuant to subsection 83(2) of the Act, in prescribed manner and prescribed form that the full amount of any resulting dividend referred to in subparagraph 88(2)(b)(i) of the Act be deemed to be a capital dividend.

As a result of the assignment and distribution of the above notes, the obligations under the notes will be cancelled.

Following receipt of the dividend refund to which Canco will become entitled as a result of the proposed transactions described herein, Canco will distribute one-quarter of such amount to each of Childco 1, Childco 2, Childco 3 and Childco 4. The refund will not arise until after the end of the fiscal period in which the dividend was paid (or deemed paid).

All properties and liabilities of Canco will have been distributed or discharged, as the case may be. Articles of Dissolution will then be executed and filed accordingly. The common shares of Canco will be cancelled and Canco will be dissolved.

ADDITIONAL INFORMATION

19.Except as described in this letter, no property has been or will be acquired by or disposed of by Canco in contemplation of and before the proposed transfer of properties described in paragraph 15 above. Nor is it contemplated that subsequent to the implementation of the transactions described herein under "Proposed Transactions" that Childco 1, Childco 2, Childco 3 or Childco 4 will transfer or sell any of its assets to any other person except in the normal course of its business.

20.None of Canco, Childco 1, Childco 2, Childco 3 or Childco 4 is, or will be at the time of the proposed transactions, an SFI.

21.None of the shares of Canco, Childco 1, Childco 2, Childco 3 or Childco 4 has been or will be, at any time during the implementation of the proposed transactions described herein:

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

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

(c) the subject of a dividend rental arrangement as that term is defined in subsection 248(1) of the Act.

22.In XXXXXXXXXX it is anticipated that approximately $XXXXXXXXXX of Class XXXXXXXXXX preferred shares held by Mr. X in each Childco will be redeemed. The redemption would result in Mr. X being deemed to receive taxable dividends of approximately $XXXXXXXXXX from each Childco. As a consequence of such share redemptions, it is expected that each Childco will receive a dividend refund pursuant to the provisions of subsection 129(1) of the Act. Following the redemption of the Class XXXXXXXXXX preferred shares by each Childco as described herein, Mr. X will retain control of Childco 1, Childco 2, Childco 3 and Childco 4.

23.It is presently intended that the wills of Mr. X and his wife will provide that on the death of the last survivor of Mr. X and his wife, the Class XXXXXXXXXX preferred shares which such survivor will hold in each of Childco 1, Childco 2, Childco 3 and Childco 4 will be transferred to the child that owns the common share in that particular company.

PURPOSE OF THE PROPOSED TRANSACTIONS

24.Mr. X is preparing to transfer his estate to his four children. He intends that all of his assets will transfer in equal portions to his four children on the date of the death of the last survivor of Mr. X and his wife. The purpose of the proposed transactions is to transfer to each of four new companies to be incorporated one quarter of the marketable securities currently held in Canco.

RULINGS GIVEN

Provided that the above statements constitute a complete and accurate disclosure of all of the relevant facts, proposed transactions and purpose of the proposed transactions, and that the proposed transactions are carried out as set forth herein, the following rulings are given:

A.Subject to the application of subsection 26(5) of the Income Tax Application Rules and to the application of paragraph 88(2.2)(b) of the Act, which applies for the purposes stated in the preamble to subsection 88(2.2) of the Act, the provisions of subsection 85(1) of the Act will apply to:

(i)the transfer of the common shares of Canco by Mr. X to each of Childco 1, Childco 2, Childco 3 and Childco 4 as described in paragraph 12 above, and

(ii)the transfer of each capital property which is the subject of an election under subsection 85(1) as described in paragraphs 15 and 16 above by Canco to each of Childco 1, Childco 2, Childco 3 and Childco 4,

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

B.As a result of the redemption by Childco 1, Childco 2, Childco 3 and Childco 4 of their Class XXXXXXXXXX preferred shares held by Canco, as described in paragraph 17 above, and as a result of the distributions by Canco in the course of its winding-up, as described in paragraph 18 above:

(a) By virtue of paragraphs 84(3)(a) and 84(3)(b) of the Act, each of Childco 1, Childco 2, Childco 3 and Childco 4 will be deemed to have paid, and Canco will be deemed to have received, a taxable dividend equal to the amount by which the amount paid in respect of the redemption by each of Childco 1, Childco 2, Childco 3 and Childco 4 of its Class XXXXXXXXXX preferred shares exceeds the PUC of such shares; and

(b)(i)Pursuant to paragraph 88(2)(b) and subsection 84(2), but subject to (ii) to (iv) herein, each of Childco 1, Childco 2, Childco 3 and Childco 4 will be deemed to have received a dividend (the "winding-up dividend") on its common shares of Canco equal to the proportion of the amount by which the aggregate fair market value of the property of Canco distributed by Canco to Childco 1, Childco 2, Childco 3 and Childco 4 on its winding-up as consideration for the cancellation of its common shares exceeds the PUC thereof, that the number of shares of such class held by Childco 1, Childco 2, Childco 3 and Childco 4, as the case may be, is of the number of all such shares that are cancelled.

(ii)Pursuant to subparagraph 88(2)(b)(i), such portion of the winding-up dividend referred to in (b)(i) as does not exceed Canco's CDA determined immediately before the payment of the winding-up dividend shall be deemed, for the purposes of the subsection 83(2) election referred to in paragraph 18 above, to be the full amount of a separate dividend.

(iii) Pursuant to subparagraph 88(2)(b)(ii), the portion of the winding-up dividend that is equal to the lesser of:

(A)Canco's pre-1972 capital surplus on hand as determined immediately before the payment of the winding-up dividend, and

(B)the amount by which the winding-up dividend exceeds the portion thereof in respect of which Canco will elect under subsection 83(2)

shall be deemed not to be a dividend.

(iv)Pursuant to subparagraph 88(2)(b)(iii), the winding-up dividend, to the extent that it exceeds the portion thereof referred to in (ii) herein that is deemed to be a separate dividend and the portion referred to in (iii) herein that is deemed not to be a dividend, shall be deemed to be a separate dividend that is a taxable dividend.

(c)(i)By virtue of subsection 186(2) and paragraph 186(4)(a) of the Act, each of Childco 1, Childco 2, Childco 3 and Childco 4 will be connected with Canco. Provided that each of Childco 1, Childco 2, Childco 3 and Childco 4 is not entitled to a dividend refund in respect of its taxation year in which it is deemed to pay the dividend referred to in (a) above, Canco will not be subject to Part IV tax under subsection 186(1) in respect of such dividend; and

(ii)By virtue of subsection 186(2) and paragraph 186(4)(a) of the Act, Canco will be connected with each of Childco 1, Childco 2, Childco 3 and Childco 4. Consequently, each of Childco 1, Childco 2, Childco 3 and Childco 4 shall, pursuant to paragraph 186(1)(b), be subject to Part IV tax in an amount equal to that proportion of the dividend refund to which Canco will become entitled as a result of the payment of the dividends referred to in (b)(iv) above, that the amount of each such dividend received by Childco 1, Childco 2, Childco 3 and Childco 4, as the case may be, is of the aggregate of all taxable dividends paid by Canco in its taxation year in which such dividend is paid.

(d)The taxable dividends deemed to have been received by Canco and each of Childco 1, Childco 2, Childco 3 and Childco 4 as a result of the redemption of the Class B preferred shares of Childco 1, Childco 2, Childco 3 and Childco 4, as the case may be, and winding-up of Canco described in paragraph (a) and subparagraph (b)(iv) herein will:

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

(ii)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; and

(iii)by virtue of subsection 112(3) of the Act, reduce the loss, if any, in respect of the disposition of the shares on which the dividend is deemed to be received.

C.By virtue of the definition of "substantial interest" as set out under paragraph 191(2)(a), Canco will have a substantial interest in each of Childco 1, Childco 2, Childco 3 and Childco 4 immediately before the redemption of their Class XXXXXXXXXX preferred shares as described in paragraph 20 above. Consequently, no tax will be payable under either section 187.2 or section 191.1 in respect of the dividend deemed to have been paid by Childco 1, Childco 2, Childco 3 and Childco 4, as the case may be, to Canco upon the redemption of the Class XXXXXXXXXX preferred shares of each such corporation since each such dividend will be an "excepted dividend" within the meaning assigned by paragraph (b) of the definition of "excepted dividend" in section 187.1 in the capacity of Canco as the recipient of the particular dividend, and shall be an "excluded dividend" within the meaning of paragraph (a) of the definition of "excluded dividend" in subsection 191(1) in the capacity of Childco 1, Childco 2, Childco 3 and Childco 4, as the case may be, as the payer of the particular dividend.

D.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 paragraph 55(3.1)(c); or

(d) an acquisition of property in the circumstances described in paragraph 55(3.1)(d),

which has not been described herein, then by virtue of paragraph 55(3)(b) of the Act, subsection 55(2) of the Act will not apply to the taxable dividends referred to in the rulings given in subparagraphs B(a) and (b) above and for greater certainty, subsection 55(3.1) of the Act will not apply to deny the exemption under paragraph 55(3)(b) of the Act.

E.The extinguishment of the debt obligations as a result of the cancellation of the Childco 1 Note, Childco 2 Note, Childco 3 Note and Childco 4 Note, as described in paragraph 21 above, will not give rise to a "forgiven amount" within the meaning of subsection 80(1) or 80.01(1) of the Act.

F.The application of subsection 84.1(1) of the Act to the transfer of the common shares of Canco by Mr. X to each of Childco 1, Childco 2, Childco 3 and Childco 4, as described in paragraph 12 above, will not result in a reduction of the PUC of the Class XXXXXXXXXX preferred shares of Childco 1, Childco 2, Childco 3 and Childco 4, as the case may be, or in a dividend deemed to have been paid by Childco 1, Childco 2, Childco 3 or Childco 4, as the case may be, to Mr. X.

G.The common shares of Canco will not, as a result of the proposed transactions in and by themselves, become taxable preferred shares within the meaning assigned by subsection 248(1) of the Act.

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

I.As a result of the proposed transactions, in and by themselves, subsection 245(2) of the Act will not be applied to redetermine the tax consequences confirmed in the rulings given.

The above rulings are given subject to the limitations and qualifications set out in Information Circular 70-6R3 dated December 31, 1996 and are binding on Revenue Canada 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 into law, could have an effect on the rulings provided herein.

Opinions

Provided that our understanding of the facts and proposed transactions described herein is correct, it is our opinion that:

(a)provided that there is no disposition or increase in interest described in any of proposed subparagraphs 55(3)(a)(i) to (v) as part of a series of transactions or events which includes the taxable dividends referred to in the rulings given in subparagraphs B(a) and (b) above and further provided that proposed paragraph 55(3)(a) and subsection 55(3.01) of the Act are enacted in substantially the same form as proposed in Bill C-69 which received first reading on December 2, 1996, the exception in proposed paragraph 55(3)(a) will prevent the application of subsection 55(2) to the taxable dividend that each of Childco 1, Childco 2, Childco 3 and Childco 4 will be deemed to receive from Canco under subsection 84(2) of the Act as a consequence of the proposed transactions described in paragraph 18 and the taxable dividend that Canco will be deemed to receive from each of Childco 1, Childco 2, Childco 3 and Childco 4 as a consequence of the proposed transactions described in paragraph 17 above. For greater certainty, the proposed transactions described in paragraphs 9 to 18 above, in and by themselves, will not be considered to result in any disposition or increase in interest described in any of proposed subparagraphs 55(3)(a)(i) to (v); and

(b)provided that proposed subsections 40(3.3) and (3.4) of the Act are enacted in substantially the same form as proposed in Bill C-69 which received first reading on December 2, 1996, paragraph 40(3.4)(a) of the Act will apply to deem Canco's loss from the disposition of the loss properties to Childco 1, Childco 2, Childco 3 or Childco 4, as described in paragraph 15 above, to be nil and, pursuant to subparagraph 40(3.4)(b)(v) of the Act, as a result of the wind-up described in paragraph 18 above, the denied capital losses will be deemed to be a loss of Canco from a disposition of the particular loss property at the time that is immediately before the time at which the winding-up of Canco begins as described in paragraph 18 above. Accordingly, to the extent that Canco does not have sufficient taxable capital gains in the year of the wind-up to offset the amount of the resulting allowable capital losses, the net capital loss of Canco computed in accordance with subsection 111(8) of the Act for the year of the wind-up will be available to be carried back to reduce taxable capital gains realized by Canco in the 3 preceding taxation years.

COMMENTS

1.You have informed us, in paragraph 12 above, that the transfer of the common shares of Canco by Mr. X to each of Childco 1, Childco 2, Childco 3 and Childco 4 will be subject to a price adjustment clause.

Nothing in this letter should be interpreted as confirming that,

(a) for purposes of the Act, any adjustment made pursuant to any such price adjustment clause in respect of a transaction subsequent to the time of such transaction will be effective, retroactively, to the time of such transaction, or

(b) for the purposes of the Act, any amount paid pursuant to any such price adjustment clause, in respect of a transaction subsequent to the time of such transaction will be an additional payment of the redemption or purchase price of any shares redeemed or repurchased.

The operation of a price adjustment clause is not a proposed transaction and, consequently, advance rulings are not given by the Department in respect thereof. The Department's general position with respect to price adjustment clauses in agreements is set out in Interpretation Bulletin IT-169 dated August 6, 1974.

2.Nothing in this ruling should be construed as implying that Revenue Canada has agreed to or reviewed:

(a)the determination of the fair market value or ACB of any particular asset or the PUC of any shares referred to herein; or

(b)any tax consequences relating to the facts and proposed transactions described herein other than those specifically described in the rulings given above. For greater certainty, we are not commenting on any tax consequences relating to Canco's exchange of its shares of the CCPC for shares of the Canadian subsidiary of the U.S. public company as described in paragraph 4 above.

Yours truly,

for Director
Reorganizations and International Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch