30 November 1997 Ruling 9733783 - PUBLIC 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.

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: Public Butterfly - No new issues.

Position:

Reasons:

XXXXXXXXXX							3-973378
XXXXXXXXXX

Attention: XXXXXXXXXX

XXXXXXXXXX, 1998

Dear Sir:

Re: XXXXXXXXXX ("Opco") et al.
Advance Income Tax Ruling Request

This is in reply to your letter of XXXXXXXXXX in which you requested various advance income tax rulings on behalf of the above-noted taxpayer. We also acknowledge your letters of XXXXXXXXXX and our related telephone conversations.

We understand that, to the best of your knowledge and that of the taxpayers involved, none of the issues involved in the requested rulings is being considered by a taxation services office or a taxation centre in connection with a tax return already filed, or is under objection or appeal.

DEFINITIONS

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

(a) "Act" means the Income Tax Act (Canada) R.S.C. 1985, 5th supp. c.1 as amended. Unless otherwise indicated, all statutory references are to the Act.

(b) XXXXXXXXXX.

(c) "ACB" means adjusted cost base as that expression is defined in section 54 and subsection 248(1);

(d) "agreed amount" has the meaning assigned by subsection 85(l). All agreed amounts referred to in this letter will be expressed in dollars;

(d.1) "approximate that proportion" as used in Paragraphs 21 and 25 means that the discrepancy from that proportion, if any, would not exceed 1%, determined as a percentage of the FMV of each type of property which Newco has received (or Opco has retained) as compared to what Newco would have received (or Opco would have retained) had it received (or retained) its appropriate pro rata share of the FMV of that type of property;

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

(f) "Canadian-controlled private corporation" has the meaning assigned by the definition in subsection 125(7);

(g) "capital property" has the meaning assigned in section 54;

(h) "cost amount" has the meaning assigned by subsection 248(l);

(i) "FMV" means fair market value;

(j) "ITAR" refers to the Income Tax Application Rules;

(k) "Newco Share Exchange" means the exchange of Opco Class XXXXXXXXXX and XXXXXXXXXX shares for Newco Class XXXXXXXXXX and XXXXXXXXXX shares described in Paragraph 16;

(l) "Paragraph" refers to a numbered paragraph in this letter;

(m) "Plan of Arrangement" means the proposed plan of arrangement under the XXXXXXXXXX, described in Paragraph 13, to effect the transactions described in Paragraphs 14-26;

(n) "prepaid expenses" means rights arising from prepaid expenses;

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

(p) "Proposed Transactions" means the transactions described in Paragraphs 12 to 26 below;

(q) "public corporation" has the meaning assigned in subsection 89(l);

(r) "PUC" means paid-up capital as that expression is defined in subsection 89(l);

(s) "related person" has the meaning assigned by section 251;

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

(u) "SFI" means specified financial institution as defined in subsection 248(l);

(v) "Share Exchange" refers to the exchange of Opco Class XXXXXXXXXX and Class XXXXXXXXXX shares for Opco Class XXXXXXXXXX and XXXXXXXXXX or Class XXXXXXXXXX and XXXXXXXXXX shares, described in Paragraph 15;

(w) "significant influence" has the meaning set out in section 3050 of the CICA Handbook.

(x) "specified investment business" ("SIB") has the meaning assigned by the definition in subsection 125(7);

(y) "stated capital" means stated capital as that expression is used in the XXXXXXXXXX;

(z) "taxable Canadian corporation" has the meaning assigned in subsection 89(l);

(aa) "taxable dividend" has the meaning assigned by subsection 89(l); and

(bb) "Transaction Date" means the date on which the Proposed Transactions will occur, which will be the date on which the Plan of Arrangement is effective.

FACTS

1. Opco is a public corporation and a taxable Canadian corporation with its head office in XXXXXXXXXX. Opco was founded in XXXXXXXXXX and its shares have been listed on XXXXXXXXXX. Beginning as a manufacturer of "XXXXXXXXXX", Opco has engaged over the years in a variety of businesses,

XXXXXXXXXX

XXXXXXXXXX

Opco as it presently exists was formed on XXXXXXXXXX as a result of the amalgamation of the predecessor to Opco with a wholly-owned subsidiary.

2. XXXXXXXXXX

The sale of the XXXXXXXXXX special warrants was undertaken to generate cash for use in Opco's day-to-day business operations. The sale of the XXXXXXXXXX assets and the sale of the XXXXXXXXXX special warrants were not undertaken in contemplation of the Proposed Transactions.

3. Opco's authorized capital stock includes XXXXXXXXXX Class XXXXXXXXXX voting participating shares and XXXXXXXXXX Class XXXXXXXXXX non-voting participating shares. The Class XXXXXXXXXX shares are entitled to a dividend equal to XXXXXXXXXX% of the dividend declared with respect to the Class XXXXXXXXXX shares. As of XXXXXXXXXX, Opco had XXXXXXXXXX Class XXXXXXXXXX shares issued and outstanding with an aggregate PUC of approximately $XXXXXXXXXX and XXXXXXXXXX Class XXXXXXXXXX shares issued and outstanding with an aggregate PUC of approximately $XXXXXXXXXX. The Class XXXXXXXXXX and Class XXXXXXXXXX shares of Opco are listed for trading on XXXXXXXXXX.

4. XXXXXXXXXX.

XXXXXXXXXX is a Canadian-controlled private corporation and a taxable Canadian corporation. All of its issued and outstanding shares are owned by Mr. A.

Holdings is a Canadian-controlled private corporation and a taxable Canadian corporation. The issued share capital of Holdings includes Class XXXXXXXXXX shares, all of which are owned by XXXXXXXXXX and Class XXXXXXXXXX shares which are owned by the A companies and Mr. A's children.

XXXXXXXXXX are the children of Mr. A. XXXXXXXXXX are the children of Mrs. B. All are over the age of 18 and all are residents of Canada.

5. To the best of the knowledge of the directors and senior officers of Opco, as of the date hereof, no person or related group of persons beneficially owns, directly or indirectly, more than 10% of either class of the issued and outstanding shares of Opco, other than Mr. A, Mrs. B and persons related to them.

6. Opco has granted certain rights under a stock option plan under which certain directors and management personnel of Opco are entitled to acquire Class XXXXXXXXXX shares of Opco at specified exercise prices. During 1997, XXXXXXXXXX Class XXXXXXXXXX non-voting shares were issued under the stock option plan for total cash consideration of $XXXXXXXXXX. The options were not exercised in contemplation of the Proposed Transactions described below and would have been exercised regardless of whether the Proposed Transactions were to be implemented.

Mr. A, as a senior executive and director of Opco, and Mrs. B, as a director of Opco, hold stock options to acquire Class XXXXXXXXXX non-voting shares at various prices and with various expiry dates, including the right held by Mr. A to acquire XXXXXXXXXX Class XXXXXXXXXX non-voting shares at $XXXXXXXXXX which will expire XXXXXXXXXX and the right held by Mrs. B to acquire XXXXXXXXXX Class XXXXXXXXXX non-voting shares at $XXXXXXXXXX which will expire XXXXXXXXXX. Both Mr. A and Mrs. B intend to exercise these options, or options received in exchange therefore as described in Paragraph 15, prior to their expiry. The exercise of these options will not be in contemplation of the Proposed Transactions.

7. Opco's assets may be summarized as follows:

(a) certain cash or near cash property, consisting of accounts receivable, inventories and prepaid expenses;

(b) certain fixed assets (principally land, buildings, machinery and equipment and tooling) used in Opco’s business operations;
(c) approximately XXXXXXXXXX% of the issued shares of Bco;

(d) shares of the following wholly-owned subsidiary corporations:

XXXXXXXXXX

Opco's liabilities include bank advances, accounts payable and accrued liabilities, long-term debt and other liabilities.

XXXXXXXXXX

Opco also has recorded an amount in respect of deferred income taxes on its balance sheet.

8. XXXXXXXXXX

Opco accounted for this entire business as a discontinued operation at XXXXXXXXXX in its annual financial statements. Complete wind-up of the business will not take place until XXXXXXXXXX as there are several remaining transition services being provided to the purchaser. It is expected that the corporate entities, XXXXXXXXXX, will both be wound up.

9. There have not been nor will there be any acquisitions or dispositions of property by Opco in contemplation of the Proposed Transactions. The sales of Opco's:

XXXXXXXXXX

were not, or will not be, undertaken in contemplation of the Proposed Transactions.

While no other significant arm's-length acquisitions or dispositions of property by Opco are currently under negotiation, it is conceivable such may occur at any time as circumstances change or as opportunities may arise. However, no such acquisition will occur in contemplation of the Proposed Transactions.

10. The most recent fiscal year end for Opco was XXXXXXXXXX due to the amalgamation described in Paragraph 1. Opco's fiscal year end will be XXXXXXXXXX for subsequent years.

11. Neither Opco nor XXXXXXXXXX will have any investment property, as defined in Paragraph 19, on the Transaction Date.

PROPOSED TRANSACTIONS

12. A newly created corporation ("Newco") will be incorporated under the XXXXXXXXXX. Newco will be a taxable Canadian corporation. Prior to the transactions described in Paragraphs 14 to 26, Newco will not have had any assets, liabilities or issued any outstanding shares. Newco's articles of incorporation will provide that its authorized capital will include Class XXXXXXXXXX common shares, Class XXXXXXXXXX non-voting shares and special shares. The Class XXXXXXXXXX shares will be fully participating and will be entitled to one vote per share. The Class XXXXXXXXXX shares will not be entitled to vote, will be fully participating, and will be entitled to receive dividends in an amount equal to XXXXXXXXXX% of the dividends declared on the Class XXXXXXXXXX shares.

The special shares of Newco will have the following attributes:

(a) each special share will be redeemable, subject to applicable law, at any time at the option of Newco at an amount equal to the aggregate FMV of the XXXXXXXXXX shares that will be transferred by Opco to Newco, divided by the number of special shares of Newco issued as consideration therefor (the "Newco Redemption Amount") plus any declared but unpaid dividends;

(b) each special share will be retractable, subject to applicable law, at any time at the option of the holder at a retraction amount equal to the Newco Redemption Amount plus any declared but unpaid dividends;

(c) the holder of each special share will be entitled to a non-cumulative cash dividend as and when declared by the Board of Directors from time to time, which dividend need not also be declared on any other class of shares of Newco;

(d) if Newco is liquidated, dissolved or wound-up or its assets are otherwise distributed among the shareholders by way of repayment of capital, whether voluntary or involuntary, the holders of the special shares shall be entitled to receive, before any distribution of any assets of Newco among the holders of the Class XXXXXXXXXX shares and the Class XXXXXXXXXX shares, an amount in respect of each special share held, equal to the Newco Redemption Amount plus any declared but unpaid dividends; and

(e) the holder of each special share will not be entitled to vote at meetings of shareholders of Newco, other than as provided under the XXXXXXXXXX.

13. Subject to, among other things, the appropriate shareholder, court and regulatory approvals, the transactions described in Paragraphs 14 to 26 will be undertaken pursuant to a plan of arrangement under the XXXXXXXXXX (the "Plan of Arrangement"). With the exception of the filing of elections under the Act, these transactions will occur by virtue of the Plan of Arrangement and will be designated in the Plan of Arrangement to occur on the Transaction Date in the order set out below. The Transaction Date will be on a date that will be subsequent to the date of this letter.

14. As part of the Plan of Arrangement, Opco's articles of incorporation will be amended in such a manner that, in addition to any other shares that may be authorized for issue, its share capital will be comprised of at least four additional classes of shares, being Opco Class XXXXXXXXXX shares, Opco Class XXXXXXXXXX non-voting shares, Opco Class XXXXXXXXXX voting special shares and Opco Class XXXXXXXXXX non-voting special shares. These four classes of shares will have the following attributes:

(a) each Opco Class XXXXXXXXXX share will be a fully participating voting share with the holder thereof entitled to one vote at meetings of shareholders of Opco;

(b) each Opco Class XXXXXXXXXX non-voting share will be a fully participating share and will not be entitled to vote at meetings of shareholders of Opco other than as provided under the XXXXXXXXXX, and will be entitled to receive dividends in an amount equal to XXXXXXXXXX% of the dividends declared on the Class XXXXXXXXXX shares.

(c) each Opco Class XXXXXXXXXX special share will be redeemable, subject to applicable law, at any time at the option of Opco at the Opco XXXXXXXXXX Redemption Amount which will equal the Opco Aggregate XXXXXXXXXX Redemption Amount, as defined in Paragraph 15(b), divided by the number of Opco Class XXXXXXXXXX special shares issued on the Share Exchange plus any declared but unpaid dividends;

(d) each Opco Class XXXXXXXXXX special share will be redeemable, subject to applicable law, at any time at the option of Opco at the Opco XXXXXXXXXX Redemption Amount which will equal the Opco Aggregate XXXXXXXXXX Redemption Amount, as defined in Paragraph 15(b), divided by the number of Opco Class XXXXXXXXXX special shares issued on the Share Exchange plus any declared but unpaid dividends;

(e) each Opco Class XXXXXXXXXX special share and each Opco Class XXXXXXXXXX special share will be retractable, subject to applicable law, at any time at the option of the holder at a retraction amount equal to the Opco XXXXXXXXXX Redemption Amount, as the case may be, plus any declared but unpaid dividends;

(f) the holders of the Class XXXXXXXXXX shares and of the Class XXXXXXXXXX shares shall be entitled to non-cumulative dividends as and when declared by the directors. No dividends shall be declared or paid on the Class XXXXXXXXXX shares or the Class XXXXXXXXXX shares unless simultaneously a dividend is declared and paid on both such classes of shares. If and whenever declared on the Class XXXXXXXXXX and Class XXXXXXXXXX shares, the dividend to be declared with respect to each Class XXXXXXXXXX share shall be an amount which is equal to XXXXXXXXXX% of the dividend declared with respect to each Class XXXXXXXXXX share.

(g) if the corporation is liquidated, dissolved or wound-up or its assets are otherwise distributed among the shareholders by way of repayment of capital, whether voluntary or involuntary, the holders of the XXXXXXXXXX special shares shall be entitled to receive, before any distribution of any assets of the corporation among the holders of the Class XXXXXXXXXX shares and the Class XXXXXXXXXX shares, an amount in respect of each Class XXXXXXXXXX or Class XXXXXXXXXX special share held, equal to the Opco XXXXXXXXXX and XXXXXXXXXX Redemption Amount, as the case may be, plus any declared but unpaid dividends;

(h) the holder of each Opco Class XXXXXXXXXX special share will be entitled to one vote for every Opco Class XXXXXXXXXX special share held; and

(i) the holder of each Opco Class XXXXXXXXXX special share will not be entitled to vote at meetings of shareholders of Opco, other than as provided under the XXXXXXXXXX.

15. Each Opco Class XXXXXXXXXX share held by an Opco shareholder will be exchanged for one Opco Class XXXXXXXXXX share and one Opco Class XXXXXXXXXX special share and each Opco Class XXXXXXXXXX share held by an Opco shareholder will be exchanged for one Opco Class XXXXXXXXXX share and one Opco Class XXXXXXXXXX special share (such exchanges referred to hereinafter as the "Share Exchange"). As a result:

(a) the aggregate Redemption Amount of the Opco Class XXXXXXXXXX special shares and Opco Class XXXXXXXXXX special shares issued on the Share Exchange will be equal to a proportion (the "XXXXXXXXXX Proportion") of the FMV of all of the issued Opco Class XXXXXXXXXX and Class XXXXXXXXXX shares immediately before the Share Exchange. The XXXXXXXXXX Proportion is the proportion that:

(i) the net FMV of the business property of Opco as represented by the XXXXXXXXXX shares, is of

(ii) the net FMV of all of the business property of Opco determined immediately before the transfer of the XXXXXXXXXX shares as described in Paragraph 21 and by applying the rules in Paragraphs 19 and 20;

(b) (i) The Opco Aggregate XXXXXXXXXX Redemption Amount will be equal to the aggregate Redemption Amount of the Opco Class XXXXXXXXXX and Opco Class XXXXXXXXXX special shares as calculated in Paragraph 15(a) multiplied by the proportion that the FMV of the Opco Class XXXXXXXXXX shares is of the aggregate FMV of the Opco Class XXXXXXXXXX and Class XXXXXXXXXX shares immediately before the Share Exchange.

(ii) The Opco Aggregate XXXXXXXXXX Redemption Amount will be equal to the aggregate Redemption Amount of the Opco Class XXXXXXXXXX and Opco Class XXXXXXXXXX special shares as calculated in Paragraph 15(a) multiplied by the proportion that the FMV of the Opco Class XXXXXXXXXX shares is of the aggregate FMV of the Opco Class XXXXXXXXXX and Class XXXXXXXXXX shares immediately before the Share Exchange.

(c) the aggregate stated capital of the Opco Class XXXXXXXXXX shares and the Opco Class XXXXXXXXXX special shares will not exceed the aggregate PUC of the Opco Class XXXXXXXXXX shares and the aggregate stated capital of the Opco Class XXXXXXXXXX non-voting shares and the Opco Class XXXXXXXXXX special shares will not exceed the aggregate PUC of the Opco Class XXXXXXXXXX shares, and

(i) the addition to the stated capital of the Opco Class XXXXXXXXXX shares will equal that portion of the aggregate PUC of the Opco Class XXXXXXXXXX shares that the FMV of the Opco Class XXXXXXXXXX special shares is of the total FMV of the Opco Class XXXXXXXXXX shares and Class XXXXXXXXXX special shares;

(ii) the addition to the stated capital of the Opco Class XXXXXXXXXX special shares will equal that portion of the aggregate PUC of the Opco Class XXXXXXXXXX shares that the FMV of the Opco Class XXXXXXXXXX special shares is of the total FMV of the Opco Class XXXXXXXXXX shares and the Opco Class XXXXXXXXXX special shares;

(iii) the addition to the stated capital of the Opco Class XXXXXXXXXX non-voting shares will equal that portion of the aggregate PUC of the Opco Class XXXXXXXXXX shares that the FMV of the Opco Class XXXXXXXXXX non-voting shares is of the total FMV of the Opco Class XXXXXXXXXX non-voting shares and Class XXXXXXXXXX special shares; and

(iv) the addition to the stated capital of the Opco Class XXXXXXXXXX special shares will equal that portion of the aggregate PUC of the Opco Class XXXXXXXXXX shares that the FMV of the Opco Class XXXXXXXXXX special shares is of the total FMV of the Opco Class XXXXXXXXXX non-voting shares and the Opco Class XXXXXXXXXX special shares;

(d) each issued Opco Class XXXXXXXXXX and Class XXXXXXXXXX share will be cancelled and the authorized Class XXXXXXXXXX and Class XXXXXXXXXX shares will be deleted from the articles of incorporation.

Employees who currently hold Opco stock options ("Old Opco stock options") will exchange their rights under those stock options for rights under a new stock option plan of Opco to acquire Opco Class XXXXXXXXXX shares ("New Opco stock options") and for rights under a stock option plan of Newco to acquire Class XXXXXXXXXX shares of Newco ("Newco stock options"). Under each of the New Opco stock options and Newco stock options issued to a particular employee, the total FMV of the Opco Class XXXXXXXXXX and Newco Class XXXXXXXXXX shares issuable thereunder may exceed the total amount payable by the option holder to acquire the Opco Class XXXXXXXXXX shares or the Newco Class XXXXXXXXXX shares under the relevant stock option. However, such excess, if any, will not exceed the amount by which the total FMV, on the Transaction Date, of the Opco Class XXXXXXXXXX shares issuable under the Old Opco stock option exceeds the exercise price payable by the option holder to acquire the Opco Class XXXXXXXXXX shares under the Old Opco stock options.

16. In accordance with the Plan of Arrangement, Newco will acquire from the Opco shareholders all of the issued Opco Class XXXXXXXXXX special shares (which will total XXXXXXXXXX) in exchange for its issuing an identical number of Newco Class XXXXXXXXXX common shares to those shareholders and Newco will acquire from the Opco shareholders all of the issued Opco Class XXXXXXXXXX special shares (currently estimated to be XXXXXXXXXX as of the date of the Proposed Transactions) in exchange for its issuing an identical number of Newco Class XXXXXXXXXX non-voting shares to those shareholders (the "Newco Share Exchange"). The certificates for the Opco Class XXXXXXXXXX special shares and Class XXXXXXXXXX special shares which otherwise would be delivered to the Opco shareholders on the Share Exchange instead will be delivered directly to Newco.

Immediately before the transfer of property described in Paragraph 21, the FMV of each Opco shareholder's shares of the capital stock of Newco will be equal to or approximate the amount determined by the formula as found in subparagraph (b)(iii) of the definition of "permitted exchange" in subsection 55(l). In addition, no person who is not an Opco shareholder will own any shares of Newco.

17. If requested by a particular Opco shareholder, Newco will execute a joint election as permitted under subsection 85(l) in respect of the disposition by that shareholder of Opco Class XXXXXXXXXX special shares for Newco Class XXXXXXXXXX common shares and of Opco Class XXXXXXXXXX special shares for Newco Class XXXXXXXXXX non-voting shares. It is anticipated that Mr. A, Mrs. B and persons related to them who own Opco Class XXXXXXXXXX and Class XXXXXXXXXX special shares will jointly elect with Newco pursuant to subsection 85(l), in prescribed form and within the time referred to in subsection 85(6) in respect of the disposition of Opco Class XXXXXXXXXX and Class XXXXXXXXXX special shares. The agreed amount in respect of each such election will not be less than the lesser of the amounts specified in subparagraphs 85(l)(c.1)(i) or (ii). In each case the agreed amount will not exceed the FMV of the Opco Class XXXXXXXXXX and Class XXXXXXXXXX special shares, as the case may be.

18. Pursuant to the Plan of Arrangement and the provisions of the XXXXXXXXXX, the addition to the stated capital of the Newco Class XXXXXXXXXX shares will equal the aggregate PUC of the Opco Class XXXXXXXXXX shares and the addition to the stated capital of the Newco Class XXXXXXXXXX non-voting shares will equal the aggregate PUC of the Opco Class XXXXXXXXXX special shares.

19. Immediately before the transfer of property described in Paragraph 21, the property of Opco will be determined on a consolidated basis by including the appropriate pro-rata share of the assets of any corporation over which Opco has the ability to exercise significant influence (Opco and such corporations will hereinafter be referred to as the "Opco Group"), which assets will be classified into three types of property for the purposes of the definition of "distribution" in subsection 55(l), as follows:

(a) cash or near cash property, comprising all of the current assets of the Opco Group, which will only consist of accounts receivable, inventories and prepaid expenses;

(b) business property, comprising all of the assets of the Opco Group, 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 SIB); and

(c) investment property, comprising all of the assets of the Opco Group, other than cash or near cash property, any income from which would, for purposes of the Act, be income from property or a SIB.

The Opco Group will own no investment property on the Transaction Date.

For greater certainty, any tax accounts, such as the balance of any non-capital losses of the Opco Group, will not be considered property for purposes of the Proposed Transactions.

For the purposes of this Paragraph and Paragraph 20 below, Opco 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. Opco will have significant influence over XXXXXXXXXX.

For greater certainty, the FMV of the shares of any corporation over which Opco has the ability to exercise significant influence and of any indebtedness receivable by Opco from such a corporation will be allocated between the types of property described above by multiplying the FMV 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 FMV of each type of property owned by the particular corporation (as determined in this Paragraph and Paragraph 20) is of the aggregate net FMV of all of the property owned by such corporation.

20. In determining, on a consolidated basis, the net FMV of each type of property of Opco immediately before the transfer described in Paragraph 21, the liabilities of Opco and any corporation over which Opco exercises significant influence will be allocated to, and will be deducted in the calculation of, the net FMV of each such type of property of such corporation in the following manner:

(a) in determining the net FMV of each type of property of a corporation over which Opco exercises significant influence, immediately before the transfer described in Paragraph 21, the liabilities of that particular corporation (other than any amount owing by such corporation to Opco) will be allocated to, and will be deducted in the calculation of, the net FMV of each type of property of the particular corporation in the following manner:

(i) current liabilities of such corporation will be allocated to the cash or near cash property of such corporation in the proportion that the FMV of each such property is of the FMV of all cash or near cash property owned by the particular corporation. To the extent that the allocation of current liabilities as described herein exceeds the aggregate FMV of the cash or near cash property of the particular corporation, such corporation will be considered to have a negative amount of cash or near cash property;

(ii) any accounts receivable, inventories and prepaid expenses of such corporation, initially classified in accordance with Paragraph 19(a) as cash or near cash property, that will relate to a business that will be carried on by the Opco Group or that will be carried on by XXXXXXXXXX and corporations over which it exercises significant influence following the transfer described in Paragraph 21 and that will be collected, sold or consumed by the Opco Group or XXXXXXXXXX and corporations over which it exercises significant influence, as the case may be, in the ordinary course of that particular business, will then be reclassified as business property and the net FMV thereof, determined after the allocation of the current liabilities described in Paragraph 20(a)(i), will be included in the net FMV of business property and will not be included in the net FMV of cash or near cash property;

(iii) liabilities, other than current liabilities, of such corporation that relate to a particular property will then be allocated to the particular property (and effectively to the type to which the particular property belongs) to the extent of its FMV. 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 that pertain to a particular type of property as described herein exceeds the aggregate FMV of all that particular type of property of the particular corporation, the particular corporation will be considered to have a negative amount of that type of property;

(iv) any liabilities, other than current liabilities, of such corporation which do not relate to a particular type of property will then be allocated to the cash or near cash property and business property of such corporation based on the relative net FMV of each type of property prior to the allocation of such liabilities, but after the allocation of the liabilities described in subparagraphs (a)(i) and (a)(iii) above.

(b) in determining, on a consolidated basis, the net FMV of each type of property of Opco immediately before the transfer of property described in Paragraph 21, Opco will include the appropriate pro-rata share of the net FMV of each type of property of any corporation over which Opco exercises significant influence, as determined in accordance with Paragraph 20(a), and any liabilities of Opco will then be allocated to, and be deducted in the calculation of, the net FMV of each type of property of Opco in the following manner:

(i) current liabilities of Opco will be allocated to the cash or near cash property (consisting only of accounts receivable, inventory and prepaid expenses) of Opco in the proportion that the FMV of each such property is of the FMV of all cash or near cash property owned by it. The allocation of current liabilities as described herein will not exceed the aggregate FMV of the cash or near cash property of Opco;

(ii) any accounts receivable, inventories and prepaid expenses of Opco, initially classified in accordance with Paragraph 19(a) as cash or near cash property, that will relate to a business that will be carried on by Opco, or that will be carried on by XXXXXXXXXX and corporations over which it exercises significant influence following the transfer described in Paragraph 21, and that will be collected, sold or consumed by Opco or XXXXXXXXXX and corporations over which it exercises significant influence, as the case may be, in the ordinary course of that particular business, will then be reclassified as business property and the net FMV thereof, determined after the allocation of the current liabilities described in Paragraph 20(b)(i) will be included in the net FMV of business property and will not be included in the net FMV of cash or near cash property.

(iii) liabilities of Opco, other than current liabilities, that relate to a particular property will be allocated to the particular property (and effectively to the type to which the particular property belongs) to the extent of its FMV. The liabilities that pertain to a type of property, but not to a particular property, then will be allocated to that type of property, but not in excess of the net FMV of such type of property after the allocation of liabilities to a particular property as described herein;

(iv) if any liabilities remain after the allocations described in steps (b)(i) and (b)(iii) above are made ("excess unallocated liabilities"), such excess unallocated liabilities will then be allocated to the cash or near cash property and business property, if any, of Opco, based on the relative net FMV of each type of property prior to the allocation of such excess unallocated liabilities.

For the purposes of this Paragraph, and for the purposes of the Proposed Transactions described herein, no amount will be considered to be a liability unless it represents a true legal liability which is capable of quantification. The amount of any deferred income tax and

XXXXXXXXXX

will not be considered a liability for the purposes of the Proposed Transactions because each such amount does not represent a legal obligation of the particular corporation.

21. Opco will transfer to Newco at FMV all of the XXXXXXXXXX shares such that, immediately after the transfer, the net FMV of the cash or near cash property, business property and investment property of Opco, calculated as described in Paragraphs 19 and 20, which is represented by the XXXXXXXXXX shares transferred to Newco as described herein, will approximate that proportion of the net FMV of all of that type of property of Opco, determined immediately before the transfer referred to herein that:

(a) the aggregate FMV of the Opco Class XXXXXXXXXX special shares and Opco Class XXXXXXXXXX special shares immediately before the transfer, is of

(b) the aggregate FMV of all the issued and outstanding shares of Opco immediately before the transfer.

As sole consideration for such transfer, Newco will issue, to Opco, Newco special shares having an aggregate stated capital not exceeding the agreed amount for the XXXXXXXXXX shares and an aggregate redemption amount and FMV equal to the FMV of the XXXXXXXXXX shares.

Opco and Newco will jointly elect, in prescribed form and within the time referred to in subsection 85(6), in respect of the disposition of the XXXXXXXXXX shares. The agreed amount in respect of such election will not be less than the lesser of the amounts specified in subparagraphs 85(l)(c.1)(i) or (ii) and will not exceed the FMV of the XXXXXXXXXX shares.

22. Opco will redeem from Newco all of its Class XXXXXXXXXX special shares and all of its Class XXXXXXXXXX special shares for an amount equal to the Opco Aggregate XXXXXXXXXX Redemption Amount and the Opco XXXXXXXXXX Aggregate Redemption Amount (as defined in Paragraph 15(b)) (hereinafter referred to as the "Opco Redemption Amounts") so redeemed and will issue to Newco in consideration therefor a demand promissory note (hereinafter referred to as the "Opco Redemption Note") with a principal amount and FMV equal to the Opco Redemption Amounts. Newco will accept such Opco Redemption Note as full payment of the Opco Redemption Amounts in respect of the redeemed Class XXXXXXXXXX special shares and Class XXXXXXXXXX special shares of Opco with the risk of the note being dishonoured.

Newco will redeem from Opco all of its Newco special shares for an amount equal to the aggregate of the Newco Redemption Amount (as defined in Paragraph 12(a)) of all the Newco special shares (hereinafter referred to as the "Newco Redemption Amounts") so redeemed and will issue to Opco in consideration therefor a demand promissory note (hereinafter referred to as the "Newco Redemption Note") with a principal amount and FMV equal to the aggregate of the foregoing Newco Redemption Amounts. Opco will accept such note as full and absolute payment of the Newco Redemption Amounts in respect of the redeemed special shares of Newco with the risk of the note being dishonoured.

23. Each of the Opco Redemption Note and the Newco Redemption Note will be a demand promissory note with interest payable only from the date of demand for payment by the holder to the date of payment of the amount owing under the particular note at a rate equal to the average monthly prime rate of a Canadian chartered bank.

24. The Opco Redemption Note issued by Opco and the Newco Redemption Note issued by Newco will be set off by each holder and issuer of the particular demand note and accepted as full payment by each of them. The Opco Redemption Note and the Newco Redemption Note will both thereupon be marked paid in full and cancelled.

25. Immediately following the Proposed Transactions, the net FMV of each of the types of property retained by Opco, determined in the manner described in Paragraphs 19 and 20, will approximate that proportion of the aggregate FMV of that type of property of Opco immediately before the transfer of property described in Paragraph 21 that:

(a) the aggregate FMV, immediately before the transfer of property described in Paragraph 21, of the Opco Class XXXXXXXXXX and Class XXXXXXXXXX shares, is of

(b) the aggregate FMV, immediately before such transfer of property, of all of the issued and outstanding shares of Opco.

26. The Opco Class XXXXXXXXXX and Class XXXXXXXXXX shares will be redesignated Class XXXXXXXXXX and Class XXXXXXXXXX shares, respectively.

ADDITIONAL INFORMATION

27. No property has or will become property of any corporation in the Opco Group or any predecessor of such corporation and no liabilities have been or will be incurred by any corporation in the Opco Group or any predecessor of such corporation in contemplation of and before the transfer described in Paragraph 21, except in the ordinary course of business, or as described herein. Except as outlined herein, Opco does not have any specific intention of disposing of any assets currently owned to an unrelated person following the Proposed Transactions and neither Opco nor Newco will dispose of any of its assets as part of a series of transactions which includes the Proposed Transactions.

28. There are not, and will not be at any time prior to the completion of the Proposed Transactions, any agreements or undertakings which constitute or include a "guarantee agreement", as defined in subsection 112(2.2), in respect of any of the Opco Class XXXXXXXXXX or Class XXXXXXXXXX special shares or Newco special shares.

29. Neither Opco nor Newco has, or will have, entered into a "dividend rental arrangement", as defined in subsection 248(l), in respect of any of the shares to be redeemed as part of the Proposed Transactions.

30. None of the Opco Class XXXXXXXXXX or Class XXXXXXXXXX special shares or the Newco special shares will be issued or acquired as part of a series of transactions of the type described in subsection 112(2.5).

31. Neither Opco nor Newco will be a corporation described in any of Paragraphs (a) to (f) of the definition of "financial intermediary corporation" in subsection 191(1). Neither Opco nor Newco is or will be an SFI prior to completion of the Proposed Transactions.

32. Each of Opco and Newco will have the financial capacity to honour, upon presentation for payment, the amount payable under its respective promissory note issued as part of the Proposed Transactions.

PURPOSE OF THE PROPOSED TRANSACTIONS

33. The purpose of the Proposed Transactions can be summarized as follows:

(a) The economics of the XXXXXXXXXX business are unrelated to the interest in XXXXXXXXXX and, accordingly, it would be preferable to give the shareholders of Opco the choice to make independent investment decisions in respect of their holdings in each business.

(b) The shares of Opco trade at a significant discount when compared to the value of the shares of XXXXXXXXXX held by Opco and the value of the XXXXXXXXXX business. The separation of Opco into two separate independent corporations will make it easier for the capital markets to effectively value these two new corporations when comparing them to more specific industry benchmarks and performance criteria.

(c) The fact that the XXXXXXXXXX shares will be held within Newco will provide, in an indirect way, a greater market float for those shares. Each Newco shareholder will be able to decide independently whether or not they want to hold their indirect interest in XXXXXXXXXX through Newco. Prior to the completion of the Proposed Transactions, Opco, as the sole holder of the XXXXXXXXXX shares, is the only party that can directly determine what to do with those shares of XXXXXXXXXX.

(d) It is probable that a Newco share will trade for a lower amount than a XXXXXXXXXX share. Investors will have an arbitrage opportunity to effectively purchase a XXXXXXXXXX share for less than the XXXXXXXXXX stock price. Although XXXXXXXXXX shares do not currently pay dividends, it is anticipated that they will do so in the future. An investor who buys a Newco share can expect a greater dividend yield when XXXXXXXXXX shares pay dividends than if the XXXXXXXXXX share had been purchased directly, assuming that Newco flows the XXXXXXXXXX dividends out to its investors.

RULINGS

Provided that the above statements are accurate and constitute complete disclosure of all of the relevant facts, proposed transactions and the purposes of the Proposed Transactions we confirm the following:

A. Provided that a particular Opco shareholder who holds Opco Class XXXXXXXXXX or Class XXXXXXXXXX shares, as the case may be, as capital property, the provisions of subsection 86(l) will apply, and the provisions of subsection 86(2) will not apply, to the Share Exchange, such that:

(a) the cost of the Opco Class XXXXXXXXXX and Class XXXXXXXXXX shares received on the Share Exchange will be deemed by paragraph 86(l)(b) to be an amount equal to that proportion of the ACB to the particular Opco shareholder, immediately before the Share Exchange, of that shareholder's Opco Class XXXXXXXXXX shares, that

(i) the fair market value, immediately after the Share Exchange, of the Opco Class XXXXXXXXXX and Class XXXXXXXXXX shares, as the case may be, is of

(ii) the fair market value, immediately after the Share Exchange, of all of the shares of Opco received by the particular Opco shareholder for that shareholder's Class XXXXXXXXXX shares of Opco;

(b) the cost of the Opco Class XXXXXXXXXX and Class XXXXXXXXXX shares received on the Share Exchange will be deemed by paragraph 86(1)(b) to be an amount equal to that proportion of the ACB to the particular Opco shareholder, immediately before the Share Exchange, of that shareholder's Opco Class XXXXXXXXXX shares, that

(i) the fair market value, immediately after the Share Exchange, of the Opco Class XXXXXXXXXX and Class XXXXXXXXXX shares, as the case may be, is of

(ii) the fair market value, immediately after the Share Exchange, of all of the shares of Opco received by the particular Opco shareholder for the Class XXXXXXXXXX shares of Opco;

(c) pursuant to paragraph 86(1)(c), a particular Opco shareholder will be deemed to have disposed of that shareholder's Opco Class XXXXXXXXXX shares for proceeds of disposition equal to the cost to the particular Opco shareholder of the Opco Class XXXXXXXXXX and Class XXXXXXXXXX shares determined in (a) above; and

(d) pursuant to paragraph 86(1)(c), a particular Opco shareholder will be deemed to have disposed of that shareholder's Opco Class XXXXXXXXXX shares for proceeds of disposition equal to the cost to the particular Opco shareholder of the Opco Class XXXXXXXXXX and Class XXXXXXXXXX shares determined in (b) above.

B) Subject to the provisions of subsection 26(26) of the ITAR and provided that an Opco shareholder who, immediately after the Share Exchange, owns Opco Class XXXXXXXXXX or Class XXXXXXXXXX shares,

(a) holds those shares as capital property;

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

(c) does not include any portion of the gain or loss otherwise determined, from the disposition of those shares, in computing that shareholder's income for the taxation year in which the exchange takes place;

(d) does not file an election under subsection 85(l) or 85(2) with Newco with respect to those shares; and

(e) does not receive any consideration other than Newco Class XXXXXXXXXX or Class XXXXXXXXXX shares in exchange for those shares;

and further provided that immediately after the Newco Share Exchange:

(f) no such shareholder or any person or persons with whom the shareholder does not deal at arm's length, or no such shareholder together with any person or persons with whom the shareholder does not deal at arm's length, will

(i) control Newco, or

(ii) beneficially own shares of Newco having a FMV of more than 50% of the FMV of all of the outstanding shares of Newco, then,

pursuant to paragraph 85.1(1)(a), such shareholder shall be deemed:

(g) to have disposed of that shareholder's Opco Class XXXXXXXXXX or Class XXXXXXXXXX shares for proceeds of disposition equal to the ACB to that shareholder of those shares immediately before the Newco Share Exchange; and

(h) to have acquired the Newco Class XXXXXXXXXX or Class XXXXXXXXXX shares at a cost to that shareholder equal to the ACB to that shareholder of the Opco Class XXXXXXXXXX or Class XXXXXXXXXX shares immediately before the Newco Share Exchange.

C. Subject to the application of the provisions of subsection 26(5) of the ITAR and to the application of paragraph 88(2.2)(b), which applies for the purposes stated in the preamble to subsection 88(2.2), and subject also to the application of subsections 69(11) and 85(4) as they may apply to the transfers referred to herein, the provisions of subsection 85(l) will apply to:

(a) the transfer of all Opco Class XXXXXXXXXX and Class XXXXXXXXXX shares to Newco by any Opco shareholder; and

(b) the transfer by Opco of all of the shares of XXXXXXXXXX to Newco as described in Paragraph 21,

such that the agreed amount in respect of each transfer will be deemed to be the proceeds of disposition to the transferor and the cost thereof to the transferee provided that the transferor and transferee jointly elect in prescribed form and within the determined under subsection 85(6). For greater certainty, paragraph 85(l)(e.2) will not apply to the transfers referred to herein.

D. For the purposes of subparagraph (b)(iii) of the definition of PUC in subsection 89(l), the paid-up capital of the:

(a) Opco Class XXXXXXXXXX, Class XXXXXXXXXX, Class XXXXXXXXXX and Class XXXXXXXXXX shares issued to the Opco shareholders as described in Paragraph 15;

(b) Newco Class XXXXXXXXXX and Class XXXXXXXXXX shares issued to the Opco shareholders as described in Paragraph 16; and

(c) Newco special shares issued to Opco as described in Paragraph 21;

computed without reference to the Act, will be equal to their stated capital as determined for purposes of the XXXXXXXXXX.

In computing the PUC of the Opco Class XXXXXXXXXX shares, subsection 86(2.1) will be applicable. In computing the PUC of the Newco special shares subsections 85(2.1) and 85.1(2.1), as the case may be, will be applicable.

E. Subsection 84(3) will apply on the redemption:

(a) as described in Paragraph 22, of the Opco Class XXXXXXXXXX and Class XXXXXXXXXX shares held by Newco, to deem Opco to have paid and Newco to have received; and

(b) as described in Paragraph 22, of the Newco special shares issued to Opco, to deem Newco to have paid and Opco to have received

a dividend on such shares equal to the amount, if any, by which the aggregate amount paid upon such redemption exceeds the aggregate PUC in respect of such shares immediately before such redemption, and any such dividend

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

(d) will be deductible by the recipient pursuant to subsection 112(l) in computing its taxable income for the year in which such dividend is deemed to have been received, and such deduction will not be prohibited by any of subsections 112(2.2), (2.3) or (2.4);

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

(f) will not be subject to tax under Part IV except to the extent provided for in paragraph 186(1)(b);

(g) will not be subject to tax under Parts IV.1 and VI.1 of the Act because they will be dividends deemed by paragraph 191(4)(d) to be "excluded dividends" as defined in subsection 191(l) and "excepted dividends" as defined in section 187.1, since Newco and Opco will be related corporations due to the controlling interest held by Mr. A.

F. The provisions of subsection 112(3) will apply to reduce any loss which otherwise would be determined for Newco and Opco as a result of the redemptions of shares described in Paragraph 22.

G. The cost to Newco of the Opco Redemption Note and the cost to Opco of the Newco Redemption Note will in each case, upon the issuance thereof, be equal to the principal amount of the particular note. Accordingly, no amount will be included in the income of Newco or Opco upon payment of the principal amount of the particular note.

H. Subsection 7(1.4) will apply to the exchange, described in Paragraph 15, by a particular option holder, of that option holder's Old Opco stock option for a New Opco stock option and a Newco stock option (the New Opco stock option and Newco stock option collectively referred to hereinafter as the "New Options") provided that, on the Effective Date; the amount by which:

(a) the total value of the shares issuable to the option holder under the New Options

exceeds

(b) the total amount payable by the option holder to acquire those shares under the New Options

does not exceed the amount by which

(c) the total value of the Opco Class XXXXXXXXXX shares issuable under that option holder's Old Opco stock option

exceeds

(d) the total amount payable by the option holder to acquire those Opco Class XXXXXXXXXX shares under the Old Opco stock option.

such that the option holder shall be deemed not to have disposed of the Old Opco stock options and not to have acquired the New Options, and the New Options shall be deemed to be the same options as, and a continuation of, the Old Opco stock options.

For greater certainty, to the extent that subsection 7(l.4) is applicable to the exchange of Old Opco stock options, paragraph 7(l)(b) will not apply in respect of such an exchange.

I. The repayment of the Opco Redemption Note held by Newco and the Newco Redemption Note held by Opco, as described in Paragraph 24, will not give rise to a "forgiven amount" within the meaning of subsections 80(l) or 80.01(l).

J. Provided the Opco Class XXXXXXXXXX and Class XXXXXXXXXX Shares constitute capital property to a particular Opco shareholder immediately prior to the commencement of the Proposed Transactions, the Proposed Transactions will not, in and by themselves, cause the Opco Class XXXXXXXXXX, Class XXXXXXXXXX, Class XXXXXXXXXX and Class XXXXXXXXXX shares to be received by that shareholder as a result of the Proposed Transactions not to be capital property of that shareholder. Furthermore, the Proposed Transactions will not, in and by themselves, cause the Newco special shares to be received by Opco not to be capital property of Opco.

K. 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 shares in the circumstances described in subparagraph 55(3.1)(b)(iii);

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

L. The provisions of subsections 15(l), 56(2), 56(4) and 246(l) will not apply to any of the Proposed Transactions, in and of themselves.

M. The provisions of subsection 245(2) will not be applied as a result of the Proposed Transactions, in and of themselves, to redetermine the tax consequences described herein.

COMMENT

The Opco Class XXXXXXXXXX and Class XXXXXXXXXX shares will not be excluded property, within the meaning of subsection 116(6), if the amendments to that provision contained in Bill C-28, which received first reading on December 10, 1997, are passed in their present form.

These rulings are given subject to the limitations and qualifications set out in Information Circular 70-6R3 dated December 30, 1996 provided that the Proposed Transactions are completed by XXXXXXXXXX.

These rulings are based on the Act as it currently reads and do not take into account any future amendments, whether currently proposed or not, to the Act.

Nothing in this letter should be construed as confirmation of the tax consequences of any of the transactions described in this letter other than as specifically described.

Yours truly,

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