1999 Ruling 9924993 - XXXXXXXXXX BUTTERFLY - DIVISIVE REORGANIZATION

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: Butterfly Ruling - Standard Issues

Position: Rulings given - in accordance with the law.

Reasons: See above.

XXXXXXXXXX 992499

Attention: XXXXXXXXXX

XXXXXXXXXX, 1999

Dear Sirs:

Re: Advance Income Tax Ruling Request for: XXXXXXXXXX

This is in reply to your letter of XXXXXXXXXX, and your subsequent correspondence requesting an advance income tax ruling on behalf of the above-noted taxpayers. You have advised that to the best of your knowledge and that of the taxpayers involved none of the issues involved in this ruling request:

(a) is involved in an earlier return of the taxpayers or a related person,

(b) is being considered by a tax services office or taxation centre in connection with a tax return already filed by the taxpayers or a related person,

(c) is under objection,

(d) is before the courts or, if a judgement has been issued, the time limit for appeal has not expired, and

(e) is the subject of a ruling previously issued by the Income Tax Rulings and Interpretations Directorate.

Unless otherwise indicated, all statutory references herein are to provisions of the Income Tax Act (Canada), R.S.C. 1985 (5th Supp.) c.1, as amended from time to time and consolidated to the date of this letter (herein referred to as the "Act") and unless otherwise expressly stated:

(a) "adjusted cost base" (also referred to as "ACB") has the meaning assigned by section 54;

(b) "agreed amount" means the amount that a transferor and transferee have agreed upon in their election under subsection 85(1) in respect of a transfer of "eligible property";

(c) "capital dividend account" (also referred to as "CDA") has the meaning assigned by subsection 89(1);

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

(e) "CBCA" means the Canada Business Corporations Act, R.S.C. 1985, c.C-44, as amended;

(f) "commercial obligation" has the meaning assigned by subsections 80(1) and 80.01(1);

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

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

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

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

(k) "ITAR" means the Income Tax Application Rules, R.S.C. 1985, c.2 (5th Supp.), as amended;

(l) "BCA" means the Business Corporations Act, R.S.O. 1990, c.B.16, as amended;

(m) "paid-up capital" (also referred to as "PUC") has the meaning assigned by subsection 89(1);

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

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

(p) "refundable dividend tax on hand" (also referred to as "RDTOH") has the meaning assigned by subsection 129(3);

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

(r) "restricted financial institution" has the meaning assigned by subsection 248(1);

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

(t) "significant influence" has the meaning assigned by section 3050 of the Canadian Institute of Chartered Accountants Handbook;

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

(v) "specified investment business" has the meaning assigned by subsection 125(7);

(w) "specified person" has the meaning assigned by paragraph (h) of the definition "taxable preferred share" in subsection 248(1);

(x) "stated capital" and "stated capital account" have the meanings assigned thereto by the CBCA or BCA, as the case may be;

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

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

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

FACTS

1. XXXXXXXXXX ("DC") was incorporated as XXXXXXXXXX on XXXXXXXXXX under the Companies Act (Canada), 1934. Its name was changed to its current name in XXXXXXXXXX and it was continued under the CBCA on XXXXXXXXXX. DC is a private corporation and a taxable Canadian corporation.

2. The issued and outstanding share capital of DC consists of the following shares (which are hereinafter sometimes referred to as the "DC Shares"):

(a) XXXXXXXXXX common shares;

(b) XXXXXXXXXX Class A special shares, which are non voting (unless dividends are not paid for XXXXXXXXX consecutive years), non-participating (except for a XXXXXXXXXX% non-cumulative dividend) and redeemable, but not retractable, at the amount paid-up thereon which is $XXXXXXXXXX in the aggregate; and

(c) XXXXXXXXXX Class B special shares, which are non-voting, non-participating (except for a non-cumulative dividend of up to XXXXXXXXXX%) and redeemable and retractable at $XXXXXXXXXX per share.

3. The outstanding common shares and Class A special shares of DC are owned in equal proportions by:

(a) XXXXXXXXXX ("Aco"), which is controlled by XXXXXXXXXX ("Mr. A"), as described in paragraph 7 below;

(b) XXXXXXXXXX ("ABco"), which is also controlled by Mr. A through Aco and XXXXXXXXXX ("Asub"), as described in paragraphs 8 and 9 below; and

(c) XXXXXXXXXX ("Cco"), which is controlled by the group of persons referred to in subparagraph 4(c) below through their respective holding companies, as described in paragraphs 11 and 12 below.

Each of Aco, ABco and Cco acquired the DC Shares it owns pursuant to the transaction(s) described in paragraph 7, 9 or 11, as applicable.

4. The outstanding Class B special shares of DC are owned as follows:

(a) XXXXXXXXXX thereof are owned by Mr. A;

(b) XXXXXXXXXX thereof are owned by XXXXXXXXXX ("Mr. B"); and

(c) XXXXXXXXXX thereof are owned in equal proportions by two surviving children of the lateXXXXXXXXXX ("Mr. C"), namely, XXXXXXXXXX ("Mr. D") and XXXXXXXXXX ("Ms. E"), and the trustees of a testamentary trust which was created under Mr. C's will for the benefit of his surviving spouse, XXXXXXXXXX ("Mrs. C"), during her lifetime and which is called the XXXXXXXXXX (such trust is hereinafter referred to as the "Spousal Trust").

5. Mr. A and Mr. B are brothers. DC had issued the XXXXXXXXXX outstanding Class B special shares of its capital stock equally to them and their other brother, Mr. C, in XXXXXXXXXX and as consideration for certain property which the three brothers (collectively, the "Brothers") had transferred to DC. Mr. C died on XXXXXXXXXX. In accordance with the terms of his will, one-third of the XXXXXXXXXX Class B special shares of DC that had been issued to him vested indefeasibly on his death in the trustees of the Spousal Trust, and one-third thereof has since vested indefeasibly in each of Mr. D and Ms. E. The Spousal Trust is a trust described in paragraph 70(6)(b). The trustees of the Spousal Trust are Mrs. C, Mr. D, Ms. E, Mr. A and Mr. B each of whom is resident in Canada.

6. The DC Shares are capital property of each owner thereof, and, in each case, were acquired by the particular owner thereof after 1971. Subsection 26(5) of the ITAR is not applicable for purposes of computing the adjusted cost base of the DC Shares to any owner thereof. The adjusted cost base, paid-up capital and fair market value ("FMV") of the DC Shares to each owner thereof at the date of this letter are set forth below.

	DC Shareholder	DC Shares	ACB	PUC	FMV

	Aco	                        XXXXXXXXXX 

	ABco	                        XXXXXXXXXX 

	Cco	                         XXXXXXXXXX 

Mr. A	                       XXXXXXXXXX
Mr. B	                       XXXXXXXXXX
	Spousal Trust	                       XXXXXXXXXX
Mr. D	                       XXXXXXXXXX
Ms. E	                       XXXXXXXXXX 

	Note:	TBD means to be determined.

The FMV of the DC Shares owned by each DC shareholder equals or exceeds the adjusted cost base thereof to the particular shareholder as described above. None of the DC Shares owned by a particular DC shareholder was acquired in contemplation of the proposed transactions hereinafter described in this letter.

7. Aco is a taxable Canadian corporation and a private corporation. All of the issued and outstanding shares of Aco, being XXXXXXXXXX common shares, are owned by Mr. A. Aco was formed by an amalgamation under the BCA on XXXXXXXXXX of XXXXXXXXXX (all the issued shares of which were owned by Mr. A) and its subsidiary wholly-owned corporation, XXXXXXXXXX. Such amalgamation was the subject matter of an advance income tax ruling XXXXXXXXXX. The DC Shares now owned by Aco were owned by XXXXXXXXXX prior to the implementation of the transactions which were the subject matter of the XXXXXXXXXX Ruling. XXXXXXXXXX transferred such DC Shares to XXXXXXXXXX on XXXXXXXXXX pursuant to the transaction described in paragraph XXXXXXXXXX of the XXXXXXXXXX Ruling. On the amalgamation of XXXXXXXXXX, such DC Shares became the property of Aco.

8. Asub is a taxable Canadian corporation and a private corporation that was formed by an amalgamation under the BCA on XXXXXXXXXX, each of which was controlled by Mr. A. Such amalgamation was also the subject matter of the XXXXXXXXXX Ruling.

The issued and outstanding share capital of Asub consists of the following shares:

(a) XXXXXXXXXX common shares, all of which are owned by Aco;

(b) XXXXXXXXXX Class A special shares, which are non-voting, non-participating (except for a XXXXXXXXXX% non-cumulative dividend) and redeemable and retractable in the aggregate at $XXXXXXXXXX, and all of which are owned by DC;

(c) XXXXXXXXXX Class C special shares, which are non-voting, non-participating (except for a XXXXXXXXXX% non-cumulative dividend) and redeemable and retractable in the aggregate at $XXXXXXXXXX, and all of which are owned by Mr. A; and

(d) XXXXXXXXXX Class D special shares, which are non-voting, non-participating (except for a XXXXXXXXXX% non-cumulative dividend) and redeemable and retractable in the aggregate at $XXXXXXXXXX, and all of which are owned by DC.

Asub is ultimately controlled by Mr. A by virtue of Aco's ownership of the common shares of Asub described in subparagraph (a) above.

9. ABco is a taxable Canadian corporation and a private corporation that was formed by an amalgamation under the BCA on XXXXXXXXXX which were controlled by Mr. A. The DC Shares which are now owned by ABco were owned by XXXXXXXXXX prior to such amalgamation and became the property of ABco on such amalgamation.

The issued and outstanding share capital of ABco consists of the following shares:

(a) XXXXXXXXXX common shares, all of which are owned by XXXXXXXXXX ("Bco");

(b) XXXXXXXXXX Class A preference shares, which are non-voting, non-participating (except for a XXXXXXXXXX% non-cumulative dividend) and redeemable (but not retractable) in the aggregate at $XXXXXXXXXX, and all of which are owned by Bco;

(c) XXXXXXXXXX Class B preference shares, which are non-voting, non-participating (except for a XXXXXXXXXX% non-cumulative dividend) and redeemable (but not retractable) in the aggregate at $XXXXXXXXXX, and all of which are owned by Bco;

(d) XXXXXXXXXX Class C preference shares, which are non-voting, non-participating (except for a XXXXXXXXXX% non-cumulative dividend) and redeemable and retractable in the aggregate at $XXXXXXXXXX, and all of which are owned by DC;

(e) XXXXXXXXXX Class D preference shares, which are non-voting, non-participating (except for an XXXXXXXXXX% non-cumulative dividend) and redeemable and retractable in the aggregate at $XXXXXXXXXX, and all of which are owned by Bco;

(f) XXXXXXXXXX Class E preference shares, which are non-voting, non-participating (except for a XXXXXXXXXX% non-cumulative dividend) and redeemable and retractable in the aggregate at $XXXXXXXXXX, and all of which are owned by DC; and

(g) XXXXXXXXXX special shares, which are voting and non-participating (except that the holders thereof are entitled to receive the amount paid-up thereon upon the winding-up of ABco), and all of which are owned by Asub.

ABco is ultimately controlled by Mr. A by virtue of Asub's ownership of the special shares of ABco described in subparagraph (g) above. As described in the following paragraph, Bco is also controlled by Mr. A, by virtue of Asub's ownership of a class of special shares of Bco which are voting and non-participating, whereas all of the other outstanding shares of Bco are owned by Mr. B. Aco, Asub, Bco, ABco and DC are all related persons.

10. Bco is a taxable Canadian corporation and a private corporation which was incorporated under the BCA on XXXXXXXXXX. The authorized share capital of Bco consists of an unlimited number of common shares, and an unlimited number of special shares which are voting and non-participating (except that the holders thereof are entitled to receive the amount paid-up thereon upon the winding-up of Bco). The issued and outstanding share capital of Bco consists of XXXXXXXXXX common shares, all of which are owned by Mr. B, and XXXXXXXXXX special shares, all of which are owned by Asub. All such shares were issued on XXXXXXXXXX, as follows:

(a) one common share was issued to Mr. B in consideration for the payment by him of a cash subscription price of $XXXXXXXXXX, and XXXXXXXXXX common shares were issued to Mr. B in consideration for the transfer by him to Bco of all the shares of ABco that it now owns; and

(b) XXXXXXXXXX special shares were issued to Asub at a cash subscription price of $XXXXXXXXXX per share.

11. Cco is a taxable Canadian corporation and a private corporation that was formed by an amalgamation under the BCA on XXXXXXXXXX which were controlled by a group of persons consisting of the trustees of the Spousal Trust, Mr. D and Ms. E. The DC Shares which are now owned by Cco were owned by XXXXXXXXXX prior to such amalgamation and became the property of Cco on such amalgamation. Cco is not a related person to any of the corporations referred to in paragraph 9.

The issued and outstanding share capital of Cco consists of the following shares:

(a) XXXXXXXXXX common shares, which are owned in equal proportions by XXXXXXXXXX ("Spousal Trust Ltd."), XXXXXXXXXX ("D Ltd.") and XXXXXXXXXX ("E Ltd.");

(b) XXXXXXXXXX Class A preference shares, which are non-voting, non-participating (except for a XXXXXXXXXX% non-cumulative dividend) and redeemable (but not retractable) in the aggregate at $XXXXXXXXXX, and which also are owned in equal proportions by Spousal Trust Ltd., D Ltd. and E Ltd.;

(c) XXXXXXXXXX Class B preference shares, which are non-voting, non-participating (except for a XXXXXXXXXX% non-cumulative dividend) and redeemable (but not retractable) in the aggregate at $XXXXXXXXXX, and which also are owned in equal proportions by Spousal Trust Ltd., D Ltd. and E Ltd.;

(d) XXXXXXXXXX Class C preference shares, which are non-voting, non-participating (except for a XXXXXXXXXX% non-cumulative dividend) and redeemable and retractable in the aggregate at $XXXXXXXXXX, and all of which are owned by DC;

(e) XXXXXXXXXX Class D preference shares, which are non-voting, non-participating and redeemable (but not retractable) in the aggregate at $XXXXXXXXXX, and all of which are owned by Spousal Trust Ltd.; and

(f) XXXXXXXXXX Class E preference shares, which are non-voting, non-participating (except for a XXXXXXXXXX% non-cumulative dividend) and redeemable and retractable in the aggregate at $XXXXXXXXXX, and all of which are owned by DC.

12. Each of Spousal Trust Ltd., D Ltd. and E Ltd. is a taxable Canadian corporation and a private corporation which was incorporated under the BCA on XXXXXXXXXX to serve as a holding company of its shareholder. All of the issued shares of Spousal Trust Ltd. are owned by the trustees of the Spousal Trust. All of the issued shares of D Ltd. are owned by Mr. D. All of the issued shares of E Ltd. are owned by Ms. E. Each of Spousal Trust Ltd., D Ltd. and E Ltd. acquired the shares of Cco that it now owns on XXXXXXXXXX from its shareholder, namely, the trustees of the Spousal Trust, Mr. D or Ms. E, as the case may be, and issued common shares of its capital stock to its shareholder as consideration for the transfer of such Cco shares. Spousal Trust Ltd., D Ltd. and E Ltd. and Cco are related persons.

13. Historically, DC served as a central holding company through which the Brothers and their respective holding companies, XXXXXXXXXX, held many of their joint investments. The most significant of such joint investments were in a public corporation that was engaged in XXXXXXXXXX businesses in which the Brothers were actively involved, and in two private corporations which owned income producing real properties. At different times over the years, DC transferred these investments to the Brothers' holding companies (and to the holding companies which resulted from the amalgamations described in paragraphs 8, 9 and 11 above) and received shares of their capital stock in exchange. These transfers were made to give the Brothers and, after the death of Mr. C, his successors, through the aforementioned holding companies, greater flexibility to deal with their interests in such public and private corporations independently. In some cases, the shares of the holding corporations received by DC on the exchange were redeemed.

More recently, DC has also served as a vehicle to which various members of the families of the Brothers have advanced monies to obtain more favourable yields than they could obtain independently. DC has been investing such monies in XXXXXXXXXX directly and indirectly through a pooled money market fund. The principal assets of DC currently consist of units of a pooled money market fund (which invests in XXXXXXXXXX) and the shares of Asub, ABco and Cco which are described above in subparagraphs 8(b) and 8(d), 9(d) and 9(f), and 11(d) and 11(f), respectively, and which are described further below.

14. You advise that the fair market value of DC's shares of each of Asub, ABco and Cco is equal to the redemption amount thereof. The redemption amount, paid-up capital and the adjusted cost base to DC of such shares are as follows:

Redemption
Issuer Shares Amount (FMV) PUC ACB

Asub XXXXXXXXXX

ABco XXXXXXXXXX

Cco XXXXXXXXXX

15. The liabilities of DC consist of accounts payable and loans which are unsecured and have no specific terms for repayment. Substantially all of the loans payable are due to DC's shareholders and persons related to its shareholders and such loans bear interest at variable rates.

16. The taxation year-end of each taxpayer referred to herein; their social insurance number or tax account number, tax service office ("TSO") or taxation centre ("TC") of Revenue Canada at which each such taxpayer files its income tax return (TSO/TC) and the approximate amounts of the capital dividend account and refundable dividend tax on hand of each such corporate taxpayer at the end of its 1998 taxation year are set forth below:

Taxpayer and

(SIN/Account #)
TSO/TC
Year-End
RDTOH
CDA

DC
(XXXXXXXXXX)

XXXXXXXXXX

ABco
(XXXXXXXXXX)

XXXXXXXXXX

Bco
(XXXXXXXXXX)

XXXXXXXXXX

Asub
(XXXXXXXXXX)

XXXXXXXXXX

Aco
(XXXXXXXXXX)

XXXXXXXXXX

Cco
(XXXXXXXXXX)

XXXXXXXXXX

Spousal Trust Ltd.

(XXXXXXXXXX)

XXXXXXXXXX

D Ltd.

(XXXXXXXXXX)

XXXXXXXXXX

E Ltd.

(XXXXXXXXXX )

XXXXXXXXXX

Spousal Trust
(XXXXXXXXXX)

XXXXXXXXXX

Mr. B

(XXXXXXXXXX)

XXXXXXXXXX

Mr. A

(XXXXXXXXXX)

XXXXXXXXXX

Mr. D

(XXXXXXXXXX)

XXXXXXXXXX

Ms. E

(XXXXXXXXXX)

XXXXXXXXXX

17. None of the transactions or events hereinbefore described in this letter occurred in contemplation of the proposed transactions hereinafter described in this letter or are part of the same series of transactions or events as the proposed transactions hereinafter described in this letter.

18. No liabilities have been incurred by, and no assets have been acquired by or disposed of by DC in contemplation of the proposed transactions hereinafter described in this letter. Except as hereinafter described in this letter, no liabilities will be incurred by, and no assets will be acquired by or disposed of by DC in contemplation of the proposed transactions described herein. Except as hereinafter described in this letter, no property of DC that is transferred pursuant to the proposed transactions described herein will be transferred to any other person or partnership as part of a series of transactions that includes the proposed transactions described herein.

19. Neither DC nor any corporation to which any of its shares or property are transferred pursuant to the proposed transactions described herein is or will be at the time such proposed transactions are implemented, a specified financial institution or a restricted financial institution.

20. None of the shares of DC and the corporations to which any of its shares or property are transferred pursuant to the proposed transactions described herein has been or will be at any time during the implementation of such transactions:

(a) subject to guarantee agreement that is given by a specified financial institution or a specified person in relation to a specified financial institution for any purpose referred to in subsection 112(2.2);

(b) issued or acquired as part of a transaction or event or a series of transactions or events contemplated by subsection 112(2.5); or

(c) the subject of a "dividend rental arrangement", as defined in subsection 248(1).

PROPOSED TRANSACTIONS

21. The articles of incorporation of each of Aco, Spousal Trust Ltd., D Ltd. and E Ltd. will be amended to include an unlimited number of the following classes of shares:

(a) in the case of Aco, XXXXXXXXXX classes of special shares the shares of which will be issued as consideration for the transfers to be made to Aco which are described in paragraphs 23 and 28 below; and

(b) in the case of each of Spousal Trust Ltd., D Ltd. and E Ltd., one class of special shares the shares of which will be issued as consideration for the transfers to be made to each such corporation which are described in paragraph 23 below.

22. Mr. B will incorporate a new corporation under the BCA, which will be a taxable Canadian corporation and a private corporation (herein referred to as "Newco"). Newco's authorized share capital will consist of an unlimited number of the following classes of shares:

(a) a class of common shares, XXXXXXXXXX shares of which will be issued to Mr. B in the course of the organization of Newco; and

(b) XXXXXXXXXX classes of special shares, the shares of which will be issued as consideration for the transfers to be made to Newco which are described in paragraphs 23 and 28 below.

The first taxation year of Newco will end after it redeems the special shares of its capital stock, as described in paragraph 31 below, it proposes to issue to DC as consideration for the transfer of property to be made to Newco which is described in paragraph 28 below, and before the DC Shares which will be transferred to Newco as described in paragraph 23, are purchased for cancellation, as described in paragraph 31 below. The first taxation year-end of Newco is expected to take place on XXXXXXXXXX.

23. Each of Mr. A, Mr. B, ABco, Mr. D, Ms. E and the trustees of the Spousal Trust (hereinafter sometimes referred to collectively as the "Share Transferors" and separately as a "Share Transferor") will transfer all of the DC Shares owned by such Share Transferor to the particular corporation whose name is set forth in the chart below opposite the name of the particular Share Transferor (such corporations being hereinafter sometimes referred to collectively as the "Share Transferees" and separately as a "Share Transferee") as follows:

									DC Shares
	Share Transferor	Share Transferee	Transferred

Mr. A	Aco	XXXXXXXXXX
Mr. B	Newco	XXXXXXXXXX
	ABco	Newco	XXXXXXXXXX
	ABco	Newco	XXXXXXXXXX
Mr. D	D Ltd.	XXXXXXXXXX
Ms. E	E Ltd.	XXXXXXXXXX
	Spousal Trust	Spousal Trust Ltd.	XXXXXXXXXX 

As consideration for the above-described transfers of DC Shares, each Share Transferee will issue to the Share Transferor thereof special shares of a particular class of the Share Transferee that are non-voting, non-participating (except for a XXXXXXXXXX% non-cumulative dividend) and redeemable and retractable at an amount in the aggregate equal to the aggregate fair market value of the DC Shares so transferred to it. The class of special shares of Newco that will be issued to Mr. B will be different from the class of special shares of Newco that will be issued to ABco, but, for greater certainty, each class of shares so issued will be non-voting. In accordance with clause 24(3) of the BCA, the amount that will be added to the stated capital account of the class of special shares so issued by each Share Transferee to a particular Share Transferor will be equal to the aggregate paid-up capital of the DC Shares transferred to it by such Share Transferor. For greater certainty, no non-share consideration will be paid by any Share Transferee in respect of the transfers of the DC Shares so acquired by it.

24. Each Share Transferor (other than Mr. D and Ms. E) will jointly elect with its Share Transferee, as described above, in prescribed form and within the time referred to in subsection 85(6), to have the rules in subsection 85(1) apply to such transfer of DC Shares (such shares being eligible property of each Share Transferor). The agreed amount in respect of each such election will be equal to the adjusted cost base of the DC Shares to the Share Transferor at the time of the transfer thereof to the particular Share Transferee, which will be less than the fair market value thereof at that time.

25. Immediately before the property transfers described in paragraph 28 below, the property owned by DC will be classified into the following three different types for purposes of paragraph 55(3)(b) such classification being determined on a consolidated basis by including DC's appropriate pro-rata share of the assets of any corporation over which DC has the ability to exercise significant influence (DC and any such corporation are hereinafter sometimes collectively called the "Group"):

(a) cash or near-cash property, consisting of all of the current assets of the Group, including cash, accounts receivable (which, for greater certainty, will not include long-term advances), term deposits and marketable securities (other than portfolio investments);

(b) investment property, consisting of all the assets of the Group, other than cash or near-cash property, any income from which would constitute income from property or a specified investment business (such assets include DC's investment portfolio); and

(c) business property, comprising all of the assets of the Group, not included in (a) or (b), any income from which would be income from a business (other than a specified investment business).

For the purpose of this paragraph and paragraphs 26 and 27, a corporation will be considered to have significant influence over a corporation if it has significant influence over that corporation or over any other corporation that has significant influence over that corporation. For greater certainty, any tax accounts of a member of the Group, such as the amount of refundable dividend tax on hand, the balance of any capital dividend account, or any deferred income tax debit balance will not be considered property for purposes of the classification described herein. For the purpose of calculating the fair market value of the types of property, as described above, each member of the Group will include its respective partnership share of each property of any partnership of which such member is a partner, other than a limited partnership of which it is a limited partner and not a general partner.

For purposes of determining DC's appropriate pro-rata share of each type of property of the assets of the Group, the fair market value of the shares of any corporation over which a corporate shareholder has the ability to exercise significant influence and of any indebtedness of any such corporation to its corporate shareholder will be allocated between the three types of property described above, by multiplying the fair market value of such shares or indebtedness, as the case may be, by the proportion that the net fair market value of each type of property owned by the particular corporation (as determined in this paragraph and paragraph 26 below) is of the aggregate net fair market value of the property owned by such corporation.

26. In determining, on a consolidated basis, the net fair market value of each type of property of DC immediately before the transfer of property as described in paragraph 28 below, the liabilities of DC and any corporation over which DC exercises significant influence will be allocated to, and will be deducted in the calculation of, the net fair market value of each such type of property of such corporation in the following manner:

(a) in determining the net fair market value of each type of property of a corporation over which DC exercises significant influence, immediately before the transfer of property as described in paragraph 28 below, the liabilities of that particular corporation (other than any amount owing by such corporation to DC) will be allocated to, and will be deducted in the calculation of, the net fair market value 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 (including any cash, accounts receivable, inventory and prepaid expenses) of such corporation in the proportion that the fair market value of each such property is of the fair market value of all cash or near cash property owned by the particular corporation. To the extent that the allocation of current liabilities as described herein exceeds the aggregate fair market value 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) 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 fair market value. Liabilities that pertain to a type of property but not to a particular property will then be allocated to that type of property. To the extent that the allocation of liabilities that pertain to a particular type of property as described herein exceeds the aggregate fair market value 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; and

(iii) 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, business property and investment property of such corporation based on the relative net fair market value of each type of property prior to the allocation of such liabilities, but after the allocation of the liabilities described in subparagraph (a)(ii) above.

(b) In determining, on a consolidated basis, the net fair market value of each type of property of DC immediately before the transfer of property as described in paragraph 28 below, DC will include the appropriate pro-rata share of the net fair market value of each type of property of any corporation over which DC exercises significant influence, as determined in accordance with subparagraph (a) herein, and any liabilities of DC will then be allocated to, and be deducted in the calculation of, the net fair market value of each type of property of DC in the following manner:

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

(ii) liabilities of DC, 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 fair market value. 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 fair market value of such type of property after the allocation of liabilities to a particular property as described herein; and

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

For the purpose of calculating the net fair market value of the types of property of DC, the liabilities of any particular member of the Group will include its respective partnership share of each liability of any partnership of which such member is a partner, other than a limited partnership of which it is a limited partner and not a general partner. For these purposes a deferred income tax credit balance will not be considered as a liability.

27. For the purposes of the classifications and determinations contemplated by paragraphs 25 and 26 above it is anticipated that DC will not have any business property, and that:

(a) DC will have two types of property: cash or near-cash property, and investment property; and

(b) DC's shares of Asub, ABco and Cco will each be classified as investment property since DC does not have significant influence over Asub, ABco or Cco.

28. On or before XXXXXXXXXX, DC will transfer a portion of each type of property owned by it at that time for fair market value to each of Aco and Newco (herein sometimes referred to collectively as the "Property Transferees" and individually as the "Property Transferee"), as follows:

(a) to Aco, a portion of the cash or near-cash property and investment property of DC, including all the shares of Asub owned by DC; and

(b) to Newco, a portion of the cash or near-cash property and investment property of DC, including all of the shares of ABco owned by DC;

such that, immediately after the transfer, the net fair market value of each type of property of DC (after allocating and deducting, in the manner described in paragraph 26 above, the liabilities of DC which are to be assumed by each Property Transferee), that is transferred to a particular Property Transferee will approximate that proportion of the net fair market value of all property of that type of DC determined immediately before the transfer referred to herein that:

(c) the aggregate fair market value of the DC Shares owned by the particular Property Transferee immediately before the transfer,

is of

(d) the aggregate fair market value of all of the issued and outstanding DC Shares owned by all shareholders of DC immediately before the transfer.

For the purpose of this paragraph the expression "approximate that proportion" means that the discrepancy from that proportion, if any, would not exceed 1%, determined as a percentage of the net fair market value of each type of property which each Property Transferee has received (or DC has retained) as compared to what each Property Transferee would have received (or DC would have retained) had it received (or retained) its appropriate pro-rata share of the net fair market value of that type of property. However, the aggregate net fair market value of all property of DC transferred to each Property Transferee as described herein will be equal to the proportion determined by (c) and (d) above of the aggregate net fair market value of all property of DC immediately before the transfer.

29. As consideration for the transfers of property by DC to the Property Transferees, as described in paragraph 28 above:

(a) each Property Transferee will assume liabilities of DC allocable to the property transferred to such Property Transferee in the manner described in paragraph 26 above and which do not exceed in the aggregate:

(i) the aggregate of the amounts agreed on by DC and such Property Transferee in the election jointly made by them pursuant to subsection 85(1), as described in paragraph 30 below, and

(ii) the aggregate fair market value of all property of DC transferred to such Property Transferee that is not the object of a joint election as described in paragraph 30 below; and

(b) each Property Transferee will issue to DC special shares of its capital stock that are voting, non-participating (except for a XXXXXXXXXX% non-cumulative dividend), redeemable and retractable in the aggregate at an amount equal to the amount by which the aggregate fair market value of all property of DC transferred to such Property Transferee exceeds the aggregate fair market value of the non-share consideration for such property, as described in (a) above. The fair market value and redemption amount of each Property Transferee's special shares will be equal to the net fair market value of the consideration for which they are issued. Such special shares are hereinafter sometimes referred to as the "Designated Special Shares".

The Designated Special Shares of a particular Property Transferee issued to DC will represent more than 10%, but less than 50%, of the issued share capital of such Property Transferee having full voting rights under all circumstances. The aggregate fair market value of the Designated Special Shares of a particular Property Transferee issued to DC will represent more than 10% of the fair market value of all of the issued share capital of such Property Transferee. In accordance with clause 24(3) of the BCA, the amount that will be added to the stated capital account of the Designated Special Shares of each Property Transferee issued to DC will not exceed the aggregate cost (determined under subsection 85(1), where applicable) of the property transferred to such Property Transferee, less the amount of the non-share consideration for such property, as described in (a) above.

30. DC and each Property Transferee will jointly elect, in prescribed form and within the time referred to in subsection 85(6), to have the rules in subsection 85(1) apply to the transfer of each property transferred by DC to a particular Property Transferee, as described in paragraph 28 above, that is an eligible property whose fair market value exceeds or may exceed the cost amount thereof to DC. Each eligible property that is the subject of such an election, will be capital property of DC other than depreciable property of a prescribed class. The agreed amount in each such election in respect of a particular eligible property included therein:

(a) will not be less than the lesser of the cost amount thereof to DC and the fair market value thereof at the time of the transfer;

(b) will not be greater than the fair market value thereof at the time of the transfer; and

(c) will not be less than the amount of any liabilities assumed by the particular Property Transferee as consideration for the transfer of such eligible property.

31. After the transfers described in paragraph 28 above, and immediately before the end of the taxation year of each of Aco and Newco in which the purchases for cancellation described in paragraph 32 below will occur (i.e., XXXXXXXXX), each Property Transferee will redeem all of the Designated Special Shares of its capital stock held by DC at the redemption price thereof. Each Property Transferee will pay the aggregate redemption price of the Designated Special Shares of its capital stock by issuing to DC a non-interest bearing promissory note, which will be payable on demand, and which will have a principal amount and fair market value equal to the aggregate redemption price of the Designated Special Shares so redeemed (such promissory notes are hereinafter referred to collectively as the "Transferee Notes" and individually as a "Transferee Note"). DC will accept the Transferee Note of each Property Transferee in full payment of the aggregate redemption price of the Designated Special Shares in the capital stock of the particular Property Transferee.

32. On XXXXXXXXXX, DC will purchase for cancellation all of the DC Shares owned by each Property Transferee at a purchase price equal to the fair market value thereof at that time. The purchase of the DC Shares of the Property Transferees for cancellation will take place in two stages, as follows:

(a) first, DC will purchase a sufficient number of DC Shares or part thereof owned by a particular Property Transferee for cancellation which will result in a deemed dividend, pursuant to the provisions of subsection 84(3), equal to that proportion of DC's capital dividend account immediately before that time that the aggregate fair market value of all DC Shares owned by the particular Property Transferee at that time is of the aggregate fair market value of all DC Shares then outstanding. DC will elect, in prescribed manner and prescribed form and at or before the earlier of the time and the day referred to in subsection 83(2), to have the rules therein apply to the full amount of each such deemed dividend resulting from the purchase of such DC Shares; and

(b) second, DC will purchase all the remaining DC Shares held by each Property Transferee for cancellation.

DC will issue to each Property Transferee, as consideration for the purchase of the DC Shares owned by the Property Transferees, two non-interest-bearing promissory notes (hereinafter referred to collectively as the "DC Notes" and individually as an "DC Note). The first DC Note will have a principal amount and fair market value equal to the purchase price of the DC Shares purchased in the first stage from the particular Property Transferee, as described in (a) above. The second DC Note will have a principal amount and fair market value equal to the purchase price of the DC Shares purchased in the second stage from the particular Property Transferee, as described in (b) above. Each Property Transferee will accept the DC Notes issued to it in full payment of the aggregate purchase price of the DC Shares sold by it in each stage. While the purchase of DC Shares owned by the Property Transferees in the second stage described in (b) above will result in an acquisition of control of DC by Cco and a deemed year end under subsection 249(4), the purchase of DC Shares owned by the Property Transferees in the first stage described in (a) will not result in an acquisition of control of DC at that time nor will it result in any Property Transferee ceasing to be a related person to DC immediately after that time.

33. DC and each Property Transferee will set-off the principal amount of their mutual debt obligations (i.e., two DC Notes issued to each Property Transferee described in 32 above and the Transferee Note issued by each Property Transferee to DC as described in 31 above). The fair market value of the respective mutual debt obligations to be set-off will be equal to the principal amount owing in respect thereof at that time such that the mutual debt obligations will be fully settled or extinguished for an amount equal to the principal amount owing in respect thereof at that time.

34. Immediately following the proposed transactions described above, the net fair market value of each type of property retained by DC, determined in the manner described in paragraphs 25 and 26 above, will approximate that proportion of the aggregate net fair market value of that type of property of DC, determined immediately before the transfers described in paragraph 28 above, that:

(a) the aggregate fair market value, immediately before the transfer of property described in paragraph 28 above, of the DC Shares owned by Cco, D Ltd., E Ltd., and Spousal Trust Ltd.

is of

(b) the aggregate fair market value, immediately before the transfer of property, of all of the issued and outstanding shares of DC.

35. After completion of the transactions described above, DC will be continued under the BCA in accordance with the provisions of the CBCA and BCA.

36. After completion of the transactions described above, DC and Cco will amalgamate in accordance with the provisions of the BCA to continue as one corporation (hereinafter referred to as "Cco Amalco"). On the amalgamation:

(a) all of the property and liabilities of DC and Cco (except shares in the capital stock of either such corporation held by the other such corporation and amounts receivable from, or payable to, each other) will become the property and liabilities of Cco Amalco;

(b) all DC Shares owned by Cco and all shares in the capital stock of Cco owned by DC will be cancelled without any repayment of capital in respect thereof; and

(c) each of Spousal Trust Ltd., D Ltd. and E Ltd. will only receive shares of Cco Amalco, in exchange for the shares of Cco owned by each such shareholder immediately before the amalgamation (such shares will have similar terms and conditions as the shares of Cco so exchanged by each shareholder), the aggregate fair market value and the aggregate stated capital of which will be equal to the aggregate fair market value and the aggregate stated capital, respectively, of the DC Shares and shares of Cco owned by it immediately before the amalgamation.

PURPOSE OF THE PROPOSED TRANSACTIONS

37. The purpose of the proposed transactions is to simplify the complex corporate structure and arrangements currently in place by:

(a) eliminating the interests that the XXXXXXXXXX families have indirectly in one another's holding companies through DC; and

(b) enabling each of the XXXXXXXXXX families to have direct and separate ownership of its pro-rata share of the property of DC which will include all the shares of its holding company now owned by DC.

RULINGS GIVEN

Provided the foregoing statements constitute a complete and accurate disclosure of all the relevant facts, proposed transactions and purpose of the proposed transactions, and provided that the proposed transactions are completed in the manner described above, we confirm the following:

A. Subsection 85(1) will apply to the transfers of DC Shares owned by each Share Transferor to the particular Share Transferee, as described in paragraph 23, where each particular Share Transferor and Share Transferee makes a valid election, as described in paragraph 24, such that the agreed amount in respect of each such transfer shall be deemed to be the proceeds of disposition of such shares to each such Share Transferor and the cost thereof to each particular Share Transferee pursuant to paragraph 85(1)(a). For greater certainty, paragraph 85(1)(e.2) will not apply to the share transfers referred to herein.

B. Subsection 84.1(1) shall not apply to reduce the paid-up capital of the special shares issued by each Share Transferee to the particular Share Transferor, as described in paragraph 23, where the particular Share Transferor is not a corporation nor shall subsection 84.1(1) apply to deem a dividend to have been paid to the particular Share Transferor by the particular Share Transferee.

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), subsection 85(1) will apply to the transfer of each eligible property owned by DC to the particular Property Transferee, as described in paragraphs 29 and 30, provided each particular Property Transferee and DC file a valid election in respect of such transfer, as described in paragraph 30, such that the agreed amount in respect of each such transfer shall be deemed to be the proceeds of disposition thereof to DC and the cost thereof to each such Property Transferee pursuant to paragraph 85(1)(a). For greater certainty, paragraph 85(1)(e.2) will not apply to the transfers referred to herein.

D. The provisions of subsection 85(2.1) will not apply to reduce

(i) the paid-up capital of the shares of Newco issued to ABco as consideration for the transfer by ABco of its DC Shares to Newco, as described in paragraph 23, or

(ii) the paid-up capital of the Designated Special Shares of the Property Transferees issued to DC, as described in subparagraph 29(b).

E. On the redemption by each Property Transferee of the Designated Special Shares issued by it to DC, as described in paragraph 31, each Property Transferee shall be deemed to have paid, by virtue of paragraph 84(3)(a), and DC shall be deemed to have received, by virtue of paragraph 84(3)(b), a dividend equal to the amount by which the amount paid on the particular share redemption exceeds the paid-up capital of the Designated Special Shares so redeemed by each Property Transferee.

F. On the purchase for cancellation of the DC Shares owned by each Property Transferee, as described in subparagraphs 32(a) and (b), DC shall be deemed to have paid to the particular Property Transferee, by virtue of paragraph 84(3)(a), and the particular Property Transferee shall be deemed to have received, by virtue of paragraph 84(3)(b), two separate dividends each of which will be equal to the amount by which the amount paid on the purchase of the particular DC Shares of the particular Property Transferee exceeds the paid-up capital of such DC Shares. Provided that DC elects pursuant to subsection 83(2), as described in subparagraph 32(a) in respect of the full amount of each such dividend, the dividend arising as a result of the purchase for cancellation of the DC Shares from a particular Property Transferee as described in subparagraph 32(a) shall be deemed to be a capital dividend.

G. With respect to each deemed dividend referred to in E and F above

(i) the amount of such dividend shall be excluded from the proceeds of disposition of the shares so redeemed or purchased for cancellation, as the case may be, by virtue of paragraph (j) of the definition of "proceeds of disposition" in section 54; and

(ii) each such dividend will be a taxable dividend unless the payer thereof elects in respect thereof in accordance with subsection 83(2) as described in F above.

H. To the extent that each deemed dividend referred to in E and F above is a taxable dividend, such dividend

(i) shall be included in the recipient's income pursuant to section 82 and paragraph 12(1)(j);

(ii) shall be deductible by a recipient corporation thereof pursuant to subsection 112(1) in computing its taxable income for the year in which such dividend is deemed to have been received, and such deduction will not be denied by any of subsections 112(2.1) to (2.4); and

(iii) shall be an "excepted dividend", within the meaning assigned by paragraph (b) of the definition of "excepted dividend" in section 187.1, to the recipient thereof, and will be an "excluded dividend", within the meaning assigned by paragraph (a) of the definition of "excluded dividend" in subsection 191(1), to the payer thereof and, therefore, will not be subject to tax under Part IV.1 or Part VI.1.

I. By virtue of paragraph 186(4)(a) each Property Transferee will be connected with DC immediately before the time the deemed dividends referred to in E are paid and by virtue of paragraph 186(4)(b) DC will be connected with each Property Transferee immediately before the time the deemed dividends referred to in F are paid such that,

(i) DC shall, pursuant to paragraph 186(1)(b), be subject to tax under Part IV in an amount equal to that proportion of the dividend refund, if any, to which each Property Transferee will become entitled for its taxation year in which the deemed dividends referred to in E are deemed to be paid, that the amount of each such dividend received by DC is of the aggregate of all taxable dividends paid by each such Property Transferee in its taxation year in which such dividends are paid, and

(ii) each Property Transferee shall, pursuant to paragraph 186(1)(b), be subject to tax under Part IV in an amount equal to that proportion of the dividend refund, if any, to which DC will become entitled for its taxation year in which the deemed dividends referred to in F are deemed to be paid, that the amount of each such dividend received by the particular Property Transferee is of the aggregate of all taxable dividends paid by DC in its taxation year in which such dividends are paid.

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

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

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

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

(iv) 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), subsection 55(2) will not apply to the taxable dividends referred to in ruling G above. For greater certainty, subsection 55(3.1) will not apply to preclude the application of paragraph 55(3)(b) to the transactions proposed herein.

K. The set-off of the mutual obligations outstanding between a particular Property Transferee and DC under the DC Notes issued to such Property Transferee and the Transferee Note issued by such Property Transferee, as described in paragraph 33, will not give rise to a forgiven amount, within the meaning of subsection 80(1) nor shall DC or the particular Property Transferee otherwise realize any gain or incur any loss as a result thereof.

L. The amalgamation of DC and Cco, as described in paragraph 36, will be an amalgamation within the meaning of subsection 87(1) with the result that:

(a) each of Spousal Trust Ltd., D Ltd. and E Ltd. will be deemed by paragraph 87(4)(a) to have disposed of its shares of Cco for proceeds equal to the adjusted cost base of such shares immediately before the amalgamation of Cco and DC;

(b) each of Spousal Trust Ltd., D Ltd. and E Ltd. will be deemed by paragraph 87(4)(b) to have acquired its shares of Cco Amalco for an amount equal to that portion of the proceeds received by it that

(i) the fair market value, immediately after the amalgamation, of all new shares of that particular class so acquired by Spousal Trust Ltd., D Ltd. or E Ltd., as the case may be,

is of

(ii) the fair market value, immediately after the amalgamation, of all new shares so acquired by Spousal Trust Ltd., D Ltd. or E Ltd., as the case may be; and

(c) the provisions of paragraphs 87(4)(c), (d) and (e), will not apply to the amalgamation of Cco and DC.

M. Subsection 80.01(3) shall apply to deem any commercial obligation owing to or from DC or Cco to the other to have been settled immediately prior to the amalgamation of DC and Cco by payment of an amount equal to the amount that would have been the cost amount thereof at that time if such cost amount were determined without reference to paragraph (e) of that definition immediately prior to the amalgamation.

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

O. The provisions of subsection 245(2) will not be applied as a result of the proposed transactions, in and by themselves, to redetermine the tax consequences confirmed herein.

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 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.

Nothing in this letter should be construed as confirmation of the income tax consequences of any of the transactions described in this letter other than as specifically described. In addition, nothing in this letter should be construed as confirmation, express or implied, of the fair market value or adjusted cost base of any property or the paid-up capital of any share.

Yours truly,

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

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