2000 Ruling 2000-0011353 - Butterfly Arrangement

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: Full basis butterfly - not using paragraph 55(3)(b) exception.

Position: Ruling provided on several key issues.

Reasons: Based on the law

XXXXXXXXXX
XXXXXXXXXX 2000-001135
XXXXXXXXXX

Attention: XXXXXXXXXX

XXXXXXXXXX, 2000

Dear Sir or Madam:

Re: XXXXXXXXXX
Advance Income Tax Ruling

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 taxpayer. 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 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) "Aco" refers to XXXXXXXXXX;

(b) "AcoSub" refers to XXXXXXXXXX;

(c) "adjusted cost base" ("ACB") and "proceeds of disposition" ("POD") have the meanings assigned to them by their respective definitions in section 54;

(d) "arm's length" has the meaning assigned by subsection 251(1);

(e) "Arrangement Record Date" means the date fixed by Canco for determining those common shareholders, incentive stock option holders, and warrant holders of Canco that are entitled to participate in the Plan of Arrangement. This date will be the last business day immediately preceding the "Transaction Date";

(f) "BCA1" refers to the XXXXXXXXXX Companies Act;

(g) "BCA2" refers to the Business Corporations Act (XXXXXXXXXX);

(h) "BCA3" refers to the XXXXXXXXXX;

(i) "Bco" refers to XXXXXXXXXX;

(j) "BcoSub" refers to XXXXXXXXXX;

(k) "Canco" refers to XXXXXXXXXX;

(l) "controlled foreign affiliate", "corporation", "employee", "foreign affiliate", "paid-up capital ("PUC"), "public corporation", "specified financial institution", "subsidiary controlled corporation", "subsidiary wholly-owned corporation", "taxable Canadian corporation", and "taxable dividend" have the meanings assigned to them by their respective definitions in subsection 248(1);

(m) "excluded property" and "foreign accrual property income" have the meanings assigned to them by their respective definitions in subsection 95(1);

(n) "FMV" means fair market value;

(o) "Plan of Arrangement" means a plan of arrangement under the "BCA2" to effect certain of the proposed transactions as described in 17 to 29 below;

(p) "prescribed stock exchange" means the XXXXXXXXXX which is a stock exchange that is listed in section 3200 of the Income Tax Regulations;

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

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

(s) "stated capital" or "capital" have the meaning assigned by the BCA1, BCA2 or the BCA3 as the case may be; and

(t) "Transaction Date" means the date on which the Plan of Arrangement is effective, which will be subsequent to the receipt of the advance income tax ruling.

FACTS

1. Canco is a taxable Canadian corporation and a public corporation that was incorporated on XXXXXXXXXX. Canco is currently governed by the BCA2. Canco's head office is presently located in XXXXXXXXXX but Canco is in the process of relocating its head office to XXXXXXXXXX. Canco is in the business of XXXXXXXXXX with book assets of approximately $XXXXXXXXXX. The common shares of Canco are listed for trading on the prescribed stock exchange. As at XXXXXXXXXX the current authorized and issued share capital of Canco consisted of approximately XXXXXXXXXX common shares with an aggregate stated capital and PUC of approximately $XXXXXXXXXX. Canco's federal income tax account number is #XXXXXXXXXX and it files its federal income tax returns at the XXXXXXXXXX Taxation Centre.

2. Aco is a subsidiary wholly-owned corporation of Canco that was incorporated under, and is governed by, the laws of XXXXXXXXXX where it is currently resident. For XXXXXXXXXX income tax purposes, Aco is an exempt corporation under XXXXXXXXXX domestic income tax law, and therefore is not liable to XXXXXXXXXX income tax on any source of income or gain. Aco currently owns shares of a foreign affiliate located in XXXXXXXXXX as described in 4 below.

3. Bco is a subsidiary wholly owned corporation of Canco that was incorporated under, and is governed by, the laws of XXXXXXXXXX where it is currently resident. XXXXXXXXXX. Bco currently owns shares of a foreign affiliate located in XXXXXXXXXX as described in 5 below.

4. AcoSub is a subsidiary controlled corporation of Aco that was incorporated under, and is governed by, the laws of XXXXXXXXXX where it is currently resident. AcoSub is taxable on its world-wide income under XXXXXXXXXX income tax laws. XXXXXXXXXX. AcoSub has an interest in XXXXXXXXXX properties (the XXXXXXXXXX projects) which are considered XXXXXXXXXX properties. The issued and outstanding shares of AcoSub are held by the following corporations:

XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX

5. BcoSub is a subsidiary controlled corporation of Bco that was incorporated under, and is governed by, the laws of XXXXXXXXXX where it is currently resident. BcoSub is taxable on its world-wide income under XXXXXXXXXX income tax laws. XXXXXXXXXX. BcoSub has an interest in XXXXXXXXXX properties (XXXXXXXXXX projects) all of which are considered XXXXXXXXXX properties. The issued and outstanding shares of BcoSub are held by the following corporations:

XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX

6. The most recent fiscal year end for each of Canco, Aco, Bco, BcoSub and AcoSub was XXXXXXXXXX.

7. A review of Canco's shareholder records indicates that ownership of more than 10% of its outstanding common shares are likely held by persons resident in each of Canada, XXXXXXXXXX and XXXXXXXXXX. To the best of the knowledge of the directors and senior officers of Canco, as of the date hereof, no person or group of related persons beneficially owns, directly or indirectly, more than ten percent of the issued and outstanding common shares of Canco, except XXXXXXXXXX who holds approximately XXXXXXXXXX % of Canco's issued common shares either directly or through XXXXXXXXXX ("Xco") a private company which is wholly-owned by him.

8. Canco has issued a number of warrants on commercial terms which are outstanding at the present time. The various agreements between Canco and each counter party (the "Canco warrant holders") were entered into in connection with Canco obtaining suitable financing for its business in exchange for FMV consideration at the time each particular agreement was entered into. Pursuant to the terms of the various existing outstanding Canco warrants the Canco warrant holders can acquire, in the aggregate, an additional XXXXXXXXXX common shares of Canco on the following terms:

Warrant Holder No. of Shares Price Range Per Share Expiry Date

Xco XXXXXXXXXX
Xco XXXXXXXXXX
Xco XXXXXXXXXX
XXXXXXXXXX XXXXXXXXXX
Agents XXXXXXXXXX

To the best of the knowledge of the directors and senior officers of Canco, as of the date hereof, it is expected that each of the Canco warrant holders fully intends to exercise its warrants. The exercise of these warrants may occur prior to the Plan of Arrangement as described in the proposed transactions and, if so exercised, such share acquisition may be considered as being in contemplation of the series of transactions or events that includes the proposed transactions described in this letter.

The warrant indenture dated XXXXXXXXXX (the "First Warrants") relating to the issuance of XXXXXXXXXX Canco common shares to Xco between Canco and XXXXXXXXXX as trustee contains articles which modify the rights of the warrant holder and the obligations of Canco upon certain events such as the Plan of Arrangement. XXXXXXXXXX of the warrant indenture which applies to the Plan of Arrangement essentially provides that in the case of:

(a) any reclassification or change in the shares of Canco (other than a change in par value, or from par value to no par value, or from no par value to par value, or as a result of a subdivision or consolidation);

(b) any amalgamation, consolidation or merger of Canco with, any other corporation (other than an amalgamation, consolidation or merger in which Canco is the continuing corporation and which does not result in any reclassification or change, other than as aforesaid, of the shares);

(c) a reorganization of Canco; or

(d) any sale, transfer or other disposition of all or substantially all of the assets of Canco.

Canco or a corporation formed by the amalgamation, merger or reorganization of Canco, or the corporation which shall have acquired such assets of Canco, as the case may be, shall execute and deliver to the Trustee a supplemental indenture providing that the holder of a Canco warrant then outstanding shall have the right thereafter (until the warrant expiry time) to exercise warrants only into the kind and amount of shares and other securities and property (including cash) receivable upon such reclassification, change, amalgamation, merger, reorganization, sale, transfer or other disposition by a holder of the number of Canco shares which were purchasable upon the exercise of the warrants had the warrants been exercised immediately prior to the reclassification, change, amalgamation, merger, reorganization, sale, transfer or other disposition.

The supplemental indenture must provide for adjustments which shall be as nearly equivalent as may be practicable to the adjustments described herein and these adjustments shall apply to successive reclassifications, changes, amalgamation, mergers, reorganizations, sales, transfers or other dispositions.

The warrant certificates relating to the issuance of XXXXXXXXXX (the "Second Warrants") and XXXXXXXXXX (the "Third Warrants") Canco common shares to Xco dated XXXXXXXXXX, respectively, contain articles which modify the rights of the warrant holder and the obligations of Canco upon certain events such as the Plan of Arrangement. The terms of the article which applies to the Plan of Arrangement under each such warrant agreement essentially provide:

Upon the occurrence of one or more events involving the capital reorganization, reclassification, subdivision or consolidation of the capital stock of Canco, or the merger, amalgamation or other corporate combination of Canco with one or more other entities, or of any other events in which new securities of any nature are delivered in exchange for the issued common shares and such issued common shares are cancelled ("Fundamental Changes"), then at the time of any exercise of the warrants taking place after such Fundamental Changes, and in lieu of issuing the common shares which, but for such Fundamental Changes and this provision, would have been issued upon such exercise, Canco or its successor shall issue instead such number of new securities as would have been delivered as a result of the Fundamental Changes in exchange for those Common Shares which the holder would have been entitled to receive upon such exercise if such exercise had occurred prior to the occurrence of the Fundamental Changes. Canco shall not effect any of the foregoing listed Fundamental Changes which result in the succession of Canco unless prior to or simultaneously with the consummation thereof the entity succeeding Canco acknowledges in writing that it is bound by and will comply with this provision.

The warrant agreement relating to the issuance of XXXXXXXXXX Canco common shares (the "Fourth Warrants") to XXXXXXXXXX dated XXXXXXXXXX, contains sections which modify the rights of the warrant holder and the obligations of Canco upon certain events such as the Plan of Arrangement. The terms of XXXXXXXXXX which applies to the Plan of Arrangement essentially provide:

If Canco makes a distribution of any shares of its capital stock the exercise price in effect immediately prior to such action shall be proportionately adjusted so that the holder of any warrant thereafter exercised may receive the aggregate number and kind of shares of the capital stock of Canco which it would have owned immediately following such action if such warrant had been exercised immediately prior to such action. This section also provides for adjustments to the exercise price and number of warrant shares issuable upon the occurrence of certain events but in defining these events, the warrant agreement is somewhat unclear in its application to a corporate re-organization structured as proposed by the Plan of Arrangement.

Management and legal counsel of Canco maintain that the commercial purpose of XXXXXXXXXX and the specific contractual intent of the parties on entering into this provision was that the warrant holder would be entitled to receive the aggregate number and kind of securities which the holder of a warrant would have owned immediately after the Plan of Arrangement as if the holder had exercised the warrant before the effective date of the Plan of Arrangement. Therefore, if Canco fails to deliver NewCanco shares to the warrant holders upon exercise of the warrants, the warrant holder may have a cause of action against Canco in accordance with such contractual intent.

The warrant certificates relating to the issuance of XXXXXXXXXX Canco common shares (the "Fifth Warrants") to agents (XXXXXXXXXX) dated XXXXXXXXXX, contain terms and conditions which modify the rights of the warrant holder and the obligations of Canco upon certain events such as the Plan of Arrangement. The terms of the warrant certificates which apply to the Plan of Arrangement essentially provide:

If and whenever at any time prior to the Expiry Time there is a reclassification of the common shares at any time outstanding or a change of the common shares into other shares or a capital reorganization of Canco, or a consolidation, amalgamation or merger of Canco with or into any other corporation or a sale of the property and assets of Canco as or substantially as an entirety to any other person, a holder holding warrants represented by this warrant certificate which have not been exercised prior to the effective date of such reclassification, capital reorganization, consolidation, amalgamation, merger or sale shall thereafter, upon the exercise of such warrants, be entitled to receive and shall accept in lieu of the number of common shares, as then constituted, to which the holder was previously entitled upon exercise of the warrants, but for the same aggregate consideration payable therefor, the number of shares or other securities or property of Canco or of the corporation resulting from such reclassification, consolidation, amalgamation or merger or of the person to which such sale may be made, as the case may be, that such holder would have been entitled to receive on such reclassification, capital reorganization, consolidation, amalgamation or merger or sale of, on the effective date thereof, the holder had been the registered holder of the number of common shares to which the holder was previously entitled upon due exercise of the warrants;

and in any case, if necessary, appropriate adjustment shall be made in the application of the provisions set forth in this warrant certificate with respect to the rights and interests thereafter of the holders of the warrants to the end that the provisions set forth in this warrant certificate shall thereafter correspondingly be made applicable, as nearly as may reasonably be, in relation to any shares or securities or property to which the holder may be entitled upon the exercise of such warrants thereafter.

9. Canco currently has outstanding a XXXXXXXXXX $XXXXXXXXXX convertible subordinated debenture (XXXXXXXXXX) which is due on XXXXXXXXXX. The funds borrowed with the issuance of this debenture were used to finance the development of Canco's business. The debenture is convertible, at any time, into common shares of Canco at a conversion price of $XXXXXXXXXX to $XXXXXXXXXX per common share. The debenture holder is a limited partnership called XXXXXXXXXX, organized under the limited partnership law of XXXXXXXXXX. The debenture contains standard anti-dilution provisions that are activated by the Plan of Arrangement. Measured on a fully diluted basis as at the date of this letter, if the convertible debenture was fully converted into additional Canco common shares issued from Canco's treasury, the partnership would hold about 10% of Canco's outstanding common shares. To the best of the knowledge of the directors and senior officers of Canco, as of the date hereof, it is expected that the debenture holder intends to fully convert the debentures into common shares. This conversion may occur prior to the Plan of Arrangement and such conversion, if exercised, may be considered as being in contemplation of the series of transactions or events that includes the proposed transactions described in this letter.

10. Canco has also granted certain rights under various incentive stock options under which certain directors and management personnel of Canco (the "Canco stock option holders") are entitled to acquire up to an additional XXXXXXXXXX common shares of Canco at specified exercise prices. During the year ended XXXXXXXXXX common shares were issued by Canco upon the exercise of stock options for total cash consideration of $XXXXXXXXXX. The incentive stock options were not issued in contemplation of the proposed transactions described below and, the exercise of the incentive stock options in XXXXXXXXXX would have been exercised regardless of whether the proposed transactions are implemented or not. To the best of the knowledge of the directors and senior officers of Canco, as of the date hereof, it is expected that none of the Canco stock option holders intends to exercise any of their incentive stock options as part of the series of transactions or events that includes the proposed transactions described in this letter.

11. None of Canco, Aco, Bco, BcoSub and AcoSub is a specified financial institution and each of Aco, Bco, BcoSub and AcoSub is a foreign affiliate and a controlled foreign affiliate of Canco. The shares of BcoSub and AcoSub constitute excluded property of a foreign affiliate of Canco.

12. In order to carry out the proposed transactions under the Plan of Arrangement as described in 17 to 29 below Canco has incorporated a new corporation under the provisions of the BCA2 ("NewCanco"). NewCanco is a taxable Canadian corporation whose common shares shall be listed on the prescribed stock exchange. The authorized capital of NewCanco consists of an unlimited number of common shares and preferred shares, XXXXXXXXXX. On incorporation Canco subscribed for one common share of NewCanco for nominal consideration. However, prior to the proposed transactions described in 17 to 29, NewCanco will not have any assets or liabilities or have issued more than one common share.

PROPOSED TRANSACTIONS

13. Under the BCA3 the process for reducing capital of a corporation is less common and such rules are not similar to those found under Canadian law. However, under the BCA1 the process for reducing the stated capital of a corporation is very similar to those under Canadian law such that a return of stated capital can be accomplished without the payment in respect thereof resulting in a dividend (deemed or otherwise) or a disposition of the share. Therefore, in accordance with the rules and procedures under the BCA3 and the BCA1, Bco will be continued into XXXXXXXXXX. As a result of the continuance Bco's corporate existence will be preserved with the result that the property of Bco will continue to be its property and all liabilities of Bco will continue to be its liabilities. In addition;

(a) No new class of shares of Bco will be created, and no additional shares will be issued by Bco;

(b) No material change will be made to the rights and conditions attached to the issued and outstanding shares in the capital of Bco;

(c) Bco will file articles of continuance pursuant to XXXXXXXXXX of the BCA1 which become the Articles of Incorporation of Bco. Bco will then become a company governed by the BCA1 as if it had been incorporated thereunder;

(d) The continuation of Bco into XXXXXXXXXX does not result in an expressed or deemed exchange, disposition, redemption, cancellation or re-issuance of the outstanding shares of Bco under the BCA1 or the BCA3; and

(f) The BCA1 requires that the consideration paid for the issued and outstanding shares of Bco before the continuation become the stated capital of Bco after the continuation.

Once Bco is continued into XXXXXXXXXX, Bco will cease to be a resident of XXXXXXXXXX and Bco will become resident in XXXXXXXXXX.

14. The shares of Aco owned by Canco have an ACB of approximately $XXXXXXXXXX while the shares of Bco owned by Canco have an ACB of approximately $XXXXXXXXXX. Canco will transfer all of the issued and outstanding shares of Aco to Bco in exchange for additional common shares of Bco having a FMV equal to the FMV of the shares of Aco at the time of their transfer. As part of the series of transactions or events that includes the proposed transactions described in this letter, Bco will not dispose of the shares of Aco to any person that, at any time, will be a person that is not related to Canco.

15. Bco will reduce the amount of its aggregate stated capital in respect of its outstanding common shares pursuant to the provisions of the BCA1 by an amount equal to the FMV of all the issued and outstanding shares of BcoSub owned by Bco at that time. Bco will then distribute all of its shares of BcoSub to Canco as payment for this stated capital reduction. Under the provisions of the BCA1 the reduction of the stated capital of Bco paid by the distribution of the BcoSub shares to Canco does not result in an express or deemed dividend being paid by Bco.

16. Subject to, among other things, the appropriate shareholder, court and regulatory authority approvals, the transactions described in 17 to 29 below will be undertaken pursuant to a Plan of Arrangement in accordance with the provisions of the BCA2. With the exception of the filing of any elections under the Act, the proposed transactions under the Plan of Arrangement, unless otherwise indicated, will be designated to occur on the Transaction Date and in the order set out below.

17. Pursuant to the provisions of the BCA2, the Articles of Incorporation of Canco will be amended to create several new classes of shares in an unlimited number including, the Canco New Common Shares, the Canco XXXXXXXXXX preferred shares, the Canco XXXXXXXXXX preferred shares and the Canco XXXXXXXXXX preferred shares. The Canco New Common Shares will be ordinary voting, fully participating shares.

18. The Canco XXXXXXXXXX preferred shares will have the following terms and attributes:

(i) entitled to one vote each;

(ii) redeemable and retractable for an amount per share (the "XXXXXXXXXX Redemption Amount") equal to the FMV of the assets to be transferred to NewCanco, as described in 22 below, divided by the number of Canco XXXXXXXXXX preferred shares issued;

(iii) not entitled to dividends;

(iv) entitled to a return of the XXXXXXXXXX Redemption Amount on a liquidation, dissolution, or winding-up of Canco in preference to the Canco common shares; and

(v) having a stated capital per share equal to the XXXXXXXXXX Redemption Amount.

19. The Canco XXXXXXXXXX preferred shares will have the following terms and attributes:

(i) non-voting;

(ii) redeemable and retractable for an amount per share (the "XXXXXXXXXX Redemption Amount") equal to the FMV of the assets to be transferred to NewCanco, as described in 22 below, divided by the number of Canco XXXXXXXXXX preferred shares issued;

(iii) convertible into one Canco XXXXXXXXXX preferred share based on a (1) one for (1) one basis;

(iv) not entitled to dividends;

(v) entitled to a return of the XXXXXXXXXX Redemption Amount on a liquidation, dissolution, or winding-up of Canco in preference to the Canco common shares and Canco XXXXXXXXXX preferred shares; and

(vi) having a stated capital equal to the XXXXXXXXXX Redemption Amount.

20. The Canco XXXXXXXXXX preferred shares will have the following terms and attributes:

(i) entitled to one vote each;

(ii) convertible into one Canco New Common Share on a one (1) for one (1) basis;

(iii) entitled to dividends;

(iv) having a stated capital per share equal to the aggregate amount of the stated capital of the pre-existing Canco common shares less the aggregate stated capital of the Canco XXXXXXXXXX preferred shares divided by the number of Canco XXXXXXXXXX preferred shares issued.

21. In order for Canco to remain in a position to honour the anti-dilution clause contained in each of the Canco warrant agreements that remain outstanding as of the Arrangement Record Date, Canco and NewCanco will enter into a separate warrant agreement (the "NewCanco warrant agreement") as part of the Plan of Arrangement. NewCanco will agree to issue the appropriate number of NewCanco common shares to Canco only if an existing Canco warrant holder that held an outstanding Canco warrant as of the Arrangement Record Date and within their respective exercise period for such Canco warrant notifies Canco that he or she is exercising their Canco warrant. The maximum number of NewCanco shares to be issued will be based on the proportionate FMV of the assets transferred to NewCanco as described in 22 to the total FMV of Canco's assets immediately before the transfer. It is expected that this proportion will represent XXXXXXXXXX the FMV of Canco's assets such that the maximum number of NewCanco common shares to be issued will be the number of Canco common shares issued (divided by XXXXXXXXXX). As an example, upon the exercise of a Canco warrant after the Transaction Date by a Canco warrant holder, such warrant holder will receive one Canco New Common Share and XXXXXXXXXX of a NewCanco common share at the exercise price per share provided for in the certificate representing the Canco warrant. If a Canco warrant expires then the appropriate number of NewCanco warrants will also expire at the same time.

The NewCanco warrant agreement will also contain a clause expressly stating that Canco can not economically profit from holding the NewCanco warrants, and that the terms and conditions of the NewCanco warrant agreement shall be interpreted to only enable Canco the ability to honour the various anti-dilution clauses in respect of any Canco warrants outstanding as of the Arrangement Record Date. Canco will agree to pay NewCanco a FMV purchase price as determined by an independent appraisal for acquiring the NewCanco warrants. For administrative simplicity, the NewCanco warrant agreement will require that the consideration for the NewCanco warrants will be paid in cash at the time the NewCanco warrant agreement is entered into such that no further amount need be paid by Canco to NewCanco upon the exercise of the NewCanco warrants. The certificates for the NewCanco common shares which otherwise would be delivered to Canco on exercise of the NewCanco warrants will be delivered directly to the respective Canco warrant holders. The terms and conditions of the existing Canco warrant agreements will not be amended, and the existing Canco warrant holders will not enter into warrant agreements with NewCanco.

22. Canco will transfer to NewCanco, at FMV, all of the issued and outstanding shares of BcoSub owned by Canco at that time and an amount of cash being equal to CDN$XXXXXXXXXX less the purchase price to be paid by Canco to NewCanco for the NewCanco warrant agreement as described in 21 above. As sole consideration for such transfer, NewCanco will issue to Canco a non-interest bearing demand promissory note with a principal amount and FMV equal to the FMV of the assets so transferred.

23. As part of a reorganization of capital of Canco each Canco common share held by a Canco shareholder will be exchanged for one Canco XXXXXXXXXX preferred share and XXXXXXXXXX Canco XXXXXXXXXX preferred shares. The Canco XXXXXXXXXX preferred shares and the Canco XXXXXXXXXX preferred shares shall be listed on the prescribed stock exchange but not called for trading. Canco will have no common shares outstanding at this point in time. The aggregate amount of the stated capital and PUC of the Canco XXXXXXXXXX preferred shares and the Canco XXXXXXXXXX preferred shares immediately after they are issued will be equal to the aggregate amount of stated capital and PUC of the Canco common shares immediately before the exchange. The amount of stated capital and PUC allocated to the XXXXXXXXXX preferred shares on their issue will equal the aggregate XXXXXXXXXX Redemption Amount of the XXXXXXXXXX preferred shares issued with the remaining amount of the stated capital and PUC allocated to the XXXXXXXXXX preferred shares. These share exchanges are intended to take place pursuant to section 86 and no section 85 elections will be filed in respect thereof.

24. Each Canco XXXXXXXXXX preferred share will then be exchanged for one Canco New Common Share and each Canco XXXXXXXXXX preferred share will be exchanged for one Canco XXXXXXXXXX preferred share. The Canco XXXXXXXXXX preferred shares and the Canco New Common Shares shall be listed on the prescribed stock exchange but the Canco XXXXXXXXXX preferred shares will not be called for trading. The aggregate amount of stated capital and PUC of the Canco XXXXXXXXXX preferred shares will equal the aggregate amount of stated capital and PUC of the Canco XXXXXXXXXX preferred shares immediately before the exchange (being an amount equal to the aggregate XXXXXXXXXX Redemption Amount of the Canco XXXXXXXXXX preferred shares). The aggregate amount of stated capital and PUC of the Canco New Common Shares will be equal to the aggregate amount of stated capital and PUC of the XXXXXXXXXX preferred shares immediately before the exchange. These share exchanges are intended to take place pursuant to section 86 and no section 85 elections will be filed in respect thereof.

25. All the holders of XXXXXXXXXX preferred shares of Canco will exchange all of the issued Canco XXXXXXXXXX preferred shares for newly issued NewCanco common shares that shall be listed on the prescribed stock exchange. The exchange ratio will be one NewCanco common share for every ninety Canco XXXXXXXXXX preferred shares so exchanged and partial NewCanco shares will not be issued (i.e., NewCanco will issue only that number of NewCanco common shares under this formula as rounded to the nearest whole number). Each exchange will take place pursuant to the provisions of section 85.1 provided the particular shareholder making the exchange otherwise meets the conditions of that section. No consideration other than NewCanco common shares will be paid to the Canco XXXXXXXXXX preferred shareholders in regard to the tendering of their Canco XXXXXXXXXX preferred shares and such shareholders will not be granted the right to file a section 85 election in respect of this exchange. The certificates for the Canco XXXXXXXXXX preferred shares, which otherwise would be delivered to the Canco shareholders on the share exchange described in 24, will instead be delivered directly to NewCanco. The addition to the amount of stated capital and PUC of the NewCanco common shares will equal the amount of stated capital and PUC of the Canco XXXXXXXXXX preferred shares received by NewCanco as consideration for the issue of its NewCanco common shares.

26. Contemporaneously with the share-for-share exchange described in 25, NewCanco will purchase for cancellation the one NewCanco common share held by Canco at its FMV for cash consideration (which will be nominal).

27. Canco will redeem all of its Canco XXXXXXXXXX preferred shares for an amount equal to the aggregate XXXXXXXXXX Redemption Amount of the Canco XXXXXXXXXX preferred shares held by NewCanco. As sole consideration for such redemption, Canco will issue to NewCanco a non-interest bearing demand promissory note with a principal amount and FMV equal to the aggregate XXXXXXXXXX Redemption Amount of the Canco XXXXXXXXXX preferred shares held by NewCanco.

28. The promissory notes described in paragraphs 22 and 27 above will be set off by each note holder and issuer of the particular demand note and accepted as full payment by each of them. For greater certainty, the principal amounts and respective FMV of the two promissory notes will be equal.

29. The Canco XXXXXXXXXX preferred shares, Canco XXXXXXXXXX preferred shares and Canco XXXXXXXXXX preferred shares shall then cease being listed on the prescribed stock exchange and the Canco New Common Shares will be called for trading.

Subsequent Events

30. NewCanco will issue employee share purchase options. Some of these employee share purchase options will be issued to individuals that will, at that time, already be shareholders of NewCanco pursuant to the share-for-share exchange described in 25 above. However, it is expected that these employee share purchase options will only be issued to such individuals solely pursuant to their position as an employee of NewCanco.

31. NewCanco intends to raise additional financing for its business pursuant to a private placement of its NewCanco common shares issued to the public.

32. For greater certainty there is no intent for either Canco or NewCanco as part of the series of transactions or events that includes the proposed transactions described in this letter, to dispose of the shares of any corporation owned by it to any person that, at any time, will be a person that is not related to Canco or NewCanco.

PURPOSE OF THE PROPOSED TRANSACTIONS

33. The management of Canco decided to proceed with a corporate restructuring designed to separate Canco's underlying ownership interest in the XXXXXXXXXX properties owned by BcoSub from the XXXXXXXXXX properties owned by AcoSub for the following commercial reasons:

(i) The economics of the XXXXXXXXXX properties and the XXXXXXXXXX properties are unrelated and, accordingly, it would be preferable to give the shareholders of Canco the choice to make independent investment decisions in respect of their indirect holdings in each type of XXXXXXXXXX property;

(ii) Currently the shares of Canco trade at a significant discount when compared to the FMV of its XXXXXXXXXX assets. The separation of Canco into two public corporations will make it easier for the capital markets to effectively value the XXXXXXXXXX assets to be owned by these two corporations; and

(iii) The separation of these two types of XXXXXXXXXX properties into separate public corporations will enhance the ability of each corporation's management to focus on its respective XXXXXXXXXX properties and pursue independent expansion and financing strategies.

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. The continuance of Bco from XXXXXXXXXX to XXXXXXXXXX as described in 13 above, will not, in and by itself, result in a disposition of any share of Bco by Canco for the purposes of the Act.

B. In computing the ACB to Canco of its common shares of Bco at any time after the return of stated capital described in 15 above, there shall be deducted the FMV of the shares of BcoSub at the time of the return of stated capital pursuant to subparagraph 53(2)(b)(ii) of the Act.

C. For each Canco shareholder who holds a common share of Canco as capital property, the provisions of subsection 86(1) will apply, and the provisions of subsection 86(2) will not apply to the exchange of the common shares of Canco for Canco XXXXXXXXXX preferred shares and Canco XXXXXXXXXX preferred shares as described in 23 above, such that:

(i) the cost of the Canco XXXXXXXXXX preferred shares and Canco XXXXXXXXXX preferred shares received on the share exchange will be deemed by paragraph 86(1)(b) to be an amount equal to that proportion of the aggregate ACB to the particular Canco shareholder, immediately before the exchange, of their common shares of Canco, that

(a) the FMV, immediately after the share exchange, of the Canco XXXXXXXXXX preferred shares and Canco XXXXXXXXXX preferred shares, as the case may be,

is of

(b) the FMV, immediately after the share exchange, of all the shares of Canco received by the particular Canco shareholder for the common shares of Canco;

(ii) pursuant to paragraph 86(1)(c), each particular Canco shareholder will be deemed to have disposed of their common shares of Canco for aggregate POD equal to the aggregate cost to the particular Canco shareholder of the Canco XXXXXXXXXX preferred shares and Canco XXXXXXXXXX preferred shares determined in (i) above; and

(iii) provided the aggregate stated capital and PUC of the Canco XXXXXXXXXX preferred shares and Canco XXXXXXXXXX preferred shares immediately after the exchange does not exceed the aggregate stated capital and PUC of the common shares of Canco immediately before the exchange subsection 86(2.1) will not apply to reduce the PUC of the Canco XXXXXXXXXX preferred shares or the Canco XXXXXXXXXX preferred shares, as the case may be.

D. For each Canco shareholder who holds a Canco XXXXXXXXXX preferred share and Canco XXXXXXXXXX preferred share as capital property, the provisions of subsection 86(1) will apply, and the provisions of subsection 86(2) will not apply to the exchange of the Canco XXXXXXXXXX preferred shares for Canco New Common Shares and the exchange of the Canco XXXXXXXXXX preferred shares for Canco XXXXXXXXXX preferred shares, as described in 24 above, such that:

(i) the cost of the Canco XXXXXXXXXX preferred shares received on each share exchange, as the case may be, will be deemed by paragraph 86(1)(b) to be an amount equal to the aggregate ACB to the particular Canco shareholder, immediately before the exchange, of their Canco XXXXXXXXXX preferred shares;

(ii) the cost of the Canco New Common Shares received on each share exchange, as the case may be, will be deemed by paragraph 86(1)(b) to be an amount equal to the aggregate ACB to the particular Canco shareholder, immediately before the exchange, of their Canco XXXXXXXXXX preferred shares;

(iii) pursuant to paragraph 86(1)(c), each particular Canco shareholder will be deemed to have disposed of their Canco XXXXXXXXXX preferred shares and Canco XXXXXXXXXX preferred shares, as the case may be, for POD equal to the cost to the particular Canco shareholder of the Canco New Common Shares or Canco XXXXXXXXXX preferred shares, as the case may be, as determined in (i) or (ii) above;

(iv) provided the aggregate stated capital and PUC of the Canco XXXXXXXXXX preferred shares immediately after the exchange does not exceed the aggregate stated capital and PUC of the Canco XXXXXXXXXX preferred shares immediately before the exchange subsection 86(2.1) will not apply to reduce the PUC of the new Canco common shares or the Canco XXXXXXXXXX preferred shares; and

(v) provided the aggregate stated capital and PUC of the Canco New Common Shares immediately after the exchange does not exceed the aggregate stated capital and PUC of the Canco XXXXXXXXXX preferred shares immediately before the exchange subsection 86(2.1) will not apply to reduce the PUC of the Canco New Common Shares.

E. Provided that the XXXXXXXXXX preferred shares of Canco received by a Canco shareholder on the share exchanges described in 23 and 24 above are listed on the prescribed stock exchange at the time of such exchanges and at the time of the exchange described in paragraph 25, such shares will be "excluded property" within the meaning of subsection 116(6) of any non-resident person owning such shares at that time.

F. Provided that a Canco shareholder who, immediately before the share-for-share exchange described in 25 above, holds Canco XXXXXXXXXX preferred shares, and

(a) holds those shares as capital property;

(b) deals at arms length with NewCanco immediately before such share-for-share exchange;

(c) does not include any portion of the gain or loss otherwise determined, from the disposition of those shares, in computing his/her income for the taxation year in which the share-for-share exchange takes place;

(d) does not file an election under section 85(1) or 85(2) with NewCanco with respect to this share-for-share exchange; and

(e) does not receive any consideration other than NewCanco common shares with respect to this share-for-share exchange;

and further provided that immediately after the exchange

(f) no such holder of NewCanco common shares or any persons with whom the holder does not deal at arm's length, or no such holder together with any person or persons with whom the holder does not deal at arm's length, will

(i) control NewCanco, or

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

then, pursuant to paragraph 85.1(1)(a) such holder shall be deemed

(g) to have disposed of his/her Canco XXXXXXXXXX preferred shares for POD equal to his/her ACB of those shares immediately before the share-for-share exchange,

(h) to have acquired the NewCanco common shares at a cost equal to his/her ACB of the Canco XXXXXXXXXX preferred shares immediately before the share-for-share exchange;

(i) where such a holder does not hold his/her Canco XXXXXXXXXX preferred shares as capital property the POD of those shares and the ACB of the NewCanco common shares will equal the FMV of the NewCanco common shares issued as consideration for the share-for-share exchange; and

pursuant to paragraph 85.1(1)(b) NewCanco shall be deemed

(j) to have acquired the XXXXXXXXXX shares at a cost equal to the lesser of their FMV or their PUC immediately before the exchange.

G. Provided that the common shares of Canco constitute capital property to a Canco shareholder immediately before the Plan of Arrangement, the proposed transactions described herein will not, in and by themselves, cause the XXXXXXXXXX preferred shares of Canco or the NewCanco common shares received by such shareholder, as the case may be, to not be capital property.

H. Subsections 84(3), 84(4) and 84(4.1) will not apply as a consequence of the share exchange as described in 23 and 24, or the redemption by Canco of its outstanding Canco XXXXXXXXXX preferred shares as described in 27.

I. A Canco warrant holder as described in 8 above will not be considered to:

(a) have disposed of any such warrants that remain outstanding at the Arrangement Record Date; or

(b) have realized a benefit under subsection 15(1);

as a result of the execution of the NewCanco warrant agreement as described in 21 above, in and by itself.

J. 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 in the rulings given above.

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 the Canada Customs and Revenue Agency ("CCRA") 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.

COMMENTS

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, that the CCRA has reviewed or agreed to:

(a) the country of residence of Aco, Bco, AcoSub or BcoSub for the purposes of the Act or a particular income tax convention which may be in force between Canada and another country;

(b) the determination of the FMV or ACB of any property or the amount of stated capital or PUC of any share referred to in this letter;

(c) the income tax consequences of the events or transactions described in 21 above to Canco or NewCanco;

(d) the income tax consequences in XXXXXXXXXX or XXXXXXXXXX or any consequences under the BCA1 or BCA3, as the case may be, of the transactions described in 13 and 15 above;

(e) the income tax consequences of any of the events or transactions described in this letter to any amount that is or may be required to be computed in respect of any foreign affiliate of Canco or NewCanco under Part LIX of the Income Tax Regulations; or

(f) the income tax consequences of any transaction or event that has already occurred, or may occur prior to, contemporaneously with, or subsequent to any of the proposed transactions described in this letter.

Yours truly,

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