2000 Ruling 2000-0035503 - Reorganization, 55(3)(b)

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: no new issues

Position:

Reasons:

XXXXXXXXXX 2000-003550

Attention: XXXXXXXXXX

XXXXXXXXXX, 2000

Dear Sirs:

Re: Advance income tax ruling
XXXXXXXXXX ("Aco")

We are writing in response to your letter of XXXXXXXXXX wherein you requested an advance income tax ruling in respect of the above taxpayer. We also acknowledge your letters of XXXXXXXXXX.

To the best of your knowledge, and that of the parties to this ruling, none of the issues contained in this advance income tax ruling:

1. is in an earlier return of the taxpayer or a related person;

2. is being considered by a tax services office or a taxation centre in connection with a previously filed tax return of the taxpayer or a related person;

3. is under objection by the taxpayer or a related person;

4. is before the courts or, if a judgment has been issued, the time limit for appeal to a higher court has not expired; or

5. is the subject of a ruling previously issued by this Directorate.

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

Facts

1. Aco was incorporated (originally under the name XXXXXXXXXX) in XXXXXXXXXX. Aco is a taxable Canadian corporation and a Canadian-controlled private corporation which, as used here and subsequently, have the meanings assigned by subsection 89(1) and 125(7), respectively. The fiscal period of Aco ends on XXXXXXXXXX. The authorized share capital of Aco consists of XXXXXXXXXX shares divided into:

(a) XXXXXXXXXX Common Shares of which XXXXXXXXXX are issued and outstanding (the "Aco Shares");

(b) XXXXXXXXXX;

(c) XXXXXXXXXX; and

(d) XXXXXXXXXX.

2. All of the Aco Shares are owned by directors, officers and employees of Aco or of XXXXXXXXXX ("Bco") or companies controlled by such individuals. Aco is controlled by a group of arm's length individuals who act in concert to control Aco (the "Control Group"). All such shares are held by the owner as capital property which, as used here and subsequently, has the meaning assigned by section 54.

3. Aco entered into an agreement dated XXXXXXXXXX (the "Bco Management Agreement") with Bco to provide management services to Bco and an agreement dated the same date (the "Adminco Administration Agreement") with XXXXXXXXXX ("Adminco") to provide administrative services to Adminco.

4. Adminco is an income trust whose units are publicly traded. Adminco owns all the shares of Bco and holds such shares as capital property. Bco owns and operates XXXXXXXXXX.

5. By agreement with Adminco, the Articles of Aco must provide that shares of Aco may only be issued to or transferred to an "Employee" (defined to mean an employee, director or officer of Aco or Bco, an affiliate of Bco, or companies controlled by such individuals).

6. To satisfy its obligation to Adminco and to maintain its status as employee-owned, Aco's Articles provide the following.

(a) Aco has an option to acquire the shares of an Employee when that Employee's employment ceases.

(b) Aco will purchase the shares of a retiring Employee.

(c) Aco has a right of first refusal to purchase the shares of an Employee who has received an offer to purchase his or her shares from another Employee.

(d) The directors of Aco will determine annually the "Share Value" of the Aco Shares. The Share Value will then constitute the purchase price and the issue price for all transactions conducted pursuant to Aco's Articles during the year.

7. On an annual basis, new Employees may be given the right to purchase Aco shares from treasury.

8. XXXXXXXXXX ("Cco") is a company incorporated under the XXXXXXXXXX. Cco was originally a wholly-owned and later majority-owned subsidiary of Aco. In XXXXXXXXXX, the shareholders of Cco agreed to merge Cco's business activities with XXXXXXXXXX ("Dco"), XXXXXXXXXX. Pursuant to a Plan of Arrangement effective XXXXXXXXXX (the "XXXXXXXXXX Transaction"), shareholders of Cco and Dco exchanged their shares of those companies for shares of XXXXXXXXXX. ("Eco"), a taxable Canadian corporation incorporated under the Canada Business Corporations Act (the "CBCA"). Eco's fiscal period ends on XXXXXXXXXX. Pursuant to the XXXXXXXXXX Transaction, Aco became a shareholder of Eco. All of Eco's shareholders entered into an agreement dated XXXXXXXXXX (the "Eco Shareholders' Agreement").

9. Since the XXXXXXXXXX Transaction, Eco has carried on the active business of XXXXXXXXXX (the "Eco Business"). Eco carries on the Eco Business directly and indirectly through Cco and Dco, both of which are wholly-owned subsidiaries of Eco.

10. The issued and outstanding share capital of Eco consists of XXXXXXXXXX Common Shares and XXXXXXXXXX Preferred Shares.

11. The rights and restrictions attached to the Common Shares and XXXXXXXXXX Preferred Shares of Eco provide that each holder is entitled to one vote for each share held. Upon a liquidation of Eco, the holders of the XXXXXXXXXX Preferred Shares are entitled to a return of the issue price ($XXXXXXXXXX) plus a dividend of XXXXXXXXXX% per annum (payable only upon a liquidation). The XXXXXXXXXX Preferred Shares are convertible into Common Shares at the option of the holder at the ratio of XXXXXXXXXX.

12. Aco owns XXXXXXXXXX Common Shares of Eco (the "Eco Shares"). The Eco Shares are capital property to Aco and represent XXXXXXXXXX% of the issued and outstanding Common Shares and XXXXXXXXXX% of the voting shares of Eco. The adjusted cost base to Aco of the Eco Shares is $XXXXXXXXXX. The term "adjusted cost base" ("ACB"), as used here and subsequently, has the meaning assigned by section 54.

13. Aco advanced the sum of $XXXXXXXXXX to Eco ( the "Eco Receivable") to assist Eco in paying current expenses. The Eco Receivable does not bear interest and Eco must repay the principal amount out of its earnings. To date, Eco has had no earnings and has made no principal repayments. The terms of the Eco Receivable are set out in a promissory note.

14. Aco has other influence over Eco as follows:

(a) Aco provides administration services to Eco and Cco pursuant to an agreement between Aco and Cco, subsequently assigned to Eco (the "Eco Administration Agreement") for an annual fee of $XXXXXXXXXX increasing to $XXXXXXXXXX in XXXXXXXXXX;

(b) pursuant to the Eco Shareholders' Agreement, Aco is entitled to nominate and have elected XXXXXXXXXX members of the Board of Directors of Eco;

(c) Aco manages a strategic alliance among Aco, Eco and Bco, the terms of which are set out in a Collaboration Agreement;

(d) the individual who is the XXXXXXXXXX of Aco is also the XXXXXXXXXX of Eco;

(e) the individual who is the XXXXXXXXXX of Aco is also the XXXXXXXXXX of Eco; and

(f) the president of Aco and other employees provide technical services to Eco.

15. All of the assets owned by Eco, Cco and Dco (with the exception of the shares of Cco and Dco owned by Eco) are used in the Eco Business.

16. Aco's basic business remains the provision of management and administrative services under the Bco Management Agreement, the Adminco Administration Agreement, and the Eco Administration Agreement. However, it also owns the following:

(a) the Eco Shares and the Eco Receivable;

(b) real estate near XXXXXXXXXX (the "Real Estate"); and

(c) certain key person life insurance policies (the "Policies").

17. The Real Estate has an ACB to Aco and fair market value ("FMV")of $XXXXXXXXXX and $XXXXXXXXXX respectively. Aco intends to sell the Real Estate and anticipates listing the Real Estate in the near future.

18. Aco continues to own and to be the beneficiary of the Policies. The Policies are pledged as security for Aco's operating line of credit.

19. Holdings is a taxable Canadian corporation and a Canadian-controlled private corporation that was incorporated under the CBCA. Holdings has an authorized share capital of an unlimited number of Common Shares (the "Holdings Common Shares") without par value and XXXXXXXXXX Preferred Shares without par value (the "Holdings Redeemable Shares"). Prior to the proposed transactions described below, Holdings will not, at any time, have had any assets, liabilities or outstanding shares (other than one share issued to Aco for organizational purposes). There is a restriction on the payment of dividends on the Holdings Common Shares so that no dividend may be paid on the Holdings Common Shares which would have the effect of reducing the value of the Holdings Redeemable Shares then outstanding. The Holdings Redeemable Shares have the following attributes:

(a) redeemable and retractable for an amount equal to the FMV of the property received therefor at the time of issuance;

(b) entitled to a non-cumulative dividend at a rate to be fixed by the directors;

(c) entitled to a return of the redemption amount on a liquidation, dissolution or winding-up of the corporation in preference to the Holdings Common Shares; and

(d) not entitled to a vote per share at shareholders' meetings.

Purpose of the Proposed Transactions

20. The directors of Aco have identified the following difficulties:

(a) because Eco is XXXXXXXXXX, the Eco Shares are becoming increasingly difficult to value due to their speculative nature; and

(b) with the increasing value of the Eco Shares, the Aco Shares are also increasing in value. As a consequence, it is becoming financially more difficult and imprudent for Aco to repurchase, and to have the obligation to repurchase, its shares from Employees and for Employees to purchase shares from treasury. However, the directors wish to maintain liquidity for Employees with respect to the original management and administrative services business and retain the employee ownership for this aspect of Aco's business.

As a consequence, to deal with these issues, the directors of Aco have proposed that the business and the assets of Aco be, in effect, divided between Aco and Holdings by transferring the Eco Shares and the Eco Receivable (together with the Real Estate and the Policies) to Holdings and returning Aco to the sole function of providing management services to Bco and administrative services to Adminco and Eco. The transfer of the Eco Shares to Holdings will avoid the necessity of valuing the Eco Shares and reduce the value of the Aco Shares, facilitating retention of the share purchase rights and obligations in relation to the management services business of Aco.

Proposed Transactions

21. Immediately before the transfers of property described in paragraph 26 below, the assets of Aco will be determined on a consolidated look-through basis by including the appropriate pro rata share of the assets of any corporation over which Aco has the ability to exercise significant influence (the "Aco Group") and will be classified into three types of property for purposes of paragraph 55(3)(b) as follows:

(a) cash or near-cash property, being the current assets of the Aco Group including cash, amounts receivable (which, for greater certainty, will not include amounts not due within 12 months), inventory, the cash surrender value of the Policies, the Real Estate and other current assets;

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

(c) business property, being all the assets of the Aco Group, other than cash or near-cash property and investment property, any income from which would, for the purposes of the Act, be income from a business other than a specified investment business.

For the purpose of this paragraph and paragraph 22 below, Aco will be considered to have significant influence over a corporation if it has the ability to exercise significant influence, within the guidelines provided by section 3050 of the CICA Handbook, over that corporation or over any corporation which has significant influence over that corporation. Immediately before the transfer described in paragraph 26 below, Aco will not have any investment property. The term "specified investment business" has the meaning assigned by subsection 125(7).

For the purposes of determining the FMV of each type of property of Aco, the FMV of the shares of any other 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 FMV of such shares or indebtedness, as the case may be, by the proportion that the FMV of each type of property owned by the particular corporation, determined in accordance with the method described herein, is of the aggregate FMV of all of the property owned by such corporation, determined in accordance with the method described herein.

22. In determining, on a consolidated basis, the net FMV of each type of property of Aco immediately before the transfers described in paragraph 26 below, the liabilities of Aco and any corporation over which Aco exercises significant influence will be allocated to, and will be deducted in the calculation of, the net FMV of each such type of property of such corporation in the following manner:

(a) In determining the net FMV of each type of property of a corporation over which Aco exercises significant influence, immediately before the transfers described in paragraph 26 below, the liabilities of that particular corporation (other than any amount owing by such corporation to Aco) will be allocated to, and will be deducted in the calculation of, the net FMV of each type of property of the particular corporation in the following manner:

(i) Current liabilities of such corporation will be allocated to the cash or near cash property of such corporation (determined in the manner described in paragraph 21 above) in the proportion that the FMV of each such property is of the FMV of all cash or near cash property owned by the particular corporation. To the extent that the allocation of current liabilities as described herein exceeds the aggregate FMV of the cash or near cash property of the particular corporation, such corporation will be considered to have a negative amount of cash or near cash property.

(ii) 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 of property to which the particular property belongs) to the extent of its FMV. Liabilities that pertain to a type of property but not to a particular property will then be allocated to that type of property. To the extent that the allocation of liabilities that pertain to a particular type of property as described herein exceed the aggregate FMV of all that type of property of the particular corporation, the particular property will be considered to have a negative amount of that type of property.

(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, investment property, and business property of such corporation based on the relative net FMV of each type of property prior to the allocation of such liabilities, but after the allocation of the liabilities described in subparagraphs (a)(i) and (a)(ii) above.

(b) In determining, on a consolidated basis, the net FMV of each type of property of Aco immediately before the transfer of property described in paragraph 26 below, Aco will include the appropriate pro rata share of the net FMV of each type of property of any corporation over which Aco exercises significant influence, as determined in accordance with paragraph (a) herein, and any liabilities of Aco will then be allocated to, and be deducted in the calculation of, the net FMV of each type of property of Aco in the following manner:

(i) Current liabilities of Aco will be allocated to the cash or near cash property of Aco in the proportion that the FMV of each such property is of the FMV of all cash or near cash property owned by it. The allocation of current liabilities as described herein will not exceed the aggregate FMV of the cash or near cash property of Aco (such allocation will result in a net FMV of cash or near cash property of nil).

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

(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, investment property and business property of Aco, based on the relative net FMV of each type of property prior to the allocation of such excess unallocated liabilities.

23. Holdings will repurchase, at its issue price, its one outstanding common share held by Aco for cash.

24. Holdings will alter its share capital under the CBCA such that the preferred shares will have the right to vote and the authorized share capital of preferred shares will be increased to an unlimited number of shares.

25. Each shareholder of Aco will transfer, at FMV, to Holdings that number of Aco Shares having an aggregate FMV equal to the proportion of the aggregate FMV of all the Aco shares immediately before the transfers described in paragraph 26 below that the aggregate net FMV of the business property to be transferred as described in paragraph 26 below is of the aggregate net FMV of all the business property owned by Aco immediately before the transfer described in paragraph 26 below. As consideration for the transfer, Holdings will issue to each transferor a number of its Common Shares having a FMV equal to that of the Aco shares so received. Holdings will add to the stated capital account of the shares so issued an amount that will not exceed the aggregate paid-up capital of the Aco Shares so received. Holdings will be controlled by the Control Group. The term "paid-up capital" ("PUC"), as used here and subsequently, has the meaning assigned by subsection 89(1).

26. Aco will transfer to Holdings, at FMV, certain of its cash or near cash property and business property including cash, amounts receivable, other current assets, the Real Estate, the cash surrender value of the Policies, the Eco Shares and the Eco Receivable (the "Transferred Assets") such that immediately following the transfer of all the Transferred Assets to Holdings the FMV of each type of property transferred to Holdings, as described herein, will approximate that proportion of the FMV of all property of that type of Aco immediately before the transfer that:

(a) the aggregate FMV of the Aco Shares owned by Holdings immediately before the transfer,

is of

(b) the aggregate FMV of all the issued and outstanding shares of Aco owned by all the shareholders of Aco immediately before the transfer.

For the purpose of this paragraph, the expression "approximate that proportion" means the discrepancy from that proportion, if any, that would not exceed one percent (1%), as determined as a percentage of the FMV of each type of property that Holdings has received as compared to what Holdings would have received had it received its appropriate prorata share of the FMV of that type of property.

As consideration for the transfer, Holdings will assume certain liabilities of Aco and issue a number of Holdings Redeemable Shares to Aco. The number of Holdings Redeemable Shares so issued will represent more than 10% of the voting shares of Holdings and more than 10% of the FMV of all the issued shares of capital stock of Holdings. The aggregate redemption amount of the Holdings Redeemable Shares will equal the amount by which the aggregate FMV of the Transferred Assets exceeds the FMV of the assumed liabilities.

27. In respect of the transfers described in paragraph 26 above, Aco and Holdings will jointly elect pursuant to subsection 85(1), in prescribed form and within the time referred to in subsection 85(6), to transfer each capital property that is an eligible property at an agreed amount which will be equal to:

(a) in the case of capital property (other than depreciable property of a prescribed class), an amount equal to the lesser of the amounts described in subparagraphs 85(1)(c.1)(i) and (ii); and

(b) in the case of depreciable property of a prescribed class, an amount equal to the least of the amounts described in subparagraphs 85(1)(e)(i), (ii) and (iii).

Holdings will add to the stated capital account in respect of its shares so issued on the transfers described in paragraph 26 above, an amount equal to the aggregate of the agreed amounts determined herein plus the FMV of the Transferred Assets which are not the subject of the election described herein less the aggregate of the liabilities assumed on the transfers. In each case, the agreed amount will not be less than the amount of any non-share consideration received by Aco in respect of such transfer of eligible property nor will the agreed amount exceed the FMV of each eligible property so transferred. The term "eligible property", as used here and subsequently, has the meaning assigned by subsection 85(1.1).

28. Aco will purchase for cancellation, at FMV, all of its Aco Shares owned by Holdings for an amount equal to the aggregate fair market value of the shares so purchased. As consideration, Aco will issue a demand promissory note having a face amount and principal amount equal to the aggregate purchase price of the shares so purchased (the "Aco Note"). Holdings will accept the Aco Note as full payment of the amount owing by Aco on the purchase of the Aco Shares, with the risk of the Aco Note being dishonoured.

29. Holdings will redeem, at their redemption amount, all of the Holdings Redeemable Shares owned by Aco and will issue to Aco a demand promissory note having a face amount and principal amount equal to the aggregate of the foregoing redemption amounts of the shares so redeemed (the "Holdings Note"). Aco will accept the Holdings Note as full payment of the amount owing by Holdings on the redemption of the Holdings Redeemable Shares, with the risk of the Holdings Note being dishonoured.

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

31. Aco will pay the principal amount of the Aco Note by transferring to Holdings the Holdings Note which will be accepted by Holdings in full payment of Aco's obligation. Holdings will pay the principal amount of the Holdings Note by transferring to Aco the Aco Note which will be accepted by Aco in full payment of Holdings' obligation. The Aco Note and the Holdings Note will both thereupon be cancelled.

32. Immediately following the transfers described in paragraph 26 above, the net FMV of each type of property retained by Aco, determined in the manner described in paragraphs 21 and 22 above, will be equal to the proportion of the aggregate net FMV of all the property of that type of Aco immediately before such transfers, determined in the manner described in paragraphs 21 and 22 above, that the aggregate FMV immediately before the transfers of all the issued and outstanding shares of Aco (other than the shares owned by Holdings) is of the aggregate FMV immediately before the transfers of all the issued and outstanding shares of Aco.

Additional Information

33. Except as set out in paragraph 19 above, no property has, or will become, property of Aco, Cco, Dco or Eco and no liabilities have been, or will be, incurred by Aco, Cco, Dco or Eco in contemplation of and before the proposed transactions described above.

34. Except as outlined herein, none of Aco, Cco, Dco, Eco or Holdings has any intention of disposing of any assets to a partnership or to an unrelated person following the proposed transactions described above and no such corporation will dispose of any of its assets as part of the series of transactions or events which include the proposed transactions described above, other than in the ordinary course of business.

35. Except as part of the obligations described in paragraph 6 above and pursuant to paragraph 25 above, no shareholder of Aco will, as part of the series of transactions or events which includes the proposed transactions described above:

(a) dispose of any Aco Shares, or any property more than 10% of the FMV of which at any time during the course of the series of transactions or events which includes the proposed transactions described above is derived from one or more shares of Aco, except where the person acquiring such shares is related to the vendor for the purposes of paragraph 55(3.1)(b); or

(b) acquire any Aco Shares in contemplation of the proposed transactions described above, except where the persons acquire such shares from a person related to the acquiror for the purposes of paragraph 55(3.1)(b).

36. Except as described in paragraphs 23 and 25 above, no shareholder of Holdings will, as part of the series of transactions or events which includes the proposed transactions described above:

(a) dispose of any shares of Holdings or any property more than 10% of the FMV of which at any time during the course of the series of transactions or events which includes the proposed transactions described above is derived from one or more shares of Holdings, except where the person acquiring such shares is related to the vendor for the purposes of paragraph 55(3.1)(b); or

(b) acquire any shares of Holdings in contemplation of the proposed transactions described above, except where the persons acquire such shares from a person related to the acquiror for the purposes of paragraph 55(3.1)(b).

37. None of the shares of any corporation referred to herein has been or will be at any time during the implementation of the proposed transactions described herein:

(a) subject to a 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 agreement within the meaning assigned by subsection 248(1).

38. The Aco Shares are not taxable preferred shares and will not become taxable preferred shares at any time before the completion of the proposed transactions described above. The term "taxable preferred share" has the meaning assigned by subsection 248(1).

39. None of Aco, Holdings or Eco is or will be a "specified financial institution" or a "financial intermediary corporation" at any time before the completion of the proposed transactions described above. The terms "specified financial institution" and "financial intermediary corporation" have the meanings assigned by subsection 248(1).

40. Aco had no refundable dividend tax on hand ("RDTOH") at the end of it last taxation year. Aco does not expect to have any RDTOH for its current taxation year, which will include the proposed transactions described above. The term RDTOH has the meaning assigned by subsection 129(3).

Rulings Provided

Provided that 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. Provided that Aco and Holdings jointly file an election pursuant to subsection 85(1), in prescribed form and within the prescribed time, in respect of the transfers of property described in paragraph 26 above, the provisions of subsection 85(1) will apply to the transfer of each eligible property such that the agreed amount in respect of each such transfer will be deemed to be the proceeds of disposition to Aco and the cost thereof to Holdings pursuant to paragraph 85(1)(a). For greater certainty, paragraph 85(1)(e.2) will not apply in respect of the transfers described herein.

B. Provided that a shareholder of Aco who, immediately before the exchange described in paragraph 25 above, holds Aco Shares:

(a) holds those shares as capital property;

(b) deals at arm's length with Holdings immediately before such exchange;

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

(d) does not file an election under subsection 85(1) or 85(2) with Holdings with respect to those shares; and

(e) does not receive any consideration other than Holdings Redeemable Shares in exchange for those shares;

and further provided that immediately after the exchange:

(f) no such holder or any person or 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 control Holdings or beneficially own shares of Holdings, having a fair market value of more than 50% of the fair market value of all of the outstanding shares of Holdings,

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

(g) to have disposed of his or her Aco Shares for proceeds of disposition equal to his or her ACB of those shares immediately before the exchange; and

(h) to have acquired the Holdings Redeemable Shares at a cost equal to his or her ACB of his or her Aco Shares so disposed immediately before the exchange.

The cost to Holdings of the Aco Shares will be deemed by paragraph 85.1(1)(b) to be the lesser of:

(i) their FMV immediately before the exchange, and

(ii) their PUC immediately before the exchange.

C. As a result of the purchase for cancellation of the Aco Shares held by Holdings as described in paragraph 28 above and the redemption by Holdings of the Holdings Redeemable Shares held by Aco, as described in paragraph 29 above:

(a) the amount, if any, by which the amount paid on the purchase for cancellation or redemption exceeds the PUC of such shares immediately before the purchase or redemption will be deemed, by virtue of paragraphs 84(3)(a) and 84(3)(b), to be a dividend paid by Aco and Holdings, as the case may be, and a dividend received by Aco and Holdings, as the case may be;

(b) to the extent that a dividend that is deemed to be received by Aco and Holdings as described in ruling C(a) above is a taxable dividend, such dividend will, pursuant to subsection 112(1), be deductible in computing the taxable income of the recipient for the year in which the dividend is deemed to have been received and, for greater certainty, the provisions of subsections 112(2.1) to (2.4) will not apply to deny the subsection 112(1) deduction in respect of such dividends and the provisions of subsection 112(3) will apply to reduce any loss which may otherwise arise to the recipient as a result of the purchase for cancellation or redemption;

(c) to the extent that a dividend that is deemed to be received by Aco and Holdings as described in ruling C(a) above is a taxable dividend, such dividend will be included in each recipient's income pursuant to subsection 82(1) and paragraph 12(1)(j);

(d) the dividends that are deemed to be received by Aco and Holdings as described in ruling C(a) above will be excluded in computing the proceeds of disposition to the holder of the shares so purchased or redeemed pursuant to paragraph (j) of the definition of "proceeds of disposition" in section 54;

(e) the dividends that are deemed to be received by Aco and Holdings as described in ruling C(a) above will not be subject to tax under Part IV except as provided in paragraph 186(1)(b);

(f) the dividends described in ruling C(a) that are deemed to be paid by Holdings to Aco on the redemption of the Holdings Redeemable Shares will not be subject to tax under Parts IV.1 and VI.1 by virtue of paragraph (c) of the definition of "excepted dividend" in section 187.1 and paragraph (a) of the definition of "excluded dividend" in subsection 191(1) because Aco will have a substantial interest, within the meaning of subsection 191(2), in Holdings; and

(g) by virtue of the provisions of paragraph 55(3)(b), the provisions of subsection 55(2) will not apply to the dividends that are deemed to be received by Aco and Holdings as described in ruling C(a) above, provided that, as part of the series of transactions or events that includes the proposed transactions described herein, there is no:

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

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

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

(iv) acquisition of property in the circumstances described in subparagraph 55(3.1)(d),

which has not been described herein and, for greater certainty, subsection 55(3.1) will not apply to deny the application of paragraph 55(3)(b).

D. The Aco Shares will not, as a result of the implementation of the proposed transactions described above, in and by themselves, become taxable preferred shares.

E. The repayment of the Holdings Note held by Aco and the Aco Note held by Holdings as described in paragraph 31 above, will not give rise to a "forgiven amount" within the meaning of subsections 80(1) and 80.01(1).

F. Provided that the cost to Aco of the Holdings Note and the cost to Holdings of the Aco Note will, in each case, upon the issuance thereof, be equal to the principal amount of the particular note, no amount will be included in the income of Aco and Holdings upon payment of the principal amount of the particular note.

G. The provisions of subsections 15(1), 56(2), 56(4), 69(4) and 246(1) will not apply as a result of the proposed transactions described herein, in and by themselves.

H. 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 based on the Act in its present form and do not take into account any proposed amendments to the Act.

The above rulings are given subject to the limitations and qualifications set out in Information Circular 70-6R3 dated December 30, 1996 issued by Revenue Canada and are binding on the Canada Customs and Revenue Agency ("the CCRA") provided the proposed transactions described herein are completed by XXXXXXXXXX.

Comment

Nothing in this ruling should be construed as implying that the CCRA has agreed to or reviewed:

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

(b) the determination of any of the balances of the CDA or RDTOH referred to herein; and

(c) any tax consequences relating to the facts and proposed transactions described herein other than those specifically described in the rulings given above.

Yours truly,

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