1999 Ruling 9906823 - BUTTERFLY 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: Application of Paragraph 55(3)(b) - Double Wing Butterfly

Position: Reorganization is Tax-Deferred

Reasons: All Butterfly Requirements Satisfied

xxxxxxxxxx 990682

Attention: xxxxxxxxxx

xxxxxxxxxx, 1999

Dear Sirs:

Re: xxxxxxxxxx ("Investco") - xxxxxxxxxx
xxxxxxxxxx ("Trust A") - xxxxxxxxxx
XXXxxxxxxx ("Trust 13") - xxxxxxxxxx
Advance Income Tax Ruling

We are writing in response to your letter of xxxxxxXxxx wherein you requested an advance income tax ruling on behalf of the above-noted taxpayers. We also acknowledge receipt of the information provided in your correspondence of xxxxXxxxxx and the information provided during our telephone conversations.

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

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

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

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

(iv) subject to a ruling previously issued by the Income Tax Rulings & Interpretations Directorate; or

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

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

(a) "Act" means the Income Tax Act, R.S.C. 1985 c.1 (5th Supp.), as amended to the date hereof, and, unless otherwise stated, every reference herein to a Part, section, subsection, paragraph or subparagraph is a reference to the relevant provision of the Act;

(b) "adjusted cost base" has the meaning assigned by section 54;

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

(d) "affiliated person" has the meaning assigned by subsection 251.1(1);

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

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

(g) "capital dividend" has the meaning assigned by subsection 83(2);

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

(i) "capital loss" has the meaning assigned by paragraph 39(1) (b)

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

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

(1) "dividend refund" has the meaning assigned by subsection129(1);

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

(n) "financial intermediary corporation" has the meaning assigned by subsection 191(1);

(o) "identical properties" or "properties identical thereto" includes a property described in subsections 40(3.5) and 248(12);

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

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

(r) "private holding corporation" has the meaning assigned by subsection 191(1);.

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

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

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

(v) "significant influence" has the meaning assigned by section 3050 of the CICA Handbook;

(w) "specified financial institution" (also referred to as "SF1") has the meaning assigned by subsection 248(1);

(x) "specified investment business'1 has the meaning assigned by subsection 125(7);

(y) "stated capital" has the meaning assigned by the BCA;

(z) "stock dividend" has the meaning assigned by subsection 248(1);

(a.1)"taxable Canadian corporation" has the meaning assigned by subsection 89(1);

(a.2)"taxable dividend" has the meaning assigned by subsection 89(1); and

(a.3)"taxable preferred share" has the meaning assigned by subsection 248(1).

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

Facts

1. On xxxxxxxxxx, the late XxxxXXXXxx (the "Settlor") settled Trust A for the benefit of his son, xxxxxxxxxx ("Child A") and his issue. Trust A is required to pay the annual income to Child A and, after his death, equally among his issue. The property owned by Trust A is distributable in equal shares among the issue of Child A upon the death of the latter of Child A and his sister, xxxxxxxxxx ("Child B"). Child A is age xxxxxxxxxx and has xxxxxxxxxx adult children and xxxxxxxxxx minor children. Trust A is resident in Canada.

2. On XXXXXxxxxx, the Settlor also settled Trust B for the benefit of his daughter, Child B, and her issue. Trust B is required to pay the annual income to Child B and, after her death, equally among her issue. The property owned by Trust B is distributable in equal shares among the issue of Child B upon the death of the last survivor of Child B and Child A. Child B is age xxxXXXxxxX and has XxxxxXXXXx adult children. Trust B is resident in Canada.

3. Each of Trust A and Trust B has two personal trustees and one institutional trustee. The unanimous consent of all the trustees of each trust is required to make decisions. None of the personal trustees are related to each other and, consequently, Trust A and Trust B are not related. In addition, Investco is not related to or affiliated with either Trust A or Trust B.

4. Investco is a taxable Canadian corporation and a Canadian-controlled private corporation. Investco was incorporated on XXXXxxxxxx under the provisions of the BCA. Investco's only undertaking is the investment of its funds.

5. The authorized share capital of Investco includes an unlimited number of non-voting Class A special shares, an unlimited number of non-voting Class B special shares and an unlimited number of voting common shares. The Class A special shares are redeemable at $XXXXXXXXXX per share and the Class B special shares are, as a consequence of the transactions described in paragraphs 16, 17 and 18, redeemable and retractable at $XXXXXXXXXX per share.

The issued share capital of Investco consists of XXXXXxxxxX Class A special shares, xxxxxxxxxX Class B special shares and xxxxxXxXXx common shares. Each of Trust A and Trust B owns XxxxxxxxXx Class A special shares, xxxxxxxxxx Class B special shares and xxxXXXXXxx common shares of Investco which are held by each of Trust A and Trust B as capital property. As of xxXXXxxxxx, the shares of Investco had an aggregate stated capital and an aggregate PUC of $XXXXXXXXXX~ being $XXXXXXXXXX per Class A, Class B and common share.

6. The Class A special shares were issued by Investco during the period from xxxxxxxxxx to xxxxxxxxxx in satisfaction of dividends payable out of XXXXXxxxxx capital surplus on hand and the capital dividend account.

7. The Class B special shares were issued in XXXXXXXXXX by Investco as a stock dividend on the common shares. The amount of the stock dividend was $XXXXXXXXXX which was added to the stated capital of the Class B special shares. The purpose of this dividend was to eliminate the accrued capital gain on the common shares of Investco prior to xxxxxxxxxx, at which time each of Trust A and Trust B was deemed to have disposed of its property at its fair market value pursuant to subsections 104(4) and 104(5.3). The directors of Investco decided at a board meeting held on XXxxxxxxXX to pay this stock dividend prior to xXXXXXXXXX.

8. None of the Investco shares owned by either of Trust A or Trust B was acquired in contemplation of the proposed transactions described below.

9. Investco owns marketable securities consisting of publicly traded Canadian and U.S. stocks, bonds and other financial instruments and a relatively small amount of cash. The Investment Manager endeavours to keep all the property of Investco fully invested in publicly-traded stocks or bonds at all times. Investco's cash at any point in time thus represents dividends and interest received or the proceeds from the sale of securities which are continually being reinvested in new securities. The income of Investco is reported as income from a specified investment business.

10. The marketable securities described in paragraph 9 are capital property to Investco and represent portfolio investments of Investco as Investco does not have significant influence over any corporation in which it holds securities.

11. The liabilities of Investco include income tax liabilities and accrued professional fees which result from the ongoing operations of Investco.

12. The aggregate fair market value as at xxxxxxxxxx of Investco's assets (before deducting Investco's liabilities) was approximately $XXXXXXXXXX and the aggregate adjusted cost base of such assets was approximately $XXXXXXXXXX

13. The aggregate capital losses accrued on certain securities (collectively, the “loss properties" or individually a "loss property") held at xxXxXxxxxx was approximately $XXXXXXXXXX It is not expected that the accrued capital losses on any loss properties owned by Investco at the time of the transfers described in paragraph 28 will be materially different than this amount.

14. Investco did not have any balance in its RDTOH account at xxxxxxxxxx, the end of its xXXXxXxxxX fiscal year. Investco will earn investment income and realize capital gains in the period from xxxxxxXXXX to the date of dissolution as described below which will result in RDTOH, the amount of which is not determinable at this time.

15. As at xXxxxxxxxx, Investco had a $XXXXXXXXXX balance in its CDA.

16. On XXXXXXXXXX, the directors of Investco passed a special resolution, pursuant to the provisions of the BCA, authorizing Investco to reduce the stated capital of its issued and outstanding Class B special shares by $xxxxxxxxxx. Pursuant to this reduction, Investco made a cash payment to each of Trust A and Trust B of $XXXXXXXXXX. Investco disposed of certain of its portfolio investments in order to fund this stated capital reduction.

17. The cash received by Trust A and Trust B from Investco as a consequence of the return of stated capital described in paragraph 16 has been used to pay the income tax owing by each trust on the taxable dividend received pursuant to paragraph 7. The reduction of Invesco's stated capital was undertaken solely to provide each trust with funds to finance the taxes owing by it and was not done in contemplation of the proposed transactions described below.

18. As a consequence of the reduction in stated capital, Investco filed Articles of Amendment pursuant to the provisions of the BCA to reduce the Redemption Amount of each Class B special share from $xxxxxxxxxx to $xxxxxxxxxx per share.

Proposed Transactions

19. Each of Trust A and Trust B will cause to be incorporated under the BCA a new corporation ("ACO" and "BCO", respectively). The only undertaking of ACo and BCo will be the investing of its funds. Each of these new corporations will be a taxable Canadian corporation and a private corporation.

20. The share capital of each new corporation will consist of an unlimited number of:

(a) common shares, and

(b) three classes of special shares, designated as Class A special shares, Class B special shares and Class C special shares.

The holders of the common shares will be entitled to one vote per share.

The Class A special shares will be non-voting and entitle the holder to a non-cumulative annual dividend of $XXXXXXXXXX per share to be paid at the discretion of the directors, redeemable and retractable at a redemption price of $XXXXXXXXXX per share (being the consideration for which they are issued).

The Class B special shares will be non-voting and entitle the holder to a non-cumulative annual dividend of $XXXXXXXXXX per share to be paid at the discretion of the directors, redeemable and retractable at a redemption price of $XXXXXXXXXX per share (being the consideration for which they are issued).

The Class C special shares will be voting (one vote per share) and entitle the holder to a non-cumulative annual dividend not to exceed xxxxxxxxxx% of the redemption price per annum, to be paid at the discretion of the directors, and will be redeemable and retractable at any time at a redemption price equal to the fair market value of the consideration for which they are issued. There will be a restriction on the payment of dividends on the common shares so that no such dividends may be paid on such class of shares of ACo and BCo so as to reduce the value of the Class C special shares then outstanding. The Class C special shares will be entitled to a return of the redemption price on a liquidation, dissolution, or winding-up of the corporation in preference to the common shares,

No shares of either of ACO or BCo will be issued on incorporation.

21. Trust A will transfer all of its shares of Investco, being xxxxxxxxxx Class A special shares, xxxxxxxxxx Class B special shares and xxxxxxxxxx common shares to ACo. As sole consideration for such transfer, ACO will issue to Trust A xxxxxXxxxx Class A special shares, XXxxXXXXxX Class B special shares and XxxxxxXxxx common shares of its capital stock having a fair market value equal to the fair market value at that time of the shares of Investco transferred to ACo.

22. Trust A and ACo will elect, jointly and in prescribed form and within the time limits referred to in subsection 85(6), to have the rules in subsection 85(1) apply in respect of the transfer described in paragraph 21. The amount agreed upon in each election will be equal to the lesser of the amounts described in subparagraphs 85(1)(c.1)(i) and (ii).

23. ACo will add to the stated capital account maintained for its Class A special shares, Class B special shares and common shares an amount equal to the PUC of the corresponding classes of shares of Investco transferred to ACO, thereby resulting in the addition of $XXXXXXXXXX per Class A share and common share and $XXXXXXXXXX per Class B share.

24. Trust B will transfer all of its shares of Investco, being XXxxxXXXxx Class A special shares, xxxxXxxxxX Class B special shares and xxxXXxxxXX common shares to BCO. As sole consideration for such transfer, BCo will issue to Trust B, xxxxxxxxxx Class A special shares, xxxxxxxxxx Class B special shares and xxxxxxxxxx common shares of its capital stock having a fair market value equal to the fair market value at that time of the shares of Investco transferred to BCo.

25. Trust B and BCo will elect, jointly and in prescribed form and within the time limits referred to in subsection 85(6), to have the rules in subsection 85(1) apply in respect of the transfer described in paragraph 24. The amount agreed upon in each election will be equal to the lesser of the amounts described in subparagraphs 85(1)(c.1)(i) and (ii).

26. BCo will add to the stated capital account maintained for its Class A special shares, Class B special shares and common shares an amount equal to the PUC of the corresponding classes of shares of Investco transferred to BCo, thereby resulting in the addition of $XXXXXXXXXX per Class A share and common share and $XXXXXXXXXX per Class B share.

27. Immediately before the transfers of property described in paragraph 28, the property owned by Investco will be classified into the following three categories:

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

(b) investment property, comprising all of the assets of Investco, other than any cash or near cash property, any income from which would be income from property or from a specified investment business, including marketable securities and similar instruments held as portfolio investments; and

(c) business property, comprising all of the remaining assets of Investco, other than cash or near cash property, any income from which would be income from a business other than a specified investment business.

Investco owns only cash or near cash property and investment property and will not own any business property at the time of the transfers described in paragraph 28.

For greater certainty, any tax accounts of Investco, such as the balance of any losses available for carryforward and its RDTOH, will not be considered property of Investco.

28. Investco will transfer to each of ACO and BCo at fair market value one-half of its:

(a) cash or near cash property;

(b) loss properties; and

(c) investment property other than property described in (b).

The transfers will be effected in a manner such that ACO and BCo will acquire an equal proportion of those properties which have unrealized gains.

As consideration for the property so transferred, each of ACo and BCO will assume one-half of Investco's liabilities, if any, and will each issue to Investco xxxxxxxxxx Class C special shares having a fair market value and aggregate redemption amount equal to the amount by which the fair market value of the assets of Investco transferred to ACo and BCo exceeds the amount of the liabilities, if any, assumed by ACO and BCO.

Immediately following the transfers set out in this paragraph, Investco will be connected to each of ACo and BCo on the basis that it will own more than 10% of the issued share capital of each of ACO and BCO which have full voting rights under all circumstances and which have a fair market value which exceeds more than 10% of the fair market value of all the issued shares of the capital stock of each of ACO and BCo.

29. Investco and each of ACO and BCo will elect, jointly and in prescribed form and within the time limits referred to in subsection 85(6), to have the provisions of subsection 85(1) apply to the transfer of each property of Investco that is an eligible property. The agreed amount in respect of each property so transferred will be equal to the lesser of the amounts described in subparagraphs 85(1)(c.1)(i) and (ii).

For greater certainty the agreed amount for any eligible property included in the subsection 85(1) elections referred to in this paragraph will not be less than the amount of any liabilities assumed by ACo or BCO, as the case may be, as consideration for the transfer of such property and will not exceed the fair market value of each such property.

30. Each of ACo and BCO will add to the stated capital account maintained for its Class C special shares an amount equal to the amount by which the aggregate cost of the properties acquired by ACO or BCo (determined pursuant to subsection 85(1), where relevant) exceeds the amount of liabilities assumed, if any, by ACo or BCo as consideration therefor.

31. Each of ACo and BCo will redeem the xxxxxxxxxx Class C special shares of its capital stock owned by Investco for an amount equal to their fair market value, being the Redemption Price and, as payment of the Redemption Price, will issue to Investco a non-interest bearing promissory note (the "ACO Note" and the "BCo Note," respectively) payable on demand having a principal amount and fair market value equal to the Redemption Price. Investco will accept the ACO Note and BCo Note as full payment for the Redemption Price of the Class C special shares of ACO and BCo.

32. At the end of the day on which the Class C special shares of each of ACO and BCo are redeemed, each of ACO and BCO will cause its first taxation year to end.

33. On the day following the redemption of the Class C special shares of ACO and BCo as described in paragraph 31, the shareholders of Investco, will, by special resolution, resolve to wind up and dissolve Investco under the applicable provisions of the BCA. In connection with the winding-up, Investco will distribute to ACo and BCo, respectively, the ACO Note and the BCO Note. No agreement or resolution relating to the winding up of Investco or the distribution of its property will provide for the cancellation of any shares of Investco.

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

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

36. Following receipt of the dividend refund to which Investco will become entitled as a result of the proposed transactions described herein, Investco will distribute one-half of such amount to each of ACo and BCO. The refund will not arise until after the end of the fiscal period in which the proposed transactions described above are completed.

37. Following the completion of the transactions described in paragraphs 19 to 36, all properties of Investco will have been distributed and all liabilities either discharged or assumed by ACO and BCO. Articles of Dissolution will then be filed and Investco will be dissolved.

Purpose of the Proposed Transactions

38. The purpose of the proposed transactions is to transfer to each of ACo and BCo one-half of the cash, marketable securities and other portfolio investments currently held by Investco to permit Trust A and Trust B to determine the future investment policies of the new corporation controlled by it without being bound by or influenced by the investment policies considered appropriate for the beneficiaries of the other trust.

Additional Information

39. Except as described herein, no property has been or will be acquired or disposed of by Investco in contemplation of and before the proposed transactions except in the ordinary course of its business.

40. Subsequent to the implementation of the proposed transactions, neither ACo nor BCo intends to transfer or sell any of its assets to any other person or partnership except in the ordinary course of its business.

41. None of the issued shares referred to herein (including the shares to be issued as part of the proposed transactions):

(a) is or will be subject to a guarantee agreement within the meaning referred to in subsection 112(2.2);

(b) is or will be part of a dividend rental arrangement within the meaning referred to in subsection 112(2.3); or

(c) has been or will be issued or acquired as part of a transaction or event or series of transactions or events of the type described in subsection 112(2.5).

42. None of Investco, ACo and BCo will be an SF1 at any time before the completion of the proposed transactions and neither of ACo nor BCo will be, at any time before the completion of the proposed transactions, a financial intermediary corporation.

43. Investco is a private holding corporation and each of ACO and BCo will be private holding corporations.

44. The common shares of Investco are not taxable preferred shares.

Rulings Given

Provided that the preceding statements constitute a complete and accurate disclosure of all of the relevant facts, proposed transactions and the purpose of the proposed transactions, and provided that the proposed transactions are completed in the manner described above, our rulings are as set forth below.

A. Subsection 85(1) will apply, subject to the application of subsection 26(5) of the Income Tax Application Rules, to the transfer of the shares of Investco by Trust A to ACo and by Trust B to BCO as described in paragraphs 21 and 24, in respect of which an election under subsection 85(1) is made, such that the agreed amount in respect of each transfer of such property will be deemed to be the transferor's proceeds of disposition and the transferee's cost thereof pursuant to paragraph 85(1)(a).

For greater certainty, paragraph 85(1)(e.2) will not apply to the transfers.

B. Subsection 85(1) will apply, subject to the application of subsection 69(11) and of subsection 26(5) of the Income Tax Application Rules, to the transfer of each eligible property by Investco to ACo and BCo, as described in paragraph 28, in respect of which an election under subsection 85(1) is made, such that the agreed amount in respect of each transfer of each eligible property will be deemed to be Investco's proceeds of disposition and each transferee corporation's cost thereof pursuant to paragraph 85(1)(a).

For greater certainty, paragraph 85(1)(e.2) will not apply to the transfers.

C. Provided that Investco does not control ACO or BCo, directly or indirectly in any manner whatever and provided that neither ACo nor BCo controls Investco, directly or indirectly in any manner whatever prior to, or as a consequence of, the proposed transactions, and provided that none of the loss properties or properties identical thereto will be acquired by any person affiliated with Investco during the period that begins 30 days before and ends 30 days after the transfers described in paragraph 28, paragraph 40(3.4)(a) will not apply to deem a capital loss realized by Investco on the disposition of a loss property, as described in paragraph 28, to be nil and any net capital loss of Investco for the taxation year as a result of the disposition of the loss properties will be deductible in computing its taxable income, subject to the restrictions in subsection 111(1.1) and within the time specified in paragraph 111(1)(b).

D. On the redemption by ACO and BCo of the Class C special shares held by Investco and as a result of the distributions by Investco in the course of its winding-up:

(a) by virtue of paragraphs 84(3)(a) and 84(3)(b), each of ACO and BCo will be deemed to have paid, and Investco will be deemed to have received, a taxable dividend at that time equal to the amount, if any, by which the amount paid to redeem the Class C special shares exceeds the PUC of those shares immediately before the redemption;

(b) (i) pursuant to paragraph 88(2)(b) and subsection 84(2), but subject to (ii) to (iv) herein, each of ACo and BCo will be deemed to have received a dividend (the "winding-up dividend") on their common shares of Investco equal to the proportion of the amount by which the aggregate fair market value of the property of Investco distributed by Investco on the winding-up in respect of the common shares exceeds the amount by which the PUC of that class of shares is reduced that the number of shares of such class held by the particular corporation is of the number of shares of that class,

(ii) pursuant to subparagraph 88(2)(b)(i), such portion of the winding-up dividend referred to in Ruling C(b)(i) as does not exceed Investco's CDA determined immediately before the payment of the winding-up dividend shall be deemed to be the full amount of a separate dividend,

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

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

(B) the amount by which the winding-up dividend exceeds the portion, if any, in respect of which Investco will elect under subsection 83(2)

shall be deemed not to be a dividend, and

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

(c) to the extent that the deemed dividends described in (a) and (b) above are taxable dividends, such dividends will, pursuant to subsection 112(1), be deductible in computing the taxable income of the recipient for the year in which the dividends are deemed to have been received and such deduction will not be denied by any of the provisions of subsections 112(2.1), (2.2), (2.3) or (2.4); and

(d) the amount of the deemed dividends described in (a) and (b) above will, by virtue of paragraph (j) of the definition of "proceeds of disposition" in section 54, be excluded from the proceeds of disposition of the shares and any loss arising from such disposition of those shares will be reduced by the amount of such dividends pursuant to subsection 112(3).

E. With respect to the dividends described in Ruling D:

(a) the deemed dividends referred to in Ruling D will not be subject to tax under Part IV.1 on the basis that such dividends will be excepted dividends by virtue of paragraph (c) of the definition of "excepted dividend" in section 187.1; and

(b) the taxable dividends described in Ruling D(a) will not be subject to tax under Part VI.1 on the basis that each such dividend will be an "excluded dividend" by virtue of paragraph 191(1)(b).

F. The common shares of Investco will not become taxable preferred shares as a result of the proposed transactions, in and of themselves.

G. By virtue of paragraph 186(4)(b), each of ACo and BCO will be connected with Investco and Investco will be connected with each of ACo and BCo immediately before the transactions described in paragraphs 31 to 33. Consequently,

(a) provided that each of ACo and BCo is not entitled to a dividend refund in respect of its taxation year in which it is deemed to pay the dividend referred to in Ruling D(a) , Investco will not be subject to Part IV tax in respect of such dividend, and

(b) each of ACO and BCo 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 to which Investco will become entitled for its taxation year in which the dividends referred to in Ruling D(b) are deemed to be paid, that the amount of each such dividend received by the particular corporation is of the aggregate of all taxable dividends paid by Investco in its taxation year in which such dividend is paid.

H. Provided that as part of the series of transactions or events that includes the proposed transactions, there is not:

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

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

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

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

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

I. The settlement of the ACo Note and the BCo Note will not give rise to a "forgiven amount" within the meaning of subsection 80(1).

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

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

The above rulings are given subject to the limitations and qualifications set out in Information Circular 70-6R3 dated December 30, 1996 and are binding on Revenue Canada Customs, Excise and Taxation provided that the proposed transactions, other than the dissolution of Investco, are completed by

xxxxxxxxxx.

The above rulings are based on the law as it presently reads and do not take into account any proposed amendments to the Act which, if enacted into law, could have an effect on the rulings provided herein.

Caveat

Nothing in this ruling should be construed as implying that Revenue Canada, Customs, Excise and Taxation is making a determination or ruling in respect of:

(a) the cost amount or fair market value of any particular asset;

(b) the paid-up capital of any shares referred to herein;

(c) the balance of the capital dividend account or the refundable dividend tax on hand of any corporation; or

(d) any tax consequences relating to the 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 and
Interpretations Directorate
Policy and Legislation Branch