Butterfly spin-offs

Overview

Loblaw has a substantial real estate rental portfolio (much of it being stores rented to it plus the former CREIT portfolio) held through Choice REIT. Loblaw will be effecting a butterfly spin-off of its Choice holdings to its parent, George Weston Limited (also TSX-listed) pursuant to a CBCA Plan of Arrangement, subject to receiving CRA rulings. This is to be accomplished by first butterflying the Choice holdings to a “Spinco” held by the Loblaw shareholders including GWL and an indirect GWL subsidiary (WHL). WHL, which apparently also indirectly holds the Weston Foods division, would then effect a butterfly distribution of its Spinco shares to a second transferee corporation (WHL/TC). There then would be a triangular amalgamation of Spinco with inter alia WHL/TC pursuant to which the public shareholders of Spinco would receive GWL common shares in exchange for their Spinco common shares.

In order to effect the initial spin-off to Spinco, there will be a s. 86 exchange of old Loblaw common shares for new Loblaw common shares and Loblaw butterfly shares. In order to reflect the FMV reduction of a Loblaw common share, the existing Loblaw stock options will be exchanged for a higher number of new options with a lower exercise price but an aggregate in-the-money value that is no higher. The in the money amount of the new and old options will be determined based on the weighted average TSX trading price of the Loblaw shares for the five-day trading period beginning on the Effective Date of the Arrangement, and ending immediately before the Effective Date, respectively.

Loblaw/Choice REIT

Loblaw is one of Canada’s largest grocery, pharmacy and health and beauty retailers and is a leading provider of apparel and general merchandise. Its common shares (the “LCL Shares”) are listed on the TSX. Currently, Loblaw holds an approximate 61.6% effective interest in Choice REIT through its indirect ownership of 21,500,000 “Trust Units” of Choice REIT and 389,961,783 (exchangeable) Class B LP Units (of a subsidiary LP of Choice REIT), representing all of the outstanding Class B LP Units.

TC Amalco

A CBCA corporation that will hold the interest in Choice REIT referred to above, namely, the Class B Units (and related Special Voting Units) and Trust Units.

GWL

George Weston Limited, which is TSX-listed, is the majority owner of Loblaw GWL has two reportable operating segments: Weston Foods and Loblaw. 93% of its market capitalization is accounted for by its interest in Loblaw.

Background to choice of butterfly

Management determined that a pro rata spin-out to all shareholders would be the best strategic alternative and would be financially attractive but also determined that spinning out or distributing Loblaw’s interest in Choice REIT directly to LCL Shareholders could not be accomplished on a tax-efficient basis. If Loblaw were to have spun out its Choice REIT interest in a direct distribution to all LCL Shareholders, it would have triggered an amount of tax payable by Loblaw that today would be approximately $640 million. To address this impediment, management and its advisors developed a spin-out structure that would involve distributing the Choice REIT interest to GWL and providing LCL Shareholders other than GWL and its subsidiaries with the equivalent market value of their pro rata interest in Choice REIT in the form of GWL Common Shares. In this structure, the Choice REIT interest and the GWL Common Shares would be distributed at FMV based on their respective trading prices at the time of the spin-out.

Consequences of Arrangement

Under the Arrangement, LCL Shareholders other than GWL and its subsidiaries will receive 0.135 of a GWL Common Share (26.7 million GWL Common Shares in total) for each LCL Common Share held and GWL will receive Loblaw’s approximate 61.6% effective interest in Choice REIT. Following the Arrangement, GWL will own an approximate 65.4% effective interest in Choice REIT directly (which includes the approximate 3.8% effective interest in Choice REIT currently owned by wholly-owned, direct subsidiaries of GWL prior to the Arrangement), and GWL will continue to be controlled by Mr. W. Galen Weston who, directly and indirectly through entities which he controls, will own approximately 52.8% of the outstanding GWL Common Shares. The public shareholders of Loblaw will own approximately 16.8% of the outstanding GWL Common Shares as a result of the Arrangement and Loblaw will have no ownership in Choice REIT. GWL’s market capitalization is expected to increase from approximately $13.0 billion to $15.7 billion, and its public float of GWL Common Shares is expected to increase from approximately $4.6 billion to $7.3 billion.

Pre-Arrangement Transactions

Under the Pre-Arrangement Transactions: (i) Loblaw and its applicable subsidiaries will undertake various reorganizations to ensure that the Trust Units and Class B LP Units representing LCL’s approximate 61.6% effective interest in Choice REIT are held by TC Amalco prior to the Effective Time, and (ii) GWL and its applicable subsidiaries will undertake various reorganizations to ensure that the Trust Units representing GWL’s approximate 3.8% effective interest in Choice REIT are held by WFDI Amalco prior to the Effective Time.

Plan of Arrangement

1. Each LCL Shareholder will exchange each of its LCL Common Shares for one LCL New Common Share and one LCL Spin-off Butterfly Share (the “LCL Capital Reorganization”). The aggregate PUC of the LLC Common Shares will be allocated between the LCL New Common Shares and the LCL Spin-off Butterfly Shares on a relative FMV basis.
2. Concurrently with the LCL Capital Reorganization, and in order to reflect the FMV reduction of an LCL Common Share, each holder of LCL Stock Options will exchange all of such holder’s outstanding LCL Stock Options for a number of LCL New Stock Options with an aggregate in-the-money value that is no higher. The in the money amount of the new and old options will be determined based on the weighted average TSX trading price of LCL Common Shares for the five-day trading period beginning on the Effective Dates, and ending immediately before the Effective Date, respectively.
3. The number of LCL DSUs, PSUs and RSUs will be proportionately increased to reflect such FMV reduction.
4. Each holder of LCL Spin-off Butterfly Shares will transfer each LCL Spin-off Butterfly Share that it owns to Spinco in exchange for one Spinco Common Share (the “Spinco Share Exchange”).
5. Loblaw will transfer the LCL Spin-off Distribution Property (namely, its TC Amalco Common Shares) to Spinco for 1,000,000 Spinco Preferred Shares, electing under s. 85(1).The net FMV of such property will accord with the s. 55(1) “distribution” fraction.
6. Spinco will redeem all of the Spinco Preferred Shares held by Loblaw for the Spinco Redemption Note, with any deemed dividend designated by Spinco as an eligible dividend.
7. The first taxation year of Spinco will end.
8. Loblaw will redeem the LCL Spin-off Butterfly Shares held by Spinco for the LCL Redemption Note.
9. Loblaw will satisfy its obligations under the LCL Redemption Note by transferring the Spinco Redemption Note to Spinco.
10. Spinco will satisfy its obligations under the Spinco Redemption Note by transferring the LCL Redemption Note to Loblaw.
11. Each LCL New Common Share will be converted into one LCL Common Share.
12. WFIC Sub will transfer all of the LCL Common Shares that it owns to WFIC Sub Holdco for 10,000 common shares of WFIC Sub Holdco, electing under s. 85(1) – and similarly for LCL Common Share drop-downs by Rocky to Rocky Holdco, and by Rocky Sub to Rocky Sub Holdco.
13. WFDI Amalco will exchange each WHL Common Share that it owns for one WHL New Common Share and one WHL Spin-off Butterfly Share.
14. WFDI Amalco will transfer all of the WHL Spin-off Butterfly Shares that it owns to WHL/TC for 10,000 WHL/TC Common Shares, electing under s. 85(1).
15. WHL will transfer the WHL Spin-Off Distribution Property (being all the common shares in 2397454, and the WHL’s Spinco Common Shares to WHL/TC for 1,000,000 WHL/TC Preferred Shares, electing under s. 85(1).
16. The net FMV of the WHL Spin-off Distribution Property received by WHL/TC will approximate the s. 55(1) “distribution” fraction.
17. WHL/TC will redeem all of the WHL/TC Preferred Shares held by WHL for the WHL/TC Redemption Note.
18. The first taxation year of WHL/TC will end.
19. WHL will redeem all of the WHL Spin-off Butterfly Shares held by WHL/TC for the WHL Redemption Note.
20. WHL will satisfy its obligations under the WHL Redemption Note by transferring the WHL/TC Redemption Note to WHL/TC.
21. WHL/TC will satisfy its obligations under the WHL/TC Redemption Note by transferring the WHL Redemption Note to WHL.
22. WFDI Amalco by exercising its conversion right will have each WHL New Common Share converted into one WHL Common Share.
23. WFDI Amalco, WHL/TC, 2397454 (assumed in the diagram to be a holding company for Choice REIT holdings of WHL, although this is not disclosed) , Rocky, Rocky Sub, WFIC Sub, Spinco and TC Amalco will amalgamate to form Spinco Amalco, with each issued and outstanding common share of WFDI Amalco being converted into one Spinco Amalco Common Share, each issued and outstanding Spinco Common Share (other than a Spinco Common Share held by a predecessor corporation) being cancelled, and in consideration therefor, GWL will issue to each such holder of Spinco Common Shares a number of GWL Common Shares per Spinco Common Share equal to the Spinco/GWL Conversion Ratio.
24. As consideration for the issuance of GWL Common Shares, Spinco Amalco will issue 1,000,000 Spinco Amalco Preferred Shares to GWL. The stated capital of the Spinco Amalco Common Shares, and the stated capital of the Spinco Amalco Preferred Shares, will be an amount equal to $0.01 and the amount to be added by GWL to the stated capital of the GWL Common Shares will be an amount equal to the PUC of the Spinco Common Shares.
25. GWL and Spinco Amalco will amalgamate, and the issued and outstanding GWL Common Shares and GWL Preferred Shares immediately prior to the amalgamation will survive and continue to be GWL Common Shares and GWL Preferred Shares.
26. As part of the Arrangement, GWL expects to issue 1,296,000 GWL Common Shares to a third party for a cash subscription price per GWL Common Share equal to the effective price being used for the GWL Common Shares being issued to LCL Shareholders in the Arrangement.

Due Bill Trading

Due Bill trading may only be used in connection with a “push-out” of listed securities (i.e. where the certificates representing the originally listed securities to which the entitlement attaches will not be replaced with new certificates; rather, only the entitlement (e.g. the dividend, shares of a new company, etc.) will be “pushed-out” to shareholders). In the case of the Arrangement, this means that Due Bill trading will only be used in connection with the LCL Common Shares, as the certificates representing the LCL Common Shares will not be replaced with new certificates. Any LCL Common Shares traded during the Due Bill Period will have Due Bills attached and will therefore carry the right to receive GWL Common Shares.

Canadian tax consequences to LCL shareholders

Loblaw s. 86 reorg

Each Resident Shareholder will exchange each of its LCL Common Shares for one LCL New Common Share and one LCL Spin-off Butterfly Share. A Resident Shareholder will not realize a capital gain or a capital loss as a result of such exchange. The aggregate ACB of a Resident Shareholder’s LCL Common Shares immediately before such exchange will be allocated among the LCL New Common Shares and LCL Spin-off Butterfly Shares received by the Resident Shareholder on the exchange in proportion to the relative FMV of such shares.

Spinco Share Exchange

Pursuant to the Spinco Share Exchange, each Resident Shareholder will transfer each of its LCL Spin-off Butterfly Shares to Spinco in exchange for one Spinco Common Share. Subject to such shareholder reporting otherwise, a Resident Shareholder will be deemed under s.85.1 to have disposed of all of its LCL Spin-off Butterfly Shares for proceeds of disposition equal to the aggregate ACB of such shares.

Conversion

The conversion of each LCL New Common Share held by a Resident Shareholder into one LCL Common Share will be deemed not to be a disposition.

Spinco Amalgamation

The amalgamation of WFDI Amalco, Spinco, TC Amalco, WHL/TC, 2397454, Rocky, Rocky Sub and WFIC Sub to form Spinco Amalco will occur on a s. 87(4) rollover basis. Resident Shareholders will receive 0.135 of a GWL Common Share in exchange for each Spinco Common Share held immediately before the amalgamation. A Resident Shareholder who receives only GWL Common Shares on the amalgamation will be deemed to have disposed of its Spinco Common Shares for proceeds of disposition equal to their aggregate ACB.

GWL/Spinco Amalco amalgamation

GWL and Spinco Amalco will amalgamate, and on the amalgamation, each GWL Common Share held by a Resident Shareholder will survive and continue to be one GWL Common Share of the amalgamated corporation. A Resident Shareholder will be deemed to have disposed of its GWL Common Shares for proceeds of disposition equal to the Resident Shareholder’s aggregate ACB of such shares immediately before the amalgamation.

Advance income tax ruling

The Tax Ruling Application was submitted to the CRA in September 2017. The Tax Ruling requested from the CRA requires, among other things, that the LCL Spin-off Butterfly complies with all of the requirements of the public company “butterfly reorganization” rules in s.55 of the Tax Act. Itis also expected to confirm that the Pre-Arrangement Transactions will generally occur on a tax-deferred basis for Loblaw, GWL and their applicable subsidiaries and affiliates.

Potential loss of butterfly treatment

Under s. 55 of the Tax Act, Loblaw and Spinco will recognize a taxable gain on the transfer by Loblaw of the LCL Spin-off Distribution Property as part of the LCL Spin-off Butterfly if: (i) within three years of the transfer, Spinco (or GWL, as the successor of Spinco) engages in a subsequent spin-off or split-up transaction under s.55 or Loblaw engages in a split-up (but not a spin-off) transaction under s. 55; (ii) a “specified shareholder” disposes of shares of Loblaw or Spinco (or GWL, as the successor of Spinco), or property that derives 10% or more of its value from such shares or property substituted therefor, to an unrelated person or a partnership as part of the series of transactions which includes the LCL Spin-off Butterfly; (iii) there is an acquisition of control of Loblaw or of Spinco (or of GWL, as the successor to Spinco) that is part of the series of transactions that includes the LCL Spin-off Butterfly; or (vi) certain persons acquire shares in the capital of Loblaw (other than in specified permitted transactions) in contemplation of, and as part of the series of transactions that includes, the LCL Spin-off Butterfly. If any of the above events occurred and caused the LCL Spin-off Butterfly to be taxable to Loblaw and Spinco under s.55, each of Loblaw and Spinco (and GWL, as the successor of Spinco), would be liable for a substantial amount of tax.

U.S. tax consequences

Taxable distribution characterization

A U.S. Holder who receives GWL Common Shares pursuant to the Arrangement should be treated as receiving a taxable distribution in an amount equal to the FMV of the gross amount of GWL Common Shares received by such holder, without reduction for Canadian withholding tax, if any, plus the amount of cash received in lieu of fractional GWL Common Shares, although the matter is not entirely free from doubt. Such taxable distribution would be treated as a dividend, taxable as ordinary income, to the extent of a U.S. Holder’s share of the current and accumulated earnings and profits of the Company. The amount of the dividend received by a non-corporate U.S. Holder, including an individual, generally would be “qualified dividend income” subject to U.S. tax at preferential rates, provided the Company is treated as a “qualified foreign corporation” under the Code and certain holding period and other requirements are met. A qualified foreign corporation includes a non-U.S. corporation that is eligible for the benefits of a comprehensive income tax treaty with the United States which the United States Treasury Department determines to be satisfactory for such purposes and which includes an exchange of information provision.

E&P calculation

GWL does not intend to calculate earnings and profits for U.S. federal income tax purposes. U.S. Holders should therefore expect the entire amount of any distribution on GWL Common Shares to be treated as a dividend for U.S. federal income tax reporting purposes. Dividends received by non-corporate U.S. Holders may be subject to an additional tax on unearned income of 3.8%.

Overview

Element Financial will be spinning off its commercial finance business as ECN Capital pursuant to a butterfly for which it did not apply for a ruling. It is contemplated that following the butterfly, ECN Capital will then acquire all the shares of a cash-rich recent IPO (IAC) in exchange for about 13% of its shares. Holders of the Element stock options will exchange a portion of their options on the shares of the “Subco,” into which the to-be-distributed business has been dropped, and then, immediately following the butterfly, exchange their Subco options for options on ECN Capital shares. The old exercise price will be prorated between the options on the post-spin-off Element (“Element Fleet”) and ECN Capital based on the relative 5-day VWAP for their share prices after giving effect to the butterfly. Holders of about $534M of Element preferred shares will not participate in the butterfly exchange. On the preliminary s. 86 exchange of Element common shares for Element Fleet common shares and Element "Butterfly Shares," stated capital will be allocated first to the Butterfly Shares in an amount equal to their estimated fair market value of $1.00 per share.

Element

A TSX-listed OBCA corporation with a fleet management business and a commercial finance (e.g., leasing) business and having a market cap of $5.2B. The following shares (all listed) are outstanding: Common Shares - 385,798,160; Preferred Shares – Series A, C, E and G, respectively: 4,600,000, 5,126,400, 5,321,900 and 6,900,000. Its 2Q financial statements showed share capital of $4.23B for common shares and $534M for preferred shares.

ECN Capital

Was formed under the OBCA.

Subco

Was formed under the OBCA.

IAC

An Ontario corporation whose initial public offering of common shares was completed on May 27, 2015, IAC’s current business is identifying and evaluating businesses and assets with a view to completing a “Qualifying Acquisition” (as described in the TSX Company Manual). 3,000,000 IAC Class A and 6,843,750 IAC Class B Shares are issued and outstanding.

Pre-Arrangement transactions

Element will transfer its commercial finance business to Subco through the direct and indirect transfer to Subco of the shares or other securities of subsidiaries and/or the assets and liabilities of Element related to that business.

Element Arrangement transactions

1. Each Dissenting Shareholder's Element Common Shares will be transferred to Element in exchange for the right to be paid the fair value of such share.
2. Each Element Common Share (after having been redesignated as a Class A Common Share with two votes per share) will be changed into one Element Fleet Common Share (having one vote per share) and a number of the Element Butterfly Shares equal to the Butterfly Multiple (being the ratio of the “Subco Share Number” (i.e., the fair market value of the Subco equity divided by $1.00) to the number of all the outstanding Element Common Shares. $1.00 of stated capital will be allocated to each Element Butterfly Share and the balance of the stated capital of the Element Common Shares will be allocated to the Post-Arrangement Element Common Shares.
3. Element Butterfly Share will be transferred to ECN Capital for the issuance of an ECN Capital Common Share.
4. Element Options will be exchanged for Element Fleet options and options to acquire Subco Shares.
5. Element will transfer all of the Subco Shares to ECN Capital in consideration for the issuance by ECN Capital to Element of the Subco Share Number of ECN Capital Reorganization Shares.
6. ECN Capital will redeem all of the ECN Capital Reorganization Shares for a non-interest bearing demand promissory note.
7. Element will redeem all of the Element Butterfly Shares for a non-interest bearing demand promissory note.
8. The notes in 6 and 7 will be set-off.
9. Each holder of an option on Subco Shares (see 4) will dispose of it to ECN Capital for an option to acquire ECN Capital Common Shares. The original exercise price of each outstanding Element Option will be allocated to the Element Fleet Option and the ECN Capital Option based on the “Butterfly Proportion” of the original exercise price, i.e., the ratio of (A) the ECN Capital Common Shares VWAP on the TSX for the first five trading days following the Element Arrangement; to (B) the sum of that VWAP and that for the Element Common Shares on the TSX for the first five trading days during which they trade without any entitlement to the ECN Capital Common Shares.
10. ECN Capital will resolve to voluntarily dissolve Subco.

Following completion of the Element Arrangement, Element, together with certain subsidiaries, will be renamed "Element Fleet Management Corp."

Element preferred shares and debentures

Element's outstanding series of preferred shares will remain outstanding following the Element Arrangement. The conversion prices of Element's Debentures (which also will remain outstanding following the Element Arrangement) will be adjusted after the Element Effective Date in an equitable manner.

Due bill trading

Element expects that the TSX will implement "due bill" trading for the Element Common Shares such that any Element Common Share traded during the period commencing on the second trading day immediately prior to the Distribution Record Date and ending on the Distribution Payment Date will automatically carry the right to receive one ECN Capital Common Share. Element expects that a "when issued" or "if, as and when issued" market for the ECN Capital Common Shares and the Element Common Shares (which will be Element Fleet Common Shares after the Effective Date of the Element Arrangement) will be made available on the TSX two trading days prior to the Distribution Record Date until the opening of trading on the first trading day following the Distribution Payment Date.

Post-Arrangement Element and ECN

Element will be a fleet management company focused on generating revenue and earnings based on the continued service to Element's existing fleet management business. ECN Capital will be a new commercial finance company with a broad origination platform in the commercial and vendor, rail and aircraft sectors, which will transition into an asset management business. Steven Hudson, Element's current Chief Executive Officer, will lead ECN Capital as its Chief Executive Officer and will serve on the board of directors of Element Fleet. Bradley Nullmeyer, Element's current President, will lead Element Fleet as its Chief Executive Officer and will serve on the board of directors of ECN Capital.

IAC Arrangement

Element and ECN Capital have agreed to the combination of ECN Capital with IAC pursuant to the IAC Arrangement. The IAC Arrangement will result in, among other things, the acquisition by ECN Capital of all the outstanding IAC Shares in exchange for ECN Capital Common Shares. The primary purpose of the IAC Arrangement is to provide immediate access to capital, namely, net cash assets of IAC of approximately $220 million (less any redemptions up to the permitted amount). Assuming no redemptions of IAC Class A Shares, ECN Capital expects to issue approximately 13% of its common shares to former IAC shareholders. Following such acquisition of the IAC shares, ECN Capital will transfer the acquired shares to a wholly-owned subsidiary in consideration for 100 common shares of such subsidiary, and IAC will be wound up into such subsidiary. The IAC Arrangement is subject to separate regulatory approvals, separate court approval, and IAC Shareholder approval at a special meeting of IAC Shareholders expected to be held subsequent to the completion of the Element Arrangement.

IAC Exchange Ratio

The Class A Exchange Ratio is calculated based on (a) IAC Net Assets, determined on a per share basis, taking into account the aggregate number of IAC Class A Shares and IAC Funding Class B Shares issued and outstanding immediately prior to the IAC Effective Time (other than IAC Class A Shares for which IAC Shareholders have validly exercised rights of redemption in respect of the IAC Arrangement) and (b) the aggregate fair market value of ECN Capital, determined on a per share basis, taking into account the aggregate number of ECN Capital Common Shares issued and outstanding immediately prior to the IAC Effective Time.

Canadian tax consequences

Element Arrangement exchange

S. 85.1 will apply to an exchange under the Element Arrangement, so that a participating shareholder who does not choose to realize a capital gain or capital loss will have rollover treatment - and the adjusted cost base of the Element Common Shares immediately prior to the Element Arrangement will generally be allocated between the ECN Capital Common Shares and the Element Common Shares based upon their relative fair market values. Following the Element Effective Date, Element intends to advise Shareholders on its website of its estimate of the appropriate proportionate allocation.

Butterfly

BMO is providing its fairness opinion on the Element Arrangement assuming that it will qualify as a "butterfly reorganization" under s. 55(3)(b), so that it is expected to occur on a tax -deferred basis to both Element and ECN Capital. No tax ruling has been requested or received from CRA on the Element Arrangement consequences.

Element Arrangement butterfly covenant

Each party (Element, ECN Capital, IAC and Subco) covenants and agrees with and in favour of each other party that, for a period of three years after the Element Arrangement Effective Date, it will not (and will cause its subsidiaries not to) take any action, omit to take any action, or enter into any transaction that could cause any dividend deemed to have been paid or received under the Element Arrangement for purposes of the Tax Act to become subject to s. 55(2).

U.S. tax consequences

Distribution of commercial fleet business

Element intends to take the position that Code s. 355 applies to the deemed distribution.

PFIC rules

Element has not made a determination as to its status as a PFIC under Section 1297 of the Code for the current or any past taxable years. Further, Element has not made a determination as to whether Element Fleet or ECN Capital may be a PFIC for any taxable year. Element is (and Element Fleet or ECN Capital may be) a specialty finance company, and U.S. Holders should consider whether the income from such finance activities is considered to be "passive". Whether such income is considered to be "passive" may depend in part on the ability of a non -U.S. corporation to meet certain requirements under the PFIC rules, the analysis of which Element has not performed.

IAC Arrangement

In general, the IAC Arrangement will not result in U.S. federal income tax consequences to U.S. Holders, except that (i) the IAC Arrangement may affect whether ECN Capital is classified as a PFIC or non-PFIC and (ii) if ECN Capital is treated as a PFIC (or if a U.S. Holder owns at least 50% of ECN Capital's stock by value) and ECN Capital owns a subsidiary PFIC, the issuance of ECN Capital Common Shares in connection with the IAC Arrangement may be treated, under proposed Treasury Regulations, as the "indirect disposition" by any such U.S. Holder of such U.S. Holder's indirect interest in such subsidiary PFIC, and such indirect disposition generally would be taxable under the rules of Section 1291 of the Code discussed above.

Overview. Nuvo will implement a butterfly spin-off of its "Drug Development Business" as "Crescita" under an OBCA Plan of Arrangement, and retain it existing revenue and EBITDA generating "Speciality Pharmaceutical Business." No butterfly ruling has been sought, and it would be reasonable to expect that Code s. 355 would apply to the spin-off. After distribution by Nuvo of the subsidiary (Subco) to which the Drug Development Business has been transferred to the intended transferee corporation (Holdco), Holdco and Subco will amalgamate as part of the same Plan of Arrangement to form Amalco. Thus, Amalco is not the transferee corporation (see Read) and Holdco is (see 1996 CMTC Roundtable, Q. 16). The granting of fresh options by Holdco to optionholders is expressed to be part consideration for the distribution. Full stated capital is allocated to the "butterfly shares" of Nuvo created on its preliminary s. 86 reorg.

Nuvo. A TSX-listed OBCA specialty pharmaceutical company with a market cap of under $100 million. It has a Mississauga head office and a manufacturing and research facility in Varennes, Québec.

Crescita. Will be a drug development company with a diversified pipeline of product candidates and sufficient cash resources to execute its current business plan for the next 24 months.

Holdco and Subco. Were formed under the OBCA in order to carry out the Arrangement, and have no assets or liabilities.

Pre-Arrangement Transactions. The Drug Development Business is currently owned and operated by Nuvo and Nuvo subsidiaries. Prior to the Arrangement time, the Parties are expected to enter into the Separation Agreement and several ancillary agreements to complete the transfer from Nuvo of (a) ownership of the Drug Development Business (on an "as-is", "where-is" basis) to Subco (through the direct and indirect transfer to Subco of the shares of these subsidiaries and/or the assets and liabilities of Nuvo related to the Drug Development Business and (b) an estimated $35 million in cash to Subco. Subco will generally agree to indemnify Nuvo and its affiliates against any liabilities associated with, among other things, the Drug Development Business, whether relating to the period, or arising, prior to or after the Arrangement Date. Conversely, Nuvo will generally agree to indemnify Subco and its affiliates from and against any liabilities relating to, among other things, the Speciality Pharmaceutical Business. Nuvo and Subco also will indemnify each other with respect to non-performance of their respective obligations under their Separation Agreement.

Plan of Arrangement

1. Each Nuvo DSU participant will exchange his or her DSUs for Nuvo Common Shares.
2. The articles of Nuvo will be amended to change the designation of Nuvo's common shares from "Common Shares" to "Class A Common Shares" and to increase their voting rights to two votes per share.
3. The Class A Common Shares of each Nuvo common shareholder other than a dissenting shareholder (a “Participating Shareholder”) will be changed into one Post-Arrangement Nuvo Common Share and one Nuvo Butterfly Share, with stated capital equal to the fair market value of the Nuvo Butterfly Share allocated to suahc share, and the balance to the Post-Arrangement Nuvo Common Share.
4. Each Participating Shareholder will transfer each of its its Nuvo Butterfly Shares to Holdco in exchange for the issuance by Holdco of one Holdco Common Share.
5. Each option on Nuvo common shares will exchanged for one Post-Arrangement option to be granted by Nuvo that will upon vesting entitle the holder thereof to acquire one Nuvo Common Share, and for one option to be granted by Crescita that will upon vesting entitle the holder thereof to acquire one Crescita Common Share. The original exercise price of each outstanding Nuvo Option will be allocated to the Post-Arrangement Nuvo Option and the Crescita Arrangement Option, such that an amount equal to the Butterfly Proportion (see below) of the original exercise price will be payable to Crescita for each Crescita Common Share acquired under the Crescita Arrangement Option and an amount equal to the remainder of the original exercise price will be payable on exercise of the Post-Arrangement Nuvo Option.
6. Each holding of Nuvo will be exchanged for Post-Arrangement Nuvo SARs and Crescita Arrangement SARs.
7. Nuvo will transfer all of the common shares in the capital stock of Subco to Holdco in exchange for the granting by Holdco to the Nuvo Option Holders of Crescita Arrangement Options in accordance with 5 above, the granting by Holdco to the Nuvo SARs Holders of Crescita Arrangement SARs in accordance with 6 above and the issuance by Holdco to Nuvo of one Holdco Reorganization Share for each Subco Share transferred to Holdco.
8. Holdco will redeem from Nuvo all the Holdco Reorganization Shares and will issue to Nuvo, as payment therefor, a non-interest bearing demand promissory note.
9. Nuvo will redeem from Holdco all the Nuvo Butterfly Shares and will issue to Holdco, as payment therefor, a non-interest bearing demand promissory note.
10. The notes issued in 8 and 9 will be set-off.
11. Holdco and Subco will amalgamate and all issued and outstanding shares of Subco will be deemed cancelled.

Transitional Services Agreement. Nuvo and Crescita will agree to provide each other, on a transitional basis, certain services in order to facilitate the orderly transfer of the Drug Development Business to Crescita. Crescita will lease from Nuvo the portion of Nuvo's manufacturing facility in Varennes, Quebec, and various trade marks will be licensed.

Butterfly Proportion. Means an amount equal to the fraction (A)/(B) where:

(A) is the volume weighted average trading price of the Crescita Common Shares on the TSX for the first five trading days commencing on the date upon which the Crescita Common Shares commence trading on the TSX following the completion of the Arrangement; and

(B) is the sum of the amount determined under (A) above, plus the volume weighted average trading price of the Post-Arrangement Nuvo Common Shares on the TSX for the first five trading days commencing on the date upon which the Post-Arrangement Nuvo Common Shares commence trading on the TSX without any entitlement to the Crescita Common Shares.

Canadian tax consequences. S. 86 exchange. Each Resident Shareholder (other than a dissenting shareholder) will, in exchange for each Nuvo Common Share, receive one Post-Arrangement Nuvo Common Share and one Nuvo Butterfly Share. On such exchange, a Resident Shareholder will be deemed to have disposed of such Nuvo Common Shares for proceeds of disposition equal to the adjusted cost base of such shares at the time of the exchange. Accordingly, a Resident Shareholder will not realize a capital gain or a capital loss as a result of such share exchange.

Allocation of ACB. The adjusted cost base immediately before the share exchange of a Resident Shareholder's Nuvo Common Shares will be allocated among the Resident Shareholder's Post-Arrangement Nuvo Common Shares and Nuvo Butterfly Shares in proportion to the relative fair market value of such shares immediately after the share exchange. Nuvo intends to inform Resident Shareholders on Nuvo's website following the Arrangement as to Nuvo's estimate of the proportionate allocation.

S. 85.1 exchange. Each Nuvo Butterfly Share acquired by a Resident Shareholder pursuant to the Arrangement will be transferred by the Resident Shareholder to Crescita in consideration for the issuance to the particular Resident Shareholder of one Crescita Common Share. On such transfer, a Resident Shareholder who does not include in computing income for the year any portion of the resulting gain or loss, as otherwise determined, will be deemed to have disposed of such Nuvo Butterfly Shares for proceeds of disposition equal to the adjusted cost base of such shares immediately prior to such exchange.

U.S. tax considerations. S. 355. Code s. 355 requires that (in addition to the Arrangement being treated as a distribution of the stock of Crescita Common Shares notwithstanding its form as a series of transactions other than a distribution): the transaction be effected for one or more corporate business purposes; the transaction not be used "principally as a device for the distribution of the earnings and profits" of Nuvo or Crescita; and that both Nuvo and Crescita continue to be engaged after the transaction in one or more trades or businesses actively conducted by Nuvo or its subsidiaries throughout the 5-year period ending on the date of the deemed distribution. The Corporation believes that it would be reasonable for U.S. Holders to take the position that s. 355 will apply to the deemed distribution of Crescita Common Shares to holders of Nuvo Common Shares. If s. 355 applies, then, in general, no gain or loss will be recognized for Code purposes by the holders of Nuvo Common Shares by reason of the receipt of the distribution.

Alternate dividend treatment. If s. 355 does not apply to the deemed distribution of Crescita Common Shares to holders of Nuvo Common Shares, the deemed distribution of Crescita Common Shares to holders of Nuvo Common Shares will be taxable to U.S. Holders under the rules of s. 301. In such event, U.S. Holders will be required to include the fair market value of the Crescita Common Shares received pursuant to the Arrangement in gross income as a dividend to the extent of the current and accumulated "earnings and profits" of Nuvo.

PFIC rules. Nuvo does not believe that it was a PFIC for 2015, and, based on current business plans and financial projections, does not expect that it will be a PFIC for 2016. Nuvo has made no determination as to whether it or Crescita may be a PFIC for any other taxable year.

Overview

Under an Alberta Plan of Arrangement, DeeThree will transfer its Brazeau Belly River assets (the "Spin-Off Assets") on a rollover basis to Boulder in connection with a butterfly spin-off of Boulder to its shareholders. DeeThree (renamed Granite Oil) will retain its assets in the Bakken formation. No tax ruling was sought, no indemnities were given respecting post-Arrangement actions that might cause the butterfly to be taxable and no Canadian tax risks were disclosed. The reorganization is expected to be treated as a qualifying Code s. 355 distribution on the basis of the form of the transactions being disregarded.

DeeThree

A TSX-listed Alberta oil and gas company with a market cap of $600M.

Boulder

A newly-incorporated Alberta subsidiary of DeeThree. A TSX listing application has been made.

Plan of Arrangement

1. DeeThree common shares held by validly dissenting shareholders will be transferred to DeeThree.
2. Out-of-the money options will be terminated and in-the-money options will be exchanged for replacement options on (post-spin off) DeeThree and Boulder shares.
3. The articles of DeeThree will be amended to redesignate the DeeThree common shares as Class A common shares and to create DeeThree Special Shares.
4. Each DeeThree shareholder will exchange its Class A common share for 1/3 of a DeeThree common share and 0.5 of a DeeThree special share, with the stated capital being allocated on a proportionate basis.
5. Each DeeThree Special Share will be transferred to Boulder in consideration for one Boulder common share, with the stated capital for the Boulder common shares increasing by the paid-up capital of the transferred DeeThree Special Shares.
6. DeeThree will transfer the Spin-Off Assets to Boulder in consideration for assumption of liabilities and for Boulder Special Shares, with a joint s. 85(1) election being made.
7. Boulder will purchase the Boulder Special Shares for cancellation in consideration for a non-interest-bearing promissory note.
8. DeeThree will purchase the DeeThree Special Shares for cancellation in consideration for a non-interest-bearing promissory note.
9. The promissory notes issued in 7 and 8 will be set off.
10. The full amount of the deemed dividend arising upon the redemptions in 7 and 8 will be deemed to have been designated by Boulder or DeeThree, as the case may be, as an eligible dividend.

Canadian tax consequences

The exchange of Class A common shares for DeeThree common and Special Shares in 4 will occur on a rollover basis. The exchange of DeeThree Special Shares for Boulder common shares in 5 will occur on a rollover basis. (No reference is made to a potential income inclusion at the transferor's option under s. 85.1(1)(a).) Following the Arrangement, DeeThree will advise holders of an appropriate proportionate allocation of the adjusted cost bases between the DeeThree and Boulder common shares.

U.S. tax consequences

DeeThree expects that (i) the mechanics of the Arrangement will be disregarded and treated as if DeeThree had transferred the Spin-Off Assets to Boulder in exchange for Boulder common shares and the assumption of liabilities, and DeeThree had distributed all of the Boulder shares to its shareholders. (ii) DeeThree and Boulder each has been engaged in an "active trade or business' as defined in Code s. 355 for at least five years immediately prior to the Arrangement and such trade has produced income, and (iii) as a result the Arrangement will qualify as a tax-free transaction under Code ss. 355 and 368(a)(1)(D). On this basis, no gain or loss will be recognized upon the receipt by U.S. holders of DeeThree and Boulder common shares under the Arrangement.

Overview

Under a spin-off s. 55(3.02) butterfly reorganization occurring under an OBCA Plan of Arrangement, the residential real estate and property services business of FirstService will be spun-off as New FSV (to be renamed FirstService), and (old) FirstService following its amalgamation with FCRESI will carry on the (retained) commercial real estate services division, with the amalgamated corporation to be called Colliers. Colliers and (spun-off) FirstServices will have pro forma opening equity of $65.5M and $158.7M, respectively, and will be highly levered. Completion of the arrangement is conditional inter alia on a Canadian tax ruling (respecting rollover treatment for FirstService, New FSV and most Canadian-resident shareholders) and a U.S. tax opinion of PWC respecting treatment as a Code s. 355 spin-off. Arrangements for a purchase of the shares of minority shareholders of FCRESI in exchange for Colliers shares will be entered into before the Arrangement, but will be timed to occur immediately after the butterfly distribution so as not to run afoul of s. 55(3.1)(a).

FirstService

An OBCA corporation whose (34.6M outstanding) FirstService Subordinate Voting Shares ("SVS"), which are listed on the TSX and NASDAQ, carry one vote per share and whose (1.3M outstanding) FirstService Multiple Voting Shares ("MVS") carry 20 votes per share and are convertible on a one-for-one basis into the FirstService SVS. It is controlled by Jay S. Hennick, the founder and CEO indirectly holding 6.6% of the SVS and 100% of the MVS, who provides management services through "Jayset." Minority shareholders hold 8.8% of a commercial real estate services subsidiary (FCRESI).

Pre-Arrangement transactions

The assets and liabilities associated with the residential and property services business of FirstService were transferred by it to FSV Holdco, a new B.C. subsidiary in exchange inter alia for a U.S.$187.5M note, which upon completion of the Arrangement will be repaid by New FSV drawing down under a line of credit and by the assumption of U.S.$150M of 2025 Notes. Outside of the Plan of Arrangement, the FCRESI Arrangements will be entered into under which, upon their becoming effective immediately after the commencement of FSV Holdco's dissolution under the Plan of Arrangement, FCRESI will become wholly-owned by FirstService and with the former minority shareholders of FCRESI holding Colliers Subordinate Voting Shares.

Plan of Arrangement

1. FirstService Shares held by dissenting shareholders will be deemed to be transferred to FirstService;
2. concurrently with the FirstService Share Exchange described below the FirstService stock options will be disposed of to New FSV and FirstService for replacement options, with the exercise prices being allocated based on the relative net fair market value of the property distributed to New FSV compared to the net fair market value of all property owned by FirstService immediately before the distribution;
3. under the "FirstService Share Exchange" each FirstService Multiple Voting Share (after being amended to increase the votes to 40 per share) and FirstService Subordinate Voting Share (after being amended to increase the votes to two per share) will be exchanged respectively for one FirstService New Multiple Voting Share (having 20 votes per share) and one FirstService MV Special Share, and for one FirstService New Subordinate Voting Share (having one vote per share) and one FirstService SV Special Share, with a proportionate allocation of the stated capital of the exchanged shares occurring;
4. each outstanding FirstService MV Special Share and FirstService SV Special Share will be transferred to New FSV (on a s. 85 rollover basis if so requested within 120 days by a shareholder that is a taxable resident Canadian, a non-resident whose shares are taxable Canadian property or a partnership with such a partner) in exchange for one New FSV Multiple Voting Share or one New FSV Subordinate Voting Share, with the stated capital of the new shares not exceeding any applicable s. 85 elected amount;
5. FirstService will transfer the common shares of FSV Holdco to New FSV in consideration for 1,000,000 New FSV Special Shares having an aggregate redemption amount equal to the fair market value of the Distribution Property and with FirstService and New FSV to elect under s. 85(1) and with the stated capital of the New FSV Special Shares to be limited accordingly;
6. New FSV will redeem the New FSV Special Shares for the New FSV Redemption Note;
7. FirstService will redeem all the FirstService MV Special Shares and FirstService SV Special Shares held by New FSV in consideration for the FirstService Redemption Note;
8. each Note will be repaid through the transfer to the creditor of the other Note;
9. New FSV will resolve to voluntarily dissolve FSV Holdco under the BCBCA in accordance with s. 88(1);
10. the stated capital of all the FCRESI shares will be reduced to $1;
11. FirstService and FCRESI will amalgamate under the OBCA to continue as Colliers, with the Certificate of Arrangement deemed to be the certificate of amalgamation of Colliers and with each share of FCRESI held by FirstService cancelled.

Butterfly covenants

Acts of FirstService or New FSV listed on p. 61 that would cause the above butterfly to be taxable would trigger an indemnity obligation. In particular FirstService (which will then be Colliers) and New FSV, for a period of three years after the Effective Date of the Arrangement, will not (and will cause their subsidiaries to not) take any action, omit to take any action or enter into any transaction that could cause the Arrangement or any transaction contemplated by the Arrangement Agreement to be taxed in a manner inconsistent with that provided for in the Tax Ruling and U.S. Tax Opinion. With respect to Canadian income taxation, in addition to various transactions that the respective parties are prohibited from undertaking prior to and after the implementation of the Arrangement, after the implementation of the Arrangement, neither Colliers nor New FSV will be permitted to dispose of or exchange property having a fair market value greater than 10% of the fair market value of its property or, among other things, undergoing an acquisition of Control.

Canadian tax consequences

Increase in voting rights. The increase in voting rights for the FirstService Subordinate Voting Share and FirstService Multiple Voting Shares will not result in their disposition.

FirstService Share Exchange

The exchange of FirstService Subordinate Voting Shares for FirstService New Subordinate Voting Shares and FirstService SV Special Shares will result in a disposition at Adjusted cost base, with the allocation thereof between the FirstService New Subordinate Voting Shares and FirstService SV Special Shares to be based on relative fair market values of the shares immediately after the exchange – and similarly for the multiple voting shares. FirstService will post its estimate of the proportionate allocation by press release or on its website following the Arrangement.

Transfer to New FSV

The transfer of FirstService MV Special Shares and FirstService SV Special Shares to New FSV will occur on a rollover basis under s. 85.1 unless the transferor shareholder chooses to elect capital gains or capital loss treatment on the transfer or jointly elects under s. 85(1) or (2).

Amalgamation

No capital gain or loss will be recognized by a shareholder as a result of the amalgamation.

Dissenting shareholders

May be deemed subject to s. 55(2) to have received a dividend based on the paid-up capital of their shares.

RRSP eligibility

The Colliers Subordinate Voting Shares are expected to be listed when issued but, in any event, it will make the election under the postamble of s. 89(1) - public corporation from the beginning of its first year.

U.S. tax consequences

Code s. 355 is intended to apply to the transfer of the New FSV Shares to U.S. holders (notwithstanding that the form of the transactions is not a distribution), so that in general no gain or loss will thereby be recognized, and with the former tax basis being allocated on a relative fair market value basis.

Overview

Dundee, which has a 70% interest in Dundee Realty, and is controlled by Ned Goodman due to a multiple voting share structure, will spin-off an approximate 50% interest in Dundee Realty to its shareholders through a butterfly reorganization, so that such shareholders will hold comparable common and subordinate voting shares of a new Ontario public company, DREAM - and so that DREAM also will be controlled by Ned Goodman. Dundee will retain an approximate 20% indirect interest in Dundee Realty by virtue of holding approximately 28.57% of the total subordinate voting and common shares of DREAM. Following the spin-off, Dundee will continue to engage in diverse business activities including asset management, capital markets and personal advisory services and private equity investments. Based on the anticipated relative liquidation amount of the preferred shares to be held in reorganized Dundee ($18.67 per share) and in DREAM ($6.33), approximately 25% of the shareholders' equity will become equity of DREAM.

Existing structure

The issued share capital of Dundee, an Ontario corporation, consists of 74.4M subordinate voting shares (3.34% owned or directed by Ned Goodman, and the balance by the public), 3.1M common shares (99% owned or directed by Ned Goodman) which carry 100 votes per share and are convertible on a one-for-one basis into subordinate voting shares, and 6M Series 1 preference shares with a liquidation amount of $25 per share. Dundee owns 70% of the common and Class C preferred shares, and 100% of the Class D preferred shares, of Dundee Realty, an Ontario corporation, with 30% being owned by Sweet Dream Corp. ("SDC"), an Ontario corporation controlled by Michael Cooper, the CEO. In addition to its real estate assets, Dundee Realty is the asset manager of Dundee REIT, Dundee International REIT and Dundee Industrial REIT.

Pre-Arrangement steps

On April 9, 2013, each of DREAM, DREAM Sub and Holdco were formed under the OBCA. DREAM did not have any issued share capital; Holdco issued one common share to Dundee; and DREAM Sub issued one common share to DREAM.

Plan of Arrangement

Under the Plan of Arrangement:

• the terms of the stock options to acquire Dundee subordinate voting shares will be adjusted so that there is a right on exercise to also be paid a fraction of a DREAM subordinate voting share
• Dundee will transfer its common shares of Dundee Realty to Holdco in consideration for Holdco common shares (s. 85(1) election)
• REIT Amalco (a subsidiary of Dundee holding Dundee Realty Class C shares) will transfer such shares to Holdco in consideration for Holdco common shares (s. 85(1) joint election)
• Dundee dissenting shareholders will be deemed to have transferred their shares to Dundee
• each Dundee common share, subordinate voting share and Series 1 Preference Share will be exchanged for two shares – one of them a "butterfly" share, and the other corresponding in various attributes to the "old" share; TSX listings become effective
• holders of Dundee DSUs will receive "top-up" DSUs
• each Dundee butterfly share will be transferred by the holder to DREAM in exchange for a DREAM common, subordinate voting or special share (confusingly, also called a butterfly share), as the case may be
• Dundee will transfer to DREAM Sub such number of Holdco common shares as will result in it having, at the completion of the Arrangement, an aggregate 28.57% interest in the DREAM subordinate voting and common shares in consideration for 1,000,000 common shares of DREAM Sub (s. 85(1) joint election)
• DREAM Sub will purchase the 1,000,000 common shares for cancellation in consideration for the DREAM Sub Note, and will be deemed to have designated the resulting deemed dividend to be an eligible dividend
• DREAM Sub will be wound up into DREAM
• Dundee will redeem the Dundee butterfly shares in consideration for the issuance of a demand note (the Dundee Note)
• Dundee will repay the Dundee Note by delivering the DREAM Sub Note; and DREAM will repay the DREAM Sub Note by delivering the Dundee Note
• DREAM and Holdco will be amalgamated, so that the Holdco common shares held by DREAM will be cancelled, the Holdco common shares held by Dundee and REIT Amalco will be converted into DREAM subordinate voting shares (to be listed), the issued and outstanding DREAM subordinate voting and common shares will survive, and each holders of a DREAM butterfly share will receive a DREAM preference share (to be listed)
• the Exchange and Permitted Sales Agreements will become effective

Permitted Sales Agreement

Upon the earlier of a specified triggering event (e.g., the termination of Michael Cooper without cause, incumbent diretors of (amalgamted) DREAM ceasing to constitute a majority or persons other than Goodman/Cooper acquiring control of DREAM), SDC may require DREAM to either (i) purchase all of SDC's shares of Dundee Realty or (ii) cause the sale of all of those shares, or the liquidation of Dundee Realty (the choice among these option's being Dundee Realty‘s). DREAM will have a somewhat similar put right.

Exchange Agreement

(Amalgamated) DREAM, SDC and Dundee Realty will enter into the Exchange Agreement, which will provide SDC with the right to exchange its shares of Dundee Realty for subordinate voting shares of DREAM on a tax-deferred basis under s. 85(1).

Canadian tax consequences

Dundee share exchange. The s. 86 rollover will apply on the exchange of each Dundee share for two shares (one of them, a butterfly share).

Dundee butterfly share transfer

S. 85.1 will govern the transfers of Dundee butterfly shares to DREAM (so that rollover treatment will apply unless a gain or loss is reported on the transfer) unless a joint election under s. 85 is made. Three signed copies of the election must be provided to DREAM within 60 days of the effective date of the Arrangement.

Amalgamation

Rollover.

Butterfly

Completion of the Arrangement is conditional on Dundee and DREAM receiving a Canadian tax opinion from Wilson & Partners LLP that the Arrangement should qualify for butterfly treatment. However, the opinion will note that Dundee and/or DREAM will recognize a taxable gain if (i) within three years of the Effective Date, DREAM engages in a subsequent spin-off or split-up transaction under s. 55, (ii) a "specified shareholder" disposes of new Dundee shares or DREAM shares (or property that derives 10% or more of its value from such shares or property substituted therfor) to an unrelated person or partnership as part of the series of transactions which includes the Arrangement, or (iii) there is an acquisition of control of Dundee or DREAM that is part of the series of transactions that includes the Arrangement. If such an event were due to an act of Dundee or DREAM, Dundee or DREAM, as applicable, would generally be required to indemnify the other party under the Arrangement Agreement.

Goodman RRIF

Under existing law (but not under potential amendments referred to in a Finance comfort letter), the new Dundee and DREAM shares to be acquired under the Arrangement by a RRIF of Ned Goodman would be prohibited investments, so that there acquisition may be subject to a 50% tax under Part XI.01. Dundee has agreed to indemnify him in the event that he is assessed for this tax.

U.S. tax consequences

Distribution. A U.S. holder who receives DREAM shares under the Arrangement should be considered to have received a taxable distribution, so that if Dundee is not treated as a PFIC, such U.S. holder generally will be required to include the fair market value of DREAM shares in income to the extent of Dundee's current or accumulated earnings and profits. Discussion of PFIC alternative.

PFIC status

"Based on their projected income, assets and activities, the Company [i.e., Dundee] currently believes that there is a meaningful possibility that the Company and/or DREAM could be treated as PFICs for the current taxable year and taxable years thereafter."

TSX-listed Globex is proposing a spin-off to its shareholders by way of butterfly reorganization of CIM, a newly-incorporated subsidiary that is proposed to be listed on the TSX-V and that will hold various mining and exploration properties in the Chibougamu mining camp.

Butterfly steps

The butterfly reorganization is implemented through the following steps occurring under a Quebec plan of arrangement:

• Globex common shares of dissenters are purchased for cancellation for their fair value
• Each Globex common share is exchanged for one Globex voting new common share and one Globex voting Butterfly Share
• Each Globex Butterfly Share is transferred to CIM in exchange for one CIM common share –except that holders of fewer than 100 Globex common shares receive a cash payment based on the immediate post-arrangement trading price of CIM common shares
• Each option on a Globex common share is exchanged for one option on a Globex new common share and one option on a CIM common share (with the exercise price on the first option being allocated to the exercise price for the 2nd and 3rd option based on the relative trading prices of the Globex new common shares and the CIM common shares for the 1st five trading days following completion of the plan of arrangement)
• Globex calculates the net fair market value of each of its three types of property (with its only investment property being marketable securities)
• Globex transfers the Chibougamu mining camp properties, along with net cash and marketable securities, to CIM - such that CIM receives the "Butterfly Proportion" of each type of property, namely, the fair market value of the transferred mining properties as a proportion of the net fair market value of all the business property of Globex calculated using the consolidated look-through approach – which proportion in turn is equal to the fair market value of the Globex Butterfly Shares divided by the aggregate fair market value of the Globex Butterfly Shares and the Globex new common shares. In consideration, CIM issues 5M redeemable retractable shares (bearing one vote per share) to Globex (with s. 85(1) elections being made and with such shares having a dollar specified amount for purposes of ITA s. 191(4)). The Chibougamu mining camp properties also are transferred subject to a 3% gross metal royalty in favour of Globex.
• CIM redeems the preference shares held by Globex through the issue of a demand promissory note
• Globex redeems the Globex Butterfly Shares through the issue of a demand promissory note
• Each promissory note is satisfied by the holder of the note transferring it to the obligor in satisfaction of the obligations on the other note owing by it

Implementation of the plan of arrangement is contingent inter alia on a favourable butterfly ruling having been obtained by Globex.

Canadian tax consequences

The exchange of (old) Globex shares for new common and Globex Butterfly Shares will occur on a rollover basis under s. 86; and the exchange of Globex Butterfly Shares for CIM common shares will occur on a rollover basis under s. 85.1 (unless the exchanging shareholder elects to include any portion of the gain or loss otherwise determined in computing income). (Capital gain or loss treatment will result where odd lots are disposed of for cash.)

Deemed dividend treatment will apply to dissenting shareholders (subject to the application of s. 55(2).)

Non-resident shareholders may not hold their shares as taxable Canadian property.