Subsection 55(3.02)

Background

DC2 is a public corporation wholly-owning DC1 (also a taxable Canadian corporation.) DC2 wishes to split into two publicly listed companies: DC2 and SpinCo. To that end, various assets held in corporate or partnership form will be transferred directly or indirectly to a Newco 1 subsidiary of DC1, which will effect a butterfly spin-off of Newco 1 to SpinCo Sub. DC2 will in turn effect a butterfly spin off SpinCo Sub to SpinCo pursuant to a plan of arrangement.

Completed transaction

DC1 transferred various shares to Newco 1, and various partnership interests to Newco 2, and transferred Newco 2 to Newco 1, all on a s. 85(1) rollover basis, such that DC1 wholly-owned Newco 1 and Newco 1 wholly-owned Newco 2.

Proposed transactions

1. There will be a s. 86 exchange by DC2 of its common shares of DC1 for new DC1 common shares and special shares.
2. DC2 will transfer on a s. 85(1) rollover basis all its DC1 special shares to a corporation newly-incorporated by it (SpinCo Sub) in exchange for SpinCo Sub common shares.
3. DC1 will transfer its shares of Newco 1 to SpinCo Sub on a s. 85(1) rollover basis in consideration for SpinCo Sub special shares.
4. The DC1 special shares and the SpinCo Sub special shares will be redeemed for notes, which will be settled by each creditor transferring its note to the debtor.
5. Each dissenting shareholder may be entitled to be paid the fair value for its shares of DC2.
6. There will be a s. 86 exchange by each DC2 shareholder other than a dissenting shareholder (a “participant”) of its common shares of DC2 for new DC2 common shares and special shares.
7. The new DC2 common shares will outside of the plan of arrangement “be listed for trading on Exchange 1 and Exchange 2 (subject to standard listing conditions imposed by Exchange 1 and Exchange 2 in similar circumstances), and for greater certainty, such listing will be effective before the DC2 Distribution [in 11 below].”
8. Employees who will be retained by the DC2 group will have any of their stock options exchanged for new options with a reduced exercise price, and those transferred to the SpinCo group will have their options exchanged for options to acquire that number of SpinCo shares equal to the number of DC2 shares covered by their old options multiplied by the Exchange Ratio (based on the VWAP for the 5-day trading period before the Effective Date of the Arrangement (or such other trading period that is acceptable to Exchange 1) in the case of a DC2 common share and for the equivalent period beginning on the Effective Date in the case of a SpinCo common share). Comparable adjustments will be made for DSUs, RSUs and ESUs.
9. Each participant will transfer (generally on a s. 85.1 rollover basis if on capital account and no gain or loss is reported) all its DC2 special shares to SpinCo (recently -incorporated by DC2) in exchange for the same number of SpinCo common shares.
10. The new DC2 common shares will outside of the plan of arrangement “be listed for trading on Exchange 1 and Exchange 2 (subject to standard listing conditions imposed by Exchange 1 and Exchange 2 in similar circumstances), and for greater certainty, such listing will be effective before the DC2 Distribution [in 11 below].”
11. DC2 will transfer its shares of SpinCo Sub to SpinCo on a s. 85(1) rollover basis in consideration for SpinCo Sub common shares.
12. The DC2 special shares and the SpinCo special shares will be redeemed for notes, which will be settled by each creditor transferring its note to the debtor.
13. Each participant will exchange each new DC common share held by the participant for one DC2 common share under s. 51. The DC common shares will continue to be listed on the two exchanges.
14. Pursuant to the post-amble in the definition of “public corporation” in s. 89(1), SpinCo will elect in its return of income for its first taxation year to have been a public corporation from the beginning of such year.

Additional information

Under the Arrangement Agreement:

DC2 and SpinCo will:

a. covenant and agree with and in favour of each other that for a period of time after the Effective Date to be agreed upon, they will not (and they will ensure that their respective subsidiaries will not) take any action or enter into any transaction that could cause the transactions contemplated in the Plan of Arrangement or by the Arrangement Agreement to be taxed in a manner that is inconsistent with the rulings provided in this letter without obtaining another tax ruling or an opinion of a nationally recognized accounting firm or law firm that such action or transaction will not have such effect; and

b. agree to indemnify each other for losses suffered or incurred as a result of or in connection with a breach or non-compliance with the covenant described in item (a) above.

Rulings

Including re ss. 86, 55(3)(b), 7(1.4) and 256(7)(a)(i)(E).

Background

DC, a specified corporation whose shares trade on an exchange and are not taxable Canadian property, carries on Project 1 through Forcos 1 and 2. Corporation 1, whose shares are listed, is DC’s only specified shareholder. DC has completed a number of acquisitions that were not in contemplation of the proposed transactions.

DC and Corporation 1 own X% and Y% of the shares of Corporation A, a taxable Canadian corporation. Pursuant to a Plan of Arrangement and following the deemed exercise of outstanding options and warrants for their in-the-money value, and the sale by Corporation 1 of all its Corporation A shares, each Corporation A common share was deemed to be transferred to DC in exchange for DC common shares and cash.

Pursuant to a Master Purchase Agreement entered into between DC and InvestCo, cash deposited with an escrow agent by InvestCo was transferred to DC and DC securities were converted, but not so as to result in InvestCo becoming a specified shareholder of DC.

Proposed transactions

The steps below up to the last step will occur largely pursuant to a Plan of Arrangement.

1. The DC Equity Incentive Plan will be amended and the SpinCo Equity Incentive Plan will come into force.
2. Each holder of DC Equity Incentive Securities will dispose of such holder’s Butterfly Proportion thereof (being the ratio of the net FMV of the Distribution Property to be transferred by DC to SpinCo as per 5 below determined immediately before such transfer, to the net FMV of all property owned by DC immediately before such transfer) to SpinCo in consideration for corresponding SpinCo Equity Incentive Securities, and will dispose of the remaining portion thereof to DC in consideration for corresponding DC New Equity Incentive Securities. This will be accomplished so that the aggregate In the Money Amount (being the excess of the FMV of the subject shares over the exercise price) of the particular corresponding SpinCo Equity Incentive Securities and of the DC New Equity Incentive Securities does not exceed the In the Money Amount of the particular corresponding exchanged DC Equity Incentive Securities. To this end, the FMV of the DC Common Shares immediately before the exchange will be determined by their VWAP on the exchange for the five business days immediately prior to the Effective Date of the Arrangement, and the FMV of the DC Common Shares and the SpinCo Common Shares immediately after the exchange will be determined by their VWAP on the exchange for the five business days beginning on the Effective Date.
3. Each Participant (being a DC common shareholder other than one who dissents) will exchange each DC Common Share with DC for one newly-created DC New Common Share (with the same attributes as a DC Common Share except for having two votes per share) and one newly-created non-cumulative redeemable retractable DC Preference Share and with a specific specified amount no higher than the consideration for their issue.
4. Each Participant will transfer to SpinCo each of their DC Preference Shares in consideration for one SpinCo Common Share.
5. DC will transfer the Distribution Property (including its indirect interest in Project 1) to SpinCo in consideration for the assumption of liabilities of DC related to the Distribution Property and the issuance of non-cumulative redeemable retractable Spinco Preference Shares, with an s. 85(1) election made.
6. SpinCo and DC will each redeem their preference shares for a note, and make s. 89(14) designations regarding the resulting s. 84(3) dividends.
7. Each Participant will exchange each of their DC New Common Shares with DC for one DC Common Share.
8. (The DC Common Shares will continue to be listed and posted for trading on the exchange; and SpinCo will, pursuant to the definition of “public corporation” in s. 89(1), timely elect in its federal return to be a public corporation from the beginning of the year until the time that the SpinCo Common Shares are listed on a designated stock exchange.)
9. Each of DC and SpinCo will satisfy its obligations under the note issued by it in 6 by transferring the note of the other to the other, such that both notes will be cancelled.
10. InvestCo will acquire DC shares pursuant to its subscription agreement and exercises its warrants pursuant to its warrant certificate agreement, but not so as to result in InvestCo becoming a specified shareholder of DC.

Additional Information

54. Except as specifically described herein, no specified shareholder of DC or SpinCo will dispose of shares of DC or SpinCo, or any property 10% or more of the FMV of which is, at any time during the series, derived from shares of DC or SpinCo, as part of the series of transactions or events that include the Proposed Transactions, to an unrelated person, a partnership or a person who will cease to be related to the transferor as part of the series of transactions or events that include the Proposed Transactions.

Within three years of the exchange in 4, DC will not undertake a distribution to a corporation that is not an acquiror within the meaning of para.(b) of the definition “specified corporation” nor will undertake a distribution.

Rulings

Including re application of s. 86(1) to 3 and of s. 51 to 7, s. 55(3)(b) applying to exclude application of s. 55(2) “and for greater certainty, subsection 55(3.1) will not apply to deny the exemption under paragraph 55(3)(b),” application of s. 7(1.4) to the exchange in 2, and non-application of s. 80 to note cancellation.

Background

Parent is a public corporation with two classes of outstanding shares and has a specified shareholder (a CCPC) which holds its Parent shares as its core long term investment. Parent wishes to spin off one of its businesses in the form of “Amalco” (described below). That business apparently is held in a subsidiary (XXXXXXXXXX) some of whose shares (the “XXXXXXXXXX Common Shares”) are held by a direct subsidiary of Parent (“Sub1”) and some of which are held by Parent directly.

Proposed transactions (occurring pursuant to a plan of arrangement)

1. Dissenting shareholders will be deemed to have transferred their shares to Parent for their fair value.
2. Parent will exchange its preferred and common shares of Sub1 for new Sub1 shares.
3. Parent will exchange its new Sub1 shares under s. 86(1) for new Sub1 special shares and new Sub1 common shares.
4. Parent will transfer its special shares of Sub1 on a s. 85(1) rollover basis to a corporation newly-incorporated by it (“Newco Sub”) in consideration for common shares of Newco Sub.
5. Sub1 will transfer all of its XXXXXXXXXX Common Shares on a s. 85(1) rollover basis in consideration for special shares of Newco Sub.
6. The special shares referred to in the above two steps will be redeemed for notes, which will be settled through mutually agreed cross transfers.
7. Parent will transfer cash, Sub1 debt and XXXXXXXXXX Common Shares to Newco Sub on a s. 85(1) rollover basis in consideration for Newco Sub common shares.
8. Parent shareholders will exchange their Parent shares for new Parent shares and Parent special shares under a s. 86 reorganization, with the PUC of the old shares being apportioned among the new shares on a relative FMV basis, and with such new shares being listed effective before 12.
9. Stock options will be exchanged for the right to acquire an identical number of Parent shares with a lower exercise price reflecting the FMV reduction in such shares.
10. The number of RSUs and DSUs recorded in the accounts of the plan participants will be proportionately increased to reflect such FMV reduction.
11. The Parent shareholders will transfer their special shares of Parent to a corporation newly-incorporated by Parent (“Newco”) in consideration for shares of Newco, with Newco jointly electing under s. 85(1) with them, if so requested, and with such Newco shares being listed on the exchange effective before 12.
12. Parent will transfer all of its Newco Sub common shares on a s. 85(1) rollover basis to Newco in consideration for special shares of Newco.
13. The special shares transferred in 11 above, and the special shares issued in 12 above will be redeemed for notes, which will be settled through mutually agreed cross transfers.
14. Newco and Newco Sub will amalgamate to form Amalco.

15. Newco will elect in its first return pursuant to the postamble in the definition of “public corporation” in s. 89(1) to have been a public corporation from the beginning of it first year.

Rulings

Including re application of s. 85.1(1) to the exchange in 11 (where no s. 85(1) election filed) and re non-application of s. 55(2) to the spin-off butterflies in 2 to 6, and 7 to 13.