2002 Ruling 2001-0097463 - Divisive 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 CCRA.

Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ADRC.

Principal Issues: Do contracts in progress constitute eligible property for purposes of subsection 85(1.1) of the Act?

Position: Yes.

Reasons: We have previously ruled that rights under construction contracts and the construction contract would be eligible property for purposes of the Act.

XXXXXXXXXX 2001-009746

XXXXXXXXXX, 2002

Dear XXXXXXXXXX:

Re: XXXXXXXXXX
XXXXXXXXXX
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-referenced taxpayers. We also acknowledge receipt of your correspondence dated XXXXXXXXXX and our telephone conversations in connection herewith.

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 one 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 one of the taxpayers or a related person;

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

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

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

DEFINITIONS

In this letter, unless otherwise expressly stated:

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

(b) "ACB" means "adjusted cost base" as that expression is defined in section 54 and subsection 248(1);

(c) "agreed amount" has the meaning assigned by subsection 85(1);

(d) "BCA" means the Business Corporations Act (XXXXXXXXXX );

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

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

(g) "CBCA" means the Canada Business Corporations Act;

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

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

(j) "Group" refers collectively to Opco, Holdco, Numberco, Investments, Realty, Management and Leasing.

(k) "Holdco" refers to XXXXXXXXXX .;

(l) "Investments" refers to XXXXXXXXXX .;

(m) "Leasing" refers to XXXXXXXXXX .;

(n) "Management" refers to XXXXXXXXXX .;

(o) "Mr. A" refers to XXXXXXXXXX ;

(p) "Numberco" refers to XXXXXXXXXX .;

(q) "Opco" refers to XXXXXXXXXX ;

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

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

(t) "proceeds of disposition" has the meaning assigned by section 54;

(u) "Realty" refers to XXXXXXXXXX .;

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

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

Our understanding of the facts, proposed transactions and purpose of the proposed transactions is as set forth below.

Facts

1. Mr. A is a resident of Canada. As at XXXXXXXXXX, Mr. A owed an arm's length individual the sum of $XXXXXXXXXX (the "Debt"), with interest payable from and after XXXXXXXXXX at the rate of prime plus XXXXXXXXXX per cent per annum. The Debt was issued as consideration for Mr. A's acquisition of certain common shares of Holdco.

2. All of the outstanding shares of Opco, consisting of XXXXXXXXXX common share, are owned by Numberco. Opco is actively engaged in the business of XXXXXXXXXX.

3. All of the outstanding shares of Numberco are owned by Holdco. Numberco is a holding corporation the primary assets of which are the shares of Opco and Leasing as well as a note receivable from Leasing.

4. All of the outstanding shares of Holdco are owned by Mr. A. Holdco also owns all of the outstanding common shares of Investments, Leasing, Management and Realty. Investments is currently an inactive entity. Leasing supplies certain tangible personal property by way of lease to Opco to enable it to carry on its business pursuits. Management employs all of the salaried personnel within the Group and such personnel provide management services to the Group. Realty leases real property (primarily consisting of land and buildings in the form of XXXXXXXXXX) to Opco and to third parties.

5. The issued share capital of Holdco as of XXXXXXXXXX consisted of XXXXXXXXXX Class A common shares with an aggregate PUC of $XXXXXXXXXX and an ACB of at least $XXXXXXXXXX.

6. The shares of Numberco and Holdco are capital property in the hands of each of the shareholders.

7. Numberco owns certain preferred shares of Leasing (the "Leasing Preferred Shares"). Numberco also owns a note receivable in respect of an indebtedness owed from Leasing (the "Leasing Note"). Numberco acquired the Leasing Preferred Shares and the Leasing Note in a section 85 rollover transaction in XXXXXXXXXX.

8. Leasing owns certain preferred shares of Realty (the "Realty Preferred Shares"). Leasing also owns a note receivable in respect of an indebtedness owed from Realty (the "Realty Note"). Leasing acquired the Realty Preferred Shares and Realty Note in a section 85 rollover transaction in XXXXXXXXXX.

9. Each of Leasing, Management, Realty, Holdco, Numberco and Investments is a corporation governed by the BCA. Opco is a corporation governed by the CBCA. Each of these corporations is both a "taxable Canadian Corporation" and a "Canadian-controlled private corporation".

10. In computing income for income tax purposes, Opco deducts the following amounts (collectively, the "Unbilled Revenue"):

a) "Holdbacks", being billed amounts "held back" by the invoice recipient by virtue of a term of the relevant construction contract or the provisions of an applicable statute;

b) "Unapproved Amounts", being invoiced amounts not yet approved and not yet payable under the terms of the relevant construction contract; and

c) "Unbilled Amounts", representing construction work undertaken for which no invoice has yet been rendered.

11. All Unbilled Revenue is included in Opco's revenues and income for financial statement purposes.

12. For income tax purposes, Unbilled Revenue from the immediately prior taxation year is added (and, as indicated above, Unbilled Revenue for the particular year is deducted) in computing the income of Opco for a particular taxation year. Opco has computed its income in accordance with the foregoing principles consistently for more than the past five years. Opco's revenue recognition method is in accordance with the progress billings method described in paragraph 3 of Interpretation Bulletin IT-92R2 entitled Income of Contractors.

13. In XXXXXXXXXX, the articles of incorporation of Holdco were amended by:

a) creating a class of preferred shares (the "Holdco First Preferred Shares") which will have a redemption amount and fair market value that is equal to the fair market value of the assets of Holdco other than the common shares of Realty;

b) creating a class of preferred shares (the "Holdco Second Preferred Shares") which will have a redemption amount and fair market value that is equal to the fair market value of the common shares of Realty (such amount will be nominal). The Holdco First Preferred Shares will rank in priority to the Holdco Second Preferred Shares; and

c) creating a new class of common share (the "Holdco New Commons").

Proposed Transactions

14. Mr. A will incorporate a new body corporate ("New Holdco") pursuant to the BCA. New Holdco will be a taxable Canadian corporation and a private corporation. The articles of New Holdco will authorize share capital which will include common shares (the "New Holdco Common Shares"), each of which will be a fully participating voting common share entitling the holder thereof to one vote at meetings of shareholders of New Holdco.

Mr. A will subscribe for a single New Holdco Common Share on incorporation for a nominal amount.

15. Realty will redeem the Realty Preferred Shares for a note payable with a principal amount equal to the fair market value of the Realty Preferred Shares (the "New Realty Note").

16. Mr. A will exchange his Holdco common shares for XXXXXXXXXX Holdco First Preferred Shares and XXXXXXXXXX Holdco Second Preferred Shares. Coincidental with the exchange, Mr. A will subscribe for XXXXXXXXXX Holdco New Commons for nominal consideration.

17. New Holdco will incorporate a new body corporate ("Mergeco") pursuant to the BCA. Mergeco will be a taxable Canadian corporation and a private corporation. The authorized share capital of Mergeco will include:

a) common shares (the "Mergeco Common Shares"), each of which will be a fully participating voting common share with the holder thereof entitled to one vote at meetings of shareholders of Mergeco; and

b) preferred shares (the "Mergeco Special Shares") having the following attributes:

i. each Mergeco Special Share will be redeemable, subject to applicable law, at any time at the option of Mergeco at a redemption amount equal to the aggregate fair market value of the consideration paid to Mergeco on the issuance thereof divided by the number of Mergeco Special Shares issued as consideration therefore (plus any declared but unpaid dividends);

ii. each Mergeco Special Share will be retractable, subject to applicable law, at any time at the option of the holder at a retraction amount equal to the redemption amount described above;

iii.the holder of each Mergeco Special Share will be entitled to a non-cumulative cash dividend as and when declared by the board of directors from time to time (not to exceed XXXXXXXXXX% per annum on the redemption amount), which dividend need not also be declared on any other class of shares of Mergeco;

iv.there will be a provision restricting the payment of dividends on, or the repurchase or redemption of, other classes of shares so that no such dividends may be paid on, and no such repurchase or redemption may be made of, any other class of shares of Mergeco if the resulting realizable value of the net assets of Mergeco after payment of dividends, or repurchase or redemption of such shares, would be less than the aggregate of the redemption amounts of all of the Mergeco Special Shares then outstanding;

v. the holder of each Mergeco Special Share will be entitled, upon the liquidation, dissolution or wind-up of Mergeco, to a payment in priority to all other classes of shares of Mergeco of an amount equal to the redemption amount therefore to the extent of the amount or value of property available under applicable law for payment to shareholders upon dissolution, but will be entitled to no more than the amount of that payment, and

vi.the holder of each Mergeco Special Share will be entitled to one vote per Mergeco Special Share at meetings of shareholders of Mergeco.

New Holdco will subscribe for a single Mergeco Common Share on incorporation for a nominal amount.

18. Mr. A will transfer his Holdco New Commons and Holdco First Preferred Shares to New Holdco for XXXXXXXXXX New Holdco Common Shares, New Holdco's assumption of the Debt (the "Assumed Debt") and the issuance of a promissory note (the "NHC Note"). In connection with the transfer, Mr. A and New Holdco will jointly elect in prescribed form within the time prescribed by subsection 85(6), to have the provisions of subsection 85(1) apply to the transfer. The agreed amount will:

a) not be less than the lesser of the cost amount of the Holdco New Commons and Holdco First Preferred Shares and the fair market value of such shares;

b) not be less than the aggregate of the amount of debt assumed by New Holdco and the NHC Note; and

c) not exceed the fair market value of the Holdco New Commons and Holdco First Preferred Shares.

The Assumed Debt and the NHC Note, in aggregate, will not exceed the adjusted cost base of the Holdco First Preferred Shares and the Holdco New Commons for purposes of section 84.1. New Holdco will add to the stated capital account maintained for its shares an amount not exceeding the amount determined as B for the purposes of paragraph 84.1(1)(a).

19. Following the transfer described in paragraph 0 above, Mr. A will transfer his Holdco Second Preferred Shares to New Holdco for 1 New Holdco Common Share. In connection with the transfer, Mr. A and New Holdco will jointly elect in prescribed form within the time prescribed by subsection 85(6), to have the provisions of subsection 85(1) apply to the transfer. The agreed amount will:

a) not be less than the lesser of the cost amount of the Holdco Second Preferred Shares and the fair market value of such shares;

b) not exceed the fair market value of the Holdco Second Preferred Shares.

New Holdco will add to the stated capital account maintained for its common shares an amount not exceeding the amount determined as B for the purposes of paragraph 84.1(1)(a).

20. After the transfers described in paragraphs 0 and 0 above, New Holdco will transfer the Holdco Second Preferred Shares to Mergeco for XXXXXXXXXX Mergeco Common Shares. In connection with the transfer, New Holdco and Mergeco will jointly elect in prescribed form within the time prescribed by subsection 85(6), to have the provisions of subsection 85(1) apply to the transfer. The agreed amount will:

a) not be less than the lesser of the cost amount of the Holdco Second Preferred Shares and the fair market value of such shares; and

b) not exceed the fair market value of the Holdco Second Preferred Shares.

Mergeco will add to the stated capital account maintained for its common shares an amount equal to the cost of the Holdco Second Preferred Shares (determined pursuant to subsection 85(1)).

21. Following the transfer described in paragraph 0 above, Holdco will transfer all of the common shares of Realty to Mergeco for XXXXXXXXXX Mergeco Special Shares. In connection with the transfer, Holdco and Mergeco will jointly elect in prescribed form within the time prescribed by subsection 85(6), to have the provisions of subsection 85(1) apply to the transfer. The agreed amount will:

a) not be less than the lesser of the cost amount of shares of Realty and the fair market value of such shares;

b) not exceed the fair market value of the shares of Realty.

Mergeco will add to the stated capital account maintained for its Mergeco Special Shares an amount equal to the cost of the Realty common shares (determined pursuant to subsection 85(1)).

22. Mergeco will redeem all of the issued and outstanding Mergeco Special Shares held by Holdco for their redemption amount. As payment for such redemption Mergeco will issue to Holdco a promissory note (the "Mergeco Note") with principal amount equal to the redemption amount of such shares.

23. Immediately following the redemption of the Mergeco Special Shares described in paragraph 0 above, Holdco will redeem all of the issued and outstanding Holdco Second Preferred Shares held by Mergeco for their redemption amount. As payment for such redemption Holdco will issue to Mergeco a promissory note (the "Holdco Note") with principal amount equal to the redemption amount of such shares.

24. Mergeco will pay the Mergeco Note by transferring to Holdco the Holdco Note, which will be accepted by Holdco in full payment of Mergeco's obligation. Holdco will pay the Holdco Note by transferring to Mergeco the Mergeco Note, which will be accepted by Mergeco in full payment of Holdco's obligation. The Mergeco Note and Holdco Note thereupon will both be marked "paid in full" and such notes will be cancelled.

25. Following the transactions described in paragraph 0 above, New Holdco, Mergeco and Realty will be amalgamated under the provisions of the BCA to form "Amalco" in such a manner that:

a) all of the property (except any amounts receivable from any predecessor corporation) of the predecessor corporations immediately before the amalgamation will become property of Amalco by virtue of the amalgamation;

b) all of the liabilities (except any amounts payable to any predecessor corporation) of the predecessor corporations immediately before the amalgamation will become liabilities of Amalco by virtue of the amalgamation; and

c) all of the shareholders (except any predecessor corporation), who owned shares of the capital stock of any predecessor corporation immediately before the amalgamation, receive shares of the capital stock of Amalco because of the amalgamation.

26. Holdco will incorporate a new body corporate ("New Opco") pursuant to the BCA. New Opco will be a taxable Canadian corporation and a Canadian-controlled private corporation. The authorized capital of New Opco will include:

a) "New Opco Common Shares", each of which will be a fully participating voting common share with the holder thereof entitled to one vote at meetings of shareholders of New Opco; and

b) "New Opco Special Shares" having the following attributes:

i. each New Opco Special Share will be redeemable, subject to applicable law, at any time at the option of New Opco at a redemption amount equal to the aggregate fair market value of the consideration paid to New Opco on the issuance thereof divided by the number of New Opco Special Shares issued as consideration therefore (plus any declared but unpaid dividends);

ii. each New Opco Special Share will be retractable, subject to applicable law, at any time at the option of the holder at a retraction amount equal to the redemption amount described above;

iii.the holder of each New Opco Special Share will be entitled to a non-cumulative cash dividend as and when declared by the board of directors from time to time (not to exceed XXXXXXXXXX% per annum on the redemption amount), which dividend need not also be declared on any other class of shares of New Structures;

iv.there will be a provision restricting the payment of dividends on, or the repurchase or redemption of, other classes of shares so that no such dividends may be paid on, and no such repurchase or redemption may be made of, any other class of shares of New Opco if the resulting realizable value of the net assets of New Opco after payment of dividends, or repurchase or redemption of such shares, would be less than the aggregate of the redemption amounts of all of the New Opco Special Shares then outstanding;

v. the holder of each New Opco Special Share will be entitled, upon the liquidation, dissolution or wind-up of New Opco, to a payment in priority to all other classes of shares of New Opco of an amount equal to the redemption amount therefore to the extent of the amount or value of property available under applicable law for payment to shareholders upon dissolution, but will be entitled to no more than the amount of that payment, and

vi.the holder of each New Opco Special Share will not be entitled to vote at meetings of shareholders of New Opco, other than as provided under the BCA.

27. The articles of incorporation of Numberco will be amended by:

a) creating a class of preferred shares (the "Target Preferred Shares") which will have a redemption amount and a fair market value that is equal to the fair market value of all of the outstanding shares of Opco.

b) creating an unlimited number of a new class of common shares which will have a fair market value equal to the fair market value of the remaining assets of Numberco.

28. The currently issued share capital of Numberco will be exchanged for the Target Preferred shares and the new class of common shares.

29. Holdco will transfer the Target Preferred Shares to New Opco in consideration for XXXXXXXXXX New Opco Common Shares. Holdco and New Opco will jointly elect in prescribed form within the time prescribed by subsection 85(6), to have the provisions of subsection 85(1) apply to the transfer. The agreed amount will:

a) not be less than the lesser of the cost amount of the Target Preferred Shares and the fair market value; and

b) not exceed the fair market value of the Target Preferred Shares.

New Opco will add to the stated capital account maintained for its common shares an amount equal to the cost of the Target Preferred Shares (determined pursuant to subsection 85(1)). The New Opco Common Shares are intended to be held as capital property by each of its shareholders.

30. Numberco will transfer all of the outstanding shares of Opco to New Opco in consideration for New Opco Special Shares with a redemption amount and fair market value equal to the fair market value of Opco's shares. Numberco and New Opco will jointly elect in prescribed form within the time prescribed by subsection 85(6), to have the provisions of subsection 85(1) apply to the transfer. The agreed amount will:

a) not be less than the lesser of the cost amount of the Opco shares and the fair market value thereof; and

b) not exceed the fair market value of the Opco shares.

New Opco will add to the stated capital account maintained for its New Opco Special Shares an amount equal to the cost of the Opco shares (determined pursuant to subsection 85(1)).

31. Numberco will redeem all of the issued and outstanding Target Preferred Shares held by New Opco for their redemption amount. As payment for such redemption Numberco will issue to New Opco a promissory note (the "Numberco Note") with principal amount equal to the redemption amount of such shares.

32. Immediately after the redemption of the Target Preferred Shares described in papragraph 0 above, New Opco will redeem all of the issued and outstanding New Opco Special Shares held by Numberco for their redemption amount. As payment for such redemption New Opco will issue to Numberco a promissory note (the "New Opco Note") with principal amount equal to the redemption amount of such shares.

33. New Opco will pay the New Opco Note by transferring to Numberco the Numberco Note, which will be accepted by Numberco in full payment of New Opco's obligation. Numberco will pay the Numberco Note by transferring to New Opco the New Opco Note, which will be accepted by New Opco in full payment of Numberco's obligation. The New Opco Note and Numberco Note thereupon will both be marked "paid in full" and such notes will be cancelled.

34. Opco will be wound-up into New Opco such that all property and known liabilities of Opco become the property and liabilities of New Opco.

35. The articles of incorporation of New Opco will be amended by creating:

a) a new class of preferred shares (the "TA Preferred Shares") which will have a redemption amount and fair market value that is equal to the fair market value of all of the assets that are to be transferred from New Opco, (such assets collectively the "Target Assets"). The Target Assets will include all incomplete construction contracts ("Contracts in Progress"), including all benefits and entitlements under the Contracts in Progress; and

b) a new class of common shares which will have a fair market value equal to the net fair market value of the remaining assets of New Opco.

36. The then issued and outstanding share capital of New Opco will be exchanged for the TA Preferred Shares and a new class of common shares.

37. Holdco will incorporate a new body corporate ("Newco") under the BCA. Newco will be a taxable Canadian corporation and a Canadian-controlled private corporation. The authorized capital of Newco will include:

a) "Newco Common Shares", each of which will be a fully participating voting common share with the holder thereof entitled to one vote at meetings of shareholders of Newco; and

b) "Newco Preferred Shares" having the following attributes:

i. each Newco Preferred Share will be redeemable, subject to applicable law, at any time at the option of Newco at a redemption amount equal to the aggregate FMV of the consideration paid to Newco on the issuance thereof divided by the number of Newco Preferred Shares issued as consideration therefore (plus any declared but unpaid dividends);

ii. each Newco Preferred Share will be retractable, subject to applicable law, at any time at the option of the holder at a retraction amount equal to the redemption amount described above;

iii.the holder of each Newco Preferred Share will be entitled to a non-cumulative cash dividend as and when declared by the board of directors from time to time (not to exceed XXXXXXXXXX% per annum on the Redemption Amount), which dividend need not also be declared on any other class of shares of Newco.

iv.there will be a provision restricting the payment of dividends on, or the repurchase or redemption of, other classes of shares so that no such dividends may be paid on, and no such repurchase or redemption may be made of, any other class of shares of Newco if the resulting realizable value of the net assets of Newco after payment of dividends, or repurchase or redemption of such shares, would be less than the aggregate of the redemption amounts of all of the Newco Preferred Shares then outstanding;

v.the holder of each Newco Preferred Share will be entitled, upon the liquidation, dissolution or wind-up of Newco, to a payment in priority to all other classes of shares of Newco of an amount equal to the redemption amount therefore to the extent of the amount or value of property available under applicable law for payment to shareholders upon dissolution, but will be entitled to no more than the amount of that payment, and

vi the holder of each Newco Preferred Share will not be entitled to vote at meetings of shareholders of Newco, other than as provided under the BCA.

38. Holdco will transfer all of the outstanding TA Preferred Shares of New Opco to Newco in consideration for XXXXXXXXXX Newco Common Shares. Holdco and Newco will jointly elect in prescribed form within the time prescribed by subsection 85(6), to have the provisions of subsection 85(1) apply to the transfer. The agreed amount will:

a) not be less than the lesser of the cost amount of the TA Preferred Shares and the fair market value thereof; and

b) not exceed the fair market value of the TA Preferred Shares.

Newco will add to the stated capital account maintained for its common shares an amount equal to the cost of the TA Preferred Shares (determined pursuant to subsection 85(1)).

39. New Opco will transfer the Target Assets to Newco in consideration for XXXXXXXXXX Newco Preferred Shares and, if appropriate, the assumption of debt. New Opco and Newco will jointly elect in prescribed form within the time prescribed by subsection 85(6), to have the provisions of subsection 85(1) apply to the transfer. The agreed amount will not be less than:

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

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

c) in the case of eligible capital property, an amount equal to the least of the amounts described in subparagraphs 85(1)(d)(i), (ii) and (iii).

In each case, the agreed amount will not exceed the fair market value of the respective property, not will it be less than the amount of any liabilities assumed by Newco as consideration for the transfer of such property. The agreed amount in respect of the Contracts in Progress will be $XXXXXXXXXX.

40. After the transfer described in paragraph 39 above, Newco will report any Unbilled Revenue in respect of the Contracts in Progress according to the method described in paragraphs 10 to 12 above.

41. New Opco will redeem all of the issued and outstanding TA Preferred Shares held by Newco for their redemption amount. As payment for such redemption New Opco will issue to Newco a promissory note (the "New Opco Note") with principal amount equal to the redemption amount of such shares.

42. Immediately after the redemption of the TA Preferred Shares described in papragraph 0 above, Newco will redeem all of the issued and outstanding Newco Preferred Shares held by New Opco for their redemption amount. As payment for such redemption Newco will issue to New Opco a promissory note (the "Newco Note") with principal amount equal to the redemption amount of such shares.

43. Newco will pay the Newco Note by transferring to New Opco the New Opco Note, which will be accepted by New Opco in full payment of Newco's obligation. New Opco will pay the Newco Note by transferring to Newco the Newco Note, which will be accepted by Newco in full payment of New Opco's obligation. The Newco Note and New Opco Note thereupon will both be marked "paid in full" and such notes will be cancelled.

Purpose of Proposed Transactions

44. The purpose of the transactions described in paragraphs 14 through to 27 above is to eliminate certain intercorporate shareholdings, cause Amalco to assume certain debt obligations of Mr. A, and to isolate Opco as a stand-alone subsidiary of Holdco.

The reorganization of capital of Holdco will be undertaken to facilitate the amalgamation of Realty without generating non-deductible interest or section 84.1 concerns.

New Holdco is being utilized to permit Mr. A to transfer his Holdco shares for consideration, including the assumption of debt, without creating a capital gain or deemed dividend. The amalgamation of Mergeco, New Holdco and Realty serves several purposes, in that it:

a) eliminates an unnecessary holding body corporation (Mergeco);

b) simplifies the corporate structure; and

c) provides real property against which the debt assumed by New Holdco can be directly secured (if necessary)

New Opco is being incorporated to cause Opco to be a sister corporation to Management, Investments and Leasing, each of which has a distinct business activity. The transactions are structured to occur on a tax-deferred manner.

As a precautionary measure Holdco was not amalgamated with Amalco to preserve the deductibility of interest on the assumption of the Debt as described in paragraph 0 above.

45. The purpose of the transactions described in paragraphs 28 through to 33 is to isolate the operational assets and construction contracts of Opco into a new corporation. Due to the high-risk nature of certain of the construction contracts undertaken by Opco, it is beneficial to isolate Opco's ongoing construction activities in such a manner that other assets in the Group are not exposed to the threat of litigation.

46. Newco is being used to isolate the construction contracts and operational assets from the remaining assets of New Opco.

Rulings

Provided that the preceding statements constitute a complete and accurate disclosure of all of the relevant facts, proposed transactions and purposes of the proposed transactions, and provided that the proposed transactions are completed in the manner described above, our rulings are as follows:

A. The Contracts in Progress, described in paragraph 35 above, at the time of the transfer described in paragraph 39 above, will constitute eligible property as defined in subsection 85(1.1) having a nil cost to New Opco, provided that Newco computes its income as described in paragraph 40 above.

B. Provided that Newco computes its income as described in paragraph 40 above, any Unbilled Revenue in respect of the Contracts in Progress will not be included in the income of New Opco.

C. Subsection 85(1) will apply, subject to the application of subsection 69(11), to the transfer of each eligible property by New Opco to Newco as described in paragraph 39, 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 New Opco's proceeds of disposition and Newco's cost thereof pursuant to paragraph 85(1)(a).

D. Provided that Amalco has a legal obligation to pay interest on the debt assumed in the transaction described in paragraph 18 above, and provided that the Holdco Commons and Holdco First Preferred Shares described in paragraph 17 above, continue to be held by Amalco for the purpose of producing income (other than income which is exempt), Amalco will, to the extent that such amount does not exceed a reasonable amount, be entitled to deduct, in computing its income for a taxation year, an amount paid in the year or payable in respect of the year (depending on the method regularly followed by Amalco in computing its income for purposes of the Act) as interest on the debt in respect of that taxation year pursuant to paragraph 20(1)(c) of the Act.

E. The provisions of subsections 15(1), 56(2), 56(4), and 246(1) will not apply as a result of the Proposed Transactions described herein, in and by themselves.

F. As a result of the Proposed Transactions described herein, 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 70-6R4 dated January 29, 2001 and are binding on the Canada Customs and Revenue Agency provided that the proposed transactions 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 affect the rulings provided herein.

Comments

Nothing in this letter should be considered as confirmation of the income tax consequences of any of the transactions described in this letter other than as specifically described. In addition, nothing in this letter should be construed as confirmation, express or implied, of the fair market value or adjusted cost base of any property or the paid-up capital of any share.

Yours truly,

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