1999 Ruling 9914063 - BUTTERFLY REORGANIZATION

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CRA.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ARC.

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the Department.

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

Principal Issues:

Single-wing butterfly involving a farm corporation

Position:

favourable rulings given

Reasons:

No unusual features

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xxxxxxxxxx 3-991406
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Attention: xxxxxxxxxx

XXXXXXXXXX, 1999

Dear Sirs/Madams:

Re: XXXXXXXXXX
xxxxxxxxxx
xxxxxxxxxx

This is in reply to your letters of XXXXXXXXXX, wherein you requested an advance income tax ruling on behalf of the abovenoted taxpayers (collectively called the "Applicants").

We understand that to the best of your knowledge and that of the Applicants none of the issues in the requested rulings is being considered by a Tax Services Office or Taxation Centre in connection with a tax return already filed and is not the subject of an appeal or of a Notice of Objection under section 165 of the Income Tax Act.

DEFINITIONS

In this letter unless otherwise expressly stated, the following terms have the meanings specified:

(a) "XXXXXXXXXX" means XXXXXXXXXX;

(b) "Applicants" means Distributor, Transferee, Shareholder 1 and Shareholder 2:

(c) "Distributor" means the corporation whose assets will be subject to distribution, namely XXXXXXXXXX; its address and tax offices are as follows:

xxxxxxxxxx
xxxxxxxxxx
XXXXXXXXXX Tax Services Office
XXXXXXXXXX Taxation Centre

(d) "Transferee" refers to XXXXXXXXXX, a company incorporated to be the recipient of assets on the butterfly distribution; its address and tax offices are as follows:

xxxxxxxxxx
xxxxxxxxxx
XXXXXXXXXX Tax Services Office
XXXXXXXXXX Taxation Centre

(e) "Shareholder 1" refers to XXXXXXXXXX whose social insurance number is XXXXXXXXXX;

(f) "Shareholder 2" refers to XXXXXXXXXX, whose social insurance number is xxxxxxxxxx;

(g) "Mother" refers to XXXXXXXXXX, the mother of shareholders 1 and 2.

(h) "Estate" refers to the estate of the late XXXXXXXXXX, the father of shareholders 1 and 2;.

(i) "FMV" means fair market value.

STATUTORY TERMS

In this letter unless otherwise expressly stated, the following terms have the meanings specified:

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

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

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

(d) "capital dividend account" has the meaning assigned by subsection 89(1);

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

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

(g) "depreciable property" has the meaning assigned by subsection 13(21);

(h) "distribution" has the meaning assigned by subsection 55(1);

(i) "dividend rental arrangement" has the meaning assigned by subsection 248(1);

(j) "guarantee agreement" has the meaning assigned by subsection 112(2.2);

(k) "paid-up capital" has the meaning assigned by subsection 89(1);

(1) "RDTOH" means "refundable dividend tax on hand" which has the meaning assigned by subsection 129(3);

(m) "series of transactions or events" has the meaning assigned by subsection 248(10);

(n) "specified financial institution" has the meaning assigned by subsection 248(1);

(o) "specified investment business" has the meaning assigned by subsection 125(7);.

(p) "stated capital" has the meaning assigned in section 26 of the xxxxxxxxxx; and

(q) "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 follows:

FACTS AND PROPOSED TRANSACTIONS

Distributor

1. Distributor is a "Canadian-controlled private corporation" and a "taxable Canadian corporation". Distributor was incorporated on XXXXXXXXXX under the laws of XXXXXXXXXX. Distributor carries on a farming business.

2. The taxation year of Distributor ends on XXXXXXXXXX.

3. The only issued and outstanding shares of Distributor are XXXXXXXXXX Class A common voting shares ("Common Shares") and XXXXXXXXXX redeemable, retractable, voting Class A preferred shares ("Preferred Shares") held by their holders as capital property as follows:

	Holder		Number
	xxxxxxxxxx	( Shareholder 1)	XXXXXXXXXX Common Shares
XXXXXXXXXX Preferred Shares
	xxxxxxxxxx	(Shareholder 2)	XXXXXXXXXX Common Shares
XXXXXXXXXX Preferred Shares

The aggregate paid-up capital ("PUC") of the XXXXXXXXXX Common Shares is $xxxxxxxxxx. The aggregate paid-up capital of the XXXXXXXXXX Preferred Shares is $XXXXXXXXXX. The redemption amount of the Preferred Shares is $XXXXXXXXXX per share.

4. Distributor calculates its income on the cash basis as permitted under section 28 for the Farming business.

5. Distributor currently has a small balance of capital dividend account and does not have, and will not have before the proposed transactions described below are carried out, any unutilized losses or deductions for tax purposes except possibly a reserve under section 28 from the prior year.

6. It is anticipated that there may be RDTOH, before payment of any fiscal XXXXXXXXXX dividends, with an expected reported carryforward from XXXXXXXXXX of $ XXXXXXXXXX.

7. On XXXXXXXXXX, each of Shareholder 1 and Shareholder 2 received 1 Common Share and XXXXXXXXXX Preferred Shares from the Estate. This occurred in the normal course of settling the Estate and was not in contemplation of a butterfly.

8. On XXXXXXXXXX, the 1 Common Share held by Mother was redeemed for about $XXXXXXXXXX. This left Shareholders 1 & 2 as the sole shareholders of Distributor. This was not carried out in contemplation of the butterfly.

9. By XXXXXXXXXX, the disputes between Shareholders 1 and 2 were so severe that they decided to farm separately. To that end, they each incorporated a separate company solely owned by each respective shareholder. These are Transferee (solely owned by Shareholder 1) and Redundantco (solely owned by Shareholder 2). Their intent was to farm the Distributor lands within those two companies, each as to separate parcels. No contracts were ever put in place, and no assets of Distributor were acquired.

However, permit books were taken out by Transferee and Redundantco over lands of Distributor. After discussion with advisors regarding the butterfly, enquiries were made as to whether these could be transferred back into the name of Distributor for the XXXXXXXXXX crop year. It was indicated by the Wheat Board that cheques had to be issued under the Permit books in place, and these cheques could not be deposited into any account other than the holders of the Permit Books. Therefore, cheques on Distributor crops are being deposited to Transferee and Redundantco. These are considered by the parties as income of Distributor, and intercorporate receivables are recorded for the amounts. The farm accounting reflects this treatment.

10. On, or about XXXXXXXXXX, Shareholders 1 and 2 obtained the services of income tax advisors to assist in separating their farming interests and a divisive reorganization under section 55 was proposed.

11. Acting upon advice, Transferee and Redundantco will enter into legal agreements that any payments or cheques for crops of Distributor received by Transferee or Redundantco would be considered to be for Distributor and accounted for to the credit of Distributor.

12. All of the individuals (Shareholders 1 & 2) are resident in Canada for purposes of the Act. Shareholder 1 is the brother of Shareholder 2.

Transferee

13. XXXXXXXXXX% of the voting common shares of Transferee, (XXXXXXXXXX Class A Common Shares) which are all of the outstanding shares, are issued to Shareholder 1. The shares have a stated capital of $XXXXXXXXXX/share, ($XXXXXXXXXX in aggregate) and were issued XXXXXXXXXX.

14. Transferee is incorporated under the XXXXXXXXXX, and is a "Canadian-controlled private corporation" and a "taxable Canadian corporation".

Newco

15. Newco will be incorporated under the XXXXXXXXXX, and will be a "Canadian-controlled private corporation" and a "taxable Canadian corporation".

16. 100% of the common shares of Newco will be owned by Transferee, and Newco will therefore be a wholly-owned subsidiary of Transferee.

Classification of Property

17. Immediately before. the transfers of property described in paragraph 43 below, the property of Distributor will be classified into three types of property for the purposes of a distribution pursuant to paragraph 55(3)(b), as follows:

(a) cash or near-cash property, comprised of the current assets of Distributor including cash, deposits, accounts receivable, inventory, patronage reserves, materials and supplies, and rights arising from the prepayment of certain expenses (“prepaid expenses");

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

(c) investment property, comprising all of the assets of Distributor other than cash or near-cash property, any income from which would, for the purposes of the Act, constitute income from property or from a specified investment business.

18. For the purposes of determining the types of property,

(a) mutual funds and similar investments (including those with Investors Group) shall be considered cash. These have been disclosed as "investments" and as "current assets" in the annual financial statements;

(b) NISA accounts will be considered business property;

(c) shares and reserves in Co-operative organizations from which Distributor purchases goods used in its business will be classified as business property;

(d) any amount receivable from any shareholder, Transferee, or Redundantco shall be considered cash or near-cash since they represent funds which will be turned into cash within 12 months, or represent cash of Distributor on deposit with Transferee or Redundantco.

Allocation of Liabilities to Types of Property

19. In determining the net FMV of each type of property owned by Distributor, immediately before the transfers of property described in paragraph 43 below, the liabilities of Distributor will be allocated to, and deducted in the calculation of the net FMV of, each type of property of Distributor as follows:

(a) current liabilities of Distributor (including the estimated current portion of long term debt) will be allocated to each cash or near-cash property in the proportion that the FMV of each such property is of the FMV of all cash or near-cash property. The allocation of current liabilities as described herein will not exceed the aggregate FMV of all the cash or near-cash property of Distributor;

(b) any accounts receivable (this would not include those intercorporate receivables classified as cash), inventory, GST and prepaid expenses of Distributor, that are initially classified in accordance with paragraph 17(a) as cash or near-cash property, that will relate to a business that will be carried on by Distributor or Transferee and that will be collected, sold, or consumed by such corporation in the ordinary course of that business, will then be reclassified as business property and the net FMV thereof, determined after the allocation of current liabilities described in (a) herein, will be included in the net FMV of business property and will not be included in the net FMV of cash or near-cash property;

(c) liabilities, other than current liabilities (which current liabilities will include the estimated current portion of long term debts), that relate to a particular property, will then be allocated to the particular property (and effectively to the type to which the particular property belongs) to the extent of its FMV. Liabilities that pertain to a type of property, but not to a particular property, will then be allocated to that type of property, but not in excess of the net FMV of such type of property after the allocation of liabilities to a particular property, as described herein; and

(d) any liabilities ("excess unallocated liabilities"), that remain after the allocations described in steps (a) to (c) are made (including excess current liabilities, if any), will then be allocated to the cash or near-cash property, business property, and investment property of Distributor based on the relative net FMV of each type of property prior to the allocation of such excess unallocated liabilities.

20. For the purpose of calculating the net FMV of the types of property Distributor,

(a) deferred taxes will not be considered;

(b) deferred revenue will be considered to be a liability to the extent that the amount of such deferred revenue gives rise to a legal obligation to repay such amount should the services not be provided or goods not delivered;

(c) all term loans (other than the current portion) will be considered to relate to business property. These debts have been incurred in support of the purchase of equipment, land, or other farming assets; and

(d) an estimate of income taxes payable on fiscal XXXXXXXXXX income to the date of the distribution will be considered a current liability.

21. It is anticipated that there will be only two types of property;

(a) cash and near-cash, being primarily the investments disclosed in current assets, any amounts receivable from any shareholder, and any receivables from Transferee or Redundantco for Distributor cash deposited to their accounts; and

(b) business property, being all of the other assets. No Acquisitions or Dispositions as Part of Series.

22. No property has or will become property of Distributor and no liabilities have been or will be incurred by Distributor in contemplation of and before the transfers described below, except in the ordinary course of business, or as described herein.

23. Except as outlined herein, Distributor has no specific intention of disposing of any assets currently owned to an unrelated person following the proposed transactions and Distributor will not dispose of any of its assets as part of the series of proposed transactions except as described.

24. Shareholders 1 and 2 will not dispose of their shares of Distributor or Transferee as part of the series of proposed transactions except as disclosed herein.

Other Facts and Representations

25. The common shares of Distributor held by each of Shareholder 1 and 2 were not acquired in contemplation of the proposed transactions.

26. Distributor does not own shares of any corporation over which it exercises significant influence within the meaning of section 3050 of the CICA Handbook.

27. None of the corporations referred to herein is, or will be, a specified financial institution.

28. None of the shares referred to herein (including the shares to be issued as described in the proposed transactions) is or will be subject to a guarantee agreement, within the meaning referred to in subsection 112(2.2).

29. None of the corporations referred to herein has, or will have, entered into a dividend rental arrangement in respect of any of the shares to be redeemed as part of the proposed transactions.

30. None of the issued shares referred to herein (including the shares to be issued as described in the proposed transactions) has been or will be issued or acquired as part of a transaction or event or series of transactions or events of the type described in subsection 112(2.5).

31. None of the corporations referred to herein will be a corporation described in any of paragraphs (a) to (f) of the definition of "financial intermediary corporation" in subsection 191(1).

32. Each of Distributor and Transferee will have the financial capacity to honour, upon presentation for payment, the amount payable under the promissory note issued by it as part of the proposed transactions.

Capital Dividend

33. A dividend shall be paid of an amount no greater than the capital dividend account of Distributor to the common shareholders. Distributor shall elect under subsection 83(2) , in prescribed manner and prescribed form, such that the dividend shall be deemed to be a capital dividend. The dividend shall be paid to the individual common shareholders (being Shareholders 1 and 2) in advance of any of the proposed transactions which follow herein. Incorporation of Transferee

34. As described in paragraphs 13 and 14 above, Shareholder 1 has incorporated Transferee, a new corporation under the xxxxxxxxxx. Transferee is a "Canadian-controlled private corporation" and a “taxable Canadian corporation".

35. The authorized share capital of Transferee will be amended to consist of common shares ("Transferee Common Shares") and preferred shares.

36. The authorized share capital of Transferee shall include one class of an unlimited number of preferred shares ("Transferee Preferred Shares") having the following attributes:

(a) each Transferee Preferred Share will be redeemable, subject to applicable law, at any time at the option of the issuer for an aggregate amount ("Redemption Amount") equal to the FMV of the property received therefore, net of any liabilities assumed, by the issuer at the time of issuance;

(b) each Transferee 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;

(c) the holder of each Transferee Preferred Share will be entitled to a non-cumulative cash dividend as and when declared by the Board of Directors from time to time, which dividend need not also be declared on any other class of shares of the issuer if the resulting realizable value of the net assets of the issuer after payment of the dividends would be less than the aggregate of the Redemption Amounts of all of the Preferred Shares then outstanding;

(d) the holder of each Transferee Preferred Share will be entitled, upon the liquidation, dissolution or windingup of the issuer, to a payment in priority to all other classes of shares of the issuer of an amount equal to the Redemption Amount 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;

(e) the holder of each Transferee Preferred Share will not be entitled to vote at meetings of shareholders of the issuer, other than as provided under the xxxxxxxxxx; and

(f) for the purpose of subsection 191(4), the terms and conditions of the Preferred Shares to be issued as described herein will specify an amount in respect of each Preferred Share, including an amount for which the share is to be redeemed, acquired or cancelled. The amount to be specified in respect of each Preferred Share, at the time of its issuance by a resolution to be made by the Board of Directors, will be expressed as a dollar amount, will not be determined by a formula and will be equal to the FMV of the property received as consideration for such share.

Incorporation of Newco

37. As described in paragraphs 15 and 16 above, Newco shall be incorporated as a new corporation under the XXXXXXXXXX. Newco shall be a "Canadian-controlled private corporation" and a "taxable Canadian corporation".

38. The authorized share capital of Newco will consist of common shares ('4Newco Common Shares") and preferred shares.

39. The authorized share capital of Newco shall include one class of an unlimited number of preferred shares ("Newco Preferred Shares") having the following attributes:

(a) each Newco Preferred Share will be redeemable, subject to applicable law, at any time at the option of the issuer for an aggregate amount ("Redemption Amount") equal to the FMV of the property received therefore, net of any liabilities assumed, by the issuer at the time of issuance;

(b) 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;

(c) 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, which dividend need not also be declared on any other class of shares of the issuer if the resulting realizable value of the net assets of the issuer after payment of the dividends would be less than the aggregate of the Redemption Amounts of all of the Preferred Shares then outstanding;

(d) the holder of each Newco Preferred Share will be entitled, upon the liquidation, dissolution or windingup of the issuer, to a payment in priority to all other classes of shares of the issuer of an amount equal to the Redemption Amount 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;

(e) the holder of each Newco Preferred Share will not be entitled to vote at meetings of shareholders of the issuer, other than as provided under the xxxxxxxxxx; and

(f) for the purpose of subsection 191(4), the terms and conditions of the Preferred Shares to be issued as described herein will specify an amount in respect of each Preferred Share, including an amount for which the share is to be redeemed, acquired or cancelled. The amount to be specified in respect of each Preferred Share, at the time of its issuance by a resolution to be made by the Board of Directors, will be expressed as a dollar amount, will not be determined by a formula and will be equal to the FMV of the property received as consideration for such share.

40. Transferee shall subscribe for one Newco Common Share on incorporation of Newco for the sum of one dollar.

Sale of Distributor Shares to Transferee by Shareholder 1

41. Shareholder 1 will transfer to Transferee all of his XXXXXXXXXX Common Shares and XXXXXXXXXX Preferred Shares of Distributor for a purchase price equal to the FMV of such shares. Transferee will pay the purchase price by issuing an equal number (XXXXXXXXXX) of Transferee Common Shares of Transferee to Shareholder 1. The aggregate addition to the stated capital of Transferee in respect of all of the common shares it issues to Shareholder 1 will be $XXXXXXXXXX, being an amount equal to the aggregate paid-up capital of the Distributor shares so transferred. No non-share consideration shall be paid.

42. Shareholder 1 and Transferee will jointly elect under subsection 85(1), in prescribed form and within the time limits prescribed by subsection 85(6), in respect of the Common Shares so transferred. The agreed amount specified in each election will be equal to the adjusted cost base to Shareholder 1 of the transferred shares, which amounts will not exceed the FMV of the transferred shares.

Sale of Distributor Assets to Newco

43. Distributor will sell at FMV to Newco cash or near-cash property, investments, and business property which consists of:

(a) XXXXXXXXXX% of the net FMV of cash or near-cash property, if any, of Distributor immediately prior to the transfer;

(b) XXXXXXXXXX% of the net FMV of the business property of Distributor used in carrying on the farming business;

(c) XXXXXXXXXX% of the net FMV of the investment property (it is expected there will be none).

44. As a result of such transfers, the net FMV of the cash or near-cash property, business property and investment property received by Newco (after allocating and deducting, in the manner described in paragraph 19 & 20 above, the assumed liabilities of Distributor) will be equal to the proportion of the net FMV of the cash or near-cash property, investment property, and business property, respectively, of Distributor, immediately before the transfer, that:

(a) the aggregate of the FMV, immediately before the transfer, of all shares of the capital stock of Distributor owned by Transferee at that time

is of

(b) the FMV immediately before the transfer of all of the issued shares of the capital stock of Distributor at that time (the "Butterfly Proportion").

45. In consideration for such transfer Newco may assume certain liabilities of Distributor and will issue to Distributor Newco Preferred Shares, having an aggregate redemption and retraction amount and FMV equal to the amount by which the FMV of the transferred properties that will be received by Newco exceeds the FMV of the liabilities assumed by Newco.

46. As a result of the transfers described herein, Newco will receive its proportionate share of each type of the property of Distributor.

47. In respect of the transfers described in the paragraph 43 above, Distributor and Newco, as the case may be, will jointly elect pursuant to subsection 85(1), in prescribed form and within the time limits prescribed by subsection 85(6), to transfer each asset that is an eligible property, within the meaning of subsection 85(1.1), and that has a FMV in excess of its cost amount to Distributor, at an agreed amount that is not less than the least of:

(a) the amounts specified in subparagraphs 85(1)(d)(i), (ii) or (iii) in the case of eligible capital property;

(b) the amounts specified in subparagraphs 85(1)(e)(i), (ii) or (iii) in the case of depreciable property of a prescribed class;

(C) the amounts specified in subparagraphs 85(1)(c.1)(i) or (ii) in the case of capital property (other than depreciable property of a prescribed class), inventory, NISA Fund #2, or any other property described in paragraph 85(1)(c.1); and

(d) the amount specified in paragraph 85(1)(c.2) in respect of inventory owned in connection with the carrying on of a business the income from which is calculated on the cash basis. For greater certainty, this will apply to inventories utilized in the farming business.

48. In each case, the agreed amount will not exceed the FMV of the respective property, nor will it be less than the amount permitted under paragraph 85(1)(b).

49. For the purposes of the joint election described herein, the reference to the undepreciated capital cost to the taxpayer of all property of that class immediately before the disposition" found in paragraph 85(1)(e)(i) shall be interpreted to mean that proportion of the undepreciated capital cost to the taxpayer of all of the property of that class that the FMV of the assets that are transferred immediately before the disposition is of the FMV of all property of that class immediately before the disposition.

50. The subsection 85(1) election referred to herein will exclude any cash, accounts receivable, NISA Fund # 1, and prepaid expenses.

51. The FMV of each eligible property transferred will exceed or be equal to the agreed amount.

52. Newco will add to its stated capital account in respect of the Newco Preferred Shares so issued an amount equal to the aggregate of the cost amounts of the property transferred from Distributor less the FMV of the liabilities of Distributor assumed by Newco.

53. The liabilities assumed will be allocated to specific properties transferred. The amount of liabilities to be allocated to a property transferred pursuant to subsection 85(1) will not exceed the elected amount in respect of that property. The amount of liabilities allocated to property other than a property transferred pursuant to subsection 85(1) will not exceed the FMV in respect of the property.

Redemption of Newco Preferred Shares

54. Immediately after the transfer of the assets to Newco, and before the end of that day, Newco will redeem its Newco Preferred Shares held by Distributor and will issue to Distributor a non-interest-bearing demand promissory note (the 4'Newco Note") having a principal amount and FMV equal to the redemption price of the Newco Preferred Shares. Distributor will accept the Newco Note in full payment of the redemption price of the Newco Preferred Shares.

Windup of Newco into Transferee

55. Newco will then be wound up into its parent, Transferee. As a result of the windup, the Newco Note will become a liability of Transferee (hereinafter referred to as "Transferee Note")

Repurchase of Distributor Common and Preferred Shares

56. Immediately following the foregoing windup of Newco into Transferee, Distributor will purchase for cancellation, at FMV, all of the (XXXXXXXXXX) Common Shares of Distributor and will redeem all of the (XXXXXXXXXX) Preferred Shares held by Transferee. Distributor will pay the purchase or redemption price for such shares by issuing to Transferee a non-interest bearing demand promissory note having a principal amount and FMV equal to the FMV of the Common and Preferred Shares so purchased or redeemed for consideration ("Distributor Note"). Transferee will accept the Distributor Note in full payment of the purchase price of the Common and Preferred Shares sold to Distributor.

57. Each of Distributor and Transferee has the financial capacity to honour, upon presentation for payment, the amount payable under the Transferee Note or Distributor Note, as the case may be.

58. The Transferee Note will be set off against the Distributor Note and they will be cancelled.

59. After the completion of the transactions, Distributor and Transferee will carry on business independent of each other.

PURPOSE OF THE PROPOSED TRANSACTIONS

Shareholder 1 and Shareholder 2 wish to farm and carry on business as separate businesses independent of each other. Shareholders 1 & 2 have serious and fundamental disagreement on how the business of Distributor should be carried on and can no longer work successfully together.

RULINGS GIVEN

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

A. Subject to the application of the provisions of subsections 69(11) and 13(21.2) as it may apply to the transfer referred to herein, the provisions of subsection 85(1) of the Act will apply to:

(a) the transfer of all the common and preferred shares of Distributor held by Shareholder 1 to Transferee as described in paragraphs 41 and 42 above, and

(b) the transfer by Distributor to Newco of any eligible property as described in paragraph 43 above, which is the subject of an election under subsection 85(1) as described in paragraph 47 above;

such that the agreed amounts in respect of each transfer shall be deemed to be the transferor's proceeds of disposition and the transferee's cost thereof pursuant to paragraph 85(1)(a). For greater certainty, paragraph 85(1)(e.2) will not apply to the transfers referred to herein.

B. Subsection 84.1(1) will not apply to reduce the PUC of the common shares of Transferee issued to Shareholder 1, as described in paragraph 41 above. No dividend shall be deemed to arise under paragraph 84.1(1)(b).

C. As a result of the redemption by Newco of its preferred shares held by Distributor described in paragraph 54 above and the purchase for cancellation of the common shares of Distributor held by Transferee described in paragraph 56 above, and by virtue of paragraphs 84(3)(a) and 84(3)(b):

(a) Newco will be deemed to have paid, and Distributor will be deemed to have received, a taxable dividend equal to the amount by which the amount paid in respect of the redemption of the Newco preferred shares exceeds the PUC thereof; and,

(b) Distributor will be deemed to have paid, and Transferee will be deemed to have received, a taxable dividend equal to the amount by which the amount paid in respect of the purchase for cancellation of the Distributor common shares exceeds the PUC thereof.

D. The taxable dividends described in Ruling C above:

(a) will be deductible by the recipient corporation in computing its respective taxable income pursuant to subsection 112(1). For greater certainty, the subsection 112(1) deduction in respect of such dividends will not be denied by the provisions of subsections 112(2.1), (2.2), (2.3) or (2.4);

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

(c) no taxes under Part IV.1 will be payable by a holder in respect of a dividend referred to in Ruling C above, as each such dividend will be an excepted dividend by virtue of paragraph (c) of the definition thereof in section 187.1;

(d) no taxes under Part VI.1 will be payable by an issuer of the preferred shares in respect of a dividend referred to in Ruling C above, as each such dividend will be an excluded dividend by virtue of the substantial interest exemption in paragraph (a) of the definition thereof in subsection 191(1) by virtue of the related party exemption in the definition of substantial interest in paragraph 191(2)(a) ; and

(e) by virtue of subsections 186(2) and 186(4), Newco will be connected with Distributor, and Distributor will be connected with Transferee. No taxes under Part IV will be payable in respect of a dividend referred to in Ruling C above, except to the extent provided in paragraph 186(1)(b).

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

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

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

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

(d) an acquisition of property in the circumstances described in paragraphs 55(3.1)(c) or 55(3.1)(d), which has not been described herein, then by virtue of paragraph 55(3)(b), subsection 55(2) will not apply to the taxable dividends referred to in Ruling C above and, for greater certainty, subsection 55(3.1) will not apply to deny the exemption under paragraph 55(3)(b).

F. The settlement and cancellation of the Transferee Note and Distributor Note described in paragraph 58 above will not give rise to a forgiven amount within the meaning of subsection 80(1) or section 80.01 and will not result in an income inclusion or in the application of the provisions of section 80, in and by themselves.

G. For the purposes of the transactions herein, the Distributor common shares and the preferred shares held by Transferee and the Newco Preferred Shares held by Distributor will be treated solely as capital property as defined in section 54 and subsection 248(1).

H. The provisions of subsections 15(1), 56(2), 56(4) and 246(1) will not apply to the proposed transactions, in and by themselves.

I. Subsection 245(2) will not be applied to the proposed transactions, in and by themselves, to redetermine the tax consequences confirmed in the rulings given above.

The above rulings are given subject to the limitations and qualifications set out in Information Circular 70-6R3 dated December 30, 1996 and are binding on Revenue Canada 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 have an effect on the rulings provided herein.

COMMENTS

Nothing in this ruling should be construed as implying that

Revenue Canada has agreed to or reviewed:

(a) the determination of the FMV or the ACB of any particular asset or the PUC of any shares referred to herein; or

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

Yours truly,

for Director
Resources, Partnerships & Trusts Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch