2012-0459781R3 Cross border butterfly

Principal Issues: Whether transaction meets legislative and administrative requirements.

Position: Transaction meets requirements.

Reasons: Consistent with law and administrative positions.

Author: XXXXXXXXXX
Section: 55(3)(b); 55(3.1); 55(3.2); 85(1)(e)(i)

XXXXXXXXXX                                                                                                                         2012-045978

XXXXXXXXXX, 2013

Attention:  XXXXXXXXXX

Re:   Advance Income Tax Ruling
XXXXXXXXXX

We are writing in response to your letter of XXXXXXXXXX, (and related emails) in which you requested an advance income tax ruling on behalf of the above-referenced taxpayer.  The documents submitted as part of your request are part of this document only to the extent described herein.

You have advised that, to the best of your knowledge, and that of the taxpayer involved, none of the issues involved in this ruling request is:

(i)   dealt with in an earlier return of B Co or a related person;

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

(iii) under objection by B Co or a related person;

(iv)  before the courts;

(v)   the subject of a judgement previously issued by a Court of law; or

(vi)  the subject of a ruling previously issued by the Income Tax Rulings Directorate.

Unless otherwise noted, all references herein to sections or components thereof are references to the Act.

Unless otherwise noted, all references to monetary amounts are in Canadian dollars.

ENTITIES

Throughout this letter, the corporations or entities mentioned in this letter will be referred to as follows:

“A Co” means XXXXXXXXXX.  A Co’s business number is XXXXXXXXXX. A Co files its annual income tax return at the XXXXXXXXXX Taxation Centre and is serviced by the XXXXXXXXXX Tax Services Office. A Co’s year end for tax reporting purposes is XXXXXXXXXX. A Co is governed under the laws of the XXXXXXXXXX and is a ULC.  The authorized share capital of A Co consists of an unlimited number of common shares.

“B Co” means XXXXXXXXXX.  B Co’s year end for tax reporting purposes is XXXXXXXXXX.

“C Co” means XXXXXXXXXX, a corporation incorporated under the laws of Country 1.

“D Co” means XXXXXXXXXX, a company incorporated under the laws of Country 1.

“DC” means the Canadian corporation formed as a result of the amalgamation described in Paragraph 19.

“DC Sub” means XXXXXXXXXX a corporation incorporated on XXXXXXXXXX pursuant to the XXXXXXXXXX as a ULC.

“E Co” means XXXXXXXXXX, a company incorporated under the laws of Country 1.

“F Co” means XXXXXXXXXX, a company incorporated under the laws of Country 1.

“Foreign PubCo” means XXXXXXXXXX, a corporation formed under the laws of XXXXXXXXXX.

“Foreign SpinCo” means the corporation formed by Foreign Sub 3, as described in Paragraph 21.

“Foreign SpinCo Sub” means XXXXXXXXXX formed by Foreign SpinCo.

“Foreign Sub 1” means XXXXXXXXXX, which is XXXXXXXXXX tax resident company organized under the laws of XXXXXXXXXX.

“Foreign Sub 2” means XXXXXXXXXX, which is a company incorporated under the laws of XXXXXXXXXX.

“Foreign Sub 3” means XXXXXXXXXX, which is a company incorporated under the laws of XXXXXXXXXX.

“Foreign Sub 4” means XXXXXXXXXX, which is a company incorporated under the laws of XXXXXXXXXX.

“Foreign Sub 5” means XXXXXXXXXX, which is a company incorporated under the laws of XXXXXXXXXX.

“H Co” means XXXXXXXXXX, a predecessor corporation to B Co, as described in Paragraph 8.

“I Co” means XXXXXXXXXX, a predecessor corporation to B Co, as described in Paragraph 8.

“New Foreign Pubco” means a corporation to be incorporated under the laws of XXXXXXXXXX.

“New Foreign Sub 2” means a corporation incorporated under the laws of XXXXXXXXXX.

“TC” means the Canadian corporation formed under the XXXXXXXXXX by Foreign SpinCo Sub.

DEFINITIONS

Unless otherwise noted, the following terms have the meanings ascribed to them below:

“A Co Common Shares” means the common shares which A Co is currently authorized to issue. Currently, there are XXXXXXXXXX A Co Common Shares issued and outstanding.

XXXXXXXXXX

“ACB” means adjusted cost base, as defined in section 54.

“Act” means the Income Tax Act, R.S.C. 1985, c.1 (5th Supp.), as amended to the date of this letter.

“agreed amount” means the amount agreed on by the transferor and transferee in respect of the transfer of an eligible property in a joint election filed pursuant to subsection 85(1).

“arm’s length” has the meaning assigned by subsection 251(1).

“B Co Cash Pool” means the cash management arrangement described in Paragraph 15 between B Co Pool Participants.

“B Co Cash Pool Bank Account” means the bank account of B Co dedicated for the deposit and withdrawal of funds under the B Co Cash Pool.

“B Co Common Shares” means the common shares which B Co is authorized to issue.

“B Co Pool Participants” means the entities that have joined the B Co Cash Pool.

“Butterfly Percentage” means the proportion, expressed as a percentage, that the net FMV of the business property of DC that is used to carry on the Canadian Spin Business is of the net FMV of all the business property of DC, (i) immediately before the transfer of property by DC to TC described in Paragraph 38, and (ii) using the principles set out in Paragraphs 34 and 36.

“C Co Common Shares” means the common shares which C Co is currently authorized to issue.

“Canadian Keep Business” means the Keep Business that is carried on in Canada.

“Canadian Spin Business” means the Spin Business that is carried on in Canada.

“capital property” has the meaning assigned by section 54.

“Capital Reorganization” has the meaning set out in Paragraph 30.

“CDA” means capital dividend account, within the meaning of subsection 89(1).

“Closing Date” means the closing date of the Spin-Off transactions described in this letter.

“connected” has the meaning assigned by subsection 186(4).

“controlled foreign affiliate” has the meaning assigned by subsection 95(1);

“cost amount” has the meaning assigned by subsection 248(1).

“Country 1” means XXXXXXXXXX.

“Country 2” means XXXXXXXXXX.

“Country 1 Group” means, collectively, C Co and its subsidiaries, D Co, E Co and F Co.

“CRA” means the Canada Revenue Agency.

“DC Common Shares” means the common shares which DC will be authorized to issue, as described in Paragraph 19.

“DC New Common Shares” means the common shares which DC will be authorized to issue, as described in Paragraph 30.

“DC Predecessors” means A Co and B Co.

“DC Redemption Amount” has the meaning set out in Paragraph 30(b)(i).

“DC Redemption Note” means the demand promissory note in the principal amount of the aggregate DC Redemption Amount issued by DC in favour of TC, as described in Paragraph 39(b).

“DC Shares” means the DC New Common Shares and the DC Special Shares as described in Paragraph 30.

“DC Special Shares” means the special shares which DC will be authorized to issue, as described in Paragraph 30.

“DC Sub Common Shares” means the common shares which DC Sub will be authorized to issue, each of which is a fully participating voting common share with the holder being entitled to one vote at each meeting of the shareholders of DC Sub.

“distribution” has the meaning assigned by subsection 55(1).

“Distribution Property” means the DC Sub Common Shares.

“eligible property” has the meaning assigned by subsection 85(1.1).

“exempt surplus” has the meaning assigned by subsection 5907(1) of the Regulations.

“financial intermediary corporation” has the meaning assigned by subsection 191(1).

“FMV” means fair market value, being the highest price available in an open and unrestricted market between informed prudent parties acting at arm’s length and without compulsion to act, expressed in terms of cash.

“Foreign Keep Business” means the Keep Business that is carried on outside of Canada.

“Foreign PubCo Group” means Foreign PubCo and the direct and indirect subsidiaries that are controlled by Foreign PubCo.

“Foreign Spin Business” means the Spin Business that is carried on outside of Canada.

“Foreign SpinCo Common Shares” means the common shares which Foreign SpinCo will be authorized to issue.

“Foreign SpinCo Sub Common Shares” means the membership interest which Foreign SpinCo Sub will be authorized to issue.

“forgiven amount” has the meaning assigned by subsections 80(1) and 80.01(1).

“Four-Party Share Exchange” has the meaning described in Paragraph 31.

“inventory” has the meaning assigned by subsection 248(1).

“ITAR” means the Income Tax Application Rules, R.S.C. 1985, c.2 (5th Supp.).

“Keep Business” means Foreign Pubco’s XXXXXXXXXX.

“legal capital” in respect of a share of a ULC means the capital of the company for the purposes of the statute by which the corporation is governed.

“Paragraph” refers to a numbered paragraph in this letter.

“prepaid expenses” means the rights arising out of the prepayment of expenses.

“principal amount” has the meaning assigned by subsection 248(1).

“private corporation” has the meaning assigned by section 54.

“Proposed Transactions” means the transactions described in the Proposed Transactions section of this letter.

“PUC” means “paid-up capital”, as defined by subsection 89(1).

“RDTOH” means refundable dividend tax on hand, as defined by subsection 129(3).

“Regulations” means the Income Tax Regulations, C.R.C., c. 945, promulgated under the Act.

“related person” means, in relation to a particular person, another person who is related to the particular person by virtue of subsection 251(2), as modified, for the purposes of section 55, by paragraph 55(5)(e).

“restricted financial institution” has the meaning assigned by subsection 248(1).

“series of transactions or events” has the meaning assigned to that term by the Courts and includes any related transaction or event referred to in subsection 248(10).

“short-term preferred share” has the meaning assigned by subsection 248(1).

“significant influence” has the meaning assigned by section 3051.04 of the Accounting Standards for Private Enterprises or by IAS 28 of the International Financial Reporting Standards.

“specified financial institution” has the meaning assigned by subsection 248(1).

“specified investment business” has the meaning assigned by subsection 125(7).

“Spin-Off” means the distribution of the shares of Foreign SpinCo as a stock dividend to the shareholders of Foreign PubCo, as described in Paragraphs 41 through 47.

“Spin Business” means the XXXXXXXXXX.

“stated capital” in respect of the share capital of a corporation has the meaning assigned by the statute by which the corporation is governed.

“substantial interest” has the meaning assigned by subsection 191(2).

“taxable Canadian corporation” has the meaning assigned by subsection 89(1).

“taxable Canadian property” has the meaning assigned by subsection 248(1).

“taxable dividend” has the meaning assigned by subsection 89(1).

“taxable preferred share” has the meaning assigned by subsection 248(1).

“TC Common Shares” means the common shares which TC will be authorized to issue, as described in Paragraph 23(a).

“TC Preferred Shares” means the preferred shares which TC will be authorized to issue, as described in Paragraph 23(b).

“TC Redemption Amount” has the meaning set out in Paragraph 23(b)(i).

“TC Redemption Note” means the demand promissory note in the principal amount of the aggregate TC Redemption Amount issued by TC in favour of DC, as described in Paragraph 39(a).

“TC Shares” means, collectively, the TC Common Shares and TC Preferred Shares.

“term preferred share” has the meaning assigned by subsection 248(1).

“ULC” means an unlimited liability company.

FACTS

Foreign PubCo’s Corporate Structure and Business Segments

1.    Foreign PubCo is a corporation that does not reside in Canada. The outstanding common stock of the capital stock of Foreign PubCo is publicly traded and listed on the XXXXXXXXXX. Currently, there are in excess of XXXXXXXXXX common shares of the capital stock of Foreign PubCo issued and outstanding. Foreign PubCo is authorized to issue preference shares, none of which are issued. As of the close of business on XXXXXXXXXX the market capitalization of Foreign PubCo was approximately XXXXXXXXXX. Foreign PubCo is widely held, and, to the best of Foreign PubCo’s knowledge, at XXXXXXXXXX, no one shareholder or group of related shareholders of Foreign PubCo owns XXXXXXXXXX% or more of the shares of the capital stock of Foreign PubCo.

2.    Foreign PubCo has a fiscal year that ends on the XXXXXXXXXX

3.    Foreign PubCo carries on the Keep Business and the Spin Business.

4.    [Reserved].

5.    Foreign Pubco owns directly (or indirectly) all of the outstanding shares of the following top-tier holding companies, none of which reside in Canada:

(a)   Foreign PubCo owns all the issued and outstanding shares of Foreign Sub 1.

(b)   Foreign Sub 1 owns all the issued and outstanding shares of Foreign Sub 2.

(c)   Foreign Sub 2 owns all the issued and outstanding shares of Foreign Sub 3.

(d)   Foreign Sub 3 owns all the issued and outstanding shares of:

a.    Foreign Sub 4.

b.    Foreign Sub 5.

Canadian Corporate Structure and Business

6.    Foreign Sub 5 owned all the issued and outstanding shares of A Co, which was a holding company, a taxable Canadian corporation and a private corporation.

7.    The A Co Common Shares represented all of the voting shares issued by A Co.

8.    B Co was a corporation resulting from an amalgamation pursuant to the laws of the XXXXXXXXXX and was and is, at all relevant times and for all purposes of the Act, a taxable Canadian corporation and a private corporation. The amalgamation took place on XXXXXXXXXX among H Co and I Co. H Co was a wholly-owned subsidiary of Foreign Sub 4 and I Co was a wholly-owned subsidiary of A Co at the time of the amalgamation, and both H Co and I Co were taxable Canadian corporations and private corporations.  Prior to the amalgamation of B Co and A Co, described in Paragraph 19, Foreign Sub 4 owned directly XXXXXXXXXX B Co Common Shares (approximately XXXXXXXXXX%) and A Co owned directly XXXXXXXXXX B Co Common Shares (approximately XXXXXXXXXX%) of B Co.

Prior to the amalgamation of H Co and I Co to form B Co, H Co’s business activities were substantially related to the Keep Business while I Co’ s business activities were substantially related to the Spin Business. At the time, management had determined that combining the activities of H Co and I Co was best practice and would result in operational efficiencies. The amalgamation referred to above was not entered into in contemplation of and before the distribution described in Paragraph 38.

9.    [Reserved]

10.   B Co carried on business activities in Canada that included the Canadian Keep Business and the Canadian Spin Business.

In the taxation year ended on XXXXXXXXXX, B Co’s net sales totalled $XXXXXXXXXX with XXXXXXXXXX% of net sales attributable to the Canadian Spin Business and XXXXXXXXXX% of its net sales attributable to the Canadian Keep Business. The FMV of the Canadian Spin Business immediately prior to the Proposed Transactions will equal approximately XXXXXXXXXX% to XXXXXXXXXX% of the FMV of the Spin Business.

Country 1 Business Group

11.   B Co directly owned all of the issued and outstanding shares of the capital stock of C Co. C Co is a holding company that does not reside in Canada and does not directly carry on any business activities. C Co owns all of the issued and outstanding shares of the following companies, none of which reside in Canada:

(a)   D Co, which carries on business activities in Country 1 in the Keep Business and the Spin Business.

(b)   E Co, which carries on business activities in Country 1 in the Keep Business.

(c)   F Co, which is an inactive company.

In the taxation year ended on XXXXXXXXXX, the Country 1 Group’s net sales totalled XXXXXXXXXX with only XXXXXXXXXX% of its net sales being attributable to activities related to the Spin Business. The FMV of the Spin Business carried on by the Country 1 Group (primarily through D Co) is expected to represent less than XXXXXXXXXX% of the FMV of the Spin Business.

12.   H Co acquired the shares of C Co on XXXXXXXXXX for a cash consideration of approximately XXXXXXXXXX from companies that were indirectly wholly-owned subsidiaries of Foreign Sub 3.  C Co, together with its three subsidiary companies (D Co, E Co and F Co), became a controlled foreign affiliate of H Co on that date. The FMV of the C Co shares is currently estimated to be approximately $XXXXXXXXXX. 

At the time H Co acquired the shares of the capital stock of C Co, management had no knowledge or expectation of the Spin-Off announced on XXXXXXXXXX. The acquisition of the Country 1 Group was not entered into in contemplation of and before the distribution described in Paragraph 38.

13.   In the latter part of XXXXXXXXXX, management began a review of the legal entity structure with a view towards streamlining the world-wide corporate structure, in part, by reducing the number of legal entities, eliminating multiple same-jurisdiction fiscal unity groups, and optimizing the corporate capital structure. As a result of such review, management determined that the current ownership of the Country 1 Group by H Co was not efficient in terms of Country 1 withholding taxes on cash repatriations. Continuing into XXXXXXXXXX, management evaluated various options associated with the contemplated transfer of the Country 1 Group within the Foreign PubCo Group. The finalization and implementation of reorganizing the Country 1 Group was further delayed in XXXXXXXXXX as a result of a significant acquisition made by Foreign Sub 3 of a group of companies which had a significant European presence, including Country 1. The subsequent reorganization related to this acquisition was completed in the XXXXXXXXXX. This acquisition and subsequent reorganization was not entered into in contemplation of and before the distribution described in Paragraph 38.

In addition, on XXXXXXXXXX, and on XXXXXXXXXX, the Canadian government introduced proposals dealing with the Canadian foreign affiliate regime. In particular, the “up-stream loan” and the “foreign affiliate dumping” proposals made the continued ownership of the Country 1 Group by B Co untenable and more specifically, made it impossible to combine the Country 1 operations of the Foreign PubCo Group under Canada.

As a result of both the corporate structure review and the foreign affiliate proposals, management had determined that the transfer of the Country 1 Group by B Co was now a priority. Following completion of a legal and commercial review, XXXXXXXXXX B Co transferred the C Co Common Shares to its shareholders in part by having the shareholders assume amounts owing by B Co to a B Co Pool Participant, and in part as a dividend-in-kind. The dividend-in-kind is expected to result in Canadian dividend withholding taxes of approximately $XXXXXXXXXX.

The transfer of the Country 1 Group by B Co was not entered into in contemplation of and before the distribution described in Paragraph 38. The transfer of the Country 1 Group would have taken place regardless of whether the Proposed Transactions were undertaken. The Proposed Transactions would have been undertaken regardless of whether the transfer of the Country 1 Group occurred.

B Co Cash Pool Arrangement

14.   XXXXXXXXXX

15.   XXXXXXXXXX

16.   XXXXXXXXXX

17.   XXXXXXXXXX

PRE-PROPOSED TRANSACTIONS

Formation of DC and DC Sub

18.   DC Sub is and will be, at any relevant time for all purposes of the Act, a taxable Canadian corporation and a private corporation. The authorized share capital of DC Sub consists of an unlimited number of DC Sub Common Shares. XXXXXXXXXX DC Sub Common Share was issued to B Co for $XXXXXXXXXX on incorporation.

19.   On XXXXXXXXXX, the DC Predecessors amalgamated under the provisions of the XXXXXXXXXX to form DC, in such a manner that:

(a)   all of the property (except any amounts receivable from any DC Predecessor or shares of the capital stock of any DC Predecessor) of the DC Predecessors held immediately before the amalgamation became property of DC by virtue of the amalgamation;

(b)   all of the liabilities (except any amount payable to any DC Predecessor) of the DC Predecessors immediately before the amalgamation became liabilities of DC by virtue of the amalgamation;

(c)   Foreign Sub 4 received DC Common Shares in exchange for its B Co Common Shares;

(d)   Foreign Sub 5 received DC Common Shares in exchange for its A Co Common Shares; and

(e)   all of the A Co Common Shares and B Co Common Shares were cancelled by virtue of the amalgamation.

The terms and conditions of the DC Common Shares are the same as those of the former B Co Common Shares.

The amount added to the stated capital account of the DC Common Shares was equal to an amount equal to the aggregate of: (a) the PUC of the A Co Common Shares, immediately prior to the amalgamation; and (b) the PUC of the B Co Common Shares, (excluding the PUC of the B Co Common Shares held by A Co), immediately prior to the amalgamation.

20.   On XXXXXXXXXX, DC transferred all of its assets and property relating to the Canadian Spin Business to DC Sub. As partial consideration for the transfer of such assets and property, DC Sub assumed liabilities related to the Canadian Spin Business in an amount not exceeding the agreed amount in the election described below and as to the balance DC Sub issued to DC XXXXXXXXXX DC Sub Common Shares having a FMV equal to the FMV of such transferred assets and property.

DC will jointly elect with DC Sub, in prescribed form and within the time limits referred to in subsection 85(6), to have the rules in subsection 85(1) apply to each transfer of eligible property to DC Sub and in respect of which the DC Sub Common Shares have been issued as full or partial consideration for the transfer of the Canadian Spin Business as described above. The agreed amount in each election will be as follows:

(a)   in the case of capital property (other than depreciable property of a prescribed class) and inventory, an amount not less than 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 not less than the least of the amounts described in subparagraphs 85(1)(e)(i), (ii) and (iii); and

(c)   in the case of eligible capital property, an amount not less than the least of the amounts described in subparagraphs 85(1)(d)(i), (ii) and (iii).

In addition, in each case, the agreed amount will not exceed the FMV of the property transferred, nor will it be less than the amount permitted under paragraph 85(1)(b). The amount of any liabilities assumed by DC Sub which are allocated to a particular property that is the subject of an election under subsection 85(1) as described herein will not exceed the agreed amount for that particular property.

The amount that will be added under the XXXXXXXXXX to the stated capital of the DC Sub Common Shares issued by DC Sub as described above will not exceed the amount by which the aggregate of the cost amounts of the property transferred by DC to DC Sub (determined pursuant to subsection 85(1), where applicable) exceed the amount of the liabilities assumed by DC Sub.

DC will also jointly elect with DC Sub, in prescribed form and within the time limits referred to in section 22, to have the rules in section 22 apply to the transfer by DC of its accounts receivable to DC Sub included in the property transferred.

Formation of Entities for Proposed Transactions

21.   Foreign Sub 3 incorporated Foreign SpinCo. Foreign SpinCo is authorized to issue Foreign SpinCo Common Shares, each of which is a fully participating common share with the holder being entitled to one vote at each meeting of the shareholders of Foreign SpinCo. On incorporation, XXXXXXXXXX Foreign Spinco Common Shares were issued to Foreign Sub 3 for US$XXXXXXXXXX per share.

22.   Foreign SpinCo formed Foreign SpinCo Sub. Foreign SpinCo Sub is authorized to issue the Foreign SpinCo Sub Common Shares, each of which is a fully participating membership interest. Foreign Spinco and New Foreign Sub 2 are the sole members and participate in the membership capital of Foreign SpinCo Sub for respectively XXXXXXXXXX% and XXXXXXXXXX%.  Each member of Foreign Spinco Sub is entitled to one (1) vote.

23.   Foreign SpinCo Sub incorporated TC as a ULC. TC will be a taxable Canadian corporation and a private corporation. The authorized capital of TC consists of the following:

(a)   an unlimited number of common shares (the “TC Common Shares”), each of which is a fully participating voting common share with the holder being entitled to one vote at each meeting of the shareholders of TC. One (1) TC Common Share was issued to Foreign SpinCo Sub for $XXXXXXXXXX on incorporation; and

(b)   an unlimited number of non-voting preferred shares (the “TC Preferred Shares”) having the following attributes:

(i)   each TC Preferred Share will be redeemable, subject to applicable law, at any time, at the option of TC at a redemption amount (the “TC Redemption Amount”) equal to the amount by which the aggregate FMV of the Distribution Property at the time of its transfer to TC, as described in Paragraph 38, exceeds the FMV of the non-share consideration to be provided by TC in exchange for the Distribution Property, divided by the number of TC Preferred Shares issued as consideration for such transfer, plus the amount of all declared and unpaid dividends thereon;

(ii)  each TC Preferred Share will be retractable, subject to applicable law, at any time at the option of the holder thereof for an amount equal to the TC Redemption Amount;

(iii) the holder of each TC Preferred Share will be entitled to a non-cumulative cash dividend as and when declared by the directors of TC from time to time, which dividend need not also be declared on any other class of shares of TC;

(iv)  there will be a provision restricting the payment of dividends on other classes of shares so that no such dividends may be paid on any other class of shares of TC if the resulting realizable value of the net assets of TC after payment of the dividends would be less than the aggregate TC Redemption Amount of all of the TC Preferred Shares then outstanding;

(v)   the holder of each TC Preferred Share is entitled, upon the liquidation, dissolution or winding-up of TC, to a payment in priority to all other classes of shares of TC of an amount equal to the TC Redemption Amount thereon to the extent of the amount of value of property available under applicable law for the payment to the shareholders of TC upon liquidation, dissolution or winding-up, but will be entitled to no more than the amount of that payment; and

(vi)  the holder of each TC Preferred Share will not be entitled to vote at any meeting of the shareholders of TC, other than as provided under the statute by which TC will be governed.

Activities of the entities described in Paragraphs 21 through 23 prior to the Proposed Transactions will be limited to initial set-up activities such as incorporation, appointment of directors and officers, opening up bank accounts, opening up accounts with various tax authorities and initiating discussions with interested parties where contracts may need to be assigned. For greater certainty, activities would not include any of the Proposed Transactions described in the Paragraphs that follow.

OVERVIEW OF PROPOSED TRANSACTIONS

24.   On XXXXXXXXXX, Foreign PubCo announced plans to separate the existing company into two independent, publicly-traded companies (the “Spin-Off”) as follows:

(a)   the Spin Business will be transferred to Foreign SpinCo;

(b)   Foreign PubCo (indirectly through Foreign Sub 3) will retain the Keep Business;

(c)   Foreign PubCo will (indirectly) contribute the shares of Foreign SpinCo to New Foreign PubCo; and

(d)   Foreign PubCo will distribute all of its shares in New Foreign PubCo to its shareholders as a dividend-in-kind, immediately after which, Foreign PubCo shareholders will own XXXXXXXXXX% of the equity in each of the two publicly-traded corporations.

25.   Completion of the Spin-Off is subject to a number of conditions, including final approval by the Foreign PubCo Board of Directors, receipt of regulatory approvals, assurance as to the tax-free status of the Spin-Off to XXXXXXXXXX shareholders of Foreign PubCo, the filing and effectiveness of registration statements with the XXXXXXXXXX, and approval by Foreign PubCo shareholders.

PROPOSED TRANSACTIONS

The Proposed Transactions will occur in the order presented unless otherwise indicated, with the exception of filing the applicable election forms, which will be filed within the applicable due dates following the completion of the Proposed Transactions.

Reorganization of the Ownership of DC

26.   Foreign Sub 4 will distribute all of its interest in all of the DC Common Shares it owns to Foreign Sub 4’s sole shareholder, Foreign Sub 3.

27.   Foreign Sub 3 will transfer all of its interest in all of the DC Common Shares it acquires in Paragraph 26 to Foreign Sub 5 in exchange for an additional membership interest in Foreign Sub 5. 

28.   The DC Common Shares will not constitute taxable Canadian property. Therefore, in respect of the dispositions described in Paragraphs 26 and 27, Foreign Sub 4 and Foreign Sub 3, where applicable, will i) not apply for a clearance certificate under section 116, and ii) not file a Canadian corporate income tax return to report the disposition of those shares.

Separation of the Spin Business from the Keep Business

29.   The separation of the Foreign Spin Business will involve the following steps:

(a)   The assets and property relating to the Foreign Spin Business (and shares of entities engaged in the Foreign Spin Business) will be transferred to Foreign SpinCo; and

(b)   Foreign Sub 3 will contribute all of its interest in the Foreign SpinCo Common Shares to Foreign Sub 5.

Canadian Butterfly Transaction (facilitating the separation of the Canadian Spin Business from the Canadian Keep Business)

30.   Pursuant to the XXXXXXXXXX, DC will reorganize its capital (the “Capital Reorganization”) by amending its articles of incorporation to create a new class of common shares (the “DC New Common Shares”) and a new class of special shares (the “DC Special Shares”) (collectively referred to as the “DC Shares”) and will change the issued and outstanding DC Common Shares into an equivalent number of DC New Common Shares and XXXXXXXXXX DC Special Shares. The DC shares will have the rights and conditions as described below:

(a)   each of the DC New Common Shares will be a fully participating voting common share with the holder thereof entitled to XXXXXXXXXX votes per share at each meeting of the shareholders of DC; and

(b)   the DC Special Shares will have the following attributes:

(i)   each DC Special Share will be redeemable, subject to applicable law, at any time at the option of DC at an amount equal to the amount (such amount being the “DC Redemption Amount”) obtained by multiplying the aggregate FMV of the outstanding DC Common Shares immediately prior to the Capital Reorganization by the Butterfly Percentage and then dividing such product by the number of DC Special Shares issued on the Capital Reorganization, plus the amount of all declared and unpaid dividends thereon;

(ii)  each DC Special Share will be retractable, subject to applicable law, at any time at the option of the holder thereof for an amount equal to the DC Redemption Amount;

(iii) the holder of each DC Special Share will be entitled to a non-cumulative cash dividend as and when declared by the directors of DC from time to time, which dividend need not also be declared on any other class of shares of DC;

(iv)  there will be a provision restricting the payment of dividends on other classes of shares so that no such dividends may be paid on any other class of shares of DC if the resulting realizable value of the net assets of DC after payment of the dividends would be less than the aggregate DC Redemption Amount of all of the DC Special Shares then outstanding;

(v)   the holder of each DC Special Share will be entitled, upon the liquidation, dissolution or winding-up of DC, to a payment in priority to all other classes of shares of DC of an amount equal to the DC Redemption Amount thereon to the extent of the amount of value of property available under applicable law for the payments to the shareholders of DC upon liquidation, dissolution or winding-up, but will be entitled to no more than the amount of that payment; and

(vi)  the holder of each DC Special Share will not be entitled to vote at any meeting of the shareholders of DC, other than as provided under the statute by which DC is governed.

The aggregate FMV of the DC Shares immediately following the Capital Reorganization will be equal to the aggregate FMV of the DC Common Shares immediately before the Capital Reorganization.

Foreign Sub 5 will hold the DC Common Shares and DC Special Shares as capital property. No election under subsection 85(1) will be filed in respect of the Capital Reorganization.

The aggregate addition to the stated capital in respect of the DC Shares issued by DC on the Capital Reorganization will not exceed the aggregate PUC of the DC Common Shares at the time of the Capital Reorganization. Such aggregate stated capital will be apportioned between the DC New Common Shares and the DC Special Shares in proportion to the relative aggregate FMV of such shares.

31.   Foreign Sub 5 will transfer all of its interest in the DC Special Shares to TC.  As part of this transfer, Foreign Sub 5, Foreign SpinCo, Foreign SpinCo Sub, and TC will enter into a four-party transfer agreement (the “Four-Party Share Exchange”) (which will be effective after the transfer of the Foreign Spin Business to Foreign SpinCo as described in Paragraph 29(a)) whereby:

(a)   TC will agree to pay the purchase price for the DC Special Shares transferred to it by Foreign Sub 5 by issuing TC Common Shares to Foreign SpinCo Sub having an aggregate FMV at that time equal to the aggregate FMV of the DC Special Shares so transferred by Foreign Sub 5 to it. TC and Foreign SpinCo Sub both will agree that the TC Common Shares will be issued to Foreign SpinCo Sub in respect of and by virtue of the disposition by Foreign Sub 5 of the DC Special Shares to TC;

(b)   Foreign Sub 5 will agree to pay the purchase price for the Foreign SpinCo Common Shares issued to it by Foreign SpinCo as described in Paragraph 31(c) by transferring all of the DC Special Shares to TC;

(c)   Foreign SpinCo will agree to pay the purchase price for the Foreign SpinCo Sub Common Shares issued to it by Foreign SpinCo Sub as described in Paragraph 31(d) by issuing Foreign SpinCo Common Shares to Foreign Sub 5 having an aggregate FMV at that time equal to the aggregate FMV of the DC Special Shares transferred by Foreign Sub 5 to TC; and

(d)   Foreign SpinCo Sub will agree to pay the purchase price for the TC Common Shares issued to it by TC as described in Paragraph 31(a) by issuing Foreign SpinCo Sub Common Shares to Foreign SpinCo having an aggregate FMV at that time equal to the aggregate FMV of the DC Special Shares transferred by Foreign Sub 5 to TC.

By virtue of the disposition described above, and subject to the application of paragraph 212.1(1)(b), the stated capital of the TC Common Shares will be increased by an amount equal to the aggregate FMV of such DC Special Shares transferred by Foreign Sub 5 to TC.

Following these transactions, Foreign SpinCo will own all of the issued and outstanding shares of Foreign SpinCo Sub, which in turn will own all of the issued and outstanding shares of TC. No other person will acquire shares of TC (except for the TC Preferred Shares which are issued by TC to DC as described in Paragraph 38 and redeemed as described in Paragraph 39(a)) as part of a series of transactions that includes the transfer of the Canadian Spin Business to TC described in Paragraph 38.  No person will acquire shares of Foreign Spinco Sub or Foreign Spinco except as described in this letter. 

32.   The DC Common Shares and DC Special Shares will not constitute taxable Canadian property.  Therefore, in respect of the dispositions described in Paragraph 30 and Paragraph 31, respectively, Foreign Sub 5 will i) not apply for a clearance certificate under section 116, and ii) not file a Canadian corporate income tax return to report the disposition of those shares.

33.   [Reserved]

34.   Immediately before the transfer of property from DC to TC described in Paragraph 38, the property of DC will be determined on a consolidated look-through basis by including the appropriate pro rata share of the assets of any corporation over which DC has the ability to exercise significant influence, which assets will be classified into the following three types of property for the purposes of the definition of “distribution” in subsection 55(1):

(a)   cash or near-cash property, comprising all of the current assets of DC and of any corporation over which DC has the ability to exercise significant influence, including cash, marketable securities, accounts receivable, trade receivables, inventory and prepaid expenses;

(b)   business property, comprising all of the assets of DC and of any corporation over which DC has the ability to exercise significant influence, other than cash or near-cash property, any income from which would, for purposes of the Act, be income from an active business (other than a specified investment business) including goodwill; and

(c)   investment property, comprising all of the assets of DC and of any corporation over which DC has the ability to exercise significant influence, other than cash or near-cash property, any income from which would, for purposes of the Act, be income from property or from a specified investment business.

For greater certainty, for purposes of this distribution:

(d)   any tax accounts such as the balance of any non-capital losses or the balance of any RDTOH or CDA, if any, will not be considered property;

(e)   advances to related persons (other than as described in (g) below) will be considered cash or near-cash property;

(f)   DC will be considered to have significant influence over a corporation if it has significant influence over that corporation or over any other corporation that has significant influence over that corporation, or if DC in combination with any corporations over which it has significant influence have significant influence over that corporation; and

(g)   for the purposes of determining the FMV of each type of property of DC, the FMV of the shares of the capital stock of any corporation over which DC has the ability to exercise significant influence, and of any indebtedness receivable by DC from a corporation over which it has significant influence, will be allocated among the three types of property described above, by multiplying the FMV of the shares of the particular corporation or amount receivable from the particular corporation, as the case may be, by the proportion that the net FMV of each type of property owned by the particular corporation (as determined in accordance with the methodologies described herein) is of the aggregate net FMV of all the property owned by such corporation (as determined in accordance with the methodologies described herein).

35.   To the best of DC’s knowledge and the knowledge of any corporations over which DC has significant influence, they have no property (other than cash and near-cash property) the income from which would be considered income from property, nor does any of them carry on any specified investment business. Accordingly, DC is not expected to have any investment property for the purposes of this distribution.

36.   In determining, on a consolidated look-through basis, the net FMV of each of the three types of property of DC immediately before the transfer of property by DC to TC described in Paragraph 38, the liabilities of DC and any corporation over which DC exercises significant influence will be allocated to, and will be deducted in the calculation of the net FMV of, each type of property of DC or such corporation, as the case may be, in the following manner:

(a)   in determining the net FMV of each type of property of a corporation over which DC exercises significant influence immediately before the transfer of property by DC to TC described in Paragraph 38, the liabilities of such corporation (other than any amount owing by such corporation to DC or to another corporation over which DC has the ability to exercise significant influence) will be allocated to, and deducted in the calculation of, the net FMV of each type of property of that particular corporation as follows:

(i)   current liabilities of such corporation will be allocated to each cash or near-cash property of the corporation in the proportion that the FMV of each such property is of the FMV of all cash or near-cash property owned by such corporation. To the extent that the total amount of current liabilities to be allocated to the cash or near-cash property exceeds the total FMV of all the cash or near-cash property, such corporation will be considered to have a negative amount of cash or near-cash property;

(ii)  following the allocation of current liabilities to cash or near-cash property as described in Paragraph 36(a)(i), provided that the net FMV of the cash or near-cash property of such corporation is positive, any remaining net FMV of any accounts receivable, trade receivables, inventories and prepaid expenses of such corporation will be reclassified as business property of such corporation and excluded from the net FMV of the cash or near-cash property, to the extent that such property will be collected, sold, used or consumed in the ordinary course of the business to which such business relates;

(iii) liabilities, other than current liabilities, of such corporation that relate to a particular property will be allocated to that particular property (and effectively to the type of property to which the particular property belongs) to the extent of its FMV. Any excess of such liabilities over the FMV of a particular property and liabilities that pertain to a particular type of property, but not to a particular property, will then be allocated to that particular type of property. To the extent that the total amount of liabilities that are to be allocated to a particular type of property as described herein exceeds the total FMV of that type of property, such corporation will be considered to have a negative amount of that type of property; and

(iv)  if any liabilities remain after the allocations described above are made, such excess unallocated liabilities will then be allocated to the cash or near-cash property, investment property and business property of such corporation, based on the relative net FMV of each type of property prior to the allocation of such excess unallocated liabilities. However, where a corporation is considered to have a negative amount of a type of property because of Paragraph 36(a)(i) or (iii), for the purposes of allocating those remaining liabilities, the net FMV of that type of property will be deemed to be nil resulting in none of those remaining liabilities being allocated to any type of property of that corporation.

(b)   in determining, on a consolidated look-through basis, the net FMV of each type of property of DC immediately before the transfer of property by DC to TC described in Paragraph 38, DC will include the appropriate pro rata share of the net FMV of each type of property of any corporation over which DC exercises significant influence, and, for greater certainty, the appropriate negative amount of such type of property of any such entity, as determined in accordance with (a) above, and any liabilities of DC will be allocated to, and be deducted in the calculation of, the net FMV of each type of property of DC in the following manner:

(i)   current liabilities of DC will be allocated to the cash or near-cash property of DC in the proportion that the FMV of each such property is of the FMV of all cash or near-cash property of DC. The allocation of current liabilities as described herein will not exceed the FMV of all the cash or near-cash property of DC;

(ii)  following the allocation of current liabilities to each cash or near-cash property in Paragraph 36(b)(i), any remaining net FMV of any accounts receivable, trade receivables, inventories and prepaid expenses of DC will be reclassified as business property and excluded from the cash or near-cash property, to the extent that such property will be collected, sold or used in the ordinary course of the business to which such property relates;

(iii) liabilities of DC, other than current liabilities, that relate to a particular property will be allocated to the particular property (and effectively to the type of property to which the particular property belongs) to the extent of its FMV. The liabilities that pertain to a type of property but not to a particular property will 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

(iv)  if any liabilities remain after the allocations described in Paragraphs 36(b)(i) and (iii) are made, such excess unallocated liabilities will then be allocated to the cash or near-cash property, investment property and business property of DC, on the basis of the relative net FMV of each type of property prior to the allocation of such excess, but after the allocation of the liabilities described in Paragraphs 36(b)(i) and (iii).

(c)   For greater certainty, for purposes of this distribution:

(i)   the amount of any deferred income tax will not be considered a liability for the purposes of the Proposed Transactions described herein because such amount does not represent a legal obligation;

(ii)  income and other taxes due and payable within a year will be classified as current liabilities;

(iii) current liabilities will include amounts normally classified as current liabilities, including accounts payable, bonuses payable, and the current portion of any long term debt;

(iv)  XXXXXXXXXX

(v)   no amount will be considered to be a liability unless it represents a true legal liability which is capable of quantification; and

(vi)  any contingent obligation of DC will not be considered a liability.

37.   Based on the methodologies described above, it is anticipated that DC will only have net business property at the time of the transfer of property described in Paragraph 38.

38.   DC will transfer the Distribution Property to TC.  Immediately after the transfer by DC of the Distribution Property to TC, the net FMV of each type of property transferred to TC will approximate that proportion of the net FMV of all property of DC of that type (after allocating and deducting liabilities, in the manner described in Paragraph 36), determined immediately before the transfer by DC of the DC Sub Common Shares to TC, that:

(a)   the aggregate FMV, immediately before the transfer, of all of the DC Special Shares owned by TC

is of

(b)   the aggregate FMV, immediately before the transfer, of all the issued and outstanding DC Shares.

The expression “approximate that proportion” described above means that the discrepancy from that proportion, if any, would not exceed 1%, determined as a percentage of the net FMV of each type of property which TC has received (or DC has retained) as compared to what TC would have received (or DC would have retained) had it received (or retained) its appropriate pro rata share of the net FMV of that type of property.

In the event that DC has cash and near-cash property at the time of the transfer, the transfer of any cash and near-cash property by DC to TC in this step will occur no later than XXXXXXXXXX days after the date of the transfer of all other property by DC to TC as described in this step, but will nonetheless be considered to have been Distribution Property transferred to TC as part of the transfer of property as described in this step for purposes of section 55.

As consideration for the Distribution Property, TC will:

(a)   if applicable, assume a portion of certain liabilities of DC; and

(b)   issue TC Preferred Shares to DC having an aggregate FMV at that time equal to the amount by which the aggregate FMV of the Distribution Property transferred to TC exceeds the amount of the liabilities assumed by TC as described in (a) above.

TC will jointly elect with DC, in prescribed form and within the time limits referred to in subsection 85(6), to have the rules in subsection 85(1) apply to each transfer of eligible property to TC and in respect of which the TC Preferred Shares have been issued as full or partial consideration for the transfer of the Distribution Property. The agreed amount in each election will be as follows:

(a)   in the case of capital property (other than depreciable property of a prescribed class) and inventory, an amount not less than 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 not less than the least of the amounts described in subparagraphs 85(1)(e)(i), (ii) and (iii); and

(c)   in the case of eligible capital property, an amount not less than the least of the amounts described in subparagraphs 85(1)(d)(i), (ii) and (iii).

In addition, in each case, the agreed amount will not exceed the FMV of the property transferred, nor will it be less than the amount permitted under paragraph 85(1)(b). The amount of any liabilities assumed by TC which are allocated to a particular property that is the subject of an election under subsection 85(1) as described herein will not exceed the agreed amount for that particular property.

The amount that will be added under the XXXXXXXXXX to the stated capital of the TC Preferred Shares issued by TC will not exceed the amount by which the aggregate of the cost amounts of the property transferred by DC to TC (determined pursuant to subsection 85(1), where applicable) exceeds the amount of the liabilities assumed by TC as described above.

39.   Immediately following the transfer of the Distribution Property described in Paragraph 38, the following transactions will occur in the following order:

(a)   TC will redeem all the TC Preferred Shares owned by DC for an amount equal to their aggregate TC Redemption Amount. In satisfaction of the TC Redemption Amount for such shares, TC will issue a promissory note, payable to DC on demand without interest or fixed terms of repayment, having a principal amount and FMV equal to the aggregate TC Redemption Amount of the TC Preferred Shares so redeemed (the “TC Redemption Note”). DC will accept the TC Redemption Note in full payment of the redemption price of the TC Preferred Shares; and

(b)   DC will redeem all the DC Special Shares owned by TC for an amount equal to their aggregate DC Redemption Amount. In satisfaction of the DC Redemption Amount for such shares, DC will issue a promissory note, payable to TC on demand without interest or fixed terms of repayment, having a principal amount and FMV equal to the aggregate DC Redemption Amount of the DC Special Shares so redeemed (the “DC Redemption Note”). TC will accept the DC Redemption Note in full payment of the redemption price of the DC Special Shares.

40.   Immediately following the transactions described in Paragraph 39, the principal amount owing by TC under the TC Redemption Note and the principal amount owing by DC under the DC Redemption Note will be set off in full against each other and each such note will be marked paid in full and cancelled.

Spin-Off

41.   Following the transactions described above, Foreign Sub 5 will distribute all of its interest in Foreign SpinCo to Foreign Sub 3.

42.   Foreign Sub 3 will distribute all of its interest in Foreign SpinCo to Foreign Sub 2.

43.   Foreign Sub 2 will contribute all of its interest in Foreign SpinCo to New Foreign Sub 2.

44.   Foreign Sub 2 will distribute all of its interest in New Foreign Sub 2 to Foreign Sub 1.

45.   Foreign Sub 1 will distribute all of its interest in New Foreign Sub 2 to Foreign PubCo.

46.   Foreign PubCo will transfer all of its interest in New Foreign Sub 2 to New Foreign PubCo.

47.   Foreign PubCo will distribute all of its interest in New Foreign PubCo to its shareholders as a dividend-in-kind.

ADDITIONAL INFORMATION

48.   No property has or will become property of A Co, B Co, DC or its related subsidiaries, and no liabilities have been or will be incurred by A Co, B Co, DC or its related subsidiaries, in contemplation of and before the Proposed Transactions, otherwise than as described herein.

49.   None of the shares of the capital stock of DC or TC has been or will be, at any time prior to the completion of the Proposed Transactions:

(a)   the subject of any undertaking that is referred to in subsection 112(2.2) as a “guarantee agreement”;

(b)   a share that is issued or acquired as part of a transaction, event or series of transactions or events of the type described in subsection 112(2.5); or

(c)   the subject of a dividend rental agreement.

Each of DC (and its subsidiaries) and TC will be a specified financial institution. None of these corporations is a “financial intermediary corporation” or a “restricted financial institution”.

50.   Each of DC and TC will have the financial capacity to honour, upon presentation for payment, the amount payable under the promissory note issued or assumed by it as part of the Proposed Transactions.

51.   The aggregate PUC of the DC Common Shares at the time of the Capital Reorganization is approximately $XXXXXXXXXX and is comprised only of funds provided by the shareholders of DC to commence, or otherwise further, the carrying on of the business of DC.

52.   At no time, during the course of the series of transactions or events that includes the dividends described in Ruling C, will:

(a)   10% or more of the FMV of the Foreign SpinCo Common Shares be derived from the DC Special Shares owned by TC, or the TC Common Shares issued to Foreign SpinCo Sub;

(b)   10% or more of the FMV of the Foreign SpinCo Common Shares be derived from the Foreign SpinCo Sub Common Shares; or

(c)   10% or more of the FMV of the New Foreign Pubco or New Foreign Sub 2 shares be derived from any combination of the shares or property of C Co, D Co, E Co, F Co, and property described in subclauses 55(3.1)(b)(i)(A)(I) or (II).

53.   Immediately following completion of the Proposed Transactions, the net fair market value of each type of property retained by DC, determined in the manner described in Paragraph 36, will approximate the proportion of the net FMV of all property of DC of that type (after allocating and deducting liabilities, in the manner described in Paragraph 36), determined immediately before the transfer described in Paragraph 38, that:

(a) the aggregate FMV, immediately before the transfer described in Paragraph 38, of all the shares in the capital stock of DC owned by all shareholders of DC other than TC, is of

(b) the aggregate FMV, immediately before the transfer, of all of the issued and outstanding DC Shares.

54.   The Proposed Transactions will not result in DC or a related person described herein being unable to pay its existing tax liabilities.

PURPOSES OF THE PROPOSED TRANSACTIONS

55.   Foreign PubCo has made the strategic decision to separate its Keep Business from its Spin Business. Foreign PubCo has determined that each of these businesses have distinctly different business models, sales channels, customers, capital requirements and talent bases. Their respective innovation pipelines differ substantially in length, regulatory approval requirements, possible risks and potential returns. Creating two independent public companies is expected to: (i) align the business models of each of the XXXXXXXXXX segments with its own business, and (ii) provide greater flexibility for each of the business segments to pursue their businesses’ respective growth strategies based on their own particular business models.

56.   The amalgamation of A Co and B Co, and the formation of DC Sub occurred XXXXXXXXXX in order to facilitate the legal and commercial considerations related to the amalgamation and formation of DC Sub, and to accelerate the operational efficiencies of separating the Canadian Spin Business from the Canadian Keep Business.

57.   XXXXXXXXXX

RULINGS REQUESTED

Provided that the preceding statements constitute complete and accurate disclosure of all of the relevant facts, proposed transactions and the purposes of the Proposed Transactions, and provided that the Proposed Transactions are completed in the manner described above:

A.    As a result of the transfer of the DC Special Shares described in Paragraph 31:

(a)   the provisions of paragraph 212.1(1)(a) will not apply to deem a dividend to be paid by TC or to be received by Foreign Sub 5 as a result of the Four-Party Share Exchange;

(b)   the provisions of paragraph 212.1(1)(b) will apply to reduce the PUC of the common shares of the capital stock of TC that TC issued to Foreign SpinCo Sub to an amount equal to the PUC, immediately before the transfer of the DC Special Shares that Foreign Sub 5 transferred to TC described in Paragraph 31; and

(c)   the aggregate cost to TC of the DC Special Shares that TC acquired from Foreign Sub 5 on the Four-Party Share Exchange described in Paragraph 31 will equal the aggregate FMV at that time of the DC Special Shares that TC acquired from Foreign Sub 5.

B.    The provisions of subsection 85(1) will apply to:

(a)   the transfer by DC of the property to DC Sub described in Paragraph 20; and

(b)   the transfer by DC of the property to TC described in Paragraph 38

such that the agreed amount in respect of each transfer of eligible property will be deemed to be the transferor’s proceeds of disposition and the transferee’s cost thereof by virtue of paragraph 85(1)(a). In respect of depreciable property, to the extent that the transferor’s capital cost exceeds the transferor’s proceeds of disposition of the property, the transferee’s capital cost of each such property will be determined in accordance with subsection 85(5).

For greater certainty, the provisions of paragraph 85(1)(e.2) will not apply to the transfers described in Paragraphs 20 and 38.

For the purposes of the transfer described in (a) above, the reference in subparagraph 85(1)(e)(i) to the “undepreciated capital cost to the taxpayer of all property of that class immediately before the disposition” shall be interpreted to mean that proportion of the undepreciated capital cost to DC of all property of that class immediately before the transfer that the FMV of the assets of that class transferred to DC Sub is of the FMV of all assets of that class.

C.    Subsection 84(3) will apply:

(a)   on the redemption, as described in Paragraph 39(a), of the TC Preferred Shares owned by DC, to deem TC to have paid, and DC to have received; and

(b)   on the redemption, as described in Paragraph 39(b), of the DC Special Shares owned by TC, to deem DC to have paid, and TC to have received

a dividend on such class of shares equal to the amount, if any, by which the aggregate amount paid upon redemption exceeds the aggregate PUC in respect of such shares, immediately before such redemption; and any such dividend:

(c)   will not be subject to tax under Part IV, except as provided in paragraph 186(1)(b); and

(d)   will not be subject to tax under Parts IV.1 or VI.1.

D.    The provisions of subsection 112(3) will apply to reduce any loss which would otherwise be determined for the particular holder as a result of the redemption of the TC Preferred Shares and the redemption of the DC Special Shares described in Ruling C.

E.    By virtue of the provisions of paragraph 55(3)(b), subsection 55(2) will not apply to the taxable dividends referred to in Ruling C, provided that:

(a)   Foreign Sub 3, Foreign Sub 2, Foreign Sub 1 and Foreign Pubco remain related throughout the course of any series of transactions or events that includes the dividends described in Ruling C;

(b)   10% or more of the FMV of the aggregate:

(i)   interest in Foreign Spinco that Foreign Sub 2 transfers to New Foreign Sub 2 as described in Paragraph 43;

(ii)  interest in New Foreign Sub 2 that Foreign PubCo transfers to New Foreign PubCo as described in Paragraph 46; and

(iii) interest in New Foreign PubCo that Foreign Pubco transfers to its shareholders as described in Paragraph 47;

was not, at any time, during the course of any series of transactions or events that includes the dividends described in Ruling C, derived from DC Special Shares, TC Common Shares or property of C Co, D Co, E Co, F Co; and

(c)   as part of a series of transactions or events that includes the dividends described in Ruling C, there is not:

(i)   an acquisition of property in circumstances described in paragraph 55(3.1)(a);

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

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

(iv)  an acquisition of shares in the capital stock of DC in the circumstances described in subparagraph 55(3.1)(b)(iii), which has not been described herein.

F.    The set-off and cancellation of the TC Redemption Note held by DC, and the set-off and cancellation of the DC Redemption Note held by TC, as described in Paragraph 40, will not give rise to a forgiven amount and neither TC nor DC will realize any gain or incur any loss therefrom.

G.    The provisions of subsections 15(1), 56(2), 69(4) and 246(1) will not apply to any of the transactions described in Paragraphs 31 and 38 to 40, in and of themselves.

H.    The provisions of subsection 245(2) will not be applied as a result of the Proposed Transactions, in and of themselves, to re-determine the tax consequences confirmed in the rulings given above.

Our rulings are given subject to the limitations set out in Information Circular 70-6R5 dated May 17, 2002, and are binding on the CRA provided the Proposed Transactions are completed within XXXXXXXXXX of the date of this letter.  Our rulings are based on the law as it currently reads and do not take into account any proposed amendments to the Act or Regulations.

Our Comments

Nothing in this letter should be construed as implying that CRA has reviewed any tax consequences relating to the facts or the Proposed Transactions other than those described in the rulings given above, or has agreed:

(a)   to the FMV or ACB of any asset, PUC of any share or the characterization of any share or other property as taxable Canadian property; or

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

Yours truly,

for Director
Reorganizations Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch

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