2014-0533601R3 Spin-off butterfly - subsection 55(2)

Principal Issues: Whether the proposed spin-off butterfly transactions described in the Ruling meet legislative and administrative requirements

Position: Transactions meet requirements.

Reasons: Consistent with law and administrative requirements.

Author: XXXXXXXXXX
Section: 55(2); 55(3.1)

XXXXXXXXXX                                      2014-053360

XXXXXXXXXX, 2014

Dear XXXXXXXXXX:

Re:   XXXXXXXXXX
Advance Income Tax Ruling Request

This is in reply to your letter of XXXXXXXXXX in which you requested an advance income tax ruling on behalf of the above-noted taxpayer.  We also acknowledge the additional information provided to us in subsequent letters and emails, and during our various telephone conversations.

To the best of your knowledge, and that of the taxpayer involved, none of the issues involved in this ruling request is

(i)   in an earlier return of the taxpayer or a related person;

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

(iii) under objection by the taxpayer or a related person;

(iv)  before the courts or, if a judgment has been issued, the time limit for appeal to a higher court has expired; or

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

I.    DEFINITIONS

Unless otherwise expressly stated, every reference herein to the “Act” or to a part, section or subsection, paragraph or subparagraph and clause or subclause is a reference to the relevant provision of the Income Tax Act (Canada), R.S.C.  1985 (5th Supp.) c.1, as amended from time to time and consolidated to the date of this letter and the Income Tax Regulations thereunder are referred to as the “Regulations.”

Unless otherwise noted, all references herein to a currency are a reference to Canadian dollars.

In this letter, the following terms have the meanings specified and, where the circumstances so require, the singular should be read as plural and vice versa:

“A Common Shares” means the initial class of common shares of DC referred to in Paragraph 2;

“A Preferred Shares” means the series A preferred shares of DC referred to in Paragraph 2;

“Aco” means XXXXXXXXXX, as described in Paragraph 6;

“Act 1” means the XXXXXXXXXX;

“Act 2” means the XXXXXXXXXX;

“Act 3” means the Canada Business Corporations Act, R.S.C. 1985, c. C-44 as amended;

“Act 4” means the XXXXXXXXXX;

“active business carried on by a corporation” has the meaning assigned by subsection 125(7); 

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

“agreed amount” in respect of a property means the amount that a transferor and transferee have agreed upon in a joint election under subsection 85(1) in respect of a transfer of an eligible property;

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

“Articles" means, in relation to a particular corporation, the constating documents of the corporation;

“B Common Shares” means the class B common shares of DC referred to in Paragraph 2;

“B Preferred Shares” means the series B preferred shares of DC referred to in Paragraph 2;

“Bco” means XXXXXXXXXX, as described in Paragraph 6;

“Butterfly Ratio” means the fraction A/B where:

A     is the aggregate net FMV of the business property of the Subco 1 Transferred Business 1 and the Subco 1 Transferred Business 2 owned by Subco 1; and

B     is the aggregate net FMV of all of the business property of DC,

in each case, determined (i) immediately before the Transfer of the Transferred Assets, and (ii) using the principles set out in Paragraphs 35 and 36;

“C Common Shares” means the class C common shares of DC referred to in Paragraph 2;

“CRA” means the Canada Revenue Agency;

“CCPC” means a “Canadian-controlled private corporation” as defined in subsection 125(7);

“CDA” means “capital dividend account”, as defined in section 89;

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

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

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

“disposition” has the meaning assigned by subsection 248(1);

“Dissenting Shareholder” means a DC Shareholder who validly dissents from the Plan of Arrangement in compliance with the Repurchase Dissent Right and who has not withdrawn the exercise of such Repurchase Dissent Right and who is ultimately paid fair value in respect of the DC Shares held by such DC Shareholder;

“DC” means XXXXXXXXXX, which is a company incorporated under Act 3.  DC files its federal corporate tax returns at the XXXXXXXXXX Tax Centre and its tax affairs are administered by the XXXXXXXXXX Tax Services Office;

“DC Butterfly Shares” means the new class of shares in the capital of DC described in Paragraph 23;

“DC Butterfly Share Redemption Amount” has the meaning set out in Paragraph 23;

“DC Common Shares” means the A Common Shares, B Common Shares and C Common Shares described in Paragraph 2;

“DC Group” means DC and its Subsidiaries including Subco 1, Subco 2, Subco 3, Foreignco 1, Foreignco 2 and Foreignco 3;   

“DC New Common Shares” means the Class D Common Shares, Class E Common Shares, Class F Common Shares, Class G Common Shares, and Class H Common Shares of DC described in Paragraph 23;

“DC Preferred Shares” means the A Preferred Shares and B Preferred Shares described in Paragraph 2;

“DC Redemption Note” means the promissory note to be issued by DC, as described in Paragraph 41; 

“DC Retained Business” means the production, processing and sale of XXXXXXXXXX business carried on by DC indirectly through its Subsidiaries including Subco 1, Subco 2, Subco 3, Foreignco 1, Foreignco 2 and Foreignco 3, as described in Paragraph 5;

“DC Share Exchange” has the meaning set out in Paragraph 24;

“DC Shares” means the DC Common Shares and the DC Preferred Shares described in Paragraph 2;

“DC Shareholder” means a holder of DC shares;

“DC Transferred Business 1” means DC’s XXXXXXXXXX business carried on indirectly through Subco 1, as described in Paragraph 5;

“DC Transferred Business 2” means DC’s XXXXXXXXXX business carried on indirectly through Subco 1, as described in Paragraph 2;

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

“dividend rental arrangement” ” has the meaning assigned by subsection 248(1);

“Effective Date” means the effective date of the Plan of Arrangement;

“Effective Time” means XXXXXXXXXX on the Effective Date, which is the time that the Proposed Transactions will be implemented;

“eligible dividend” has the meaning assigned by subsection 89(1);

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

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

“Foreignco 1” means XXXXXXXXXX, which is a company incorporated under Act 2 and a member of the DC Group;

“Foreignco 2” means XXXXXXXXXX, which is a company incorporated under Act 2 and a member of the DC Group; 

“Foreignco3” means XXXXXXXXXX, which is a company incorporated under Act 4 and a member of the DC Group;

“forgiven amount” has the meaning assigned by subsection 80(1) and subsection 80.01(1);

“guarantee agreement” has the meaning assigned by subsection 112(2.2);

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

“Invited Employees” has the meaning set out in Paragraph 11;

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

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

“Participant” means a DC Shareholder, other than a Dissenting Shareholder; 

“Plan of Arrangement” means a plan of arrangement under Act 3 in the form to be approved by the DC Shareholders to effect the spinoff divisive reorganization as described in the Proposed Transactions, as amended, modified or supplemented from time to time in accordance with the arrangement agreement entered into between DC and Spinco, the Plan of Arrangement or at the direction of the court;

“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 subsection 89(1);

“proceeds of disposition” has the meaning assigned by section 54;

“Proposed Transactions” means the proposed transactions which are described in Paragraphs 17 to 43 inclusively;

“XXXXXXXXXX Dividends” means ordinary course dividends paid by DC pursuant to its long-standing policy to declare and pay, subject to maintaining DC’s financial integrity, dividends XXXXXXXXXX over a fiscal year;

“RDTOH” means refundable dividend tax on hand, within the meaning of subsection 129(3);

“related persons” 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);

“Repurchase Dissent Right” means a right of a DC Shareholder to require DC to repurchase any particular class of its DC Shares as provided under Act 3, or as required by an order of the court in respect of the arrangement agreement entered into between DC and Spinco and the Plan of Arrangement, as described in Paragraph 19;

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

“Sale Note” has the meaning set out in Paragraph 31;

“series of transactions or events” includes the transactions or events 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, as more particularly described in Paragraph 35(iii);

“specified class” has the meaning assigned by subsection 55(1);

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

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

“specified shareholder” has the meaning assigned by subsection 248(1), as modified by subsections 55(3.2), (3.3) and (3.4);

“Spinco” means XXXXXXXXXX, that was incorporated under Act 3 on XXXXXXXXXX;

“Spinco Common Shares” means the common shares in the capital of Spinco described in Paragraph 13;

“Spinco Redemption Note” means the promissory note described in Paragraph 39;

“Spinco Redemption Shares” means the class of preferred shares in the capital of Spinco described in Paragraph 22;

“Spinco Redemption Share Amount” has the meaning set out in Paragraph 22;

“Spinco Share Exchange” has the meaning set out in Paragraph 27;

“stated capital” in respect of the share capital of a corporation has the meaning assigned by the statute by which the corporation is governed at the relevant time;

“Subco 1” means XXXXXXXXXX, which is a company incorporated under Act 1 and a member of the DC Group;

“Subco 1 Land 1” has the meaning set out in Paragraph 7;

“Subco 1 Land 2” has the meaning set out in Paragraph 7;

“Subco 1 Retained Business” means Subco 1’s XXXXXXXXXX business described in Paragraph 10;

“Subco 1 Services Business” has the meaning set out in Paragraph 10(a);

“Subco 1 Shares” means the shares of Subco 1, as described in Paragraph 6;

“Subco 1 Transferred Business 1” means Subco 1’s XXXXXXXXXX business described in Paragraph 7;

“Subco 1 Transferred Business 2” means Subco 1’s XXXXXXXXXX business described in 7;

“Subco 2” means XXXXXXXXXX, which is a company incorporated under Act 1 and a member of the DC Group;

“Subco 2 Lease” has the meaning set out in Paragraph 10(c);

“Subco 2 Property 1” has the meaning set out in Paragraph 10(b);

“Subco 3” means XXXXXXXXXX, which is a company incorporated under Act 1 and a member of the DC Group;

“Subsidiaries” means the subsidiaries of DC, which include Subco 1, Subco 2, Subco 3, Foreignco 1, Foreignco 2 and Foreignco 3;

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

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

“taxable preferred shares” has the meaning assigned by subsection 248(1);

“taxable RFI share” has the meaning assigned by subsection 248(1);

“taxation year” has the meaning assigned by subsection 249(1);

“term preferred shares” has the meaning assigned by subsection 248(1);

“Transfer” means the transfer by DC of the Transferred Assets to Spinco, as described in Paragraph 37;

“Transferred Assets” means all of the Subco 1 Shares held by DC to be transferred to Spinco, as described in Paragraph 37; and

“Units” has the meaning set out in Paragraph 11.

II.   FACTS

DC

1.    DC is a CCPC and a taxable Canadian corporation.  DC’s taxation year ends on XXXXXXXXXX.

DC was formed on XXXXXXXXXX through an the amalgamation of XXXXXXXXXX and XXXXXXXXXX. 

2.    The issued and outstanding share capital of DC consists of:

(a)   XXXXXXXXXX common shares (the “A Common Shares”);

(b)   XXXXXXXXXX B common shares (the “B Common Shares”);

(c)   XXXXXXXXXX C common shares (the “C Common Shares”);

(d)   XXXXXXXXXX A preferred shares (the “A Preferred Shares”); and

(e)   XXXXXXXXXX B preferred shares (the “B Preferred Shares”).

(The A Common Shares, B Common Shares and C Common Shares are collectively referred to as the “DC Common Shares,” the A Preferred Shares and B Preferred Shares are collectively referred to as the “DC Preferred Shares,” and the DC Common Shares and the DC Preferred Shares are collectively referred to as the “DC Shares”). 

The DC Shares have the following attributes:

The DC Common Shares

(i)   The DC Common Shares are entitled to one vote per share and are entitled to receive discretionary dividends on a pro rata basis.

(ii)  The DC Common Shares are entitled, on a pro rata basis, to the surplus of DC on liquidation or winding up of DC, subject to the entitlement of the DC Preferred Shares.

(iii) The B Common Shares and C Common Shares are convertible into A Common Shares (by DC or the holder) on a one-for-one basis.

The DC Preferred Shares

(I)   The A Preferred Shares and B Preferred Shares are non-voting; non-retractable; not entitled to dividends; redeemable at a redemption amount of $XXXXXXXXXX per share; and entitled only to their redemption amount on liquidation or winding up of DC.

(II)  The stated capital (and the PUC) of each A Preferred Share is $XXXXXXXXXX, and of each B Preferred Share is $XXXXXXXXXX.

The DC Preferred Shares are not shares of a specified class.

3.    Prior to XXXXXXXXXX, DC only had one class of common shares (namely, the A Common Shares). 

In XXXXXXXXXX, DC amended its authorized share capital to create class B common shares (namely, the B Common Shares).

In XXXXXXXXXX, pursuant to a restructuring, XXXXXXXXXX, inter alia,

(a)   DC amended its authorized share capital to create class C common shares (namely, the C Common Shares); 

(b)   DC issued:

(i)   a certain number of B Preferred Shares as a stock dividend to the DC Shareholders that were connected with DC at that time; and

(ii) a certain number of A Preferred Shares as a stock dividend to the remaining DC Shareholders that were not connected with DC at that time; and

(c)   DC added to its stated capital maintained for the A Preferred Shares and B Preferred Shares as follows: an amount of $XXXXXXXXXX for each A Preferred Share issued, and an amount of $XXXXXXXXXX for each B Preferred Share issued. 

4.    There are currently XXXXXXXXXX DC Shareholders.  Of these, XXXXXXXXXX are CCPCs.  The remaining shareholders are individuals (XXXXXXXXXX in total) and trusts (XXXXXXXXXX in total).  A small percentage of the DC Shareholders are XXXXXXXXXX.  The total equity percentage shareholding in DC held by the XXXXXXXXXX trusts is XXXXXXXXXX% of all of the issued and outstanding shares of DC.

The number of DC Common Shares (whether A Common Shares, B Common Shares, or C Common Shares) owned by a DC Shareholder is identical to the number of the DC Preferred Shares (whether A Preferred Shares or B Preferred Shares) owned by that DC Shareholder.  In addition, the DC Common Shares and the DC Preferred Shares must always be bought or sold as a unit.  That is, if a DC Shareholder wishes to sell shares of DC, the sale will consist of DC Common Shares and DC Preferred Shares in equal proportions. 

      No DC Shareholder or any group of DC Shareholders controls DC.

5.    DC’s principal business is the production, processing and sale of XXXXXXXXXX (“DC Retained Business”) through its subsidiaries (“Subsidiaries”) including: Subco 1, Subco 2, Subco 3, Foreignco 1, Foreignco 2 and Foreignco 3. 

DC also carries on a XXXXXXXXXX business (“DC Transferred Business 1”) and a XXXXXXXXXX business (“DC Transferred Business 2”), both indirectly through Subco 1 in XXXXXXXXXX. 

The DC Transferred Business 1 involves the XXXXXXXXXX. 

The DC Transferred Business 2 involves the XXXXXXXXXX on the Subco 1 Land 1.    

6.    DC owns all of the issued and outstanding shares of Subco 1 (“Subco 1 Shares”) and of Foreignco1.   

Subco 1, Subco 2 and Subco 3

Subco 1 is a TCC, which owns all of the issued and outstanding shares of Subco 2.

Subco 2 is a TCC, which owns XXXXXXXXXX% of all of the issued and outstanding shares of Subco 3. 

Subco 3 is a TCC.  The other XXXXXXXXXX% of the shares of Subco 3 are owned by XXXXXXXXXX (“Aco”), which is a company wholly-owned by XXXXXXXXXX (“Bco”).  Bco is not related to DC.

Foreignco 1, Foreignco 2, and Foreignco 3

Foreignco 1 is a holding company resident in the United States.  Foreignco 1 owns all of the issued and outstanding shares of Foreignco 2.

Foreignco 2 is a holding company resident in the United States.  Foreignco 2 owns all of the issued and outstanding shares of Foreignco 3.   

Foreignco 3 is an operating company resident in the United States.

Foreignco 1, Foreignco 2 and Foreignco 3 are all foreign affiliates of DC.

Suboc 1, Subco 2, Subco 3, Foreignco 1, Foreignco 2 and Foreignco 3 all carry on the DC Retained Business. 

7.    Subco 1 carries on a XXXXXXXXXX business (“Subco 1 Transferred Business 1”), as described in this Paragraph 7, and a XXXXXXXXXX business (“Subco 1 Transferred Business 2”), as described in Paragraph 9. 

Income earned from the operations of these two businesses constitutes income derived from an active business carried on by a corporation.

Subco 1 Transferred Business 1

Subco 1 carries on the Subco 1 Transferred Business 1 on XXXXXXXXXX land (“Subco 1 Land 1”) and XXXXXXXXXX land (“Subco 1 Land 2”).  

(a)   Subco 1 Land 1

XXXXXXXXXX

      (b)   Subco 1 Land 2

XXXXXXXXXX of the Subco 1 Land 2 are currently used:

XXXXXXXXXX

The remaining XXXXXXXXXX of the Subco 1 Land 2 were acquired solely for the Subco 1 Transferred Business 1. 

Currently these XXXXXXXXXX of land surround the existing XXXXXXXXXX operations as described above and act as XXXXXXXXXX for these existing operations.  XXXXXXXXXX. 

Of these XXXXXXXXXX, XXXXXXXXXX are presently leased to XXXXXXXXXX. 

All leasing revenue received has been reported by Subco 1 as active business income, representing income that is earned in connection with the Subco 1 Transferred Business 1.

8.    Subco 1 has also leased portions of the Subco 1 Land 1 and a portion of the Subco 1 Land 2 to third parties that operate XXXXXXXXXX businesses as follows.  

(a)   XXXXXXXXXX: 

This group of XXXXXXXXXX businesses XXXXXXXXXX. 

Subco 1 acquires the XXXXXXXXXX these XXXXXXXXXX businesses, and uses XXXXXXXXXX for Subco 1’s XXXXXXXXXX business operations.  XXXXXXXXXX.

(b)   XXXXXXXXXX: 

A XXXXXXXXXX business acquires XXXXXXXXXX. 

Subco 1 receives XXXXXXXXXX as part of Subco 1’s XXXXXXXXXX business operations, XXXXXXXXXX.  

(c)   XXXXXXXXXX: 

A business operates a XXXXXXXXXX business on an incidental portion of the same acreage that Subco 1 uses primarily as the XXXXXXXXXX.

All leasing revenue received by Subco 1 from the XXXXXXXXXX businesses has been reported by Subco 1 as active business income, such income being earned in connection with the Subco 1 Transferred Business 1.  

XXXXXXXXXX

9.    Subco 1 Transferred Business 2

Subco 1 has been planning to XXXXXXXXXX the Subco 1 Land 1 into XXXXXXXXXX. 

Subco 1 will own and operate XXXXXXXXXX.  Once the XXXXXXXXXX are XXXXXXXXXX, they will generate active business income for Subco 1. 

The initial XXXXXXXXXX of XXXXXXXXXX the Subco 1 Land 1 into XXXXXXXXXX began in XXXXXXXXXX; the first XXXXXXXXXX to start XXXXXXXXXX work were issued in XXXXXXXXXX. 

10.   Subco 1 also carries on a XXXXXXXXXX business (“Subco 1 Retained Business”) which consists of the following assets:

(a)   Subco 1 owns a business division called XXXXXXXXXX (“Subco 1 Services Business”) which provides XXXXXXXXXX services (for a fee) to the members of the DC Group engaged in the DC Retained Business. 

The assets of the Subco 1 Services Business consist of:

(i)   employees providing such XXXXXXXXXX services,

(ii)  software and hardware for a system called XXXXXXXXXX, and

(iii) any goodwill associated with the Subco 1 Services Business. 

(b)   Subco 3 holds the bare legal title to a property known as XXXXXXXXXX (“Subco 2 Property 1”), as agent for Subco 2 and Aco as beneficial owners of the property pursuant to a written co-ownership agreement on XXXXXXXXXX.

XXXXXXXXXX

(c)   Subco 2 and Aco are also subtenants to a XXXXXXXXXX (“Subco 2 Lease”) with XXXXXXXXXX, in which Subco 2 has an XXXXXXXXXX interest. 

XXXXXXXXXX

11.   DC has a Long Term Incentive Plan for employees who are invited to participate (“Invited Employees”).  The plan is subject to amendment from time to time in the discretion of the board of DC.  A brief summary of the current plan is as follows:

XXXXXXXXXX

12.   The employees of DC who acquired Units under the Long Term Incentive Plan paid an amount equal to XXXXXXXXXX.  

Spinco

13.   Spinco is a TCC.  Spinco was incorporated under Act 3 on XXXXXXXXXX. 

The authorized share capital of Spinco consists of an unlimited number of fully participating voting common shares (“Spinco Common Shares”) with the holders thereof entitled to one vote per share at each meeting of the shareholders of Spinco.

No shares of Spinco were issued on its incorporation, and no shares of Spinco will be issued except in connection with the Plan of Arrangement.

DC Plan of Arrangement

14.   DC and Spinco entered into an arrangement agreement on XXXXXXXXXX to implement the Plan of Arrangement.

15.   DC obtained an interim order from the XXXXXXXXXX for the Plan of Arrangement on XXXXXXXXXX.

16.   A special meeting of the DC Shareholders was held on XXXXXXXXXX in which the Plan of Arrangement was approved.

III.  PROPOSED TRANSACTIONS

DC Plan of Arrangement

17.   With the exception of the filing of any elections under the Act, the Proposed Transactions will occur by virtue of the Plan of Arrangement and will be designated in the Plan of Arrangement to occur commencing on the Effective Date and in the order set out below. 

18.   Completion of the Plan of Arrangement will remain subject to all regulatory and court approvals.

Repurchase Dissent Right

19.   Under the Plan of Arrangement, each DC Shareholder may issue, prior to the date set for approval of the Plan of Arrangement by the DC Shareholders, a written notice informing DC of the intention of the DC Shareholder to exercise the right to demand the repurchase of any particular class of DC Shares pursuant to the repurchase dissent right (“Repurchase Dissent Right”) under Act 3, as modified by the Plan of Arrangement and, if any, by an interim Court order and any other order of the Court. 

For the purposes of the Proposed Transactions comprising the Plan of Arrangement, any DC Shareholder exercising its Repurchase Dissent Right would be deemed to have transferred such class of DC Shares to DC for cancellation at the Effective Time and would be considered to have ceased to be a DC Shareholder with respect to that particular class of DC Shares at the Effective Time, such that this particular class of DC Shares held by the DC Shareholder exercising its Repurchase Dissent Right would no longer be considered to be outstanding for the purpose of the Proposed Transactions comprising the Plan of Arrangement. 

20.   DC has not received any dissent notices.  The date for delivering a dissent notice expired on XXXXXXXXXX.

21.   [Reserved].

Amendments to Spinco’s Articles

22.   Pursuant to Act 3, the Articles of Spinco will be amended to create and authorize the issuance of an unlimited number of Spinco preferred shares (“Spinco Redemption Shares”) having the following attributes:

(a)   each Spinco Redemption Share will be redeemable, subject to applicable law, at any time at the option of Spinco at a redemption amount (“Spinco Redemption Share Amount”) equal to the aggregate FMV of the Transferred Assets at the time of the Transfer, divided by the number of Spinco Redemption Shares issued as consideration for the Transfer, plus all declared but unpaid dividends thereon;

(b)   each Spinco Redemption Share will be retractable, subject to applicable law, at any time at the option of the holder at a retraction amount equal to the Spinco Redemption Share Amount;

(c)   the holders of the Spinco Redemption Shares will be entitled to dividends as and when declared by the directors in their discretion, which dividends need not be declared on any other class of shares of Spinco;

(d)   for the purposes of subsection 191(4), the terms and conditions of the Spinco Redemption Shares will, at the time of their issuance, specify an amount in respect of each such share, for which the share is to be redeemed, acquired or cancelled. 

The amount to be specified in respect of each of such shares:

(i)   will be pursuant to a resolution of the board of directors of Spinco;

(ii)  will be expressed as a dollar amount;

(iii) will not be determined by a formula;

(iv)  will not exceed the FMV of the consideration for which such Spinco Redemption Share is issued; and

(v)   will not be subject to change thereafter;

(e)   the holder of each Spinco Redemption Share will be entitled, upon the liquidation, dissolution or winding-up of Spinco, to a payment in priority to all other classes of shares of Spinco of an amount equal to the Spinco Redemption Share Amount to the extent of the amount of value of property available under applicable law for payment to shareholders upon such liquidation, dissolution or winding-up, and no other amount; and

(f)   the holders of the Spinco Redemption Shares will not be entitled to vote at meetings of shareholders of Spinco, other than as provided for under applicable law.

Amendment to DC’s Articles

23.   Pursuant to Act 3, the Articles of DC will be amended to create and authorize the issuance of an unlimited number of Class D Common Shares, Class E Common Shares, Class F Common Shares, Class G Common Shares, and Class H Common Shares (collectively referred to as the “DC New Common Shares”), and an unlimited number of DC Butterfly Shares having the attributes described in Paragraphs 23.1 and 23.2.

23.1  DC Butterfly Shares:

(a)   Each DC Butterfly Share will be redeemable, subject to applicable law, at any time at the option of DC for an amount (“DC Butterfly Share Redemption Amount”) equal to:

(i)   the amount obtained by multiplying the aggregate FMV of all the issued and outstanding DC Shares immediately prior to the DC Share Exchange by the Butterfly Ratio and then dividing that product by the number of the DC Butterfly Shares issued on the DC Share Exchange, plus

(ii)  the amount of all declared but unpaid dividends thereon.

(b)   Each DC Butterfly Share will be retractable, subject to applicable law, at any time at the option of the holder at an aggregate retraction amount equal to the DC Butterfly Share Redemption Amount.

(c)   The holders of each DC Butterfly Share will be entitled to dividends as and when declared by the directors in their discretion, which dividends need not be declared on any other class of shares of DC.

(d)   For the purposes of subsection 191(4), the terms and conditions of the DC Butterfly Shares will, at the time of their issuance, specify an amount in respect of each such share, for which the share is to be redeemed, acquired or cancelled. 

The amount to be specified in respect of each of such shares:

(i)   will be pursuant to a resolution of the board of directors of DC;

(ii)  will be expressed as a dollar amount;

(iii) will not be determined by a formula;

(iv)  will not exceed the FMV of the consideration for which such DC Butterfly Share is issued; and

(v)   will not be subject to change thereafter.

(e)   The holder of each DC Butterfly 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 Butterfly Share Redemption Amount thereon, to the extent of the amount of value of property available under applicable law for payment to the DC Shareholders upon such liquidation, dissolution or winding-up, but is entitled to no more than the amount of that payment.

(f)   The holder of each DC Butterfly Share will not be entitled to vote at meetings of the DC Shareholders, other than as provided for under applicable law.

23.2  DC New Common Shares:

(a)   The holders of these shares will be entitled to one vote per share and will be entitled to receive dividends as declared in the discretion of the directors of DC on a pro rata basis. 

(b)   The holders of these shares will not be entitled to stock dividends having a different stated capital amount as described above in relation to the A Common Shares, B Common Shares, and C Common Shares. 

(c)   The Class E Common Shares will be convertible into Class D Common Shares (by DC or the holder).

(d)   The Class F Common Shares will be convertible into Class D Common Shares (by DC or the holder).

(e)   The holders of these shares will be entitled on a pro rata basis to share in the surplus of DC on liquidation or winding up, subject to the entitlement of the DC Butterfly Shares (and, while they are outstanding, the DC Preferred Shares).

(f)   Unless the board of directors of DC determines otherwise, the holders of these shares shall be provided consolidated unaudited quarterly financial statements prepared by DC in accordance with international financial reporting standards, promptly following approval by the board of directors of DC (or the applicable committee of the board of directors), and in any event no later than XXXXXXXXXX days after the end of the applicable period.  This right does not exist for the holders of the A Common Shares, B Common Shares, and C Common Shares. 

(g)   The directors of DC will not be able to declare dividends on any DC Shares if there are reasonable grounds for believing that:

(i)   DC is, or would after the payment be, unable to pay its liabilities as they become due;

(ii)  the realizable value of DC’s assets would thereby be less than the aggregate of its liabilities and the stated capital of all classes of shares; or

(iii) the payment of such dividends would result in DC being unable to redeem each DC Butterfly Share and fully pay the DC Butterfly Share Redemption Amount. 

Reorganization of the Capital of DC

24.   Each Participant will simultaneously transfer (“DC Share Exchange”) to DC all of the DC Shares held by such Participant on the Effective Date as follows:

(a)   Such Participant’s DC Common Shares will be exchanged for a certain number of DC Butterfly Shares and a certain number of Class D Common Shares, Class E Common Shares or Class F Common Shares, as the case may be, such that:

(i)   the aggregate FMV and DC Butterfly Share Redemption Amount of the DC Butterfly Shares received by such Participant immediately after the DC Share Exchange, will be equal to the Butterfly Ratio multiplied by the aggregate FMV of all of the DC Shares held by such Participant immediately before the DC Share Exchange; and

(ii)  the total of:

(I)   the aggregate FMV of the Class D Common Shares, Class E Common Shares or Class F Common Shares, as the case may be, received by such Participant immediately after the DC Share Exchange; and

(II)  the aggregate FMV and DC Butterfly Share Redemption Amount of the DC Butterfly Shares received by such Participant immediately after the DC Share Exchange, as described in Paragraph 24(a)(i),

will be equal to the aggregate FMV of such Participant’s DC Common Shares so transferred to DC immediately before the DC Share Exchange.

For greater certainty, A Common Shares will be exchanged for DC Butterfly Shares and Class D Common Shares; B Common Shares will be exchanged for DC Butterfly Shares and Class E Common Shares; and C Common Shares will be exchanged for DC Butterfly Shares and Class F Common Shares.  

(b)   Such Participant’s A Preferred Shares, if any, will be exchanged for Class G Common Shares having an aggregate FMV immediately after the DC Share Exchange equal to the aggregate FMV of such Participant’s A Preferred Shares so transferred to DC immediately before the DC Share Exchange.

(c)         Such Participant’s B Preferred Shares, if any, will be exchanged for Class H Common Shares having an aggregate FMV immediately after the DC Share Exchange equal to the aggregate FMV of such Participant’s B Preferred Shares so transferred to DC immediately before the DC Share Exchange.

      (d)   For greater certainty,

(i)   the aggregate FMV of all of the DC Butterfly Shares and the DC New Common Shares received by such Participant, as described in Paragraphs 24(a), (b) and (c), immediately after the DC Share Exchange, will be equal to or approximate (as a consequence of the fractional shares being rounded down to the nearest whole number, as described in Paragraph 24(d)(iii)) the aggregate FMV of all of the DC Shares held by such Participant immediately before the DC Share Exchange; 

(ii)  no election under subsection 85(1) will be made with respect to the DC Share Exchange; and

(iii) on the DC Share Exchange, fractional shares will not be issued; such Participant will receive an aggregate number of DC Butterfly Shares and DC New Common Shares, as the case may be, rounded down to the nearest whole number.

25.   All of the DC Shares so exchanged, as described in Paragraph 24, will thereafter be cancelled by DC.

26.   For the purposes of Act 3,

(a)   the aggregate addition to the stated capital of the DC Butterfly Shares and Class D Common Shares issued by DC on the DC Share Exchange, will be equal to the aggregate PUC of the A Common Shares for which the DC Butterfly Shares and Class D Common Shares were issued.  For greater certainty, such aggregate stated capital will be apportioned between the DC Butterfly Shares and the Class D Common Shares in proportion to the relative aggregate FMV of such shares;

(b)   the aggregate addition to the stated capital of the DC Butterfly Shares and Class E Common Shares issued by DC on the DC Share Exchange, will be equal to the aggregate PUC of the B Common Shares for which the DC Butterfly Shares and Class E Common Shares were issued.  For greater certainty, such aggregate stated capital will be apportioned between the DC Butterfly Shares and the Class E Common Shares in proportion to the relative aggregate FMV of such shares;

(c)   the aggregate addition to the stated capital of the DC Butterfly Shares and Class F Common Shares issued by DC on the DC Share Exchange, will be equal to the aggregate PUC of the C Common Shares for which the DC Butterfly Shares and Class F Common Shares were issued.  For greater certainty, such aggregate stated capital will be apportioned between the DC Butterfly Shares and the Class F Common Shares in proportion to the relative aggregate FMV of such shares; and

(d)   the addition to the stated capital of the Class G Common Shares and Class H Common Shares will be equal to the aggregate PUC of the DC Preferred Shares for which they were issued.

Transfer of DC Butterfly Shares to Spinco

27.   Each Participant will simultaneously transfer (“Spinco Share Exchange”) to Spinco all of the DC Butterfly Shares held by such Participant.  The sole consideration issued by Spinco for each DC Butterfly Share will be one Spinco Common Share.  

Immediately after the Spinco Share Exchange, no person other than a Participant will own any shares of the capital stock of Spinco. 

If requested by a particular Participant, Spinco and the particular Participant will jointly elect to have the provisions of subsection 85(1) apply to the transfer.

28.   For the purposes of Act 3, Spinco will add to the stated capital account maintained for the Spinco Common Shares an amount equal to the aggregate PUC of the DC Butterfly Shares so acquired by Spinco less the amount, if any, by which the aggregate PUC of the DC Butterfly Shares that are subject to elections under subsection 85(1) exceeds the aggregate agreed amount specified in such elections.

29.   [Reserved].

30.   Immediately before the Transfer, the aggregate FMV of the Spinco Common Shares owned by each Participant will be equal to or approximate the amount determined by the formula:

(A × B/C) + D

as set out in subparagraph (b)(iii) of the definition of “permitted exchange” in subsection 55(1), on the assumption that each Participant is a participant, DC is the distributing corporation and Spinco is the acquiror.

Pre-Distribution Transfers

31.   Prior to the Transfer, Subco 1 will transfer the Subco 1 Retained Business to DC.  As sole consideration for such transfer, DC will issue a promissory note (the “Sale Note”) to Subco 1 having a principal amount and FMV equal to the aggregate FMV of the Subco 1 Retained Business so transferred to DC at that time. 

32.   Subco 1 will:

(a)   distribute an amount to DC as a reduction of its existing PUC in respect of its issued and outstanding shares held by DC; and

(b)   will declare one or more dividends equal to any remaining proceeds received described in this Paragraph 32(a). 

Payment for such distribution and dividends will be made by way of set-off of the Sale Note.   

33.   A cash dividend will be paid from Foreignco 3 to Foreignco 2, and thereafter a cash dividend will be paid from Foreignco 2 to Foreignco 1. 

Foreignco 1 will thereafter pay a cash dividend on the shares of Foreignco 1 held by DC.  The cash dividend will be an ordinary dividend distribution made pro rata on all of the shares of Foreignco 1 (and not a distribution made in the course of a liquidation and dissolution of Foreignco 1, on a redemption, acquisition or cancellation of the shares of Foreignco 1, or on a qualifying return of capital (described in subsection 90(3)) in respect of the shares of Foreignco 1).   

The cash dividend from Foreignco 1 to DC will be subject to withholding tax in the United States, such that DC will only receive an amount of cash equal to the dividend less such withholding tax. 

34.   DC will contribute the cash received from Foreignco 1 as described in Paragraph 33 to the capital of Subco 1, not by way of a share subscription but rather, as a contribution to the stated capital of Subco 1. 

Transfer of the Transferred Assets by DC to Spinco

35.   Immediately prior to the Transfer, the property of DC will be determined on a consolidated basis by including the appropriate pro rata share of the assets of any corporation over which DC has the ability to exercise significant influence (including Subco 1, Subco 2, Subco 3, Foreignco 1, Foreignco 2 and Foreignco 3).  Such assets will be classified into the following three types of property for the purposes of the definition of distribution as follows:

(a)   cash or near-cash property, comprising all of the current assets of DC, including cash, marketable securities, accounts receivable, trade receivables, inventory and prepaid expenses;

(b)   business property, comprising all of the assets of DC, 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, 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:

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

(ii)  advances that have a term of less than 12 months or are due on demand (other than advances owing to DC which are described in (iv) below) are considered cash or near-cash property;

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

(iv)  the FMV of the shares in the capital of any corporation over which DC has the ability to exercise significant influence, and of any indebtedness receivable by DC from such a corporation, will be allocated among the three types of property described above by multiplying the FMV of the shares in the capital of such corporations or the amount of indebtedness receivable therefrom, as the case may be, by the proportion that the net FMV of each type of property owned by the particular corporation (determined in accordance herewith) is of the net FMV of all property owned by such corporation; and

(v)   the Subco 1 Land 1 and the Subco 1 Land 2 described in Paragraph 7, as well as any other property used in the Subco 1 Transferred Business 1 or the Subco 1 Transferred Business 2 will be classified as business property. 

It is not anticipated that the DC Group will have any investment property for the purpose of this distribution, immediately prior to the Transfer.  

36.   In determining, on a consolidated basis, the net FMV of each of the three types of property of DC immediately before the Transfer, the liabilities of DC and any corporation over which DC exercised 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, the liabilities of that corporation (other than any amount owing by such corporation to DC) will be allocated to, and be deducted in the calculation of the net FMV of, each type of property of that particular corporation in the following manner:

(i)   current liabilities of that particular 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 that particular 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 of the cash or near-cash property, that particular corporation will be considered to have a negative amount of cash or near-cash property;

(ii)  liabilities, other than current liabilities, of that particular 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 pertains to a particular type of property, but not to a particular property, will be allocated to that particular type of property. To the extent that the total amount of liabilities allocated to a particular type of property as described herein exceeds the total FMV of that type of property, that particular corporation will be considered to have a negative amount of that type of property; and

(iii) any liabilities that remain after the allocations described in Paragraphs 36(a)(i) and (ii) are made, will then be allocated to the cash or near-cash property, investment property and business property of that particular corporation, based on the relative net FMV of each type of property prior to the allocation of such excess unallocated liabilities. However, where that particular corporation is considered to have a negative amount of a type of property because of Paragraph 36(a)(i) or (ii), 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 that type of property.

(b)   in determining, on a consolidated basis, the net FMV of each type of property of DC immediately before the Transfer, 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 corporation, and any liabilities of DC will be allocated to, and deducted in the calculation of the net FMV of, each such 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 total amount of DC’s current liabilities to be allocated to DC’s cash or near cash property will not exceed the FMV of all of DC’s cash or near-cash property;

(ii)  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 after the allocation of liabilities to a particular property, as described herein; and

(iii) any liabilities that remain after the allocations described in Paragraphs 36(b)(i) and (ii) are made, 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 immediately prior to the allocation of such excess, but after the allocation of liabilities as described in Paragraphs 36(b)(i) and (ii).

(c)   For greater certainty, for purposes of the determination described in this Paragraph 36:

(i)   the amount of any deferred income tax will not be considered a liability because such amount does not represent a legal obligation;

(ii)  amounts owing that have a term of less than 12 months or are due on demand are considered current liabilities;

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

(iv)  no amount will be considered to be a liability unless it represents a true legal liability that is capable of quantification. 

37.   Following the transfer of the Subco 1 Retained Business by Subco 1 to DC described in Paragraph 31, DC will transfer (“Transfer”) all of its Subco 1 Shares (“Transferred Assets”) to Spinco. 

Immediately after the Transfer, the net FMV of each type of property of DC transferred to Spinco, will be equal to or approximate the proportion of the net FMV of that type of property of DC, determined immediately before the Transfer (in each case, determined on the basis of the principles set out in Paragraphs 35 and 36) that:

(a)   the aggregate FMV of all the DC Butterfly Shares owned by Spinco immediately before the Transfer,

is of

(b)   the aggregate FMV of all of the issued and outstanding DC Butterfly Shares and DC New Common Shares immediately before the Transfer.

For the purposes of this Paragraph 37 and Paragraph 43, the expression “approximate the proportion” means that the discrepancy from that proportion, if any, will not exceed XXXXXXXXXX%), determined as a percentage of the net FMV at that time of each type of property that Spinco has received (or DC has retained) as compared to the amount of property that Spinco would have received (or DC would have retained) had Spinco received (or had DC retained) its appropriate pro rata share of the net FMV of that type of property at that time.

As sole consideration for the Transferred Assets, Spinco will issue Spinco Redemption Shares to DC, having an aggregate FMV equal to the aggregate FMV of the Transferred Assets. 

Spinco will add to the stated capital maintained for the Spinco Redemption Shares the amount of XXXXXXXXXX.

38.   Spinco and DC will jointly elect, in prescribed form and within the time limit referred to in subsection 85(6), to have the provisions of subsection 85(1) apply to the Transfer.  The agreed amount for purposes of subsection 85(1) in respect of the Transferred Assets will be an amount equal to the lesser of the amounts described in subparagraph 85(1)(c.1)(i) and (ii).

The Transferred Assets will be eligible property under subsection 85(1.1).

Redemption of the Spinco Redemption Shares

39.   Spinco will redeem all of the Spinco Redemption Shares owned by DC for an amount equal to their aggregate Spinco Redemption Share Amount.  In satisfaction of the Spinco Redemption Share Amount, Spinco will issue to DC a demand non-interest bearing promissory note (“Spinco Redemption Note”), having a principal amount and FMV equal to the aggregate Spinco Redemption Share Amount of the Spinco Redemption Shares so redeemed.

DC will accept the Spinco Redemption Note as full payment for the redemption of the Spinco Redemption Shares with the risk that the Spinco Redemption Note may not be honored.

Redemption of the DC Butterfly Shares

40.   DC will reduce the stated capital account of the issued and outstanding DC Butterfly Shares to an amount of XXXXXXXXXX without any payment or distribution of property. 

41.   After the reduction of the stated capital of DC described in Paragraph 40, DC will redeem all of the DC Butterfly Shares owned by Spinco for an amount equal to the aggregate DC Butterfly Share Redemption Amount.  In satisfaction of the DC Butterfly Share Redemption Amount, DC will issue to Spinco a demand non-interest bearing promissory note (“DC Redemption Note”), having a principal amount and FMV equal to the aggregate DC Butterfly Share Redemption Amount of the DC Butterfly Shares so redeemed.

Spinco will accept the DC Redemption Note as full payment for the redemption of the DC Butterfly Shares with the risk that the DC Redemption Note may not be honored.

Set-Off

42.   DC will satisfy its obligations under the DC Redemption Note by transferring the Spinco Redemption Note to Spinco, and Spinco will accept the Spinco Redemption Note in full satisfaction of DC’s obligations under the DC Redemption Note. 

Similarly, Spinco will satisfy its obligations under the Spinco Redemption Note by transferring the DC Redemption Note to DC, and DC will accept the DC Redemption Note in full satisfaction of Spinco’s obligations under the Spinco Redemption Note.

      The DC Redemption Note and the Spinco Redemption Note will be marked paid in full and cancelled.

DC Pro Rata test

43.   Immediately following the transactions described in Paragraph 42, the net FMV of each type of property retained by DC (in each case, determined on the basis of the principles set out in Paragraphs 35 and 36) will be equal to or approximate the proportion of the net FMV of that type of property of DC, determined immediately before the Transfer, that:

(a)   the aggregate FMV of all of the issued and outstanding DC New Common Shares immediately before the Transfer,

is of

(b)   the aggregate FMV of all of the issued and outstanding DC Butterfly Shares and DC New Common Shares immediately before the Transfer.

IV.   ADDITIONAL INFORMATION

44.   Neither DC nor Spinco is, or will be at the time of the Proposed Transactions, a restricted financial institution or a specified financial institution.

45.   The DC Common Shares and the Subco 1 Shares are not, and will not be, at any time before completion of the Proposed Transactions, taxable preferred shares or short-term preferred shares.

46.   None of the shares of DC or Spinco are or will be, at any time during the implementation of the Proposed Transactions:

(a)   the subject of any undertaking or agreement 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 arrangement” referred to in subsection 112(2.3), as such term is defined in subsection 248(1).

47.   Prior to the date of the Transfer, as part of a series of transactions or events that will include the Proposed Transactions, there has not been, or will not be, any disposition or acquisition of property in the circumstances described in subparagraph 55(3.1)(b)(i) or (iii), or acquisition of control in the circumstances described in subparagraph 55(3.1)(b)(ii).

48.   Except as described herein, no debts have been or will be incurred or paid, and no property has been or will be acquired, by DC or any of its Subsidiary, in contemplation of and before the Transfer, otherwise than in the normal course of its business or in a transaction described in subparagraphs 55(3.1)(a)(i) to (iv).

49.   Neither DC nor Spinco has any expectation or intention, subsequent to the Proposed Transactions, of selling or transferring any property, as part of a series of transactions or events that includes the Proposed Transactions, to a person unrelated to DC or Spinco, as the case may be, or to a partnership as described in paragraph 55(3.1)(c) or (d).

50.   DC has paid to date the following XXXXXXXXXX Dividends:

XXXXXXXXXX

51.   It is expected that Spinco will adopt a dividend policy substantially similar to the policy that governs the XXXXXXXXXX Dividends for DC. 

52.   None of DC or Spinco is or will be a financial intermediary corporation as defined in subsection 191(1).

53.   None of the DC Butterfly Shares or the Spinco Redemption Shares are taxable RFI shares.

54.   Each of DC and Spinco will have the financial capacity to honor the amounts payable under the DC Redemption Note and the Spinco Redemption Note, respectively.

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

V.    PURPOSES OF THE PROPOSED TRANSACTIONS

56.   Management of DC considers that the Transfer of the Transferred Assets will be in the best interests of the DC Shareholders.  The Proposed Transactions will completely separate the DC Transferred Business 1 and the DC Transferred Business 2 from the DC Retained Business, with the expectation that it will enhance the ability of the management of DC and Spinco to separately pursue their respective objectives, strategies and financings.

57.   The purpose for the conversion feature in the Class E Common Shares and Class F Common Shares described in Paragraph 23, is to mirror the existing conversion feature that applies for the B Common Shares and C Common Shares described in Paragraph 2, i.e., the B Common Shares and C Common Shares are convertible into A Common Shares. 

As the A Common Shares will be exchanged for Class D Common Shares, and the B Common Shares and C Common Shares will be exchanged for the Class E Common Shares and Class F Common Shares, respectively, it follows that the Class E Common Shares and Class F Common Shares will be convertible into Class D Common Shares.

58.   The purpose for exchanging the A Preferred Shares and B Preferred Shares for the Class G Common Shares and Class H Common Shares, respectively, as described in Paragraph 24, is to allow the holders of the Class G Common Shares and Class H Common Shares to receive eligible dividends from DC.

59.   The transfer described in Paragraph 31 is being conducted at FMV as a matter of expediency.  The FMV of these assets is relatively small, and the preference of management was not to further complicate the Proposed Transactions by inserting a sequential butterfly transaction. 

60.   The sole purpose of transferring the Subco 1 Retained Business to DC for the Sale Note described in Paragraph 31 and then setting off the Sale Note against the PUC reduction and dividends described in Paragraph 32 (“Two-Step Transfer”), was to reduce the amount of dividends that would arise on the transfer of the Subco 1 Retained Business. This purpose could also have been achieved by Subco 1 transferring the Subco 1 Retained Business to DC (without receiving the Sale Note as consideration) and treating the transfer partially as a PUC reduction and partially as dividends (“One-Step Transfer”).  There is no income tax benefit that was achieved by the Two-Step Transfer that would not have been achieved by doing a One-Step Transfer instead.

61.   The purpose of the contribution of cash, by DC to Subco 1, to the capital of Subco 1 described in Paragraph 32, is to satisfy the pro rata requirement pertaining to the cash or near cash property of DC to be transferred to Spinco indirectly through Subco 1, as described in Paragraph 37. 

62.   The sole purpose of adding an amount of XXXXXXXXXX to Spinco’s stated capital account of Spinco Redemption Shares that are issued to DC, as described in Paragraph 37, and the sole purpose of reducing the stated capital of the DC Butterfly Shares to an amount of XXXXXXXXXX, as described in Paragraph 40, is to ensure that each of Spinco’s and DC’s respective dividend refunds under subsection 129(1) and respective Part IV tax under paragraph 186(1)(a) (all in respect of the dividends arising on the redemption of the DC Butterfly Shares, and the dividends arising on the redemption of the Spinco Redemption Shares) will be approximately equal to each other, such that each of DC and Spinco will not have any net tax liabilities (i.e., as a result of each corporation’s Part IV tax liabilities exceeding such corporation’s dividend refund).

VI.   RULINGS

Provided that the preceding statements constitute a 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, our rulings are set forth below:

A.    On the exchange of DC Common Shares and DC Preferred Shares by a Participant, as the case may be, on the DC Share Exchange, the provisions of subsection 86(1) will apply, and the provisions of subsection 86(2) will not apply, to the disposition of the DC Common Shares and the DC Preferred Shares by the Participant for the DC New Common Shares, provided that:

(a)   the Participant holds its DC Common Shares and DC Preferred Shares, as the case may be, as capital property; and  

(b)   the Participant and DC do not file an election under subsection 85(1) or (2) in respect of the exchange.

B.    The DC Share Exchange will not, in and of itself, cause the DC Butterfly Shares that a Participant received in exchange for its DC Common Shares that were, immediately before the DC Share Exchange, capital property to the Participant, not to be capital property to the Participant immediately after the DC Share Exchange.

C.    Provided that the conditions of paragraph 7(1.5)(c) are satisfied with respect to the particular share exchange referred to in Ruling C(a) and (b), the provisions of paragraphs 7(1.5)(d), (e), (f) and (g) will apply, for the purposes of section 7 and paragraph 110(1)(d.1), to the exchange of

(a)   a Participant’s A Common Shares for DC Butterfly Shares and Class D Common Shares, as described in Paragraph 24, to the extent the Participant’s A Common Shares were acquired under circumstances to which subsection 7(1.1) applies, and

(b)   a Participant’s B Preferred Shares for Class H Common Shares, as described in Paragraph 24, to the extent the Participant’s B Preferred Shares were acquired under circumstances to which subsection 7(1.1) applies.  

For greater certainty, subsection 7(1.5) will not apply to the exchange of the DC Butterfly Shares for the Spinco Common Shares on the Spinco Share Exchange.

D.    Provided that a Participant who:

(a)   holds DC Butterfly Shares as capital property;

(b)   does not receive any consideration other than the Spinco Common Shares in exchange for the DC Butterfly Shares;

(c)   deals at arm’s length with Spinco immediately before the Spinco Share Exchange;

(d)   does not file an election under subsection 85(1) or subsection 85(2) with respect to the Spinco Share Exchange;

(e)   does not include any portion of the gain or loss otherwise determined in computing his or her income for that year; and

(f)   is not a person described in paragraph 85.1(2)(e) who has included any portion of the gain or loss in computing its foreign accrual property income (as defined in subsection 95(1)) for that year;

and further, provided that immediately after such exchange:

(g)   such Participant or persons with whom such Participant does not deal at arm’s length, or such Participant together with any other person or persons with whom such Participant does not deal at arm's length, will not control Spinco or beneficially own shares of Spinco having an aggregate FMV representing more than XXXXXXXXXX% of the aggregate FMV of all of the issued and outstanding Spinco Common Shares;

then, pursuant to paragraph 85.1(1)(a):

(h)   such Participant will be deemed to have disposed of such DC Butterfly Shares for proceeds of disposition equal to the aggregate ACB of such DC Butterfly Shares to such Participant immediately before the exchange; and

(i)   such Participant will be deemed to have acquired such Spinco Common Shares at an aggregate cost equal to the aggregate ACB of such Participant’s DC Butterfly Shares immediately before the exchange;

and, pursuant to paragraph 85.1(1)(b):

(j)   the cost to Spinco of each DC Butterfly Share acquired from each such Participant will be deemed to be the lesser of its FMV immediately before the exchange and the PUC of such DC Butterfly Share immediately before the exchange.

E.    Subject to the application of subsection 69(11), the provisions of subsection 85(1) will apply to the Transfer of the Transferred Assets 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 pursuant to paragraph 85(1)(a). 

For greater certainty, paragraph 85(1)(e.2) will not apply to such transfer.

F.    Subsection 84(3) will apply:

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

(b)   on the redemption, as described in Paragraph 41, of the DC Butterfly Shares owned by Spinco, to deem DC to have paid, and Spinco to have received,

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

(c)   will be included, pursuant to subsection 82(1) and paragraph 12(1)(j), in computing the income of the recipient corporation;

(d)   will be deductible, pursuant to the subsection 112(1), by the recipient corporation;

(e)   will not be a dividend to which any of subsections 112(2.1), (2.2), (2.3) or (2.4) apply;

(f)   will be excluded, pursuant to paragraph (j) of the definition of “proceeds of disposition” in section 54, in determining the proceeds of disposition to the recipient corporation of the shares so redeemed;

(g)   will be subject to tax under Part IV; 

(h)   will entitle the dividend payer to a dividend refund to the extent permitted by subsection 129(1);  

(i)   the deemed dividend referred to in Ruling F(a), will not be subject to tax under Part IV.1 or VI.1, to the extent that the amount paid by Spinco to DC on the redemption of the Spinco Redemption Shares does not exceed the amount specified in respect of those shares for the purposes of subsection 191(4);

(j)   the deemed dividend referred to in Ruling F(b), will not be subject to tax under Part IV.1 or VI.1, to the extent that the amount paid by DC to Spinco on the redemption of the DC Butterfly Shares does not exceed the amount specified in respect of those shares for the purposes of subsection 191(4); and

(k)   the provisions of subsection 112(3) will apply to reduce any loss that would otherwise be determined for the particular holder as a result of the redemption of the Spinco Redemption Shares or of the DC Butterfly Shares, as the case may be.

G.    Subsection 129(1.2) will not apply to deem the taxable dividends referred to in Ruling F not to be taxable dividends.

H.    By virtue of the provisions of paragraph 55(3)(b), subsection 55(2) will not apply to the taxable dividends referred to in Ruling F provided that as part of a series of transactions or events that includes the dividends described in Ruling F, there is not:

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

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

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

(d)   an acquisition of shares in the capital stock of DC in the circumstances described in subparagraph 55(3.1)(b)(iii); or

(e)   an acquisition of property in the circumstances described in paragraph 55(3.1)(c) or (d);

which has not been described herein and, for greater certainty, subsection 55(3.1) will not apply to deny the exemption under paragraph 55(3)(b).

I.    The provisions of paragraph 256(7)(c) will apply to deem control of Spinco to have been acquired at the time of the Spinco Share Exchange by a person or group of persons and, provided that no election is made under subsection 256(9) in respect of that acquisition of control, pursuant to subsection 249(4), the taxation year of Spinco will be deemed to end immediately before the beginning of the day on the Effective Date.

J.    The set-off and cancellation of the Spinco Redemption Note held by DC and of the DC Redemption Note held by Spinco, as described in Paragraph 42, will not, in either case, give rise to a forgiven amount, and neither DC nor Spinco will realize any gain or incur any loss therefrom.

K.    The provisions of subsections 15(1), 56(2), 56(4), 69(4) and 246(1) will not apply to any of the Proposed Transactions, in and of themselves.

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

These rulings are given subject to the limitations and qualifications set out in Information Circular 70-6R6 issued by the CRA on August 29, 2014 and are binding on the CRA provided that the Proposed Transactions are completed on or before XXXXXXXXXX.

The above rulings are based on the Act in its present form and do not take into account any proposed amendments to the Act which, if enacted, could have an effect on the rulings provided herein.

VII.  COMMENTS

Nothing in this letter should be construed as implying that the CRA has confirmed, reviewed, made any determination, or accepted any method for the determination in respect of:

(a)   the PUC of any share or the ACB or FMV of any property referred to herein;

(b)   any other tax account of any corporation referred to herein;

(c)   the characterization of any property described herein to the holder thereof, other than as specifically provided herein; and

(d)   any other tax consequence relating to the facts, Proposed Transactions or any transaction or event taking place either prior to the Proposed Transactions or subsequent to the Proposed Transactions, whether described in this letter or not, other than those specifically described in the rulings given above, including whether any of the Proposed Transactions would also be included in a series of transactions or events that includes other transactions or events that are not described in this letter. 

In particular, we are not commenting on:

(i)   whether the Long-Term Incentive Plan described in Paragraph 11 constitutes an agreement by DC to sell or issue DC Shares to Invited Employees;

(ii)  whether subsection 55(2) will apply to the dividends to be paid by Subco 1 to DC, as described in Paragraph 32(b), and

(iii) any tax consequences relating to the cash dividend to be paid by Foreignco 1 to DC, as described in Paragraph 33.

Yours truly,

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

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