2015-0616291R3 Cross-Border Butterfly

Principal Issues: Did the proposed cross-border butterfly qualify for the exemption in paragraph 55(3)(b) from the butterfly denial rule in subsection 55(2)?

Position: Yes.

Reasons: Meets the statutory requirements and our prior positions and rulings on cross-border butterfly reorganizations.

Author: XXXXXXXXXX
Section: 55(1), 55(2), 55(3)(b), 55(3.1)(b), 85(1), 86(1), 112

XXXXXXXXXX                        2015-061629

XXXXXXXXXX, 2016

Dear XXXXXXXXXX

Re:    XXXXXXXXXX
    Advance Income Tax Ruling

This is in reply to your letter dated XXXXXXXXXX in which you requested an advance income tax ruling on behalf of the above-noted taxpayer.  We also acknowledge the information provided in subsequent letters, e-mails and telephone discussions (XXXXXXXXXX).  The information that you provided in such correspondence and in the telephone discussions form part of this letter only to the extent described herein.

We understand that to the best of your knowledge and that of the taxpayer involved, none of the issues described herein is:

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

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

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

(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.

Unless otherwise stated, all statutory references are to the Act. 

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

I.    DEFINITIONS

In this ruling application, unless otherwise specified, the following terms have the meanings specified below:

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

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

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

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

“BCA 1” means the Business Corporations Act XXXXXXXXXX;

“BCA 2” means the Business Corporations Act XXXXXXXXXX;

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

“BCA 4” means the Business Corporations Act XXXXXXXXXX;

“Butterfly Percentage” means the proportion, expressed as a percentage, that the net FMV of the business property owned by Canadian DC that relates to the Canadian DC Spin Business is of the net FMV of all of the business property of Canadian DC, determined: (i) immediately before the transfer of property by Canadian DC to Canadian TC described in Paragraph 55, and (ii) using the principles set out in Paragraphs 52 to 54;

“Canadian DC” means XXXXXXXXXX, a corporation existing under the BCA 3;

“Canadian DC Articles” means the certificate and articles of amalgamation of Canadian DC which became effective on XXXXXXXXXX;

“Canadian DC Capital Reorganization” means the reorganization of capital described in Paragraph 49;

“Canadian DC Common Shares” means the shares described in Paragraph 19;

“Canadian DC New Common Shares” means the shares described in Paragraph 47(a);

“Canadian DC Redemption Amount” means the redemption amount of a Canadian DC Special Share, as described in Paragraph 48(c);

“Canadian DC Redemption Note” means the promissory note described in Paragraph 59;

“Canadian DC Special Shares” means the shares described in Paragraph 47(b);

“Canadian DC Spin Business” has the meaning assigned in Paragraph 22;

“Canadian TC” means the new unlimited liability company to be incorporated under the BCA 2 as described in Paragraph 45;

“Canadian TC Common Shares” means the shares described in Paragraph 45(a);

“Canadian TC Redemption Amount” means the redemption amount of a Canadian TC Special Share, as described in Paragraph 46(c);

“Canadian TC Redemption Note” means the promissory note described in Paragraph 58;

“Canadian TC Special Shares” means the shares described in Paragraph 45(b);

“Canco 1” means XXXXXXXXXX, a corporation existing under the BCA 1;

“Canco 1 Loan” means the loan described in Paragraph 24;

“Canco 2” means XXXXXXXXXX, a corporation existing under the BCA 4;

“Canco 2 Debt” means the debt obligation described in Paragraph 28;

“Canco 3” means XXXXXXXXXX, a corporation existing under the BCA 4;

“Canco 3 Debt” means the debt obligation described in Paragraph 29;

“capital property” has the meaning assigned by section 54 and subsection 248(1);

“Cash Pooling Participant” has the meaning assigned in Paragraph 33;

“CDA” means capital dividend account, as defined in subsection 89(1);

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

“CRA” means the Canada Revenue Agency;

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

“Distribution Property” means the property owned by Canadian DC which will be transferred to Canadian TC pursuant to the First Distribution, as described in Paragraph 55;

“dividend refund” has the meaning assigned in paragraph 129(1)(a);

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

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

“First Distribution” means the transfer of property described in Paragraph 55;

“First Distribution Steps” means the transactions described in Paragraphs 44 to 61;

“First Three-Party Share Exchange” means the share exchange described in Paragraph 50;

“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;

“Forco 1” means XXXXXXXXXX, a corporation existing under the laws of XXXXXXXXXX;

“Forco 2” means XXXXXXXXXX, a corporation existing under the laws of XXXXXXXXXX;

“Forco 3” means XXXXXXXXXX, a corporation existing under the laws of XXXXXXXXXX;

“Foreign DC” means the new limited liability company to be formed under the laws of XXXXXXXXXX as described in Paragraph 44;

“Foreign Holdco 1” means the new corporation to be incorporated under the laws of XXXXXXXXXX as described in Paragraph 39;

“Foreign Holdco 2” means the new corporation to be incorporated under the laws of XXXXXXXXXX as described in Paragraph 40;

“Foreign Pubco” means XXXXXXXXXX, a corporation existing under the laws of XXXXXXXXXX;

“Foreign Spin Business” has the meaning assigned in Paragraph 41;

“Foreign Spinco” means the new corporation to be formed under the laws of XXXXXXXXXX as described in Paragraph 37;

“Foreign TC” means the new corporation to be formed under the laws of XXXXXXXXXX as described in Paragraph 64;

“Former Canco” means XXXXXXXXXX, a corporation incorporated under the BCA 1;

“Group Account” has the meaning assigned in Paragraph 34;

“GST” means the Goods and Services Tax imposed under the laws of Canada;

“HST” means the Harmonized Sales Tax imposed under the laws of Canada, New Brunswick, Newfoundland and Labrador, Nova Scotia, Ontario and Prince Edward Island;

“New LLC” means the new limited liability company to be formed under the laws of XXXXXXXXXX as described in Paragraph 38;

“Non-resident” has the meaning assigned by subsection 248(1);

“Operating Account” has the meaning assigned in Paragraph 34;

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

“permanent establishment” has the meaning assigned by subsection 400(2) of the Regulations;

“POD” means proceeds of disposition, as defined in section 54;

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

“Proposed Transactions” means the transactions described in Section III below;

“PST” means the Provincial Sales Tax imposed under the laws of British Columbia, Manitoba, and Saskatchewan; 

“Pubco Group” means Foreign Pubco, together with its direct and indirect subsidiaries;

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

“QST” means the Québec Sales Tax imposed under the laws of Québec;

“Record Account” has the meaning assigned in Paragraph 34;

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

“Regulations” means the Income Tax Regulations, C.R.C., c.945, as amended to the date hereof;

“related persons” has the meaning assigned by subsection 251(2);

“Second Distribution” means the transaction described in Paragraph 67;

“Second Distribution Steps” means the transactions described in Paragraphs 62 to 67;

“Second Three-Party Share Exchange” means the share exchange described in Paragraph 65;

“Segments” means, collectively, XXXXXXXXXX;

XXXXXXXXXX

“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;

“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);

“Spin Business” has the meaning assigned in Paragraph 9;

“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); 

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

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

II.    FACTS

Foreign Pubco

1.    Foreign Pubco is the parent company in the Pubco Group. Foreign Pubco is a non-resident corporation. The authorized share capital of Foreign Pubco consists of XXXXXXXXXX common shares and XXXXXXXXXX preferred shares. As of the date if this letter, there were approximately XXXXXXXXXX common shares and no preferred shares issued and outstanding. The common shares of Foreign Pubco are listed on the XXXXXXXXXX Stock Exchange.

2.    The common shares of Foreign Pubco are widely-held. To the best of Foreign Pubco’s knowledge, no person or related group of persons beneficially owns, directly or indirectly, more than XXXXXXXXXX% of the issued and outstanding shares of any class of Foreign Pubco.

3.    The Pubco Group provides a variety of share-based compensation plans to its officers and employees. Common shares of Foreign Pubco, and rights in respect of such shares, are granted to officers and employees of the members of the Pubco Group pursuant to these plans. All such shares are newly-issued directly by Foreign Pubco. As of XXXXXXXXXX, approximately XXXXXXXXXX common shares of Foreign Pubco were reserved for issuance under share-based compensation plans of the Pubco Group.

4.    The common shares of Foreign Pubco are the subject of a direct stock purchase and dividend reinvestment plan administered by XXXXXXXXXX, an arm’s length third party. This plan allows members of the public to acquire common shares of Foreign Pubco. All such shares are newly-issued directly by Foreign Pubco. Employees of Foreign Pubco may participate in this plan. Other members of the Pubco Group may not participate in this plan.

5.    Foreign Pubco regularly purchases its outstanding common shares for treasury through a share purchase program. The current share purchase program was approved by the board of directors of Foreign Pubco in XXXXXXXXXX, and is the most recent in a series of such programs which have been in place for over XXXXXXXXXX years, with the immediately prior program being approved in XXXXXXXXXX.  Up to XXXXXXXXXX common shares can be purchased under the current share purchase program, and as of XXXXXXXXXX, approximately XXXXXXXXXX common shares remained available for purchase. Foreign Pubco purchased approximately XXXXXXXXXX common shares under the program in the XXXXXXXXXX month period ended XXXXXXXXXX.

6.    Foreign Pubco pays quarterly dividends on its common shares, in XXXXXXXXXX of each year.

Business of the Pubco Group

7.    The Pubco Group XXXXXXXXXX. The business activities of the Pubco Group are organized into XXXXXXXXXX, based on the nature of the products and services rendered:

XXXXXXXXXX

8.    For the year ended on XXXXXXXXXX, the Pubco Group’s net sales were approximately US$XXXXXXXXXX, of which XXXXXXXXXX were attributable to XXXXXXXXXX.

9.    On XXXXXXXXXX, the Pubco Group announced that it planned to spin-off its global XXXXXXXXXX operations (the “Spin Business”) to its shareholders. The spin-off will result in XXXXXXXXXX. The global spin-off is expected to be substantially completed by XXXXXXXXXX.

10.    As part of the spin-off, the assets of the Spin Business held by the Pubco Group members, including Canadian DC, will be directly or indirectly transferred to Foreign Spinco or its subsidiaries. Following the spin-off, Foreign Spinco will be the parent company for the Spin Business, which will be carried on by Foreign Spinco together with its direct and indirect subsidiaries. The shares of Foreign Spinco will be publicly-listed.

Relevant Members of the Pubco Group

11.    The activities of the Pubco Group are conducted through numerous direct and indirect subsidiaries of Foreign Pubco. The members of the Pubco Group that are relevant to the Proposed Transactions are described below.

12.    Forco 1 is a non-resident corporation. All of the issued and outstanding shares of Forco 1 are directly owned by Foreign Pubco.

13.    Forco 2 is a non-resident corporation. All of the issued and outstanding shares of Forco 2 are directly owned by Forco 1.

14.    Forco 3 is a non-resident corporation. The capital of Forco 3 is divided equally into XXXXXXXXXX quotas, XXXXXXXXXX of which are owned by Forco 1 and 3 of which are owned by Canadian DC. Forco 3 indirectly owns companies that carry on business operations of the Pubco Group in XXXXXXXXXX.

15.    Canco 1 is a taxable Canadian corporation and a private corporation. Canco 1 is a successor to Former Canco by way of amalgamation. All of the issued and outstanding shares of Canco 1 are directly owned by Forco 2.

16.    Canco 2 is a taxable Canadian corporation and a private corporation. All of the issued and outstanding shares of Canco 2 are indirectly owned by Foreign Pubco.

17.    Canco 3 is a taxable Canadian corporation and a private corporation. All of the issued and outstanding shares of Canco 3 are indirectly owned by Foreign Pubco.

Canadian DC

18.    Canadian DC is a taxable Canadian corporation and a private corporation. Canadian DC has a XXXXXXXXXX taxation year-end. Canadian DC’s head office is located at XXXXXXXXXX. Canadian DC’s business number and tax account number is XXXXXXXXXX, it deals with the XXXXXXXXXX Tax Services Office, and it files its returns with the XXXXXXXXXX Tax Centre. Canadian DC has not made a functional currency election under paragraph 261(3)(b). Canadian DC was formed on XXXXXXXXXX, upon the amalgamation of the former XXXXXXXXXX and XXXXXXXXXX.

19.    Canadian DC’s authorized share capital consists solely of an unlimited number of common shares (the “Canadian DC Common Shares”), of which XXXXXXXXXX shares are issued and outstanding. All of the issued and outstanding Canadian DC Common Shares are owned by Forco 2, which holds these shares as capital property. Canadian DC has not issued any shares during the XXXXXXXXXX-year period ending XXXXXXXXXX and will not issue any shares prior to the completion of the Proposed Transactions, other than as part of the Proposed Transactions.

20.    The Canadian DC Common Shares are not short-term preferred shares, taxable preferred shares, or taxable RFI shares.

21.    Prior to the First Distribution Steps, the FMV of the Canadian DC Common Shares will exceed the ACB of such shares to Forco 2 and the PUC of such shares.

Business of Canadian DC

22.    Canadian DC carries on Canadian business operations of the Pubco Group. Canadian DC carries on business operations of XXXXXXXXXX, including business operations of XXXXXXXXXX (the “Canadian DC Spin Business”). Canadian DC offers XXXXXXXXXX. As a result of these activities, Canadian DC incurs amounts payable to members of the Pubco Group. Canadian DC conducts its business activities through permanent establishments in XXXXXXXXXX.

23.    As of XXXXXXXXXX, Canadian DC employed approximately XXXXXXXXXX employees in its business operations, and approximately XXXXXXXXXX of these employees were employed in activities relating to the Canadian DC Spin Business.

24.    Canadian DC has a loan receivable from Canco 1 under a loan agreement dated XXXXXXXXXX (the “Canco 1 Loan”). The Canco 1 Loan was advanced to Former Canco to finance its acquisition of the former XXXXXXXXXX. Former Canco amalgamated with the former XXXXXXXXXX to form Canco 1, and its obligations under the Canco 1 Loan became obligations of Canco 1. The Canco 1 Loan allowed Former Canco to borrow money from Canadian DC up to a maximum principal amount of $XXXXXXXXXX, and had an outstanding principal amount of $XXXXXXXXXX as of XXXXXXXXXX. The Canco 1 Loan has a term of XXXXXXXXXX years plus XXXXXXXXXX days from the date of the borrowing and is not payable on demand. The principal amount of the Canco 1 Loan is payable in XXXXXXXXXX equal annual instalments, and may be prepaid at the borrower’s option. The outstanding principal amount of the Canco 1 Loan bears interest at a rate of XXXXXXXXXX% per annum, or such other arm’s length rate as may be agreed by the parties, payable quarterly. The Canco 1 Loan is not convertible into other property.  Canco 1 will not exercise its right to prepay any portion of the Canco 1 Loan within the XXXXXXXXXX months following the date of this letter.

25.    Canadian DC owns real properties located at XXXXXXXXXX. The property at XXXXXXXXXX is shared by a division of Canadian DC’s XXXXXXXXXX operations and a division of the Canadian DC Spin Business, which uses the property for XXXXXXXXXX. The property at XXXXXXXXXX is used by Canadian DC’s XXXXXXXXXX operations for XXXXXXXXXX.

26.    Canadian DC leases the other properties used in its business operations from arm’s length lessors and from other members of the Pubco Group. Canadian DC has entered into sub-lease arrangements in respect of XXXXXXXXXX leased properties, located in XXXXXXXXXX, under which it sub-leases a portion of each property to arm’s length sub-lessees (the remaining portions of each property are used by Canadian DC in its other business activities). The rent received by Canadian DC under each sub-lease is less than the rent paid by Canadian DC under the lease of the relevant property.  The sub-leased portion of the leased properties represents approximately XXXXXXXXXX% of the total space leased by Canadian DC.

27.    Canadian DC owns approximately XXXXXXXXXX% of the outstanding quotas of Forco 3, as described in Paragraph 14 above. Canadian DC does not own shares of any other corporation, does not own any interest in a partnership and is not a party to any joint venture agreement.

28.    Canadian DC has a debt owing to Canco 2 under a loan agreement dated XXXXXXXXXX (“Canco 2 Debt”). This loan agreement allows Canadian DC to borrow from Canco 2 in one or more drawdowns, up to a maximum principal amount of $XXXXXXXXXX. The Canco 2 Debt had an outstanding principal amount of $XXXXXXXXXX as of XXXXXXXXXX. Amounts borrowed under the Canco 2 Debt are payable XXXXXXXXXX years after the date of borrowing, and may be prepaid at the borrower’s option. The principal amount currently outstanding under the Canco 2 Debt is payable between XXXXXXXXXX. The outstanding principal amount of the Canco 2 Debt bears interest at a rate based on the monthly Canadian bankers’ acceptance rate, or such other arm’s length rate as may be agreed by the parties, payable quarterly. The Canco 2 Debt is not convertible into other property.  Canadian DC will not exercise its right to prepay any portion of the Canco 2 Debt within the XXXXXXXXXX months following the date of this letter.

29.    Canadian DC has a debt owing to Canco 3 under a loan agreement dated XXXXXXXXXX and amended effective XXXXXXXXXX (“Canco 3 Debt”). This loan agreement allows Canadian DC to borrow from Canco 3 in one or more drawdowns, up to a maximum principal amount of $XXXXXXXXXX (effective from the XXXXXXXXXX amendment). The Canco 3 Debt had an outstanding principal amount of $XXXXXXXXXX as of XXXXXXXXXX. Amounts borrowed under the Canco 3 Debt are payable XXXXXXXXXX years after the date of borrowing, and may be prepaid at the borrower’s option. The principal amount currently outstanding under the Canco 3 Debt is payable between XXXXXXXXXX. The outstanding principal amount of the Canco 3 Debt bears interest at a rate based on the XXXXXXXXXX Canadian bankers’ acceptance rate, or such other arm’s length rate as may be agreed by the parties, payable XXXXXXXXXX.  The Canco 3 Debt is not convertible into other property.  Canadian DC will not exercise its right to prepay any portion of the Canco 3 Debt within the XXXXXXXXXX months following the date of this letter.

30.    The funds borrowed by Canadian DC under the Canco 2 Debt and the Canco 3 Debt were deposited into bank accounts of Canadian DC with the XXXXXXXXXX and were commingled with the funds received by Canadian DC under the cash pooling arrangements described in Paragraphs 33 to 35 below. These funds are available for use by Canadian DC and by other participants in the cash pooling arrangements for general corporate purposes and cannot be traced to any particular property or particular use by such participants.

31.    Certain officers and employees of Canadian DC are eligible to receive shares of Foreign Pubco, or rights in respect of such shares, under the share-based compensation plans of the Pubco Group described in Paragraph 3. All such shares are newly-issued directly by Foreign Pubco.

32.    Canadian DC provides several pension and other post-employment benefit plans that collectively cover substantially all of its employees. The post-employment benefit plans provided by Canadian DC include defined benefit pension plans, defined contribution pension plans, retirement allowance plans, and post-retirement life insurance and health care plans. The defined benefit plans are closed to new members, and current employees of Canadian DC are transitioning to the defined contribution plans. Accrual of benefits under the defined benefit pension plans ceased, effective XXXXXXXXXX.

33.    Canadian DC participates in cash pooling arrangements with certain other Canadian-resident members of the Pubco Group (each a “Cash Pooling Participant”) and the XXXXXXXXXX, an arm’s length financial services company. Canadian DC is the head entity in these cash pooling arrangements and holds the bank account in which the cash of the various Cash Pooling Participants is pooled.

34.    Canadian DC maintains a group bank account (the “Group Account”) with the XXXXXXXXXX. Each Cash Pooling Participant maintains XXXXXXXXXX current operating bank accounts (each an “Operating Account”) and a single record entry account (each a “Record Account”) with the XXXXXXXXXX. The accounts of the Cash Pooling Participants are balanced at the close of business on each banking day. In particular:

(a)    If a Cash Pooling Participant has a credit balance in its Operating Account(s), the XXXXXXXXXX will make debit entries to the Record Account for that Cash Pooling Participant in an amount equal to such credit balance, and will make a corresponding credit entry to the Group Account; and

(b)    If a Cash Pooling Participant has a debit balance in its Operating Account(s), the XXXXXXXXXX will make credit entries to the Record Account for that Cash Pooling Participant in an amount equal to such debit balance, and will make a corresponding debit entry to the Group Account.

The Cash Pooling Participants agree that these transactions have the same legal effect as actual transfers of funds from (or to) the Group Account to (or from) the Record Accounts.

35.    This daily cash balancing is reflected by loans between Canadian DC and the Cash Pooling Participants. A transfer of funds from the Record Account of a Cash Pooling Participant to the Group Account increases the amount payable (or decreases the amount receivable) by Canadian DC to (or from) that Cash Pooling Participant. A transfer of funds from the Group Account to the Record Account of a Cash Pooling Participant decreases the amount payable (or increases the amount receivable) by Canadian DC to (or from) that Cash Pooling Participant. All such loans are payable on demand. Interest accrues on the outstanding loan balances at market rates, and is settled on a monthly basis.

Recent Activities

36.    As described above, the Pubco Group conducts XXXXXXXXXX, and engages in various transactions in the ordinary course of business. The Pubco Group also frequently participates in the acquisition and divestiture of business operations outside of the ordinary course of business, as opportunities arise from time to time. As a member of the Pubco Group, Canadian DC also likewise acquires and divests of business operations outside of the ordinary course of business, as opportunities arise from time to time. These purchases and sales are generally made for cash consideration. Several such transactions have occurred in recent years, and more are expected to occur in the near future. These transactions are independent of the Proposed Transactions and would occur regardless of whether the Proposed Transactions are undertaken and the Proposed Transactions would occur regardless of whether such purchase or sale transactions were completed.  Over the past XXXXXXXXXX years, the only such transactions that Canadian DC has been involved in were the following:

(a)    On XXXXXXXXXX, Canadian DC sold the assets of its XXXXXXXXXX business (part of its XXXXXXXXXX operations) to XXXXXXXXXX, an arm’s length purchaser, in exchange for the assumption of liabilities associated with the transferred assets.

(b)    On XXXXXXXXXX, Canadian DC sold the assets of its XXXXXXXXXX business (part of its XXXXXXXXXX operations) to XXXXXXXXXX, an arm’s length purchaser, in exchange for $XXXXXXXXXX cash and the assumption of liabilities associated with the transferred assets.

III.    PROPOSED TRANSACTIONS

Initial Global Spin-off Steps

37.    Foreign Pubco will incorporate Foreign Spinco under the laws of XXXXXXXXXX. The authorized share capital of Foreign Spinco will consist solely of common shares. Foreign Pubco will subscribe for shares of Foreign Spinco upon its formation for nominal cash consideration. Foreign Spinco will be a non-resident of Canada for purposes of the Act.

38.    Foreign Pubco will incorporate New LLC under the laws of XXXXXXXXXX. The authorized capital of New LLC will be designated as units. Foreign Pubco will subscribe for units of New LLC upon its formation for nominal cash consideration. New LLC will be a non-resident of Canada for purposes of the Act.

39.    Foreign Pubco will incorporate Foreign Holdco 1 under the laws of XXXXXXXXXX, and will subscribe for shares of Foreign Holdco 1 upon its formation for nominal cash consideration. Foreign Holdco 1 will be a non-resident of Canada for purposes of the Act.

40.    Foreign Holdco 1 will incorporate Foreign Holdco 2 under the laws of XXXXXXXXXX, and will subscribe for shares of Foreign Holdco 2 upon its formation for nominal cash consideration. Foreign Holdco 2 will be a non-resident of Canada for purposes of the Act.

41.    The foreign members of the Pubco Group will directly or indirectly transfer the assets of the non-Canadian XXXXXXXXXX business operations (the “Foreign Spin Business”) to New LLC or Foreign Holdco 1 (or a direct or indirect subsidiary of Foreign Holdco 1) as follows:

(a)    Foreign Pubco will contribute any U.S. assets of the Foreign Spin Business, or shares of U.S. companies that hold such assets, that it holds directly, to New LLC for units and / or unit premium; 

(b)    Foreign members of the Pubco Group in the U.S. will generally distribute U.S. assets of the Foreign Spin Business, or shares of U.S. companies that hold such assets, to Foreign Pubco (and for greater certainty, Foreign Pubco will not issue any shares or debt as part of these steps), and Foreign Pubco will contribute such assets to New LLC for units and / or unit premium; and

(c)    Foreign members of the Pubco Group outside of the U.S. will generally transfer the non-U.S. Foreign Spin Business assets, or shares of non-U.S. foreign companies that hold such assets, in one of two ways:

(i)    such assets will be transferred to Foreign Holdco 1 or Foreign Holdco 2 (or, in some cases, to a direct or indirect subsidiary of Foreign Holdco 2 that Foreign Holdco 2 either acquires as part of the Proposed Transactions or that is newly formed) for FMV consideration; or 

(ii)    such assets will be distributed to Foreign Pubco (and for greater certainty, Foreign Pubco will not issue any shares or debt as part of these steps) and then contributed by Foreign Pubco to Foreign Holdco 1 (and such assets may be contributed by Foreign Holdco 1 to Foreign Holdco 2, and Foreign Holdco 2 may also contribute such assets to a direct or indirect subsidiary of Foreign Holdco 2) for FMV consideration. 

The transfer of the Foreign Spin Business assets in certain jurisdictions will involve more complex steps. The consideration for the transfers described in (c)(i) will be for either cash or a note payable, and any note payable will immediately be capitalized for share consideration as part of the Proposed Transactions. The transfers from Foreign Pubco to Foreign Holdco 1, and further down the corporate chain, described in (c)(ii), will be either for cash, shares and / or share premium or by way of a capital contribution. Foreign Holdco 1, Foreign Holdco 2 and any other relevant asset transferee will obtain the requisite cash from intercompany borrowings from an indirect foreign subsidiary of Foreign Pubco that is not a direct or indirect shareholder of Canadian DC.

42.    Following the completion of all or substantially all of the transfers described in Paragraph 41(c), Foreign Pubco will transfer the shares of Foreign Holdco 1 to New LLC for additional units or by way of a capital contribution.

43.    The assets of the Foreign Spin Business to be transferred directly or indirectly to Foreign Spinco as described in Paragraph 41 will not include shares of Foreign Pubco, Forco 1, Forco 2, Canadian DC, Canco 2, Canco 3, or any direct or indirect shareholder of Canco 2 or Canco 3. As described in Paragraph 22, several members of the Pubco Group have amounts receivable from Canadian DC, which were incurred in the ordinary course of Canadian DC’s business. Certain of these amounts receivable, and/or shares of companies that directly or indirectly hold such amounts receivable, may be directly or indirectly transferred to Foreign Spinco as part of the transfer of the Foreign Spin Business assets.

First Distribution Steps

44.    Prior to the First Three-Party Share Exchange, Forco 2 will incorporate Foreign DC under the laws of XXXXXXXXXX. The authorized capital of Foreign DC will be designated as units. Forco 2 will subscribe for units of Foreign DC upon its formation for nominal cash consideration. Foreign DC will be a non-resident of Canada for purposes of the Act.

45.    Prior to the First Three-Party Share Exchange, Foreign DC will incorporate Canadian TC under the BCA 2. The authorized share capital of Canadian TC will consist of:

(a)    an unlimited number of voting, fully participating common shares (the “Canadian TC Common Shares”); and

(b)    an unlimited number of preferred shares (the “Canadian TC Special Shares”), with terms and conditions described in Paragraph 46.

Foreign DC will subscribe for Canadian TC Common Shares upon its formation for nominal cash consideration. Canadian TC will be a taxable Canadian corporation and will adopt a XXXXXXXXXX taxation year-end.

46.    The Canadian TC Special Shares will have the following terms:

(a)    The Canadian TC Special Shares will be non-voting.

(b)    Each Canadian TC Special Share will entitle the holder to receive non-cumulative dividends as and when declared by the board of directors of Canadian TC.

(c)    The Canadian TC Special Shares will be redeemable and retractable, subject to applicable law, at any time at the option of the holder or Canadian TC for a redemption amount per share (the “Canadian TC Redemption Amount”) equal to the aggregate of the following two amounts:

(i)    the FMV of the consideration paid to Canadian TC for the issuance of the Canadian TC Special Share; and

(ii)    that amount which is equal to all declared and unpaid dividends on such Canadian TC Special Share.

(d)    Except with the consent in writing of the holders of all of the Canadian TC Special Shares, no dividend shall at any time be declared and paid on, or declared and set apart for payment on, the Canadian TC Common Shares unless, after the payment of such dividend, the realizable value of the assets of Canadian TC would not be less than the aggregate Canadian TC Redemption Amount.

(e)    In the event of the dissolution, liquidation or winding-up of Canadian TC, whether voluntary or involuntary, or any other distribution of assets of Canadian TC among its shareholders for the purpose of winding-up its affairs, the holders of Canadian TC Special Shares will be entitled to receive from the assets of Canadian TC an amount equal to the aggregate Canadian TC Redemption Amount before any amount will be paid or any assets of Canadian TC are distributed upon any liquidation, dissolution or winding-up of Canadian TC to the holders of the Canadian TC Common Shares. After payment to the holders of Canadian TC Special Shares of the amount so payable to them, such holders shall not be entitled to share in any further distribution of the assets of Canadian TC.

47.    Canadian DC will reorganize its capital by filing articles of amendment to amend the Canadian DC Articles to create and authorize the issuance of (in addition to the shares that Canadian DC is authorized to issue immediately before such amendment) the following new classes of shares:

(a) an unlimited number of common shares (the “Canadian DC New Common Shares”), with terms and conditions identical to the Canadian DC Common Shares immediately before such amendment, except that each Canadian DC New Common Share will entitle the holder to XXXXXXXXXX votes per share (XXXXXXXXXX); and

(b) an unlimited number of preferred shares (the “Canadian DC Special Shares”), with terms and conditions described in Paragraph 48.

48.    The Canadian DC Special Shares will have the following terms:

(a)    The Canadian DC Special Shares will be non-voting.

(b)    Each Canadian DC Special Share will entitle the holder to receive non-cumulative dividends as and when declared by the board of directors of Canadian DC.

(c)    The Canadian DC Special Shares will be redeemable and retractable, subject to applicable law, at any time at the option of the holder or Canadian DC, for a redemption amount per share (the “Canadian DC Redemption Amount”) equal to the total of the following two amounts:

(i)    that amount which is equal to the quotient obtained when

(A) the amount equal to the aggregate FMV of all of the issued and outstanding Canadian DC Common Shares, determined immediately prior to the Canadian DC Capital Reorganization, multiplied by the Butterfly Percentage;

is divided by:

(B)    the number of Canadian DC Special Shares issued in connection with the Canadian DC Capital Reorganization;

plus:

(ii)    that amount which is equal to all declared and unpaid dividends on such Canadian DC Special Share.

(d)    Except with the consent in writing of the holders of all of the Canadian DC Special Shares, no dividend shall at any time be declared and paid on, or declared and set apart for payment on any other class of Canadian DC shares unless, after the payment of such dividend, the realizable value of the assets of Canadian DC would not be less than the aggregate Canadian DC Redemption Amount.

(e)    In the event of the dissolution, liquidation or winding-up of Canadian DC, whether voluntary or involuntary, or any other distribution of assets of Canadian DC among its shareholders for the purpose of winding-up its affairs, the holders of Canadian DC Special Shares will be entitled to receive from the assets of Canadian DC an amount equal to the aggregate Canadian DC Redemption Amount before any amount will be paid or any assets of Canadian DC are distributed upon any liquidation, dissolution or winding-up of Canadian DC to the holders of any other class of Canadian DC shares. After payment to the holders of Canadian DC Special Shares of the amount so payable to them, such holders shall not be entitled to share in any further distribution of the assets of Canadian DC.

49.    Forco 2 will exchange each issued and outstanding Canadian DC Common Share for one Canadian DC New Common Share and one Canadian DC Special Share, and the Canadian DC Common Shares so exchanged will be cancelled (the “Canadian DC Capital Reorganization”). In connection with the Canadian DC Capital Reorganization:

(a)    Canadian DC and Forco 2 will not make a joint election under the provisions of subsection 85(1); and

(b) Canadian DC will add to the stated capital accounts of the Canadian DC New Common Shares and the Canadian DC Special Shares issued on the Canadian DC Capital Reorganization an aggregate amount equal to the aggregate PUC of the Canadian DC Common Shares immediately before such exchange, and such PUC will be allocated between the Canadian DC New Common Shares and the Canadian DC Special Shares based on the proportion that the FMV of the Canadian DC New Common Shares and the Canadian DC Special Shares, as the case may be, is of the FMV of all of the Canadian DC New Common Shares and the Canadian DC Special Shares issued on such exchange.

50.    In the context of a three-party transfer agreement between Forco 2, Canadian TC and Foreign DC (the “First Three-Party Share Exchange”), Forco 2 will transfer the Canadian DC Special Shares to Canadian TC for a purchase price equal to the aggregate FMV of such Canadian DC Special Shares in the following manner:

(a)    Canadian TC will agree to pay the purchase price for the Canadian DC Special Shares transferred to it by Forco 2 by issuing Canadian TC Common Shares to Foreign DC having an aggregate FMV at that time equal to the aggregate FMV of the Canadian DC Special Shares so transferred to it by Forco 2, and Canadian TC and Foreign DC both will agree that the Canadian TC Common Shares will be issued to Foreign DC in respect of and by virtue of the disposition by Forco 2 of the Canadian DC Special Shares to Canadian TC;

(b)    Forco 2 will agree to pay the purchase price for the Foreign DC units issued to it as described in (c) below by transferring all of the Canadian DC Special Shares to Canadian TC; and

(c)    Foreign DC will agree to pay the purchase price for the Canadian TC Common Shares issued to it as described in (a) above by issuing units to Forco 2 having an aggregate FMV at that time equal to the aggregate FMV of the Canadian TC Common Shares issued to it.

In connection with the First Three-Party Share Exchange, Canadian TC will add an amount to the stated capital account of the Canadian TC Common Shares equal to the aggregate stated capital of the Canadian DC Special Shares transferred to Canadian TC.

51.    The aggregate FMV, immediately before the transfer of property by Canadian DC to Canadian TC described in Paragraph 55, of the units of Foreign DC owned by Forco 2 will be equal to or approximate the amount determined by the formula:

(A × B/C) + D

as found in subparagraph (b)(iii) of the definition of “permitted exchange” in subsection 55(1) on the assumption that Forco 2 is the participant, Canadian DC is the distributing corporation and Foreign DC is the acquiror.  For greater certainty, Forco 2 will at all relevant times prior to the distribution described in Paragraph 62 own all of the issued and outstanding units of Foreign DC. 

52.    Canadian DC would be considered to have Significant Influence over a corporation or partnership if it has Significant Influence over that corporation or partnership or over any other corporation or partnership that has Significant Influence over that corporation or partnership, or if Canadian DC in combination with corporations or partnerships over which it has Significant Influence have Significant Influence over that corporation or partnership. Immediately before the transfer of the Distribution Property by Canadian DC to Canadian TC described in Paragraph 55, Canadian DC will not own shares of any other corporation, other than XXXXXXXXXX% of the outstanding quotas of Forco 3 as described in Paragraph 14, and will not own any interest in a partnership. Accordingly, Canadian DC will not exercise Significant Influence over any corporation or partnership. As a result, Canadian DC will not be required to use the consolidated look-through approach when classifying its assets in accordance with the principles described in Paragraphs 53 and 54.

53.    Immediately before the transfer of the Distribution Property by Canadian DC to Canadian TC described in Paragraph 55, the assets of Canadian DC 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 Canadian DC, including cash, short-term deposits and similar amounts receivable within one year, marketable securities, accounts receivable (including HST/GST/QST receivables) inventory and prepaid expenses;

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

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

(e)    the amount of any deferred or future income tax asset will not be considered property;

(f)    advances and loans of Canadian DC, or portions thereof (including those owing from non-arm’s length persons), that are not due within the next XXXXXXXXXX months and that have a fixed term of repayment (other than as described in Paragraph 53(k) below), will be considered business property;

(g)    advances and loans of Canadian DC, or portions thereof (including those owing from non-arm’s length persons) that are due within the next XXXXXXXXXX months or those with no fixed term of repayment, will be considered cash or near-cash property;

(h)    accounts receivable will be classified as cash or near-cash property even if they are not expected to be paid within XXXXXXXXXX months;

(i)    amounts receivable by Canadian DC under the cash pooling arrangement, as described in Paragraphs 33 to 35, will be considered cash or near-cash property;

(j)    the quotas of Forco 3 owned by Canadian DC will be considered investment property;

(k)    notwithstanding Paragraph 53(f) above, the portion of the Canco 1 Loan that is not due within the next XXXXXXXXXX months will be considered investment property;

(l)    the real properties described in Paragraph 25 will be considered business property;

(m)    the leasehold interests of Canadian DC which are subject to the sub-lease arrangements described in Paragraph 26 will be considered business property;

(n)    any net pension plan asset (i.e., actuarial plan assets in excess of actuarial plan liabilities) of Canadian DC will not be considered property of Canadian DC;

(o)    income and other taxes receivable (excluding HST/GST/QST) within a year, as well as any corresponding interest and penalties, which relate to either: an assessment, additional assessment, reassessment or variance thereof received prior to the transfer of property described in Paragraph 55 or a return filed for a taxation year for which no assessment, additional assessment, reassessment or variance thereof has been received prior to the transfer of property described in Paragraph 55, will be classified as cash or near-cash property. Income and other taxes receivable (excluding HST/GST/QST) that relate to taxation years for which a return has not been filed will not be considered property; and

(p)    HST/GST/QST receivable within a year, which relates to reporting periods ending prior to the transfer of property described in Paragraph 55 for which a return has been filed, will be classified as cash or near-cash property. HST/GST/QST receivable that relates to reporting periods ending after the transfer of property described in Paragraph 55 or to reporting periods for which a return has not been filed will not be considered property.

54.    In determining the net FMV of each of the three types of property of Canadian DC immediately before the transfer of property described in Paragraph 55, the liabilities of Canadian DC will be allocated to, and will be deducted in the calculation of, the net FMV of each type of property of Canadian DC, in the following manner:

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

(b)    following the allocation of current liabilities to each cash or near-cash property in (a) above, any remaining net FMV of any accounts receivable (including HST/GST/QST receivables and accounts receivable owing from non-arm’s length persons), inventories and prepaid expenses of Canadian 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;

(c)    liabilities of Canadian 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

(d)    if any liabilities remain after the allocations described in (a) and (c) are made, such excess unallocated liabilities will then be allocated to the cash or near-cash property, investment property and business property of Canadian 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 (a) and (c) above.

For greater certainty, for the purposes of this determination:

(e)    no amount will be considered to be a liability unless it represents a legal liability which is capable of quantification. For greater certainty, an obligation that is contingent at the time of the transfer of property described in Paragraph 55, unless otherwise noted below, will not be considered to be a liability as the amount does not represent a legal liability that is capable of quantification at that time;

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

(g)    current liabilities will include amounts with no fixed term of repayment and amounts normally classified as current liabilities, including accounts payable, bonuses payable, vacation payable, and the portion of any long-term debt or advance due within one year, owing to both arm’s length and non-arm’s length parties (other than as described in Paragraph 54(j) below);

(h)    income or other taxes due and payable within a year (excluding HST/GST/PST/QST), as well as any corresponding interest and penalties, which relate to either an assessment, additional assessment, reassessment or variance thereof received prior to the transfer of property described in Paragraph 55 or a return filed for a taxation year for which no assessment, additional assessment, reassessment or variance thereof has been received prior to the transfer of property described in Paragraph 55, will be classified as current liabilities. Income and other taxes payable (excluding HST/GST/PST/QST) that relate to taxation years for which a return has not been filed will be classified as contingent liabilities unless they represent non-resident withholding tax or similar non-income taxes which are payable pursuant to the applicable legislation;

(i)    HST/GST/PST/QST payables will be classified as current liabilities.

(j)    notwithstanding Paragraph 54(a) above:

(i)    any amounts payable by Canadian DC under the cash pooling arrangement, as described in Paragraphs 33 to 35, will be considered current liabilities allocable solely to cash;

(ii)    outstanding cheques corresponding to a particular bank account (cash pool or non-cash pool) are to be netted against the positive balance of that same account;

(iii)    if the cash pool account is in a negative balance position, due to outstanding cheques or otherwise, that negative balance can be offset against any other bank account that is in a positive position;

(iv)    if that negative balance exceeds the aggregate positive balance of all other bank accounts, then that excess will be considered to be a current liability for the purposes of Paragraph 54(a); and

(v)    if a particular non-cash pool account is negative, due to outstanding cheques or otherwise, then that negative balance cannot offset the positive balance of another bank account, and such negative balance will be considered to be a current liability for the purposes of Paragraph 54(a);

(k)    any amount collected from customers and recorded as deferred revenue for financial statement purposes will not be considered a liability provided it does not represent a true legal liability capable of quantification;

(l)    any amount recorded as a deferred leasehold inducement for financial statement purposes will not be considered a liability provided it does not represent a true legal liability capable of quantification;

(m)    any net pension liability (i.e. actuarial plan liabilities in excess of actuarial plan assets as determined by the method prescribed by the applicable pension legislation) that is in respect of a registered pension plan that is governed by specific pension legislation will be considered a legal liability capable of quantification. Any net current pension plan liability in respect of these registered plans (i.e. current actuarial plan liabilities in excess of current actuarial plan assets as determined by the method prescribed by the applicable pension legislation) will be allocated to cash or near-cash property, and any net non-current pension plan liability (i.e., non-current actuarial plan liabilities in excess of non-current actuarial plan assets as determined by the method prescribed by the applicable pension legislation) will be allocated to business property;

(n)    any liability that is related to an unregistered retirement plan or similar post-employment arrangement (including a pension plan, a post-retirement benefit plan, a supplemental retirement plan, a disability plan, a health care plan, a dental care plan, a life insurance plan, a plan in respect of long term service awards and a retirement bonus plan), will be considered a contingent liability which will be disregarded provided such amounts are dependent on future events before it can be ascertained that an obligation exists; and

(o)    the Canco 2 Debt and the Canco 3 Debt will be considered liabilities that pertain to cash or near-cash property for purposes of Paragraphs 54(c) and (d).

55.    Canadian DC will transfer assets relating to the Canadian DC Spin Business (the “Distribution Property”) to Canadian TC for a purchase price equal to the FMV of the Distribution Property (the “First Distribution”). As consideration for the Distribution Property, Canadian TC will:

(a)    assume all or a portion of certain liabilities of Canadian DC; and

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

In connection with the First Distribution:

(c)    Canadian DC and Canadian TC will jointly elect, in the prescribed form and manner and within the time specified in subsection 85(6), to have subsection 85(1) apply in respect of the transfer of each eligible property transferred to Canadian TC and in respect of which the Canadian TC Special Shares have been issued as full or partial consideration as described in Paragraph 55. The agreed amount in respect of each eligible property so transferred will be as follows:

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

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

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

and, in each case, the agreed amount will not exceed the FMV of the particular eligible property transferred, nor will it be less than the amount permitted under paragraph 85(1)(b);

(d)    the amount of any liabilities assumed by Canadian TC which are allocated to a particular eligible property that is the subject of an election under subsection 85(1) as described above will not exceed the agreed amount for that particular property;

(e)    Canadian TC will add an amount to the stated capital of the Canadian TC Special Shares equal to the amount by which the aggregate cost to Canadian TC of the properties transferred to Canadian TC (determined pursuant to subsection 85(1), where relevant) exceeds the aggregate amount of the liabilities assumed by Canadian TC on the transfer.  For greater certainty, the amount that will be added to the stated capital of the Canadian TC Special Shares will not exceed the amount that could have been added, having regard to subsection 85(2.1);

(f)    Canadian DC will make payments to Canadian TC in consideration for Canadian TC assuming undertakings of Canadian DC to which paragraph 12(1)(a) applies. In such case, any such payments made by Canadian DC to Canadian TC will be paid as, and considered to be, part of the First Distribution, as described in Paragraph 55, made by Canadian DC to Canadian TC. For purposes of paragraph 20(24)(b), Canadian TC will receive the amounts in the course of the business. Canadian TC and Canadian DC will elect, jointly and in prescribed form within the time referred to in subsection 20(25), to have the rules in subsection 20(24) apply in respect of amounts paid for such amounts; and

(g)    The employees of Canadian DC who are employed in activities relating to Canadian DC Spin Business will become employed by Canadian TC.

56.    As a result of the transfer of the Distribution Property to Canadian TC and the assumption of liabilities by Canadian TC as described in Paragraph 55, the net FMV of each type of property received by Canadian TC will be equal to or approximate that proportion of the net FMV of all property of Canadian DC of that type (as determined immediately before such transfer and using the principles set out in Paragraphs 53 and 54), that:

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

is of

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

In the event that Canadian DC has cash or near-cash property at the time of the transfer, then no later than XXXXXXXXXX days after the date of the transfer of all other property by Canadian DC to Canadian TC as described in Paragraph 55, Canadian DC will transfer to Canadian TC any cash or near cash property that is required to ensure that the net FMV of the cash or near cash property of Canadian DC transferred to Canadian TC as described in Paragraph 55 will approximate that proportion described in paragraph (a) and (b) of Paragraph 56 and such transfer will be considered to have been Distribution Property transferred to Canadian TC as part of the transfer of property as described in this step for purposes of section 55.

In determining the net FMV of each type of property that has been received by Canadian TC, a liability assumed by Canadian TC will be allocated to the same type of property to which such liability was allocated in determining the net FMV of each type of property of Canadian DC (as determined using the principles set out in Paragraphs 53 and 54). 

For greater certainty, a current liability, or a portion thereof, allocated to an account receivable, inventory or prepaid expense of Canadian DC that will be reclassified as business property in accordance with Paragraph 54(b) will be considered to be a liability allocated to a business property. 

To the extent that current liabilities of Canadian DC are allocated to more than one type of property of Canadian DC (for example, as a result of the reclassification of property pursuant to Paragraph 54(b)) and all or a portion of those liabilities are assumed by Canadian TC as partial consideration for the transfer of assets described in Paragraph 55, Canadian TC will have the option to allocate those current liabilities to any such corresponding type of property of Canadian TC, or a combination thereof, provided that the amount of such liabilities allocated to a particular type of property of Canadian TC does not exceed the amount allocated to that same type of property by Canadian DC.

Canadian DC will transfer a portion of the Canco 1 Loan to Canadian TC as part of the First Distribution.  Since the Canco 1 Loan will be considered to be more than one type of property of Canadian DC (as set out in Paragraph 53), Canadian DC and Canadian TC will jointly agree on the portion of the transferred Canco 1 Loan that will be considered to be the corresponding type of property or types of property of Canadian TC, provided that the amount of the transferred Canco 1 Loan considered to be a particular type of property of Canadian TC does not exceed the amount of the Canco 1 Loan considered to be the same type of property by Canadian DC (as set out in Paragraph 53).

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

57.    Canadian DC and Canadian TC may enter into XXXXXXXXXX transitional services agreements, separation agreements, management services agreements, lease agreements or similar agreements relating to the transfer of the Canadian DC Spin Business.  Such agreements will not have any net FMV.

58.    Canadian TC will redeem all of the outstanding Canadian TC Special Shares held by Canadian DC for an amount equal to the aggregate Canadian TC Redemption Amount.  In satisfaction of the Canadian TC Redemption Amount for such shares, Canadian TC will issue to Canadian DC a non-interest-bearing promissory note, payable on demand (the “Canadian TC Redemption Note”) with a principal amount equal to the aggregate Canadian TC Redemption Amount of the shares so redeemed.  Canadian DC will accept the Canadian TC Redemption Note in full payment of the aggregate Canadian TC Redemption Amount of the redeemed shares.  No designation will be made under subsection 89(14) with respect to the dividend deemed to arise under subsection 84(3) on the redemption of the Canadian TC Special Shares.

59.    Canadian DC will redeem all of the outstanding Canadian DC Special Shares held by Canadian TC for an amount equal to the aggregate Canadian DC Redemption Amount. In satisfaction of the Canadian DC Redemption Amount for such shares, Canadian DC will issue to Canadian TC a non-interest-bearing promissory note, payable on demand (the “Canadian DC Redemption Note”) with a principal amount equal to the aggregate Canadian DC Redemption Amount of the shares so redeemed.  Canadian TC will accept the Canadian DC Redemption Note in full payment of the aggregate Canadian DC Redemption Amount of the redeemed shares. No designation will be made under subsection 89(14) with respect to the dividend deemed to arise under subsection 84(3) on the redemption of the Canadian DC Special Shares.

60.    Canadian DC and Canadian TC will enter into a set-off agreement, pursuant to which the principal amount owing by Canadian DC to Canadian TC under the Canadian DC Redemption Note and the principal amount owing by Canadian TC to Canadian DC under the Canadian TC Redemption Note will be set off in full against each other. Following the set-off, each such note will be considered to be paid in full and will be cancelled.

61.    It is expected that share-based compensation plans and post-retirement benefit plans (other than defined benefit plans) will be established for employees of Canadian TC similar to those currently available for employees of the Canadian DC Spin Business of Canadian DC, with the exception that the shares under the plans will be Foreign Spinco shares (or rights in respect of such shares) instead of Foreign Pubco shares. If all members of a particular plan are transferred to Canadian TC, it is expected that sponsorship of the plan will be transferred from Canadian DC to Canadian TC, rather than creating a new plan. For greater certainty, it is not expected that Canadian TC will establish any defined benefit plans, and in the event that an employee of Canadian TC is entitled to benefits under a defined benefit plan of Canadian DC, such employee will continue to be entitled to those benefits after the First Distribution.

Second Distribution Steps

62.    Forco 2 will distribute the units of Foreign DC to Forco 1 as a dividend and a return of share premium.

63.    Forco 1 will in turn distribute the units of Foreign DC to Foreign Pubco as a dividend.

64.    Prior to the Second Three-Party Share Exchange, New LLC will incorporate Foreign TC under the laws of XXXXXXXXXX. The authorized capital of Foreign TC will be comprised of ordinary shares. New LLC will subscribe for ordinary shares of Foreign TC upon its formation, for nominal cash consideration. Foreign TC will be a non-resident of Canada for purposes of the Act.

65.    In the context of a three-party transfer agreement between Foreign Pubco, Foreign TC and New LLC (the “Second Three-Party Share Exchange”), Foreign Pubco will transfer the Foreign DC units to Foreign TC in the following manner:

(a)    Foreign TC will agree to pay the purchase price for the Foreign DC units transferred to it by Foreign Pubco by issuing Foreign TC shares to New LLC having an aggregate FMV at that time equal to the aggregate FMV of the Foreign DC units so transferred to it by Foreign Pubco, and Foreign TC and New LLC both will agree that the Foreign TC shares will be issued to New LLC in respect of and by virtue of the disposition by Foreign Pubco of the Foreign DC units to Foreign TC;

(b)    Foreign Pubco will agree to pay the purchase price for the New LLC units issued to it as described in (c) below by transferring all of the Foreign DC units to Foreign TC; and 

(c)    New LLC will agree to pay the purchase price for the Foreign TC Common Shares issued to it as described in (a) above by issuing units to Foreign Pubco having an aggregate FMV at that time equal to the aggregate FMV of the Foreign TC shares issued to it.

66.    The aggregate FMV, immediately before the transfer of property by Foreign DC to Foreign TC described in Paragraph 67, of the units of New LLC owned by Foreign Pubco will be equal to or approximate the amount determined by the formula: 

(A × B/C) + D

as found in subparagraph (b)(iii) of the definition of “permitted exchange” in subsection 55(1) on the assumption that Foreign Pubco is the participant, Foreign DC is the distributing corporation and New LLC is the acquiror.  For greater certainty, Foreign Pubco will, at all relevant times prior to the transfer described in Paragraph 69, own all of the units of New LLC.

67.    Foreign DC will commence liquidation and dissolution proceedings under the relevant company law. In the course of the liquidation, Foreign DC will distribute all of its property (including the shares of Canadian TC) to its sole unitholder Foreign TC (the “Second Distribution”) and Foreign TC will assume all of the liabilities of Foreign DC (although Foreign DC is not expected to have any liabilities at this time). In due course, within XXXXXXXXXX months of distributing the property, Foreign DC will be dissolved and will cease to exist upon filing a certificate of cancellation.

Final Global Spin-off Steps

68.    Foreign Spinco will borrow money from a third party lender or a syndicate of third party lenders.

69.    Foreign Pubco will transfer the units of New LLC to Foreign Spinco for a portion of the cash borrowed by Foreign Spinco in Paragraph 68 and shares of Foreign Spinco.

70.    Foreign Spinco will make a capital contribution to New LLC using the balance of the cash borrowed in Paragraph 68.

71.    New LLC will use the cash received from Foreign Spinco to make a capital contribution to Foreign Holdco 1 and make a loan to Foreign Holdco 1.

72.    Foreign Holdco 1 will use a portion of the cash received from New LLC to subscribe for additional shares of Foreign Holdco 2 and make a loan to Foreign Holdco 2, and will use the balance to repay intercompany debt it incurred as described in Paragraph 41(c). Foreign Holdco 2 will use the cash received from Foreign Holdco 1, and funds borrowed from a direct or indirect foreign subsidiary of Foreign Holdco 2, to repay the intercompany debt it incurred as described in Paragraph 41(c).

73.    If any direct or indirect subsidiary of Foreign Holdco 2 has intercompany debt it incurred as described in Paragraph 41(c), the particular subsidiary will borrow funds from a direct or indirect foreign subsidiary of Foreign Holdco 2 and use these funds to repay any such intercompany debt. Further, if any direct or indirect subsidiary of Foreign Holdco 2 has pre-existing intercompany debt that is owing to a foreign corporation that will remain a subsidiary of Foreign Pubco following the Proposed Transactions, this debt will be capitalized or refinanced so that such subsidiary will no longer owe such debt and, if the latter, such subsidiary will instead become indebted to a direct or indirect foreign subsidiary of Foreign Holdco 2.

74.    Foreign Pubco, and where applicable, its subsidiaries (including Canadian DC), and Foreign Spinco, and where applicable, its subsidiaries (including Canadian TC), will enter into certain intercompany agreements as necessary in connection with the implementation of the Proposed Transactions and/or to govern the ongoing relationships between Foreign Pubco and its subsidiaries, and Foreign Spinco and its subsidiaries, after the completion of the Proposed Transactions. These agreements will include:

(a)    a separation and distribution agreement, which will govern the overall terms of the separation of Foreign Pubco into XXXXXXXXXX separate public entities, including with respect to the allocation of assets and liabilities, and with respect to the rights and obligations of Foreign Pubco and its subsidiaries and Foreign Spinco and its subsidiaries with respect to the distribution of the Foreign Spinco shares to Foreign Pubco’s shareholders;

(b)    a master contribution agreement, which will set out the key assets to be contributed by Foreign Pubco to Foreign Spinco;

(c)    a tax matters agreement, which will govern the responsibilities of Foreign Pubco and its subsidiaries and Foreign Spinco and its subsidiaries with respect to liabilities for taxes (including payments between the parties with respect to certain tax liabilities and tax benefits realized by one party but attributable to the other party), the preparation and filing of tax returns, and tax disputes;

(d)    a transition services agreement, which will set forth the terms on which Foreign Pubco and its subsidiaries will provide to Foreign Spinco and its subsidiaries (and Foreign Spinco and its subsidiaries will provide to Foreign Pubco and its subsidiaries), on a transitional basis, certain services or functions that the companies historically have shared (including various administrative and information technology services);

(e)    an employee matters agreement, which will govern the respective compensation and benefit obligations of Foreign Pubco and its subsidiaries and Foreign Spinco and its subsidiaries with respect to current and former employees, and will set forth general principles relating to employee matters in connection with the Proposed Transactions (such as the assumption and retention of benefit plan liabilities and related assets, the treatment of outstanding share-based compensation awards, transfers of employees, service credit under benefit plans, and the sharing of employee information);

(f)    an intellectual property cross license agreement, which will allocate ownership of intellectual property rights in certain XXXXXXXXXX jointly developed by Foreign Pubco and Foreign Spinco (or their respective subsidiaries) prior to the date of separation, and pursuant to which each of Foreign Pubco and Foreign Spinco will grant the other a non-exclusive, perpetual, royalty-free license to intellectual property rights (other than any trademarks owned by the licensor party) XXXXXXXXXX, but solely in connection with the business of the licensee party as of the date of separation and any natural extensions or evolutions thereof (Foreign Pubco and Foreign Spinco also expect to enter into a trademark license agreement, pursuant to which Foreign Pubco will grant to Foreign Spinco a license to use a certain trademark in connection with certain products related to the Spin Business);

(g)    XXXXXXXXXX supply agreements, which will provide for the purchase and sale by Foreign Spinco or its subsidiaries of certain goods and services that historically have been purchased from or sold to Foreign Pubco or its subsidiaries on an intercompany basis; and

(h)    XXXXXXXXXX lease agreements, which will provide for the lease or sublease by Foreign Spinco or its subsidiaries of premises to or from Foreign Pubco or its subsidiaries prior to the Proposed Transactions.

In the agreement described in paragraph (c), Foreign Spinco will agree that for a period of XXXXXXXXXX years commencing on the date of the distribution of the Foreign Spinco shares to Foreign Pubco’s shareholders, it will not (and that it will cause each of its direct and indirect subsidiaries, respectively, to not) take any action, omit to take any action or enter into any transaction that could cause the Proposed Transactions to be taxed in a manner inconsistent with that provided for in the ruling without obtaining an advance income tax ruling from the CRA or an opinion from a nationally recognized law or accounting firm that such action, omission or transaction will not have such effect.  Foreign Spinco will indemnify Foreign Pubco for any tax-related losses resulting from a breach by it of the foregoing covenant.

Certain of these agreements may be relevant to Canadian DC and Canadian TC, to the extent the matters addressed in these agreements are not dealt with in the Canadian-specific agreements described in Paragraph 57. However, these agreements are not expected to become effective in relation to Canadian DC and Canadian TC until after the First Distribution, and are not expected to be applicable to Foreign DC as it will not carry on any operations, and accordingly Canadian DC and Foreign DC will not acquire any rights under such agreements in advance of their respective distributions.

75.    New LLC will transfer the shares of Foreign TC to Foreign Holdco 1 for cash and by way of a capital contribution.

76.    Foreign Holdco 1 will transfer the shares of Foreign TC to Foreign Holdco 2 in exchange for shares of Foreign Holdco 2 and cash.

77.    Foreign Holdco 2 will transfer the shares of Foreign TC to a corporation which is a non-resident of Canada and wholly owned direct subsidiary of Foreign Holdco 2 in exchange for shares of that corporation. The non-resident transferee corporation will be an existing corporation that is acquired by Foreign Holdco 2 as part of the transactions described in Paragraph 41(c).

78.    Foreign Pubco will distribute the issued and outstanding common shares of Foreign Spinco pro rata to its shareholders.

IV.    ADDITIONAL INFORMATION

79.    The Proposed Transactions will occur in the order presented unless otherwise indicated, subject to the following exceptions:

(a)    the applicable election forms will be filed within the applicable due dates following the completion of the Proposed Transactions; 

(b)    the filing of any articles of dissolution or certificate of cancellation may occur following the completion of the Proposed Transactions; and

(c)    if the share transfers described in Paragraphs 75 to 77 are undertaken, it is possible that these transfers may occur after the distribution in Paragraph 78.

80.    Neither Canadian DC nor Canadian TC is, or will be at the time of the Proposed Transactions, a specified financial institution.

81.    XXXXXXXXXX

82.    None of the shares of Canadian DC or Canadian TC has been, or will be, at any time during the implementation of the Proposed Transactions:

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

(b)    the subject of a dividend rental arrangement referred to in subsection 112(2.3), as that term is defined in subsection 248(1);

(c)    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);

(d)    the subject of any secured undertaking of the type described in paragraph 112(2.4)(a); or

(e)    issued for consideration that is or includes:

(i)    an obligation of the type described in subparagraph 112(2.4)(b)(i); or

(ii)    any right of the type described in subparagraph 112(2.4)(b)(ii).

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

84.    No property has or will become property of Canadian DC, and no liabilities have been or will be incurred by Canadian DC, in contemplation of and before the transfer described in Paragraph 55, otherwise than as described herein.

85.    No property has or will become property of Foreign DC or any corporation controlled by Foreign DC, and no liabilities have been or will be incurred by Foreign DC or any corporation controlled by Foreign DC, in contemplation of and before the liquidation described in Paragraph 67, otherwise than as described herein.

85.1    Foreign Pubco is not aware of an anticipated or expected acquisition of control or takeover of Foreign Pubco, Foreign Spinco, Foreign DC, Foreign TC, Canadian DC, or Canadian TC.

86.    As part of the series of transactions or events that includes the Proposed Transactions, there will not be:

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

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

(c)    an acquisition of shares in the circumstances described in subparagraph 55(3.1)(b)(iii).

87.    At no time, during the course of a series of transactions that includes the dividends described in this Ruling, will:

(a)    XXXXXXXXXX% or more of the FMV of the Foreign Spinco common shares, the units of New LLC, the shares of Foreign Holdco 1, or the shares of the foreign subsidiary of Foreign Holdco 2 described in Paragraph 77 be derived from any of the shares of Canadian DC, shares of Canadian TC, units of Foreign DC or shares of Foreign TC; or

(b)    the shares of the capital stock (or units) of Canadian DC, Canadian TC, Foreign Pubco, Forco 1, Forco 2, Foreign DC, or Foreign TC be acquired by any person or partnership who was not related to the vendor or as part of the series, ceased to be related to the vendor, otherwise than as described herein (taking into consideration paragraph 55(3.2)(c), if applicable).

With respect to the XXXXXXXXXX% tests set out above: (a) the aggregate FMV of the shares of Canadian TC (and thus Foreign TC, whose only asset will be shares of Foreign DC, and after its wind-up, shares of Canadian TC and Foreign DC, whose only asset will be shares of Canadian TC) will not be in excess of $XXXXXXXXXX, (b) the aggregate FMV of all of the assets of the Spin Business (i.e., including the shares of Canadian TC) in each of the relevant entities will be as follows: in respect of Foreign Spinco, not less than $XXXXXXXXXX; in respect of New LLC, not less than $XXXXXXXXXX; in respect of Foreign Holdco 1, not less than $XXXXXXXXXX; in respect of Foreign Holdco 2, not less than $XXXXXXXXXX; and in respect of the subsidiary of Foreign Holdco 2 described in Paragraph 77, not less than $XXXXXXXXXX; and (c) no part of the FMV of the shares of Foreign Spinco, the units of New LLC, or the shares of Foreign Holdco 1, Foreign Holdco 2 or the wholly owned subsidiary of Foreign Holdco 2 referred to in Paragraph 77 will, at any time during the course of the series that includes the dividends described in this Ruling, be derived from shares of Canadian DC.

88.    For the purposes of Paragraphs 86 and 87, in determining the portion of the FMV of the shares or debt of a particular corporation which is derived from the shares of another corporation, any indebtedness of the particular corporation that is not a secured debt or a debt related to a particular property will be considered to reduce the FMV of each property of the particular corporation (or indirectly the FMV derived from shares owned by the particular corporation) pro rata in proportion to the relative FMV of all property of the particular corporation.

89.    The Canadian DC Common Shares will not be taxable Canadian property at the time these shares are exchanged by Forco 2, as described in Paragraph 49. Accordingly, Forco 2 will not apply for a clearance certificate under section 116 in respect of the transfer, and will not file a Canadian income tax return to report the disposition of these shares.

90.    The Canadian DC Special Shares will not be taxable Canadian property at the time these shares are transferred by Forco 2 to Canadian TC, as described in Paragraph 50. Accordingly, Forco 2 will not apply for a clearance certificate under section 116 in respect of the transfer, and will not file a Canadian income tax return to report the disposition of these shares.

91.    The units of Foreign DC will not be taxable Canadian property at the time of the transactions described in Paragraphs 62, 63 and 65. Accordingly, Forco 2, Forco 1 and Foreign Pubco will not apply for clearance certificates under section 116 in respect of these transfers, and will not file Canadian income tax returns to report the dispositions of these shares.

92.    The shares of Canadian TC will not be taxable Canadian property at the time these shares are transferred to Foreign TC on the liquidation of Foreign DC, as described in Paragraph 67. Accordingly, Foreign DC will not apply for a clearance certificate under section 116 in respect of the transfer, and will not file a Canadian income tax return to report the disposition of these shares.

93.    The shares of Foreign TC will not be taxable Canadian property at the time of the transactions described in Paragraphs 75, 76 and 77. Accordingly, New LLC, Foreign Holdco 1 and Foreign Holdco 2 will not apply for clearance certificates under section 116 in respect of these transfers, and will not file Canadian income tax returns to report the disposition of these shares.

94.    Canadian DC and Canadian TC will not have any RDTOH at the end of their taxation years which include the First Distribution Steps.

95.    As described above, the Pubco Group (and Canadian DC, as a member of the Pubco Group) frequently acquires and divests business operations, as opportunities arise from time to time. These purchases and sales are generally made for cash or other non-share consideration. The Pubco Group is currently planning to divest certain business operations of XXXXXXXXXX. Canadian DC owns assets of these business operations and may therefore participate in any sale. However, at this time no definite arrangements for the sale of these business operations are in place and no buyers have been identified.  No divestiture transaction will be completed prior to the Second Distribution.

96.    Other than as described herein, no property of Canadian DC will be sold outside of the ordinary course of its business. 

97.    [Reserved]

98.    Any purchases or issuances of shares of Foreign Pubco pursuant to the direct stock purchase and dividend reinvestment plan described in Paragraph 4 or the share purchase program described in Paragraph 5 are independent of the Proposed Transactions and would occur regardless of whether the Proposed Transactions are undertaken. 

99.    Following the completion of the Proposed Transactions, Foreign Pubco will distribute the cash received from Foreign Spinco as described in Paragraph 69 pro rata to its shareholders pursuant to a plan of reorganization. The cash may be distributed by way of a repurchase of Foreign Pubco shares.

100.    Canadian TC will not participate in the cash pooling arrangements described in Paragraphs 33 to 35. However, following the Proposed Transactions, Canadian TC may enter into cash pooling arrangements with other direct or indirect subsidiaries of Foreign Spinco. As part of these arrangements, Canadian TC may have loans owing to, or receivable from, the head entity in these cash pooling arrangements, which would be a non-resident direct or indirect subsidiary of Foreign Spinco.  It is expected that Canadian TC would file “pertinent loan or indebtedness” elections under subsection 15(2.11) in respect of any amounts owing to it by a non-resident under these arrangements.

101.    Following the Proposed Transactions, Canadian DC may pay one or more dividends to Forco 2. The decision to pay any such dividends would be made in accordance with the cash management and distribution policies of the Pubco Group. Any such dividends would be independent of and unrelated to the Proposed Transactions.

V.    PURPOSE OF THE PROPOSED TRANSACTIONS

102.    The purpose of the Proposed Transactions is to facilitate the spin-off of the Spin Business to the shareholders of Foreign Pubco. The spin-off is part of the Pubco Group’s strategic plan to streamline its portfolio and drive growth and value creation for its shareholders. The spin-off will result in XXXXXXXXXX independent publicly-listed companies with distinct strategies and investment profiles. The XXXXXXXXXX companies will have XXXXXXXXXX, enabling XXXXXXXXXX companies to better allocate resources, incentivize employees and allocate capital to capture the significant long-term opportunities in their respective markets. This will create significant opportunities for enhanced growth, profitability, cash flow and returns to shareholders.

103.    For greater certainty, the First Three Party Exchange does not have a Canadian tax purpose.

VI.    RULINGS 

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

A.    The provisions of subsection 86(1) will apply, and the provisions of subsection 86(2) will not apply, to the exchange of shares on the Canadian DC Capital Reorganization, as described in Paragraph 49, such that:

(a)    the cost of each of the Canadian DC New Common Shares and the Canadian DC Special Shares received by Forco 2 on the exchange will be deemed by paragraph 86(1)(b) to be an amount equal to that proportion of the aggregate ACB to Forco 2, immediately before the exchange, of the Canadian DC Common Shares held by Forco 2, that:

(i)    the FMV, immediately after the exchange, of the Canadian DC New Common Shares or the Canadian DC Special Shares, as the case may be, received by Forco 2;

is of

(ii)    the FMV, immediately after the exchange, of all of the shares of Canadian DC received by Forco 2 for the Canadian DC Common Shares; and

(b)    pursuant to paragraph 86(1)(c), Forco 2 will be deemed to have disposed of the Canadian DC Common Shares for aggregate POD equal to the aggregate cost to Forco 2 of the Canadian DC New Common Shares and the Canadian DC Special Shares received by Forco 2, as determined in (a) above.

B.    As a result of the share exchange pursuant to the First Three-Party Share Exchange described in Paragraph 50:

(a)    the provisions of subsection 84(1) and paragraph 212.1(1)(a) will not apply to deem a dividend to be paid by Canadian TC, or to be received by Forco 2, as a result of the exchange;

(b)    the provisions of paragraph 212.1(1)(b) will apply such that the amount added to the PUC of the Canadian TC Common Shares in connection with the exchange will not exceed the PUC, immediately before the exchange, of the Canadian DC Special Shares transferred to Canadian TC; and

(c)    the aggregate cost to Canadian TC of the Canadian DC Special Shares that Canadian TC acquires from Forco 2 on the exchange will be equal to the aggregate FMV at that time of such shares. 

C.    The provisions of subsection 85(1), other than paragraph 85(1)(e.2), will apply to the transfer of the Distribution Property by Canadian DC to Canadian TC as described in Paragraph 55 above, such that the agreed amount in respect of each transfer of eligible property will be deemed to be Canadian DC’s POD and Canadian TC’s cost of such property pursuant to paragraph 85(1)(a). In applying subsection 85(1):

(a) 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 Canadian DC of all of the property of that class immediately before the disposition that the FMV at that time of the asset that is transferred is of the FMV at that time of all property of that class; and

(b) if Canadian DC and Canadian TC so indicate in their joint election, the reference in subparagraph 85(1)(d)(i) to “XXXXXXXXXX of the taxpayer’s cumulative eligible capital in respect of the business immediately before the disposition” shall be interpreted to mean that proportion of XXXXXXXXXX of Canadian DC’s cumulative eligible capital in respect of its business immediately before the disposition that the transferred eligible capital property in respect of the business (based on the FMV at that time or the amount of the cumulative eligible capital that is attributable to those assets) is of all of Canadian DC’s eligible capital property in respect of the business (based on the FMV at that time or the amount of the cumulative eligible capital that is attributable to those assets).

D.    Subsection 84(3) will apply to:

(a)    the redemption of the Canadian TC Special Shares held by Canadian DC, as described in Paragraph 58 above, such that Canadian TC will be deemed to have paid and Canadian DC will be deemed to have received; and

(b)    the redemption of the Canadian DC Special Shares held by Canadian TC, as described in Paragraph 59 above, such that Canadian DC will be deemed to have paid and Canadian TC will be deemed to have received; 

a dividend on such 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 in computing the income, pursuant to subsection 82(1) and paragraph 12(1)(j), of the person deemed to have received such dividend;

(d)    will be deductible by the recipient pursuant to subsection 112(1) in computing its taxable income for the year in which such dividend is deemed to have been received, and such deduction will not be prohibited by any of subsections 112(2.1), (2.2), (2.3) or (2.4);

(e)    will be excluded in determining the POD to the recipient corporation of the shares which are redeemed pursuant to paragraph (j) of the definition of “proceeds of disposition” in section 54;

(f)    will, by virtue of the provisions of subsection 112(3), apply to reduce any loss arising from the redemption to Canadian TC and Canadian DC which would otherwise be determined;

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

(h)    will not be subject to tax under Parts IV.1 and VI.1.

E.    By virtue of the provisions of paragraph 55(3)(b), subsection 55(2) will not apply to the dividends described in Ruling D, provided that as part of the series of transactions or events that includes the dividends described in Ruling D above 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); or

(d)    an acquisition of shares (or units) of Canadian DC or Foreign DC in the circumstances described in subparagraph 55(3.1)(b)(iii);

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) to any of the dividends described in Ruling D.

F.    Subject to subsections 1102(14.11) and (14.12) of the Regulations, each property which immediately before the transfer described in Paragraph 55, is depreciable property of a prescribed class or separate prescribed class of Canadian DC and which is acquired by Canadian TC on the transfer described in Paragraph 55, will be deemed by virtue of subsection 1102(14) of the Regulations to be depreciable property of the same prescribed class or separate prescribed class, as the case may be, of Canadian TC.

G.    Provided that the condition specified in paragraph 1100(2.2)(f) or (g) of the Regulations is satisfied, paragraph 1100(2.2)(h) of the Regulations will apply so that no amount will be included by Canadian TC under paragraph 1100(2)(a) of the Regulations in respect of depreciable property of a prescribed class that is property acquired by Canadian TC from Canadian DC, on the transfer described in Paragraph 55.

H.    The set-off and cancellation of the Canadian DC Redemption Note held by Canadian TC and the Canadian TC Redemption Note held by Canadian DC, as described in Paragraph 60 above, will not give rise to a “forgiven amount” within the meaning of subsections 80(1) or 80.01(1). Neither Canadian TC nor Canadian DC will realize any gain or incur any loss as a result of the set-off and resultant cancellation of the Canadian DC Redemption Note or the Canadian TC Redemption Note.

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

J.    Subsection 245(2) will not apply to the Proposed Transactions, in and of themselves, to redetermine the tax consequences confirmed in the Rulings given above.

The above rulings are given subject to the limitations and qualifications set forth in Information Circular 70-6R7 issued on April 22, 2016, and are binding on the CRA provided that the Proposed Transactions are completed 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

Unless otherwise expressively confirmed, nothing in this ruling 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 FMV or ACB of any property referred to herein or the PUC in respect of any share referred to herein;

b)    the outstanding balance of various tax accounts such as RDTOH, GRIP, non-capital losses, or CDA for any of the corporate entities described herein;

c)    any provincial tax consequences of the Proposed Transactions or 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.

Nothing in this letter should be construed as confirmation, express or implied, that, for the purpose of any of the rulings given above, any adjustment to the FMV of the properties transferred or the redemption amount of the shares issued as consideration, whether pursuant to a price adjustment clause or otherwise, will be effective retroactively to the time of the transfer or issuance of shares.  Furthermore, none of the rulings given in this letter are intended to apply to, or in the event of, the operation of a price adjustment clause, since such adjustment will be due to circumstances that do not constitute proposed transactions that are seriously contemplated.  The general position of the CRA with respect to price adjustment clauses is stated in Income Tax Folio S4-F3-C1, Price Adjustment Clauses, dated March 28, 2013.

Yours truly,

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

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