2009 Ruling 2008-0292091R3 - 55(3)(a) internal reorganization

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

Principal Issues: Internal reorganization involving the tax free sale of a subsidiary between two XXXXXXXXXX corporations.

Position: Favourable rulings issued.

XXXXXXXXXX 									2008-029209

XXXXXXXXXX , 2009

Dear XXXXXXXXXX ;

Re: Advance Income Tax Ruling Request
XXXXXXXXXX

This is in reply to your letter of XXXXXXXXXX and your other correspondence in which you requested an advance income tax ruling on behalf of the above-noted taxpayers. You have advised that to the best of your knowledge, and that of the taxpayers involved, none of the issues contained herein is:

(a) in an earlier tax return of one of the taxpayers or any related person;

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

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

(d) before the courts or, if a judgment has been issued, the time limit for appeal to a higher court has not expired; or

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

DEFINITIONS

In this letter, all monetary amounts are expressed in Canadian dollars unless otherwise indicated, and the following terms or expressions have the meaning specified:

a) "ACB" means "adjusted cost base" as defined in section 54;

b) "Acquisitionco" means the wholly-owned subsidiary of Opco2 to be formed on the basis described in Paragraph 15;

c) "Acquisitionco Shares" means, collectively, the XXXXXXXXXX Shares and XXXXXXXXXX Shares in the capital stock of Acquisitionco, which classes of shares will be authorized on the basis described in Paragraph 15;

d) "Act" means the Income Tax Act (Canada) and the regulations thereto, as amended, and unless otherwise stated; every reference herein to a part, division, subdivision, section, subsection, paragraph, subparagraph or clause is a reference to the corresponding provision of the Act;

e) "affiliated persons" has the meaning described in section 251.1;

f) "XXXXXXXXXX " means XXXXXXXXXX ., a taxable Canadian corporation and a public corporation, the shares of which are widely-held by members of the public, and which is controlled by Parentco;

g) "Amalco" means the corporation resulting from the amalgamation of Acquisitionco and Opco1 on the basis described in Paragraph 21;

h) "arm's length" has the meaning assigned by subsection 251(1);

i) "BCA" means the Business Corporations Act (XXXXXXXXXX ) and the regulations thereto, as amended;

j) "Business Number" means the tax identification number assigned by the CRA to the particular entity;

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

l) "CRA" means the Canada Revenue Agency, and a reference to the CRA in this correspondence includes, where necessary and appropriate, a reference to either the Canada Customs and Revenue Agency or to Revenue Canada;

m) "disposition" has the meaning assigned by subsection 248(1);

n) "dividend payer" has the meaning assigned by clause 55(3)(a)(iii)(A);

o) "dividend recipient" has the meaning assigned by paragraph 55(3)(a);

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

q) "eligible dividend" has the meaning assigned by subsection 89(1);

r) "excepted dividend" has the meaning assigned by section 187.1;

s) "excessive eligible dividend designation" has the meaning assigned by subsection 89(1);

t) "excluded dividend" has the meaning assigned by subsection 191(1);

u) "FMV" means fair market value, being that amount at which property would be transferred by a willing buyer to a willing seller, in an open and unrestricted market, between informed parties under no compulsion to act;

v) "forgiven amount" has the meaning assigned by subsection 80(1);

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

x) "Holdco" means XXXXXXXXXX ., a corporation governed by the BCA;

y) "Holdco Shares" means, collectively, all of the issued and outstanding shares in the capital stock of Holdco as described in Paragraph 2;

z) "Internal Loans" means the non-interest-bearing loans which may be made to Opco2 by Holdco, on the basis described in Paragraph 16(ii);

aa) "low rate income pool" or "LRIP" has the meaning assigned by subsection 89(1);

bb) "New Opco1 Common Shares" means voting common shares in the capital stock of Opco1, which class of shares will be authorized on the basis described in Paragraph 11;

cc) "New Opco1 Preferred Shares" means preferred shares in the capital stock of Opco1 which have limited voting rights, bear floating rate non-cumulative dividends and are redeemable and retractable for the Opco1 P/S Redemption Amount, which class of shares will be designated on the basis described in Paragraph 12;

dd) "non-resident" has the meaning assigned by subsection 248(1);

ee) "Opco1" means XXXXXXXXXX ., a corporation governed by the BCA;

ff) "Opco1 Existing Shares" means, collectively, the issued and outstanding XXXXXXXXXX Shares and XXXXXXXXXX Shares in the capital stock of Opco1 as described in Paragraph 8;

gg) "Opco1 P/S Redemption Amount" means the amount for which a New Opco1 Preferred Share may be redeemed (at the option of Opco1) or retracted (at the option of the holder) as described in Paragraph 12;

hh) "Opco1 PSA" means the purchase and sale agreement to be entered into between Acquisitionco, Subco, and Opco2 on the basis described in Paragraph 19;

ii) "Opco1 Redemption Note" means the promissory note to be issued by Opco1 to Subco on the redemption of the New Opco1 Preferred Shares on the basis described in Paragraph 14;

jj) "Opco2" means XXXXXXXXXX ., a corporation governed by the BCA;

kk) "Opco2 Loans" means interest-bearing loans to be made to Opco2 by a combination of third-party financial institutions and, possibly, Holdco, on the basis described in Paragraph 16(i);

ll) "Opco2 Share Subscription" has the meaning described in Paragraph 16(iii);

mm) "Opco2 Shares" means, collectively, the XXXXXXXXXX Shares and the XXXXXXXXXX Shares in the capital stock of Opco2 as described in Paragraph 10;

nn) "Paragraph" means a numbered paragraph in this Ruling Request;

oo) "person" has the meaning assigned by subsection 248(1);

pp) "principal amount" has the meaning assigned by subsection 248(1);

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

rr) "Proposed Transactions" means the proposed transactions which are described in Paragraphs 11 to 21;

ss) "public corporation" has the meaning assigned by subsection 89(1);

tt) "public trading" means any trading of Holdco Shares or Subco Shares, as applicable, by holders of such shares, other than holders which are Parentco or XXXXXXXXXX ;

uu) "PUC" means "paid-up capital" as that expression is defined in subsection 89(1);

vv) "related person" means, in relation to a particular person, another person which is related to the particular person by virtue of subsection 251(2), as modified for the purposes of section 55 by paragraph 55(5)(e);

ww) "Parentco" means XXXXXXXXXX ., a taxable Canadian corporation which is controlled, XXXXXXXXXX ;

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

yy) "XXXXXXXXXX" means XXXXXXXXXX , each of whom are residents of Canada for the purposes of the Act, and includes any corporations (other than Holdco, Subco, or XXXXXXXXXX ) which are controlled by one or more of the foregoing XXXXXXXXXX ;

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

aaa) "specified shareholder" has the meaning assigned by subsection 248(1);

bbb) "Stated Capital" has, in relation to a corporation that exists under the BCA, the meaning assigned by section XXXXXXXXXX of the BCA;

ccc) "Subco" means XXXXXXXXXX , a corporation governed by the XXXXXXXXXX Business Corporations Act;

ddd) "Subco Shares" means, collectively, all of the issued and outstanding shares in the capital stock of Subco as described in Paragraph 5;

eee) "substantial interest" has the meaning assigned by subsection 191(2);

fff) "taxable Canadian corporation" has the meaning assigned by subsection 89(1);

ggg) "taxation year" has the meaning assigned by subsection 249(1);

hhh) XXXXXXXXXX ; and

iii) "unrelated person" has the meaning assigned by paragraph 55(3.01)(a).

FACTS

1. Holdco is a corporation which was formed pursuant to the provisions of the Companies Act (XXXXXXXXXX ) and continued under the BCA. Holdco is a taxable Canadian corporation and a public corporation. Holdco has a taxation year end of XXXXXXXXXX . The mailing address of Holdco is XXXXXXXXXX and its registered office is located at XXXXXXXXXX . Holdco files its tax returns at the XXXXXXXXXX Taxation Centre and it deals with the XXXXXXXXXX Tax Services Office. Holdco's Business Number is XXXXXXXXXX . Holdco functions as a holding corporation for a number of Canadian and foreign subsidiaries operating in XXXXXXXXXX . Holdco controls a group of subsidiaries, including Subco and Opco2. The board of directors of Holdco consists of XXXXXXXXXX individuals, including XXXXXXXXXX .

2. The issued and outstanding share capital of Holdco (the "Holdco Shares") consists of:

(i) XXXXXXXXXX Shares, which are listed for trading on the XXXXXXXXXX under the symbol XXXXXXXXXX ,

(ii) XXXXXXXXXX Shares, which are listed for trading on the XXXXXXXXXX under the symbol XXXXXXXXXX , and

(iii) XXXXXXXXXX Shares, XXXXXXXXXX , which are listed for trading on the XXXXXXXXXX under the symbol XXXXXXXXXX .

3. Of the issued and outstanding Holdco Shares, Parentco owns approximately XXXXXXXXXX % of the XXXXXXXXXX Shares and approximately XXXXXXXXXX % of the XXXXXXXXXX Shares. In addition, XXXXXXXXXX directly hold, in the aggregate, less than XXXXXXXXXX % of the XXXXXXXXXX Shares and less than XXXXXXXXXX % of the XXXXXXXXXX Shares. The remainder of the Holdco Shares are widely-held by members of the public. A significant portion of the Holdco Shares is registered in the name of an intermediary, such as a broker or a fund manager. Based on a review, by the senior officers of Holdco, of the Holdco shareholders' register maintained by Holdco's transfer agent, Holdco does not presently have any specified shareholders, except for Parentco and XXXXXXXXXX (and persons that do not deal at arm's length with such persons). The market capitalization of Holdco, as of XXXXXXXXXX , was approximately $XXXXXXXXXX .

4. Subco is a corporation which was continued pursuant to the provisions of the XXXXXXXXXX Business Corporations Act. Subco is a taxable Canadian corporation and a public corporation. Subco has a taxation year end of XXXXXXXXXX . The mailing address of Subco is XXXXXXXXXX and its registered office is located at XXXXXXXXXX . Subco files its tax returns at the XXXXXXXXXX Taxation Centre and it deals with the XXXXXXXXXX Tax Services Office. Subco's Business Number is XXXXXXXXXX . Subco functions as a holding company for operating subsidiaries in the XXXXXXXXXX , including Opco1. The board of directors of Subco consists of XXXXXXXXXX individuals, including XXXXXXXXXX .

5. The issued and outstanding share capital of Subco (the "Subco Shares") consists of:

(i) XXXXXXXXXX shares which are listed for trading on the XXXXXXXXXX under the symbol XXXXXXXXXX ,

(ii) XXXXXXXXXX shares, which are listed for trading on the XXXXXXXXXX under the symbol XXXXXXXXXX ,

(iii) XXXXXXXXXX , which are listed for trading on the XXXXXXXXXX under the symbol XXXXXXXXXX ,

(iv) XXXXXXXXXX , which are listed for trading on the XXXXXXXXXX under the symbol XXXXXXXXXX ,

(v) XXXXXXXXXX , which are not listed on any stock exchange and are held primarily by various financial institutions,

(vi) XXXXXXXXXX , which are not listed on any stock exchange and are held primarily by various financial institutions,

(vii) XXXXXXXXXX , which are not listed on any stock exchange and are held primarily by various financial institutions, and

(viii) XXXXXXXXXX , which are not listed on any stock exchange and are held primarily by various financial institutions.

6. Of the issued and outstanding Subco Shares, Holdco owns approximately XXXXXXXXXX % of the XXXXXXXXXX shares and approximately XXXXXXXXXX % of the XXXXXXXXXX shares. In addition, Parentco and XXXXXXXXXX directly hold, in the aggregate, less than XXXXXXXXXX % of the XXXXXXXXXX shares and less than XXXXXXXXXX % of the XXXXXXXXXX shares. The remainder of the Subco Shares are widely-held by members of the public. A significant portion of the Subco Shares is registered in the name of an intermediary such as a broker or a fund manager. Based on a review, by the senior officers of Subco, of the Subco shareholders' register maintained by Subco's transfer agent, Subco does not presently have any specified shareholders, except for Parentco and XXXXXXXXXX (and persons that do not deal at arm's length with such persons). In XXXXXXXXXX , Holdco acquired a XXXXXXXXXX % controlling interest in Subco and has, at all times since that acquisition, owned at least XXXXXXXXXX % of the issued and outstanding voting shares of Subco and thus has exercised de jure control of Subco. The market capitalization of Subco, as of XXXXXXXXXX , was approximately $XXXXXXXXXX .

7. Each of Holdco and Subco have implemented various equity-incentive plans for the benefit of employees of Holdco or Subco, as applicable, and their respective subsidiaries, including stock option plans (which entitle certain key employees and officers to acquire XXXXXXXXXX Shares in the capital stock of Holdco or XXXXXXXXXX shares in the capital stock of Subco pursuant to stock options) and plans pursuant to which employees are entitled to acquire Holdco Shares or Subco Shares, as applicable. Certain stock options in each of Holdco and Subco have been granted to XXXXXXXXXX who are employees, officers, or directors of Holdco and Subco or their respective subsidiaries.

8. Opco1 is a corporation which was formed pursuant to the BCA and which is a taxable Canadian corporation and is not a public corporation. Opco1 has a taxation year end of XXXXXXXXXX . The mailing address of Opco1 is XXXXXXXXXX and its registered office is located at XXXXXXXXXX . Opco1 files its tax returns at the XXXXXXXXXX Taxation Centre and deals with the XXXXXXXXXX Tax Services Office. Opco1's Business Number is XXXXXXXXXX . The issued and outstanding share capital of Opco1 consists of XXXXXXXXXX Shares and XXXXXXXXXX Shares (collectively, the "Opco1 Existing Shares"). All of the Opco1 Existing Shares are owned by Subco and constitute capital property to Subco. The ACB and PUC of the XXXXXXXXXX Shares is $XXXXXXXXXX and the ACB and PUC of the XXXXXXXXXX Shares is $XXXXXXXXXX , for an aggregate ACB and PUC of approximately $XXXXXXXXXX . Opco1 also has an authorized class of Preferred Shares which are issuable in series. Each series of Preferred Shares has terms and conditions to be set by the board of directors of Opco1 prior to their issuance. Only Preferred Shares, XXXXXXXXXX have ever been issued and no preferred shares are currently issued and outstanding. Opco1, directly and through various operating subsidiaries, currently has XXXXXXXXXX lines of business: XXXXXXXXXX Opco1 also owns all of the issued and outstanding shares of XXXXXXXXXX. Opco1's preliminary XXXXXXXXXX forecast earnings are approximately $XXXXXXXXXX .

9. Certain employees, officers and directors of Opco1 have been granted, by virtue of their status as employees of Opco1, stock options in Subco which entitle them to acquire XXXXXXXXXX shares in the capital stock of Subco upon payment of the stipulated exercise price.

10. Opco2 is a corporation which was formed pursuant to the BCA and which is a taxable Canadian corporation and is not a public corporation. Opco2 has a taxation year end of XXXXXXXXXX . The mailing address of Opco2 is XXXXXXXXXX and its registered office is located at XXXXXXXXXX . Opco2 files its tax returns at the XXXXXXXXXX Taxation Centre and it deals with the XXXXXXXXXX Tax Services Office. Opco2's Business Number is XXXXXXXXXX . The issued and outstanding capital of Opco2 consists of XXXXXXXXXX Shares and XXXXXXXXXX Shares (collectively, the "Opco2 Shares"). All of the issued Opco2 Shares are owned, directly or indirectly, by Holdco. XXXXXXXXXX ., a taxable Canadian corporation which is a wholly-owned subsidiary of Holdco, owns XXXXXXXXXX and XXXXXXXXXX in the capital stock of Opco2. XXXXXXXXXX , a non-resident corporation formed under the laws of the XXXXXXXXXX , which is a wholly-owned subsidiary of Holdco, owns XXXXXXXXXX and XXXXXXXXXX in the capital stock of Opco2. Holdco owns the remaining XXXXXXXXXX Shares and XXXXXXXXXX Shares in the capital stock of Opco2. Opco2 is in the business of the XXXXXXXXXX , which activities are carried on directly and through various operating subsidiaries.

PROPOSED TRANSACTIONS

11. Subco, as the sole shareholder of Opco1, will pass a special resolution to amend the Articles of Incorporation of Opco1, pursuant to the provisions of the BCA, to increase the voting rights of the Opco1 XXXXXXXXXX Shares to XXXXXXXXXX votes per share and to create, (in addition to the shares that Opco1 is authorized to issue immediately before the filing of the Articles of Amendment) an unlimited number of New Opco1 Common Shares. Each New Opco1 Common Share will be a fully participating common share with the holder thereof entitled to vote at meetings of shareholders of Opco1, and the terms of which will be identical to the terms of the Opco1 XXXXXXXXXX Shares prior to the increase in the voting rights applicable to such shares resulting from this amendment to the Articles of Incorporation of Opco1.

12. The board of directors of Opco1 will pass a resolution designating a series of the preferred shares in the capital stock of Opco1 as "Preferred Shares, XXXXXXXXXX " (the "New Opco1 Preferred Shares") with the following rights, privileges, restrictions and conditions:

(i) each New Opco1 Preferred Share will be redeemable, subject to applicable law, at any time at the option of Opco1 at a per share redemption amount (the "Opco1 P/S Redemption Amount") equal to the FMV of the consideration received by Opco1 for which the New Opco1 Preferred Share was issued, plus any declared but unpaid dividends;

(ii) each New Opco1 Preferred Share will be retractable, subject to applicable law, at any time at the option of the holder at a retraction amount equal to the Opco1 P/S Redemption Amount;

(iii) the holder of each New Opco1 Preferred Share will be entitled, subject to applicable law, to a non-cumulative cash dividend as and when declared by the board of directors of Opco1 from time to time, which dividend need not also be declared on any other class of shares of Opco1;

(iv) the holder of each New Opco1 Preferred Share will be entitled, upon the liquidation, dissolution or winding-up of Opco1, to a payment in priority to all other classes of shares of Opco1 of an amount equal to the Opco1 P/S Redemption Amount to the extent of the amount or value of property available under applicable law for payment to shareholders upon dissolution, but will be entitled to no more than the amount of that payment; and

(v) the holder of each New Opco1 Preferred Share will not be entitled to vote at meetings of shareholders of Opco1, other than as provided under the XXXXXXXXXX .

The designation of the New Opco1 Preferred Shares will be included in the Articles of Amendment filed as contemplated in Paragraph 11.

13. Subco will transfer to Opco1 all of the Opco1 Existing Shares. As the sole consideration for such transfer, Opco1 will issue to Subco: XXXXXXXXXX New Opco1 Preferred Shares, having an aggregate Opco1 P/S Redemption Amount equal to the FMV of the Opco1 Existing Shares transferred and one New Opco1 Common Share. The aggregate Opco1 P/S Redemption Amount of the New Opco1 Preferred Shares will be subject to adjustment to ensure that it is equal to the FMV of the Opco1 Existing Shares. The adjustment mechanism will include a price adjustment clause and may, to the extent necessary, include adjustments for the working capital and long term debt of Opco1. In connection with this share exchange:

(i) Opco1 and Subco will not make a joint election under the provisions of subsection 85(l);

(ii) the amount in the Stated Capital account maintained by Opco1 for each of the XXXXXXXXXX Shares and the XXXXXXXXXX Shares will be deducted from those accounts and an amount equal to the aggregate PUC of the Opco1 Existing Shares immediately before the share exchange (estimated to be approximately $XXXXXXXXXX ) will be added (pursuant to the provisions of the BCA) to the Stated Capital account maintained by Opco1 for each of the New Opco1 Preferred Shares and the New Opco1 Common Shares based on the proportion thereof that the FMV of each of such two classes of shares immediately after the share exchange is of the FMV of the Opco1 Existing Shares so exchanged immediately before the share exchange. As a consequence, it is anticipated that, immediately after the share exchange, the PUC of the New Opco1 Preferred Shares will be approximately $XXXXXXXXXX and the PUC of the New Opco1 Common Shares will be XXXXXXXXXX . For greater certainty, the paid up capital of the New Opco1 Preferred Shares and the New Opco1 Common Share, in aggregate, will not exceed the paid up capital of the Opco1 Existing Shares; and

(iii) the Opco1 Existing Shares so exchanged will be cancelled.

14. Opco1 will redeem for cancellation all of the outstanding New Opco1 Preferred Shares issued to Subco, as described in Paragraph 13, for an amount equal to the aggregate Opco1 P/S Redemption Amount (as determined pursuant to the Articles of Incorporation of Opco1) for such New Opco1 Preferred Shares and will issue to Subco, as the sole consideration therefor, a demand promissory note (the "Opco1 Redemption Note"), in a principal amount equal to such aggregate Opco1 P/S Redemption Amount (as adjusted pursuant to the adjustment provisions described in Paragraph 13) and bearing interest at a rate equal to the Canadian dollar commercial loan prime rate of a specified Canadian chartered bank from the date of demand for payment to the date of payment, in full and absolute payment, satisfaction and discharge of such aggregate Opco1 P/S Redemption Amount. Opco1 will designate, pursuant to subsection 89(14), the amount of the deemed dividend resulting from the redemption of the New Opco1 Preferred Shares as an eligible dividend by notifying Subco in writing at the time of the redemption of the New Opco1 Preferred Shares and resulting deemed dividend.

15. Opco2 will cause the incorporation of a wholly-owned subsidiary ("Acquisitionco") pursuant to the provisions of the XXXXXXXXXX . Acquisitionco will be a taxable Canadian corporation and will not be a public corporation. The taxation year of Acquisitionco will end on XXXXXXXXXX . The authorized share capital of Acquisitionco will consist of an unlimited number of XXXXXXXXXX Shares and an unlimited number of XXXXXXXXXX Shares (collectively, the "Acquisitionco Shares"). The XXXXXXXXXX Shares and the XXXXXXXXXX Shares will both be fully participating common shares, which will rank equally with respect to dividends and rights to property on the dissolution of Acquisitionco. The key substantive difference between the XXXXXXXXXX Shares and the XXXXXXXXXX Shares will be XXXXXXXXXX . In certain circumstances, the XXXXXXXXXX . Opco2 will subscribe for a number of XXXXXXXXXX Shares and XXXXXXXXXX Shares for $XXXXXXXXXX (or some other similar XXXXXXXXXX amount) upon the incorporation of Acquisitionco. Acquisitionco will establish bank accounts, books of account and other indicia that support its existence.

16. As described in Paragraph 17, Opco2 intends to fund Acquisitionco, through one or more share subscriptions, so that Acquisitionco can complete the acquisition described in Paragraph 20. In order to obtain the necessary funds, Opco2 will borrow an amount from a combination of arm's length financial institutions and, possibly, Holdco (collectively, the "Opco2 Loans"). In all cases, the terms of the Opco2 Loans, including interest rate, will be commercial arm's length terms.

17. Opco2 will use the entire proceeds from the Opco2 Loans, the Internal Loans, and the Opco2 Share Subscription to subscribe for a number of XXXXXXXXXX Shares and XXXXXXXXXX Shares in the capital stock of Acquisitionco.

18. The Subco stock option plan provides that, where a holder ceases to be a director, officer or employee of Subco or a subsidiary of Subco for any reason (other than XXXXXXXXXX ), all unvested Subco stock options terminate and the holder has a limited period of XXXXXXXXXX days during which to exercise vested options XXXXXXXXXX . However, the Subco stock option plan also provides as follows:

XXXXXXXXXX

XXXXXXXXXX , the board of directors of Subco will pass a resolution authorizing all Subco stock options granted to employees, officers, and directors of Opco1 to continue, on their regular terms and conditions, notwithstanding any sale of Opco1 to Holdco or to a subsidiary of Holdco.

19. Acquisitionco, Subco, and Opco2 will enter into a purchase and sale agreement (the "Opco1 PSA"), whereunder Acquisitionco will agree to acquire all of the issued and outstanding shares of Opco1 (which will be the one issued and outstanding New Opco1 Common Share), for FMV consideration, together with any debt owing by Opco1 to Subco XXXXXXXXXX , for consideration equal to the principal amount of such indebtedness, such consideration to be payable solely in cash. The Opco1 PSA will be executed and closing will occur on the same day. The terms and conditions of the Opco1 PSA will be typical commercial market terms, including standard representations, warranties, covenants and indemnities.

20. Acquisitionco will use the funds acquired from the share subscription described in Paragraph 17 to complete its obligations under the Opco1 PSA. As a consequence, Opco1 will become a wholly-owned subsidiary of Acquisitionco and the Opco1 Redemption Note will become owing by Opco1 to Acquisitionco.

21. Acquisitionco and Opco1 will be amalgamated to form Amalco pursuant to the provisions of the BCA in such a manner that on and by virtue of the amalgamation:

(i) all of the property (except any amount receivable from any predecessor corporation or any shares of any predecessor corporation) of the predecessor corporations held immediately before the amalgamation will become the property of Amalco;

(ii) all of the liabilities and obligations (excepting any amount payable to any predecessor corporation) of the predecessor corporations immediately before the amalgamation will become liabilities and obligations of Amalco;

(iii) all of the outstanding New Opco1 Common Shares will be cancelled without any repayment of capital;

(iv) the Acquisitionco XXXXXXXXXX Shares will become the Amalco XXXXXXXXXX Shares and the Acquisitionco XXXXXXXXXX Shares will become Amalco XXXXXXXXXX Shares;

(v) the amount of the Stated Capital account maintained by Amalco for the Amalco XXXXXXXXXX Shares immediately after the amalgamation will be equal to the PUC of the Acquisitionco XXXXXXXXXX Shares immediately before the amalgamation and the amount of the Stated Capital account maintained by Amalco for the Amalco XXXXXXXXXX Common Shares immediately after the amalgamation will be equal to the PUC of the Acquisitionco XXXXXXXXXX Shares immediately before the amalgamation; and

(vi) the Opco1 Redemption Note will be extinguished and cancelled by operation of law as the result of the amalgamation of the payor and payee.

ADDITIONAL INFORMATION

22. The Proposed Transactions will be undertaken in the order of the Paragraphs set forth above or as the text of the Paragraphs indicates. Each Proposed Transaction will have received all necessary approvals prior to its implementation.

23. The New Opco1 Preferred Shares, which will be issued as described in Paragraph 13, will not, at any time throughout the series of transactions or events that includes the Proposed Transactions, be:

(i) the subject of any undertaking that is a guarantee agreement;

(ii) the subject of a dividend rental arrangement;

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

(iv) 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).

24. XXXXXXXXXX

25. XXXXXXXXXX

26. At various times throughout the series of transactions or events that includes the Proposed Transactions, XXXXXXXXXX .

27. Each corporation that issues a promissory note or incurs indebtedness in the course of the Proposed Transactions will have the financial capacity to honour, upon presentation for payment, the amount payable under such promissory note or indebtedness.

28. No shares of Opco2, Opco1 or Amalco (or, if an amalgamation of the type described in Paragraph 32 occurs, the amalgamated entity) will be disposed of to any person which is an unrelated person to Subco as part of the series of transactions or events that includes the Proposed Transactions.

29. Dispositions and acquisitions of Holdco Shares and of Subco Shares by members of the public will occur during the same time frame as the Proposed Transactions, in the ordinary course of public trading on the XXXXXXXXXX (including XXXXXXXXXX ). Acquisitions of Holdco Shares and Subco Shares may also occur by virtue of the exercise of employee stock options or through employee participation in other employee equity incentive plans, as described in Paragraphs 7 and 9. Such acquisitions of Holdco Shares or Subco Shares by employees are in no way facilitated by the Proposed Transactions. In addition, it is possible that XXXXXXXXXX may dispose of Holdco Shares or Subco Shares acquired pursuant to the exercise of employee stock options which have been granted to them. Any dispositions of shares acquired pursuant to an employee stock option by XXXXXXXXXX will be undertaken irrespective of whether any of the Proposed Transactions are implemented. The Proposed Transactions do not, in any manner, facilitate any disposition by XXXXXXXXXX of Holdco Shares or Subco Shares acquired pursuant to the exercise of an employee stock option.

30. Subject to the comments in Paragraph 29, none of Parentco, XXXXXXXXXX , or Holdco will, as part of the series of transactions or events that includes the Proposed Transactions, dispose of any Subco Shares (or any other property more than 10% of the FMV of which is, at any time during the series of transactions or events that includes the Proposed Transactions, derived from the Subco Shares) to any person which is an unrelated person to Subco. Further, again subject to the comments in Paragraph 29, neither Parentco nor XXXXXXXXXX will, as part of the series of transactions or events that includes the Proposed Transactions, dispose of any Holdco Shares (or any other property more than 10% of the FMV of which is at any time during the series of transactions or events that includes the Proposed Transactions, derived from the value of Opco1 or any successor thereto) to any person which is an unrelated person to Subco. It is possible that XXXXXXXXXX will transfer Holdco Shares or Subco Shares XXXXXXXXXX to Parentco (or vice versa). It is also possible that Parentco XXXXXXXXXX will increase their holdings of Holdco Shares or Subco Shares by buying additional shares in the market.

31. Parentco, XXXXXXXXXX , Holdco, Opco2, Acquisitionco, and Opco1 (and their successors by way of the amalgamation described in Paragraph 21 and possible amalgamation described in Paragraph 32) are, and will be, throughout the series of transactions or events that includes the Proposed Transactions, related persons to Subco, by virtue of the fact that, at all relevant times, XXXXXXXXXX will, XXXXXXXXXX , control, directly or indirectly, each of Parentco, Holdco, Subco, Opco2, Acquisitionco, Opco1, and Amalco (and any amalgamated entity arising from an amalgamation of the type described in Paragraph 32). Holdco, Subco, Opco2, Acquisitionco, and Opco1 (and their successors by way of the amalgamation described in Paragraph 21 and possible amalgamation described in Paragraph 32) are, and will be, throughout the series of transactions or events that includes the Proposed Transactions, affiliated persons.

32. It is possible that, following the transactions described above, further steps will be taken to consolidate the businesses of Opco2 and Amalco. Holdco is in the process of analyzing the appropriate steps in this regard and no decisions on any particular course of action have been made, but it is possible that such transactions will occur, as part of the same series of transactions or events as that which includes the Proposed Transactions. It is, for example, possible that Opco2 and Amalco will be amalgamated to form a consolidated XXXXXXXXXX entity or that Opco2 will transfer all, or a portion, of its assets to Amalco, pursuant to subsection 85(1), so that the consolidated XXXXXXXXXX business is thereafter carried out directly by Amalco (or, further to additional transfers pursuant to subsection 85(1), by subsidiaries of Amalco). Another possible transaction would be the transfer by each of Amalco and Opco2 of all, or a portion, of their respective assets, to a new subsidiary, corporation or partnership, pursuant to subsections 85(1) or 97(2).

PURPOSE OF THE PROPOSED TRANSACTIONS

33. The purpose of the Proposed Transactions is to permit the transfer of Opco1 from Subco to Holdco in a tax-effective manner. XXXXXXXXXX . This will create operating efficiencies XXXXXXXXXX and thus enhance their competitive position.

34. The purpose of increasing the voting rights of the Opco1 XXXXXXXXXX Shares, described in Paragraph 11, is to create a distinction between the New Opco1 Common Shares and the Opco1 XXXXXXXXXX Shares in order to support the two classes being treated as separate classes of shares under the BCA. The purpose of the creation of the New Opco1 Common Shares and the New Opco1 Preferred Shares is to authorize the issuance of such shares in the course of the section 86 reorganization of capital described in Paragraph 13.

35. The purpose of the section 86 reorganization of capital, described in Paragraph 13, is to "freeze" the value of the Opco1 Existing Shares in the form of the New Opco1 Preferred Shares, so that such value can be realized through the redemption of such shares described in Paragraph 14.

36. The purpose of the redemption of the New Opco1 Preferred Shares, described in Paragraph 14, is to permit Subco to obtain a promissory note with a principal amount and value equal to the value of the New Opco1 Preferred Shares while, simultaneously, retaining control of Opco1 by virtue of its retained ownership of the New Opco1 Common Share. The deemed dividend arising on such redemption will be designated as an eligible dividend. The purpose of such designation is to ensure that the amount of the deemed dividend is not considered an addition to the "low rate income pool", within the meaning of subsection 89(1), of Subco.

37. The purpose of the formation of Acquisitionco, described in Paragraph 15, is to facilitate the acquisition of Opco1 described in Paragraph 20. The acquisition of Opco1 is being undertaken by Acquisitionco, rather than by Opco2 directly, to facilitate the acquisition and subsequent cancellation of the Opco1 Redemption Note, as described in Paragraph 21.

38. The purpose of the amalgamation of Acquisitionco and Opco1, as described in Paragraph 21, is that, from a commercial perspective, it is desirable to ensure that Amalco will be a directly held subsidiary of Opco2 and to cause the extinguishment and cancellation of the Opco1 Redemption Note.

RULINGS

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

A. The amendment to the terms of the Opco1 XXXXXXXXXX Shares to increase the voting rights of such shares, as described in Paragraph 11, will not, in and of itself, result in a disposition of such shares.

B. The provisions of subsection 86(1) will apply, and the provisions of subsection 86(2) and subsection 86(2.1) will not apply, to the exchange by Subco of the Opco1 Existing Shares for the New Opco1 Preferred Shares and the New Opco1 Common Share.

C. As a result of the redemption by Opco1 of the New Opco1 Preferred Shares as described in Paragraph 14:

a) Opco1 will be deemed by paragraph 84(3)(a) to have paid, and Subco will be deemed by paragraph 84(3)(b) to have received, a dividend equal to the amount by which the aggregate Opco1 P/S Redemption Amount exceeds the PUC of the New Opco1 Preferred Shares;

b) the amount of such deemed dividend, as described in Ruling C(a), will be included in Subco's income pursuant to subsection 82(1) and paragraph 12(1)(j);

c) the amount of such deemed dividend, as described in Ruling C(a), will be excluded, pursuant to paragraph (j) of the definition of proceeds of disposition, in determining Subco's proceeds of disposition for the New Opco1 Preferred Shares; and

d) Subco will be entitled, pursuant to subsection 112(l), to deduct the amount of such deemed dividend, as described in Ruling C(a), in computing its taxable income for the taxation year in which such dividend is deemed to be received and, for greater certainty, the provisions of subsection 112(2.1), (2.2), (2.3) or (2.4) will not apply to deny the deduction of such deemed dividend..

D. In respect of the deemed dividend referred to in Ruling C(a):

a) the amount of such deemed dividend will not be subject to tax under Part IV except to the extent that the payer corporation is entitled to a dividend refund for its taxation year in which it paid such dividend; and

b) by virtue of paragraph 191(2)(a), Subco will have a substantial interest in Opco1 immediately before the redemption of the New Opco1 Preferred Shares held by Subco, and, consequently, the amount of such deemed dividend will not be subject to Part IV.1 tax under section 187.2 or to Part VI.1 tax under section 191.1, since such dividend will be an excepted dividend within the meaning of paragraph (b) of the definition of excepted dividend in section 187.1 and will be an excluded dividend within the meaning of paragraph (a) of the definition of excluded dividend in subsection 191(1).

E. By virtue of paragraph 55(3)(a), subsection 55(2) will not apply to the deemed dividend described in Ruling C(a), provided that there is no disposition or increase in interest described in any of subparagraphs 55(3)(a)(i) to (v) as part of a series of transactions as part of which those dividends were received. For greater certainty, the Proposed Transactions, in and of themselves, will not be considered to result in any disposition to, or increase in interest by, an unrelated person described in subparagraphs 55(3)(a)(i) to (v).

F. The deemed dividend described in Ruling C(a) will constitute an eligible dividend when received by Subco. For greater certainty, the Proposed Transactions will not artificially maintain or decrease Opco1's low rate income pool within the meaning of paragraph (c) of the definition of excessive eligible dividend designation.

G. The cost to Subco of the Opco1 Redemption Note issued to Subco as described in Paragraph 14 will, upon the issuance thereof, be equal to its principal amount.

H. Provided that Opco2 holds the Acquisitionco Shares and the shares in the capital stock of Amalco for the purpose of earning income from business or property, interest payable in respect of a taxation year on any money borrowed by Opco2, as represented by the Opco2 Loans described in Paragraph 16, will be deductible by Opco2 in such taxation year pursuant to paragraph 20(l)(c).

I. The cost to Acquisitionco of the Opco1 Redemption Note acquired by Acquisitionco as described in Paragraph 20 will be equal to its principal amount.

J. On the amalgamation of Opco1 and Acquisitionco to form Amalco as described in Paragraph 21:

a) the provisions of subsection 87(1) will, by virtue of subsection 87(1.1), apply;

b) the provisions of subsection 87(4) will apply; and

c) pursuant to the provisions of subsection 80.01(3), the settlement and cancellation of the Opco1 Redemption Note upon the amalgamation of Opco1 and Acquisitionco will result in such indebtedness being deemed to have been settled immediately before the time that is immediately before the amalgamation by the payment, made by Opco1 and received by Acquisitionco, of an amount equal to the amount that would have been Acquisitionco's cost amount of the Opco1 Redemption Note at that time, such that no forgiven amount will arise.

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

The above rulings are subject to the limitations and qualifications set out in Information Circular 70-6R5 dated May 17, 2002 and are binding on CRA provided that the Proposed Transactions are completed by XXXXXXXXXX . The above rulings are based on the law as it presently reads and do not take into account any proposed amendments to the Act and the Regulations which, if enacted into law, could have an effect on the rulings provided herein.

OTHER COMMENTS

Unless otherwise confirmed in the above rulings, nothing in this letter should be construed as implying that the CRA has confirmed, reviewed or has made any determination in respect of:

(a) the paid-up capital of any share or the adjusted cost base or fair market value of any property referred to herein;

(b) the balance of LRIP of any corporation; or

(c) 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 include other transactions or events that are not described in this letter.

(d) In Paragraph 14, you have indicated that the Opco1 P/S Redemption amount of the New Opco1 Preferred Shares will include a price adjustment clause. 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 and the redemption amount of the shares issued as consideration, will be effective retroactively to the time of the transfer and issuance of shares. In addition, any such adjustment could affect the ruling given in Ruling B above. Furthermore, none of the rulings given in this letter are intended to apply to the operation of a price adjustment clause, since its coming into effect 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 Interpretation Bulletin IT-169.

Yours truly,

XXXXXXXXXX
Manager
Corporate Reorganizations Section II
Reorganizations and Resources Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch