30 November 1996 Ruling 9727743 - STOCK DIVIDEND - SAFE INCOME

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

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

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

Principal Issues:

Would 55(2)(b) be applied where a stock dividend is subject to subsection 55(2).

Position:

no.

Reasons:

Subsection 248(28) - consistent with answer to q. 19 at 1995 TEI.

XXXXXXXXXX							3-972774
XXXXXXXXXX

Attention: XXXXXXXXXX

XXXXXXXXXX, 1997

Dear Sir:

Re: XXXXXXXXXX
Advance Income Tax Ruling Request

This is in reply to your letter of XXXXXXXXXX in which you requested various advance income tax rulings on behalf of the above-noted taxpayer. We also acknowledge your letters of XXXXXXXXXX and our related telephone conversations.

We understand that, to the best of your knowledge and that of the taxpayers involved, none of the issues involved in the requested rulings is being considered by a taxation services office or a taxation centre in connection with a tax return already filed, or is under objection or appeal.

Definitions

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

"adjusted cost base" has the meaning assigned by section 54;

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

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

"Paragraph" means a numbered paragraph in this letter;

"Proposed Transactions" means the transactions described in Paragraphs 19 to 46;

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

"specified person" has the meaning assigned by paragraph (h) of the definition of "taxable preferred share" in subsection 248(1); and

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

Facts

Aco

1. Aco is XXXXXXXXXX corporation governed by the XXXXXXXXXX. Aco is a taxable Canadian corporation and a public corporation.

2. The federal tax account number of Aco is XXXXXXXXXX. Aco's tax affairs are administered by Revenue Canada's XXXXXXXXXX Tax Services Office, and it files its tax returns at Revenue Canada's XXXXXXXXXX Taxation Centre. The taxation year of Aco ends on the XXXXXXXXXX in each year.

3. Aco's current mailing address is as follows:

XXXXXXXXXX.

4. The XXXXXXXXXX shares of Aco are listed for trading on XXXXXXXXXX.

XXXXXXXXXX.

5. Aco is the successor to XXXXXXXXXX. The assets of XXXXXXXXXX consisted of

XXXXXXXXXX.

6. Aco owns, directly and indirectly, an aggregate of XXXXXXXXXX common shares of Bco representing an approximate XXXXXXXXXX% interest in Bco. XXXXXXXXXX ("Subco"), a wholly owned subsidiary of Aco, owns XXXXXXXXXX Bco common shares (the "Subco Bco Shares"). The remaining XXXXXXXXXX Bco common shares are owned by Aco directly.

Acquisition of Bco Shares by Aco

6.1

XXXXXXXXXX

6.2
XXXXXXXXXX

6.3

XXXXXXXXXX

6.4

XXXXXXXXXX

6.5
XXXXXXXXXX

7. XXXXXXXXXX

XXXXXXXXXX

7.1

XXXXXXXXXX

XXXXXXXXXX

8. XXXXXXXXXX

Tax Attributes of Bco Shares

9. The XXXXXXXXXX Bco Shares, the XXXXXXXXXX Bco Shares and the XXXXXXXXXX Bco Shares are capital property to Aco for purposes of the Act. The Subco Bco Shares are capital property to Subco for purposes of the Act.

10. The aggregate adjusted cost base of the XXXXXXXXXX Bco Shares, the XXXXXXXXXX Bco Shares and the XXXXXXXXXX Bco Shares owned by Aco is $XXXXXXXXXX, or approximately $XXXXXXXXXX per share. The aggregate adjusted cost base of the Subco Bco Shares is $XXXXXXXXXX, or approximately $XXXXXXXXXX per share. The paid-up capital of the Bco shares has, as described in paragraph 16, not been ascertained.

11. Aco has engaged XXXXXXXXXX to determine the portion of the unrealized capital gain inherent in the XXXXXXXXXX Bco Shares, the XXXXXXXXXX Bco Shares and the XXXXXXXXXX Bco Shares owned by Aco that can reasonably be considered to be attributable to the income earned or realized, within the meaning of paragraph 55(5)(b), by Bco before the "safe income determination time" as that term is proposed to be defined in subsection 55(1) (such income being referred to hereinafter as "Safe Income on Hand") attributable to each of the XXXXXXXXXX Bco Shares, the XXXXXXXXXX Bco Shares and the XXXXXXXXXX Bco Shares owned directly by Aco, and the Safe Income on Hand attributable to each of the Subco Bco Shares owned by Subco. Prior to the commencement of the Proposed Transactions, XXXXXXXXXX will, with the assistance of Bco, complete its analysis and provide to Aco its determination of the estimated Safe Income on Hand.

Bco

12. Bco is XXXXXXXXXX corporation governed by the XXXXXXXXXX. Bco is a taxable Canadian corporation and a public corporation.

13. The federal tax account number of Bco is XXXXXXXXXX. Bco's tax affairs are administered by Revenue Canada's XXXXXXXXXX Tax Services Office and it files its tax returns at Revenue Canada's XXXXXXXXXX Tax Services Office. The taxation year of Bco ends on the XXXXXXXXXX in each year.

14. Bco's current mailing address is as follows:

XXXXXXXXXX.

15. The authorized capital of Bco consists of XXXXXXXXXX. The only issued and outstanding shares of Bco are common shares.

16. Although neither the stated capital nor the paid-up capital of the issued and outstanding Bco common shares has been precisely determined, the stated capital is assumed to be greater than the paid-up capital.

17. The common shares of Bco are listed for trading on XXXXXXXXXX.

18. Bco carries on business as XXXXXXXXXX.

Proposed Transactions

Incorporation of Newcos

19. Aco will cause a new company ("Newco 1") to be incorporated under the XXXXXXXXXX. The authorized share capital of Newco 1 will consist of an unlimited number of common shares. On incorporation, Aco will subscribe for one common share of Newco 1 for $XXXXXXXXXX.

20. Aco will cause a second new company ("Newco 2") to be incorporated under the XXXXXXXXXX. The authorized share capital of Newco 2 will consist of an unlimited number of Class XXXXXXXXXX voting common shares and an unlimited number of Class XXXXXXXXXX non-voting common shares. On incorporation, Aco will subscribe for one Class XXXXXXXXXX common share of Newco 2 for $XXXXXXXXXX.

Transfer of XXXXXXXXXX Bco Shares and XXXXXXXXXX Bco Shares to Newco 1

21. Pursuant to the XXXXXXXXXX Indenture, Aco will deliver to the Trustee XXXXXXXXXX of the XXXXXXXXXX Bco Shares which will, by the terms of the XXXXXXXXXX Indenture, become subject to the XXXXXXXXXX Pledge. Pursuant to the provisions of the XXXXXXXXXX Indenture and upon complying with the requirements of those provisions, the Trustee will release the XXXXXXXXXX Bco Shares from the XXXXXXXXXX Pledge and deliver such shares to Aco.

22. Aco will then transfer the XXXXXXXXXX Bco Shares owned by it to Newco 1. Newco 1 will issue to Aco additional common shares as the sole consideration for the XXXXXXXXXX Bco Shares. Aco and Newco 1 will file an election under the provisions of subsection 85(1) with an elected amount equal to Aco's adjusted cost base of the XXXXXXXXXX Bco Shares. XXXXXXXXXX, the directors of Newco 1 will add $XXXXXXXXXX to the stated capital account for the Newco 1 common shares, in respect of the additional common shares issued to Aco.

23. Newco 1 will then provide a guarantee (the "XXXXXXXXXX Guarantee") to the Trustee pursuant to which Newco 1 will guarantee Aco's obligation to XXXXXXXXXX. The obligations of Newco 1 under the XXXXXXXXXX Guarantee will be secured by a pledge (the "Temporary XXXXXXXXXX Pledge") by Newco 1 to the Trustee of the XXXXXXXXXX Bco Shares owned by Newco 1.

24. Pursuant to the provisions of the XXXXXXXXXX Indenture and upon complying with the requirements of those provisions, the Trustee will release the XXXXXXXXXX Bco Shares pledged to the Trustee as described in Paragraph 21 from the XXXXXXXXXX Pledge and return such shares to Aco.

25. Pursuant to the XXXXXXXXXX Indenture, Aco will then deliver to the Trustee XXXXXXXXXX of the XXXXXXXXXX Bco Shares which will, by the terms of the XXXXXXXXXX Indenture, become subject to the XXXXXXXXXX Pledge. Pursuant to the provisions of the XXXXXXXXXX Indenture and upon complying with the requirements of those provisions, the Trustee will release the XXXXXXXXXX Bco Shares from the XXXXXXXXXX Pledge and deliver such shares to Aco.

26. Aco will then transfer the XXXXXXXXXX Bco Shares owned by it to Newco 1. Newco 1 will issue to Aco additional common shares as the sole consideration for the XXXXXXXXXX Bco Shares. Aco and Newco 1 will file an election under the provisions of subsection 85(1) with an elected amount equal to Aco's adjusted cost base of the XXXXXXXXXX Bco Shares. XXXXXXXXXX, the directors of Newco 1 will add $XXXXXXXXXX to the stated capital account for the Newco 1 common shares, in respect of the additional common shares issued to Aco.

27. Newco 1 will then provide a guarantee (the "XXXXXXXXXX Guarantee") to the Trustee pursuant to which Newco 1 will guarantee Aco's obligation to XXXXXXXXXX. The obligations of Newco 1 under the XXXXXXXXXX Guarantee will be secured by a pledge (the "Temporary XXXXXXXXXX Pledge") by Newco 1 to the Trustee of the XXXXXXXXXX Bco Shares owned by Newco 1.

28. Pursuant to the provisions of the XXXXXXXXXX Indenture and upon complying with the requirements of those provisions, the Trustee will release the XXXXXXXXXX Bco Shares pledged to the Trustee as described in Paragraph 25 from the XXXXXXXXXX Pledge and return such shares to Aco.

29. After giving effect to these transactions, Aco will own directly the XXXXXXXXXX Bco Shares (which will not be subject to any pledge) and Newco 1 will own the XXXXXXXXXX Bco Shares and the XXXXXXXXXX Bco Shares which will be subject to the XXXXXXXXXX Temporary Pledge and the XXXXXXXXXX Temporary Pledge, respectively.

Transfer of XXXXXXXXXX Bco Shares and Subco Bco Shares to Newco 2

30. Aco will transfer all of the XXXXXXXXXX Bco Shares owned by it to Newco 2. Newco 2 will issue to Aco additional Class XXXXXXXXXX common shares as the sole consideration for the XXXXXXXXXX Bco Shares. Aco and Newco 2 will file an election under the provisions of subsection 85(1) at an elected amount equal to Aco's adjusted cost base of the XXXXXXXXXX Bco Shares. XXXXXXXXXX, the directors of Newco 2 will add $XXXXXXXXXX to the stated capital account for the Newco 2 Class XXXXXXXXXX common shares, in respect of the additional Class XXXXXXXXXX common shares issued to Aco.

31. Subco will transfer the Subco Bco Shares to Newco 2. Newco 2 will issue Class XXXXXXXXXX common shares to Subco as the sole consideration for the Subco Bco Shares. Subco and Newco 2 will file an election under the provisions of subsection 85(1) with an elected amount equal to Subco's adjusted cost base of the Subco Bco Shares. XXXXXXXXXX, the directors of Newco 2 will add $XXXXXXXXXX to the stated capital account for the Newco 2 Class XXXXXXXXXX common shares, in respect of the Class XXXXXXXXXX common shares issued to Subco.

Newco 1 and Newco 2 Pay Stock Dividends

32. Subsequent to the acquisition of the XXXXXXXXXX Bco Shares and the XXXXXXXXXX Bco Shares by Newco 1, the directors of Newco 1 will, in respect of the common shares of Newco 1, declare a series of stock dividends payable to Aco. The stock dividends will be payable in additional common shares of Newco 1. The aggregate amount of the stock dividends payable on the common shares of Newco 1 will not exceed Aco's estimate of the Safe Income on Hand attributable to the XXXXXXXXXX Bco Shares and the XXXXXXXXXX Bco Shares immediately before such shares were transferred to Newco 1.

33. XXXXXXXXXX, the directors of Newco 1 will add to the stated capital account for the Newco 1 common shares, in respect of the additional common shares issued to Aco in payment of the series of stock dividends, a separate amount for each stock dividend declared which amount will equal the amount of the dividend so declared.

34. Subsequent to the acquisition of the XXXXXXXXXX Bco Shares and the Subco Bco Shares by Newco 2, the directors of Newco 2 will, in respect of each class of shares of Newco 2, declare a series of stock dividends payable to the holder of shares of such class. The stock dividends payable to Aco in respect of the Class XXXXXXXXXX common shares of Newco 2 will be payable in additional Class XXXXXXXXXX common shares of Newco 2. The stock dividends payable to Subco in respect of the Class XXXXXXXXXX common shares of Newco 2 will be payable in additional Class XXXXXXXXXX common shares of Newco 2. The aggregate amount of the stock dividends payable on the Class XXXXXXXXXX common shares of Newco 2 will not exceed Aco's estimate of the Safe Income on Hand attributable to the XXXXXXXXXX Bco Shares immediately before such shares were transferred to Newco 2. The aggregate amount of the stock dividends payable on the Class XXXXXXXXXX common shares of Newco 2 will not exceed Aco's estimate of the Safe Income on Hand attributable to the Subco Bco Shares immediately before such shares were transferred to Newco 2.

35. XXXXXXXXXX, the directors of Newco 2 will add to the stated capital account for the Newco 2 Class XXXXXXXXXX common shares, in respect of the additional Class XXXXXXXXXX common shares issued to Aco in payment of the series of stock dividends, a separate amount for each stock dividend declared which amount will equal the amount of the dividend so declared.

36. XXXXXXXXXX, the directors of Newco 2 will add to the stated capital account for the Newco 2 Class XXXXXXXXXX common shares, in respect of the additional Class XXXXXXXXXX common shares issued to Subco in payment of the series of stock dividends, a separate amount for each stock dividend declared which amount will equal the amount of the dividend so declared.

Transfer of Newco 1 and Newco 2 Shares to Bco

37. Aco will transfer all of the Newco 1 common shares owned by it to Bco. Bco will issue to Aco XXXXXXXXXX common shares (the "New XXXXXXXXXX Bco Shares") as the sole consideration for the Newco 1 common shares. Aco and Bco will file an election under the provisions of subsection 85(1) with an elected amount equal to the sum of the elected amounts referred to in Paragraphs 22 and 26 and the aggregate amount of the stock dividends referred to in Paragraph 33. XXXXXXXXXX, the directors of Bco will add to the stated capital for the Bco common shares in respect of the New XXXXXXXXXX Bco Shares issued to Aco, an amount equal to the amount elected jointly by Aco and Bco in respect of the transfer.

38. Immediately upon the issue of the New XXXXXXXXXX Bco Shares as described in Paragraph 37, the following will occur:

(i) pursuant to the XXXXXXXXXX Indenture, Aco will deliver to the Trustee XXXXXXXXXX of the New XXXXXXXXXX Bco Shares, which will become subject to the XXXXXXXXXX Pledge,

(ii) the Trustee will release the XXXXXXXXXX Bco Shares from the Temporary XXXXXXXXXX Pledge and such pledge and the XXXXXXXXXX Guarantee will be cancelled,

(iii) pursuant to the XXXXXXXXXX Indenture, Aco will deliver to the Trustee XXXXXXXXXX of the New XXXXXXXXXX Bco Shares, which will become subject to the XXXXXXXXXX Pledge, and

(iv) the Trustee will release the XXXXXXXXXX Bco Shares from the XXXXXXXXXX Temporary Pledge and such pledge and the XXXXXXXXXX Guarantee will be cancelled.

39. Aco will transfer all of the Newco 2 Class XXXXXXXXXX common shares owned by it to Bco. Bco will issue to Aco XXXXXXXXXX common shares as the sole consideration for the Newco 2 Class XXXXXXXXXX common shares. Aco and Bco will file an election under the provisions of subsection 85(1) with an elected amount equal to the sum of the elected amount referred to in Paragraph 30 and the aggregate amount of the stock dividends paid to Aco in Class XXXXXXXXXX common shares of Newco 2 as described in Paragraph 35. XXXXXXXXXX, the directors of Bco will add to the stated capital for the Bco common shares in respect of the XXXXXXXXXX common shares issued to Aco, an amount equal to the amount elected jointly by Aco and Bco in respect of the transfer.

40. Subco will transfer all of the Newco 2 Class XXXXXXXXXX common shares owned by it to Bco. Bco will issue XXXXXXXXXX common shares to Subco as the sole consideration for the Newco 2 Class XXXXXXXXXX common shares. Subco and Bco will file an election under the provisions of subsection 85(1) with an elected amount equal to the sum of the elected amount referred to in Paragraph 31 and the aggregate amount of the stock dividends paid to Subco in Class XXXXXXXXXX common shares of Newco 2 as described in Paragraph 36. XXXXXXXXXX, the directors of Bco will add to the stated capital for the Bco common shares in respect of the XXXXXXXXXX common shares issued to Subco, an amount equal to the amount elected jointly by Subco and Bco in respect of the transfer.

Bco Winds Up Newco 1 and Newco 2

41. Subsequent to the acquisition by Bco of all of the issued and outstanding Newco 1 shares, Bco, as sole shareholder of Newco 1, will commence the voluntary dissolution of Newco 1 XXXXXXXXXX. In furtherance of the dissolution, Newco 1 will transfer all of the XXXXXXXXXX Bco Shares and the XXXXXXXXXX Bco Shares to Bco, and Bco will assume all of the liabilities of Newco 1.

42. As a consequence of the transfer of the XXXXXXXXXX Bco Shares and the XXXXXXXXXX Bco Shares to Bco in the course of the dissolution of Newco 1, the XXXXXXXXXX Bco Shares and the XXXXXXXXXX Bco Shares will be cancelled XXXXXXXXXX, Bco will deduct from the stated capital account maintained for its common shares, in respect of the cancelled Bco shares, an amount equal to the result obtained by multiplying the stated capital for the Bco common shares (before the cancellation) by the number of cancelled Bco shares, divided by the total number of Bco common shares immediately before the cancellation.

43. Subsequent to the acquisition by Bco of all of the issued and outstanding Newco 2 shares, Bco, as sole shareholder of Newco 2, will commence the voluntary dissolution of Newco 2 XXXXXXXXXX. In furtherance of the dissolution, Newco 2 will transfer all of the XXXXXXXXXX Bco Shares and the Subco Bco Shares to Bco, and Bco will assume all of the liabilities of Newco 2.

44. As a consequence of the transfer of the XXXXXXXXXX Bco Shares and the Subco Bco Shares to Bco in the course of the dissolution of Newco 2, the XXXXXXXXXX Bco Shares and the Subco Bco Shares will be cancelled XXXXXXXXXX, Bco will deduct from the stated capital account maintained for its common shares, in respect of the cancelled Bco shares, an amount equal to the result obtained by multiplying the stated capital for the Bco common shares (before the cancellation) by the number of cancelled Bco shares, divided by the total number of Bco common shares immediately before the cancellation. Once the Proposed Transactions are completed, the paid-up capital and stated capital of each issued Bco share will be less than it was at the time of the commencement of the Proposed Transactions.

45. After the cancellation of the XXXXXXXXXX Bco Shares, the XXXXXXXXXX Bco Shares, the XXXXXXXXXX Bco Shares and the Subco Bco Shares as described in Paragraphs 42 and 44, the total number of issued and outstanding Bco common shares will be equal to the total number of issued and outstanding Bco common shares at the commencement of the Proposed Transactions.

46. Following the cancellations of the Bco shares, each of Newco 1 and Newco 2 will file articles of dissolution XXXXXXXXXX and will be formally dissolved upon issuance of a certificate of dissolution XXXXXXXXXX.

46.1 The Proposed Transactions, as they relate to Subco and the Subco Bco Shares, will be implemented only if the stock market trading price of a Bco Share exceeds the adjusted cost base to Subco of each Subco Bco Share at the time of implementation. In other words, if at the time the Proposed Transactions are implemented there is no accrued capital gain in respect of the Subco Bco Shares, the Proposed Transactions will be implemented only in respect of the XXXXXXXXXX Bco Shares, the XXXXXXXXXX Bco Shares, and the XXXXXXXXXX Bco Shares owned directly by Aco.

Other Information

47. Subsequent to the completion of the Proposed Transactions, Aco intends to sell some or all of the Bco shares owned by it XXXXXXXXXX and the XXXXXXXXXX Pledge and to cause the Bco shares owned by Subco to be sold.

48. Bco's role in the Proposed Transactions is limited to assisting Aco to increase its adjusted cost base of the Bco common shares owned directly and indirectly by it by the amount of the Safe Income on Hand attributable to such shares. Aco will agree to reimburse Bco for all expenses incurred by it in connection with the Proposed Transactions. Aco will also agree to indemnify Bco for liability incurred by Bco in respect of adverse tax consequences resulting from the Proposed Transactions.

49. None of the shares of Bco owned directly or indirectly by Aco has been, and none of the shares of Newco 1 and Newco 2 will be, subject to a guarantee agreement, within the meaning referred to in subsection 112(2.2), that is given by a specified financial institution or a specified person in relation to any such institution for any of the purposes described in subsection 112(2.2).

49.1 Neither Newco 1 nor Newco 2 has entered into a dividend rental arrangement as defined in subsection 248(1).

50. None of the Bco shares owned directly or indirectly by Aco has been, and none of the shares of Newco 1 or Newco 2 will be, issued or acquired as part of a transaction or event or a series of transactions or events of the type described in subsection 112(2.5).

50.1 The fair market value of the Newco shares acquired by Bco, as described in Paragraphs 37, 39 and 40, will exceed the aggregate increase in the stated capital account for the Bco common shares as a result of the issuance of the Bco shares described in Paragraphs 37, 39 and 40.

Purpose of Proposed Transactions

51. Aco intends XXXXXXXXXX by selling some or all of the XXXXXXXXXX Bco shares directly and indirectly owned by it. Aco's purpose in entering into the Proposed Transactions is therefore (i) to increase the adjusted cost base of the Bco shares directly and indirectly owned by it by the amount of Safe Income on Hand attributable to such shares; and (ii) to achieve the increase in adjusted cost base in a manner that permits Aco (and Subco) to acquire directly shares of Bco, a public corporation, with such increased adjusted cost base.

Rulings

Provided that the above statements are accurate and constitute complete disclosure of all of the relevant facts, proposed transactions and the purposes of the Proposed Transactions we confirm the following:

A. Provided that the transferor and transferee jointly elect in prescribed form and within the time determined under subsection 85(6), the provisions of subsection 85(1) will apply to the transfers of the Bco shares by Aco to Newco 1 as described in Paragraphs 22 and 26, and by each of Aco and Subco to Newco 2 as described in Paragraphs 30 and 31, with the result that the amounts agreed upon with respect to such shares will be deemed to be the proceeds of disposition thereof to the transferor and the cost thereof to the transferee and will be the cost of the shares of the transferee received by the transferor. Paragraph 85(1)(e.2) shall not apply to deem the elected amount to be an amount other than that elected by the transferor and transferee.

B. The provisions of subsection 85(2.1) will not apply to reduce the paid-up capital of the Newco 1 shares issued to Aco or the Newco 2 shares issued to Aco or Subco as a result of the transactions described in Paragraphs 22, 26, 30 and 31.

C. The Safe Income on Hand attributable to the Newco 1 shares owned by Aco immediately following the issuance of those Newco 1 shares, as described in Paragraphs 22 and 26, will equal the Safe Income on Hand attributable to the XXXXXXXXXX and XXXXXXXXXX Bco Shares at the time immediately before the transfer of those shares by Aco to Newco 1 as described in Paragraphs 22 and 26.

C.1 The Safe Income on Hand attributable to the Newco 2 shares owned by Aco immediately following the issuance of those Newco 2 shares, as described in Paragraph 30, will equal the Safe Income on Hand attributable to the XXXXXXXXXX Bco Shares at the time immediately before the transfer of those shares by Aco to Newco 2 as described in Paragraph 30.

C.2 The Safe Income on Hand attributable to the Newco 2 shares owned by Subco immediately following the issuance of those Newco 2 shares, as described in Paragraph 31, will equal the Safe Income on Hand attributable to the Subco Bco Shares at the time immediately before the transfer of those shares by Subco to Newco 2 as described in Paragraph 31.

D. Provided that subsection 55(2) is not applicable to the particular stock dividend, the "amount", as that term is defined in subsection 248(1), of each stock dividend, as described in Paragraphs 32 and 34, paid by Newco 1 and Newco 2, and received by each of Aco and Subco, as the case may be, will be the amount by which the stated capital of Newco 1 and Newco 2, as the case may be, is increased by reason of the declaration and payment of the particular stock dividend.

E. Provided that subsection 55(2) is not applicable to the particular stock dividend, each stock dividend referred to in Ruling D above:

(i) will be deductible by the recipient thereof in calculating its taxable income pursuant to subsection 112(1), and for greater certainty, such deduction will not be prohibited by any of subsections 112(2.1), (2.2), (2.3) or (2.4); and

(ii) will not be subject to tax under Part IV of the Act, except to the extent that tax is exigible pursuant to paragraph 186(1)(b).

F. Provided that subsection 55(2) is not applicable to a particular stock dividend referred to in Ruling D above, pursuant to paragraph 52(3)(a), Aco and Subco, as the case may be, will be deemed to have acquired the shares received as that stock dividend at a cost equal to the amount of that stock dividend.

F.1 To the extent that the provisions of subsection 55(2) apply to a particular stock dividend paid by Newco 1 and Newco 2 and, as a consequence, the stock dividend is deemed by paragraph 55(2)(a) not to be a dividend received by Aco or Subco, as the case may be, neither paragraph 55(2)(b) nor (c) shall be applied to the stock dividend.

G. Part VI.1 will not apply to the taxable dividends described in paragraph 55 because such dividends will be excluded dividends by virtue of paragraph (a) of the definition of "excluded dividend" in subsection 191(1).

H. Provided that the transferor and transferee jointly elect in prescribed form and within the time determined under subsection 85(6), the provisions of subsection 85(1) will apply to the transfer of Newco 1 shares by Aco to Bco, as described in Paragraph 37, and the transfers of Newco 2 shares by each of Aco and Subco to Bco, as described in Paragraphs 39 and 40, with the result that the amounts agreed upon with respect to such shares will be deemed to be the proceeds of disposition thereof to the transferor and the cost thereof to the transferee and will be the cost of the treasury Bco shares received by the transferor. Paragraph 85(1)(e.2) shall not apply to deem the elected amount to be an amount other than that elected by the transferor and transferee.

I. The provisions of subsection 85(2.1) will not apply to reduce the paid-up capital of the Bco shares issued to Aco or Subco as a result of the transactions described in Paragraphs 37, 39 and 40.

J. No dividend will be deemed to arise pursuant to subsection 84(1) with respect to the increase in the paid-up capital of the Bco common shares as the consequence of the issuance by Bco of XXXXXXXXXX shares to Aco and Subco, as described in Paragraphs 37, 39 and 40, by virtue of paragraph 84(1)(b).

K. The provisions of subsection 88(1) will apply to the dissolution of each of Newco 1 and Newco 2, as described in Paragraphs 41 and 43, with the result that:

(i) each of Newco 1 and Newco 2 will, pursuant to subparagraph 88(1)(a)(iii), be deemed to have disposed of the Bco shares owned by it for proceeds equal to the cost amount thereof to such corporation immediately before the winding-up; and

(ii) Bco will, pursuant to paragraph 88(1)(b), be deemed to have disposed of the shares of each of Newco 1 and Newco 2 owned by it for proceeds equal to the greater of the amounts described in subparagraphs 88(1)(b)(i) and (ii).

L. The provisions of subsection 84(2) will not apply to the winding-up of Newco 1 or Newco 2 by virtue of paragraph 88(1)(d.1).

M. The provisions of subsection 84(3) will not apply to the cancellation of the Bco shares or the winding-up of Newco 1 or Newco 2 described in Paragraphs 42 and 44.

N. The provisions of subsection 69(11) will not apply to the transactions described in Paragraphs 22, 26, 30, 31, 37, 39, 40, 41 and 43, in and by themselves.

O. Subsections 15(1), 56(2) and 246(1) will not apply to the Proposed Transactions, in and by themselves.

P. The provisions of subsection 245(2) will not be applied as a result of the Proposed Transactions to redetermine the tax consequences described herein.

These rulings are given subject to the limitations and qualifications set out in Information Circular 70-6R3 dated December 30, 1996 and are binding provided that the Proposed Transactions are completed before XXXXXXXXXX.

These rulings are based on the Act as it currently reads and do not take into account any future amendments, whether currently proposed or not, to the Act.

Nothing in this letter should be construed as confirmation of the tax consequences of any of the transactions described in this letter other than as specifically described. More specifically, we make no comments on the income tax consequences of the reimbursement of Bco's expenses by Aco as described in Paragraph 48.

Opinions

Provided that our understanding of the facts and proposed transactions described herein is correct and provided that the Act is amended substantially in accordance with Bill C-69, which received first reading on December 2, 1996 but which was not passed, it is our opinion that

I. The "safe-income determination time" as that term is proposed to be defined in subsection 55(1), in respect of the Proposed Transactions, will be the time that is immediately before the earliest time that a stock dividend is paid as described in Paragraphs 32 and 34.

II. Subsection 69(11) will not apply to the transactions described in Paragraphs 22, 26, 30, 31, 37, 39, 40, 41 and 43, in and by themselves.

Yours truly,

for Director
Reorganizations and International Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch

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