2023 Ruling 2022-0958241R3 - Public Spin-Off Butterfly

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: Whether the proposed transactions meet the requirements of paragraph 55(3)(b).

Position: Yes.

Reasons: In accordance with law and previous positions.

XXXXXXXXXX								         2022-095824

XXXXXXXXXX, 2023

Dear XXXXXXXXXX:

Re: Advance Income Tax Ruling
XXXXXXXXXX

This is in reply to your letter dated XXXXXXXXXX in which you requested an advance income tax ruling on behalf of the above named Taxpayer.

This letter is based solely on the facts, proposed transactions, additional information and purposes of the proposed transactions described below. Any documentation submitted in respect of your request does not form part of the facts, proposed transactions or additional information unless specifically reproduced therein and any references to documentation are provided solely for the convenience of the reader.

We understand that, to the best of your knowledge and that of the Taxpayer, none of the proposed transactions and/or issues involved in this ruling are the same as, or substantially similar to, transactions and/or issues that are:

(a) in a previously filed tax return of the Taxpayer or a related person;

(b) being considered by the CRA in connection with a previously filed tax return of the Taxpayer or a person related to the Taxpayer;

(c) under objection by the Taxpayer or a person related to the Taxpayer;

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

(e) the subject of an advance income tax ruling previously issued by the Income Tax Rulings Directorate of the CRA in connection with the Taxpayer or a person related to the Taxpayer.

The tax account numbers, Tax Services Offices and the Tax Centres and addresses of the Taxpayers involved are as follows:

XXXXXXXXXX

Unless otherwise stated:

(a) all references herein to a part, section, subsection, paragraph or subparagraph is a reference to the relevant provision of the Income Tax Act, R.S.C. 1985 c.1 (5th Supp.) (the “Act”), as amended to the date of this letter;

(b) all terms and conditions used in this letter that are defined in the Act have the meaning given in such definition;

(c) all references to specific dollar amounts are in United States dollars; and

(d) the singular should be read as plural and vice versa where the circumstances so require.

DEFINITIONS

The following abbreviations, terms and expressions have the meanings specified, and the relevant parties to the Proposed Transactions (as defined below) will be referred to as follows:

“acquiror” has the meaning assigned in the definition of “specified corporation” in subsection 55(1);

“Act 1” means the Business Corporations Act XXXXXXXXXX;

“Act 2” means the Business Corporations Act XXXXXXXXXX;

“adjusted cost base” or “ACB” means “adjusted cost base” as defined in section 54 and subsection 248(1);

“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);

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

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

A is the net FMV of the Distribution Property to be transferred by DC to SpinCo as described in Paragraph 41 determined immediately before such transfer; and

B is the net FMV of all property owned by DC immediately before the transfer of the Distribution Property by DC to SpinCo as described in Paragraph 41 determined immediately before such transfer;

“Canco 1” means XXXXXXXXXX., a taxable Canadian corporation incorporated under Act 1;

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

“controlled foreign affiliate” has the meaning assigned by subsections 248(1) and 95(1);

“Corporation A” means XXXXXXXXXX, a taxable Canadian corporation incorporated under Act 2. Immediately prior to the implementation of the Plan of Arrangement referred to in Paragraph 20, DC owned approximately XXXXXXXXXX% of the shares of Corporation A and, prior to disposing of all of its shares to third parties as referred to in Paragraph 19, Corporation 1 owned approximately XXXXXXXXXX% of the shares of Corporation A;

“Corporation B” means XXXXXXXXXX;

“Corporation C” means XXXXXXXXXX;

“Corporation 1” means XXXXXXXXXX;

“Court” means the XXXXXXXXXX;

“CRA” means Canada Revenue Agency;

“DC” means XXXXXXXXXX, a taxable Canadian corporation incorporated under Act 1;

“DC Common Shares” means the common shares of DC, as described in Paragraph 2;

XXXXXXXXXX;

“DC Equity Incentive Plan” means DC’s XXXXXXXXXX Equity Incentive Plan, XXXXXXXXXX;

“DC Equity Incentive Securities” means, XXXXXXXXXX;

“DC Investor Rights Agreement” means an agreement between InvestCo and DC entered into on XXXXXXXXXX, providing, XXXXXXXXXX;

“DC New Common Shares” means the new class of common shares that DC will be authorized to issue after the amendment to its Articles described in Paragraph 37;

XXXXXXXXXX;

“DC New Equity Incentive Securities” means, XXXXXXXXXX;

XXXXXXXXXX;

“DC Preference Shares” the new class of preference shares that DC will be authorized to issue after the amendment to its Articles, described in Paragraph 38;

XXXXXXXXXX;

“DC Redemption Amount” means, for each DC Preference Share, the product of the Butterfly Proportion and the aggregate FMV of all of the DC Common Shares held by the Participants immediately before the transaction step described in Paragraph 39, divided by the number of DC Preference Shares, plus all declared but unpaid dividends thereon;

“DC Redemption Note” means the demand, non-interest bearing promissory note with a principal amount and FMV equal to the aggregate DC Redemption Amount, issued by DC to SpinCo in consideration for the redemption of the DC Preference Shares held by SpinCo;

XXXXXXXXXX;

“DC XXXXXXXXXX” means XXXXXXXXXX issued by DC to InvestCo XXXXXXXXXX;

“DC XXXXXXXXXX Subscription Agreement” means an agreement entered into between InvestCo and DC on XXXXXXXXXX, setting out the terms and conditions of InvestCo’s obligation to purchase DC Common Shares XXXXXXXXXX;

“DC Warrants” means warrants of DC granting InvestCo an option to acquire DC Common Shares for cash;

“DC Warrant Certificate Agreement” means an agreement entered into between InvestCo and DC on XXXXXXXXXX, setting out the terms and conditions of the DC Warrants XXXXXXXXXX;

“designated stock exchange” has the meaning assigned by subsection 248(1);

“Dissenting Shareholder” means a holder of a DC Common Share who exercises its right to dissent from the Plan of Arrangement;

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

“distributing corporation” has the meaning assigned in the definition of “distribution” in subsection 55(1);

“Distribution Property” means XXXXXXXXXX. None of the shares of the capital stock of any corporation, that are included in the Distribution Property will be taxable preferred shares of a taxable Canadian corporation;

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

“eligible dividend” has the meaning assigned by subsection 89(14);

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

“Escrow Agent” means XXXXXXXXXX;

XXXXXXXXXX;

“fair market value” or “FMV” means the highest price available in an open and unrestricted market between informed and prudent parties dealing at arm’s length and under no compulsion to act, expressed in terms of money;

“Forco 1” means XXXXXXXXXX, a non-resident corporation governed by the laws of the XXXXXXXXXX;

“Forco 2” means XXXXXXXXXX, a non-resident XXXXXXXXXX corporation XXXXXXXXXX;

“In the Money Amount” means, in relation to a particular warrant, performance-based restricted share unit, restricted share unit or deferred share unit, the amount by which the FMV of the share that is the subject of the particular security exceeds the exercise price of the security, if any.

“InvestCo” means XXXXXXXXXX, a XXXXXXXXXX corporation governed by the laws of the XXXXXXXXXX;

XXXXXXXXXX;

“Master Purchase Agreement” means the agreement between DC and InvestCo, entered into on XXXXXXXXXX, providing XXXXXXXXXX;

XXXXXXXXXX;

“Paragraph” means a numbered paragraph in this letter;

“Participant” means a holder of a DC Common Share, other than a Dissenting Shareholder;

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

“Plan of Arrangement” means the proposed plan of arrangement of DC XXXXXXXXXX to effect the transactions described in Paragraphs 33 to 45;

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

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

“Project 1” means the XXXXXXXXXX;

“Proposed Transactions” means the proposed transactions described in Paragraphs 33 to 49;

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

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

“Retained Property” means all of the property of DC other than the Distribution Property;

“series of transactions or events” includes the transactions or events described in subsection 248(10);

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

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

“SpinCo” means XXXXXXXXXX, a taxable Canadian corporation incorporated under Act 1 as described in Paragraph 15;

“SpinCo Common Shares” means the common shares of SpinCo as described in Paragraph 17;

XXXXXXXXXX;

“SpinCo Equity Incentive Plan” means the equity incentive plan of SpinCo;

“SpinCo Equity Incentive Securities” means, XXXXXXXXXX;

“SpinCo Investor Rights Agreement” means an agreement between InvestCo and SpinCo entered into after XXXXXXXXXX, providing, XXXXXXXXXX;

“SpinCo Preference Shares” means the preference shares of SpinCo as described in Paragraph 18;

XXXXXXXXXX;

“SpinCo Redemption Amount” means, for each SpinCo Preference Share, the net FMV of the Distribution Property, divided by the number of SpinCo Preference Shares, plus all declared but unpaid dividends thereon;

“SpinCo Redemption Note” means the demand, non-interest bearing promissory note with a principal amount and FMV equal to the aggregate SpinCo Redemption Amount, issued by SpinCo to DC in consideration for the redemption of the SpinCo Preference Shares held by DC;

XXXXXXXXXX;

“SpinCo XXXXXXXXXX Subscription Agreement” means an agreement to be entered into between InvestCo and SpinCo setting out the terms and conditions of InvestCo’s obligation to purchase SpinCo Common Shares XXXXXXXXXX;

“SpinCo Warrant Certificate Agreement” means an agreement to be entered into between Investco and SpinCo, setting out the terms and conditions of the SpinCo Warrants XXXXXXXXXX;

“SpinCo Warrants” means warrants of SpinCo granting InvestCo an option to acquire SpinCo Common Shares for cash in the amount of XXXXXXXXXX;

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

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

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

“United States” means the United States of America.

FACTS

1. DC is a public corporation and a specified corporation. DC’s taxation year end is XXXXXXXXXX.

2. DC is authorized to issue an unlimited number of DC Common Shares. All of the issued and outstanding DC Common Shares are widely held and publicly traded on XXXXXXXXXX.

3. DC is XXXXXXXXXX focused on XXXXXXXXXX through its interests in the Distribution Property and the Retained Property.

4. DC delivers a long-term incentive plan in the form of its DC Equity Incentive Securities which is governed by the DC Equity Incentive Plan. As of XXXXXXXXXX the issued and outstanding DC Equity Incentive Securities were approximately as follows:

XXXXXXXXXX.

5. Corporation 1 owns XXXXXXXXXX DC Common Shares, comprising (prior to the transaction described in Paragraph 29) approximately XXXXXXXXXX% of all of the issued and outstanding DC Common Shares. Corporation 1 is the only specified shareholder of DC at any time during the series and is not related to or affiliated with DC.

6. The shares of Corporation 1 are traded publicly on XXXXXXXXXX. An individual, XXXXXXXXXX owns approximately XXXXXXXXXX% of the issued and outstanding voting shares of Corporation 1. XXXXXXXXXX deals at arm’s length with Corporation 1.

7. DC owns all of the issued and outstanding shares of Canco 1. DC also owns an interest-bearing receivable owing from Canco 1 in the amount of approximately $XXXXXXXXXX.

8. Canco 1 owns all of the issued and outstanding shares of Forco 1. Forco 1 is a controlled foreign affiliate of Canco 1. Canco 1 also owns an interest-bearing receivable owing from Forco 1 in the amount of approximately $XXXXXXXXXX. Forco 1 owns XXXXXXXXXX

9. Forco 2 is a controlled foreign affiliate of Canco 1. Forco 1 owns all of the member interests of Forco 2.

10. The business activities of Project 1 are carried on with the assets held by Forco 1 and Forco 2 XXXXXXXXXX.

11. DC owns a minority interest of 5% in the shares of Corporation B. Corporation B is a XXXXXXXXXXcompany with assets inXXXXXXXXXX. Corporation B’s shares are listed on the XXXXXXXXXX.

12. DC owns a minority interest of XXXXXXXXXX% in the shares of Corporation C. Corporation C provides XXXXXXXXXX.

13. DC continuously examines opportunities to participate in new XXXXXXXXXX, assets and businesses. DC has completed a number of acquisitions. These acquisitions were not undertaken in contemplation of the Proposed Transactions and would have occurred without regard to whether the Proposed Transactions are implemented.

14. On XXXXXXXXXX, DC entered into the Master Purchase Agreement with InvestCo.

15. DC incorporated SpinCo on XXXXXXXXXX. SpinCo has a taxation year end of XXXXXXXXXX. SpinCo has no shares issued or outstanding. SpinCo will, on or before SpinCo’s filing due date for its first taxation year, pursuant to the definition of “public corporation” in subsection 89(1), elect in its federal return of income for that taxation year to be a public corporation from the beginning of the year until the time that the SpinCo Common Shares are listed on a designated stock exchange.

16. The authorized share capital of SpinCo includes an unlimited number of common shares (the “SpinCo Common Shares”) and an unlimited number of preference shares (the “SpinCo Preference Shares”).

17. The attributes of the SpinCo Common Shares are as follows:

(a) the holders of the SpinCo Common Shares will be entitled to receive dividends if, as and when declared by the board of directors, in such amounts and payable in such manner as the board may from time to time determine. Subject to the rights of the holders of the SpinCo Preference Shares, the board may, in its sole discretion, declare dividends on the SpinCo Common Shares exclusively;

(b) in the event of the liquidation, dissolution or winding up of SpinCo, the holders of the SpinCo Common Shares will, subject to the rights of the holders of the SpinCo Preference Shares, participate rateably in any distribution of the assets of SpinCo; and

(c) subject to applicable law, the holders of the SpinCo Common Shares will be entitled to receive notice of and to attend all meetings of the shareholders of SpinCo and to one vote in respect of each SpinCo Common Share held at all such meetings, except at separate meetings of or on separate votes by the holders of another class or series of shares of SpinCo.

18. The attributes of the SpinCo Preference Shares are as follows:

(a) the holders of the SpinCo Preference Shares will be entitled to receive non-cumulative dividends, if, as and when declared by the board of directors, in such amounts and payable in such manner and at such times as the board may from time to time determine. The board may, in its sole discretion, declare dividends on the SpinCo Preference Shares exclusively;

(b) in the event of the liquidation, dissolution or winding up of SpinCo, to the extent permitted by law, holders of the SpinCo Preference shares will be entitled to receive, before any amount is paid by SpinCo to holders of the SpinCo Common Shares, an amount equal to the SpinCo Redemption Amount in respect of each SpinCo Preference Share. After such payment, holders of SpinCo Preference Shares will not be entitled to any further distribution of assets of SpinCo;

(c) SpinCo may redeem at any time the whole or any portion of the SpinCo Preference Shares on payment of the SpinCo Redemption Amount;

(d) subject to applicable law, a holder of a SpinCo Preference Share will be entitled to require SpinCo to redeem, at any time, all or any portion of the SpinCo Preference Shares held by such holder;

(e) for so long as any SpinCo Preference Shares are outstanding, SpinCo will not:

(i) declare or pay any dividend on the SpinCo Common Shares; or

(ii) redeem, purchase for cancellation or otherwise acquire any SpinCo Common Shares.

(f) subject to applicable law, holders of the SpinCo Preference Shares will not be entitled to receive notice of or to attend any meeting of the shareholders of SpinCo and will not be entitled to vote at any such meeting; and

(g) for the purposes of subsection 191(4), the terms and conditions of the SpinCo Preference Shares, or an agreement in respect of the SpinCo Preference Shares will, at the time of their issue, specify an amount in respect of each SpinCo Preference Share that will be expressed as a dollar amount (and not expressed as a formula) that is not higher than the consideration for which such SpinCo Preference Share is issued.

19. Prior to XXXXXXXXXX, all warrants of Corporation A held by Corporation 1 were exercised and Corporation 1 sold all its common shares (including the common shares underlying said warrants) of Corporation A to third parties so that it no longer held any shares or options to acquire shares of Corporation A.

20. On XXXXXXXXXX, pursuant to a plan of arrangement, each holder of options to acquire common shares of Corporation A, that had not been exercised or surrendered, were deemed to be assigned and transferred by the holder to Corporation A for an amount equal to the aggregate In the Money Amount of the options, payable in Corporation A common shares. The stock option plan of Corporation A and all option agreements were terminated.

21. Immediately following the transaction described in Paragraph 20, each warrant of Corporation A held by a holder, that had not been exercised or surrendered, was deemed to be assigned and transferred by the holder to Corporation A for an amount equal to the aggregate In the Money Amount of the warrants, payable in Corporation A common shares.

22. Reserved.

23. Immediately following the transaction described in Paragraph 21, each Corporation A common share held by a shareholder (other than any dissenting shareholder of Corporation A) was deemed to be transferred to and acquired by DC in exchange for XXXXXXXXXX of a DC Common Share and $XXXXXXXXXX of cash.

24. Reserved.

25. Reserved.

26. Reserved.

27. Reserved.

28. On XXXXXXXXXX, in accordance with the Master Purchase Agreement, InvestCo deposited XXXXXXXXXX with the Escrow Agent for the issuance by DC of the DC XXXXXXXXXX to InvestCo.

29. Immediately after the completion of the transaction step described in Paragraph 28, the Escrow Agent transferred the cash deposit held in escrow to DC and each DC XXXXXXXXXX converted into XXXXXXXXXX. Following conversion of the DC XXXXXXXXXX, InvestCo owned less than 10 percent of the DC Common Shares and, for greater certainty, InvestCo is not a specified shareholder of DC and will not become a specified shareholder of DC following the settlement of the DC XXXXXXXXXX Subscription Agreement described in Paragraph 46 and the exercise of the DC Warrants described in Paragraph 47.

30. Immediately after the completion of the transaction described in Paragraph 29, InvestCo and DC entered into the DC XXXXXXXXXX Subscription Agreement, the DC Warrant Certificate Agreement, the DC Investor Rights Agreement and XXXXXXXXXX.

31. On or around XXXXXXXXXX, DC and SpinCo entered into an agreement in respect of the Plan of Arrangement, which was amended and restated by agreement dated XXXXXXXXXX. The Proposed Transactions described in Paragraphs 33 to 45 will be undertaken pursuant to a Plan of Arrangement commencing on the Effective Date.

32. DC and Corporation 1 have entered into a voting support agreement with under which Corporation 1 has agreed to vote its DC Common Shares in favour of the Plan of Arrangement, XXXXXXXXXX:

XXXXXXXXXX.

PROPOSED TRANSACTIONS

Unless otherwise indicated, the Proposed Transactions will take place in the following order:

33. The DC Common Shares held by a Dissenting Shareholder who exercises their dissent right will be deemed to have been transferred to DC and cancelled and will cease to be outstanding at the Effective Date such that the Dissenting Shareholders will cease to have any rights as shareholders of DC, other than the right to be paid the fair value for their DC Common Shares by DC, as determined by the Court.

34. The DC Equity Incentive Plan will be amended and the SpinCo Equity Incentive Plan will come into force.

35. Each holder of DC Equity Incentive Securities will dispose of such holder’s Butterfly Proportion thereof to SpinCo in consideration for corresponding SpinCo Equity Incentive Securities, and will dispose of the remaining portion thereof to DC in consideration for corresponding DC New Equity Incentive Securities. In connection with this exchange:

(a) no other consideration will be received on the exchange;

(b) SpinCo will issue the same number and type of SpinCo Equity Securities to each holder as the full number of DC Equity Securities of that type held by the holder before the exchange;

(c) DC will issue the same number and type of DC New Equity Incentive Securities to each holder as the full number of DC Equity Incentive Securities of that type held by the holder before the exchange, except that the number of each type of DC New Equity Incentive Securities that are issued will be reduced, if and as necessary, so that the aggregate of the In the Money Amount of the particular corresponding SpinCo Equity Incentive Securities and of the DC New Equity Incentive Securities does not exceed the In the Money Amount of the particular corresponding exchanged DC Equity Incentive Securities. For the purposes of computing the In the Money Amount of DC Equity Incentive Securities, DC New Equity Incentive Securities and SpinCo Equity Incentive Securities, DC New Equity Incentive Securities and SpinCo Equity Incentive Securities, the FMV of the DC Common Shares immediately before the exchange will be determined by the volume weighted average price at which such shares traded on XXXXXXXXXX for the five business days immediately prior to the Effective Date, and the FMV of the DC Common Shares and the SpinCo Common Shares immediately after the exchange will be determined by the volume weighted average price at which such shares traded on XXXXXXXXXX for the five business days beginning on the Effective Date;

(d) the terms and conditions of the SpinCo Equity Incentive Securities and the DC New Equity Incentive Securities will be substantially similar to the terms and conditions of the corresponding DC Equity Incentive Securities that are exchanged, but modified as is expedient and as the circumstances require provided, however, that XXXXXXXXXX; and

(e) each DC Equity Inventive Security will be cancelled.

36. DC’s Articles will be amended to create the DC New Common Shares and the DC Preference Shares.

37. The attributes of the DC New Common Shares will be substantially identical to the DC Common Shares other than carrying a right to two votes per share.

38. The attributes of the DC Preference Shares will be as follows:

(a) the holders of the DC Preference Shares will be entitled to receive non-cumulative dividends, if, as and when declared by the board of directors, in such amounts and payable in such manner and at such times as the board may from time to time determine. The board may, in its sole discretion, declare dividends on the DC Preference Shares exclusively;

(b) in the event of the liquidation, dissolution or winding up of DC, to the extent permitted by law, holders of the DC Preference Shares will be entitled to receive, before any amount is paid by DC to holders of DC New Common Shares, an amount equal to the DC Redemption Amount in respect of each DC Preference Share. After such payment, holders of the DC Preference Shares will not be entitled to any further distribution of assets of DC;

(c) DC may redeem at any time the whole or any portion of the DC Preference Shares on payment in any form of the DC Redemption Amount;

(d) subject to applicable law, a holder of DC Preference Shares will be entitled to require DC to redeem, at any time, all or any portion of the DC Preference Shares held by such holder;

(e) for so long any DC Preference Shares are outstanding, DC will not:

(i) declare or pay any dividend on the DC New Common Shares; or

(ii) redeem, purchase for cancellation or otherwise acquire any DC New Common Shares

(f) holders of the DC Preference Shares will not be entitled to receive notice of or to attend any meeting of the shareholders of DC and will not be entitled to vote at any such meeting; and

(g) for the purposes of subsection 191(4), the terms and conditions of, or an agreement in respect of, the DC Preference Shares will, at the time of their issue, specify an amount in respect of each DC Preference Share that will be expressed as a dollar amount that is not higher than the consideration for its issue.

39. Each Participant will exchange each DC Common Share held by the Participant with DC for one DC New Common Share and one DC Preference Share, and the DC Common Shares so exchanged will be cancelled. In connection with this share exchange:

(a) DC will not make a joint election under the provisions of section 85 with any holder of a DC Common Share; and

(b) the aggregate amount to be added by DC, pursuant to the provisions of the applicable corporation law, to the stated capital of the DC New Common Shares and the DC Preference Shares will be an amount equal to the aggregate PUC of the DC Common Shares immediately before the share exchange, and such PUC will be allocated between the DC New Common Shares and the DC Preference Shares based on the proportion that the FMV of the DC New Common Shares and the DC Preference Shares, as the case may be, is of the aggregate FMV of all of the DC New Common Shares and DC Preference Shares issued on this share exchange.

40. Each Participant will transfer to SpinCo all the DC Preference Shares held by the Participant. Every Participant will receive FMV consideration from SpinCo in the form of one SpinCo Common Share for every transferred DC Preference Share. In connection with this exchange:

(a) SpinCo will not make a joint election under the provisions of section 85 with any holder of a DC Preference Share;

(b) the amount added by SpinCo, pursuant to the provisions of the applicable corporation law, to the stated capital of the SpinCo Common Shares will be an amount equal to the PUC of the DC Preference Shares immediately before this exchange; and

(c) the SpinCo Common Shares will, outside and not as part of the Plan of Arrangement, be listed and posted for trading on XXXXXXXXXX.

41. DC will transfer to SpinCo all of the Distribution Property. In consideration for that transfer, SpinCo will:

(a) assume the liabilities of DC related to the Distribution Property; and

(b) issue a number of SpinCo Preference Shares to DC which will have an aggregate redemption amount and aggregate FMV equal the SpinCo Redemption Amount.

In connection with the distribution:

(a) DC will jointly elect with SpinCo, in prescribed form and manner and within the time limits referred to in subsection 85(6), to have the provisions of subsection 85(1) apply to the transfers of each eligible property of DC that is transferred by DC to SpinCo;

(b) The agreed amount in respect of each such eligible property transferred will be as follows:

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

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

The agreed amount in respect of each eligible property so transferred using the provisions of subsection 85(1), will not be greater than the FMV of such eligible property.

(c) The amount of the liabilities assumed by SpinCo, which are allocated to a particular eligible property that is subject to an election under subsection 85(1), will not exceed the agreed amount for that particular property. The amount of liabilities assumed by SpinCo, which are allocated to a particular property that is not subject to an election under subsection 85(1), will not exceed the FMV of any such property.

(d) the amount added by SpinCo to the stated capital of the SpinCo Preference Shares will be an amount equal to the aggregate of (a) the agreed amounts, in the case of each eligible property transferred to SpinCo, and (b) the aggregate FMV, in the case of each property transferred to SpinCo that is not an eligible property, less (c) the aggregate principal amounts of the liabilities of DC assumed by SpinCo. For greater certainty, the amount added to the stated capital of the SpinCo Preference Shares issued by SpinCo as partial consideration for the property it will receive on the distribution will not exceed the maximum amount that could be added to the aggregate PUC of such shares without a reduction taking place pursuant to subsection 85(2.1).

42. SpinCo will redeem for cancellation all of the outstanding SpinCo Preference Shares held by DC and will issue to DC, as the sole consideration therefor, the SpinCo Redemption Note. The amount of any deemed dividend resulting from the application of subsection 84(3) to the redemption of all of the outstanding SpinCo Preference Shares will be designated by SpinCo, pursuant to subsection 89(14), to the extent permitted under the Act, to be treated as an eligible dividend.

43. DC will redeem for cancellation all of the outstanding DC Preference Shares held by SpinCo and will issue to SpinCo, as sole consideration therefor, the DC Redemption Note. The amount of any deemed dividend resulting from the application of subsection 84(3) to the redemption of all of the outstanding DC Preference Shares will be designated by DC, pursuant to subsection 89(14), to the extent permitted under the Act, to be treated as an eligible dividend.

44. Each Participant will exchange each DC New Common Share held by the Participant with DC for one DC Common Share. In connection with this share exchange:

(a) DC will not make a joint election under the provisions of section 85 with any holder of a DC New Common Share;

(b) the aggregate amount to be added by DC, pursuant to the provisions of the applicable corporation law, to the stated capital of the DC Common Shares will be an amount equal to the PUC of the DC New Common Shares immediately before the this share exchange; and

(c) the DC Common Shares, the DC Common Shares will, outside and not as part of the Plan of Arrangement, continue to be listed and posted for trading on XXXXXXXXXX

45. In order to settle the SpinCo Redemption Note and the DC Redemption Note, the following transactions will occur simultaneously:

(a) DC will satisfy the obligations under the DC Redemption Note by transferring the SpinCo Redemption Note to SpinCo, and SpinCo will accept the SpinCo Redemption Note in full satisfaction of DC’s obligations under the DC Redemption Note; and

(b) SpinCo will satisfy the obligations under the SpinCo Redemption Note by transferring the DC Redemption Note to DC, and DC will accept the DC Redemption Note in full satisfaction of SpinCo’s obligations under the SpinCo Redemption Note.

The DC Redemption Note and the SpinCo Redemption Note will both be paid in full and cancelled.

46. Pursuant to the DC XXXXXXXXXX Subscription Agreement, InvestCo will acquire, in aggregate, XXXXXXXXXX.

47. Pursuant to the DC Warrant Certificate Agreement, InvestCo will exercise all of its DC Warrants to acquire, in aggregate, XXXXXXXXXX.

48. XXXXXXXXXX.

49. XXXXXXXXXX:

XXXXXXXXXX.

ADDITIONAL INFORMATION

50. The Proposed Transactions will occur in the order presented unless otherwise indicated except that any election forms will be filed within the applicable due dates following the completion of the Proposed Transactions.

51. SpinCo will, pursuant to the definition of “public corporation” in subsection 89(1), elect in its return of income for its first taxation year to have been a public corporation from the beginning of such year.

52. Neither DC nor SpinCo is or will be at the time of the Proposed Transactions, a “specified financial institution” as defined in subsection 248(1), a “financial intermediary corporation” as defined in subsection 191(1), or a “restricted financial institution” as defined in subsection 248(1).

53. None of the shares of DC or SpinCo 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) the subject of any secured undertaking of the type described in paragraph 112(2.4)(a); or

(d) 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); or

(e) 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).

54. Except as specifically described herein, no specified shareholder of DC or SpinCo will dispose of shares of DC or SpinCo, or any property 10% or more of the FMV of which is, at any time during the series, derived from shares of DC or SpinCo, as part of the series of transactions or events that include the Proposed Transactions, to an unrelated person, a partnership or a person who will cease to be related to the transferor as part of the series of transactions or events that include the Proposed Transactions.

55. Apart from the investments described in Paragraphs 29, 46 and 47, neither InvestCo nor any person with which InvestCo does not deal at arm’s length owns any shares or rights to acquire shares in DC.

56. There is no anticipated or expected acquisition of control of DC, SpinCo or Corporation 1 either through a direct or indirect acquisition of shares.

57. Except as specifically described herein, there is no anticipated or expected disposition of property by DC and its subsidiaries, or by SpinCo and its subsidiaries, other than in the ordinary course of business.

58. Within three years of the exchange described in Paragraph 40, DC will not undertake a distribution to a corporation that is not an acquiror within the meaning of paragraph (b) of the definition “specified corporation” and SpinCo will not, within three years of the exchange described in Paragraph 40, undertake a distribution.

59. The DC Common Shares are not taxable Canadian property. More specifically, the DC Common Shares have not derived, and will not derive, more than 50% of their FMV from one or any combination of real or immovable property situated in Canada, Canadian resource properties, timber resource properties, or options in respect of, or interests in, or for civil law rights in, any such property at any time during the 60-month period that ends on the Effective Date.

PURPOSE OF THE PROPOSED TRANSACTIONS

60. The purpose of the Proposed Transactions is to transfer the Distribution Property, through which the business activities of Project 1 are carried on, to SpinCo. DC believes that this transfer is in the best interests of DC and its shareholders because it should:

(a) enhance the ability for each of DC and SpinCo to pursue its independent business opportunities, objectives and strategies; and

(b) enable dedicated management teams to focus on the core assets of each separate public corporation.

RULINGS

Provided that the above statements of Facts, Proposed Transactions, Additional Information and Purpose of the Proposed Transactions are accurate and constitute a complete disclosure of all relevant information and provided that the Proposed Transactions are completed in the manner described above, our rulings are as follows:

A. With regard to the purchase by DC of existing DC Common Shares from a Dissenting Shareholder as described in Paragraph 33 and subject to the application of subsection 55(2):

(a) DC will be deemed by paragraph 84(3)(a) to have paid, and each Dissenting Shareholder will be deemed by paragraph 84(3)(b) to have received, a dividend, equal to the amount by which any payment from DC to a Dissenting Shareholder in respect of the purchase for cancellation of such Dissenting Shareholder’s DC Common Shares exceeds the amount of PUC attributable to such shares immediately prior to their purchase for cancellation;

(b) Subsections 212(2) and 215(1) will apply (subject to the provisions of any applicable tax treaty) to require DC to withhold and remit 25% of the amount of each such dividend deemed to have been paid as described in (a) to a Dissenting Shareholder who is a non-resident of Canada.

B. On the exchange of the DC Common Shares for DC New Common Shares and DC Preference Shares, as described in Paragraph 39, the provisions of subsection 86(1) will apply, and the provisions of subsection 86(2) will not apply, to the disposition of each DC Common Share by a Participant for one DC New Common Share and one DC Preference Share provided that:

(a) the particular Participant holds its DC Common Shares as capital property; and

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

such that

(c) the Participant will be deemed by paragraph 86(1)(b) to have acquired the DC New Common Shares and DC Preference Shares at a cost equal to the proportion of the ACB of the DC Common Shares to such Participant, immediately before the exchange, that:

(i) the FMV, immediately after the exchange, of the DC New Common Shares or the DC Preference Shares, as the case may be, received by such Participant,

is of

(ii) the FMV, immediately after the exchange, of all of the shares in the capital of DC acquired by such Participant for the DC Common Shares; and

(d) pursuant to paragraph 86(1)(c), such Participant will be deemed to have disposed of the Participant’s DC Common Shares for aggregate proceeds of disposition equal to the aggregate cost to such Participant of the DC New Common Shares and the DC Preference Shares received by such Participant as determined in (c) above.

C. The exchange of the DC Common Shares for DC New Common Shares and DC Preference Shares, as described in Paragraph 39, will not in and by themselves, cause the shares that a Participant received in exchange for shares that were, immediately before such exchange, capital property to that Participant, not to be capital property to that Participant immediately after such exchange.

D. With regard to the exchange of DC Preference Shares for SpinCo Common Shares as described in Paragraph 40, provided that a Participant:

(a) Holds such DC Preference Shares as capital property immediately before the exchange;

(b) does not receive any consideration, other than SpinCo Common Shares in exchange for the DC Preference Shares;

(c) deals at arm’s length with SpinCo immediately before the exchange;

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

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

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

and further, provided that immediately after the exchange,

(g) such Participant or persons with whom such Participant does not deal at arm’s length or such Participant together with any other person or persons with whom such Participant does not deal at arm’s length, will not control SpinCo or beneficially own shares in the capital of SpinCo having an aggregate fair market value representing more than 50% of the aggregate fair market value of all the outstanding shares in the capital of SpinCo;

then, pursuant to paragraph 85.1(1)(a) such Participant will be deemed,

(h) to have disposed of such DC Preference Shares for proceeds of disposition equal to the aggregate ACB of such shares to the Participant immediately before the exchange; and

(i) to have acquired such SpinCo Common Shares at an aggregate cost equal to the aggregate ACB of such Participant’s DC Preference Shares immediately before the exchange;

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

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

E. Subject to the application of subsection 69(11), provided that the requisite section 85 elections are made in the prescribed form and manner within the time limit specified in subsection 85(6), and provided that each property so transferred is an eligible property in respect of which shares have been issued as full or partial consideration therefor, the provisions of subsection 85(1), other than paragraph 85(1)(e.2), will apply to the transfer of property by DC to SpinCo as described in Paragraph 41 such that the agreed amount in respect of each transfer of eligible property will be deemed to be the transferor’s proceeds of disposition and the transferee’s cost of such property pursuant to paragraph 85(1)(a).

F. Subsection 84(3) will apply to:

(a) the redemption for cancellation of the SpinCo Preference Shares held by DC, as described in Paragraph 42, such that SpinCo will be deemed to have paid and DC will be deemed to have received a dividend on the SpinCo Preference Shares equal to the amount, if any, by which the SpinCo Redemption Amount exceeds the aggregate PUC, of such shares immediately before such redemption for cancellation; and

(b) the redemption for cancellation of the DC Preference Shares held by SpinCo, as described in Paragraph 43, such that DC will be deemed to have paid and SpinCo will be deemed to have received a dividend on the DC Preference Shares, equal to the amount, if any, by which the DC Redemption Amount exceeds the aggregate PUC of such shares immediately before such redemption for cancellation.

Any such dividend will:

(c) be included in computing the income, pursuant to subsection 82(1) and paragraph 12(1)(j), of the corporation deemed to have received such dividend;

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

(e) by virtue of paragraph (j) of the definition of “proceeds of disposition” in section 54, be excluded from the proceeds of disposition of the recipient in respect of the shares so redeemed; and

(f) reduce, by virtue of subsection 112(3), the loss, if any, in respect of the redemption of the shares on which the particular dividend is deemed to be received; and

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

G. Provided that:

(a) there is not a distribution by DC to a corporation that is not an acquiror before the day that is three years after the Effective Date; and

(b) there is not a distribution by SpinCo or any acquiror in relation to DC before the day that is three years after the Effective Date;

and as part of the series of transaction or events that includes the taxable dividends described in Ruling F, there is not:

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

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

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

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

which has not been described in this letter, then by virtue of paragraph 55(3)(b), subsection 55(2) will not apply to the taxable dividends referred to in Ruling F, and for greater certainty, subsection 55(3.1) will not apply to deny the exemption under paragraph 55(3)(b).

H. Provided that the DC New Common Shares represent capital property to a Participant, the provisions of subsection 51(1) will apply, and the provisions of subsection 51(2) will not apply, to the share exchange by the Participant of the DC New Common Shares for DC Common Shares, as described in Paragraph 44.

I. The settlement and cancellation of the DC Redemption Note held by SpinCo and the settlement and cancellation of the SpinCo Redemption Note held by DC, as described in Paragraph 45, will not give rise to a “forgiven amount” within the meaning of subsection 80(1) and 80.01(1). Neither SpinCo nor DC will realize a gain or incur a loss as a result of the repayment and resultant cancellation of the DC Redemption Note or SpinCo Redemption Note.

J. The provisions of subsection 7(1.4) will apply with respect to each exchange by a particular holder of DC Equity Incentive Securities that are subject to the provisions of subsection 7(1) for DC New Equity Incentive Securities and SpinCo Equity Incentive Securities, as described in Paragraph 35, provided the aggregate In the Money Amount of the DC New Equity Incentive Securities and the SpinCo Equity Incentive Securities received by the holder on the exchange does not exceed the In the Money Amount of the DC Equity Incentive Securities that were so exchanged by the holder, with the result that for purposes of section 7:

(a) such holder will be deemed not to have disposed of such holder’s DC Equity Incentive Securities and not to have acquired such holder’s DC New Equity Incentive Securities and SpinCo Equity Incentive Securities;

(b) the DC New Equity Incentive Securities and the SpinCo Equity Incentive Securities will be deemed to be the same as, and a continuation of, the corresponding DC Equity Incentive Securities; and

(c) SpinCo will be deemed in respect of the SpinCo Equity Incentive Securities to be the same person as, and continuation of, DC.

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

L. Subsection 245(2) will not be applied, as a result of the Proposed Transactions, in and by themselves, to re-determine the tax consequences described in the rulings given above.

The above rulings are given subject to the limitations and qualifications set forth in Information Circular 70-6R12 issued on April 1, 2022, and are binding on the CRA provided that the Proposed Transactions are completed within six months of the date of this letter, except as otherwise specified.

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.

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

(b) the balance of the “general rate income pool” as defined in subsection 89(1) and the “low rate income pool” as defined in subsection 89(1); and

(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 includes other transactions or events that are not described in this letter and, specifically, whether any acquisition or disposition of the shares of DC or SpinCo following the Proposed Transactions would be part of a series of transactions or events that includes the taxable dividends to which Rulings F and G apply.

Nothing in this letter should be construed as confirmation, express or implied, that, for the purposes 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 and 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.

An invoice for our fees in connection with this ruling request will be forwarded to you under separate cover.

Yours Truly,

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