Demystifying 55(2) and Butterfly Reorganizations. Mark Brender Osler, Hoskin & Harcourt LLP

Transcription

1 Demystifying 55(2) and Butterfly Reorganizations Osler, Hoskin & Harcourt LLP

2 Demystifying 55(2) & Butterfly Reorganizations Objectives: Review the basics of 55(2) Review the basics of 55(3)(a) and 55(3)(b) exceptions Butterflies in motion 2

3 Background: Subsection 55(2) Anti-avoidance rule directed at capital gain stripping Conversion of taxable capital gains into tax-free intercorporate dividends 3

4 SECTION 55 - CRA s Basic Concern: Capital Gain Strips PROPOSED SALE OF SHARES Mr. A Holdco 1 2 Dividend in excess of taxed earnings [84(3),112(1)] Buyco 1. Opco shares redeemed or dividend paid in excess of taxed earnings. Opco issues promissory note in payment of redemption price/dividend; 2. Buyco acquires note and shares at reduced FMV. Opco FMV in part attributable to something other than taxed earnings i.e goodwill 4

5 SECTION 55 - CRA s Basic Concern: Capital Gain Strips PROPOSED SALE OF ASSETS Mr. A Vendor 84(3), 112(1) Buyco 1. Vendor rolls appreciated assets to Buyco for hi-lo preferred shares 2. Buyco redeems preferred shares for cash Target Assets Target Assets 5

6 Subsection 55(2)-Requirements Where a corporation resident in Canada has after April 21, 1980, received a taxable dividend in respect of which it is entitled to claim a deduction under subsection 112(1) or (2) or 138(6) See example on next slide 6

7 Taxable Dividend Must Be Received by a Corporation Resident in Canada USCO 100% CANSUB Real estate BUYCO USCO wants to sell Cansub Cansub shares derive their value principally from Canadian real estate if USCO sells shares has non- treaty exempt capital gain 1. Buyco subscribes for Cansub shares 2. Cansub uses subscription proceeds to redeem/repurchase shares held by USCO 7

8 Series of transactions as part of a transaction or event or series of transactions or events Common law series FCA in OSFC Holdings: A common law series of transactions involves a number of transactions that are pre-ordained in order to produce a given result with no practical likelihood that the pre-planned series would not take place in the order ordained. SCC in Canada Trustco endorsed OSFC Holdings. 8

9 Related Transactions or Events: 248(10) as part of a transaction or event or series of transactions or events Subsection 248(10): Series is deemed to include any related transactions or events completed in contemplation of the series. SCC in Canada Trustco confirmed that subsection 248(10) can apply forward looking (related transaction before series) or backward looking (related transaction after series) OSFC parties knew of the series, such that it could be said that they took it into account when deciding to complete the transaction Canada Trustco elaborates on OSFC in contemplation of not read in sense of actual knowledge. Rather in sense of because of or in relation to 9

10 Related Transactions or Events: 248(10) as part of a transaction or event or series of transactions or events MIL Investments (FCA) more than a mere possibility requires strong nexus; found to not be present in MIL Copthorne Holdings (SCC) Upheld finding that 1995 Redemption undertaken in contemplation of series. 248(10) can apply on a forward looking basis or backward looking basis. Reiterates because of or in relation to test and also took into account" test. 10

11 Related Transactions or Events: 248(10) 11 as part of a transaction or event or series of transactions or events Copthorne Holdings (SCC) Not much assistance in application Factual determination; Does not require strong nexus; Requires more than mere possibility / extreme degree of remoteness; Length of time may be relevant; Existence of intervening events relevant. Does not adopt FCA - one of motivating factors test redemption of high PUC shares was exactly the type of transaction necessary to make a tax benefit a reality based on the PUC preservations broadens scope of 248(10)?

12 Purpose or Result one of the purposes (or if subsection 84(3) applies, one of the results) of which was to effect a significant reduction in the portion of the capital gain that, but for the dividend, would have been realized on a disposition at fair market value of any share of capital stock immediately before the dividend Placer Dome (FCA) CPL Holdings VIH Logging (FCA) CRA takes the position that 55(2) can be engaged even if no disposition 12

13 Income Earned or Realized Safe Income and that could reasonably be considered to be attributable to anything other than income earned or realized by any corporation after 1971 and before the safe-income determination time for the transaction or event or the series of transactions or events Statutory Rules 55(5)(b) income earned or realized by a resident corporation other than a private corporation 55(5)(c) income earned or realized by a resident private corporation 55(5)(d) income earned or realized by a foreign affiliate 13

14 Income Earned or Realized Safe Income CRA Administrative Positions CTF conference papers e.g. Robertson Rules CTF; 2006 CTF CRA Roundtable ITTN No. 33, No. 34 and 37 Technical interpretations Case law Much case law has developed around the concept of safe income e.g. Brelco (FCA), Kruco (FCA) 14

15 Part IV Tax Exception notwithstanding any other section of this Act, the amount of the dividend (other than the portion of it, if any, subject to tax under Part IV that is not refunded as a consequence of a dividend paid to a corporation where the payment is part of the series) Canutilities Holdings (FCA, 2004) Ottawa Air Cargo (FCA, 2008) 15

16 What Happens When 55(2) Applies...the portion of dividend that is attributed to something other than income earned or realized and that is not subject to Part IV tax, shall be deemed not to be a dividend received by the corporation where the corporation has disposed of the share, shall be deemed to be proceeds of disposition of the share where a corporation has not disposed of the share, shall be deemed to be a gain of the corporation for the year in which the dividend was received from the disposition of a capital property 16

17 Income earned or realized - Safe Income Generally, retained income that has already been subject to tax Recognition that corporate income taxed once should not be taxed again at the corporate level 17

18 Safe Income-Kruco Inc. v. R. (TCC, 2001 ) (FCA, 2003) Kruco owned 32% of common shares in Kruger Inc. which were repurchased in 1989 by Kruger Inc. for $99,000,000 Kruger Inc. guaranteed safe income of $70,000,000 CRA made 3 negative adjustments to SI reducing Kruco s portion by $24.2 million, thereby increasing its capital gain by that amount: 2 adjustments related to phantom income due to investment tax credits ( ITCs ) the other adjustment related to a debt acquired by Kruco 18

19 Safe Income-Kruco Inc. v. R. CRA s Position on ITC Issue There was no cash flow attributable to the income resulting from the reduction in CCA claims and the income inclusion related to the ITCs (i.e. phantom income) Reduction in capital cost and UCC under 13(7)(e) and 13(21)(f)(vii) respectively caused a decrease in CCA and a corresponding increase in income without an increase in cash-flow Similarly, income inclusion of ITCs under 12(1)(t) caused an increase in income but no increase in cash-flow 19

20 Safe Income-Kruco Inc. v. R. CRA s Position on ITC Issue (cont d) Robertson s Rule No XX: There should be a deduction [from safe income] for any amount that has been included in taxable income that does not represent actual income earned by the corporation [ ], for example, phantom income Safe income must be on hand (i.e., disposable income) according to Brelco Drilling Ltd. and phantom income is not disposable income 20

21 Safe Income-Kruco Inc. v. R. FCA decision income earned or realized is deemed to be income otherwise computed subject to only two exceptions mentioned in 55(5)(c) (i.e., 20(1)(gg) and 37.1) Therefore, no adjustment can be made to that deemed safe income, even if the income is not supported by cash flows (i.e. recaptured ITCs) Once the income earned or realized is computed, the only exercise remaining is the determination of the portion of the notional capital gain attributable to anything other than such income 21

22 Subsection 55(2) Exceptions Paragraph 55(3)(a) and paragraph 55(3)(b) are exceptions to the application of subsection 55(2) In other words, subsection 55(2) does not apply to a dividend that meets the requirements of either paragraph 55(3)(a) or paragraph 55(3)(b) 22

23 Paragraph 55(3)(a) Related party butterfly Used to move assets around a corporate group Five triggering events set out in subparagraphs 55(3)(a)(i) (v) Subsection 55(2) does not apply if the series does not include any of the triggering events 23

24 Paragraph 55(3)(a) Key Definitions 24 Dividend Recipient is the corporation that received the dividend being tested Unrelated Person is defined in paragraph 55(3.01)(a) as a person (other than the Dividend Recipient) unrelated to the Dividend Recipient or a partnership any member of which (other than the Dividend Recipient) is not related to the Dividend Recipient Dividend Payer is the corporation that paid the dividend being tested

25 Paragraph 55(3)(a) - Interpretive Rules Paragraph 55(5)(c) sets out certain interpretative rules Siblings are not related Special rules for trusts Subsection 251(3) and paragraph 251(5)(b) not considered in determining whether entities are related 25

26 Subparagraph 55(3)(a)(i) Disposition of property as part of the series, at any particular time, to Unrelated Person (immediately before the particular time) other than: money disposed of on the payment of a dividend or on a reduction of the paid-up capital of a share property disposed of for proceeds that are not less than fair market value 26

27 Subparagraph 55(3)(a)(i) - Example Transfer assets to Purchaser under section 85 then redeem shares Vendor Purchaser Keep Assets Sell Assets 27

28 Subparagraph 55(3)(a)(i) - Example There has been a disposition of property that is less than FMV to an Unrelated Person (i.e., not related to Dividend Recipient (Vendor)) Vendor redeem Keep Assets Purchaser Sell Assets 28

29 Subparagraph 55(3)(a)(i) Example Loss consolidation transaction permitted under subparagraph 55(3)(a)(i) Vendor Purchaser Profitco Lossco Asset 29

30 Subparagraph 55(3)(a)(i) - Example No disposition of property to an Unrelated Person for proceeds less than FMV Vendor Purchaser Profitco Lossco FMV proceeds Asset 30

31 Subparagraph 55(3)(a)(ii) Significant increase (other than as a consequence of disposition of shares for proceeds not less than FMV) in the total direct interest in any corporation of one or more persons or partnerships that were Unrelated Persons Interest is not defined Clearly includes shares CRA used to take position that could include debt, but now seems to accept that ordinary debt (in contrast to, eg., convertible debt) is not an interest for this purpose 31

32 Subparagraph 55(3)(a)(ii) Interpretive Issues 32 Increase can be measured in dollars or percentage CRA seems to accept that a large dollar increase will not be significant if newly acquired shares represent less than three percent of the aggregate fair market value of the shares of the corporation s capital stock Redemption can trigger an increase in interest Must look at aggregate interests of all Unrelated Persons Direct interests only

33 Subparagraph 55(3)(a)(ii) - Example Opco transfers Asset A to Newco Purchaser subscribes for shares of Newco, then Opco s shares are redeemed Purchaser s interest (an Unrelated Person) in Newco has increased Vendor Vendor Purchaser Opco Opco Asset A Other Assets Newco Asset A 33

34 Subparagraph 55(3)(a)(ii) - Example A Co s shares are redeemed, B Co s interest (an Unrelated Person) in Opco increases A Co B Co 60% 40% Opco 34

35 Subparagraph 55(3)(a)(iii) - Example Disposition to an Unrelated Person of shares of Dividend Payer or property (other than shares of the Dividend Recipient), more than 10% of the FMV of which was derived from shares of the Dividend Payer at any time during series Vendor Unrelated Person Dividend Dividend Payer Dividend Payer 35 Prior to the sale, a dividend is paid to eliminate accrued gain on shares Subparagraph 55(3)(a)(iii) applies since there is a disposition of the shares of the Dividend Payer to an Unrelated Person

36 Subparagraph 55(3)(a)(iii) - Example Shares of Newco are property more than 10% of the FMV of which was derived from shares of Dividend Payer Vendor Vendor Purchaser Dividend Dividend Payer Newco Newco Dividend Payer Dividend Payer 36

37 Subparagraph 55(3)(a)(iv) - Example Disposition to an Unrelated Person, after the dividend was received, of shares of the Dividend Recipient or property more than 10% of the FMV of which was derived from shares of the Dividend Recipient at any time during the series Transfer asset to Newco for shares and redeem the shares from Opco Vendor Vendor Opco Opco Newco Keep Asset Sell Asset Sell Asset Keep Asset 37

38 Subparagraph 55(3)(a)(iv) - Example Purchaser (an Unrelated Person) acquires shares of Opco (Dividend Recipient) Vendor Purchaser Newco Opco Keep Asset Sell Asset 38

39 Subparagraph 55(3)(a)(v) - Example Significant increase in total of all direct interests in Dividend Payer of one or more persons or partnerships who were Unrelated Persons immediately before the particular time Increase in the direct interest of an Unrelated Person in Opco when shares held by Holdco are redeemed Holdco Unrelated Person Unrelated Person 60% 40% Opco Opco 39

40 55(3)(a) Interpretive Rules 40 55(3.01)(b)/(c): Continuity rules prevent status as Dividend Payer or Dividend Recipient from being lost in a merger 55(3.01)(b): corporation formed on an amalgamation is deemed to be the same corporation as, and a continuation of, its predecessor corporations 55(3.01)(c): a parent is deemed to be the same corporation as, and a continuation of, a subsidiary that has been wound up into the parent under subsection 88(1) 55(3.01)(d): For purposes of paragraph 55(3)(a), proceeds of disposition determined without reference to paragraph 55(2)(a), paragraph (j) of the definition of proceeds of disposition in section 54, and section 93 E.g. a share redeemed at FMV is not disposed of for proceeds of FMV 55(3.01)(e): A non-resident person is deemed to have disposed of property for less than FMV proceeds unless Gain or loss is included in computing the non-resident s taxable income earned in Canada in the year of disposition, or Under the income tax laws of the country of residence of the non-resident, the gain or loss is computed as if the property were disposed of for proceeds of disposition not less than its FMV and such gain or loss is recognized for tax purposes in that country

41 Paragraph 55(3)(a) Interpretive Rules Subsection 55(4) is a specific anti-avoidance rule Where it can reasonably be considered that one of the main purposes of one or more transactions or events was to cause two or more persons to be related or to cause a corporation to control another corporation Persons deemed not to be related or corporation deemed not to control the other corporation 41

42 Butterfly Reorganizations Two Types of Butterflies Split-ups Spin-offs Spin-off corporate assets or split-up corporation with deferral of corporate level tax No definition of butterfly, spin-off or split-up 42

43 Butterfly Disclaimer Ever try to catch a butterfly? The rules are very technical and numerous This slide deck focuses on the fundamentals Transaction steps Continuity of interest rules/prohibited transactions There are too many definitions and interpretive rules to cover in the allotted time e.g. permitted exchange, permitted acquisition, permitted redemption, specified shareholder, specified class, etc. etc. Never assume you are exempt from subsection 55(2) Rules must be thoroughly analyzed 43

44 Split-Ups Corporate Spin-offs & Split-ups Butterfly Transactions Where shareholders wish to go their separate ways Involves dividing a company so that one group of shareholders owns one constituent part and another group owns another constituent part Often used to settle family business disputes or divide the family holding company so that each family member can pursue his or her own investment strategy Careful planning needed to effect split up on a tax deferred basis 44

45 Corporate Spin-offs & Split-ups Butterfly Transactions 45 Spin-Offs Where desirable to distribute shares of a subsidiary to shareholders Could create value by eliminating holding company discount Results in the creation of a new corporation in which each shareholder receives a pro rata interest in the distributed property e.g. BCE/Nortel, CP Rail Could be done in public or private context types of property requirement must be satisfied in private context Careful planning needed to effect spin-off on a tax deferred basis

46 Principal Statutory Provisions Subsection 55(1): key definitions Subsection 55(3.1): purchase butterfly rules Subsection 55(3.2): interpretive rules Other rules in section 55 46

47 Multi-Step Transaction Complex multi-step transaction May be undertaken by way of plan of arrangement Otherwise, significant implementing documentation required 47

48 Rulings from CRA Frequently obtained Large dollar amounts involved Significant or novel issues Timing considerations 48

49 Paragraph 55(3)(b) If dividend received in the course of a reorganization in which DC made a distribution to one or more TC DC was wound up or all shares owned by each TC immediately before the distribution were redeemed or cancelled On a permitted redemption in relation the distribution or on the wind-up of DC 49

50 Distribution [55(1)] Key definition Direct or indirect transfer of property to TC, where TC receives each type of property having fmv equal (or approximate) to formula Special/Reorganization shares often used Approximates considered by CRA to allow a deviation of 1% fmv of each type of property received fmv, immediately before the transfer, of all property of that type owned by DC = x fmv, immediately before transfer, of shares of DC owned by TC fmv, immediately before transfer, of all issued shares of DC 50

51 Paragraph 55(3)(b) Split-up butterfly: permitted exchange (b)(ii) Spin-off butterfly: permitted exchange (b)(iii) permitted exchange is generally an exception to the purchase butterfly rules in subsection 55(3.1) 51

52 Split-up Butterfly Shareholder(s) of DC receive pro rata share of each type of property owned by DC Cease to be shareholder(s) of DC type of property concept discussed in spin-off section 52

53 Split-up Butterfly Before After A B A B Opco Aco Bco Div. X Div. Y Div. X Div. Y 53

54 Split-up Butterfly Permitted Exchange (b)(ii) TC owns immediately before distribution all shares of DC that were owned, immediately before the exchange, by the participant Precludes partial butterfly No special provision regarding shares of a specified class Holders of specified class can remain shareholders of DC or transfer to TC 54

55 Split-up Butterfly Reorganization Mechanics A Aco B Bco Steps: 1. A and B transfer all of their shares of Opco (DC) to Aco (TC) and Bco,(TC), respectively 2. Opco transfers Div. X to Aco and Div. Y to Bco 3. Aco and Bco issue shares (and perhaps non-share consideration) to Opco X Opco Y 55

56 Split-up Butterfly Reorganization Mechanics A Aco Opco B Bco Steps: 4. Aco and Bco redeem shares held by Opco and issue promissory notes 5. Opco repurchases shares from Aco and Bco in course of winding up 6. Promissory notes distributed to Aco and Bco 56

57 Split-up Butterfly Reorganization Mechanics A B Promissory notes cancelled by Set-off Aco Bco Div. A Div. B 57

58 The Corporate Spin-off Before Participants (public) After Participants (public) Distributing Corporation Distributing Corporation Spinco Keepco Spinco Keepco 58

59 Canadian Public Corporation Spin-off The Basics Before After Participants (Public) Participants (Public) Distributing Corporation Distributing Corporation Transferee Corporation Keepco Spinco Keepco Spinco 59

60 Before The U.S. Spin-off Experience One-Step Corporate Distributions (Dividend in kind) After Public FMV = 1B ACB = 100M Public DC FMV = 750M ACB = 75M FMV = 250M ACB = 25M FMV = 250M ACB = 50M Spin-Offco DC Spin-Offco 60

61 The Canadian Spin-off Experience Complex Multi-Step Corporate Reorganizations ( Butterfly Transaction ) Multi-Step Transaction Complex technical rules Many traps Common to obtain ATR 61

62 Types of Property- Distribution Cash or near-cash property Business property Investment property 62

63 Cash Property 63 Current assets Cash Short-term deposits Marketable securities (other than portfolio investments) Accounts receivable Inventory Pre-paid expenses Advances to other corporations within a corporate group (other than from the DC to a corporation over which it has significant influence)

64 Business Property Property used to earn business income (that is not cash property) Accounts receivable, inventory and pre-paid expenses may be classified as business property TC acquire business to which they relate Collected, sold or used in ordinary course of that business 64

65 Investment Property Property (other than cash property) that is not used to produce business income Shares of a corporation over which DC does not have significant influence (unless acquired in ordinary course of active business) 65

66 Corporate Shares Shares of subsidiary or a corporation in which DC has significant influence must be looked-through CICA Handbook 3050 Question of fact; presumed to exist where at least 20% interest 66

67 Corporate Shares For example, subsidiary owns 75% business property, 15% cash property and 10% investment property The shares of the subsidiary will be classified as 75% business property, 15% cash property and 10% investment property 67

68 Distribution Difficult valuation issues Valuation report Frequently use formulae to implement transfers 68

69 Gross vs. Net Asset Butterfly Definition of distribution technically permits only gross asset butterfly TC receives proportionate share of each type of property without regard to associated liabilities Net asset butterfly permitted by administrative concession Value of each type of property determined on a net basis after deducting related liabilities 69

70 Net Asset Butterfly Frequently impracticable to divide assets without a proportionate allocation of liabilities Need to satisfy corporate solvency to redeem shares 70

71 Net Asset Butterfly Current liabilities must be allocated against cash property Business liabilities must be allocated against business assets Liabilities assumed by shareholder need not relate to specific assets being acquired 71

72 Public Company Butterfly Public companies need not comply with types of property requirement in spin-off butterflies Subsection 55(3.02): specified corporation 72

73 Public Company Butterfly DC must constitute specified corporation Public corporation or specified wholly-owned corporation Shares must be exchanged in spin-off permitted exchange Cannot make another distribution other than a spin-off within three years TC cannot make distribution within three years Deemed continuation rules 73

74 Permitted Redemption Definition of permitted redemption is relevant since excluded from purchase butterfly rules in subsection 55(3.1) Cross-redemption of shares by DC and TC Prevents partial butterflies Redemption of all shares of specified class (cost of which, at issuance, was equal to fmv of consideration for which issued) 74

75 Permitted Redemption Notes issued on redemption generally not equal due to difference between net asset value and share value Administratively, no benefit or debt forgiveness considered to arise 75

76 Butterfly Exemption Denial Rules Restrict acquisitions of property Paragraph 55(3.1)(a) Preclude purchase butterflies through continuity of interest rules Paragraphs 55(3.1)(b), (c), (d) Share transactions Asset transactions by TC Asset transactions by DC 76

77 Paragraph 55(3.1)(a) Paragraph 55(3)(b) does not apply where in contemplation of and before distribution, property became property of DC, a corporation controlled by it or predecessor (subject to certain exceptions) Prevents pre-butterfly manipulation of types of property to facilitate tax-free barter transactions or cash-outs 77

78 Paragraph 55(3.1)(a) Example A B 50% 50% 100% DC Holdco Business A $20,000 Business B $60,000 Cash $60,000 Cash $120,000 A s pro rata share is: - Business Property $40,000 - Cash $30,000 A would like to receive Business A ($20,000) and $50,000 cash 78

79 Paragraph 55(3.1)(a) Example DC acquires shares of Holdco worth $60,000 on transfer of Business B to Holdco A B 50% 50% 66.67% DC Holdco 33.33% Shares Business A $20,000 Cash $60,000 Business $20,000 Cash $40,000 Business B $ 60,000 Cash $120,000 79

80 Paragraph 55(3.1)(a) In contemplation of and before Must precede distribution Became property is very broad Must be some connection between acquisition and butterfly Not in contemplation if property would have become property regardless of whether butterfly undertaken 80

81 Paragraph 55(3.1)(a) Requires monitoring of any substantial pre-butterfly transaction No de minimis exception In rulings context, usually disclose significant transactions and make appropriate representations 81

82 Paragraph 55(3.1)(a) Exceptions Property became property of DC, otherwise than as a result of: Amalgamation of corporations related to DC Amalgamation of predecessor to DC and corporation controlled by predecessor Sequential paragraph 55(3)(b) butterfly 82

83 Paragraph 55(3.1)(a) Exceptions Property became property of DC, otherwise than as a result of: Disposition of property by: DC, corporation controlled by DC, or predecessor of either, to: corporation controlled by DC or predecessor Corporation controlled by DC or predecessor to DC, to: DC or predecessor DC, corporation controlled by DC, predecessor of either, for: consideration that consists only of money or indebtedness (eg., taxable disposition) 83

84 Paragraph 55(3.1)(b) Prevent purchase butterflies, which eliminate corporate level tax, by requiring continuity of interest A Third Party Purchaser TC DC Target Asset 84

85 Subparagraph 55(3.1)(b)(i) Generally, specified shareholder of DC or TC cannot dispose of shares of DC or TC as part of series Person or partnership ( vendor ) disposes of property Property is share of DC or TC (or derives 10% or more of its FMV, at any time in the series, from such a share) Vendor (other than qualified person) is specified shareholder of DC or TC (at any time in series) Property or substituted property is acquired by a partnership or person unrelated to vendor (or who ceased to be related as part of series) Otherwise than on permitted acquisition, permitted exchange, permitted redemption 85

86 Specified Shareholder Generally, includes a taxpayer who owns, directly or indirectly, at any time in the year, not less than 10% of any class (i.e., series) of shares of the corporation or of any other corporation that is related to the corporation and that has a significant direct or indirect interest in the corporation Taxpayer deemed to own each share owned by person with whom deals at nonarm s length Related provisions Subsection 248(1)( specified shareholder ) Paragraph 55(3.2)(a) Subsection 55(3.3) Subsection 55(3.4) (proposed) Paragraph 55(5)(e) 86

87 Subparagraph 55(3.1)(b)(i) Obtain agreement/undertaking of specified shareholders not to dispose of shares as part of series Generally cannot combine butterfly with divestiture by specified shareholder 87

88 Subparagraph 55(3.1)(b)(ii) Control of a DC or TC cannot be acquired as part of series Other than as a result of permitted acquisition, permitted exchange or permitted redemption Where DC and TC not related, consider agreement / indemnification not to facilitate takeover Generally, cannot combine butterfly with takeover 88

89 Subparagraph 55(3.1)(b)(iii) Share of DC cannot be acquired in contemplation of distribution by TC or person or partnership with whom TC did not deal at arm s length from an unrelated person or partnership Person or member of group who acquired control of DC as part of series A partnership in which a person in the preceding bullet holds an interest, directly or indirectly A person or partnership with whom either the partnership in the preceding bullet or the person in the second bullet did not deal at arm s length Otherwise than on a permitted acquisition or permitted exchange or amalgamation of predecessors to DC 89

90 Subparagraph 55(3.1)(b)(iii) Captures acquisition of shares of DC from non-specified shareholders that does not result in acquisition of control (or results in acquisition of control that is excluded from subparagraph 55(3.1)(b)(ii), eg., on a permitted redemption) 90

91 Paragraphs 55(3.1)(c) and (d) Maintain continuity of interest in the business by restricting post-butterfly asset sales and proportionality requirement Inapplicable if DC and TC are related after the reorganization 91

92 Paragraph 55(3.1)(c) Disqualifies dividend received by TC if property received by TC on distribution, or property the fmv of which was wholly or partly attributable thereto at any time during the series, or property more than 10% of the fmv of which was attributable, at any time after the distribution and during series, to the foregoing is acquired as part of series by an unrelated person (or person who ceased to be related as part of series) or partnership has a value greater than 10% of the fmv, at the time of distribution, of all property (other than money and indebtedness) received by TC 92

93 Paragraph 55(3.1)(c) Exceptions for Disposition in ordinary course of business Permitted acquisition Amalgamation of related corporations Money, indebtedness, share of TC, etc. 93

94 Paragraph 55(3.1)(d) Parallel rule disqualifies dividend received by DC if, generally, more than 10% of property retained by DC disposed of as part of the series 94

95 BCE-Nortel Butterfly Spin-off Step 1 - Pre-Butterfly * BCE cm Public Network Holdco BCE 100% 100% 100% Network Holdco Sub Canada Inc. cm Canada Inc. cm cm NETWORK cm cm Network Public Incorporation of Network Holdco and Network Holdco Sub. Network Holdco will subscribe to one common share of Network Holdco Sub 95

96 BCE-Nortel Butterfly Spin-off Step 2 - Pre-Butterfly * BCE cm Public Network Holdco BCE 100% Network Holdco Sub 100% Canada cm Inc. 100% Canada Inc. cm cm NETWORK cm cm cm Network Public Canada Inc. transfers 3M common shares of Network it owns at FMV to Canada Inc. in return for common shares of Canada Inc. 96

97 BCE-Nortel Butterfly Spin-off Step 3 - Pre-Butterfly * BCE cm Public BCE Network Holdco 100% Canada Inc. 100% Network Holdco Sub cm Canada Inc. cm NETWORK cm cm Network Public BCE transfers all of its Network shares at FMV to Canada Inc. in return for Canada Inc. common shares. 97

98 BCE-Nortel Butterfly Spin-off Step 4 - Butterfly * BCE cm Public cm class B Network Holdco BCE cm 100% Canada Inc. Network Holdco Sub cm NETWORK cm Network Public BCE and amalgamate. BCE common shareholders receive new BCE common shares (on a one-for-one basis) and non-voting convertible class B shares (class B common shares will track to value of shares to be butterflied in step 7) 98

99 BCE-Nortel Butterfly Spin-off Step 5 - Butterfly * BCE cm Public cm class B Network Holdco BCE PUC increase 100% cm 100% Canada Inc. Network Holdco Sub cm NETWORK cm Network Public , through a series of resolutions, increases the PUC of common shares up to safe income on hand, resulting in an increase in the ACB of common shares to BCE. 99

100 BCE-Nortel Butterfly Spin-off Step 6 - Butterfly * cm BCE cm Public cm Network Holdco Class B BCE 100% 100% cm Canada Inc. Network Holdco Sub cm NETWORK cm Network Public BCE cm Public transfer the BCE Class B common shares to Network Holdco in exchange for common shares of Network Holdco. 100

101 BCE-Nortel Butterfly Spin-off Step 7 - Butterfly * cm BCE cm Public Network Holdco cm class B cm cm BCE Network Holdco Sub cm 95% cm Canada Inc. cm NETWORK cm 5% cm Network Public BCE transfers approximately 95% of the common shares it holds in to Network Holdco Sub in exchange for Network Holdco Sub common shares. 101

102 BCE-Nortel Butterfly Spin-off Step 8 - Butterfly * cm BCE cm Public Network Holdco cm cm BCE Network Holdco Sub 95% cm Canada Inc. cm NETWORK cm 5% cm Network Public Network Holdco Sub purchases for cancellation the Network Holdco Sub common shares held by BCE in return for a noninterest bearing demand note. 102

103 BCE-Nortel Butterfly Spin-off Step 9 - Butterfly * Network Holdco cm BCE cm Public cm BCE Network Holdco Sub 95% cm Canada Inc. cm NETWORK 5% cm Network Public BCE purchases for cancellation the BCE class B common shares held by Network Holdco in return for a non-interest bearing demand note. 103

104 BCE-Nortel Butterfly Spin-off Step 10 - Butterfly * Network Holdco cm Note Note BCE cm Public BCE cm 95% cm Canada Inc. cm NETWORK cm 5% cm Network Public Network Holdco Sub is wound up into Network Holdco. 104

105 BCE-Nortel Butterfly Spin-off Step 11 - Butterfly * cm BCE cm Public cm Network Holdco BCE 95% cm Canada Inc. cm NETWORK 5% cm Network Public The two notes are cancelled. 105

106 BCE-Nortel Butterfly Spin-off Step 12 - Post- Butterfly * Network Public cm Network Holdco cm BCE cm Public BCE cm 95% cm Canada Inc. cm NETWORK 5% cm REVERSE TAKE-OVER ASPECT Network Holdco acquires all of the Network common shares held by Network Public in exchange for Network Holdco common shares. 106

107 BCE-Nortel Butterfly Spin-off Step 13 Post- Butterfly * 60%cm Network Public cm 40% BCE cm Public cm Network Holdco cm BCE 100% cm NETWORK Network Holdco and amalgamate. Network Public, BCE cm Public and BCE receive new Network Holdco common shares. 107

108 Thank you 108