**Exhibit13.2**

FINANCIALREPORT – MANAGEMENT AND AUDITORS’ REPORTS

**Managementreport to the shareholders of Cascades Inc.**

The consolidated financialstatements for the years endedDecember 31, 2006 and 2005, are the responsibility of the management of Cascades Inc., and have beenreviewed by the Audit Committeeand approved by the Board of Directors. They were prepared in accordance with accounting principles generally accepted in Canada and include someamounts, which are based onmanagement’s estimates and judgement. Management is also responsible for all other information included in this Annual Report and forensuring that this informationis consistent with the Company’s consolidated financial statements and business activities.

The Management of the Companyis responsible for the design, establishment and maintenance of appropriateinternal controls and procedures for financial reporting, to ensure that financialstatements for external purposes are fairly presented in conformity withgenerally accepted accounting principles. Such internal controls systems aredesigned to provide reasonable assurance on the reliability of the financialinformation and the safeguarding of assets.

External and internalauditors have free and independent access to the Audit Committee, which iscomprised of outside independent directors. The Audit Committee, which meets regularlythroughout the year with members of the financial management and the externaland internal auditors, reviews the consolidated financial statements andrecommends their approval to the Board of Directors.

The financial statementshave been audited by PricewaterhouseCoopers LLP, whose report is providedbelow.

**ALAIN LEMAIRE** PRESIDENT AND CHIEF EXECUTIVE OFFICERKINGSEY FALLS, CANADAMARCH 2, 2007

**CHRISTIAN DUBÉ** VICE-PRESIDENT AND CHIEF FINANCIALOFFICERKINGSEY FALLS, CANADAMARCH 2, 2007

**Auditors’report to the shareholders of Cascades Inc.**

We have audited theconsolidated balance sheets of Cascades Inc. (the “Company”) as at December 31,2006 and 2005 and the consolidated statements of earnings (loss), retainedearnings and cash flows for each of the years in the three-year period endedDecember 31, 2006. These financial statements are the responsibility of theCompany’s management. Our responsibility is to express an opinion on these financialstatements based on our audits.

We conducted our audits inaccordance with Canadian generally accepted auditing standards. Those standardsrequire that we plan and perform an audit to obtain reasonable assurance whetherthe financial statements are free of material misstatement. An audit includesexamining, on a test basis, evidence supporting the amounts and disclosures inthe financial statements. An audit also includes assessing the accounting principlesused and significant estimates made by management, as well as evaluating theoverall financial statement presentation.

In our opinion, theseconsolidated financial statements present fairly, in all material respects, thefinancial position of the Company as at December 31, 2006 and 2005 and theresults of its operations and its cash flows for each of the years in the three-yearperiod ended December 31, 2006 in accordance with Canadian generally acceptedaccounting principles.

 

CHARTERED ACCOUNTANTSMONTRÉAL, CANADAMARCH 2, 2007

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FINANCIAL REPORT –CONSOLIDATED FINANCIAL STATEMENTS

**Consolidatedbalance sheets**
| **As at December 31, 2006 and 2005  (in millions of Canadian dollars)** | ** ** | **Note**   | ** ** | **2006**  | ** ** | **2005** | ** ** |
|---------------------------------------------------------------------------------------------------------------------------|------------|------------|------------|-----------|------------|----------|------------|
| **Assets**                                                                                                                |       |       |       |      |       |     |       |
| **Current  assets**                                                                                                       |       |       |       |      |       |     |       |
| Cash and cash  equivalents                                                                                                | ** ** | ** ** |       | **34**    |       | 43       |       |
| Accounts  receivable                                                                                                      | ** ** | ** ** |       | **650**   |       | 545      |       |
| Inventories                                                                                                               |       | 6          | ** ** | **548**   |       | 537      |       |
|                                                                                                                      | ** ** | ** ** |       | **1,232** |       | 1,125    |       |
| **Property,  plant and equipment**                                                                                        |       | 7          | ** ** | **2,063** |       | 1,562    |       |
| **Other  assets**                                                                                                         |       | 8 a)       | ** ** | **303**   |       | 233      |       |
| **Goodwill**                                                                                                              |       | 8 b)       | ** ** | **313**   |       | 126      |       |
|                                                                                                                      | ** ** | ** ** |       | **3,911** |       | 3,046    |       |
| **Liabilities  and Shareholders’ Equity**                                                                            |       |       |       |      |       |     |       |
| **Current  liabilities**                                                                                                  |       |       |       |      |       |     |       |
| Bank loans and  advances                                                                                                  | ** ** | ** ** |       | **42**    |       | 44       |       |
| Accounts payable  and accrued liabilities                                                                                 | ** ** | ** ** |       | **607**   |       | 543      |       |
| Current portion  of long-term debt                                                                                        |       | 9          | ** ** | **9**     |       | 8        |       |
|                                                                                                                      | ** ** | ** ** |       | **658**   |       | 595      |       |
| **Long-term  debt**                                                                                                       |       | 9          | ** ** | **1,657** |       | 1,289    |       |
| **Other  liabilities**                                                                                                    |       | 10         | ** ** | **439**   |       | 265      |       |
|                                                                                                                      | ** ** | ** ** |       | **2,754** |       | 2,149    |       |
| **Shareholders’  equity**                                                                                            |       |       |       |      |       |     |       |
| Capital stock                                                                                                             |       | 11         | ** ** | **517**   |       | 264      |       |
| Retained  earnings                                                                                                        | ** ** | ** ** |       | **649**   |       | 669      |       |
| Cumulative  translation adjustments                                                                                       |       | 20         | ** ** | **(9**    | **)**      | (36      | )          |
|                                                                                                                      | ** ** | ** ** |       | **1,157** |       | 897      |       |
|                                                                                                                      | ** ** | ** ** |       | **3,911** |       | 3,046    |       |

 

The accompanying notes are anintegral part of these consolidated financial statements.

Approved by the Board ofDirectors

 
|                 |                 |
|-----------------|-----------------|
| BERNARD LEMAIRE | ROBERT CHEVRIER |
| DIRECTOR        | DIRECTOR        |

 

37

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**Consolidatedstatements of retained earnings**
| **For each of the years in the three-year period ended December 31, 2006  (in millions of Canadian dollars)** | ** ** | **Note**   | ** ** | **2006** | ** ** | **2005** | ** ** | **2004** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------|------------|----------|------------|----------|------------|----------|------------|
| **Balance  – Beginning of year**                                                                                                                                                         |       |       | ** ** | **669**  |       | 783      |       | 778      |       |
| Net earnings  (loss) for the year                                                                                                                                                             |       |       | ** ** | **3**    |       | (97      | )          | 23       |       |
| Dividends on  common shares                                                                                                                                                                   |       |       | ** ** | **(13**  | **)**      | (13      | )          | (13      | )          |
| Excess of common  share redemption price over paid-up capital                                                                                                                                 |       | 11 d)      | ** ** | **(3**   | **)**      | (4       | )          | (5       | )          |
| Share issue  costs, net of related income taxes                                                                                                                                               |       |       | ** ** | **(7**   | **)**      | —   |       | —   |       |
| **Balance – End of year**                                                                                                                                                                | ** ** | ** ** |       | **649**  |       | 669      |       | 783      |       |

 

**Consolidated statements of earnings (loss)**
| **For each of the years in the three-year period ended December 31, 2006  (in millions of Canadian dollars, except per share amounts)** | ** ** | **Note**   | ** ** | **2006**       | ** ** | **2005**   | ** ** | **2004**   | ** ** |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------|------------|----------------|------------|------------|------------|------------|------------|
| **Sales**                                                                                                                                                                                                                                   | ** ** | ** ** |       | **3,403**      |       | 3,308      |       | 3,096      |       |
| **Cost of  sales and expenses**                                                                                                                                                                                                             |       |       |       |           |       |       |       |       |       |
| Cost of sales  (exclusive of depreciation and amortization shown below)                                                                                                                                                                     |       | 16 c)      | ** ** | **2,777**      |       | 2,735      |       | 2,532      |       |
| Depreciation and  amortization                                                                                                                                                                                                              | ** ** | ** ** |       | **163**        |       | 172        |       | 157        |       |
| Selling and  administrative expenses                                                                                                                                                                                                        | ** ** | ** ** |       | **308**        |       | 309        |       | 304        |       |
| Unusual gains                                                                                                                                                                                                                               |       | 12         | ** ** | **(4**         | **)**      | (10        | )          | (4         | )          |
| Impairment loss  on property, plant and equipment                                                                                                                                                                                           |       | 13 a)      | ** ** | **61**         |       | 47         |       | 18         |       |
| Closure and  restructuring costs                                                                                                                                                                                                            |       | 13 a)      | ** ** | **20**         |       | 18         |       | —     |       |
| Loss (gain) on  commodity derivative financial instruments                                                                                                                                                                                  |       | 14 a)      | ** ** | **(3**         | **)**      | 10         |       | (2         | )          |
|                                                                                                                                                                                                                                        | ** ** | ** ** |       | **3,322**      |       | 3,281      |       | 3,005      |       |
| **Operating  income from continuing operations**                                                                                                                                                                                            | ** ** | ** ** |       | **81**         |       | 27         |       | 91         |       |
| Interest expense                                                                                                                                                                                                                            | ** ** | ** ** |       | **82**         |       | 78         |       | 73         |       |
| Gain on  derivative financial instruments                                                                                                                                                                                                   |       | 14 b)      | ** ** | **—**     |       | (2         | )          | —     |       |
| Foreign exchange  gain on long-term debt                                                                                                                                                                                                    | ** ** | ** ** |       | **—**     |       | (10        | )          | (18        | )          |
| Loss on  long-term debt refinancing                                                                                                                                                                                                         | ** ** | ** ** |       | **—**     |       | —     |       | 1          |       |
|                                                                                                                                                                                                                                        | ** ** | ** ** |       | **(1**         | **)**      | (39        | )          | 35         |       |
| **Provision  for (recovery of) income taxes**                                                                                                                                                                                               |       | 15         | ** ** | **(1**         | **)**      | (9         | )          | 7          |       |
| **Share  of results of significantly influenced companies**                                                                                                                                                                                 | ** ** | ** ** |       | **(8**         | **)**      | (7         | )          | (2         | )          |
| **Net  earnings (loss) from continuing operations**                                                                                                                                                                                         | ** ** | ** ** |       | **8**          |       | (23        | )          | 30         |       |
| **Net  loss from discontinued operations**                                                                                                                                                                                                  |       | 4          | ** ** | **(5**         | **)**      | (74        | )          | (7         | )          |
| **Net  earnings (loss) for the year**                                                                                                                                                                                                       | ** ** | ** ** |       | **3**          |       | (97        | )          | 23         |       |
| **Basic  net earnings (loss) from continuing operations per common share**                                                                                                                                                                  | ** ** | ** ** |       | **0.10**       |       | (0.28      | )          | 0.37       |       |
| **Basic  and diluted net earnings (loss) per common share**                                                                                                                                                                                 | ** ** | 11 e)      |       | **0.04**       |       | (1.19      | )          | 0.28       |       |
| **Weighted average number of  common shares outstanding during the year**                                                                                                                                                                   | ** ** | ** ** |       | **80,941,603** |       | 81,136,576 |       | 81,678,884 |       |

 

The accompanying notes are anintegral part of these consolidated financial statements.

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**Consolidatedstatements of cash flows**
| **For each of the years in the three-year period ended December 31, 2006  (in millions of Canadian dollars)** | ** ** | **Note**   | ** ** | **2006**   | ** ** | **2005** | ** ** | **2004** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------|------------|------------|------------|----------|------------|----------|------------|
| **Operating  activities from continuing operations**                                                                                                                                          |       |       |       |       |       |     |       |     |       |
| Net earnings  (loss) from continuing operations                                                                                                                                               | ** ** | ** ** |       | **8**      |       | (23      | )          | 30       |       |
| Adjustments for                                                                                                                                                                               |       |       |       |       |       |     |       |     |       |
| Depreciation and amortization                                                                                                                                                                 | ** ** | ** ** |       | **163**    |       | 172      |       | 157      |       |
| Unusual gains                                                                                                                                                                                 |       | 12         | ** ** | **(4**     | **)**      | (10      | )          | (4       | )          |
| Impairment loss on property, plant and equipment                                                                                                                                              |       | 13 a)      | ** ** | **61**     |       | 47       |       | 18       |       |
| Closure and restructuring costs                                                                                                                                                               | ** ** | ** ** |       | **3**      |       | 5        |       | —   |       |
| Unrealized loss (gain) on commodity derivative  financial instruments                                                                                                                         |       | 14 a)      | ** ** | **(5**     | **)**      | 9        |       | —   |       |
| Amortization of transitional deferred unrealized  gain                                                                                                                                        |       | 14 a)      | ** ** | **—** |       | (1       | )          | (2       | )          |
| Foreign exchange gain on long-term debt                                                                                                                                                       | ** ** | ** ** |       | **—** |       | (10      | )          | (18      | )          |
| Loss on long-term debt refinancing                                                                                                                                                            | ** ** | ** ** |       | **—** |       | —   |       | 1        |       |
| Future income taxes                                                                                                                                                                           |       | 15 a)      | ** ** | **(35**    | **)**      | (30      | )          | (14      | )          |
| Share of results of significantly influenced  companies                                                                                                                                       | ** ** | ** ** |       | **(8**     | **)**      | (7       | )          | (2       | )          |
| Others                                                                                                                                                                                        | ** ** | ** ** |       | **(1**     | **)**      | 4        |       | 6        |       |
|                                                                                                                                                                                          | ** ** | ** ** |       | **182**    |       | 156      |       | 172      |       |
| Changes in non-cash  working capital components                                                                                                                                               |       | 16 a)      | ** ** | **31**     |       | (32      | )          | (6       | )          |
|                                                                                                                                                                                          | ** ** | ** ** |       | **213**    |       | 124      |       | 166      |       |
| **Investing  activities from continuing operations**                                                                                                                                          |       |       |       |       |       |     |       |     |       |
| Purchases of  property, plant and equipment                                                                                                                                                   | ** ** | ** ** |       | **(110**   | **)**      | (120     | )          | (129     | )          |
| Proceeds from  disposal of property, plant and equipment                                                                                                                                      | ** ** | ** ** |       | **—** |       | 19       |       | —   |       |
| Increase in  other assets                                                                                                                                                                     | ** ** | ** ** |       | **(10**    | **)**      | (14      | )          | (9       | )          |
| Business  acquisitions, net of cash acquired                                                                                                                                                  |       | 5 a) b) c) | ** ** | **(572**   | **)**      | (52      | )          | (120     | )          |
| Business  disposals, net of cash disposed                                                                                                                                                     |       | 5 d) f)    | ** ** | **8**      |       | —   |       | 14       |       |
|                                                                                                                                                                                          | ** ** | ** ** |       | **(684**   | **)**      | (167     | )          | (244     | )          |
| **Financing  activities from continuing operations**                                                                                                                                          |       |       |       |       |       |     |       |     |       |
| Bank loans and  advances                                                                                                                                                                      | ** ** | ** ** |       | **(4**     | **)**      | (2       | )          | 5        |       |
| Issuance of  senior notes, net of related expenses                                                                                                                                            | ** ** | ** ** |       | **—** |       | —   |       | 156      |       |
| Change in  revolving credit facilities, net of related expenses                                                                                                                               | ** ** | ** ** |       | **186**    |       | 159      |       | (8       | )          |
| Increase in  other long-term debt                                                                                                                                                             | ** ** | ** ** |       | **2**      |       | 4        |       | 10       |       |
| Payments of  other long-term debt                                                                                                                                                             | ** ** | ** ** |       | **(10**    | **)**      | (71      | )          | (49      | )          |
| Premium paid on  redemption of long-term debt                                                                                                                                                 | ** ** | ** ** |       | **—** |       | —   |       | (1       | )          |
| Net proceeds  from issuances of common shares                                                                                                                                                 |       | 11 b)      | ** ** | **242**    |       | —   |       | 2        |       |
| Redemption of  common shares                                                                                                                                                                  |       | 11 d)      | ** ** | **(4**     | **)**      | (6       | )          | (7       | )          |
| Dividends                                                                                                                                                                                     | ** ** | ** ** |       | **(13**    | **)**      | (13      | )          | (13      | )          |
|                                                                                                                                                                                          | ** ** | ** ** |       | **399**    |       | 71       |       | 95       |       |
| **Change  in cash and cash equivalents during the year from continuing operations**                                                                                                           | ** ** | ** ** |       | **(72**    | **)**      | 28       |       | 17       |       |
| **Change  in cash and cash equivalents from discontinued operations**                                                                                                                         |       | 4          | ** ** | **62**     |       | (12      | )          | (12      | )          |
| **Net  change in cash and cash equivalents during the year**                                                                                                                                  | ** ** | ** ** |       | **(10**    | **)**      | 16       |       | 5        |       |
| **Translation  adjustments on cash and cash equivalents**                                                                                                                                     | ** ** | ** ** |       | **1**      |       | (3       | )          | (2       | )          |
| **Cash  and cash equivalents – Beginning of year**                                                                                                                                       | ** ** | ** ** |       | **43**     |       | 30       |       | 27       |       |
| **Cash and cash equivalents – End  of year**                                                                                                                                             | ** ** | ** ** |       | **34**     |       | 43       |       | 30       |       |

 

The accompanying notes are anintegral part of these consolidated financial statements.

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FINANCIAL REPORT – SEGMENTEDINFORMATION

**Segmentedinformation**

The Company’s operations areorganized into and managed by two segments: packaging products and tissuepapers.

The Company analyzes the performanceof its operating segments based on their operating income before depreciation andamortization, which is not a measure of performance under Canadian generallyaccepted accounting principles (“Canadian GAAP”); however, the chief operatingdecision-maker uses this performance measure for assessing the operatingperformance of each reportable segment. Earnings for each segment are preparedon the same basis as those of the Company. Intersegment operations are recordedon the same basis as sales to third parties, which is at fair market value.

The segmented informationfor 2005 and 2004 has been restated to reflect the change in reportable segmentin 2006. Sales of the Company presented by reportable segment are as follows:

Sales
| **For each of the years in the three-year period ended December 31, 2006** | ** ** | ** ** | ** ** |
|----------------------------------------------------------------------------------------------------------------------------------------|------------|------------|------------|
| **(in millions of Canadian dollars)**                                                                              | ** ** | **2006**   | ** ** | **2005** | ** ** | **2004** | ** ** |
| **Packaging products**                                                                                                                 |       |       |       |   |   |   |   |
| Boxboard                                                                                                                               |       |       |       |   |   |   |   |
| Manufacturing                                                                                                                          | ** ** | **727**    |       | 684 |   | 705 |   |
| Converting                                                                                                                             | ** ** | **748**    |       | 717 |   | 513 |   |
| Eliminations and  others                                                                                                               | ** ** | **(74**    | **)**      | (62 | ) | (28 | ) |
|                                                                                                                                   |       | **1,401**  |       | 1,339 |   | 1,190 |   |
| Containerboard(1)                                                                                                                      |       |       |       |   |   |   |   |
| Manufacturing                                                                                                                          | ** ** | **333**    |       | 331 |   | 344 |   |
| Converting                                                                                                                             | ** ** | **506**    |       | 494 |   | 489 |   |
| Eliminations and  others                                                                                                               | ** ** | **(239**   | **)**      | (220 | ) | (233 | ) |
|                                                                                                                                   |       | **600**    |       | 605 |   | 600 |   |
| Specialty  products                                                                                                                    |       |       |       |   |   |   |   |
| Manufacturing                                                                                                                          | ** ** | **333**    |       | 327 |   | 344 |   |
| Converting                                                                                                                             | ** ** | **226**    |       | 224 |   | 238 |   |
| Recovery,  deinked pulp and eliminations                                                                                               | ** ** | **214**    |       | 205 |   | 184 |   |
|                                                                                                                                   |       | **773**    |       | 756 |   | 766 |   |
| Eliminations                                                                                                                           | ** ** | **(70**    | **)**      | (69 | ) | (81 | ) |
|                                                                                                                                   |       | **2,704**  |       | 2,631 |   | 2,475 |   |
| **Tissue papers**                                                                                                                      |       |       |       |   |   |   |   |
| Manufacturing  and converting                                                                                                          | ** ** | **727**    |       | 708 |   | 653 |   |
| **Eliminations**                                                                                                                       |       | **(28**    | **)**      | (31 | ) | (32 | ) |
| **Total**                                                                                                                              | ** ** | **3,403**  |       | 3,308 |   | 3,096 |   |

 

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(1)          The Company’s containerboard sub-segmentconsists of 50% of Norampac’s sales.

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The operating income (loss)before depreciation and amortization from continuing operations and thedepreciation and amortization from continuing operations of the Companypresented by reportable segment are as follows:

Operating income (loss) beforedepreciation and amortizationand operating income from continuing operations
| **For each of the years in the three-year period ended December 31, 2006  (in millions of Canadian dollars)** | ** ** | **2006** | ** ** | **2005** | ** ** | **2004** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| **Packaging  products**                                                                                                                                                                       |       |     |       |     |       |     |       |
| Boxboard                                                                                                                                                                                      |       |     |       |     |       |     |       |
| Manufacturing                                                                                                                                                                                 | ** ** | **1**    |       | (17      | )          | 19       |       |
| Converting                                                                                                                                                                                    | ** ** | **62**   |       | 56       |       | 45       |       |
| Others                                                                                                                                                                                        | ** ** | **(22**  | **)**      | (10      | )          | (1       | )          |
|                                                                                                                                                                                          | ** ** | **41**   |       | 29       |       | 63       |       |
| Containerboard(1)                                                                                                                                                                             |       |     |       |     |       |     |       |
| Manufacturing                                                                                                                                                                                 | ** ** | **(8**   | **)**      | (14      | )          | 25       |       |
| Converting                                                                                                                                                                                    | ** ** | **45**   |       | 46       |       | 54       |       |
| Others                                                                                                                                                                                        | ** ** | **7**    |       | 7        |       | 4        |       |
|                                                                                                                                                                                          | ** ** | **44**   |       | 39       |       | 83       |       |
| Specialty products                                                                                                                                                                            |       |     |       |     |       |     |       |
| Manufacturing                                                                                                                                                                                 | ** ** | **1**    |       | (6       | )          | 11       |       |
| Converting                                                                                                                                                                                    | ** ** | **30**   |       | 24       |       | 28       |       |
| Recovery, deinked pulp and others                                                                                                                                                             | ** ** | **17**   |       | 9        |       | (5       | )          |
|                                                                                                                                                                                          | ** ** | **48**   |       | 27       |       | 34       |       |
|                                                                                                                                                                                          | ** ** | **133**  |       | 95       |       | 180      |       |
| **Tissue  papers**                                                                                                                                                                            |       |     |       |     |       |     |       |
| Manufacturing and converting                                                                                                                                                                  | ** ** | **116**  |       | 100      |       | 76       |       |
| **Corporate**                                                                                                                                                                                 | ** ** | **(5**   | **)**      | 4        |       | (8       | )          |
| **Operating  income before depreciation and amortization from continuing operations**                                                                                                         | ** ** | **244**  |       | 199      |       | 248      |       |
| **Depreciation  and amortization**                                                                                                                                                            |       |     |       |     |       |     |       |
| Boxboard                                                                                                                                                                                      | ** ** | **(68**  | **)**      | (75      | )          | (64      | )          |
| Containerboard(1)                                                                                                                                                                             | ** ** | **(38**  | **)**      | (39      | )          | (38      | )          |
| Specialty  products                                                                                                                                                                           | ** ** | **(28**  | **)**      | (29      | )          | (27      | )          |
| Tissue papers                                                                                                                                                                                 | ** ** | **(37**  | **)**      | (37      | )          | (36      | )          |
| Corporate and  eliminations                                                                                                                                                                   | ** ** | **8**    |       | 8        |       | 8        |       |
|                                                                                                                                                                                          | ** ** | **(163** | **)**      | (172     | )          | (157     | )          |
| **Operating income from  continuing operations**                                                                                                                                              | ** ** | **81**   |       | 27       |       | 91       |       |

 

----

(1)          The Company’s containerboard sub-segmentconsists of 50% of operating income (loss) before depreciation and amortizationand operating income from continuing operations of Norampac.

41

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Purchases of property, plantand equipment by the Company presented by reportable segment are as follows:

Purchases of property, plantand equipment
| **For each of the years in the three-year period ended December 31, 2006  (in millions of Canadian dollars)** | ** ** | **2006**   | ** ** | **2005** | ** ** | **2004** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------|------------|----------|------------|----------|------------|
| **Packaging  products**                                                                                                                                                                       |       |       |       |     |       |     |       |
| Boxboard                                                                                                                                                                                      |       |       |       |     |       |     |       |
| Manufacturing                                                                                                                                                                                 | ** ** | **10**     |       | 9        |       | 22       |       |
| Converting                                                                                                                                                                                    | ** ** | **24**     |       | 28       |       | 20       |       |
| Others                                                                                                                                                                                        | ** ** | **1**      |       | 1        |       | 3        |       |
|                                                                                                                                                                                          |       | **35**     |       | 38       |       | 45       |       |
| Containerboard(1)                                                                                                                                                                             |       |       |       |     |       |     |       |
| Manufacturing                                                                                                                                                                                 | ** ** | **13**     |       | 12       |       | 13       |       |
| Converting                                                                                                                                                                                    | ** ** | **10**     |       | 10       |       | 15       |       |
| Others                                                                                                                                                                                        | ** ** | **—** |       | 3        |       | —   |       |
|                                                                                                                                                                                          |       | **23**     |       | 25       |       | 28       |       |
| Specialty products                                                                                                                                                                            |       |       |       |     |       |     |       |
| Manufacturing                                                                                                                                                                                 | ** ** | **10**     |       | 9        |       | 12       |       |
| Converting                                                                                                                                                                                    | ** ** | **6**      |       | 5        |       | 10       |       |
| Recovery, deinked pulp and others                                                                                                                                                             | ** ** | **6**      |       | 6        |       | 9        |       |
|                                                                                                                                                                                          |       | **22**     |       | 20       |       | 31       |       |
|                                                                                                                                                                                          |       | **80**     |       | 83       |       | 104      |       |
| **Tissue  papers**                                                                                                                                                                            |       |       |       |     |       |     |       |
| Manufacturing and converting                                                                                                                                                                  | ** ** | **27**     |       | 33       |       | 20       |       |
| **Corporate**                                                                                                                                                                                 |       | **3**      |       | 4        |       | 5        |       |
| **Total**                                                                                                                                                                                     | ** ** | **110**    |       | 120      |       | 129      |       |

 

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(1)          The Company’s containerboard sub-segmentconsists of 50% of purchase of property, plant and equipment of Norampac.

Identifiable assets of theCompany presented by reportable segment are as follows:

Identifiable assets
| **As at December 31, 2006 and 2005  (in millions of Canadian dollars)** | ** ** | **2006**   | ** ** | **2005** | ** ** |
|---------------------------------------------------------------------------------------------------------------------------|------------|------------|------------|----------|------------|
| **Packaging  products**                                                                                                   |       |       |       |     |       |
| Boxboard                                                                                                                  | ** ** | **1,079**  |       | 1,044    |       |
| Containerboard(1)                                                                                                         | ** ** | **1,554**  |       | 634      |       |
| Specialty products                                                                                                        | ** ** | **570**    |       | 547      |       |
|                                                                                                                      |       | **3,203**  |       | 2,225    |       |
| **Tissue  papers**                                                                                                        | ** ** | **537**    |       | 546      |       |
| **Corporate**                                                                                                             | ** ** | **206**    |       | 144      |       |
| **Intersegment  eliminations**                                                                                            | ** ** | **(154**   | **)**      | (89      | )          |
| **Discontinued  operations**                                                                                              | ** ** | **—** |       | 122      |       |
| ** **                                                                                                                |       | **3,792**  |       | 2,948    |       |
| **Investments**                                                                                                           | ** ** | **119**    |       | 98       |       |
| **Total**                                                                                                                 | ** ** | **3,911**  |       | 3,046    |       |

 

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(1)          In 2005, the Company’s containerboardsub-segment consists of 50% of identifiable assets of Norampac.

42

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Informationby geographic segment is presented as follows:
| **For each of the years in the three-year period ended December 31, 2006  (in millions of Canadian dollars)** | ** ** | **2006**  | ** ** | **2005** | ** ** | **2004** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------|------------|----------|------------|----------|------------|
| **Sales**                                                                                                                                                                                     |       |      |       |     |       |     |       |
| Operations located in Canada                                                                                                                                                                  |       |      |       |     |       |     |       |
| Within Canada                                                                                                                                                                                 | ** ** | **1,073** |       | 1,104    |       | 1,073    |       |
| To the United States                                                                                                                                                                          | ** ** | **465**   |       | 419      |       | 457      |       |
| Offshore                                                                                                                                                                                      | ** ** | **17**    |       | 33       |       | 54       |       |
|                                                                                                                                                                                          |       | **1,555** |       | 1,556    |       | 1,584    |       |
| Operations located in the United States                                                                                                                                                       |       |      |       |     |       |     |       |
| Within the United States                                                                                                                                                                      | ** ** | **1,117** |       | 1,009    |       | 833      |       |
| To Canada                                                                                                                                                                                     | ** ** | **156**   |       | 152      |       | 94       |       |
| Offshore                                                                                                                                                                                      | ** ** | **14**    |       | 17       |       | 31       |       |
|                                                                                                                                                                                          |       | **1,287** |       | 1,178    |       | 958      |       |
| Operations located in Europe                                                                                                                                                                  |       |      |       |     |       |     |       |
| Within Europe                                                                                                                                                                                 | ** ** | **526**   |       | 533      |       | 496      |       |
| To the United States                                                                                                                                                                          | ** ** | **3**     |       | 5        |       | 5        |       |
| To other countries                                                                                                                                                                            | ** ** | **32**    |       | 36       |       | 53       |       |
|                                                                                                                                                                                          |       | **561**   |       | 574      |       | 554      |       |
| **Total**                                                                                                                                                                                     | ** ** | **3,403** |       | 3,308    |       | 3,096    |       |

 
|                                    | ** ** | **2006**   | ** ** | **2005** | ** ** |
|------------------------------------|------------|------------|------------|----------|------------|
| **Property,  plant and equipment** | ** ** | ** ** |       |     |       |
| Canada                             | ** ** | **1,337**  |       | 930      |       |
| United States                      | ** ** | **548**    |       | 479      |       |
| Europe                             | ** ** | **178**    |       | 153      |       |
| **Total**                          | ** ** | **2,063**  |       | 1,562    |       |

 
|                                                                                                | ** ** | **2006**   | ** ** | **2005** | ** ** |
|------------------------------------------------------------------------------------------------|------------|------------|------------|----------|------------|
| **Goodwill,  customer relationship and client lists and other finite-life intangible  assets** | ** ** | ** ** |       |     |       |
| Canada                                                                                         | ** ** | **261**    |       | 101      |       |
| United States                                                                                  | ** ** | **142**    |       | 77       |       |
| Europe                                                                                         | ** ** | **1**      |       | 1        |       |
| **Total**                                                                                      | ** ** | **404**    |       | 179      |       |

 

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FINANCIAL REPORT – NOTES TOCONSOLIDATED FINANCIAL STATEMENTS FOR EACH OF THE YEARS IN THE THREE-YEARPERIOD ENDED DECEMBER 31, 2006 – (tabular amounts in millions of Canadian dollars, except per shareamounts)

**1 Accounting policies**

Basis of presentation

The consolidated financialstatements have been prepared in accordance with Canadian GAAP and include thesignificant accounting policies listed below. The Company refers to CascadesInc., its subsidiaries and its joint ventures (including Norampac untilDecember 29, 2006).

Basis of consolidation

The consolidated financialstatements include the accounts of the Company and its subsidiaries. They alsoinclude the portion of the accounts of the joint ventures accounted for throughthe proportionate consolidation method. Investments in significantly influencedcompanies are accounted for using the equity method.

Variable interest entities

The Company also identifiesvariable interest entities in which it has an interest and determines whetherit is the primary beneficiary of such entities. If the Company is the primary beneficiaryof the variable interest entities identified, those entities are consolidated.A variable interest entity is defined as an entity in which the equity is notsufficient to permit the entity to finance its activities without external financialsupport, or the equity investors lack either voting control and obligation to absorbfuture losses or the right to receive future returns.

Use of estimates

The preparation of financialstatements in conformity with Canadian GAAP requires the use of estimates andassumptions that affect the reported amounts of assets and liabilities in the financialstatements and disclosure of contingencies at the balance sheet date, as wellas the reported amounts of revenues and expenses during the reporting period.On a regular basis and with the available information, management reviews its estimates,including those related to environmental costs, employee future benefits,income taxes, useful life of property, plant and equipment and impairment oflong-lived assets and goodwill. Actual results could differ from thoseestimates. When adjustments become necessary, they are reported in earnings inthe period in which they are known.

Revenue recognition

The Company recognizes itssales, which consist quasi exclusively of product sales, when persuasiveevidence of an arrangement exists, goods are shipped, significant risks andbenefits of ownership are transferred, the price is fixed and determinable, andcollection of the resulting receivable is reasonably assured.

Fair market value of financialinstruments

The Company estimates thefair market value of its financial instruments based on current interest rates,market value and current pricing of financial instruments with similar terms. Unlessotherwise disclosed herein, the carrying value of these financial instruments,especially those with current maturities such as cash and cash equivalents,accounts receivable, bank loans and advances, accounts payable and accruedliabilities, approximates their fair market value.

Derivative financialinstruments

The Company uses derivative financialinstruments in the management of its foreign currency, commodity and interest rateexposures. The Company’s policy is not to utilize derivative financialinstruments for trading or speculative purposes.

The Company documentsrelationships between hedging instruments and hedged items, as well as its riskmanagement objective and strategy for undertaking various hedge transactions.This process includes linking derivatives to specific assets and liabilities onthe balance sheet or to specific firm commitments or forecasted transactions.The Company also assesses whether the derivatives that are used in hedging transactionsare effective in offsetting changes in fair values or cash flows of hedgeditems.

**FOREIGN EXCHANGE FORWARDCONTRACTS DESIGNATED AS HEDGING INSTRUMENTS**

In order to reduce thepotential adverse effects of currency fluctuation, the Company enters intovarious foreign exchange forward contracts. Realized and unrealized gains andlosses on these derivative financial instruments used to hedge anticipated sales,purchases or interest expenses denominated in foreign currencies are recognizedas an adjustment of sales, cost of sales or interest expenses when theunderlying sale, purchase or interest expense is realized.

**FOREIGN EXCHANGE FORWARD CONTRACTSAND CURRENCY OPTIONS NOT DESIGNATED AS HEDGING INSTRUMENTS**

Foreign exchange forwardcontracts and currency options not designated as hedging instruments arerecorded at fair value. The fair value of these instruments is reviewed at eachbalance sheet date and the resulting gains and losses are reported to earnings.

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**COMMODITY CONTRACTS DESIGNATED ASHEDGING INSTRUMENTS**

The Company also usescertain swaps and forward contracts on commodities in order to fix the pricefor nominal quantities of certain raw materials or finished goods to reduce theadverse effects of changes in raw material costs and sales prices of finishedgoods. Realized and unrealized gains and losses arising from these contractsare recognized in sales or cost of sales when the sale or purchase of theunderlying commodity is recorded.

**COMMODITY CONTRACTS NOTDESIGNATED AS HEDGING INSTRUMENTS**

The Company uses swaps andforward contracts on commodities that are not designated as hedginginstruments. These instruments are recorded at fair value. The fair value ofthese contracts is reviewed at each balance sheet date and the resulting gainsand losses are reported to earnings.

**INTEREST RATE SWAP AGREEMENTDESIGNATED AS HEDGING INSTRUMENT**

The Company has entered intoan interest rate swap agreement in order to hedge the changes in fair value ofa portion of its longterm debt. Interest expense on the debt is adjusted toinclude the payments made or received under the interest rate swaps.

**INTEREST RATE SWAP AGREEMENTS NOTDESIGNATED AS HEDGING INSTRUMENTS**

These interest rate swapagreements require the exchange of interest payments without actual exchange ofthe notional amount on which the payments are based. The Company adjusts theinterest expense on the debt to include payments made or received underinterest rate swap agreements. These instruments are accounted for at fairvalue and the resulting gains and losses are included in earnings under sellingand administrative expenses.

**OTHERS**

Realized and unrealizedgains and losses associated with derivative financial instruments which havebeen terminatedor ceaseto be effective prior to maturity are deferred under current or long-term assets or liabilitiesand recognized in earnings inthe period in which the underlying original hedged transaction is recognized. In the event adesignated hedged item is sold,extinguished or matures prior to the termination of the related derivative financial instrument, any realized or unrealized gain or loss on such derivative financialinstrument is recognized inearnings.

Derivative financialinstruments which are not designatedas hedges or have ceased to be effective prior to maturity are recorded at their estimated fair values undercurrent or long term assets orliabilities with changes in their estimated fair values recorded in earnings. Estimated fair value is determined using pricing models incorporating currentmarket prices and thecontractual prices of the underlying instruments, the time value of money and yield curves.

Cash and cash equivalents

Cash and cash equivalentsinclude cash on hand, bank balances and short-term liquid investments withoriginal maturities of three months or less.

Inventories

Inventories of finishedgoods are valued at the lower of average production cost and net realizable value.Inventories of raw materials and supplies are valued at the lower of cost andreplacement value. Cost of raw materials and supplies is determined using theaverage cost and the first-in, first-out methods respectively.

Property, plant andequipment and depreciation

Property, plant andequipment are recorded at cost, including interest incurred during theconstruction period of certain property, plant and equipment. Depreciation iscalculated on a straight-line basis at annual rates varying from 3% to 5% forbuildings, 5% to 10% for machinery and equipment, and 15% to 20% for automotiveequipment, determined according to the estimated useful life of each class ofproperty, plant and equipment.

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Grants and investment taxcredits

Grants and investment taxcredits are accounted for using the cost reduction method and are amortized toearnings as a reduction of depreciation, using the same rates as those used toamortize the related property, plant and equipment.

Other investments

Other investments arerecorded at cost except when there is a decline in value which is other thantemporary, in which case they are reduced to their estimated net realizablevalue.

Goodwill

Goodwill is tested forimpairment annually on December 31 or when an event or circumstance occurs thatcould potentially result in a permanent decline in value. This is accomplished mainlyby determining whether projected discounted future cash flows exceed the netbook value of goodwill of the respective business units.

Impairment of long-livedassets

Long-lived assets arereviewed for impairment upon the occurrence of events or changes incircumstances indicating that the carrying value of the asset may not berecoverable, as measured by comparing their net book value to the estimatedundiscounted future cash flows generated by their use. Impaired assets arerecorded at fair value, determined principally using discounted future cashflows expected from their use and eventual disposition.

Others assets

Deferred charges arerecorded at cost and include, in particular, the issuance costs of long-termdebt, which are amortized on a straight-line basis over the anticipated periodof repayment of the respective debt, and start-up costs which are amortized on astraight-line basis over a period of three to five years from the end of thestart-up period. Customer relationship and client lists are recorded at costand are amortized on a straight-line basis over a period not exceeding 20years.

Environmental costs

Environmental expendituresare expensed or capitalized depending upon their future economic benefit.Expenditures incurred to prevent future environmental contamination are capitalizedand amortized on a straight-line basis at annual rates varying from 5% to 10%.Expenditures that relate to an existing condition caused by past operations,and which do not contribute to current or future revenue generation, are expensed.A provision for environmental cost is recorded when it is probable that aliability has been incurred and the costs can be reasonably estimated.

Asset retirement obligations

Asset retirement obligationsare recognized at fair value in the period in which the Company incurred suchan obligation and if a reasonable estimate of the fair value can be made. The associatedcosts are capitalized as part of the carrying value of the related asset andare depreciated over its remaining useful life. The liability is accreted usinga credit-adjusted risk-free interest rate of the Company.

Employee future benefits

The Company offers fundedand non-funded defined benefitpension plans, some defined contribution pension plans, and group registered retirement savings plansthat provide retirement benefitpayments for most of its employees. The defined benefit pension plans are usually contributory and are based on the number of years of service and,in most cases, based on theaverage salaries or compensation at the end of career. Retirement benefits are, in some cases, partially adjusted based on inflation. The Company alsocontributes to its employee’scomplementary retirement benefit plans and other post-employment benefit plans, such as group life insurance, medical and dental care plans. However,these benefits, other thanpension plans, are not funded.

The cost of pensions andother retirement benefits earnedby employees is actuarially determined using the projected benefit method pro-rated on years of serviceand management’s best estimateof expected plan investment performance, salary escalations, retirement ages of employees and expected health care costs. The accrued benefit obligation isevaluated using the marketinterest rate at the evaluation date.

For the purpose ofcalculating the expected return on planassets, those assets are valued at fair value. Past service costs arising from a plan amendment areamortized on a straight-line basisover the average remaining service period of the group of employees active at the date of theamendment. The excess of the netactuarial gain or loss over the greater of a) 10% of the accrued benefit obligation at thebeginning of the year and b) 10%of the fair value of plan assets at the beginning of the year is amortized over the averageremaining service period ofactive employees, which may vary from 5 to 19 years (weighted average of 12 years) in 2006depending on the plan (2005 — 5to 19 years (weighted average of 13 years)). 

When restructuring a plan,it causes a curtailment and asettlement at the same time, the curtailment is accounted for before the settlement.  

The measurement date of theretirement benefit plans isDecember31 of each year. An actuarial evaluation is performed at least every three years. The lastevaluation took place onDecember 31, 2004 for approximately 25% of the plans, on December 31, 2005 for approximately 50% ofthe plans and on December 31, 2006 for the other plans.

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Income taxes

The Company uses theliability method in accounting forincome taxes. According to this method, future income taxes are determined using the difference betweenthe accounting and tax bases ofassets and liabilities. Future income tax assets and liabilities are measured using substantively enacted tax rates in effect in the year in which thesetemporary differences areexpected to be recovered or settled. Future income tax assets are recognized when it is more likelythan not that the assets will berealized.

Foreign currency translation

**FOREIGN CURRENCY TRANSACTIONS**

Transactions denominated incurrencies other than the businessunit’s currency measurement are recorded at the rate of exchange prevailing at the transaction date.Monetary assets and liabilities denominatedin foreign currencies are translated at the rate of exchange prevailing at the balance sheetdate. Gains and losses related tothe portion of the long-term debt designated as a hedge of the net investment of the Company inself-sustaining foreignoperations are recorded in cumulative translation adjustments net of related income taxes.Unrealized gains and losses ontranslation of other monetary assets and liabilities are reflected in the determination of netearnings for the year.  

**FOREIGN OPERATIONS**

The Company’s foreignoperations are defined as self-sustaining.The assets and liabilities of theseoperations are translated intoCanadian dollars at the rate of exchange prevailing at the balance sheet date. Revenues and expenses aretranslated at the averageexchange rate for the year. Translation gains and losses are deferred and shown as a separatecomponent of shareholders’ equityas cumulative translation adjustments.  

Stock-based compensation

The Company uses the fairvalue method of accounting forstock-based compensation awards granted to officers and key employees. This method consists of recordingexpenses to earnings based onthe vesting period of the options granted. The fair value is calculated based on the Black-Scholes option pricing model. This model was developed foruse in estimating the fair valueof traded options that have no vesting restrictions and are fully transferable. When stockoptions are exercised, anyconsideration paid by employees, as well as the related stock-based compensation are credited tocapital stock.  

Earnings per common share

Earnings per common share isdetermined using the weightedaverage number of common shares outstanding during the year. Diluted earnings per common share isdetermined using the treasurystock method to evaluate the dilutive effect of stock options, convertible instruments and equivalents, when applicable. Under this method, instrumentswith a dilutive effect,basically when the average market price of a share for the period exceeds the exercise price, areconsidered to have beenexercised at the beginning of the period and the proceeds received are considered to have been used toredeem common shares of theCompany at the average market price for the period.

Comparative figures

Certain reclassificationshave been made to the prior years’figures to conform to the presentation adopted in 2006.  

**2 Changesin accounting policies**

New accounting standardsadopted

**A) VARIABLE INTEREST ENTITIES**

On January 1, 2005, theCompany adopted prospectivelyAccounting Guideline 15 (“AcG-15”), “*Consolidationof variable**interest entities*”. The new guideline requires companies to identify variable interest entities in whichthey hold a variable interest todetermine whether they are the primary beneficiary of such entities and, if so, to consolidatethem. A variable interest entityis defined as an entity in which the equity is not sufficient to permit that entity to finance its activities without external support, or the equityinvestors lack either votingcontrol and obligation to absorb future losses or the right to receive future returns. Theapplication of this standard hadno material impact on the financial position or results of operations of theCompany.

New accounting standards notyet adopted

**B) FINANCIAL INSTRUMENTS,HEDGING, EQUITY AND COMPREHENSIVE INCOME**

In January 2005, the CICApublished four new sections:Section 1530, “*Comprehensive Income*”;Section 3251, “*Equity*”; Section 3855, “*Financial Instruments — Recognition and**Measurement*”; and Section 3865, “*Hedges*”. These new standards regarding recognition and measurement offinancial instruments, hedgingand comprehensive income have been issued to allow harmonization with the generally accepted accounting principles already used in the United States(U.S. GAAP). These new standardswill be adopted by the Company effective January 1, 2007. The application of these standards does not have a material impact on the financialposition on results of operationsof the Company.  

**C) ACCOUNTING CHANGES**

In July 2006, the CICArevised the existing Section 1506,“*Accounting Changes*”. Therevised standard established criteria for changing policies, together with the accounting treatment and disclosure of changes in accountingpolicies and estimates, andcorrection of errors. The revised standard will be applied to accounting changes initiated in periodsbeginning after January 1, 2007.

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**D) CAPITAL DISCLOSURES**

In December 2006, the CICApublished a new section: Section1535, “*Capital Disclosures*”.This new standard established disclosurerequirements concerning capital such as: qualitative information about its objectives, policiesand processes for managingcapital; quantitative data about what it regards as capital; whether it has complied with anyexternally imposed capitalrequirements and, if not, the consequences of such noncompliance. The new requirements will be effectivestarting January 1, 2008. TheCompany is presently evaluating the impact of this new standard.

**E) FINANCIAL INSTRUMENTS –DISCLOSURES AND PRESENTATION**

In December 2006, the CICApublished two new sections:Section3862, “*Financial Instruments — Disclosures*”, and Section 3863, “*Financial Instruments — Presentation*”. These new standards replace Section3861, “*Financial**Instruments — Disclosureand Presentation*”, revisingand enhancing its disclosurerequirements, and carrying forward unchangedits presentation requirements. These new standards will be effective starting January 1, 2008.The Company is presentlyevaluating the impact of these new standards.

**3Measurement uncertainty**

The Company evaluates thenet book value of its long-livedassets when events or changes in circumstances indicate that the net book value of the assets may notbe recoverable. To evaluatelong-lived assets, the Company determines if the undiscounted future cash flows of operating activities exceed the net book value of the assets at thevaluation date. Estimates offuture cash flows and fair value are based on judgment and could change. 

In 2006, impairment tests onlong-lived assets were performedon six operating units (seven in 2005). Three (three in 2005) of these units are part of theBoxboard group, two (three in2005) are part of the Containerboard group and one (one in 2005) is in the Specialty Products group of the Packaging products segment. In 2006, thesetests resulted in an impairmentcharge to the Red Rock, Ontario containerboard mill amounting to $40 million ($27 million after tax). In 2005, these tests resulted in animpairment charge to the Blendecques,France boxboard mill amounting to €20 million ($28 million or $19 million after tax). The combined net book value of the property, plant and equipment,tested for impairment, net ofcharges describe above, is $228 million as at December 31, 2006 ($237 million as at December 31, 2005).  

On June 29, 2006, theCompany announced that it ceasedoperations at its FjordCell pulp mill of the Boxboard group for an indefinite period. The businessenvironment, which has beenmarked by a strong appreciation of the Canadian dollar compared to the U.S. dollar as well as high wood and energy costs, dictates this course of action.The Company is monitoring thesituation closely and is committed to re-evaluating the situation should conditions affecting operating costs, the exchange rate and theselling price improve. Giventhis indefinite period of closure, the uncertainty of the operating costs and the impairment testperformed, no impairment chargewas recorded on the net book value of the property, plant and equipment, which stood at $45 million as at December 31, 2006 ($49 million as atDecember 31, 2005).

On October 6, 2006, theCompany announced the temporaryshutdown of the Scierie Lemay sawmill of the Boxboard group due to conditions prevailing in thelumber market. During the fourthquarter of 2006, an impairment charge of $14 million ($10 million after tax) was recorded to bring the net book value of the property, plant andequipment and other assets totheir estimated net realizable value.

According to the results ofthe impairment tests performed,it is not necessary to record an impairment loss for these operating units, with the exception of theimpairment loss on property,plant and equipment disclosed above and in note 13. However, given the sensitivity of certain keyassumptions used, such as exchangerates, selling prices and costs of raw materials and energy, there is a measurement uncertainty regarding certain operating units because it ispossible that variations infuture conditions could require a modification of the stated amount of long-lived assets when newimpairment tests are conducted.

**4Discontinued operations**

During the fourth quarter of2004, the Company decidedtoinitiate a divestiture plan for its Fine papers and Tissue distribution activities. These divestitureswere realized in February 2006and March 2005 respectively. In addition, the Company ceased its operations at its Fine papers Thunder Bay, Ontario mill on January 21, 2006.Consequently, the assets, liabilities,earnings and cash flows from these activities for the current period and for all comparativeperiods are classified as discontinuedoperations. The comparative financial information of 2005 and 2004 has been restated to reflectthis change.

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Financial informationrelating to these discontinued operations is as follows:
| ** **                                      | ** ** | **Note** | ** ** | **2006**   | ** ** | **2005** | ** ** | **2004** | ** ** |
|-------------------------------------------------|------------|----------|------------|------------|------------|----------|------------|----------|------------|
| Condensed  balance sheet                        |       |     |       |       |       |     |       |     |       |
| Current assets                                  |       |     | ** ** | **—** |       | 117      |       |     |       |
| Long-term assets                                |       |     | ** ** | **—** |       | 5        |       |     |       |
| Current liabilities                             |       |     | ** ** | **—** |       | 50       |       |     |       |
| Condensed  statement of earnings                |       |     |       |       |       |     |       |     |       |
| Sales                                           |       |     | ** ** | **78**     |       | 554      |       | 596      |       |
| Depreciation and amortization                   |       |     | ** ** | **—** |       | 2        |       | 4        |       |
| Operating loss(1)                               |       |     | ** ** | **(6**     | **)**      | (98      | )          | (5       | )          |
| Interest expense                                |       |     | ** ** | **1**      |       | 7        |       | 6        |       |
| Recovery of income taxes                        |       |     | ** ** | **(2**     | **)**      | (31      | )          | (4       | )          |
| Net loss from discontinued operations           |       |     | ** ** | **(5**     | **)**      | (74      | )          | (7       | )          |
| Net loss per share from discontinued operations |       |     | ** ** | **(0.06**  | **)**      | (0.91    | )          | (0.09    | )          |
| Condensed  statement of cash flows              |       |     |       |       |       |     |       |     |       |
| Operating activities                            |       |     | ** ** | **(24**    | **)**      | (24      | )          | (9       | )          |
| Investing activities                            |       | 5 d) e)  | ** ** | **86**     |       | 13       |       | (1       | )          |
| Financing  activities                           |       |     | ** ** | **—** |       | (1       | )          | (2       | )          |

 

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(1) Operating loss includesthe following items:
| ** **                                                            | ** ** | **Note** | ** ** | **2006**   | ** ** | **2005** | ** ** | **2004** | ** ** |
|-----------------------------------------------------------------------|------------|----------|------------|------------|------------|----------|------------|----------|------------|
| Gain on disposal of distribution activities of  Tissue papers segment |       | 5 e)     | ** ** | **—** | ** ** | 1        |       | —   |       |
| Provision on disposal of distribution activities of  Fine papers      |       | a)       | ** ** | **(1**     | **)**      | (9       | )          | —   |       |
| Legal settlement                                                      |       | b)       | ** ** | **(1**     | **)**      | (10      | )          | —   |       |
| Impairment of property, plant and equipment                           |       |     | ** ** | **—** | ** ** | (20      | )          | —   |       |
| Closure and restructuring costs                                       |       |     | ** ** | **(2**     | **)**      | (58      | )          | —   |       |
|                                                                  |       |     | ** ** | **(4**     | **)**      | (96      | )          | —   |       |

 

a) On November 17, 2005, theCompany announced that ithadreached an agreement for the sale of its paper merchant division known as Cascades Resources, theFine papers distribution activities,to Coast Paper Limited, a subsidiary of PaperlinX Limited. In 2005, the Company recorded a loss of $9 million ($7 million after tax) to bringthe book value of the net assetsto be sold to their net estimated realizable value. On February 28, 2006, the Company completed the transaction for a total consideration of $86million subject to final closingadjustments. An additional loss of $1 million was recorded in 2006 based on the considerationmentioned above.

b) In 2003, the Company wasinformed that CascadesResourceswas the subject of an enquiry by the Canadian Commissioner of Competition as to whether this division and its competitors had colluded to unduly reducemarket competition among papermerchants in Canada. On January 9, 2006, the Company entered a guilty plea in Ontario Superior Court relating to sales of carbonless sheet paperin Ontario and Quebec. Pursuantto the plea, the Company has agreed to pay a total of $12.5 million in equal installments over a period of six and a half years. The first payment isdue in January 2008. In 2005, aloss of $10 million was recorded in earnings representing the discounted amount of the liability which is presented as “Other liabilities” in thebalance sheet.

**5 Businessacquisitions and disposals**

a) 2006 Acquisitions

On April 25, 2006, theCompany’s Boxboard group announcedthat it has acquired certain assets from the paperboard division of Simkins Industries located inRidgefield, New Jersey and NewHaven, Connecticut, for $14 million (US$12.5 million). On July 19 and August 7, 2006, the Companycompleted the acquisition of theassets of Caraustar Industries, Inc.’s coated recycled boxboard mills located in Sprague, Connecticut and certain of the assets of Caraustar Industriescoated recycled boxboard milllocated in Rittman, Ohio, for a total purchase price of $18 million (US$15 million). The Sprague mill will now operate under the name of Versailles.

In 2006, the Companyfinalized the allocation of thepurchase price relating to the acquisition of three corrugated plants from SPB Canada Inc. completed in2005. The purchase price wasreduced by $3 million. Accordingly, the amounts disclosed in the table below represent the adjustments required to the allocation prepared in 2005.

49

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On December 29, 2006, theCompany acquired theremainingoutstanding common shares (50%) of Norampac Inc. from Domtar Inc. for a total purchase price of $561 million (including $1 million in transaction cost).Norampac is a manufacturer ofcontainerboard and corrugated products principally in North America. The balance sheet and results of Norampac are fully consolidated since thatdate as they were proportionallyconsolidated prior to the acquisition.

In connection with thistransaction, the Company andDomtar Inc. entered into a cost sharing agreement with respect to Norampac’s mill located in Red Rock,Ontario, pursuant to which, inthe event that the Company decides to permanently shut down the Red Rock mill within two yearsof the closing of thetransaction, and this closure results in environmental remediation costs, the parties have agreedthat the Company will beresponsible for the first $10 million of such costs, Domtar Inc. and the Company shall be equallyresponsible for any such costsin excess of $10 million but not greater than $40 million and the Company will be responsible for any amount in excess of $40 million. Domtar Inc.’sobligation to assume any suchcosts will apply only to costs engaged prior to the fifth anniversary of the date on which it is announced that the mill has been permanently shut down.

b) 2005 Acquisitions

On January 14, 2005, theCompany acquired certain assets ofDover Industries Limited, located in Burlington, Ontario, for a cash consideration of $8 million. OnOctober 14, 2005, the Companypaid $6 million to acquire certain assets of the paperboard division of Fraser Papers Inc. located inEdmundston, New Brunswick. Bothunits are part of the converting sector of the Boxboard group.

On October 11, 2005, theCompany acquired the assetsofthree corrugated products converting plants from SPB Canada Inc. located in Montreal and LeGardeur, Quebec, and Belleville,Ontario, for an approximate consideration of $38 million.

During the second quarter of2005, the Company madeitsfinal payment amounting to $57 million (US$46 million) with respect to the acquisition of Dopaco,Inc. announced in August 2004,which resulted in an adjustment to goodwill of $3 million (US$2 million).

c) 2004 Acquisitions

On February 18, 2004 andJune 3, 2004, the Company acquiredthe 50% interest held by its partners in Cascades Sonoco S.A. for an amount of nil and in Greenfield SASfor a cash consideration of $2million (€1.5 million). On March 11, 2004, the Company acquired the assets of a tissue mill located in Memphis, Tennessee, from American Tissue oraffiliates thereof, for a cashconsideration of $15 million (US$11.4 million). On April 2, 2004, the Companyacquired the shares of Johnson CorrugatedProducts Corp., a corrugated products plant in Thompson, Connecticut, for an approximate cash consideration of $8 million (US$5.9 million). On June 11,2004, the Company acquired thenon-controlling interest of its subsidiary for a cash consideration of $7 million.

On August 24, 2004, theCompany acquired the remainingoutstanding shares (50%) of Dopaco, Inc., a U.S. producer of packaging products for the quick servicerestaurant industry, for anapproximate consideration of $139 million (US$106.5 million), of which $82 million (US$63 million) had been paid in cash at the closing date anda balance initially estimated at$57 million (US$43.5 million) was payable in May 2005 based on a financial formula. The balance sheet and results of Dopaco, Inc. are fullyconsolidated since that date. OnAugust 27, 2004, the Company acquired the assets of AIM Corrugated Container Corp., a corrugatedproducts plant in Lancaster, NewYork, for an approximate cash consideration of $10 million (US$8 million).

These acquisitions have beenaccounted for using thepurchasemethod and the accounts and results of operations of these entities have been included in theconsolidated financial statementssince their respective dates of acquisition. The following allocations of the purchase prices to the identifiable assets acquired and liabilities assumedresulted in goodwill of $194million as at December 31, 2006 (2005 — $10 million; 2004 — $33 million) and a reduction ofgoodwill of $7 million followingan adjustment to the 2005 acquisition of SPB. None of this goodwill is expectedto be deductible for tax purposeswith the exception of an amount of $7 million as at December 31, 2006 (2005 — $10 million; 2004 —$5 million). The purchase priceallocations presented in the table below for the Norampac acquisition have not yet been completed mainly with respect to the identification andvaluation of property, plant andequipment and other potential intangible assets. The final allocation of the purchase price could result insignificant changes.

50

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| ** **                                | ** ** | **2006**                    | ** ** |
|-------------------------------------------|------------|-----------------------------|------------|
| **Acquired company**                 | ** ** | **Simkins**                 | ** ** | **Caraustar** | ** ** | **SPB** | ** ** | **Norampac** | ** ** | ** ** | ** ** |
| **Business segment**                 | ** ** | **Packaging products** | ** ** | **Packaging products** | ** ** | **Packaging products** | ** ** | **Packaging products** | ** ** | **Total** | ** ** |
| Cash and cash  equivalents                | ** ** | **—**                  | ** ** | **—** | ** ** | **—** | ** ** | **18** | ** ** | **18** | ** ** |
| Accounts receivable                       | ** ** | **—**                  | ** ** | **7** | ** ** | **(2** | **)** | **111** | ** ** | **116** | ** ** |
| Inventories                               | ** ** | **—**                  | ** ** | **4** | ** ** | **—** | ** ** | **75** | ** ** | **79** | ** ** |
| Property, plant and  equipment            | ** ** | **—**                  | ** ** | **18** | ** ** | **—** | ** ** | **583** | ** ** | **601** | ** ** |
| Other assets                              | ** ** | **—**                  | ** ** | **—** | ** ** | **—** | ** ** | **13** | ** ** | **13** | ** ** |
| Customer relationship  and client lists   | ** ** | **11**                      | ** ** | **—** | ** ** | **4** | ** ** | **24** | ** ** | **39** | ** ** |
| Goodwill                                  | ** ** | **7**                       | ** ** | **—** | ** ** | **(7** | **)** | **187** | ** ** | **187** | ** ** |
|                                      | ** ** | **18**                      | ** ** | **29** | ** ** | **(5** | **)** | **1,011** | ** ** | **1,053** | ** ** |
| Bank loan and advances                    | ** ** | **—**                  | ** ** | **—** | ** ** | **—** | ** ** | **(2** | **)** | **(2** | **)** |
| Accounts payable and  accrued liabilities | ** ** | **—**                  | ** ** | **(6** | **)** | **—** | ** ** | **(92** | **)** | **(98** | **)** |
| Long-term debt                            | ** ** | **—**                  | ** ** | **—** | ** ** | **—** | ** ** | **(182** | **)** | **(182** | **)** |
| Other liabilities                         | ** ** | **(4**                      | **)**      | **(5** | **)** | **2** | ** ** | **(155** | **)** | **(162** | **)** |
| Non-controlling  interest                 | ** ** | **—**                  | ** ** | **—** | ** ** | **—** | ** ** | **(19** | **)** | **(19** | **)** |
| **Total consideration paid**              | ** ** | **14**                      | ** ** | **18** | ** ** | **(3** | **)** | **561** | ** ** | **590** | ** ** |

 
| ** **                                | ** ** | **2005**                    | ** ** |
|-------------------------------------------|------------|-----------------------------|------------|
| **Acquired company**                 | ** ** | **Dover**                   | ** ** | **Fraser** | ** ** | **SPB** | ** ** | ** ** | ** ** |
| **Business segment**                 | ** ** | **Packaging products** | ** ** | **Packaging products** | ** ** | **Packaging products** | ** ** | **Total** | ** ** |
| Accounts  receivable                      |       | —                      |       | — |   | 8 |   | 8 |   |
| Inventories                               |       | —                      |       | — |   | 5 |   | 5 |   |
| Property, plant  and equipment            |       | 3                           |       | 1 |   | 22 |   | 26 |   |
| Customer  relationship and client lists   |       | 5                           |       | 5 |   | — |   | 10 |   |
| Goodwill                                  |       | —                      |       | — |   | 10 |   | 10 |   |
|                                      |       | 8                           |       | 6 |   | 45 |   | 59 |   |
| Accounts payable  and accrued liabilities |       | —                      |       | — |   | (4 | ) | (4 | ) |
| Other  liabilities                        |       | —                      |       | — |   | (3 | ) | (3 | ) |
| **Total consideration paid**              |       | 8                           |       | 6 |   | 38 |   | 52 |   |

 
| ** **                                 | ** ** | **2004**                    | ** ** |
|--------------------------------------------|------------|-----------------------------|------------|
| **Acquired company**                  | ** ** | **Dopaco**                  | ** ** | **AIM & Johnson** | ** ** | **American Tissue** | ** ** | **Others** | ** ** | ** ** | ** ** |
| **Business segment**                  | ** ** | **Packaging products** | ** ** | **Packaging products** | ** ** | **Tissue papers** | ** ** | **Packaging products** | ** ** | **Total** | ** ** |
| Cash and cash  equivalents                 |       | 2                           |       | 1 |   | — |   | 1 |   | 4 |   |
| Accounts  receivable                       |       | 26                          |       | 3 |   | — |   | 4 |   | 33 |   |
| Inventories                                |       | 38                          |       | — |   | — |   | 6 |   | 44 |   |
| Property, plant  and equipment             |       | 123                         |       | 8 |   | 15 |   | 3 |   | 149 |   |
| Customer  relationship and client lists    |       | 26                          |       | — |   | — |   | 4 |   | 30 |   |
| Goodwill                                   |       | 24                          |       | 9 |   | — |   | — |   | 33 |   |
|                                       |       | 239                         |       | 21 |   | 15 |   | 18 |   | 293 |   |
| Accounts payable  and accrued liabilities  |       | (27                         | )          | (2 | ) | — |   | (8 | ) | (37 | ) |
| Long-term debt                             |       | (17                         | )          | — |   | — |   | (3 | ) | (20 | ) |
| Other  liabilities                         |       | (46                         | )          | (1 | ) | — |   | 2 |   | (45 | ) |
|                                       |       | 149                         |       | 18 |   | 15 |   | 9 |   | 191 |   |
| Less:  Investments realized in prior years |       | (10                         | )          | — |   | — |   | — |   | (10 | ) |
| Less: Balance of  purchase price           |       | (57                         | )          | — |   | — |   | — |   | (57 | ) |
| **Total consideration paid**               |       | 82                          |       | 18 |   | 15 |   | 9 |   | 124 |   |

 

51

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d) 2006 Disposals

On February 28, 2006, theCompany sold its Fine papersdistribution activities for a total consideration of $86 million. The final closing adjustments areexpected to be completed in2007. 

On September 7, 2006, theCompany disposed of itsinvestmentin a joint venture of its Boxboard group for a consideration of $11 million (US$10 million), of which $9 million (US$8 million) was received atclosing and $2 million (US$2million) will be received over the next two years. The Company realized a gain of $4 million before income taxes of $2 million.

Assets and liabilities atthe time of disposal where as follows:
| ** **                                               | ** ** | **Specialty products** | ** ** | ** **   | ** ** |
|----------------------------------------------------------|------------|-----------------------------|------------|--------------|------------|
| ** **                                               | ** ** | **(discontinued**           | ** ** | ** **   | ** ** |
| **Business sub-segment**                            | ** ** | **operations)**             | ** ** | **Boxboard** | ** ** |
| Accounts  receivable                                     | ** ** | **56**                      | ** ** | **4**        | ** ** |
| Inventories                                              | ** ** | **49**                      | ** ** | **3**        | ** ** |
| Property, plant  and equipment                           | ** ** | **5**                       | ** ** | **4**        | ** ** |
|                                                     | ** ** | **110**                     | ** ** | **11**       | ** ** |
| Accounts payable  and accrued liabilities                | ** ** | **(23**                     | **)**      | **(3**       | **)**      |
| Long-term debt                                           | ** ** | **—**                  | ** ** | **(2**       | **)**      |
|                                                     | ** ** | **87**                      | ** ** | **6**        | ** ** |
| Purchase price  adjustment and gain on disposal          | ** ** | **(1**                      | **)**      | **4**        | ** ** |
| Balance of sale  price—receivables and other assets | ** ** | **—**                  | ** ** | **(2**       | **)**      |
| Total consideration  received, net of cash disposed      | ** ** | **86**                      | ** ** | **8**        | ** ** |

 

e) 2005 Disposals

On March 31, 2005, theCompany sold the distributionactivities of its Tissue papers segment for a net consideration of $16 million. Of the total selling price,$14 million was received atclosing; $1 million will be received at the first anniversary date and $1 million in four installments due March 31, 2006 to March 31, 2009. Thedisposal of the net assets resultedin a gain of $1 million before related income taxes of $0.5 million.
| Business segment                     | ** ** | **Tissue papers   (discontinued operations)** | ** ** |
|-------------------------------------------|------------|--------------------------------------------------------------|------------|
| Accounts  receivable                      |       | 11                                                           |       |
| Inventories                               |       | 7                                                            |       |
| Property, plant  and equipment            |       | 4                                                            |       |
| Other assets                              |       | 1                                                            |       |
|                                      |       | 23                                                           |       |
| Accounts payable  and accrued liabilities |       | (8                                                           | )          |
|                                      |       | 15                                                           |       |
| Gain on disposal                          |       | 1                                                            |       |
| Balance of sale  price—other assets  |       | (2                                                           | )          |
| **Total consideration received**          |       | 14                                                           |       |

 

f) 2004 Disposals

On May 10, 2004, the Companysold the assets of two of itsfiberboard panel businesses (Packaging products segment) located in Canada for a total considerationof $16 million. Of thistransaction price, $14 million was received at closing and $2 million will be received in 2011 atthe latest. The Company realizeda gain of $4 million before related income taxes of $1 million.

52

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**6 Inventories**
| ** **     | ** ** | **2006** | ** ** | **2005** | ** ** |
|----------------|------------|----------|------------|----------|------------|
| Finished goods | ** ** | **247**  |       | 288      |       |
| Raw materials  | ** ** | **126**  |       | 114      |       |
| Supplies       | ** ** | **175**  |       | 135      |       |
|           | ** ** | **548**  |       | 537      |       |

 

**7 Property,plant and equipment**
| ** **               | ** ** | **2006**   | ** ** |
|--------------------------|------------|------------|------------|
| ** **               | ** ** | ** ** | ** ** | **Accumulated** | ** ** | ** ** | ** ** |
| ** **               | ** ** | **Cost**   | ** ** | **depreciation** | ** ** | **Net** | ** ** |
| Lands                    | ** ** | **83**     | ** ** | **—** | ** ** | **83** | ** ** |
| Buildings                | ** ** | **498**    | ** ** | **163** | ** ** | **335** | ** ** |
| Machinery and  equipment | ** ** | **2,855**  | ** ** | **1,349** | ** ** | **1,506** | ** ** |
| Automotive  equipment    | ** ** | **57**     | ** ** | **41** | ** ** | **16** | ** ** |
| Others                   | ** ** | **280**    | ** ** | **157** | ** ** | **123** | ** ** |
|                     | ** ** | **3,773**  | ** ** | **1,710** | ** ** | **2,063** | ** ** |

 
| ** **               | ** ** | **2005**   | ** ** |
|--------------------------|------------|------------|------------|
| ** **               | ** ** | ** ** | ** ** | **Accumulated** | ** ** | ** ** | ** ** |
| ** **               | ** ** | **Cost**   | ** ** | **depreciation** | ** ** | **Net** | ** ** |
| Lands                    |       | 54         |       | — |   | 54 |   |
| Buildings                |       | 437        |       | 151 |   | 286 |   |
| Machinery and  equipment |       | 2,484      |       | 1,321 |   | 1,163 |   |
| Automotive  equipment    |       | 55         |       | 43 |   | 12 |   |
| Others                   |       | 75         |       | 28 |   | 47 |   |
|                     |       | 3,105      |       | 1,543 |   | 1,562 |   |

 

Property, plant andequipment include assets under capitalleases with a cost of $15 million and accumulated depreciation of $4 million as at December 31, 2006 (2005 —$16 million and $4 millionrespectively). Other property, plant and equipment include items that are not depreciated, suchas machinery and equipment inthe process of installation with a book value of $8 million (2005 — $12 million), deposits on purchases of equipments amounting to $15 million (2005 —$14 million) and unusedproperties, machinery and equipment with a net book value of $93 million (2005 — $15 million) of which $45 million continues to be depreciated.

Depreciation of property,plant and equipment amounted to $156 million for the year ended December 31,2006 (2005 — $169 million; 2004 — $157 million).

53

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**8 Other assets and goodwill**

a)Other assets are detailed as follows: 
| ** **                                            | ** ** | **Note** | ** ** | **2006** | ** ** | **2005** | ** ** |
|-------------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| Investments in  significantly influenced companies(1) |       |     | ** ** | **107**  |       | 90       |       |
| Other  investments                                    |       |     | ** ** | **12**   |       | 8        |       |
| Deferred charges                                      |       | c)       | ** ** | **34**   |       | 36       |       |
| Employee future  benefits                             |       | 17b)     | ** ** | **52**   |       | 46       |       |
| Fair value of  derivative financial instruments       |       |     | ** ** | **7**    |       | —   |       |
| Customer relationship  and client lists               |       | c)       | ** ** | **77**   |       | 38       |       |
| Other  finite-life intangible assets                  |       | c)       | ** ** | **14**   |       | 15       |       |
|                                                  |       |     | ** ** | **303**  |       | 233      |       |

 

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(1)   Investmentsin significantly influenced companies include a 43% interest in Boralex Inc.for a net book value of $88 million and a market value of $134 million (2005 –$82 million and $108 million respectively).

b) Goodwill fluctuated asfollows:
| ** **                                         | ** ** | **2006**                    | ** ** |
|----------------------------------------------------|------------|-----------------------------|------------|
| ** **                                         | ** ** | **Packaging products** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                                         | ** ** | **Boxboard**                | ** ** | **Container-  board** | ** ** | **Specialty   products** | ** ** | **Sub-total** | ** ** | **Tissue papers** | ** ** | **Total** | ** ** |
| Carrying value  of goodwill–Beginning of year | ** ** | **30**                      | ** ** | **80** | ** ** | **6** | ** ** | **116** | ** ** | **10** | ** ** | **126** | ** ** |
| Goodwill  resulting from business acquisitions     | ** ** | **7**                       | ** ** | **180** | ** ** | **—** | ** ** | **187** | ** ** | **—** | ** ** | **187** | ** ** |
| Amortization of  a deferred gain(1)                | ** ** | **—**                  | ** ** | **1** | ** ** | **—** | ** ** | **1** | ** ** | **—** | ** ** | **1** | ** ** |
| Foreign currency  translation and others           | ** ** | **(1**                      | **)**      | **(4** | **)** | **4** | ** ** | **(1** | **)** | **—** | ** ** | **(1** | **)** |
| Carrying value of goodwill–End  of year       | ** ** | **36**                      | ** ** | **257** | ** ** | **10** | ** ** | **303** | ** ** | **10** | ** ** | **313** | ** ** |

 
| ** **                                         | ** ** | **2005**                    | ** ** |
|----------------------------------------------------|------------|-----------------------------|------------|
| ** **                                         | ** ** | **Packaging products** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                                         | ** ** | **Boxboard**                | ** ** | **Container-  board** | ** ** | **Specialty   products** | ** ** | **Sub-total** | ** ** | **Tissue papers** | ** ** | **Total** | ** ** |
| Carrying value  of goodwill–Beginning of year |       | 26                          |       | 71 |   | 6 |   | 103 |   | 10 |   | 113 |   |
| Goodwill resulting  from business acquisitions     |       | 3                           |       | 10 |   | — |   | 13 |   | — |   | 13 |   |
| Amortization of  a deferred gain(1)                |       | —                      |       | 1 |   | — |   | 1 |   | — |   | 1 |   |
| Foreign currency  translation and others           |       | 1                           |       | (2 | ) | — |   | (1 | ) | — |   | (1 | ) |
| Carrying value of  goodwill–End of year       |       | 30                          |       | 80 |   | 6 |   | 116 |   | 10 |   | 126 |   |

 

----

(1)          On December 30, 1997, the Company and DomtarInc. merged their respective containerboard and corrugated packaging operationsto form Norampac, a 50-50 joint venture. A portion of the gain realized on thetransaction was recorded against property, plant and equipment and goodwill.Until December 29, 2006, the portion of the deferred gain allocated to goodwillwas amortized on a straight-line basis over a period of 25 years. However, as aresult of the acquisition of Norampac, as described in note 5 a), the amountsrecorded against goodwill have been considered as part of the purchase priceallocation and therefore, starting January 1, 2007, amortization will cease.

c)     Other intangible assets are detailed as follows:
| ** **                              | ** ** | **2006**   | ** ** | **2005**         | ** ** |
|-----------------------------------------|------------|------------|------------|------------------|------------|
| ** **                              | ** ** | ** ** | ** ** | **Accumulated**  | ** ** | ** ** | ** ** | ** ** | ** ** | **Accumulated** | ** ** | ** ** | ** ** |
| ** **                              | ** ** | **Cost**   | ** ** | **amortization** | ** ** | **Net** | ** ** | **Cost** | ** ** | **amortization** | ** ** | **Net** | ** ** |
| Deferred charges                        |       |       |       |             |       |   |   |   |   |   |   |   |   |
| Start-up cost                           | ** ** | **11**     | ** ** | **7**            | ** ** | **4** |   | 12 |   | 5 |   | 7 |   |
| Financing costs                         | ** ** | **37**     | ** ** | **15**           | ** ** | **22** |   | 33 |   | 12 |   | 21 |   |
| Other                                   | ** ** | **9**      | ** ** | **1**            | ** ** | **8** |   | 10 |   | 2 |   | 8 |   |
|                                    | ** ** | **57**     | ** ** | **23**           | ** ** | **34** |   | 55 |   | 19 |   | 36 |   |
| Customer  relationship and client lists | ** ** | **83**     | ** ** | **6**            | ** ** | **77** |   | 42 |   | 4 |   | 38 |   |
| Other  finite-life intangible assets    | ** ** | **16**     | ** ** | **2**            | ** ** | **14** |   | 16 |   | 1 |   | 15 |   |
|                                    | ** ** | **99**     | ** ** | **8**            | ** ** | **91** |   | 58 |   | 5 |   | 53 |   |

 

Amortization of deferredcharges, customer relationship and client lists and other finite-lifeintangible assets calculated on a straight-line basis amounted to $9 millionfor the year ended December 31, 2006 (2005 — $10 million; 2004 — $8 million). 

54

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The weighted averageamortization period is as follows (in number of years):

 
| Start-up cost                           |   | 4  |   |
|-----------------------------------------|--------|----|--------|
| Financing costs                         |   | 9  |   |
| Other                                   |   | 5  |   |
| Deferred charges                        |   | 7  |   |
| Customer  relationship and client lists |   | 16 |   |
| Other finite-life  intangible assets    |   | 20 |   |

 

The estimated aggregateamount of amortization expense for intangible assets in each of the next fiveyears is as follows:
| **Years ending December 31,** | ** ** | ** ** | ** ** |
|----------------------------------------------|------------|------------|------------|
| 2007                                         |       | 12         |       |
| 2008                                         |       | 11         |       |
| 2009                                         |       | 10         |       |
| 2010                                         |       | 9          |       |
| 2011                                         |       | 7          |       |

 

**9 Long-termdebt**
| ** **                                                                                                    | ** ** | **Note**   | ** ** | **2006**   | ** ** | **2005** | ** ** |
|---------------------------------------------------------------------------------------------------------------|------------|------------|------------|------------|------------|----------|------------|
| Revolving credit  facility, weighted average rate of 5.19% as at December 31, 2006, maturing in  2011         |       | a)         | ** ** | **457**    |       | 167      |       |
| Term credit  facility, bearing interest at 5.26% as at December 31, 2006, maturing in 2012                    |       | a)         | ** ** | **100**    |       | 100      |       |
| 7.25% Unsecured  senior notes of US$675 million, maturing in 2013                                             |       | b)         | ** ** | **787**    |       | 787      |       |
| 6.75% Unsecured  senior notes of US$250 million, (Cascades portion US$125 million in 2005), maturing  in 2013 |       | b)         |       | **291**    |       | 146      |       |
| Capital lease  obligations                                                                                    |       | b) f)      | ** ** | **7**      |       | 11       |       |
| Other debts                                                                                                   | ** ** | ** ** |       | **24**     |       | 28       |       |
| Revolving credit  facility, repaid in 2006                                                                    |       | a)         | ** ** | **—** |       | 58       |       |
|                                                                                                          | ** ** | ** ** |       | **1,666**  |       | 1,297    |       |
| Less: Current  portion                                                                                        | ** ** | ** ** |       | **9**      |       | 8        |       |
|                                                                                                          | ** ** | ** ** |       | **1,657**  |       | 1,289    |       |

 

a) On December 29, 2006, inconnection with the acquisitionof the remaining outstanding common shares of Norampac, the Company completed the refinancing of its$875 million (including $325million of Norampac) credit facility to provide for new $850 million credit facilities consisting of a $650 million secured revolving creditfacility maturing in December2011, a $100 million secured term facility maturing in October 2012 and a six-month $100 millionsenior unsecured revolvingcredit facility which should be converted into the secured revolving facility in 2007. Subject to certain conditions, the Company also has the optionto request an increase of itssecured revolving credit facility by an additional amount of up to $150 million. The termfacility can be reimbursed withoutpenalty at the Company’s option any time prior to maturity. The Company’s obligations under the revolving credit facility and the term facility aresecured by all inventory andreceivables of the Company and its subsidiaries located in North America and by the property, plant andequipment of three of its mills.

As such, as at December 31,2006, accounts receivableandinventories totalling approximately $786 million (2005 — $739 million) as well as property, plant and equipment totalling approximately $150million (2005 — $237 million)were pledged as collateral for the long-term debt of the Company.

b) As at December 31, 2006,the fair value of the unsecuredsenior notes and the capital lease obligations of the Company was estimated at $1,064 million (December 31,2005 — $868 million) based onthe market value of the unsecured senior notes and on discounted future cash flows using interestrates available for issues with similar terms andaverage maturities.

c) As at December 31, 2006,the long-term debt includedamountsdenominated in foreign currencies of US$947 million and €25 million (December 31, 2005 — US$839million and €28 million).

d)Under various credit agreements, the Company is subjectto a number of covenants, including themaintenance of certain financialratios.  

55

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e) The estimated aggregateamounts of repayments on long-term debt, excluding capital lease obligations,in each of the next five years are as follows:
| **Years ending December 31,** | ** ** | ** ** | ** ** |
|----------------------------------------------|------------|------------|------------|
| 2007                                         |       | 4          |       |
| 2008                                         |       | 3          |       |
| 2009                                         |       | 3          |       |
| 2010                                         |       | 1          |       |
| 2011                                         |       | 458        |       |
| Thereafter                                   |       | 1,190      |       |

 

f) As at December 31, 2006,future minimum payments under capital lease obligations are as follows:
| **Years ending December 31,**     | ** ** | ** ** | ** ** |
|--------------------------------------------------|------------|------------|------------|
| 2007                                             |       | 6          |       |
| 2008                                             |       | 2          |       |
|                                             |       | 8          |       |
| Less: Interest  (weighted average rate of 6.17%) |       | 1          |       |
|                                             |       | 7          |       |
| Less: Current portion                            |       | 5          |       |
|                                             |       | 2          |       |

 

g) As at December 31, 2006,the Company had unused credit facilities of $295 million (December 31, 2005 —$400 million).

**10 Otherliabilities**
| ** **                                           | ** ** | **Note** | ** ** | **2006** | ** ** | **2005** | ** ** |
|------------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| Employee future  benefits                            |       | 17 b)    | ** ** | **107**  |       | 85       |       |
| Future income taxes                                  |       | 15 c)    | ** ** | **286**  |       | 160      |       |
| Unrealized gain on derivative  financial instruments |       |     | ** ** | **2**    |       | 6        |       |
| Legal settlement                                     |       | 4 b)     | ** ** | **11**   |       | 10       |       |
| Non-controlling  interest                            |       |     | ** ** | **19**   |       | —   |       |
| Other                                                |       |     | ** ** | **14**   |       | 4        |       |
|                                                 |       |     | ** ** | **439**  |       | 265      |       |

 

**11 Capitalstock**
| ** **                                       | ** ** | **Note**   | ** ** | **2006** | ** ** | **2005** | ** ** |
|--------------------------------------------------|------------|------------|------------|----------|------------|----------|------------|
| Common shares                                    |       | a) b) | ** ** | **510**  |       | 259      |       |
| Adjustment  relating to stock options and others |       | c)         | ** ** | **7**    |       | 5        |       |
|                                             |       |       | ** ** | **517**  |       | 264      |       |

 

a) The authorized capitalstock of the Company consists of an unlimited number of common shares, withoutnominal value, and an unlimited number of Class A and B shares issuable inseries without nominal value. Over the past two years, the common shares havefluctuated as follows:
| ** **                                  | ** ** | **Note**   | ** ** | **2006**                       | ** ** | **2005**    | ** ** |
|---------------------------------------------|------------|------------|------------|--------------------------------|------------|-------------|------------|
| ** **                                  | ** ** | ** ** | ** ** | **Number of shares** | ** ** | **$ ** | ** ** | **Number of shares** | ** ** | **$ ** | ** ** |
| Balance – Beginning  of year           |       |       | ** ** | **80,818,540**                 | ** ** | **259**     |       | 81,361,580 |   | 261 |   |
| Shares issued                               |       | b)         | ** ** | **18,868,585**                 | ** ** | **250**     |       | — |   | — |   |
| Shares issued on  exercise of stock options |       | c)         | ** ** | **131,229**                    | ** ** | **2**       |       | 12,560 |   | — |   |
| Redemption of  common shares                |       | d)         | ** ** | **(284,700**                   | **)**      | **(1**      | **)**      | (555,600 | ) | (2 | ) |
| Balance – End of year                  | ** ** | ** ** | ** ** | **99,533,654**                 | ** ** | **510**     |       | 80,818,540 |   | 259 |   |

 

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b) On December 20, 2006,the Company closed a public offering of 15,095,000 Subscription Receipts at aunit price of $13.25 for a total consideration of $200 million. Concurrently, theCompany also closed a $50 million private placement of 3,773,585 SubscriptionReceipts at a price of $13.25 each. Each Subscription Receipt was convertedinto an equal number of common shares of the Company, concurrently with the closingof the acquisition of the remaining 50% interest in Norampac, on December 29,2006.

c) Under the terms of a shareoption plan adopted onDecember15, 1998 for officers and key employees of the Company, 6,403,472 common shares have been specifically reserved for issuance. Each option will expireat a date not to exceed 10 yearsfollowing the grant date of the option. The exercise price of an option shall not be lower than the market value of the share at the date ofgrant, determined as the averageof the closing price of the share on the Toronto Stock Exchange on the five trading days preceding the date of grant. The terms for exercising the optionsgranted before December 31, 2003are 25% of the number of shares under option within 12 months after the date of grant, and up to an additional 25% every 12 months after thefirst, second and thirdanniversary dates of grant. The terms for exercising the options granted in 2004 and thereafter are 25%of the number of shares underoption within the first anniversary date of grant, and up to an additional 25% every 12 months after the second, third and fourth anniversary datesof grant. The options cannot beexercised if the market value of the share is lower than its book value at the date of grant. The stockbased compensation cost related to theseoptions amounted to $1.4 million(2005 — $1.3 million; 2004 — $1.1 million).

Changes in the number ofoptions outstanding as at December 31 are as follows:
| ** **                               | ** ** | **2006**                        | ** ** | **2005**                  | ** ** | **2004**                        | ** ** |
|------------------------------------------|------------|---------------------------------|------------|---------------------------|------------|---------------------------------|------------|
| ** **                               | ** ** | ** **                      | ** ** | **Weighted average** | ** ** | ** **                      | ** ** | **Weighted average** | ** ** | ** ** | ** ** | **Weighted average** | ** ** |
| ** **                               | ** ** | **Number of options** | ** ** | **exercise price**   | ** ** | **Number of options** | ** ** | **exercise price** | ** ** | **Number of options** | ** ** | **exercise price** | ** ** |
| Beginning of year                        | ** ** | **2,115,167**                   | ** ** | **11.03**                 |       | 1,756,986                       |       | 10.67 |   | 1,494,942 |   | 9.83 |   |
| Granted                                  | ** ** | **417,416**                     | ** ** | **11.49**                 |       | 390,181                         |       | 12.73 |   | 407,723 |   | 13.02 |   |
| Exercised                                | ** ** | **(131,229**                    | **)**      | **9.35**                  |       | (12,560                         | )          | 9.47 |   | (133,893 | ) | 8.27 |   |
| Forfeited                                | ** ** | **(85,963**                     | **)**      | **13.03**                 |       | (19,440                         | )          | 13.10 |   | (11,786 | ) | 13.10 |   |
| End of year                              | ** ** | **2,315,391**                   | ** ** | **11.14**                 |       | 2,115,167                       |       | 11.03 |   | 1,756,986 |   | 10.67 |   |
| Options  exercisable  – End of year | ** ** | **1,426,071**                   | ** ** | **10.47**                 |       | 766,001                         |       | 7.60 |   | 1,131,655 |   | 9.35 |   |

 

The following options wereoutstanding as at December 31, 2006:
| ** **            | ** ** | **Options outstanding**    | ** ** | **Options exercisable** | ** ** |
|-----------------------|------------|---------------------------------|------------|------------------------------|------------|
| ** **            | ** ** | ** **                      | ** ** | **Weighted average**    | ** ** | ** ** | ** ** | **Weighted average** | ** ** | ** ** | ** ** |
| **Year granted** | ** ** | **Number of options** | ** ** | **exercise price**      | ** ** | **Number of options** | ** ** | **exercise price** | ** ** | **Expiration date** | ** ** |
| 1999                  |       | 306,347                         |       | 8.49                         |       | 306,347 |   | 8.49 |   | 2009 |   |
| 2000                  |       | 56,182                          |       | 7.63                         |       | 56,182 |   | 7.63 |   | 2010 |   |
| 2001                  |       | 318,522                         |       | 6.82                         |       | 318,522 |   | 6.82 |   | 2011 |   |
| 2002                  |       | 215,244                         |       | 13.24                        |       | 215,244 |   | 13.24 |   | 2012 |   |
| 2003                  |       | 245,110                         |       | 13.04                        |       | 245,110 |   | 13.04 |   | 2013 |   |
| 2004                  |       | 382,097                         |       | 13.01                        |       | 191,048 |   | 13.01 |   | 2014 |   |
| 2005                  |       | 374,473                         |       | 12.73                        |       | 93,618 |   | 12.73 |   | 2015 |   |
| 2006                  |       | 417,416                         |       | 11.49                        |       | — |   | — |   | 2016 |   |
|                  |       | 2,315,391                       |       |                         |       | 1,426,071 |   |   |   |   |   |

 

The following assumptionswere used to estimate the fair value, at the date of grant, of each optionissued to employees:
| ** **                                     | ** ** | **2006**    | ** ** | **2005** | ** ** | **2004** | ** ** |
|------------------------------------------------|------------|-------------|------------|----------|------------|----------|------------|
| Risk-free  interest rate                       | ** ** | **4.5**     | **%**      | 3.9      | %          | 4.3      | %          |
| Expected  dividend yield                       | ** ** | **1.46**    | **%**      | 1.26     | %          | 1.24     | %          |
| Expected life of  options                      | ** ** | **6 years** |       | 6 years  |       | 6 years  |       |
| Expected  volatility                           | ** ** | **33**      | **%**      | 26       | %          | 29       | %          |
| Weighted average fair  value of issued options | ** ** | **$**       | **3.65**   |     | $          | 3.69     |       | $ | 4.07 |   |
|                                                |            |             |            |          |            |          |            |  |  |  |

 

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d) In 2006, in the normalcourse of business, the Company renewed its redemption program of a maximum of4,040,417 common shares with the Toronto Stock Exchange which shares representapproximately 5% of issued and outstanding common shares. The redemptionauthorization is valid from March 13, 2006 to March 12, 2007. Also in 2006, theCompany redeemed 284,700 common shares under this program for a considerationof approximately $4 million (2005 — $6 million; 2004 — $ 7 million).

e) The basic and diluted netearnings (loss) per common share are calculated as follows:
| ** **                                              | ** ** | **2006** | ** ** | **2005** | ** ** | **2004** | ** ** |
|---------------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| Net earnings  (loss) available to common shareholders   | ** ** | **3.3**  |       | (97.5    | )          | 22.6     |       |
| Weighted average  common shares                         | ** ** | **80.9** |       | 81.1     |       | 81.7     |       |
| Dilution effect  of stock options                       | ** ** | **0.1**  |       | —   |       | 0.2      |       |
| Adjusted  weighted average common shares                | ** ** | **81.0** |       | 81.1     |       | 81.9     |       |
| Basic and diluted net  earnings (loss) per common share | ** ** | **0.04** |       | (1.19    | )          | 0.28     |       |

 

In 2005, because of the netloss, stock options were not consideredin the computation of the diluted per share amount.  

In calculating dilutedearnings per share for 2006 and 2004,1,636,110 and 625,331 stock options were excluded due to their antidilutive effect.

f) The Company offers to itsCanadian employees a sharepurchaseplan of its common stock. Employees can contribute voluntarily up to a maximum of 5% of theirsalary and, if certain conditionsare met, the Company will contribute to the plan 25% of the employee’s contribution.

The shares are purchased onthe market on a predetermineddate each month. For the years ended December 31, 2006, 2005 and 2004, the Company’s contribution tothe plan amounted to $0.6 millionannually.

g) DEFERRED SHARE UNIT PLAN The Company has a Deferred Share Unit Plan for the benefit of itsexternal directors allowing themto receive all or a portion of their annual compensation in the form of Deferred Share Units (DSUs). ADSU is a notional unit equivalentin value to the Company’s common share.Upon resignation from the Board of Directors, participants are entitled to receive the payment of theircumulated DSUs in the form ofcash based on the average price of the Company’s common shares as traded on the open market during the five days before the date of theparticipant’s resignation.

The DSU expense and therelated liability are recorded atthe grant date. The liability is adjusted periodically to reflect any variation in the market value of thecommon shares. As at December 31,2006, the Company had a total of 38,888 DSUs outstanding (2005 — 18,527), representing a long-term liability of $0.5 million (2005 — $0.2 million).

**12 Unusualgains**

a) Unusual gains are detailedas follows:
| ** **                                                            | ** ** | **Note** | ** ** | **2006**   | ** ** | **2005** | ** ** | **2004** | ** ** |
|-----------------------------------------------------------------------|------------|----------|------------|------------|------------|----------|------------|----------|------------|
| Gain on disposal of property, plant and equipment                     |       | b)       | ** ** | **—** |       | (11      | )          | —   |       |
| Impairment charge of investment in a significantly influenced company |       |     | ** ** | **—** |       | 1        |       | —   |       |
| Gain on business disposal                                             |       | 5 d) f)  | ** ** | **(4**     | **)**      | —   |       | (4       | )          |
|                                                                  |       |     | ** ** | **(4**     | **)**      | (10      | )          | (4       | )          |

 

b) In 2005, the Companyrealized a gain of $4 million($3 million after tax), on the disposal of a building of one of its corrugated products plants. In addition,the Company sold a warehouse ofthe Corporate segment resulting in a gain of $11 million. Of that amount, $7 million has been recorded in earnings ($6 million after tax) and theremaining portion of the gain hasbeen deferred and will be recognized in earnings over the term of a two-year lease agreement entered into with the buyer.

**13Impairment of property, plant and equipment and closure and restructuring costs**

In 2006, the Companyannounced the permanent shutdown ofits specialty products board mill in France and of its converting boxboard plant in Montréal, Québec. TheCompany also ceased for anindefinite period the operation of the Red Rock, Ontario containerboard mill, and of the Fjordcell pulpmill and Scierie Lemay sawmill,Québec, both of the Boxboard group.

In 2005, the Companypermanently shutdown its fine papersThunder Bay, Ontario mill and a machine at its Red Rock mill, Ontario. The company has also shutdownthree corrugated productsconverting units in Montréal, Québec, Concord, Ontario and Buffalo, New York. The Company also decided

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to close some equipment atits St-Jérôme, Québec fine papersmill, at its Montréal, Québec boxboard converting plant and at its Toronto, Ontario tissue converting unit.The Company also reduced thevalue of some fixed assets that are not in use to their net realizable value.

In 2004, the Company recordedan impairment loss of$18million ($12 million after tax) related to the property, plant and equipment of its de-inked pulp milllocated in Cap-de-la-Madeleine,Québec which was temporarily closed in March 2003. The Company decided to permanently shutdown this facility. The book value of those assetshas been written down to theirfair value representing the present value of the estimated net proceeds from dismantling, redeployment or disposal. Those assets are part of theSpecialty products group in thePackaging products segment.

a) The impairment charges andclosure and restructuring costs are detailed as follows:
| ** **                                                | ** ** | **Note**   | ** ** | **2006**       | ** ** | **2005**             | ** ** | **2004**       | ** ** |
|-----------------------------------------------------------|------------|------------|------------|----------------|------------|----------------------|------------|----------------|------------|
| ** **                                                | ** ** | ** ** | ** ** | ** **     | ** ** | **Closure and** | ** ** | ** **     | ** ** | **Closure and** | ** ** | ** ** | ** ** |
| ** **                                                | ** ** | ** ** | ** ** | ** **     | ** ** | **restructuring**    | ** ** | ** **     | ** ** | **restructuring** | ** ** | ** ** | ** ** |
| ** **                                                | ** ** | ** ** | ** ** | **Impairment** | ** ** | **costs**            | ** ** | **Impairment** | ** ** | **costs** | ** ** | **Impairment** | ** ** |
| Boxboard – Montréal                             |       |       | ** ** | **—**     | ** ** | **1**                |       | —         |       | 2 |   | — |   |
| Boxboard – Blendecques                               |       | 3          | ** ** | **—**     | ** ** | **—**           |       | 28             |       | — |   | — |   |
| Boxboard – Fjordcell                                 |       |       | ** ** | **—**     | ** ** | **1**                |       | —         |       | — |   | — |   |
| Boxboard – Scierie  Lemay                            |       | 3          | ** ** | **14**         | ** ** | **—**           |       | —         |       | — |   | — |   |
| Containerboard –  Red Rock                           |       | 3          | ** ** | **40**         | ** ** | **12**               |       | 7              |       | 4 |   | — |   |
| Containerboard –  Montréal, Concord and Buffalo |       |       | ** ** | **—**     | ** ** | **—**           |       | 2              |       | 4 |   | — |   |
| Specialty  products – pulp mill                      |       |       | ** ** | **—**     | ** ** | **—**           |       | —         |       | — |   | 18 |   |
| Specialty  products – St-Jérôme            |       |       | ** ** | **—**     | ** ** | **3**                |       | 2              |       | 6 |   | — |   |
| Specialty  products – board mill                     |       |       | ** ** | **7**          | ** ** | **3**                |       | —         |       | — |   | — |   |
| Tissue – Toronto                                     |       |       | ** ** | **—**     | ** ** | **—**           |       | —         |       | 2 |   | — |   |
| Others                                                    |       |       | ** ** | **—**     | ** ** | **—**           |       | 8              |       | — |   | — |   |
|                                                      |       |       | ** ** | **61**         | ** ** | **20**               |       | 47             |       | 18 |   | 18 |   |

 

b) The following table showsreconciliation of all closure and restructuring costs provisions which shouldbe paid in 2007.

It includes the provisionspresented in discontinued operations:
| ** **                                       | ** ** | **2006**   | ** ** | **2005** | ** ** | **2004** | ** ** |
|--------------------------------------------------|------------|------------|------------|----------|------------|----------|------------|
| Balance – Beginning  of year                | ** ** | **55**     |       | —   |       | —   |       |
| Additional provisions                            |       |       |       |     |       |     |       |
| Severance and pension liability                  | ** ** | **26**     |       | 57       |       | —   |       |
| Write-down of inventories                        | ** ** | **(2**     | **)**      | 13       |       | —   |       |
| Others                                           | ** ** | **—** |       | 6        |       | —   |       |
| Non-monetary  items                              |       |       |       |     |       |     |       |
| Write-down of inventories                        | ** ** | **2**      |       | (13      | )          | —   |       |
| Pension liability adjustments and others         | ** ** | **(7**     | **)**      | (3       | )          | —   |       |
| Liability assumed  from the Norampac acquisition | ** ** | **8**      |       | —   |       | —   |       |
| Closure and  restructuring cost payments         | ** ** | **(35**    | **)**      | (5       | )          | —   |       |
| Balance – End of year                       | ** ** | **47**     |       | 55       |       | —   |       |

 

**14 Loss(gain) on derivative financial instruments**

a) The loss (gain) oncommodity derivative financial instruments is as follows:
| ** **                                                            | ** ** | **2006**   | ** ** | **2005** | ** ** | **2004** | ** ** |
|-----------------------------------------------------------------------|------------|------------|------------|----------|------------|----------|------------|
| Unrealized loss  (gain) on commodity derivative financial instruments | ** ** | **(5)**    |       | 9        |       | —   |       |
| Realized loss on  commodity derivative financial instruments          | ** ** | **2**      | ** ** | 2        |       | —   |       |
| Amortization of  transitional deferred unrealized gain under AcG-13   | ** ** | **—** | ** ** | (1       | )          | (2       | )          |
|                                                                  | ** ** | **(3**     | **)**      | 10       |       | (2       | )          |

 

b) During the first quarterof 2005, the Company entered into an interest rate swap agreement for anotional amount of US$125millionmaturing in 2013 relating to its 7.25% unsecured senior notes. During thesecond quarter of 2005, the Company cancelled this swap agreement and as this instrument was not designatedas a hedge, a gain of $2 million was recorded.

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**15  Income taxes**

a) The provision for (recovery of) income taxes is asfollows:
| ** ** | ** ** | **2006** | ** ** | **2005** | ** ** | **2004** | ** ** |
|------------|------------|----------|------------|----------|------------|----------|------------|
| Current    | ** ** | **34**   |       | 21       |       | 21       |       |
| Future     | ** ** | **(35**  | **)**      | (30      | )          | (14      | )          |
|       | ** ** | **(1**   | **)**      | (9       | )          | 7        |       |

 

b) The provision for income taxes based on theeffective income tax rate differs from the provision for income taxes based onthe combined basic rate for the following reasons:
| ** **                                                                                                     | ** ** | **2006**   | ** ** | **2005** | ** ** | **2004** | ** ** |
|----------------------------------------------------------------------------------------------------------------|------------|------------|------------|----------|------------|----------|------------|
| Provision for (recovery  of) income taxes based on the combined basic Canadian and provincial income  tax rate |       | **—** | ** ** | (12      | )          | 16       |       |
| Adjustment for income  taxes arising from the following:                                                       |       |       | ** ** |     |       |     |       |
| Difference in  statutory income tax rate of foreign operations                                                 | ** ** | **(4**     | **)**      | —   |       | (5       | )          |
| Unrecognized tax  benefit arising from current losses of subsidiaries                                          | ** ** | **7**      | ** ** | 1        |       | 1        |       |
| Non-taxable  portion of foreign exchange gain on long-term debt                                                | ** ** | **—** | ** ** | (2       | )          | (3       | )          |
| Recognized tax  benefit arising from previously incurred losses of subsidiaries                                | ** ** | **—** | ** ** | (9       | )          | (5       | )          |
| Permanent  differences                                                                                         | ** ** | **—** | ** ** | 4        |       | 1        |       |
| Large  corporations tax                                                                                        | ** ** | **—** | ** ** | 2        |       | 4        |       |
| Increase  (decrease) in future income taxes resulting from a substantively enacted  change in tax rates        |       | **(3**     | **)**      | 4        |       | —   |       |
| Others                                                                                                         | ** ** | **(1**     | **)**      | 3        |       | (2       | )          |
|                                                                                                           | ** ** | **(1**     | **)**      | 3        |       | (9       | )          |
| Provision for (recovery of) income taxes                                                                       | ** ** | **(1**     | **)**      | (9       | )          | 7        |       |

 

c) Future income taxes include the following items:
| ** **                                           | ** ** | **2006**   | ** ** | **2005** | ** ** |
|------------------------------------------------------|------------|------------|------------|----------|------------|
| **Future income tax assets**                         |       |       |       |     |       |
| Tax benefit arising  from income tax losses          | ** ** | **145**    |       | 124      |       |
| Employee future  benefits                            | ** ** | **26**     |       | 28       |       |
| Unused tax credits                                   | ** ** | **12**     |       | 10       |       |
| Others                                               | ** ** | **18**     |       | 23       |       |
| Valuation allowance  Future income tax liabilities   | ** ** | **(21**    | **)**      | (14      | )          |
|                                                 |       | **180**    |       | 171      |       |
| **Future income tax liabilities**                    |       | ** ** |       |     |       |
| Property, plant and  equipment                       | ** ** | **335**    |       | 241      |       |
| Foreign exchange gain  on long-term debt             | ** ** | **43**     |       | 41       |       |
| Employee future  benefits                            | ** ** | **8**      |       | 13       |       |
| Other assets                                         | ** ** | **32**     |       | 29       |       |
| Others Future income  taxes                          | ** ** | **8**      |       | 7        |       |
|                                                 |       | **426**    |       | 331      |       |
| **Future income taxes**                              |       | **(246**   | **)**      | (160     | )          |
| Future income taxes  included in Accounts receivable | ** ** | **40**     |       | —   |       |
| Future income taxes  included in Other liabilities   | ** ** | **(286**   | **)**      | (160     | )          |
|                                                 | ** ** | **(246**   | **)**      | (160     | )          |

 

d) The Company has accumulated losses for income taxpurposes amounting to approximately $418 million which may be carried forwardto reduce taxable income in future years. The future tax benefit resulting fromthe deferral of $350 million of these losses has been recognized in theaccounts as a future income tax asset. These unused losses for income taxpurposes may be claimed in years ending no later than 2026 for an amount of$231 million and indefinitely for an amount of $187 million.

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**16  Additional information**

a) Changes in non-cash working capital components aredetailed as follows:
| ** **                                | ** ** | **2006** | ** ** | **2005** | ** ** | **2004** | ** ** |
|-------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| Accounts  receivable                      | ** ** | **(14**  | **)**      | (51      | )          | (15      | )          |
| Inventories                               | ** ** | **9**    |       | (28      | )          | (28      | )          |
| Accounts payable  and accrued liabilities | ** ** | **36**   |       | 47       |       | 37       |       |
|                                      | ** ** | **31**   |       | (32      | )          | (6       | )          |

 

b) Additional information
| ** **                                                             | ** ** | **2006** | ** ** | **2005** | ** ** | **2004** | ** ** |
|------------------------------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| Amortization of  deferred financing costs included in interest expense | ** ** | **4**    |       | 4        |       | 4        |       |
| Interest paid                                                          | ** ** | **80**   |       | 83       |       | 76       |       |
| Income taxes paid                                                      | ** ** | **10**   |       | 26       |       | 9        |       |

 

c) Cost of sales
| ** **             | ** ** | **2006** | ** ** | **2005** | ** ** | **2004** | ** ** |
|------------------------|------------|----------|------------|----------|------------|----------|------------|
| Foreign exchange  loss |       | —   |       | —   |       | (4       | )          |

 

**17  Employee futurebenefits**

a) The expense for employee future benefits as atDecember 31 is as follows:
| ** **                                                                                                     | ** ** | **2006**               | ** ** | **2005**             | ** ** |
|----------------------------------------------------------------------------------------------------------------|------------|------------------------|------------|----------------------|------------|
| ** **                                                                                                     | ** ** | **Pension plans** | ** ** | **Other plans** | ** ** | **Pension plans** | ** ** | **Other plans** | ** ** |
| Current service  cost                                                                                          | ** ** | **13**                 | ** ** | **4**                |       | 14 |   | 3 |   |
| Interest cost                                                                                                  | ** ** | **29**                 | ** ** | **4**                |       | 32 |   | 5 |   |
| Past service  costs                                                                                            | ** ** | **—**             | ** ** | **—**           |       | 9 |   | — |   |
| Actual return on  plan assets                                                                                  | ** ** | **(61**                | **)**      | **—**           |       | (67 | ) | — |   |
| Actuarial losses  on accrued benefit obligation                                                                | ** ** | **(15**                | **)**      | **(8**               | **)**      | 93 |   | 7 |   |
| Curtailment and  settlement                                                                                    | ** ** | **6**                  | ** ** | **1**                |       | 35 |   | — |   |
| Benefit costs  before adjustments to recognize long-term nature of employee future benefit  costs              |       | **(28**                | **)**      | **1**                |       | 116 |   | 15 |   |
| Difference  between expected return and actual return on plan assets for the year                              |       | **28**                 |       | **—**           |       | 32 |   | — |   |
| Difference  between actuarial loss for the year and actuarial loss on accrued benefit  obligation for the year |       | **19**                 |       | **8**                |       | (92 | ) | (8 | ) |
| Difference  between amortization of past service costs and actual plan amendments for the  year                |       | **1**                  |       | **—**           |       | (8 | ) | — |   |
| Others                                                                                                         | ** ** | **(1**                 | **)**      | **(4**               | **)**      | 1 |   | — |   |
| Adjustments to  recognize long-term nature of employee future benefit costs                                    | ** ** | **47**                 | ** ** | **4**                |       | (67 | ) | (8 | ) |
| Recognized costs  for defined benefit pension plans                                                            | ** ** | **19**                 | ** ** | **5**                |       | 49 |   | 7 |   |
| Recognized costs  for defined contribution pension plans                                                       | ** ** | **15**                 | ** ** | **—**           |       | 13 |   | — |   |
| Total expense for  employee future benefits                                                                    | ** ** | **34**                 | ** ** | **5**                |       | 62 |   | 7 |   |

 

Total cash payments for employee future benefits for 2006,consisting of cash contributed by the Company to its funded pension plans,including its defined contribution plans, and cash payments made directly tobeneficiaries for its unfunded other benefit plans, including its collectiveRRSPs, are $43 million (2005 — $39 million). Total estimated cash payments foremployee future benefits are $68 million for 2007, including specific paymentrelated to the settlement of four pension plans wind-up.

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b) The funded status ofthe defined benefit plans and the other complementary retirement benefit plansand post-employment benefit plans as at December 31 are as follows:
| ** **                                            | ** ** | **2006**               | ** ** | **2005**             | ** ** |
|-------------------------------------------------------|------------|------------------------|------------|----------------------|------------|
| ** **                                            | ** ** | **Pension plans** | ** ** | **Other plans** | ** ** | **Pension plans** | ** ** | **Other plans** | ** ** |
| **Accrued  benefit obligation**                       |       |                   |       |                 |       |   |   |   |   |
| Beginning of  year                                    | ** ** | **659**                | ** ** | **96**               |       | 536 |   | 85 |   |
| Current service  cost                                 | ** ** | **13**                 | ** ** | **4**                |       | 14 |   | 3 |   |
| Interest cost                                         | ** ** | **29**                 | ** ** | **4**                |       | 32 |   | 5 |   |
| Employees’  contributions                        | ** ** | **3**                  | ** ** | **—**           |       | 5 |   | — |   |
| Actuarial losses                                      | ** ** | **(15**                | **)**      | **(8**               | **)**      | 93 |   | 7 |   |
| Benefits paid                                         | ** ** | **(35**                | **)**      | **(4**               | **)**      | (26 | ) | (5 | ) |
| Business  acquisitions and disposals                  | ** ** | **125**                | ** ** | **17**               |       | (4 | ) | 5 |   |
| Past service  costs                                   | ** ** | **—**             | ** ** | **—**           |       | 9 |   | — |   |
| Others                                                | ** ** | **1**                  | ** ** | **3**                |       | — |   | (4 | ) |
| End of year                                           | ** ** | **780**                | ** ** | **112**              |       | 659 |   | 96 |   |
| **Plan  assets**                                      |       |                   |       |                 |       |   |   |   |   |
| Beginning of  year                                    | ** ** | **573**                | ** ** | **—**           |       | 514 |   | — |   |
| Actual return on  plan assets                         | ** ** | **61**                 | ** ** | **—**           |       | 67 |   | — |   |
| Employer’s  contributions                        | ** ** | **24**                 | ** ** | **4**                |       | 21 |   | 5 |   |
| Employees’  contributions                        | ** ** | **3**                  | ** ** | **—**           |       | 5 |   | — |   |
| Benefits paid                                         | ** ** | **(35**                | **)**      | **(4**               | **)**      | (26 | ) | (5 | ) |
| Business  acquisitions and disposals                  | ** ** | **127**                | ** ** | **—**           |       | (8 | ) | — |   |
| End of year                                           | ** ** | **753**                | ** ** | **—**           |       | 573 |   | — |   |
| **Reconciliation  of funded status**                  |       |                   |       |                 |       |   |   |   |   |
| Fair value of  plan assets                            | ** ** | **753**                | ** ** | **—**           |       | 573 |   | — |   |
| Accrued benefit  obligation                           | ** ** | **780**                | ** ** | **112**              |       | 659 |   | 96 |   |
| Funded status of  plan – deficit                 | ** ** | **(27**                | **)**      | **(112**             | **)**      | (86 | ) | (96 | ) |
| Unrecognized net  actuarial loss                      | ** ** | **30**                 | ** ** | **7**                |       | 83 |   | 16 |   |
| Unamortized  transitional balance                     | ** ** | **(2**                 | **)**      | **(1**               | **)**      | (2 | ) | — |   |
| Unamortized past  service costs                       | ** ** | **19**                 | ** ** | **3**                |       | 20 |   | 3 |   |
| Others                                                | ** ** | **2**                  | ** ** | **—**           |       | — |   | — |   |
| Accrued benefit asset  (liability) – End of year | ** ** | **22**                 | ** ** | **(103**             | **)**      | 15 |   | (77 | ) |

 

The net amount recognized on the balance sheet as atDecember 31 is detailed as follows:
| ** **                                                                               | ** ** | **2006**               | ** ** |
|------------------------------------------------------------------------------------------|------------|------------------------|------------|
| ** **                                                                               | ** ** | **Pension plans** | ** ** | **Other plans** | ** ** | **Total** | ** ** |
| Employee future  benefit asset, included in Other assets                                 | ** ** | **52**                 | ** ** | **—** | ** ** | **52** | ** ** |
| Employee future  benefit liability, included in Other liabilities                        | ** ** | **(4**                 | **)**      | **(103** | **)** | **(107** | **)** |
| Employee future  benefit liability, included in Accounts payable and accrued liabilities | ** ** | **(26**                | **)**      | **—** | ** ** | **(26** | **)** |
|                                                                                     | ** ** | **22**                 | ** ** | **(103** | **)** | **(81** | **)** |

 
| ** **                                                                               | ** ** | **2005**               | ** ** |
|------------------------------------------------------------------------------------------|------------|------------------------|------------|
| ** **                                                                               | ** ** | **Pension plans** | ** ** | **Other plans** | ** ** | **Total** | ** ** |
| Employee future  benefit asset, included in Other assets                                 |       | 46                     |       | — |   | 46 |   |
| Employee future  benefit liability, included in Other liabilities                        |       | (8                     | )          | (77 | ) | (85 | ) |
| Employee future  benefit liability, included in Accounts payable and accrued liabilities |       | (23                    | )          | — |   | (23 | ) |
|                                                                                     |       | 15                     |       | (77 | ) | (62 | ) |

 

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c) The following amounts relate to plans that are notfully funded as at December 31:
| ** **                  | ** ** | **2006**               | ** ** | **2005**             | ** ** |
|-----------------------------|------------|------------------------|------------|----------------------|------------|
| ** **                  | ** ** | **Pension plans** | ** ** | **Other plans** | ** ** | **Pension plans** | ** ** | **Other plans** | ** ** |
| Fair value of  plan assets  | ** ** | **287**                | ** ** | **—**           |       | 470 |   | — |   |
| Accrued benefit  obligation | ** ** | **(348**               | **)**      | **(112**             | **)**      | (569 | ) | (96 | ) |
| Funded deficit              | ** ** | **(61**                | **)**      | **(112**             | **)**      | (99 | ) | (96 | ) |

 

d) The main actuarial assumptions adopted in measuringthe accrued benefit obligation and expenses as at December 31 are asfollows:
| ** **                                                    | ** ** | **2006**               | ** ** | **2005**             | ** ** |
|---------------------------------------------------------------|------------|------------------------|------------|----------------------|------------|
| ** **                                                    | ** ** | **Pension plans** | ** ** | **Other plans** | ** ** | **Pension plans** | ** ** | **Other plans** | ** ** |
| **Accrued  benefit obligation as at December 31**        |       |                   |       |                 |       |   |   |   |   |
| Discount rate                                                 | ** ** | **5.25**               | **%**      | **5.25**             | **%**      | 5.00 | % | 5.00 | % |
| Rate of  compensation increase                                | ** ** | **2.00–5.00**     | **%**      | **2.25–3.50**   | **%**      | 2.00–4.25 | % | 2.25–4.25 | % |
| **Benefit  costs for years ended December 31**           |       |                   |       |                 |       |   |   |   |   |
| Discount rate                                                 | ** ** | **5.00**               | **%**      | **5.00**             | **%**      | 6.00 | % | 6.00 | % |
| Expected  long-term return on assets                          | ** ** | **7.00**               | **%**      | **—**           |       | 7.00 | % | — |   |
| Rate of  compensation increase                                | ** ** | **2.00–4.25**     | **%**      | **2.25–4.25**   | **%**      | 2.50–4.25 | % | 2.50–4.25 | % |
| **Assumed  health care cost trend rates at December 31** |       |                   |       |                 |       |   |   |   |   |
| Rate increase in  health care costs                           | ** ** | ** **             |       | **6.25–10.00**  | **%**      |   |   | 6.90–12.00 | % |
| Cost trend rates  decline to                                  | ** ** | ** **             |       | **4.30–5.00**   | **%**      |   |   | 4.70–8.00 | % |
| Year the rate should  stabilize                               | ** ** | ** **             |       | **2012**             |       |   |   | 2012 |   |

 

e) Assumed rate increases in health care cost have asignificant effect on the amounts reported for the health-care plans. A 1%change in assumed health-care cost trend rates would have the following effectsfor 2006:
| ** **                                   | ** ** | **Increase of 1%** | ** ** | **Decrease of 1%** | ** ** |
|----------------------------------------------|------------|------------------------------|------------|------------------------------|------------|
| Current service  cost and interest costs     |       | 0.9                          |       | (0.5                         | )          |
| Accrued benefit  obligation–End of year |       | 4.7                          |       | (3.8                         | )          |

 

f) The plan assets allocation and investment targetallocation as at December 31 are detailed as follows:
| ** **              | ** ** | **2006** | ** ** | **2005** | ** ** |
|-------------------------|------------|----------|------------|----------|------------|
| Plan assets  allocation |       |     |       |     |       |
| Money market            | ** ** | **11**   | **%**      | 3        | %          |
| Debt securities         | ** ** | **32**   | **%**      | 36       | %          |
| Equity  securities      | ** ** | **57**   | **%**      | 61       | %          |
| Total                   | ** ** | **100**  | **%**      | 100      | %          |

 

The plan assets do not include shares or debtsecurities of the Company. Annual benefit annuities, of an approximate value of$2 million, are pledged by insurance contracts established by the Company.
| ** **                    | ** ** | **2006** | ** ** | **2005** | ** ** |
|-------------------------------|------------|----------|------------|----------|------------|
| Investment  target allocation |       |     |       |     |       |
| Money market                  | ** ** | **11**   | **%**      | 3        | %          |
| Debt securities               | ** ** | **37**   | **%**      | 41       | %          |
| Equity  securities            | ** ** | **52**   | **%**      | 56       | %          |
| Total                         | ** ** | **100**  | **%**      | 100      | %          |

 

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Target allocation is established so as to maximizereturn while considering an acceptable level of risk in order to meet the planobligations on a long-term basis except for the assets related to Thunder Baythat are invested in cash and bonds due to a liquidation expected in 2007.

Investment objectives for the plan assets are thefollowing: optimizing return while considering an acceptable level of risk,maintaining an adequate diversification, controlling the risk according todifferent asset categories, and maintaining a longterm objective of return oninvestments.

Investment guidance is established for each investmentmanager. It includes parameters that must be followed by managers and presentscriteria for diversification, non-eligible assets and minimum quality ofinvestments as well as for return objectives. Unless indicated otherwise, themanagers cannot use any derivative product or invest more than 10% of theirassets in one particular security.

g) ESTIMATED FUTURE BENEFIT PAYMENTS Futurebenefit payments for definted benefit pension plans and other post-employmentbenefits, taking into consideration future participation, are estimated asfollows:
| ** ** | ** ** | **Pension plans** | ** ** | **Other plans** | ** ** |
|------------|------------|------------------------|------------|----------------------|------------|
| 2007       |       | 241                    |       | 4                    |       |
| 2008       |       | 33                     |       | 4                    |       |
| 2009       |       | 33                     |       | 4                    |       |
| 2010       |       | 35                     |       | 4                    |       |
| 2011       |       | 36                     |       | 5                    |       |
| 2012-2016  |       | 202                    |       | 27                   |       |

 

**18 Commitments and contingencies**

a) Future minimum payments under operating leases andother commercial commitments (mainly composed of raw materials, natural gas,steam and electricity) for the next years are as follows:
| ** **                                   | ** ** | ** **                | ** ** | **Other commercial** | ** ** |
|----------------------------------------------|------------|---------------------------|------------|---------------------------|------------|
| **Years ending December 31,** | ** ** | **Operating leases** | ** ** | **commitments**           | ** ** |
| 2007                                         |       | 42                        |       | 163                       |       |
| 2008                                         |       | 36                        |       | 96                        |       |
| 2009                                         |       | 32                        |       | 63                        |       |
| 2010                                         |       | 27                        |       | 45                        |       |
| 2011                                         |       | 20                        |       | 41                        |       |
| Thereafter                                   |       | 49                        |       | 76                        |       |

 

b) The Company has guaranteed the payment ofapproximately $3 million under operating leases held by third parties. TheCompany also guaranteed residual values at the expiration of lease contracts ofcertain equipment for an amount of $1 million. These guarantees are not likelyto be called and, therefore, no liability has been recognized in theconsolidated financial statements.

In addition, the Company has guaranteed the debt ofone of its joint ventures. The maximum amount guaranteed is US$3 million(2005—US$8.7 million). As at December 31, 2006, the debt of this jointventure, guaranteed by the Company, amounts to US$2.1 million (2005—US$5.5million). This guarantee is not likely to be called and, as a result, noliability has been recognized in the consolidated financial statements.

c) In the normal courseof operations, the Company is party to various legal actions and contingencies,mostly related to contract disputes, environmental and product warranty claims,and labour issues. While the final outcome with respect to legal actionsoutstanding or pending as at December 31, 2006 cannot be predicted withcertainty, it is management’s opinion that the settlements will not havematerial adverse impacts on the Company’s consolidated financial position,results of its operations or its cash flows.

d) An action was filed against the Company onOctober 4, 2004, in the Supreme Court of the State of New York, NiagaraCounty, by ServiceCore, Inc. alleging that the Company breached a Finder’sAgreement dated April 1999 regarding sale of gypsum board and seekingdamages in excess of US$9 million. The Company removed the action to the UnitedStates District Court for the Western District of New York and filed an answerdenying the allegations of breach of the Finder’s Agreement. The Company iscontesting the claim but is unable to determine the outcome at this time.

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e) On January 9, 2006, Cascades Fine Papers GroupInc., a subsidiary of the Company, Domtar Inc. and Unisource Canada Inc.pleaded guilty to two infractions under the Competition Act relating to thesale of carbonless paper sheets during the years 1999 and 2000 in the provincesof Quebec and Ontario. On January 10, 2006, the Company was informed thata class action based on the infractions has been filed against Cascades FinePapers Group Inc., Domtar Inc. and Unisource Canada Inc. before the QuebecSuperior Court claiming damages totaling $10 million. On January 12, 2006,the Company was informed that a second class action had been filed in the QuebecSuperior Court against the same defendants based on the infractions claimingdamages for an undetermined amount. On February 6, 2006, the Company wasinformed that a third class action based on the infractions was filed againstthe same defendants as well as Coast Paper Ltd. In the Ontario Superior Courtfor damages totaling $25 million. Cascades Fine Papers Group Inc. intends tovigorously defend itself against these claims. The Company is unable to predictthe outcome of these claims at this time.

f) Further to discussions with representatives of theOntario Ministry of the Environment (“MOE”)—Northern Region, the Company iscurrently working with them regarding its potential responsibility for anenvironmental impact identified at the Company’s Thunder Bay facility (the“Mill”). The MOE has requested that the Company look into a management siteplan relating to the sediment quality adjacent to the Mill’s lagoon. Severalmeetings have recently been held with the MOE and the other potentiallyresponsible party (“PRP”), and a study on the sediment quality and potentialremediation options has commenced. Although a loss is probable, it is notpossible at this time to estimate the Company’s obligation because of theuncertainty surrounding the extent of the environmental impact, the allocationamong the PRP, the potential remediation alternatives and the concurrence ofthe MOE.

**19  Financial instruments**

The Company uses a variety of derivative financialinstruments to limit their exposure to foreign currency and commodityfluctuations as well as changing interest rates but do not hold or issue suchfinancial instruments for trading purposes with the exception of certaininterest rate swap agreements as described below.

Currency risks

The Company is exposed to currency risks as a resultof its export of goods produced in Canada, the United States, France, Germany,Sweden and England. These risks are partially covered by purchases, debtservice and forward exchange contracts. 

The Company entered into various foreign exchangearrangements as follows:
| ** **                                                    | ** ** | **2006**                        | ** ** | **2005**                | ** ** | **2006**                                       | ** ** | **2005** | ** ** | **2006**   | ** ** | **2005** | ** ** |
|---------------------------------------------------------------|------------|---------------------------------|------------|-------------------------|------------|------------------------------------------------|------------|----------|------------|------------|------------|----------|------------|
| Foreign exchange forward contracts (sell US$ for CAS)    | ** ** | Weighted  average exchange rate | ** ** | Unrealized  gain (loss) | ** ** | Notional  amount (in millions of US$)          |       |
| 0 to 12 months                                                | ** ** | **1.1496**                      |       | 1.2411                  | ** ** | **(0.4**                                       | **)**      | 1.4      | ** ** | **44**     |       | 17       |       |
| 13 to 24 months                                               |       | —                          |       | 1.1697                  | ** ** | **—**                                     |       | —   | ** ** | **—** |       | 2        |       |
| Foreign exchange forward contracts (buy US$ for CAS)     |       | Weighted  average exchange rate | ** ** | Unrealized  gain (loss) | ** ** | Notional  amount (in millions of US$)          |       |
| 0 to 12 months                                                |       | —                          |       | 1.1644                  | ** ** | **—**                                     |       | —   | ** ** | **—** |       | 20       |       |
| Currency option instruments                                   | ** ** | Strike  rate                    | ** ** | Unrealized  gain (loss) | ** ** | Notional  amount (in millions of US$)          |       |
| 0 to 12 months                                                | ** ** | **1.10 to 1.27**                |       | 1.17 to 1.30            | ** ** | **(0.3**                                       | **)**      | 0.4      | ** ** | **29**     |       | 81       |       |
| 13 to 24 months                                               |       | —                          |       | 1.23 to 1.30            | ** ** | **—**                                     |       | 0.2      | ** ** | **—** |       | 3        |       |
| Foreign exchange forward contracts (sell US$ for €) | ** ** | Weighted  average exchange rate | ** ** | Unrealized  gain (loss) |       | Notional  amount (in millions of US$)          |       |
| 0 to 12 months                                                | ** ** | **0.7874**                      |       | 0.8267                  | ** ** | **—**                                     |       | (0.1     | )          | **1**      |       | 4        |       |
| Foreign exchange forward contracts (sell GBP for SEK)         | ** ** | Weighted  average exchange rate | ** ** | Unrealized  gain (loss) |       | Notional  amount (in millions of GBP)          |       |
| 0 to 12 months                                                | ** ** | **13.5991**                     |       | 13.9285                 | ** ** | **0.1**                                        |       | (0.3     | )          | **2**      |       | 5        |       |
| 13 to 24 months                                               |       | —                          |       | 13.8260                 | ** ** | **—**                                     |       | —   | ** ** | **—** |       | 1        |       |
| Foreign exchange forward contracts (sell € for SEK)      | ** ** | Weighted  average exchange rate | ** ** | Unrealized  gain (loss) |       | Notional  amount (in millions of  €) |       |
| 0 to 12 months                                                | ** ** | **9.2443**                      |       | 9.5599                  | ** ** | **0.1**                                        |       | (0.1     | )          | **2**      |       | 5        |       |
| 13 to 24 months                                               |       | —                          |       | 9.5275                  | ** ** | **—**                                     |       | —   | ** ** | **—** |       | 1        |       |
| Foreign exchange forward contracts (sell GBP for €)      | ** ** | Weighted  average exchange rate | ** ** | Unrealized  gain (loss) | ** ** | Notional  amount (in millions of GBP)          |       |
| 0 to 12 months                                                | ** ** | **1.4606**                      |       | 1.4473                  | ** ** | **(0.1**                                       | **)**      | —   | ** ** | **5**      |       | 6        |       |

 

Currency options arecontracts whereby the Company has the right, but not the obligation, to sellU.S. dollars at the strike rate if the U.S. dollar trades below that rate. Inaccordance with the contracts, the Company has the obligation to sell U.S.dollars at the strike rate if the U.S. dollar trades above a specific rate.

The fair value of the foreign exchange arrangementgenerally reflects the estimated amounts the Company would have received orpaid to settle the contracts at year-end.

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Interest rate risks

As at December 31, 2006,approximately 34% (2005 — 26%) of the Company’s long-term debt was at variablerates.

In addition, the Companyholds certain interest rate swapagreements not designated as hedges. These agreements, maturing from 2008 to 2012, have beencontracted to fix interest at aweighted average rate of 8.23% on a notional amount of US$5.2 million. As at December 31, 2006, these agreements are recorded as liabilities attheir fair value of $0.4 million(2005 — $0.4 million).

In April 2004, the Companyentered into interest rate swapsmaturing in 2013. These contracts are designated as hedges of the change in fair value of a portion of theCompany’s long-term debt.Accordingly, the interest rate went from a fixed rate of 6.75% to an average floating rate paid in2006 of 7.50% (2005 — 6.23%) fora notional amount of US$50 million. As at December 31, 2006, the fair value ofthese instruments represented an unrealized loss of $2.4 million (2005 —unrealized gain of $1.1 million).

Credit risks

The Company is exposed tocredit risk on the accounts receivable from its customers. In order to reducethis risk, the Company’s credit policies include the analysis of the financialposition of its customers and the regular review of their credit limits. Inaddition, the Company believes there is no particular concentration of creditrisks due to the geographic diversity of customers and the procedures for themanagement of commercial risks. Derivative financial instruments include anelement of credit risk should the counterparty be unable to meet its obligations.The Company reduces this risk by dealing with creditworthy financialinstitutions.

Commodity price risk

The Company enteredinto various derivative financial instruments whereby it sets the price fornotional quantities of old corrugated containers, electricity, natural gas andunbleached 42-lb. kraft linerboard. In 2005 and 2006, gains and losses arisingfrom electricity and natural gas contracts were applied to earnings only when theywere realized, whereas all other types of contracts were accounted for at fairvalue. The fair value of these contracts represented unrealized gains (losses) asfollows:
| ** **                | ** ** | **2006**            | ** ** |
|---------------------------|------------|---------------------|------------|
| ** **                | ** ** | ** **          | ** ** | ** ** | ** ** | **Unrealized** | ** ** |
| ** **                | ** ** | **Quantity**        | ** ** | **Maturity** | ** ** | **gains (losses)** | ** ** |
| Old corrugated containers | ** ** | **307,500 s.t.**    | ** ** | **2007 to 2008** | ** ** | **0.8** | ** ** |
| Electricity               | ** ** | **16,529 MWh**      | ** ** | **2007** | ** ** | **0.5** | ** ** |
| Natural gas               |       |                |       |   |   |   |   |
| Canadian  portfolio       | ** ** | **1,095,000 GJ**    | ** ** | **2007 to 2010** | ** ** | **1.8** | ** ** |
| U.S. porfolio             | ** ** | **5,153,900 MMBtu** | ** ** | **2007 to 2011** | ** ** | **(2.4** | **)** |

 

With the closure of the RedRock facility in 2006, a portion of the Company’s electricity contract does notmeet the requirements for hedge accounting any longer. As a result, the Companyhas recorded that contract at fair value. The contract, expiring in 2007, has afair market value of $0.8 million.
| ** **                         | ** ** | **2005**        | ** ** |
|------------------------------------|------------|-----------------|------------|
| ** **                         | ** ** | ** **      | ** ** | ** ** | ** ** | **Unrealized** | ** ** |
| ** **                         | ** ** | **Quantity**    | ** ** | **Maturity** | ** ** | **gains (losses)** | ** ** |
| Old corrugated  containers         |       | 596,500 s.t.    |       | 2006 to 2008 |   | (2.3 | ) |
| Electricity                        |       | 135,571 MWh     |       | 2006 to 2007 |   | 4.6 |   |
| Natural gas                        |       |            |       |   |   |   |   |
| Canadian  portfolio                |       | 7,368,820 GJ    |       | 2006 to 2010 |   | 0.8 |   |
| U.S. porfolio                      |       | 3,315,000 MMBtu |       | 2006 to 2010 |   | 8.0 |   |
| Unbleached 42-lb. kraft linerboard |       | 10,000 s.t.     |       | 2006 |   | (0.2 | ) |

 

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**20  Cumulativetranslation adjustments**
| ** **                                                                                                                                   | ** ** | **2006**   | ** ** | **2005** | ** ** | **2004** | ** ** |
|----------------------------------------------------------------------------------------------------------------------------------------------|------------|------------|------------|----------|------------|----------|------------|
| **Balance–Beginning  of year**                                                                                                          | ** ** | **(36**    | **)**      | 11       |       | 14       |       |
| Effect of changes in exchange rates during the year:                                                                                         |       |       |       |     |       |     |       |
| On net investment in self-sustaining foreign  subsidiaries                                                                                   | ** ** | **23**     |       | (63      | )          | (36      | )          |
| On certain long-term debt denominated in foreign  currency designated as a hedge of net investments in self-sustaining foreign  subsidiaries | ** ** | **1**      |       | 21       |       | 41       |       |
| Future income taxes on designated long-term debt                                                                                             | ** ** | **—** |       | (4       | )          | (8       | )          |
| Others                                                                                                                                       | ** ** | **3**      |       | (1       | )          | —   |       |
| **Balance–End of year**                                                                                                                 | ** ** | **(9**     | **)**      | (36      | )          | 11       |       |

 

**21  Relatedparty transactions**

The Company entered into thefollowing transactions with related parties:
| ** **                                              | ** ** | **2006** | ** ** | **2005** | ** ** | **2004** | ** ** |
|---------------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| Joint ventures(1)                                       |       |     |       |     |       |     |       |
| Sales                                                   | ** ** | **33**   |       | 33       |       | 25       |       |
| Revenue from services                                   | ** ** | **12**   |       | 13       |       | 12       |       |
| Purchases                                               | ** ** | **29**   |       | 23       |       | 27       |       |
| Significantly  influenced companies                     |       |     |       |     |       |     |       |
| Sales                                                   | ** ** | **17**   |       | 16       |       | 11       |       |
| Purchases                                               | ** ** | **2**    |       | 7        |       | 15       |       |
| Entity  controlled by a related director of the Company |       |     |       |     |       |     |       |
| Purchases                                               | ** ** | **7**    |       | 7        |       | 6        |       |

 

These transactions occurredin the normal course of operations and are measured at the exchange amount,which is the amount of consideration established and agreed to by the relatedparties.

The balance sheets as atDecember 31 included the following balances with related parties:
| ** **                                              | ** ** | **2006**   | ** ** | **2005**   | ** ** |
|---------------------------------------------------------|------------|------------|------------|------------|------------|
| Joint ventures(1)                                       | ** ** | ** ** | ** ** | ** ** | ** ** |
| Accounts receivable                                     | ** ** | **2**      |       | 6          |       |
| Accounts payable                                        | ** ** | **2**      |       | 6          |       |
| Significantly  influenced companies                     |       |       |       |       |       |
| Accounts receivable                                     | ** ** | **4**      |       | 3          |       |
| Entity  controlled by a related director of the Company |       |       |       |       |       |
| Accounts payable                                        | ** ** | **1**      |       | 1          |       |

 

----

(1)   Represent the portion of transactions orbalances not eliminated upon proportionate consolidation of the joint ventures.

67

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**22  Interestsin joint ventures**

The interests in jointventures include 50% of the results andcash flows information of Norampac until December 29, 2006, the date of acquisition of the remaining 50%by the Company.

The Norampac balance sheetinformation is not included inthe following table as it is no longer a joint venture.

The major components of theinterests in joint ventures inthe consolidated financial statements are as follows:
| ** **                                             | ** ** | **2006**   | ** ** | **2005**   | ** ** | **2004**   | ** ** |
|--------------------------------------------------------|------------|------------|------------|------------|------------|------------|------------|
| Consolidated  balance sheets                           | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Current assets                                         | ** ** | **33**     |       | 224        |       |       | ** ** |
| Long-term assets                                       | ** ** | **33**     |       | 486        |       |       |       |
| Current liabilities                                    | ** ** | **9**      |       | 101        |       |       |       |
| Long-term debt, net                                    | ** ** | **2**      |       | 212        |       |       |       |
| Cash and cash equivalents at end of year               | ** ** | **5**      |       | 18         |       |       |       |
| Total assets                                           | ** ** | **66**     |       | 710        |       |       |       |
| Total debt(1)                                          | ** ** | **4**      |       | 222        |       |       |       |
| Consolidated  statements of earnings                   |       |       |       |       |       |       |       |
| Sales                                                  | ** ** | **757**    |       | 758        |       | 866        |       |
| Depreciation and amortization                          | ** ** | **33**     |       | 35         |       | 41         |       |
| Operating income                                       | ** ** | **89**     |       | 57         |       | 80         |       |
| Financial expenses                                     | ** ** | **14**     |       | 13         |       | 13         |       |
| Net earnings                                           | ** ** | **25**     |       | 14         |       | 51         |       |
| Consolidated  statements of cash flows                 |       |       |       |       |       |       |       |
| Operating activities                                   | ** ** | **60**     |       | 44         |       | 55         |       |
| Investing activities                                   | ** ** | **(26**    | **)**      | (68        | )          | (66        | )          |
| Financing activities                                   | ** ** | **(30**    | **)**      | 35         |       | 11         |       |
| Additional  information                                |       |       |       |       |       |       |       |
| Dividends received  by the Company from joint ventures | ** ** | **22**     |       | 33         |       | 19         |       |

 

----

(1)   Includes bank loans and advances, currentportion of long-term debt, and long-term debt.

**23  Subsequentevent**

On January 25, 2007, theCompany announced the sale of its40% interest in GSD Packaging, LLC, a U.S. food pail manufacturing company, to Rock-Tenn Company. Theproceeds of this transaction,which amount to US$32 million, will be used to reduce debt.

**24 Summaryof differences between Canadian and United States generally accepted accountingprinciples**

The consolidated financialstatements have been preparedin accordance with Canadian GAAP which differs in certain respects from U.S. GAAP. Such differences, asthey relate to the Company, aresummarized below.

New accounting policiesunder U.S. GAAP

a) Effective December 31,2006, the Company adopted theSFAS 158, *“Employers’ Accounting forDefined Benefit Pension**and Other Postretirement Plans–an amendment of FASBStatements**No.87, 88, 106, and 132(R)”*.This standard requires and employerto i) recognize the overfunded or underfunded status of a defined benefit plan as an asset orliability with changes in thatfunded status recognized through comprehensive income; and ii) measure the funded status of a plan asof the year-end date. The impactof adopting SFAS 158 as of December 31, 2006, is summarized in the table below. In accordance with the transition provision of the standard,prior period financials statementswere not restated.
| ** **                              | ** ** | **Before application of** | ** ** | **Incremental effect of** | ** ** | **After application of** | ** ** |
|-----------------------------------------|------------|-------------------------------------|------------|-------------------------------------|------------|------------------------------------|------------|
| ** **                              | ** ** | **SFAS 158**                   | ** ** | **applying SFAS 158**     | ** ** | **SFAS 158**                  | ** ** |
| Other assets and  goodwill              |       | 630                                 |       | (13                                 | )          | 617                                |       |
| Other  liabilities                      |       | 165                                 |       | 21                                  |       | 186                                |       |
| Future income  tax                      |       | 292                                 |       | (12                                 | )          | 280                                |       |
| Accumulated other  comprehensive income |       | (18                                 | )          | (22                                 | )          | (40                                | )          |

 

Under U.S. GAAP, prior to theadoption of SFAS 158, aminimumpension liability adjustment was recorded for plans where the accumulated benefit obligationexceeds the fair value of planassets. The excess of its liability over the intangible asset, which can also be recorded for theplan, is recorded in othercomprehensive income in shareholders’ equity.

68

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b) Effective January 1, 2006,the Company adopted SFAS 123(Revised) which amends SFAS 123, *“Accountingfor stock-based**compensation”*and supersedes SFAS 148, *“Accountingfor stock-based**compensation — transition and Disclosure — an amendment of**SFAS 123”*. The main amendments relate to therequirement to use a fair valuemethod to record stock-based compensation and to measurement methodology to evaluate equity instruments. The application of this standard had nomaterial impact on the Company’sfinancial position or results of operation. The total intrinsic value of the Company’s option as atDecember 31, 2006 are as follows:
| Outstanding |   | $ | 4.9 million |   |
|-------------|--------|---|-------------|--------|
| Exercisable |   | $ | 3.9 million |   |

 

The total intrinsic value ofthe Company’s exercised option for the year ended December 31, 2006 amounted to$1.2 million (2005 — nil; 2004 — $1.1 million).

The stock-based compensationcost related to the nonvested options not yet recognized amounts to $1.8million as at December 31, 2006.

c) Effective January 1, 2004,the Company adopted FIN 46,*“Consolidation of Variable Interest Entities”*. The primary objective of this interpretation is to provide guidance on the identification of and financial reporting forentities over which control isachieved through means other than voting rights; such entities are known as variable interest entities (VIEs). The adoption of this standard had no materialimpact on the Company’s financialposition or results of operations.

**Reconciliation of net earnings(loss), shareholders’ equity and balance sheet**

d) The following summary setsout the material adjustments to the Company’s reported net earnings (loss),shareholders’ equity and balance sheet which would be made in order to reconcileto U.S. GAAP. It also sets out a statement of changes in shareholders’ equityunder U.S. GAAP.

**Reconciliationof net earnings (loss)**
| ** **                                                                                          | ** ** | **Note**   | ** ** | **2006**  | ** ** | **2005** | ** ** | **2004** | ** ** |
|-----------------------------------------------------------------------------------------------------|------------|------------|------------|-----------|------------|----------|------------|----------|------------|
| Net earnings  (loss) under Canadian GAAP                                                            | ** ** | ** ** |       | **3**     |       | (97      | )          | 23       |       |
| U.S. GAAP  adjustments:                                                                             |       |       |       |      |       |     |       |     |       |
| Start-up costs                                                                                      |       | e)         | ** ** | **1**     |       | —   |       | (2       | )          |
| Gain realized on formation of Norampac                                                              |       | f)         | ** ** | **(5**    | **)**      | (4       | )          | (5       | )          |
| Unrealized losses arising from foreign exchange  forward contracts                                  |       | g)         | ** ** | **(2**    | **)**      | (4       | )          | (2       | )          |
| Unrealized losses arising from change in fair values  of commodity derivative financial instruments |       | h)         | ** ** | **(3**    | **)**      | —   |       | (1       | )          |
| Employee future benefits                                                                            |       | i)         | ** ** | **(3**    | **)**      | (3       | )          | 1        |       |
| Excess of redemption price of Class B preferred  shares on their paid-up capital                    |       | t)         | ** ** | **(1**    | **)**      | —   |       | (1       | )          |
| Tax effect on above adjustments                                                                     | ** ** | ** ** |       | **6**     |       | 6        |       | 3        |       |
| Net earnings (loss)  under U.S. GAAP                                                                | ** ** | ** ** |       | **(4**    | **)**      | (102     | )          | 16       |       |
| Net earnings (loss) under U.S. GAAP from continuing  operations                                     | ** ** | ** ** |       | **1**     |       | (28      | )          | 23       |       |
| Net loss under U.S. GAAP from discontinued  operations                                              | ** ** | ** ** |       | **(5**    | **)**      | (74      | )          | (7       | )          |
|                                                                                                | ** ** | ** ** |       | **(4**    | **)**      | (102     | )          | 16       |       |
| Basic net  earnings (loss) under U.S. GAAP from continuing operations per common share              | ** ** | ** ** |       | **0.01**  |       | (0.35    | )          | 0.29     |       |
| Basic and diluted net  earnings (loss) under U.S. GAAP per common share                             | ** ** | ** ** |       | **(0.05** | **)**      | (1.27    | )          | 0.20     |       |

 

69

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**Statement of changes in shareholders’ equity under U.S. GAAP**
| ** **                                                                                                                                     | ** ** | **2006**                       | ** ** | **2005**   | ** ** | **2004**                       | ** ** |
|------------------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------------------|------------|------------|------------|--------------------------------|------------|
| ** **                                                                                                                                     | ** ** | **Number of shares** | ** ** | **$**      | ** ** | **Number of shares** | ** ** | **$** | ** ** | **Number of shares** | ** ** | **$** | ** ** |
| Common stock                                                                                                                                   | ** ** | ** **                     | ** ** | ** ** | ** ** | ** **                     | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Balance – beginning of year                                                                                                               | ** ** | **80,818,540**                 | ** ** | **259**    |       | 81,361,580                     |       | 261 |   | 81,731,387 |   | 262 |   |
| Shares issued                                                                                                                                  | ** ** | **18,868,585**                 | ** ** | **250**    |       | —                         |       | — |   | — |   | — |   |
| Shares issued on exercise of stock options                                                                                                     | ** ** | **131,229**                    | ** ** | **2**      |       | 12,560                         |       | — |   | 133,893 |   | 1 |   |
| Redemption of common shares                                                                                                                    | ** ** | **(284,700**                   | **)**      | **(1**     | **)**      | (555,600                       | )          | (2 | ) | (503,700 | ) | (2 | ) |
| Share issue costs, net of related income taxes                                                                                                 | ** ** | **—**                     | ** ** | **(7**     | **)**      | —                         |       | — |   | — |   | — |   |
| Balance – end of year                                                                                                                     | ** ** | **99,533,654**                 | ** ** | **503**    |       | 80,818,540                     |       | 259 |   | 81,361,580 |   | 261 |   |
| Adjustment  relating to stock options                                                                                                          | ** ** | ** **                     | ** ** | ** ** |       |                           |       |   |   |   |   |   |   |
| Balance – beginning of year                                                                                                               | ** ** | ** **                     | ** ** | **8**      |       |                           |       | 7 |   |   |   | 4 |   |
| Adjustment of the year                                                                                                                         | ** ** | ** **                     | ** ** | **2**      |       |                           |       | 1 |   |   |   | 3 |   |
| Balance – end of year                                                                                                                     | ** ** | ** **                     | ** ** | **10**     |       |                           |       | 8 |   |   |   | 7 |   |
| Retained earnings                                                                                                                              | ** ** | ** **                     | ** ** | ** ** |       |                           |       |   |   |   |   |   |   |
| Balance – beginning of year                                                                                                               | ** ** | ** **                     | ** ** | **711**    |       |                           |       | 830 |   |   |   | 832 |   |
| Net earnings (loss) for the year                                                                                                               | ** ** | ** **                     | ** ** | **(4**     | **)**      |                           |       | (102 | ) |   |   | 16 |   |
| Dividend on common shares                                                                                                                      | ** ** | ** **                     | ** ** | **(13**    | **)**      |                           |       | (13 | ) |   |   | (13 | ) |
| Excess of common share redemption price over their  paid-up capital                                                                            | ** ** | ** **                     | ** ** | **(3**     | **)**      |                           |       | (4 | ) |   |   | (5 | ) |
| Balance – end of year                                                                                                                     | ** ** | ** **                     | ** ** | **691**    |       |                           |       | 711 |   |   |   | 830 |   |
| Accumulated other  comprehensive income                                                                                                        | ** ** | ** **                     | ** ** | ** ** | ** ** |                           |       |   |   |   |   |   |   |
| Balance – beginning of year                                                                                                               | ** ** | ** **                     | ** ** | **(57**    | **)**      |                           |       | 2 |   |   |   | 4 |   |
| Annual changes – net of related taxes                                                                                                     | ** ** | ** **                     | ** ** | ** ** |       |                           |       |   |   |   |   |   |   |
| Foreign currency translation                                                                                                                   | ** ** | ** **                     | ** ** | **27**     |       |                           |       | (48 | ) |   |   | (3 | ) |
| Minimum pension liability                                                                                                                      | ** ** | ** **                     | ** ** | **13**     |       |                           |       | (8 | ) |   |   | (4 | ) |
| Unrealized gains (loss) arising from foreign exchange  forward contracts designated as hedges                                                  | ** ** | ** **                     | ** ** | **(1**     | **)**      |                           |       | (4 | ) |   |   | 5 |   |
| Unrealized gains arising from commodity derivative  financial instruments designated as hedges                                                 | ** ** | ** **                     | ** ** | **—** |       |                           |       | 1 |   |   |   | — |   |
| Unrecognized actuarial gains and losses and past  service cost on defined benefit pension and other benefit plan, net related  of income taxes | ** ** | ** **                     | ** ** | **(22**    | **)**      |                           |       | — |   |   |   | — |   |
| Balance – end of  year                                                                                                                    | ** ** | ** **                     | ** ** | **(40**    | **)**      |                           |       | (57 | ) |   |   | 2 |   |
| Rounding                                                                                                                                       | ** ** | ** **                     | ** ** | **2**      |       |                           |       | — |   |   |   | 1 |   |
| Shareholders’ equity –  End of year                                                                                                  | ** ** | ** **                     | ** ** | **1,166**  |       |                           |       | 921 |   |   |   | 1,101 |   |

 

**Reconciliation of shareholders’ equity**
| ** **                                                                                                                                     | ** ** | **Note**   | ** ** | **2006**   | ** ** | **2005** | ** ** | **2004** | ** ** |
|------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------|------------|------------|------------|----------|------------|----------|------------|
| Shareholders’  equity under Canadian GAAP                                                                                                 | ** ** | ** ** |       | **1,157**  |       | 897      |       | 1,059    |       |
| U.S. GAAP  adjustments:                                                                                                                        |       |       |       |       |       |     |       |     |       |
| Start-up costs                                                                                                                                 |       | e)         | ** ** | **(6**     | **)**      | (7       | )          | (7       | )          |
| Gain realized on formation of Norampac                                                                                                         |       | f)         | ** ** | **48**     |       | 53       |       | 57       |       |
| Unrealized gains (losses) arising from foreign  exchange forward contracts                                                                     |       | g)         | ** ** | **(2**     | **)**      | 1        |       | 12       |       |
| Unrealized gains arising from change in fair values  of commodity derivative financial instruments                                             |       | h)         | ** ** | **1**      |       | 5        |       | 3        |       |
| Employee future benefits                                                                                                                       |       | i)         | ** ** | **(15**    | **)**      | (12      | )          | (9       | )          |
| Minimum pension liability                                                                                                                      |       | a)         | ** ** | **—** |       | (32      | )          | (21      | )          |
| Tax effect on above adjustments                                                                                                                | ** ** | ** ** |       | **10**     |       | 7        |       | (2       | )          |
| Unrecognized actuarial gains and losses and past  service cost on defined benefit pension and other benefit plan, net of  related income taxes |       | a)         | ** ** | **(35**    | **)**      | —   |       | —   |       |
| Excess of redemption price of Class B preferred  shares on their paid-up capital                                                               |       | t)         | ** ** | **8**      |       | 9        |       | 9        |       |
| Shareholders’ equity  under U.S. GAAP                                                                                                     | ** ** | ** ** |       | **1,166**  |       | 921      |       | 1,101    |       |

 

70

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**Reconciliation of balance sheet**
| ** **                     | ** ** | ** **                      | ** ** | **2006**               | ** ** | **2005**           | ** ** |
|--------------------------------|------------|---------------------------------|------------|------------------------|------------|--------------------|------------|
| ** **                     | ** ** | **Note**                        | ** ** | **Canadian GAAP** | ** ** | **U.S. GAAP** | ** ** | **Canadian GAAP** | ** ** | **U.S. GAAP** | ** ** |
| Property, plant  and equipment |       | f) j) and t)                    | ** ** | **2,063**              | ** ** | **2,098**          |       | 1,562 |   | 1,601 |   |
| Other assets and  goodwill     |       | a) e) to i) and q)              | ** ** | **616**                | ** ** | **617**            |       | 359 |   | 376 |   |
| Other  liabilities             |       | a) e) f) g) h) i) j) t)  and v) | ** ** | **439**                | ** ** | **466**            |       | 265 |   | 297 |   |
| Shareholders’ equity      |       | a) e) to j) t) and v)           | ** ** | **1,157**              | ** ** | **1,166**          |       | 897 |   | 921 |   |

 

The amounts shown in the abovetable include joint ventures accounted for by the proportionate consolidationmethod, as indicated under p), in accordance with both Canadian and U.S. GAAP. 

e) Under Canadian GAAP, start-upcosts are deferred andamortizedover a period not exceeding five years. Under U.S. GAAP, start-up costs are accounted for underStatement of Position (“SOP”) No.98-5, *“Reporting on the Costs of Start-Up**Activities”*, and are included in the statement ofearnings in the period they areincurred.

f) On December 30, 1997, theCompany and Domtar Inc.mergedtheir respective containerboard and corrugated packaging operations to form Norampac Inc., a 50-50joint venture. Under CanadianGAAP, a portion of the gain realized on the transaction of an original amount of approximately $58million, net of related incometaxes, was recorded against property, plant and equipment and goodwill. Under U.S. GAAP, this gain would have been recognized in earnings on December30, 1997.  

In addition, under U.S. GAAP,additional liabilities wouldhave been included in the allocation of the purchase price at the date of the transaction with respect toemployee future benefits with acorresponding adjustment to goodwill.

g) Under Canadian GAAP, gainsand losses arising fromforeignexchange forward contracts used to hedge anticipated sales, purchases or interest are charged toearnings as an adjustment ofsales, cost of sales or financial expenses when the underlying sale, purchase or interest is recorded. Under U.S. GAAP, the foreign exchange forwardcontracts concluded beforeJanuary 1, 2004 are not designated as hedges as defined in SFAS 133, *“Accountingfor Derivative Instruments and Hedging**Activities”*; therefore, the unrealized gains and lossesfrom these contracts are chargedto earnings as they arise. Under U.S.GAAP, foreign exchange forward contracts entered into after January 1, 2004 are designated ashedges, as defined by SFAS 133.

h) Under Canadian GAAP, gainsand losses arising from swapcommodity contracts designated as hedges are charged to earnings only when realized. Under U.S. GAAP,the unrealized gains and lossesarising from these contracts, which do not meet requirements of hedging as defined in SFAS 133, are charged to earnings. For contracts initiatedprior to January 1, 2004, theCompany had elected to not designate these contracts as hedging instruments for U.S. GAAP reporting purpose. Accordingly, those contracts aremarked to market and theresulting unrealized gains and losses are recorded to earnings.

i) Since the adoption of CICA3461, *“Employee Future Benefits”*,on January 1, 2000, the treatmentof pension costs is not materially differentfrom U.S. GAAP. The remaining adjustments result from the amortization of actuarial losses and gains which arose prior to January 1, 2000.

j) On December 31, 2000, theCompany acquired shares heldby non-controlling shareholders in three of its subsidiaries (the “privatized subsidiaries”) in exchangefor common shares of the Company.Under Canadian GAAP, the fair value of $6.85 attributed to the shares issued represents the quoted market value of the Company’s shares at thedate of privatization. Under U.S.GAAP, the fair value attributed to the shares issued would have been $6.67 which represents the quoted market value of the Company’s shares during areasonable period before andafter the date the transaction was agreed upon and announced. Since the excess of the net book value of the non-controlling interests over theirpurchase price has been recordedunder Canadian GAAP as a decrease of property, plant and equipment and future income taxliabilities, the adjustment resultingfrom a different measurement date as stated above would affect these accounts accordingly.

71

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k) Comprehensive income(loss)
| ** **                                                                                                                               | ** ** | **2006**   | ** ** | **2005** | ** ** | **2004** | ** ** |
|------------------------------------------------------------------------------------------------------------------------------------------|------------|------------|------------|----------|------------|----------|------------|
| Net earnings  (loss) under U.S. GAAP                                                                                                     | ** ** | **(4**     | **)**      | (102     | )          | 16       |       |
| Foreign currency translation                                                                                                             | ** ** | **27**     |       | (48      | )          | (3       | )          |
| Minimum pension liability adjustment, net of related  income taxes(1)                                                                    | ** ** | **13**     |       | (8       | )          | (4       | )          |
| Unrealized gains (losses) arising from foreign  exchange forward contracts designated as hedges, net of related income taxes(2)          | ** ** | **(1**     | **)**      | (4       | )          | 5        |       |
| Unrealized gains (losses) arising from commodity  derivative financial instruments designated as hedges, net of related income  taxes(3) | ** ** | **—** |       | 1        |       | —   |       |
| Comprehensive income  (loss) under U.S. GAAP                                                                                             | ** ** | **35**     |       | (161     | )          | 14       |       |

 

----

(1)          The minimum pension liability adjustment represents $13.0 million, $7.5million and $4.4 million for the years ended December 31, 2006, 2005 and 2004respectively, net of related income taxes of $6.6 million, $3.8 million and $1.5million for the years ended December 31, 2006, 2005 and 2004 respectively.

(2)          The unrealized exchange losses of $1.0 million for the year endedDecember 31, 2006 (2005 - unrealized losses of $4.2 million; 2004 - unrealizedgains of $5.1 million) is net of related income taxes of $0.5 million (2005 -$2.1 million; 2004 - $2.7 million).

(3)          The unrealized losses of $0.5 million for the year ended December 31,2006 (2005 - unrealized gains of $1.1 million) is net of related income taxesof $0.3 million (2005 - $0.7 million).

l) Accumulated othercomprehensive income (loss)
| ** **                                                                                                                                     | ** ** | **2006**   | ** ** | **2005** | ** ** |
|------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------|------------|----------|------------|
| Cumulative  translation adjustments                                                                                                            | ** ** | **(10**    | **)**      | (37      | )          |
| Cumulative  minimum pension liability adjustments, net of related income taxes                                                                 | ** ** | **—** |       | (22      | )          |
| Cumulative  unrealized gains arising from foreign exchange forward contracts designated  as hedges, net of related income taxes                | ** ** | **—** |       | 1        |       |
| Cumulative  unrealized gains arising from commodity derivative financial instruments  designated as hedges, net of related income taxes        | ** ** | **1**      |       | 1        |       |
| Unrecognized  actuarial gains and losses and past service cost on defined benefit pension  and other benefit plan, net of related income taxes | ** ** | **(31**    | **)**      | —   |       |
|                                                                                                                                           | ** ** | **(40**    | **)**      | (57      | )          |

 

m) For pension plans wherethe accumulated benefit obligation (“ABO”) exceeds the fair value of planassets under U.S. GAAP, the projected benefit obligation (“PBO”), ABO and fairvalue of plan assets are as follows:
| ** **                 | ** ** | **2006** | ** ** | **2005** | ** ** |
|----------------------------|------------|----------|------------|----------|------------|
| PBO                        | ** ** | **340**  |       | 424      |       |
| ABO                        | ** ** | **328**  |       | 408      |       |
| Fair value of plan  assets | ** ** | **279**  |       | 335      |       |

 

72

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n) The following disclosureis required by U.S. GAAP. However, the information presented is based onamounts published according to Canadian GAAP.
| ** **                                                                                                                      | ** ** | **2006 ** | ** ** |
|---------------------------------------------------------------------------------------------------------------------------------|------------|----------------|------------|
| ** **                                                                                                                      | ** ** | **Canada**     | ** ** | **Other countries** | ** ** | **Total** | ** ** |
| Net earnings  (loss) from continuing operations before income taxes and share of results of  significantly influenced companies | ** ** | **(77**        | **)**      | **76** | ** ** | **(1** | **)** |
| Provision for  (recovery of) income taxes                                                                                       |       |           |       |   |   |   |   |
| Current                                                                                                                         | ** ** | **6**          | ** ** | **28** | ** ** | **34** | ** ** |
| Future                                                                                                                          | ** ** | **(26**        | **)**      | **(6** | **)** | **(32** | **)** |
| Future income  taxes resulting from a decrease in tax rates                                                                     | ** ** | **(3**         | **)**      | **—** | ** ** | **(3** | **)** |
|                                                                                                                            | ** ** | **(23**        | **)**      | **22** | ** ** | **(1** | **)** |
| Net earnings (loss)  from continuing operations before share of results of significantly  influenced companies                  | ** ** | **(54**        | **)**      | **54** | ** ** | **—** | ** ** |

 
| ** **                                                                                                                      | ** ** | **2005 **   | ** ** |
|---------------------------------------------------------------------------------------------------------------------------------|------------|------------------|------------|
| ** **                                                                                                                      | ** ** | **Canada ** | ** ** | **Other countries ** | ** ** | **Total ** | ** ** |
| Net earnings  (loss) from continuing operations before income taxes and share of results of  significantly influenced companies |       | (90              | )          | 51 |   | (39 | ) |
| Provision for  (recovery of) income taxes                                                                                       |       |             |       |   |   |   |   |
| Current                                                                                                                         |       | —           |       | 21 |   | 21 |   |
| Future                                                                                                                          |       | (30              | )          | (4 | ) | (34 | ) |
| Future income taxes resulting from an increase in  tax rates                                                                    |       | 4                |       | — |   | 4 |   |
|                                                                                                                            |       | (26              | )          | 17 |   | (9 | ) |
| Net earnings (loss)  from continuing operations before share of results of significantly  influenced companies                  |       | (64              | )          | 34 |   | (30 | ) |

 
| ** **                                                                                                                      | ** ** | **2004**         | ** ** |
|---------------------------------------------------------------------------------------------------------------------------------|------------|------------------|------------|
| ** **                                                                                                                      | ** ** | **Canada ** | ** ** | **Other countries ** | ** ** | **Total ** | ** ** |
| Net earnings  (loss) from continuing operations before income taxes and share of results of  significantly influenced companies |       | (9               | )          | 44 |   | 35 |   |
| Provision for  (recovery of) income taxes                                                                                       |       |             |       |   |   |   |   |
| Current                                                                                                                         |       | 5                |       | 16 |   | 21 |   |
| Future                                                                                                                          |       | (8               | )          | (6 | ) | (14 | ) |
|                                                                                                                            |       | (3               | )          | 10 |   | 7 |   |
| Net earnings (loss)  from continuing operations before share of results of significantly  influenced companies                  |       | (6               | )          | 34 |   | 28 |   |

 

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o) The disclosureof the following amounts is required by U.S. GAAP:
| ** **                                         | ** ** | **2006** | ** ** | **2005** | ** ** | **2004** | ** ** |
|----------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| Payment on  operating leases                       | ** ** | **34**   |       | 42       |       | 45       |       |
| Payment on  capital lease                          | ** ** | **5**    |       | 2        |       | 2        |       |
| Loss (gain) on  foreign currency                   |       |     |       |     |       |     |       |
| Realized                                           | ** ** | **(2**   | **)**      | (7       | )          | 1        |       |
| Unrealized                                         | ** ** | **2**    |       | 7        |       | 3        |       |
| Trade accounts  receivable                         | ** ** | **538**  |       | 462      |       |     |       |
| Provision for  bad debt                            | ** ** | **(13**  | **)**      | (12      | )          |     |       |
| Accounts  receivable from related companies        | ** ** | **6**    |       | 8        |       |     |       |
| Other accounts  receivable                         | ** ** | **41**   |       | 45       |       |     |       |
| Income tax  receivable                             | ** ** | **18**   |       | 24       |       |     |       |
| Future income tax  assets                          | ** ** | **40**   |       | —   |       |     |       |
| Prepaid expenses                                   | ** ** | **20**   |       | 18       |       |     |       |
|                                               | ** ** | **650**  |       | 545      |       |     |       |
| Trade accounts  payable                            | ** ** | **396**  |       | 359      |       |     |       |
| Accounts payable  to related companies             | ** ** | **7**    |       | 6        |       |     |       |
| Salaries and  benefits payable                     | ** ** | **101**  |       | 108      |       |     |       |
| Interest payable                                   | ** ** | **22**   |       | 22       |       |     |       |
| Income taxes  payable on benefit                   | ** ** | **5**    |       | 4        |       |     |       |
| Capital  expenditures included in accounts payable | ** ** | **14**   |       | 10       |       |     |       |
| Others                                             | ** ** | **62**   |       | 34       |       |     |       |
|                                               | ** ** | **607**  |       | 543      |       |     |       |

 

Valuation and qualifyingaccounts
| ** **                               | ** ** | **2006 **                                     | ** ** |
|------------------------------------------|------------|----------------------------------------------------|------------|
| ** **                               | ** ** | **Balance at beginning  of period** | ** ** | **Additions charged  to expenses** | ** ** | **Deductions** | ** ** | **Balance at end  of period** | ** ** |
| Provision for  doubtful accounts         | ** ** | **12**                                             | ** ** | **4** | ** ** | **(3** | **)** | **13** | ** ** |
| Provision for  obsolete inventory        | ** ** | **18**                                             | ** ** | **(8** | **)** | **—** | ** ** | **10** | ** ** |
| Valuation allowance for  tax purposes(1) | ** ** | **14**                                             | ** ** | **7** | ** ** | **—** | ** ** | **21** | ** ** |

 
| ** **                              | ** ** | **2005 **                                     | ** ** |
|-----------------------------------------|------------|----------------------------------------------------|------------|
| ** **                              | ** ** | **Balance at beginning  of period** | ** ** | **Additions charged  to expenses** | ** ** | **Deductions** | ** ** | **Balance at end  of period** | ** ** |
| Provision for doubtful accounts         | ** ** | 13                                                 | ** ** | 4 | ** ** | (5 | ) | 12 | ** ** |
| Provision for obsolete inventory        | ** ** | 8                                                  | ** ** | 10 | ** ** | — | ** ** | 18 | ** ** |
| Valuation allowance for tax purposes(1) | ** ** | 25                                                 | ** ** | — | ** ** | (11 | ) | 14 | ** ** |

 
| ** **                              | ** ** | **2004 **                                     | ** ** |
|-----------------------------------------|------------|----------------------------------------------------|------------|
| ** **                              | ** ** | **Balance at beginning  of period** | ** ** | **Additions charged  to expenses** | ** ** | **Deductions** | ** ** | **Balance at end  of period** | ** ** |
| Provision for doubtful accounts         | ** ** | 13                                                 | ** ** | 6 | ** ** | (6 | ) | 13 | ** ** |
| Provision for obsolete inventory        | ** ** | 8                                                  | ** ** | — | ** ** | — | ** ** | 8 | ** ** |
| Valuation allowance for tax purposes(1) | ** ** | 28                                                 | ** ** | — | ** ** | (3 | ) | 25 | ** ** |

 

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(1)  The additionsand deductions in the valuation allowance for tax purposes are detailed asfollows:
| ** **                                                                      | ** ** | **2006** | ** ** | **2005** | ** ** | **2004** | ** ** |
|---------------------------------------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| Foreign currency  translation                                                   |       | —   |       | (3       | )          | 1        |       |
| Unrecognized tax  benefit arising from current losses of subsidiaries           |       | 7        |       | 1        |       | 1        |       |
| Recognized tax  benefit arising from previously incurred losses of subsidiaries |       | —   |       | (9       | )          | (5       | )          |
|                                                                            |       | 7        |       | (11      | )          | (3       | )          |

 

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p) Under Canadian GAAP,investments in joint ventures areaccounted for using the proportionate consolidation method. Under U.S. GAAP, investments in joint venturesare accounted for using the equitymethod. The different accounting treatments affect only the display and classification of financialstatement items and not netearnings or shareholders’ equity. Rules prescribed by the U.S. Securities and Exchange Commission (“SEC”)permit the use of the proportionateconsolidation method in the reconciliation to U.S. GAAP provided the joint venture is anoperating entity and the significantfinancial operating policies are, by contractual arrangement, jointly controlled by all parties having anequity interest in the jointventure. As required, the Company discloses in note 22 the major components of its financialstatements resulting from the useof the proportionate consolidation method to account for its interests in joint ventures.

q) Under Canadian GAAP, theCompany’s deferred financing costsare amortized on a straight-line basis over the anticipated period of repayment of the underlying debt. UnderU.S. GAAP, such costs areamortized under the interest method. Amortization under both methods is not materially different for eachof the periods presented.

r) Under U.S. GAAP, theamounts for each category of cash flowsfrom discontinued operations presented in note 4 would be presented directly on the statement of cashflows.

s) Under U.S. GAAP, thepremium paid on redemption oflong-term debt would be classified as an operating activity and not as cash flow used in financing activities.In addition, under U.S. GAAP,financing charges incurred in 2006, 2005 and 2004 amounting to $3 million, $2 million and $2 million respectively would be classified under operatingactivities rather than financingactivities.

t) Under Canadian GAAP, theClass B preferred shares of asubsidiary are included under capital stock. Under U.S. GAAP, these preferred shares would be shown on thebalance sheet as anon-controlling interest. In 2003, the Company redeemed all of the outstanding Class B preferred shares ofa subsidiary for a considerationof $16 million. Under Canadian GAAP, the excess of the redemption price of $10 million over therecorded capital was included inretained earnings. Under U.S. GAAP, as these preferred shares represent a non-controlling interest,the excess of $10 million wouldhave been recorded as an increase of $15 million in property, plant and equipment and an increase of $5million in future income taxliabilities. The adjustment of $15 million in property, plant and equipment is amortized on a straight-linebasis over a period of 20 years.In addition, under U.S. GAAP, the premium paid on redemption would be classified under investingactivities rather than financingactivities.

u) Under Canadian GAAP, costrelated to share issuance is presentedin retained earnings, net of related income taxes. Under U.S. GAAP, share issue costs are recorded as areduction of capital stock.

v) Under Canadian GAAP, theinterest rate swap contractsdesignated as hedges of the change in fair value of a portion of long-term debt is not recognized on thebalance sheets. Under U.S. GAAP,the fair value of these swap contracts are measured at fair value on the balance sheet and inearnings. In addition, acompensating adjustment is recorded to the book value of the long-term debt and to earnings.

Accounting pronouncement notyetimplemented underU.S. GAAP

w) In March 2006, the FASBpublished SFAS 155, *“Accounting**for CertainHybrid Financial Instruments–an amendment of SFAS**133 and 140”*. This standard amends SFAS 133 on derivativeand hedging and SFAS 140 ontransfers and servicing of financial assets and extinguishments of liabilities, and resolves issued addressed in SFAS 133, DIG Issue D1 on theapplication of SFAS 133 to beneficialinterests in securitized financial assets. SFAS 155 provides a fair value measurement option for certainhybrid financial instruments containingan embedded derivative that would otherwiserequire bifurcation. This new standard is effective for all instruments acquired, issued or subject to aremeasurement event occurring infiscal years beginning after September 15, 2006. The Company is presently evaluating the impact ofthis new standard.

x) In March 2006, the FASBpublished SFAS 156 *“Accounting**forServicing of Financial Assets–an amendment of SFAS 140”*. This new standard amends SFAS 140 with respect to accounting for separately recognized servicing assets andservicing liabilities. This newstandard will be effective for fiscal years beginning after September 15, 2006. The Company is presentlyevaluating the impact of this newstandard.

y) In July 2006, the FASBpublished FIN 48, *“Accounting for**Uncertaintyin Income Taxes, and interpretation of SFAS 109”*. This standard prescribe a recognition and measurement model for tax positions taken or expected to be taken ina tax return, and provideguidance on derecognition, classification, interest and penalties, accounting in interim periods,disclosure and transition. Thisnew standard is effective for fiscal years beginning after December 15, 2006. The Company is presentlyevaluating the impact of this newstandard.

z) In September 2006, theFASB published SFAS 157, *“Fair Value**Measurements”*. This standard defines fair value,establishes a framework formeasuring fair value and expands disclosures about fair value measurements. This new standard iseffective for fiscal years beginningafter November 15, 2007. The Company is presently evaluating the impact of this new standard.

 

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