2002 Ruling 2001-0087253 - Butterfly Ruling

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

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

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

Principal Issues:

1. For the purposes of section 55, where an individual A, a trust and company A are related to one another but the children of individual A are not related to the trust and company A, whether the acquisition of control of company A, followed by the acquisitions of shares of company A by individual A's children, will be subject to the application of subsection 55(4)?

2. Whether ITAR 26(5) will apply to a pre-1972 share when the original owner of the share transfers such share to a non-arm's length person and elects under ITAR 26(7) to deem the cost of the share to be its V-day value?

3. Where a trust controls company A, and individual A, the trust and company A are related to one another for the purposes of section 55, whether the shifting of control of company A from the trust to individual A will result in an acquisition of control by individual A for the purposes of section 55?

Position:

1. yes.

2. no.

3. no.

Reasons:

1. As one of the main purposes of having individual A acquiring control of company A is to cause each of individual A's children to be related to company A so that subsection 55(2) will not apply to a dividend.

2. ITAR 26(7) will override ITAR 26(5).

3. As individual A and company A are related to each other immediately before the shifting of control of company A from the trust to individual A and, consequently, such acquisition of control by individual A will be exempt under subparagraph 256(7)(a)(i)(B).

XXXXXXXXXX 			2001-008725

XXXXXXXXXX, 2002

Dear XXXXXXXXXX:

Re: XXXXXXXXXX
Advance Income Tax Ruling

This is in reply to the letter of XXXXXXXXXX in which she requested an advance income tax ruling on behalf of the above-noted taxpayer. In XXXXXXXXXX letters of XXXXXXXXXX, you and XXXXXXXXXX provided additional information concerning the facts and proposed transactions described in XXXXXXXXXX original letter. We also acknowledge the information provided during our various telephone conversations (XXXXXXXXXX).

To the best of your knowledge, and that of the taxpayer involved, none of the issues contained herein:

(i) is in an earlier return of the taxpayer or a related person;

(ii) is being considered by a tax services office or taxation centre in connection with a previously filed tax return of the taxpayer or a related person;

(iii) is under objection by the taxpayer or a related person;

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

(v) is the subject of a ruling previously issued by the Directorate.

Definitions

In this letter, the following terms have the meanings specified:

(a) Unless otherwise indicated, all statutory references are to the Income Tax Act, R.S.C. 1985 (5th Supp.), c.1, as amended (the "Act");

(b) "adjusted cost base"("ACB") has the meaning assigned by subsection 248(1);

(c) "agreed amount" has the meaning assigned by subsection 85(1);

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

(e) "BCA" means the Business Corporations Act XXXXXXXXXX;

(f) "Canadian-controlled private corporation" ("CCPC") has the meaning assigned by subsection 125(7);

(g) "capital dividend account" ("CDA") has the meaning assigned by subsection 89(1);

(h) "capital property" has the meaning assigned by the definition in section 54;

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

(j) "depreciable property" has the meaning assigned by subsection 13(21);

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

(l) "eligible property" has the meaning assigned by subsection 85(1.1);

(m) "fair market value" ("FMV") means the highest price, expressed in terms of money or money's worth, obtainable in an open and unrestricted market between knowledgeable, informed and prudent parties acting at arm's length, neither party being under any compulsion to transact;

(n) "ITAR" refers to the Income Tax Application Rules;

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

(p) "personal trust" has the meaning assigned by subsection 248(1);

(q) "pre-1972 spousal trust" has the meaning assigned by subsection 108(1);

(r) "refundable dividend tax on hand" ("RDTOH") has the meaning assigned by subsection 129(3);

(s) "related persons" has the meaning assigned by section 251;

(t) "restricted financial institution" has the meaning assigned by subsection 248(1);

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

(v) "specified investment business" ("SIB") has the meaning assigned by subsection 248(1);

(w) "stated capital" has the meaning assigned by the BCA;

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

(y) "taxable dividend" has the meaning assigned by subsection 89(1); and

(z) "testamentary trust" has the meaning assigned by subsection 248(1);

(aa) "valuation day" ("V-day") has the meaning assigned by section 24 of the ITAR.

Our understanding of the relevant facts, proposed transactions and purpose of the proposed transactions is as follows:

Facts

1. XXXXXXXXXX ("DC") is a CCPC and a TCC. DC is not a specified financial institution or a restricted financial institution. DC was incorporated on XXXXXXXXXX under the Companies Act (XXXXXXXXXX) and was continued under the BCA in XXXXXXXXXX. The authorized, issued and outstanding share capital of DC consists of:

(a) XXXXXXXXXX Class A voting common shares (the "DC Class A Common Shares"), of which

(I) XXXXXXXXXX shares are owned by a trust (the "Trust"); and

(II) XXXXXXXXXX shares are owned by XXXXXXXXXX ("Individual A"); and

(b) XXXXXXXXXX Class B non-voting, redeemable and XXXXXXXXXX % non-cumulative dividend preferred shares (the "DC Class B Preferred Shares") having an aggregate PUC and redemption amounts of $XXXXXXXXXX which are all owned by the Trust.

All the DC Class A Common Shares and the DC Class B Preferred Shares were issued by DC prior to 1972. The V-day value of each of the DC Class A Common Shares and the DC Class B Preferred Shares is $XXXXXXXXXX and $XXXXXXXXXX, respectively. The DC Class A Common Shares and the DC Class B Preferred Shares represent capital property to the current owners thereof. None of the shares of DC were acquired by Individual A or the Trust in contemplation of the proposed transactions as described below.

The assets of DC consist of:

(i) cash, Goods and Services tax receivable and income taxes recoverable which represents an overpayment of its federal tax instalments and its tax refunds;

(ii) net income stabilization account (the "NISA");

(iii) Agricore and UFA patronage reserve accounts (the "Patronage Reserve Accounts"); and

(iv) lands (the "Lands"), buildings which include a personal residence (the "Personal Residence") situated on the Lands, feedlot, fences and machinery and equipment.

DC is currently carrying on a SIB, as its primary business activity and source of income has been rental income from property. Prior to the year XXXXXXXXXX, DC carried on the business of farming. Its principal activities included the XXXXXXXXXX. Individual A's two children, XXXXXXXXXX ("Child1") and XXXXXXXXXX ("Child2"), were actively involved in DC's farming operations but they also ran their own farming business independently of DC. In the year XXXXXXXXXX, DC disposed of all of its XXXXXXXXXX and leased all of its Lands, machinery and equipment to Child1 and Child2 for use in their respective farming businesses. Child2 has also rented the Personal Residence from DC and has paid rent to DC. DC has included such rental income from Child1 and Child2 in computing its income in the taxation year in which such amount was received.

The NISA and the Patronage Reserve Accounts of DC are related to DC's former farming business. The NISA cannot be assigned but it can be converted into cash at any time. However, the Patronage Reserve Accounts of DC can be assigned but cannot be converted into cash within the next twelve-month period.

As at the date hereof, the aggregate FMV of the cash or near cash property of DC that includes cash, Goods and Services tax receivable, income taxes recoverable and NISA, is exceeded by the principal amount of the DC Debt as described below. It is not expected that the FMV of the cash or near cash property of DC will exceed the principal amount of the DC Debt at the date of the proposed transactions described below.

DC does not have any liabilities other than a debt due to the Trust (the "DC Debt") in the principal amount of $XXXXXXXXXX. The DC Debt has been in existence since the late XXXXXXXXXX and has been no change in the principal amount since XXXXXXXXXX. The DC Debt is a demand and non-interest bearing loan with no fixed repayment terms.

DC's fiscal and taxation year ends XXXXXXXXXX. DC sold some of its equipment in its XXXXXXXXXX taxation year. The disposition of such equipment was not part of the series of transactions that includes the proposed transactions described below.

It is expected that the balance in the CDA of DC as at XXXXXXXXXX will be approximately $XXXXXXXXXX. However, DC did not have any balance in its RDTOH as at XXXXXXXXXX. It is not expected that DC will have any balance in its RDTOH at the end of its taxation year in which the proposed transactions described below are completed.

DC's tax affairs are administered by the XXXXXXXXXX Tax Services Office and its corporate tax returns are filed at the XXXXXXXXXX Taxation Centre.

2. Individual A and her late spouse XXXXXXXXXX ("Individual B") each subscribed for 1 DC Class A Common share when DC was incorporated in XXXXXXXXXX . In XXXXXXXXXX , Individual B transferred his farming operation to DC, which included lands, buildings and equipment at FMV. As part of the consideration for the transfer of the property, DC issued to Individual B:

(a) XXXXXXXXXX DC Class A Common Shares having an aggregate FMV and PUC of $XXXXXXXXXX; and

(b) XXXXXXXXXX DC Class B Preferred Shares having an aggregate FMV, redemption amounts and PUC of $XXXXXXXXXX.

Individual B died in XXXXXXXXXX. Prior to his death, Individual B had transferred XXXXXXXXXX of his DC Class A Common Shares to Individual A.

Individual A and her three adult children: Child1, Child2 and XXXXXXXXXX ("Child3"), are all residents of Canada. Child3 is not involved in the business of farming. Individual A has never claimed a deduction under section 110.6 of the Act with respect to any gains from the disposition of any of her DC shares.

3. The Trust is a pre-1972 spousal trust, a testamentary trust, and a personal trust and is resident in Canada. The trustees of the Trust are Individual A and her three adult children (collectively referred to hereafter as the "Trustees"). The Trust requires a unanimous decision of the Trustees to bind the Trust.

The assets of the Trust include:

(a) the XXXXXXXXXX DC Class A Common Shares;

(b) the XXXXXXXXXX DC Class B Preferred Shares; and

(c) the loan receivable from DC in the amount of $XXXXXXXXXX (the "Loan Receivable from DC").

The Trust was created when Individual B died in XXXXXXXXXX. Pursuant to the will of Individual B, all of his property including the XXXXXXXXXX DC Class A Common Shares and the XXXXXXXXXX DC Class B Preferred Shares were transferred to the Trust. Under the terms of the Trust, Individual A is the sole income beneficiary during her lifetime. However, Individual A and her three children are all capital beneficiaries of the Trust but their entitlement to the capital is subject to the discretion of the Trustees. None of Individual A's children has received any of the income or capital of the Trust.

Each of Individual A and the Trust has not disposed of any of her or its capital property owned on December 31, 1971 and consequently, has not made an election under subsection 26(7) of the ITAR to deem the cost of such capital property to be an amount equal to its FMV on V-day.

Individual A is related to each of the beneficiaries of the Trust for the purposes of section 55 of the Act. Consequently, pursuant to subparagraph 55(5)(e)(ii), Individual A is related to the Trust for the purposes of section 55. Individual A is also related to DC pursuant to paragraph 251(2)(b)(iii), as the Trust controls DC. However, each of Individual A's children is not related to each of the beneficiaries of the Trust for the purposes of section 55, as siblings are not related to each other under subparagraph 55(5)(e)(i). Consequently, none of Individual A's children is related to the Trust and DC for the purposes of section 55.

Proposed Transactions

4. Pursuant to the provisions of the BCA, the Articles of Continuance of DC will be amended to create an additional class of an unlimited number of common shares (the "DC New Common Shares") and two new classes of an unlimited number of preferred shares (the "DC Class C Preferred Shares" and the "DC Class D Preferred Shares") which will include the following attributes:

(a) the holders of the DC New Common Shares will be entitled to the same rights as the holders of the existing DC Class A Common Shares; and

(b) each of the DC Class C Preferred Shares and the DC Class D Preferred Shares:

(i) will be non-voting;

(ii) will be redeemable and retractable, subject to applicable law, at any time for an amount equal to the aggregate net FMV of the consideration for which the DC Class C Preferred Shares or the DC Class D Preferred Shares are issued, as the case may be, divided by the number of such shares issued (the "DC Redemption Amount"); and

(iii) will be entitled to a non-cumulative dividend at a fixed rate per annum (to be set by the directors of DC from time to time, but not to exceed a reasonable amount) of the DC Redemption Amount and will have a preference on dissolution over the DC common shares for the return of the redemption amount plus unpaid dividends. However, DC will be permitted to declare dividends on any particular class of DC preferred shares without paying dividends on the other classes of DC preferred shares.

5. A new company ("Newco") will be incorporated under the BCA. Newco will be a TCC and will not be a specified financial institution or a restricted financial institution.

Newco's authorized capital will consist of two classes of an unlimited number of common shares (the "Newco Class A Common Shares" and the "Newco Class B Common Shares") and four classes of an unlimited number of preferred shares (the "Newco Class C Preferred Shares", the "Newco Class D Preferred Shares", the "Newco Class E Preferred Shares" and the "Newco Class F Preferred Shares") which will include the following attributes:

(a) the Newco Class A Common Shares and the Newco Class B Common Shares will be voting; and

(b) each of the Newco Class C Preferred Shares, the Newco Class D Preferred Shares, the Newco Class E Preferred Shares and the Newco Class F Preferred Shares:

(i) will be non-voting;

(ii) will be redeemable and retractable, subject to applicable law, at any time for an amount equal to the aggregate net FMV of the consideration for which the Newco Class C Preferred Shares, the Newco Class D Preferred Shares, the Newco Class E Preferred Shares or the Newco Class F Preferred Shares are issued, as the case may be, divided by the number of such shares issued, (the "Newco Redemption Amount"); and

(iii) will be entitled to a non-cumulative dividend at a fixed rate per annum (to be set by the directors of Newco from time to time, but not to exceed a reasonable amount) of the Newco Redemption Amount as described herein and will have a preference on dissolution over the Newco common shares. However, Newco will be permitted to declare dividends on any particular class of Newco preferred shares without paying dividends on the other classes of Newco preferred shares.

6. DC will declare and pay a dividend on the DC Class A Common Shares equal to the balance of its CDA immediately before the payment of such dividend and will elect, in prescribed manner and prescribed form pursuant to subsection 83(2), that the full amount of such dividend be deemed to be paid out of its CDA.

The Trust will distribute the capital dividend received from DC as described herein to Individual A.

7. Individual A will subscribe for XXXXXXXXXX Newco Class A Common Shares and the Trust will subscribe for XXXXXXXXXX Newco Class A Common Shares for a nominal subscription price of $XXXXXXXXXX each.

Individual A, the Trust and Newco will not be dealing with each other at arm's length at any particular time which includes the proposed transactions described herein.

8. Individual A will transfer her XXXXXXXXXX DC Class A Common Shares and the Trust will transfer its XXXXXXXXXX DC Class A Common Shares and XXXXXXXXXX DC Class B Preferred Shares to Newco at FMV. As the sole consideration, Newco will issue to each of Individual A and the Trust Newco Class C Preferred Shares having an aggregate FMV, redemption and retraction amount equal to the FMV at that time of the DC shares that each of Individual A and the Trust transferred to Newco.

Immediately after the share subscriptions described in paragraph 7 above and the share exchanges described in this paragraph, the FMV of each DC shareholder's shares of the capital stock of Newco will be equal to or approximate the amount determined by the formula, on the assumption that Individual A and the Trust are participants, DC is the distributing corporation and Newco is the acquiror,

			(A x B) + D
				       C

as found in subparagraph (b)(iii) of the definition of "permitted exchange" in subsection 55(1). In addition, no person who is not a DC shareholder will own any shares of Newco.

9. Newco and each of Individual A and the Trust will jointly elect in prescribed form and within the time period referred to in subsection 85(6), but prior to the dissolution of the Trust described in paragraph 17 below, to have the provisions of subsection 85(1) apply to each transfer described in paragraph 8 above. The agreed amount in respect of the DC shares so transferred by each of Individual A and the Trust will be equal to the lesser of the amounts described in paragraphs 85(1)(c.1)(i) and (ii) of the Act.

Each of Individual A and the Trust will elect under subsection 26(7) of the ITAR, in prescribed form and within the time period referred to therein (in the case of the Trust, prior to the dissolution of the Trust described in paragraph 17 below), that the cost to Individual A and the Trust of her or its capital property owned on December 31, 1971 will be its FMV on V-day.

For the purposes of the BCA, the addition to the stated capital of the Newco Class C Preferred Shares will equal the greater of the aggregate PUC and the ACB, as modified by paragraph 84.1(2)(a), of the XXXXXXXXXX DC Class A Common Shares transferred to Newco from Individual A and the XXXXXXXXXX DC Class A Common Shares and the XXXXXXXXXX DC Class B Preferred Shares transferred to Newco from the Trust as described in paragraph 8 above.

10. Immediately before the transfer of property as described in paragraph 12 below, the property of DC will be classified into three types of property for the purposes of the definition of "distribution" in subsection 55(1), as follows:

(a) cash or near cash property, comprising all of the current assets of DC, including cash, Goods and Services Tax receivable, income taxes recoverable and NISA;

(b) business property, comprising all of the assets of DC, other than cash or near cash property, any income from which would, for the purposes of the Act, be income from a business (other than a SIB); and

(c) investment property, comprising all of the assets of DC, other than cash or near cash property, any income from which would, for the purposes of the Act, be income from property or a SIB.

For the purposes of determining the types of property described herein,

(i) property that is relating to the SIB of DC including Lands, buildings, Personal Residence, feedlot and fences, and machinery and equipment will be considered investment property; and

(ii) the Patronage Reserve Accounts will be considered investment property.

It is not anticipated that DC will have any business property immediately before the transfer of property as described in paragraph 12 below. For greater certainty, any tax accounts, such as the balance of any non-capital losses of DC or the balance of any RDTOH account or CDA of DC, will not be considered property for the purposes of the proposed transactions described herein.

11. DC's liabilities will consist solely of the DC Debt which will be considered a current liability of DC on the basis that it is payable on demand. Consequently, for the purposes of determining the net FMV of each type of property of DC immediately before the transfer of property as described in paragraph 12 below,

(a) the DC Debt will be allocated to the cash or near cash property of DC to the extent of its aggregate FMV; and

(b) the excess DC Debt remaining unallocated after step (a) above will then be allocated to the investment property and will not exceed its aggregate FMV.

As a result of the allocation as described herein, DC will not have any cash or near cash property, but will only have investment property immediately before the transfer of property described in paragraph 12 below.

12. DC will transfer to Newco at FMV a proportionate share of its net investment property (after allocating and deducting, in the manner described in paragraphs 10 and 11 above, the portion of the DC Debt which is to be assumed by Newco as described below) and immediately after the transfer, the net FMV of the investment property received by Newco will be equal to that proportion of the net FMV of each type of property of DC, determined immediately before the transfer referred to herein that:

(a) the aggregate FMV of the DC Class A Common Shares and the DC Class B Preferred Shares owned by Newco, immediately before the transfer,

		is of

(b) the aggregate FMV, immediately before the transfer of property, of all of the issued and outstanding shares of DC .

As consideration for the transfer of property as described herein, Newco will:

(c) assume a portion of the DC Debt (the "DC Debt Portion") that is allocable to the investment property of DC transferred to Newco as described above; and

(d) issue Newco Class D Preferred Shares having an aggregate FMV and redemption and retraction amount equal to the FMV at that time of the investment property of DC transferred to Newco as described herein less the amount of the DC Debt Portion assumed by Newco as described in paragraph (c) above.

The Trust will consent to the assumption by Newco of the DC Debt Portion as described herein.

13. DC and Newco will jointly elect pursuant to subsection 85(1), in prescribed form and within the time referred to in subsection 85(6), with respect to the transfer to Newco of any eligible property of DC that has a FMV in excess of its cost amount. Specifically, the agreed amount in each joint election will not be less than the least of:

(a) the amounts specified in subparagraphs 85(1)(d)(i), (ii) or (iii) in the case of eligible capital property,

(b) the amounts specified in subparagraphs 85(1)(e)(i), (ii) or (iii) in the case of depreciable property of a prescribed class, and

(c) the amounts specified in subparagraphs 85(1)(c.1)(i) or (ii), in the case of property described in paragraph 85(1)(c.1).

In each case, the agreed amount will not exceed the FMV of the respective property, nor will it be less than the amount permitted under paragraph 85(1)(b).

14. Pursuant to the provisions of the BCA, the addition to the stated capital of Newco in respect of the issuance of the Newco Class D Preferred Shares will equal the amount by which the aggregate of the cost (determined pursuant to subsection 85(1), where relevant) of the property transferred to Newco as described in paragraph 12 above exceeds the principal amount of the DC Debt Portion assumed by Newco as described in paragraph 12(c) above.

15. Immediately following the transfer of property described in paragraph 12 above, Newco will redeem from DC all of the Newco Class D Preferred Shares for an amount equal to their FMV, being the aggregate of the Newco Redemption Amounts of the Newco Class D Preferred Shares so redeemed and will issue to DC in consideration therefor a demand non-interest bearing promissory note with a principal amount and FMV equal to the aggregate of the Newco Redemption Amounts of the Newco Class D Preferred Shares so redeemed (the "Newco Redemption Note"). DC will accept the Newco Redemption Note as full payment of the Newco Redemption Amount in respect of each redeemed Newco Class D Preferred Share with the risk of the note being dishonored.

DC will purchase for cancellation and redeem from Newco all of the DC Class A Common Shares and the DC Class B Preferred Shares for an amount equal to their FMV, being the sum of the aggregate of the FMV (the "DC Purchase Amounts") of the DC Class A Common Shares so purchased and the aggregate of the DC Redemption Amounts of the DC Class B Preferred Shares so redeemed, and will issue to Newco in consideration therefor a demand non-interest bearing promissory note with a principal amount and FMV equal to the sum of the aggregate of the DC Purchase Amounts and the aggregate of the DC Redemption Amounts (the "DC Redemption Note"). The principal amount and FMV of the Newco Redemption Note and the DC Redemption Note will both be equal to one another. Newco will accept the DC Redemption Note as full and absolute payment of the DC Purchase Amount in respect of each purchased DC Class A Common Shares and the DC Redemption Amount in respect of each redeemed DC Class B Preferred Share with the risk of the note being dishonored.

DC will pay the principal amount of the DC Redemption Note by transferring to Newco the Newco Redemption Note that will be accepted by Newco in full payment of DC's obligation. Newco will pay the principal amount of the Newco Redemption Note by transferring to DC the DC Redemption Note that will be accepted by DC in full payment of Newco's obligation. The DC Redemption Note and the Newco Redemption Note will both be marked paid in full and cancelled.

16. Immediately following the transfer described in paragraph 12 above, the net FMV of the investment property retained by DC, determined in the manner described in paragraphs 10 and 11 above, will be equal to that proportion of the net FMV of each type of property of DC, determined immediately before the transfer described in paragraph 12 above, that :

(a) the aggregate FMV, immediately before the transfer of property described in paragraph 12, of the DC Class A Common Shares owned by Individual A and the DC Class A Common Shares and the DC Class B Preferred Shares owned by the Trust

		is of 

(b) the aggregate FMV, immediately before the transfer of property, of all of the issued and outstanding shares of DC.

17. The Trustees of the Trust will seek a court order to dissolve the Trust and to distribute all property of the Trust to the capital beneficiaries of the Trust in full satisfaction of each of his or her capital interest in the Trust in the following manner:

(a) the trust property of the Trust including the DC Class A Common Shares, the DC Class B Preferred Shares and the Loan Receivable from DC less the amount of the DC Debt Portion assumed by Newco as described in paragraph 12(c) above (which DC Debt Portion due to the Trust is referred to hereafter as the "Loan Receivable from Newco"), will be distributed to Individual A, Child1 and Child3 in the following proportion: XXXXXXXXXX to Individual A, XXXXXXXXXX to Child3 and XXXXXXXXXX to Child1; and

(b) the trust property of the Trust including the Newco Class A Common Shares, the Newco Class C Preferred Shares and the Loan Receivable from Newco, will be distributed to Individual A, Child2 and Child3 in the following proportion: XXXXXXXXXX to Individual A, XXXXXXXXXX to Child3 and XXXXXXXXXX to Child2.

After the distribution by the Trust of all of its property to Individual A, Child1, Child2 and Child3 as described herein, the Trust will be dissolved and Individual A will control both DC and Newco.

Pursuant to paragraph 55(3.2)(d) of the Act, where a share of DC or Newco is acquired by a child of Individual A from the Trust in satisfaction of all or a part of the child's capital interest in the Trust, the child shall be deemed, in respect of that acquisition, to be related to the Trust for the purposes of paragraph 55(3.1)(b).

Each of Individual A, Child1, Child2 and Child3 will hold the DC shares and the Newco shares distributed to them as capital property.

18. Individual A, Child1 and Child3 each will transfer all of his or her DC Class A Common Shares and DC Class B Preferred Shares to DC at FMV. As the sole consideration, DC will issue to

(a) each of Individual A and Child1, DC Class C Preferred Shares having an aggregate FMV and redemption and retraction amount equal to the FMV at that time of the property of Individual A and Child1 transferred to DC, as the case may be, as described herein, and

(b) Child3, DC Class D Preferred Shares having an aggregate FMV and redemption and retraction amount equal to the FMV at that time of the property of Child3 transferred to DC as described herein.

DC and each of Individual A, Child1 and Child3 will jointly elect in prescribed form and within the time period referred to in subsection 85(6) to have the provisions of subsection 85(1) apply to each transfer as described herein. The agreed amount in respect of the DC shares so transferred by each transferor to DC will be equal to the lesser of the amounts described in subparagraphs 85(1)(c.1)(i) and (ii) of the Act.

For the purposes of the BCA, the amount to be added to:

(i) the stated capital of the DC Class C Preferred Shares will be equal to the aggregate PUC of the DC Class A Common Shares and the DC Class B Preferred Shares owned by each of Individual A and Child1 immediately before the transfers described herein; and

(ii) the stated capital of the DC Class D Preferred Shares will be equal to the aggregate PUC of the DC Class A Common Shares and the DC Class B Preferred Shares owned by Child3 immediately before the transfers described herein.

19. Immediately following the share transfers described in paragraph 18 above, Individual A will subscribe for XXXXXXXXXX DC New Common Shares and Child1 will subscribe for XXXXXXXXXX DC New Common Shares for a subscription price of $XXXXXXXXXX each.

20. Individual A, Child2 and Child3 each will transfer all of his or her Newco Class A Common Shares and Newco Class C Preferred Shares to Newco at FMV. As the sole consideration, Newco will issue to

(a) each of Individual A and Child2, Newco Class E Preferred Shares having an aggregate FMV and redemption and retraction amount equal to the FMV at that time of the property of Individual A and Child2 transferred to Newco, as the case may be, as described herein, and

(b) Child3, Newco Class F Preferred Shares having an aggregate FMV and redemption and retraction amount equal to the FMV at that time of the property of Child3 transferred to Newco as described herein.

Newco and each of Individual A, Child2 and Child3 will jointly elect in prescribed form and within the time period referred to in subsection 85(6) to have the provisions of subsection 85(1) apply to each transfer as described herein. The agreed amount in respect of the Newco shares so transferred by each transferor to Newco will be equal to the lesser of the amounts described in subparagraphs 85(1)(c.1)(i) and (ii) of the Act.

For the purposes of the BCA, the amount to be added to:

(i) the stated capital of the Newco Class E Preferred Shares will be equal to the aggregate PUC of the Newco Class A Common Shares and the Newco Class C Preferred Shares owned by each of Individual A and Child2 immediately before the share transfers described herein; and

(ii) the stated capital of the Newco Class F Preferred Shares will be equal to the aggregate PUC of the Newco Class A Common Shares and the Newco Class C Preferred Shares owned by Child3 immediately before the share transfers described herein.

21. Immediately following the share transfers as described in paragraph 20 above, Individual A will subscribe for XXXXXXXXXX Newco Class B Common Shares and Child2 will subscribe for XXXXXXXXXX Newco Class B Common Shares for a subscription price of $XXXXXXXXXX each.

Additional Information

22. No property has or will become property of DC or Newco and no liabilities have been or will be incurred by DC or Newco in contemplation of and before the transfers of property described in paragraph 12, except as described herein.

23. Except as outlined herein, DC does not have any specific intention of disposing of any assets currently owned by it to an unrelated person following the proposed transactions and neither DC nor Newco will dispose of any of its assets as part of a series of transactions which includes the proposed transactions.

24. There are not, and will not be at any time prior to the completion of the proposed transactions, any agreements or undertakings which constitute or include a "guarantee agreement", as defined in subsection 112(2.2), in respect of any of the shares of DC or Newco.

25. Neither DC nor Newco has, or will have, entered into a "dividend rental arrangement", as defined in subsection 248(1), in respect of any of the shares to be purchased or redeemed as part of the proposed transactions.

26. None of the shares of DC or Newco will be issued or acquired as part of a series of transactions of the type described in subsection 112(2.5) of the Act.

27. Neither DC nor Newco will be a corporation described in any of paragraphs (a) to (f) of the definition of "financial intermediary corporation" in subsection 191(1) of the Act.

28. Each of DC and Newco will have the financial capacity to honour, upon presentation for payment, the amount payable under the promissory note issued by it as part of the proposed transactions.

Purpose of the Proposed Transactions

29. The purpose of the proposed transactions described above is to allow Individual A

(a) to develop a succession plan for the operations of DC;

(b) develop an estate plan to ensure that her children are treated fairly in the distribution of her assets; and

(c) maintain control of the operations in DC and Newco during her lifetime.

Rulings

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

A. Subject to the application of the provisions of subsection 20(1.2) of the ITAR and to the application of subsection 69(11) of the Act, the provisions of subsection 85(1) will apply to:

(a) the transfer by each of Individual A of her DC Class A Common Shares and the Trust of its DC Class A Common Shares and DC Class B Preferred Shares to Newco as described in paragraph 8 above;

(b) the transfer by DC to Newco as described in paragraph 12 above, of each eligible property which is the object of the election described in paragraph 13 above;

(c) the transfer by each of Individual A, Child1 and Child3 of his or her DC Class A Common Shares and DC Class B Preferred Shares to DC as described in paragraph 18 above; and

(d) the transfer by each of Individual A, Child2 and Child3 of his or her Newco Class A Common Shares and Newco Class C Preferred Shares to Newco as described in paragraph 20 above,

such that the agreed amount in respect of each transfer will be deemed to be the proceeds of disposition to the transferor and the cost thereof to the transferee. For greater certainty, paragraph 85(1)(e.2) will not apply to the transfers referred to herein.

For the purpose of the joint election in respect of depreciable property of the SIB assets of DC, the reference to "the undepreciated capital cost to the taxpayer of all the property of that class immediately before the disposition..." in subparagraph 85(1)(e)(i) of the Act will be read to mean "the proportion of the undepreciated capital cost to DC of all the property of that class that the capital cost of the property immediately before the disposition is of the capital cost of all property of that class immediately before the disposition".

B. Subsection 84(3) will apply on the purchase for cancellation or the redemption, as described in paragraph 15 above,

(a) of the Newco Class D Preferred Shares held by DC, to deem Newco to have paid and DC to have received; and

(b) of the DC Class A Common Shares held by Newco, to deem DC to have paid and Newco to have received;

a dividend on such shares equal to the amount, if any, by which the aggregate amount paid upon such purchase for cancellation or redemption exceeds the aggregate PUC in respect of such shares immediately before such purchase for cancellation or redemption, and any such dividend

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

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

(e) will be excluded in determining the proceeds of disposition to the recipient of the shares so redeemed pursuant to paragraph (j) of the definition of "proceeds of disposition" in section 54; and

(f) will not be subject to tax under Part IV.1 and Part VI.1 of the Act on the basis that such dividends will be excepted dividends by virtue of paragraph (b) of the definition of "excepted dividend" in section 187.1 of the Act and excluded dividends by virtue of paragraph (a) of the definition of "excluded dividend" in subsection 191(1) of the Act, as DC and Newco, as the case may be, will have a substantial interest, within the meaning assigned by subsection 191(2) of the Act, in the payer corporation immediately before the redemption or purchase for cancellation of such shares.

C. With respect to the redemption by DC of the DC Class B Preferred Shares held by Newco as described in paragraph 15 above, no dividend will be deemed to have been paid by DC and received by Newco under subsection 84(3) of the Act, as the aggregate redemption amounts paid upon such redemption will not exceed the aggregate PUC in respect of such shares immediately before such redemption.

D. By virtue of subsection 186(2) and paragraph 186(4)(a) of the Act, DC and Newco will be connected to each other. Provided that each of DC and Newco is not entitled to a dividend refund in respect of its taxation year in which it is deemed to pay the dividend referred to in Ruling B above, each of DC and Newco will not be subject to Part IV tax under subsection 186(1) in respect of such dividend.

E. The repayment of the Newco Redemption Note held by DC and the DC Redemption Note held by Newco as described in paragraph 15 above will not give rise to a "forgiven amount" within the meaning of subsection 80(1) or 80.01(1).

F. Provided that as part of the series of transactions or events that includes the proposed transactions described herein, there is not:

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

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

(c) an acquisition of property in the circumstances described in paragraph 55(3.1)(c); or

(d) an acquisition of property in the circumstances described in paragraph 55(3.1)(d);

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

G. The provisions of subsection 15(1) will not apply to any of the proposed transactions described in paragraphs 4 to 21 above, in and of themselves.

H. As a result of the proposed transactions described in paragraphs 4 to 21 above, in and of themselves, subsection 245(2) will not be applied to redetermine the tax consequences confirmed in the rulings given above.

These rulings are given subject to the limitations and qualifications set out in Information Circular 70-6R4 issued by Canada Customs and Revenue Agency ("CCRA") on January 29, 2001 and are binding on the CCRA provided that the proposed transactions are completed by XXXXXXXXXX.

The above rulings are based on the Act in its present form and do not take into account any proposed amendments to the Act which, if enacted, could have an effect on the rulings provided herein.

Comments

Nothing in this ruling should be construed as implying that CCRA has agreed to or reviewed:

1. the determination of the FMV or the cost amount of any particular asset or the PUC of any shares referred to herein; and

2. any tax consequences relating to the facts and proposed transactions described herein other than those specifically described in the rulings given above. For greater certainty, our rulings should not be construed as providing comfort that any of the DC shares or the Newco shares is or will be a share of the capital stock of a family farm corporation (as defined in subsection 70(10) of the Act).

Yours truly,

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