2001 2001-0089511 - Split - Up Butterfly

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

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

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

Principal Issues:

The major issue is how to combine the assets of Jco, a CBCA company, with those of Kco, XXXXXXXXXX followed by a split-up butterfly to divide the assets between Mr. A and Mr. B, who each control 50% of the shares of Jco and Kco.

Position:

Jco is able to combine its property with Kco and then split-up Kco.

Reasons:

The transactions combining Jco and Kco's property qualified for exceptions under subsection 55(3.1), and the split-up qualifies for the subsection 55(3)(b) butterfly exception.

XXXXXXXXXX 2001 - 008951

XXXXXXXXXX, 2001

Dear XXXXXXXXXX:

Re: XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX
Advance Income Tax Ruling

We are writing in response to your letter of XXXXXXXXXX wherein you requested certain changes to a previously issued advance income tax ruling on behalf of the above-referenced taxpayers. This ruling replaces and rescinds Ruling # 2000 - 004652, dated XXXXXXXXX , 2001.

Throughout this letter, the corporate and individual taxpayers, and other related organizations will be referred to as follows:

XXXXXXXXXX . Jco
XXXXXXXXXX . Kco

XXXXXXXXXX Mr. A

XXXXXXXXXX Mr. B

XXXXXXXXXX CLP

The Tax Services Office of Jco, Mr. A and Mr. B is XXXXXXXXXX. The Tax Services Office of Kco is XXXXXXXXXX . The personal tax returns of Mr. A and Mr. B as well as the corporate tax returns of Jco and Kco are filed at the XXXXXXXXXX Taxation Centre. All the individual and corporate taxpayers are resident in Canada for the purposes of the Act.

To the best of your knowledge, and that of any of the taxpayers, none of the issues involved in this ruling request is:

(i) involved in an earlier return of any of the taxpayers or a related person;

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

(iii) under objection by any of the taxpayers or a related person;

(iv) before the courts; or

(v) the subject of a ruling previously issued by the Income Tax Rulings Directorate.

The taxpayers have represented that the proposed transactions will not affect their ability to pay any of their outstanding tax liabilities.

DEFINITIONS

In this letter, unless otherwise expressly stated, the following terms have the meanings specified:

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

(b) "adjusted cost base" ("ACB") has the meaning assigned to that term by section 54;

(c) "agreed amount" in respect of a property means the amount that the transferor and the transferee of the property have agreed upon in an election under subsection 85(1);

(d) "CBCA" means the Canada Business Corporations Act and, where applicable, its predecessor statutes;

(e) "Canadian-controlled private corporation" ("CCPC") has the meaning assigned to that term by subsection 125(7);

(f) "capital dividend account" ("CDA") has the meaning assigned to that term by subsection 89(1);

(g) "capital property" has the meaning assigned to that term by section 54;

(h) "CICA" means the Canadian Institute of Chartered Accountants;

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

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

(k) "distribution" has the meaning assigned to that term by subsection 55(1);

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

(m) "forgiven amount" has the meaning assigned to that term by subsection 80(1) and 80.01(1);

(n) "paid-up capital" ("PUC") has the meaning assigned to that term by subsection 89(1);

(o) "principal amount" has the meaning assigned to that term by subsection 248(1);

(p) XXXXXXXXXX;

(q) "refundable dividend tax on hand" ("RDTOH") has the meaning assigned to that term by subsection 129(3);

(r) "series of transactions or events" includes the transactions or events referred to in subsection 248(10);

(s) "significant influence" is defined in paragraph 3050 of the CICA handbook. A corporation is also considered to have significant influence over a second corporation if the first corporation has significant influence over a third corporation that has significant influence over the second corporation;

(t) "specified financial institution" ("SFI") has the meaning assigned to that term by subsection 248(1);

(u) "specified investment business" has the meaning assigned to that term by subsection 125(7);

(v) "stated capital" and "stated capital account" have the meaning assigned to those terms by section 26 of the CBCA;

(w) "substantial interest" has the meaning assigned to that term by subsection 191(2);

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

(y) "taxable dividend" has the meaning assigned to that term by subsection 89(1).

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

FACTS

The Distributing Corporations

1. Jco is a taxable Canadian corporation and a Canadian-controlled private corporation incorporated on XXXXXXXXXX under the provisions of the CBCA. Jco carries on a XXXXXXXXXX business. Jco's taxation year end is XXXXXXXXXX.

Jco's issued and outstanding share capital consists of XXXXXXXXXX Class A common voting shares ("Jco Common Shares"). The shareholders and their respective holdings of Jco are as follows:

Name of Shareholder Number of Shares

Mr. A XXXXXXXXXX Jco Common Shares

Mr. B XXXXXXXXXX Jco Common Shares

The shares of Jco were received by each of Mr. A and Mr. B upon initial subscription for cash on the date Jco was incorporated. All of the issued and outstanding shares of Jco are capital property in the hands of each of the shareholders. The aggregate paid-up capital of the XXXXXXXXXX Jco Common Shares is $XXXXXXXXXX.

2. Jco is earning XXXXXXXXXX income and did not employ more than 5 full-time employees throughout any of its taxation years since the date of its incorporation. Jco is carrying on a specified investment business.

3. Jco currently has a capital dividend account balance of nil and does not have, and will not have at any time before the proposed transactions described below are carried out, any unutilized losses or deductions for tax purposes. It is not anticipated that Jco will have any RDTOH immediately prior to the beginning of the proposed transactions.

4. Kco is a taxable Canadian corporation and a Canadian-controlled private corporation incorporated on XXXXXXXXXX under the provisions of the XXXXXXXXXX. Kco carries on a XXXXXXXXXX business. Kco's taxation year end is XXXXXXXXXX.

Kco's issued and outstanding share capital consists of XXXXXXXXXX common voting shares ("Kco Common Shares"). The shareholders and their respective holdings of Kco are as follows:

Name of Shareholder Number of Shares

Mr. A XXXXXXXXXX Kco Common Shares

Mr. B XXXXXXXXXX Kco Common Shares

The shares of Kco were received by each of Mr. A and Mr. B upon initial subscription for cash on the date Kco was incorporated. All of the issued and outstanding shares of Kco are capital property in the hands of each of the shareholders. The aggregate paid-up capital of the XXXXXXXXXX Kco Common Shares is $XXXXXXXXXX.

5. Kco is earning XXXXXXXXXX income and did not employ more than 5 full-time employees throughout any of its taxation years since the date of its incorporation. Kco is carrying on a specified investment business.

6. Kco currently has a capital dividend account balance of nil and does not have, and will not have at any time before the proposed transactions described below are carried out, any unutilized losses or deductions for tax purposes. It is not anticipated that Kco will have any RDTOH immediately prior to the beginning of the proposed transactions.

7. The land and buildings owned by both Jco and Kco are capital property.

8. Mr. A and Mr. B are XXXXXXXXXX. Mr. A and Mr. B have always acted jointly and in concert as shareholders in respect of all important decisions regarding Jco and Kco. In particular, all decisions regarding dividends to be paid by Jco and Kco, financing or refinancing of their assets, XXXXXXXXXX, and elections of the directors of Jco and Kco were made in concert between Mr. A and Mr. B. The directors of both Jco and Kco were Mr. A and Mr. B at all times since their incorporation. Mr. A and Mr. B remain equal partners in other businesses in which they have common control.

Furthermore, Jco and Kco have always filed their respective corporate tax returns on the basis that they are related to each other and, in particular, have filed T2 Schedule 36 - Agreement Among Related Corporations - Part I.3 Tax.

PROPOSED TRANSACTIONS

Pre-Distribution Transactions

9. Kco will incorporate a new corporation under the provisions of the XXXXXXXXXX ("Lco"). The authorized share capital of Lco will consist of common shares ("Lco Common Shares") and preferred shares ("Lco Preferred Shares"). The initial subscription will be for XXXXXXXXXX Lco Common Shares issued to Kco for a total amount of $XXXXXXXXXX. The Lco Preferred Shares will have the following attributes:

(a) each Lco Preferred Share will be redeemable, subject to applicable law, at any time at the option of the issuer for an amount equal to $XXXXXXXXXX per share (the "Lco Preferred Share Redemption Amount");

(b) each Lco Preferred Share will be retractable, subject to applicable law, at any time at the option of the holder for an amount equal to the Lco Preferred Share Redemption Amount;

(c) the holder of each Lco Preferred Share will be entitled to a non-cumulative dividend of XXXXXXXXXX% per month calculated on the Lco Preferred Share Redemption Amount. No dividend can be declared on any other class of shares of the issuer if the resulting realizable value of the net assets of the issuer after payment of such dividend would be less than the aggregate Lco Preferred Share Redemption Amount of all of the Lco Preferred Shares then outstanding;

(d) the holder of each Lco Preferred Share will be entitled, upon the liquidation, dissolution or winding-up of the issuer, to a payment, in priority to all other classes of shares of the issuer, of an amount equal to the Lco Preferred Share Redemption Amount to the extent of the amount or value of property available under applicable law for payment to shareholders upon dissolution, but will be entitled to no more than the amount of that payment; and

(e) the holder of each Lco Preferred Share will not be entitled to vote at meetings of shareholders of the issuer.

10. Lco will incorporate a new corporation under the provisions of the CBCA ("Mco"). The authorized share capital of Mco will consist only of common shares ("Mco Common Shares"). The initial subscription will be for XXXXXXXXXX Mco Common Shares issued to Lco for a total amount of $XXXXXXXXXX.

11. Jco and Mco will amalgamate under the provisions of the CBCA to form a new corporation ("Amalco"). On the amalgamation, Mr. A and Mr. B (the shareholders of Jco) will each receive one Lco Preferred Share, and Lco (the sole shareholder of Mco) will receive XXXXXXXXXX common shares of Amalco, being all the issued and outstanding shares of Amalco.

12. Lco will redeem the two Lco Preferred Shares held by Mr. A and Mr. B for $XXXXXXXXXX each.

13. Lco will be wound-up into Kco.

14. Amalco will be wound-up into Kco.

The Transferee Corporations

15. Mr. A will incorporate a new corporation ("HoldcoA") under the provisions of the CBCA or XXXXXXXXXX. HoldcoA will be a taxable Canadian corporation and a Canadian-controlled private corporation. The authorized share capital of HoldcoA will consist of common shares ("HoldcoA Common Shares") and preferred shares ("HoldcoA Preferred Shares").

16. The HoldcoA Preferred Shares will have the following attributes:

(a) each HoldcoA Preferred Share will be redeemable, subject to applicable law, at any time at the option of the issuer for an amount equal to $XXXXXXXXXX per share (the "HoldcoA Redemption Amount");

(b) each HoldcoA Preferred Share will be retractable, subject to applicable law, at any time at the option of the holder for an amount equal to the HoldcoA Redemption Amount;

(c) the holder of each HoldcoA Preferred Share will be entitled to a non-cumulative dividend of XXXXXXXXXX% per month calculated on the HoldcoA Redemption Amount. No dividend can be declared on any other class of shares of the issuer if the resulting realizable value of the net assets of the issuer after payment of such dividend would be less than the aggregate HoldcoA Redemption Amount of all of the HoldcoA Preferred Shares then outstanding;

(d) the holder of each HoldcoA Preferred Share will be entitled, upon the liquidation, dissolution or winding-up of the issuer, to a payment, in priority to all other classes of shares of the issuer, of an amount equal to the HoldcoA Redemption Amount to the extent of the amount or value of property available under applicable law for payment to shareholders upon dissolution, but will be entitled to no more than the amount of that payment; and

(e) the holder of each HoldcoA Preferred Share will be entitled to vote at meetings of shareholders of the issuer on the basis of one vote per share.

17. Mr. B will incorporate a new corporation ("HoldcoB") under the provisions of the CBCA or XXXXXXXXXX. HoldcoB will be a taxable Canadian corporation and a Canadian-controlled private corporation. The authorized share capital of HoldcoB will consist of common shares ("HoldcoB Common Shares") and preferred shares ("HoldcoB Preferred Shares").

18. The HoldcoB Preferred Shares will have the following attributes:

(a) each HoldcoB Preferred Share will be redeemable, subject to applicable law, at any time at the option of the issuer for an amount equal to $XXXXXXXXXX per share (the "HoldcoB Redemption Amount");

(b) each HoldcoB Preferred Share will be retractable, subject to applicable law, at any time at the option of the holder for an amount equal to the HoldcoB Redemption Amount;

(c) the holder of each HoldcoB Preferred Share will be entitled to a non-cumulative dividend of XXXXXXXXXX% per month calculated on the HoldcoB Redemption Amount. No dividend can be declared on any other class of shares of the issuer if the resulting realizable value of the net assets of the issuer after payment of such dividend would be less than the aggregate HoldcoB Redemption Amount of all of the HoldcoB Preferred Shares then outstanding;

(d) the holder of each HoldcoB Preferred Share will be entitled, upon the liquidation, dissolution or winding-up of the issuer, to a payment, in priority to all other classes of shares of the issuer, of an amount equal to the HoldcoB Redemption Amount to the extent of the amount or value of property available under applicable law for payment to shareholders upon dissolution, but will be entitled to no more than the amount of that payment; and

(e) the holder of each HoldcoB Preferred Share will be entitled to vote at meetings of shareholders of the issuer on the basis of one vote per share.

Classification of Property

19. Immediately before the proposed transfer of property described in paragraph 25 below, the assets of Kco will be classified into three types of property for the purposes of a distribution pursuant to paragraph 55(3)(b), as follows:

(a) cash or near-cash property, comprising all of the current assets of Kco, including cash and accounts receivable;

(b) business property, comprising all of the assets of Kco, other than cash or near-cash property, any income from which would, for the purposes of the Act, be income from an active business carried on by Kco (other than a specified investment business); and

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

For the purposes of this distribution, the investment by Kco in CLP, which comprises a XXXXXXXXXX% interest as a limited partner in a limited partnership, the assets of which consist of an interest in a XXXXXXXXXX property and ancillary assets, will be categorized as investment property.

For greater certainty, any tax accounts, such as the balance of any non-capital losses, RDTOH or CDA of Kco, will not be considered to be property for purposes of the proposed transactions described herein.

Allocation of Liabilities to Types of Property

20. In determining the net FMV of each property or type of property owned by Kco immediately before the transfer of property described in paragraph 25 below, the liabilities of Kco will be allocated to, and deducted in the calculation of the net FMV of, each property or type of property of Kco as follows:

(a) mortgages that relate to a particular immovable property will be primarily allocated to the immovable property they are attached to. Any part of a given mortgage that exceeds the tax cost of the immovable property it is attached to will be allocated to other assets transferred to the Transferee that will receive such mortgage and immovable property. If the FMV of the immovable property is less than the tax cost, the mortgage allocated to the immovable property will not exceed its FMV;

(b) accounts payable and accrued liabilities, corporation taxes and shareholders' loans will be allocated to the investment assets since these liabilities pertain to the rental activities of Kco.

For the purpose of calculating the net FMV of the property of Kco, deferred income taxes, if any, will be ignored.

Transfer of Kco Common Shares to HoldcoA and HoldcoB

21. Mr. A will transfer all of his XXXXXXXXXX Kco Common Shares to HoldcoA. As the sole consideration, HoldcoA will issue XXXXXXXXXX HoldcoA Common Shares to Mr. A.

22. In respect of the transfer described in paragraph 21 above, Mr. A and HoldcoA will elect, jointly and in prescribed form and within the time limits referred to in subsection 85(6), to have the rules in subsection 85(1) apply to the transfer of the XXXXXXXXXX Kco Common Shares to HoldcoA. The agreed amount specified in the election will be equal to the ACB to Mr. A of the transferred shares immediately before the transfer. For greater certainty, the ACB of the transferred shares will not exceed the FMV of the shares.

The amount that will be added to the stated capital of the HoldcoA Common Shares as a result of the acquisition of the Kco Common Shares by HoldcoA will be equal to the PUC of the shares so transferred.

23. Mr. B will transfer all of his XXXXXXXXXX Kco Common Shares to HoldcoB. As the sole consideration, HoldcoB will issue XXXXXXXXXX HoldcoB Common Shares to Mr. B.

24. In respect of the transfer described in paragraph 23 above, Mr. B and HoldcoB will elect, jointly and in prescribed form and within the time limits referred to in subsection 85(6), to have the rules in subsection 85(1) apply to the transfer of the XXXXXXXXXX Kco Common Shares to HoldcoB. The agreed amount specified in the election will be equal to the ACB to Mr. B of the transferred shares immediately before the transfer. For greater certainty, the ACB of the transferred shares will not exceed the FMV of the shares.

The amount that will be added to the stated capital of the HoldcoB Common Shares as a result of the acquisition of the Kco Common Shares by HoldcoB will be equal to the PUC of the shares so transferred.

Transfer of Kco Property to HoldcoA and HoldcoB

25. Kco will then transfer all of its property to HoldcoA and HoldcoB by transferring a portion of its cash or near cash property, business property, if any, and investment property such that the net FMV of each type of property so transferred to HoldcoA and HoldcoB (after allocating and deducting the liabilities of Kco, in the manner described in paragraph 20 above) will be equal to that proportion of the net fair market value of all property of Kco of that type determined immediately before such transfer that

(a) the aggregate fair market value, immediately before the transfer, of all of the shares of the capital stock of Kco owned by HoldcoA or HoldcoB, as the case may be, at that time

is of

(b) the aggregate fair market value, immediately before the transfer, of all of the issued and outstanding shares of the capital stock of Kco at that time.

As consideration for the property so transferred, HoldcoA and HoldcoB will each assume a portion of the liabilities of Kco as described in paragraph 20 above, and HoldcoA and HoldcoB will issue to Kco that number of HoldcoA Preferred Shares and HoldcoB Preferred Shares, respectively, such that the aggregate redemption and retraction amount and FMV of the HoldcoA Preferred Shares and HoldcoB Preferred Shares so issued will be equal to the net fair market value of the assets received by HoldcoA and HoldcoB, respectively, which is the amount by which the FMV of the property transferred to HoldcoA and HoldcoB exceeds the liabilities assumed by HoldcoA and HoldcoB, respectively.

For greater certainty, Kco will transfer to HoldcoA and HoldcoB a portion of its interest in CLP, such that the net FMV of each portion so transferred will be equal to each transferee's respective share, as determined by the formula described in paragraph (a) and (b) herein, of the net fair market value of the partnership interest owned by Kco immediately before such transfer.

26. In respect of the transfers described in paragraph 25 above, Kco and HoldcoA and Kco and HoldcoB will respectively elect, jointly and in prescribed form and within the time limits referred to in subsection 85(6), to have the rules in subsection 85(1) apply to the transfer of each asset of Kco that is an eligible property to HoldcoA and HoldcoB, respectively. The agreed amount specified in such elections in respect of each eligible property so transferred that has a FMV in excess of its cost amount to Kco will be an amount that is not 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, if any;

(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 capital property (other than depreciable property of a prescribed class).

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).

The liabilities assumed as consideration for a property transferred pursuant to subsection 85(1) will not exceed the agreed amount in respect of that property. To the extent that any mortgage liability secured by a transferred property exceeds the agreed amount in respect of that property, the excess mortgage liability will be assumed as consideration for the transfer of other assets. The liabilities allocated to a property other than a property transferred pursuant to subsection 85(1) will not exceed the FMV in respect of that property.

The subsection 85(1) elections referred to herein will exclude any cash, accounts receivable and prepaid expenses.

27. HoldcoA will add to its stated capital account in respect of the HoldcoA Preferred Shares issued to Kco an amount equal to the FMV of the property transferred from Kco to HoldcoA, less the liabilities of Kco assumed by HoldcoA. Pursuant to subsection 85(2.1), the PUC of the HoldcoA Preferred Shares will be reduced to the aggregate cost to HoldcoA, immediately after the transfer, of the property transferred less the FMV of the liabilities of Kco assumed by HoldcoA therefor.

HoldcoB will add to its stated capital account in respect of the HoldcoB Preferred Shares issued to Kco an amount equal to the FMV of the property transferred from Kco to HoldcoB, less the liabilities of Kco assumed by HoldcoB. Pursuant to subsection 85(2.1), the PUC of the HoldcoB Preferred Shares will be reduced to the aggregate cost to HoldcoB, immediately after the transfer, of the property transferred less the FMV of the liabilities of Kco assumed by HoldcoB therefor.

Redemption of HoldcoA Preferred Shares and HoldcoB Preferred Shares

28. Immediately after the transfer of property from Kco to HoldcoA as described in paragraph 25 above, and before the end of that day, HoldcoA will redeem the HoldcoA Preferred Shares held by Kco and will issue to Kco a non-interest-bearing promissory note payable on demand (the "HoldcoA Note") having a principal amount and FMV equal to the aggregate redemption amount of the HoldcoA Preferred Shares. Kco will accept the HoldcoA Note as full payment of the aggregate redemption amount of the HoldcoA Preferred Shares so redeemed.

Immediately after the transfer of property from Kco to HoldcoB as described in paragraph 25 above, and before the end of that day, HoldcoB will redeem the HoldcoB Preferred Shares held by Kco and will issue to Kco a non-interest-bearing promissory note payable on demand (the "HoldcoB Note") having a principal amount and FMV equal to the aggregate redemption amount of the HoldcoB Preferred Shares. Kco will accept the HoldcoB Note as full payment of the aggregate redemption amount of the HoldcoB Preferred Shares so redeemed.

Repurchase of Kco Common Shares

29. Immediately following the redemption of the HoldcoA Preferred Shares, and before the end of the day, Kco will repurchase the XXXXXXXXXX Kco Common Shares held by HoldcoA and will issue to HoldcoA a non-interest-bearing promissory note payable on demand (the "Kco Note #1") having a principal amount and FMV equal to the aggregate FMV of the repurchased shares. HoldcoA will accept the Kco Note #1 as full payment of the aggregate FMV of the XXXXXXXXXX Kco Common Shares so repurchased.

Immediately following the redemption of the HoldcoB Preferred Shares, and before the end of the day, Kco will repurchase the XXXXXXXXXX Kco Common Shares held by HoldcoB and will issue to HoldcoB a non-interest-bearing promissory note payable on demand (the "Kco Note #2") having a principal amount and FMV equal to the aggregate FMV of the repurchased shares. HoldcoB will accept the Kco Note #2 as full payment of the aggregate FMV of the XXXXXXXXXX Kco Common Shares so repurchased.

Cancellation of Promissory Notes

30. The HoldcoA Note will be set off against the Kco Note #1 and the HoldcoB Note will be set off against the Kco Note #2, and all of the notes will be cancelled.

Winding-up and Dissolution of Kco

31. The shareholders of Kco will, by special resolution, resolve to wind-up and dissolve Kco. There will be no distribution of assets upon winding-up since there will be no property left in Kco.

32. After completion of the proposed transactions, HoldcoA and HoldcoB will carry on business independently of each other.

ADDITIONAL INFORMATION

33. The shares of Jco and Kco held by each of Mr. A and Mr. B were not acquired in contemplation of the proposed transactions set out in paragraphs 9 to 32 above.

34. Jco and Kco do not own shares of any corporation over which they exercise significant influence within the meaning of section 3050 of the CICA Handbook.

35. None of the corporations referred to herein is, or will be, a specified financial institution.

36. None of the corporations referred to herein will be a corporation described in any of paragraphs (a) to (f) of the definition of "financial intermediary corporation" in subsection 191(1).

37. Kco, HoldcoA and HoldcoB will each 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.

38. No assets have been or will be acquired or disposed of, and no liabilities have been or will be incurred, by Jco or Kco in contemplation of and before the proposed transfer of property described in paragraph 25 above, except as described in this letter.

39. Jco and Kco will not dispose of any of their assets as part of the proposed series of transactions, and will not dispose of any of their assets to an unrelated person or partnership subsequent to the proposed transactions, except as described in this letter.

40. Mr. A and Mr. B will not dispose of their shares of Jco, Kco, Lco, HoldcoA or HoldcoB as part of the proposed series of transactions except as described in this letter.

41. None of the shares referred to herein, including the shares to be issued as described in the proposed transactions are, or will be, at any time during the implementation of the proposed transactions described herein:

(a) the subject of any undertaking or agreement that is referred to in subsection 112(2.2) as a "guarantee agreement";

(b) a share that is issued or acquired as part of a transaction, event or series of transactions or events of the type described in subsection 112(2.5); or

(c) the subject of a dividend rental arrangement referred to in subsection 112(2.3) as that term is defined in subsection 248(1).

PURPOSE OF THE PROPOSED TRANSACTIONS

42. Mr. A and Mr. B wish to carry on the businesses of Jco and Kco as separate businesses independent of each other. Mr. A and Mr. B have serious and fundamental disagreements on how the businesses of Jco and Kco should be carried on and can no longer work successfully together in respect of these businesses.

RULINGS GIVEN

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

A. The provisions of subsections 87(1) and 87(9) will apply to the amalgamation of Jco and Mco described in paragraph 11 above. For greater certainty, the provisions of paragraphs 87(4)(c), (d) and (e) will not apply to the amalgamation.

B. Subject to the application of subsections 69(11) and 13(21.2) as they may apply to the transfers referred to herein, the provisions of subsection 85(1) will apply to:

(a) the transfer of the Kco Common Shares held by each of Mr. A and Mr. B to HoldcoA and HoldcoB, respectively, as described in paragraphs 21 to 24 above; and

(b) the transfer of each eligible property of Kco that is the subject of an election under subsection 85(1) to HoldcoA and HoldcoB, as described in paragraphs 25 and 26 above;

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

For the purpose of the joint elections described in paragraph 26 above, the reference in subparagraph 85(1)(e)(i) to "the undepreciated capital cost to the taxpayer of all property of that class immediately before the disposition" shall be interpreted to mean that proportion of the undepreciated capital cost to the taxpayer of all property of that class that the FMV of the transferred asset immediately before the disposition is of the FMV of all property of that class immediately before the disposition.

C. As a result of the redemption by HoldcoA of the HoldcoA Preferred Shares and the redemption by HoldcoB of the HoldcoB Preferred Shares, as described in paragraph 28 above, and the repurchase by Kco of the Kco Common Shares held by HoldcoA and HoldcoB, as the case may be, as described in paragraph 29 above:

(a) by virtue of paragraphs 84(3)(a) and 84(3)(b):

(i) HoldcoA will be deemed to have paid, and Kco will be deemed to have received, a taxable dividend equal to the amount by which the amount paid to redeem the HoldcoA Preferred Shares exceeds the PUC thereof, immediately before such redemption;

(ii) Kco will be deemed to have paid, and HoldcoA will be deemed to have received, a taxable dividend equal to the amount by which the amount paid to repurchase the Kco Common Shares held by HoldcoA exceeds the PUC thereof, immediately before such repurchase.

(iii) HoldcoB will be deemed to have paid, and Kco will be deemed to have received, a taxable dividend equal to the amount by which the amount paid to redeem the HoldcoB Preferred Shares exceeds the PUC thereof, immediately before such redemption; and

(iv) Kco will be deemed to have paid, and HoldcoB will be deemed to have received, a taxable dividend equal to the amount by which the amount paid to repurchase the Kco Common Shares held by HoldcoB exceeds the PUC thereof, immediately before such repurchase;

(b) the dividends deemed to be received by Kco, HoldcoA and HoldcoB as a result of the redemptions and repurchases referred to in Ruling C(a) above will be included in each corporation's income pursuant to paragraph 12(1)(j), and will be deductible by each corporation in computing its taxable income pursuant to subsection 112(1). For greater certainty, the provisions of subsections 112(2.1), 112(2.2), 112(2.3), and 112(2.4) will not apply to deny the application of the subsection 112(1) deduction in respect of such dividends;

(c) the dividends deemed to be received by Kco, HoldcoA and HoldcoB as a result of the redemptions and repurchases referred to in Ruling C(a) above will be excluded from the proceeds of disposition of such shares by virtue of paragraph (j) of the definition of "proceeds of disposition" in section 54, and any loss arising from the disposition of those shares will be reduced by the amount of such dividends pursuant to subsection 112(3);

(d) by virtue of paragraph 191(2)(a), each recipient of a deemed dividend will have a substantial interest in the payer of the deemed dividend immediately before the redemptions and repurchases referred to in paragraphs 28 and 29 above. In particular:

(i) Kco will have a substantial interest in HoldcoA immediately before the redemption of the HoldcoA Preferred Shares held by Kco, and HoldcoA will have a substantial interest in Kco immediately before the repurchase of the Kco Common Shares held by HoldcoA; and

(ii) Kco will have a substantial interest in HoldcoB immediately before the redemption of the HoldcoB Preferred Shares held by Kco, and HoldcoB will have a substantial interest in Kco immediately before the repurchase of the Kco Common Shares held by HoldcoB.

Consequently, neither Kco, HoldcoA nor HoldcoB will be subject to Part IV.1 tax under section 187.2 or to Part VI.1 tax under section 191.1 in respect of:

(iii) the dividends deemed to have been paid by HoldcoA to Kco upon the redemption of the HoldcoA Preferred Shares since each such dividend will be an "excepted dividend" within the meaning of paragraph (b) of the definition of "excepted dividend" in section 187.1 where Kco is the recipient of the particular dividends, and will be an "excluded dividend" within the meaning of paragraph (a) of the definition of "excluded dividend" in subsection 191(1) where HoldcoA is the payer of the particular dividends;

(iv) the dividends deemed to have been paid by Kco to HoldcoA upon the repurchase of the Kco Common Shares since each such dividend will be an "excepted dividend" within the meaning of paragraph (b) of the definition of "excepted dividend" in section 187.1 where HoldcoA is the recipient of the particular dividends, and will be an "excluded dividend" within the meaning of paragraph (a) of the definition of "excluded dividend" in subsection 191(1) where Kco is the payer of the particular dividends;

(v) the dividends deemed to have been paid by HoldcoB to Kco upon the redemption of the HoldcoB Preferred Shares since each such dividend will be an "excepted dividend" within the meaning of paragraph (b) of the definition of "excepted dividend" in section 187.1 where Kco is the recipient of the particular dividends, and will be an "excluded dividend" within the meaning of paragraph (a) of the definition of "excluded dividend" in subsection 191(1) where HoldcoB is the payer of the particular dividends; and

(vi) the dividends deemed to have been paid by Kco to HoldcoB upon the repurchase of the Kco Common Shares since each such dividend will be an "excepted dividend" within the meaning of paragraph (b) of the definition of "excepted dividend" in section 187.1 where HoldcoB is the recipient of the particular dividends, and will be an "excluded dividend" within the meaning of paragraph (a) of the definition of "excluded dividend" in subsection 191(1) where Kco is the payer of the particular dividends; and

(e) by virtue of paragraph 186(4)(a), Kco will be connected with each of HoldcoA and HoldcoB, and HoldcoA and HoldcoB will each be connected with Kco. Provided that neither Kco, HoldcoA nor HoldcoB is entitled to a dividend refund in respect of its taxation year in which it is deemed to pay the dividend referred to in Ruling C(a)(i) to (a)(iv) above, neither Kco, HoldcoA nor HoldcoB will be subject to Part IV tax under subsection 186(1) in respect of such dividend.

D. 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 subparagraph 55(3.1)(b)(iii); or

(d) an acquisition of property in the circumstances described in paragraphs 55(3.1)(c) or 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 C(a) above and, for greater certainty, subsection 55(3.1) will not apply to deny the exemption from subsection 55(2) provided by paragraph 55(3)(b).

E. The settlement and cancellation of the HoldcoA Note, HoldcoB Note, Kco Note #1 and Kco Note #2, as described in paragraph 30 above, will not give rise to a "forgiven amount" within the meaning of subsections 80(1) and 80.01(1), and will not result in an income inclusion, in and by themselves.

F. The provisions of subsections 15(1), 56(2), 56(4) and 246(1) will not apply to the proposed transactions described herein, in and by themselves.

G. Subsection 245(2) will not be applied to the proposed transactions, in and by themselves, to re-determine the tax consequences confirmed in the rulings given.

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

The above rulings are based on the law as it presently reads 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

1. Nothing in this ruling should be construed as implying that the Canada Customs and Revenue Agency has agreed to or reviewed:

(a) the determination of the fair market value or ACB of any particular asset or the paid-up capital of any shares referred to herein; or

(b) any tax consequences relating to the facts and proposed transactions described herein other than those specifically described in the rulings given above.

Yours truly,

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

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