2001 Ruling 2001-0096983 - 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 CCRA.

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

Principal Issues: Split up butterfly

Position: Standard butterfly

Reasons: N/A
XXXXXXXXXX 2001-009698
XXXXXXXXXX, 2001

Dear XXXXXXXXXX:

Re: XXXXXXXXXX Advance Income Tax Ruling Request

This is in reply to your letter of XXXXXXXXXX in which you requested advance income tax rulings on behalf of the above named taxpayer. We acknowledge your letter of XXXXXXXXXX and the information provided during our various telephone conversations in connection with your request. We also acknowledge the receipt of the undertakings provided by XXXXXXXXXX, regarding their ability to pay any income taxes after the implementation of the proposed transactions described herein.

We understand that, to the best of your knowledge and that of the taxpayers involved, none of the issues involved in this ruling request:

(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 to the taxpayer or a related person.

DEFINITIONS

In this letter, unless otherwise noted: (i) all statutory references are to the Income Tax Act, R.S.C. 1985, c.1 (5th Supp.), as amended (the "Act"), and (ii) all references to monetary amounts are in Canadian dollars.

In this letter:

(a) "ACB" means "adjusted cost base" which has the meaning assigned by section 54 and subsection 248(1);

(b) "Agency" means the Canada Customs and Revenue Agency;

(c) "agreed amount" in respect of an asset means the amount that the transferor and the transferee of the asset agree upon in their election under subsection 85(1) in respect of that asset;

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

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

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

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

(h) "DC" means XXXXXXXXXX, a corporation described in paragraph 9 below;

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

(j) "FMV" means "fair market value";

(k) "Holdco" means XXXXXXXXXX ., a corporation described in paragraph 6 below;

(l) "prepaid expenses" means rights arising from the prepayment of expenses;

(m) "private corporation" has the meaning assigned by subsection 89(1);

(n) "proceeds of disposition" has the meaning assigned by section 54;

(o) "proposed transactions" means the proposed transactions described in paragraphs 24 to 43 below under the heading "Proposed Transactions";

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

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

(r) "related person" has the meaning assigned by section 251;

(s) "series of transactions or events" has the meaning assigned by subsection 248(10);

(t) "SFI" means "specified financial institution" which has the meaning assigned by subsection 248(1);

(u) "SIB" means "specified investment business" which has the meaning assigned by subsection 125(7);

(v) "Sisterco" means XXXXXXXXXX, a corporation described in paragraph 8 below;

(w) "stated capital" means stated capital as that expression is used in the BCA;

(x) "Subco1" means XXXXXXXXXX, a corporation described in paragraph 23 below;

(y) "Subco1 Transferred Assets" has the meaning assigned by paragraph 30 below;

(z) "Subco2" means XXXXXXXXXX, a corporation described in paragraph 23, below;

(aa) "Subco2 Transferred Assets" has the meaning assigned by paragraph 31 below;

(bb) "taxable Canadian corporation" has the meaning assigned in subsection 89(1);

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

(dd) "TC1" means XXXXXXXXXX, a corporation described in paragraph 4 below;

(ee) "TC2" means XXXXXXXXXX, a corporation described in paragraph 5 below;

(ff) "TC3" means XXXXXXXXXX, a corporation described in paragraph 7 below;

(gg) "TCs" means two or more of any of TC1, TC2 and TC3, as the context requires; and

(hh) "Transferred Assets" means the assets of DC which will be transferred from DC to Subco1 and Subco2 as described in paragraphs 30 and 31 below.

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

FACTS

1. XXXXXXXXXX are adult individuals who are married to each other, and each is a resident of Canada for the purposes of the Act. Their Social Insurance Numbers are XXXXXXXXXX, respectively. Their residential address is XXXXXXXXXX.

2. XXXXXXXXXX are adult individuals who are married to each other, and each is a resident of Canada for the purposes of the Act. Their Social Insurance Numbers are XXXXXXXXXX, respectively. Their residential address is XXXXXXXXXX.

3. XXXXXXXXXX are adult individuals who are married to each other, and each is a resident of Canada for the purposes of the Act. Their Social Insurance Numbers are XXXXXXXXXX. respectively. Their residential address is XXXXXXXXXX.

4. TC1 is a corporation incorporated under the laws of the province of XXXXXXXXXX. TC1 is a taxable Canadian corporation and a CCPC. TC1 does not have, and does not expect to have at any relevant time, RDTOH. The head office of TC1 is located at XXXXXXXXXX, and it deals with the XXXXXXXXXX Tax Services Office and files its returns with the XXXXXXXXXX Tax Centre. TC1's Business Number is XXXXXXXXXX. The shareholders of TC1 are as follows:

Shareholder No. and Class of Shares Held
XXXXXXXXXX XXXXXXXXXX preference shares
XXXXXXXXXX preference shares
XXXXXXXXXX common shares

XXXXXXXXXX XXXXXXXXXX preference shares
XXXXXXXXXX preference shares
XXXXXXXXXX common shares

5. TC2 is a corporation incorporated under the laws of the province of XXXXXXXXXX. TC2 is a taxable Canadian corporation and a CCPC. TC2 does not have, and does not expect to have at any relevant time, RDTOH. The head office of TC2 is located at XXXXXXXXXX, and it deals with the XXXXXXXXXX Tax Services Office and files its returns with the XXXXXXXXXX Tax Centre. TC2's Business Number is XXXXXXXXXX. The shareholders of TC2 are as follows:

Shareholder No. and Class of Shares Held
XXXXXXXXXX XXXXXXXXXX common shares
XXXXXXXXXX XXXXXXXXXX common shares

6. Holdco is a corporation incorporated under the laws of the province of XXXXXXXXXX. Holdco is a taxable Canadian corporation and a CCPC. The head office of Holdco is located at XXXXXXXXXX, and it deals with the XXXXXXXXXX Tax Services Office and files its returns with the XXXXXXXXXX Tax Centre. Holdco's Business Number is XXXXXXXXXX. The shareholders of Holdco are as follows:

Shareholder No. and Class of Shares Held
XXXXXXXXXX XXXXXXXXXX preference shares
XXXXXXXXXX common shares

XXXXXXXXXX XXXXXXXXXX preference shares
XXXXXXXXXX common shares

7. TC3 is a corporation incorporated under the laws of the province of XXXXXXXXXX . TC3 is a taxable Canadian corporation and a CCPC. TC3 does not have, and does not expect to have at any relevant time, RDTOH. The head office of TC3 is at XXXXXXXXXX , and it deals with the XXXXXXXXXX Tax Services Office and files its returns with the XXXXXXXXXX Tax Centre. TC3's Business Number is XXXXXXXXXX . Holdco owns all of the issued and outstanding shares in the capital of TC3.

8. Sisterco is a corporation incorporated under the laws of the province of XXXXXXXXXX. Sisterco is a taxable Canadian corporation and a CCPC. The head office of Sisterco is at XXXXXXXXXX, and it deals with the XXXXXXXXXX Tax Services Office and files its returns with the XXXXXXXXXX Tax Centre. Sisterco's Business Number is XXXXXXXXXXX.
The shareholders of Sisterco are as follows:

Shareholder No. and Class of Shares Held

TC1 XXXXXXXXXX common shares

XXXXXXXXXX XXXXXXXXXX common shares

TC3 XXXXXXXXXX common shares

Sisterco carries on business as a XXXXXXXXXX. As of XXXXXXXXXX, the assets of Sisterco consisted of cash (about $XXXXXXXXXX), accounts receivable and inventory, with an aggregate FMV of approximately $XXXXXXXXXX. Sisterco is indebted to DC in the amount of $XXXXXXXXXX. The loan is non-interest-bearing and has no provision requiring its repayment within a specified period of time.

9. DC is a corporation incorporated under the laws of the province of XXXXXXXXXX. DC is a taxable Canadian corporation and a CCPC. The head office of DC is located at XXXXXXXXXX, and it deals with the XXXXXXXXXX Tax Services Office and files its returns with the XXXXXXXXXX Tax Centre. DC's Business Number is XXXXXXXXXX.

10. The authorized share capital of DC, and a summary of the rights, restrictions and conditions attaching to these shares, is as follows:

a) an unlimited number of XXXXXXXXXX shares which are non-voting, redeemable and retractable for $XXXXXXXXXX per share, entitle the holders to cumulative dividends in an amount determined by the board but which cannot be less than XXXXXXXXXX% per year and not more than XXXXXXXXXX% per year, and, on the dissolution of DC, the holders of the XXXXXXXXXX shares are entitled to receive "the amount paid up thereon" plus any dividends declared thereon and unpaid in priority to the holders of any other issued and outstanding class of shares of DC;

b) an unlimited number of XXXXXXXXXX shares which are non-voting, redeemable and retractable for $XXXXXXXXXX per share, entitle the holders to non-cumulative dividends in an amount determined by the board but which cannot exceed XXXXXXXXXX% of the XXXXXXXXXX share "Redemption Amount" per year, and, on the dissolution of DC, the holders of the XXXXXXXXXX shares are entitled to receive the XXXXXXXXXX share "Redemption Amount" per share plus any dividends declared thereon and unpaid in priority to the holders of the issued and outstanding common shares in the capital of DC;

c) an unlimited number of XXXXXXXXXX shares which are non-voting, redeemable and retractable for $XXXXXXXXXX per share, entitle the holders to non-cumulative dividends in an amount determined by the board but which cannot exceed XXXXXXXXXX % of the XXXXXXXXXX share "Redemption Amount" per year, and, on the dissolution of DC, the holders of the XXXXXXXXXX shares are entitled to receive the XXXXXXXXXX share "Redemption Amount" per share plus any dividends declared thereon and unpaid in priority to the holders of the issued and outstanding common shares in the capital of DC;

d) an unlimited number of XXXXXXXXXX shares which are non-voting, redeemable and retractable for $XXXXXXXXXX per share, entitle the holders to non-cumulative dividends in an amount determined by the board but which cannot exceed XXXXXXXXXX% of the XXXXXXXXXX share "Redemption Amount" per year, and, on the dissolution of DC, the holders of the XXXXXXXXXX shares are entitled to receive the XXXXXXXXXX share "Redemption Amount" per share plus any dividends declared thereon and unpaid in priority to the holders of the issued and outstanding common shares in the capital of DC;

e) the XXXXXXXXXX shares, the XXXXXXXXXX shares and the XXXXXXXXXX shares share rateably with respect to all payments made on any such class; and
f) the authorized common shares in the capital of DC are ordinary common shares.

11. The shareholders of DC are as follows:

Shareholder No. and Class of Shares Held

TC1 XXXXXXXXXX shares
XXXXXXXXXX common shares

TC2 XXXXXXXXXX shares
XXXXXXXXXX common shares

TC3 XXXXXXXXXX shares
XXXXXXXXXX shares
XXXXXXXXXX common shares

The shares held by each TC, as described above, have a FMV of XXXXXXXXXX% or more of the FMV of all the issued and outstanding shares of DC. The common shares held by each TC have a FMV of XXXXXXXXXX % or more of the FMV of all the issued and outstanding common shares of DC.

The FMV of the common shares and the XXXXXXXXXX shares held by TC1 is equal to the FMV of the common shares and the XXXXXXXXXX shares held by TC2.

12. The shares in the capital of DC are capital property to their owners for the purposes of the Act.

13. In DC, the PUC of the:

a) XXXXXXXXXX shares is $ XXXXXXXXXX;

b) XXXXXXXXXX shares is $XXXXXXXXXX;

c) XXXXXXXXXX shares is $XXXXXXXXXX;

d) XXXXXXXXXX shares is $XXXXXXXXXX; and

e) common shares is $XXXXXXXXXX.

14. The ACB of the issued and outstanding shares in the capital of DC is as follows:

Shareholder Class of Shares ACB
TC1 XXXXXXXXXX Shares $ XXXXXXXXXX
common shares $ XXXXXXXXXX

TC2 XXXXXXXXXX Shares $XXXXXXXXXX
common shares $XXXXXXXXXX

TC3 XXXXXXXXXX Shares $XXXXXXXXXX
XXXXXXXXXX Shares $XXXXXXXXXX
common shares $ XXXXXXXXXX

15. DC did not have, as of XXXXXXXXXX, and does not expect to have at any relevant time, RDTOH, a balance in its capital dividend account or pre-1972 capital surplus on hand, as these latter terms are defined for the purposes of the Act.

16. DC carries on business as a XXXXXXXXXX.

17. DC's assets may be summarized as follows:

a) certain cash or near cash property, consisting of cash, deposits, accounts receivable, inventories, materials and supplies, and prepaid expenses;

b) certain fixed assets (principally machinery and equipment) used in DC's business operations; and

c) XXXXXXXXXX common shares in the capital of XXXXXXXXXX, whose common shares are listed on the XXXXXXXXXX Stock Exchange, and which is a public corporation for the purposes of the Act.

18. On XXXXXXXXXX, DC paid a dividend of $XXXXXXXXXX to the XXXXXXXXXX shareholder. The following dividends were paid in previous years:

Class of Share Amount of Dividend Date Paid

XXXXXXXXXX

19. On XXXXXXXXXX , DC paid $XXXXXXXXXX to TC3 in satisfaction of an obligation owing to TC3 as a result of the redemption on that date of XXXXXXXXXX Shares in the capital of DC.

20. On XXXXXXXXXX, TC3 loaned $XXXXXXXXXX to DC under a demand, interest-bearing promissory note. The interest under the note is payable at XXXXXXXXXX%, compounded annually. DC paid to TC3 accrued interest of $XXXXXXXXXX in respect of the obligation on XXXXXXXXXX.

21. In XXXXXXXXXX, DC loaned funds to each of TC1, TC2 and TC3 as follows:

Date of Loan Borrower Amount of Loan
XXXXXXXXXX TC1 $XXXXXXXXXX
XXXXXXXXXX TC2 $XXXXXXXXXX
XXXXXXXXXX TC3 $XXXXXXXXXX

The loans are non-interest-bearing and payable on demand.

22. Other than as described above, DC has not acquired or disposed of any property with a material FMV other than in the ordinary course of business. While DC is not currently negotiating to acquire or dispose of property with a significant FMV, it is conceivable that, in the ordinary course of business, DC could enter into such negotiations as circumstances change or opportunities arise. No such acquisition or disposition, however, will occur in contemplation of the proposed transactions.

PRELIMINARY TRANSACTION

23. On XXXXXXXXXX, DC incorporated Subco1 and Subco2 under the BCA as wholly-owned subsidiaries. Each of Subco1 and Subco2 is a taxable Canadian corporation. Neither Subco1 nor Subco2 issued shares upon incorporation.

The share capital of Subco1 consists of: (i) an unlimited number of XXXXXXXXXX shares that are redeemable and retractable for $XXXXXXXXXX per share, non-voting and entitled to non-cumulative dividends at the rate of XXXXXXXXXX% per month calculated on the redemption amount, (ii) an unlimited number of XXXXXXXXXX shares that are redeemable and retractable for $XXXXXXXXXX per share, non-voting and entitled to cumulative dividends at the rate of XXXXXXXXXX% per month calculated on the redemption amount, and (iii) an unlimited number of common shares.

The share capital of Subco2 consists of an unlimited number of common shares.

PROPOSED TRANSACTIONS

24. TC1, TC2 and TC3 will each file articles of amendment to create XXXXXXXXXX shares designated as "XXXXXXXXXX Shares". The XXXXXXXXXX Shares will have the following attributes:

a) subject to applicable law, each XXXXXXXXXX Share will be redeemable at any time at the option of the issuing corporation for an amount per share (the "XXXXXXXXXX Share Redemption Amount") equal to the amount determined by the following formula:

(A + B)/C
where
'A' is the total net FMV of the consideration for which such shares are issued (which will be the aggregate FMV of the shares of Subco1 or Subco2, as the case may be, that will be transferred to the relevant TC, as described in paragraphs 34, 35 and 36 below);
'B' is the total amount of any declared but unpaid dividends; and
'C' is XXXXXXXXXX;

b) subject to applicable law, each XXXXXXXXXX Share will be retractable at any time at the option of the holder at a retraction amount equal to the XXXXXXXXXX Share Redemption Amount;

c) the holder of each XXXXXXXXXX Share will be entitled to a non-cumulative cash dividend as and when declared by the board of directors of the issuing corporation from time to time, which dividend need not also be declared on any other class of shares of the issuing corporation;

d) if the issuing corporation is liquidated, dissolved or wound-up, or if its assets are otherwise distributed among the shareholders by way of a repayment of capital, whether voluntary or involuntary, the holders of the XXXXXXXXXX Shares will be entitled to receive, before any distribution of any assets of the issuing corporation among the holders of the other issued shares of the issuer, an amount per XXXXXXXXXX Share equal to the XXXXXXXXXX Share Redemption Amount; and

e) the holders of XXXXXXXXXX Shares will be entitled to one vote per share at meetings of shareholders of the issuing corporation.

The amount determined by the formula in paragraph a) above will be fixed by a resolution of the board of directors of the relevant TC upon the issue of the XXXXXXXXXX Shares. The amount so fixed will be a specified amount for the purposes of subsection 191(4) of the Act.

For greater certainty, the amended articles of each TC will stipulate that the TC cannot redeem or purchase for cancellation a share in its capital if doing so would impair its ability to redeem the XXXXXXXXXX shares.

25. The articles of amendment for TC1 and TC2 referred to above will also subdivide the issued and outstanding common shares in the capital of each corporation on the basis of XXXXXXXXXX common shares for each issued and outstanding common share. This subdivision of common shares will not result in a change in:

a) the rights or privileges of the shareholders of the TC;

b) the percentage of common shares held by any shareholder; or

c) the total capital represented by the common shares.

There will be no other concurrent changes in the capital structure of either of TC1 or TC2 or in the rights and privileges of other classes of shares of the two corporations. As a result of this subdivision of shares, the voting capital of each of the TCs will consist of XXXXXXXXXX common shares, each of which is entitled to one vote per share.

26. Immediately before the transfers of property described in paragraphs 30 and 31 below, DC will pay to TC3 accrued interest, for the period from XXXXXXXXXX to the date of the transfers described in paragraphs 30 and 31 below, in respect of the obligation it owes to TC3 that is described in paragraph 20 above.

27. Immediately before the transfers of property described in paragraphs 30 and 31 below and after the payment of interest described in paragraph 26 above, 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 any cash, deposits, accounts receivable, inventories, materials and supplies, prepaid expenses and the non-interest-bearing loans made by DC to each of the TCs as described in paragraph 21 above and the non-interest-bearing loan made by DC to Sisterco as described in paragraph 8 above;

b) business property, comprising all of the assets of DC, other than cash or near cash property and any income from which would, for 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 purposes of the Act, be income from property or a SIB, which at present includes the XXXXXXXXXX shares described in paragraph 17c) above, and it is expected that this will still be true at the time of the transfer of the Transferred Assets.

28. For greater certainty, any tax accounts, such as the balance of any capital losses, non-capital losses and investment tax credits of DC, will not be considered property for purposes of the proposed transactions.

29. In determining the net FMV of each type of property of DC immediately before the transfers described in paragraphs 30 and 31 below, the liabilities of DC will be allocated to, and will be deducted in the calculation of, the net FMV of each such type of property of DC in the following manner:

a) current liabilities of DC will be allocated to the cash or near cash property (as described in paragraph 27a) above) of DC in the proportion that the FMV of each such property is of the FMV of all cash or near cash property owned by DC;

b) following the allocation of current liabilities to cash or near-cash property in paragraph a) above, any remaining net FMV of any accounts receivables, inventories and prepaid expenses of DC will be reclassified as business property and excluded from cash or near-cash property, to the extent that such property will be collected, sold or used in the ordinary course of the business to which such property relates; for greater certainty: (i) the non-interest-bearing loans made by DC to each of the TCs as described in paragraph 21 above, and (ii) the non-interest-bearing loan made by DC to Sisterco as described in paragraph 8 above, will not be re-classified as business property;

c) liabilities of DC, other than current liabilities, that relate to a particular property will be allocated to the particular property (and effectively to the type to which the particular property belongs) to the extent of its FMV and the liabilities that pertain to a type of property, but not to a particular property, will be allocated to that type of property, but not in excess of the net FMV of such type of property after the allocation of liabilities to a particular property as described herein; and
d) if any liabilities remain after the allocations described in paragraphs a) and b) above are made ("excess unallocated liabilities"), such excess unallocated liabilities will then be allocated to the cash or near cash property, investment property and business property, if any, of DC, based on the relative net FMV of each type of property prior to the allocation of such excess unallocated liabilities.

For the purposes of this paragraph, and for the purposes of the proposed transactions, no amount will be considered to be a liability unless it represents a true legal liability which is capable of quantification. The amount of any deferred income tax will not be considered a liability for the purposes of the proposed transactions because such an amount would not represent a legal obligation of DC. Deferred revenue will be considered to be a liability to the extent that the amount of such deferred revenue gives rise to a legal obligation to repay such amount should the services not be provided or goods not be delivered.

As a result of the foregoing determinations, and in accordance with the Agency's administrative practice allowing for the re-classification of current assets other than cash as business property in certain circumstances, it is expected that the only types of property of DC will be cash, business-type property and investment-type property.

30. DC and Subco1 will enter into an agreement of purchase and sale under which DC will transfer certain assets (the "Subco1 Transferred Assets") to Subco1 for a purchase price equal to their FMV. The Subco1 Transferred Assets will consist of cash, business property and investment property each with a net FMV equal to the proportion of all of the property of each such type owned by DC immediately before the transfers described in this paragraph and paragraph 31 below that the total FMV of the issued and outstanding shares of DC owned by TC1 and TC2 is of the total FMV of all of the issued and outstanding shares of DC. Subco1 will satisfy the purchase price by assuming certain liabilities of DC and by issuing to DC XXXXXXXXXX common shares with an aggregate FMV equal to the FMV of the Subco1 Transferred Assets less any liabilities assumed by Subco1 under the agreement of purchase and sale. With respect to property transferred to Subco1 under section 85, the directors of Subco1, in accordance with the provisions of subsection 24(3) of the BCA, will limit the amount to be added to the stated capital of the common shares issued for that property to an amount equal to the aggregate agreed amounts under subsection 85(1), less the amount of any liabilities assumed by Subco1 as described above.

31. DC and Subco2 will enter into an agreement of purchase and sale under which DC will transfer certain assets (the "Subco2 Transferred Assets") to Subco2 for a purchase price equal to their FMV. The Subco2 Transferred Assets will consist of cash, business property and investment property each with a net FMV equal to the proportion of all of the property of each such type owned by DC immediately before the transfers described in this paragraph and paragraph 30 above that the total FMV of the issued and outstanding shares of DC owned by TC3 is of the total FMV of all of the issued and outstanding shares of DC. Subco2 will satisfy the purchase price by assuming certain liabilities of DC and by issuing to DC XXXXXXXXXX common shares with an aggregate FMV equal to the FMV of the Subco2 Transferred Assets less any liabilities assumed by Subco2 under the agreement of purchase and sale. With respect to property transferred to Subco2 under section 85, the directors of Subco2, in accordance with the provisions of subsection 24(3) of the BCA, will limit the amount to be added to the stated capital of the common shares issued for that property to an amount equal to the aggregate agreed amounts under subsection 85(1), less the amount of any liabilities assumed by Subco2 as described above.

32. DC will jointly elect with each of Subco1 and Subco2 in prescribed form and within the time referred to in subsection 85(6), to have the provisions of subsection 85(1) apply to the transfer of each eligible property transferred to each of Subco1 and Subco2 as described in paragraphs 30 and 31 above. The agreed amount in respect of each of the eligible properties transferred will be as follows:

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

b) in the case of depreciable property of a prescribed class, an amount equal to the least of the amounts described in subparagraphs 85(1)(e)(i), (ii) and (iii); and

c) in the case of eligible capital property, an amount equal to the least of the amounts described in subparagraphs 85(1)(d)(i), (ii) and (iii).

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 amount of liabilities to be allocated to the property that is the subject of an election under subsection 85(1) will not exceed the total of the agreed amounts elected for that property. The amount of liabilities to be allocated to the property that is not the subject of an election under subsection 85(1) will not exceed the FMV of any such property.

33. Neither Subco1 nor Subco2 will dispose of or acquire property in the period of time (which is expected to be quite brief) between the transfer of assets from DC to each of Subco1 and Subco2, as described in paragraphs 30 and 31 above, and the moment immediately before the sale of shares in the capital of Subco1 and Subco2, as described in paragraphs 34, 35 and 36 below.

34. DC will sell, and TC1 will purchase, XXXXXXXXXX common shares in the capital of Subco1 for a purchase price equal to the FMV of the common shares. TC1 will satisfy the purchase price payable for the common shares by issuing to DC XXXXXXXXXX Shares with a FMV and a total redemption amount equal to the FMV of the common shares. The directors of TC1, in accordance with the provisions of subsection 24(3) of the BCA, will add to the stated capital account maintained for the XXXXXXXXXX Shares issued an amount not to exceed the PUC of the Subco1 common shares transferred.

35. DC will sell, and TC2 will purchase, XXXXXXXXXX common shares in the capital of Subco1 for a purchase price equal to the FMV of the common shares. TC2 will satisfy the purchase price payable for the common shares by issuing to DC XXXXXXXXXX Shares with a FMV and a total redemption amount equal to the FMV of the common shares. The directors of TC2, in accordance with the provisions of subsection 24(3) of the BCA, will add to the stated capital account maintained for the XXXXXXXXXX Shares issued an amount not to exceed the PUC of the Subco1 common shares transferred.

36. DC will sell, and TC3 will purchase, XXXXXXXXXX common shares in the capital of Subco2 for a purchase price equal to the FMV of the common shares. TC3 will satisfy the purchase price payable for the common shares by issuing to DC XXXXXXXXXX Shares with a FMV and a total redemption amount equal to the FMV of the common shares. The directors of TC3, in accordance with the provisions of subsection 24(3) of the BCA, will add to the stated capital account maintained for the XXXXXXXXXX Shares issued an amount not to exceed the PUC of the Subco2 common shares transferred.

37. After the completion of the transactions described in paragraphs 34, 35 and 36 above, DC will own XXXXXXXXXX of the XXXXXXXXXX issued and outstanding voting shares in the capital of each of the TCs. Accordingly, DC will own XXXXXXXXXX % of the voting shares of each TC and these shares will have a FMV that is more than 10% of the FMV of all the issued and outstanding shares of the particular TC.

38. DC will jointly elect with each of the TCs in prescribed form and within the time referred to in subsection 85(6), to have the provisions of subsection 85(1) apply to the transfers of common shares of Subco1 and Subco2, as described in paragraphs 34, 35 and 36 above. In each case, the agreed amount in respect of each eligible property will be an amount equal to the lesser of the amounts described in subparagraphs 85(1)(c.1)(i) and (ii), and, further, 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).

39. TC1 will redeem the XXXXXXXXXX Shares in its capital owned by DC for an amount per share equal to the XXXXXXXXXX Share Redemption Amount and TC1 will issue to DC in consideration therefor a demand, non-interest-bearing promissory note (the "TC1 Note") with a principal amount and FMV equal to the aggregate XXXXXXXXXX Share Redemption Amounts of the XXXXXXXXXX Shares so redeemed. DC will accept the TC1 Note as full payment of the aggregate XXXXXXXXXX Share Redemption Amount of the XXXXXXXXXX Shares so redeemed.

40. TC2 will redeem the XXXXXXXXXX Shares in its capital owned by DC for an amount per share equal to the XXXXXXXXXX Share Redemption Amount and TC2 will issue to DC in consideration therefor a demand, non-interest-bearing promissory note (the "TC2 Note") with a principal amount and FMV equal to the aggregate XXXXXXXXXX Share Redemption Amounts of the XXXXXXXXXX Shares so redeemed. DC will accept the TC2 Note as full payment of the aggregate XXXXXXXXXX Share Redemption Amount of the XXXXXXXXXX Shares so redeemed.

41. TC3 will redeem the XXXXXXXXXX Shares in its capital owned by DC for an amount per share equal to the XXXXXXXXXX Share Redemption Amount and TC3 will issue to DC in consideration therefor a demand, non-interest-bearing promissory note (the "TC3 Note") with a principal amount and FMV equal to the aggregate XXXXXXXXXX Share Redemption Amounts of the XXXXXXXXXX Shares so redeemed. DC will accept the TC3 Note as full payment of the aggregate XXXXXXXXXX Share Redemption Amount of the XXXXXXXXXX Shares so redeemed.

42. Immediately after the redemptions described in paragraphs 39, 40 and 41 above, the shareholders of DC will, by special resolution, resolve to liquidate and dissolve DC under the applicable provisions of the BCA. No agreement or resolution relating to the winding-up of DC or the distribution of its property will provide for the cancellation of any shares of DC. In connection with the winding-up of DC, DC will distribute the TC1 Note to TC1, the TC2 Note to TC2 and the TC3 Note to TC3. As a result of the assignment and distribution of the notes, the obligations under each such note will be cancelled. In due course, DC will file tax returns for its XXXXXXXXXX taxation year and articles of dissolution will be filed and DC will be dissolved.

For the purposes of the Act, in particular subsection 84(2), the FMV of each note received by each respective TC will be allocated amongst the classes of shares held by each TC based on the relative aggregate FMV of the shares of each class held by the particular TC.

43. After the series of transactions described above, Sisterco will be indebted to Subco1 and Subco2. Sisterco will repay its accounts payable, and then repay a portion of the indebtedness to each of Subco1 and Subco2 by transferring to each a portion of Sisterco's remaining assets. The remaining portion of the loan from each of Subco1 and Subco2 to Sisterco will then be forgiven and Sisterco will be dissolved.

ADDITIONAL INFORMATION

44. No property has or will become property of DC, Subco1 and Subco2 and no liabilities have been or will be incurred by any of these corporations in contemplation of and before the transfers described in paragraphs 30 and 31 above except as described in this letter. None of DC, Subco1, Subco2, TC1, TC2 or TC3 has any specific intention of disposing of any of the assets it owns to an unrelated person following the proposed transactions and as part of a series of transactions or events that includes the proposed transactions, other than in the ordinary course of business.

45. There are not, and will not be at any time before 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 in the capital of DC or any of the XXXXXXXXXX Shares in the capitals of TC1, TC2 or TC3.

46. None of DC, TC1, TC2 or TC3 has, or will have, entered into a "dividend rental arrangement", as defined in subsection 248(l), in respect of any of the shares to be redeemed or purchased for cancellation as part of the proposed transactions.

47. No share of the issued capital of any of DC, TC1, TC2 or TC3 has been, or will be, issued or acquired as part of a series of transactions of the type described in subsection 112(2.5).

48. None of DC, TC1, TC2 or TC3 will be a corporation described in any of paragraphs (a) to (f) of the definition of "financial intermediary corporation" in subsection 191(1). None of DC, TC1, TC2 or TC3 is or will be a SFI prior to completion of the proposed transactions.

PURPOSE OF THE PROPOSED TRANSACTIONS

The TCs have been carrying on business together through DC for about XXXXXXXXXX years. Differences between the shareholders of TC1 and TC2 on the one hand and the shareholders of TC3 on the other concerning the management of DC have led the parties to agree to carry on business separately. The divisive reorganization described above will permit TC3 to carry on business through Subco2 and TC1 and TC2 to carry on business through Subco1.

RULINGS

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

A. The subdivision of common shares in the capital of TC1 and TC2, as described in paragraph 25 above, will not result in the common shareholders of the corporations being considered to have disposed of or acquired common shares in the capital of TC1 or TC2. The ACB of a common share in the capital of TC1 and TC2 to a particular shareholder immediately after the subdivision will be equal to the aggregate ACB of the issued common shares held by that shareholder immediately before the subdivision, divided by the new number of common shares held by that shareholder after the subdivision.

B. Subject to the application of subsection 69(11), the provisions of subsection 85(1) will apply to the transfer by DC of its properties that are eligible properties to Subco1 and Subco2, as described in paragraphs 30 and 31 above, such that the agreed amount in respect of each transfer of eligible property will be deemed to be the transferor's proceeds of disposition and the transferee's cost thereof under paragraph 85(1)(a). For greater certainty:

1. paragraph 85(1)(e.2) will not apply to the transfers referred to in the previous sentence; and

2. for the purposes of determining the agreed amounts of the depreciable property of a prescribed class transferred, the reference to "the undepreciated capital cost to the taxpayer of all the property of that class immediately before the disposition" found in subparagraph 85(1)(e)(i) will be interpreted to mean that portion of the undepreciated capital cost to DC of all the property of that class that the capital cost of the assets of that class transferred is of the capital cost of all the assets of that class.

C. Respecting the transfers by DC of its shares in the capital of Subco1 to each of TC1 and TC2, as described in paragraphs 34 and 35 above, and of its shares in the capital of Subco2 to TC3, as described in paragraph 36 above:

1. the transfers will be treated as agreements of purchase and sale between DC and each of TC1, TC2 and TC3 and not as dividends paid by DC to TC1, TC2 and TC3 in respect of their shares in the capital of DC;

2. subsections 69(4), 69(5) and 84(2) will not apply; and

3. subject to the application of subsection 69(11), the provisions of subsection 85(1) will apply, such that the agreed amount in respect of each such transfer of eligible property will be deemed to be the transferor's proceeds of disposition and the transferee's cost thereof under paragraph 85(1)(a), and, for greater certainty, paragraph 85(1)(e.2) will not apply to these transfers.

D. As a result of the redemption by the TCs of their XXXXXXXXXX Shares held by DC, as described in paragraphs 39, 40 and 41 above, and as a result of the distributions by DC in the course of its winding-up, as described in paragraph 42 above:

1. by virtue of subsection 84(3), each TC will be deemed to have paid, and DC will be considered to have received, a dividend on such shares equal to the amount, if any, by which the aggregate amount paid upon such redemption exceeds the aggregate PUC in respect of such shares immediately before such redemption;

2. pursuant to paragraph 88(2)(b) and subsection 84(2), each TC will be deemed to have received a dividend on the common shares, the XXXXXXXXXX Shares, the XXXXXXXXXX Shares, the XXXXXXXXXX Shares and the XXXXXXXXXX Shares, as the case may be, equal to the proportion of the amount by which the aggregate FMV of the property of DC distributed to each TC on the winding-up exceeds the amount by which the PUC of the common shares, the XXXXXXXXXX Shares, the XXXXXXXXXX, the XXXXXXXXXX Shares and the XXXXXXXXXX Shares, as the case may be, is reduced as a result of the distribution, that the number of shares of such class held by each TC, as the case may be, is of the number of issued shares of such class outstanding immediately before the distribution; and

3. the dividends described in paragraphs 1 and 2 above:

a) 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;

b) 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, for greater certainty, such deduction will not be prohibited by any of subsections 112(2.2), (2.3) or (2.4);

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

d) will not be subject to tax under Part IV; and

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

E. Provided that as part of the series of transactions or events that include the proposed transactions there is not:

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

2. an acquisition of control described in subparagraph 55(3.1)(b)(ii); or

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

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

F. The settlement of the TC1 Note, the TC2 Note and the TC3 Note, as described in paragraph 42 above, will not give rise to a "forgiven amount" within the meaning of subsections 80(1) and 80.01(1).

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

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

These rulings are given subject to the limitations and qualifications set out in Information Circular IC 70-6R4 issued on January 29, 2001 and are binding on the Agency provided that the proposed transactions are completed before XXXXXXXXXX.
Yours truly,

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