2006 Ruling 2005-0158841R3 - XXXXXXXXXX - Butterfly Distribution

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.

Principal Issues: Multiple wing butterfly followed by winding-up of the DC. Several mostly routine issues.

Position: Favourable ruling issued.

Reasons: Complies with the law.

XXXXXXXXXX 								2005-015884

XXXXXXXXXX, 2006

Dear Sirs:

Subject: XXXXXXXXXX. - Advance Income Tax Ruling Request

This is in reply to your letter of XXXXXXXXXX, as modified by your other correspondence, including your letter dated XXXXXXXXXX, wherein you requested an advance income tax ruling on behalf of the above-noted taxpayer. You have advised us that to the best of your knowledge and that of the taxpayer involved none of the issues involved in this ruling request are:

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

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

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

(iv) before the courts or, if a judgment has been issued, the time limit for appeal to a higher court has expired; or

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

The taxpayer has also represented that the proposed transactions described herein will not result in the taxpayer or any related person described herein being unable to pay its existing outstanding tax liabilities.

DEFINITIONS

In this letter, all monetary amounts are expressed in Canadian dollars unless otherwise indicated, and the following terms or expressions have the meaning specified:

(a) "Act" means the Income Tax Act, R.S.C. 1985 (5th Supp.) c.1, as amended from time to time and consolidated to this date of this letter, and unless otherwise expressly stated, every reference herein to a part, section or subsection, paragraph or subparagraph, clause or subclause is a reference to the relevant provision, and the Income Tax Act Regulations thereunder are referred to as the "Regulations";

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

(c) "agreed amount" means the amount agreed on by the transferor and transferee in respect of an eligible property in an election filed pursuant to subsection 85(1);

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

(e) "B's Children" means Child B1, Child B2 and Child B3 collectively;

(f) "BN" means the tax identification number assigned by the CRA to the particular entity;

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

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

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

(j) "Child B1" means XXXXXXXXXX, a daughter of Individual B;

(k) "Child B2" means XXXXXXXXXX, a son of Individual B;

(l) "Child B3" means XXXXXXXXXX, a daughter of Individual B;

(m) "CRA" means the Canada Revenue Agency;

(n) "depreciable property" has the meaning assigned by subsection 248(1);

(o) "distribution" has the meaning assigned by subsection 55(1);

(p) "DC" means XXXXXXXXXX.;

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

(r) "fair market value" ("FMV") means the highest price available in an open and unrestricted market, between informed prudent parties, acting at arm's length and with no compulsion to act, expressed in terms of cash;

(s) "forgiven amount" has the meaning assigned by subsections 80(1) and 80.01(1);

(t) "Individual A" means XXXXXXXXXX an individual resident in Canada for the purposes of the Act;

(u) "Individual B" means XXXXXXXXXX an individual resident in XXXXXXXXXX for the purposes of the Act;

(v) "Individual C" means XXXXXXXXXX an individual resident in Canada for the purposes of the Act;

(w) "NewCos" means NewCo A, NewCo B and NewCo C collectively, and "NewCo" means any of NewCo A, NewCo B and NewCo C in the singular;

(x) "NewCo A" means the new corporation incorporated by Individual A as described in Paragraph 11;

(y) "NewCo B" means the new corporation incorporated by Individual B as described in Paragraph 11;

(z) "NewCo C" means the new corporation incorporated by Individual C as described in Paragraph 11;

(aa) "Paragraph" refers to a numbered paragraph in this advance income tax ruling;

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

(cc) "Proposed Transactions" means the proposed transactions described in Paragraphs 11 to 31;

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

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

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

(gg) "SIN" means Social Insurance Number;

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

(ii) "specified investment business" has the meaning assigned by subsection 125(7);

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

(kk) "SubCo A" means the new corporation incorporated by NewCo A as described in Paragraph 15;

(ll) "SubCo B" means the new corporation incorporated by NewCo B as described in Paragraph 15;

(mm) "SubCo C" means the new corporation incorporated by NewCo C as described in Paragraph 15;

(nn) "SubCos" means SubCo A, SubCo B and SubCo C collectively, and "SubCo" means any of SubCo A, SubCo B and SubCo C in the singular;

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

(pp) "Transferred Assets" means those assets of DC to be transferred by DC to the NewCos, as described in Paragraph 22.

FACTS

1. DC is a Canadian-controlled private corporation and a taxable Canadian corporation that was incorporated under the BCA. DC's BN is XXXXXXXXXX and it has a XXXXXXXXXX taxation year. DC deals with the XXXXXXXXXX TSO and files its federal corporate tax returns at the XXXXXXXXXX TC.

2. The authorized share capital of DC is comprised of the following classes of shares:

(a) Class I voting, fully participating common shares ("Common Shares");

(b) Class II voting, fully participating common shares;

(c) Class III.1 non-voting, non-cumulative, redeemable, retractable preferred shares ("Class III.1 Shares");

(d) Class III.2 non-voting, non-cumulative, redeemable, retractable preferred shares ("Class III.2 Shares");

(e) Class III.3 non-voting, non-cumulative, redeemable, retractable preferred shares ("Class III.3 Shares");

(f) Class III.4 non-voting, non-cumulative, redeemable, retractable preferred shares ("Class III.4 Shares");

(g) Class III.5 non-voting, non-cumulative, redeemable, retractable preferred shares ("Class III.5 Shares"); and

(h) Class IV non-voting, non-cumulative, redeemable, retractable preferred shares.

3. The issued and outstanding shares capital of DC are held as follows.

				Number of 		Number of 		Number of
				Shares Owned 	Shares Owned 	Shares Owned
Class of DC's Shares 	by Individual A 	by Individual B 	by Individual C 

Common Shares		XXXXXXXX 		XXXXXXXX 		XXXXXXXX
Class III.1 Shares	XXXXXXXX 		XXXXXXXX 		XXXXXXXX
Class III.2 Shares	XXXXXXXX 		XXXXXXXX 		XXXXXXXX
Class III.3 Shares	XXXXXXXX 		XXXXXXXX 		XXXXXXXX
Class III.4 Shares	XXXXXXXX 		XXXXXXXX 		XXXXXXXX
Class III.3 Shares	XXXXXXXX 		XXXXXXXX 		XXXXXXXX 

Hereinafter, the Class III.1 Shares, Class III.2 Shares, Class III.3 Shares, Class III.4 Shares and Class III.5 Shares will collectively be referred to as the "DC Preferred Shares". The Common Shares and the DC Preferred Shares are held by each of the above-described individuals as capital property and each such individual has been a shareholder of DC for more than XXXXXXXXXX years. No shares of DC have been acquired by any person in contemplation of the Proposed Transactions.

4. Each of the DC Preferred Shares has a FMV, redemption amount, PUC and ACB to each holder of $XXXXXXXXXX . The XXXXXXXXXX Common Shares of DC that are owned by each holder have an aggregate ACB and an aggregate PUC of $XXXXXXXXXX to each such holder.

5. Individual A, Individual B and Individual C are adult siblings.

6. Child B1, Child B2 and Child B3 are the adult children of Individual B. Each of B's Children is resident in Canada for purposes of the Act.

7. DC carries on a business of XXXXXXXXXX ("Rental Properties") and earning income (including interest and dividends) from other investments that it owns. DC does not have more than five full-time employees and, for purposes of the Act, reports its income from such property as income from a specified investment business.

8. The assets of DC include:

(a) Rental Properties, which are capital property to DC, comprised of buildings and the land on which they are situated, located in XXXXXXXXXX and the vicinity;

(b) certain parcels of vacant land in XXXXXXXXXX, which are capital property to DC, that have been held by DC for many years for future development of additional rental properties ("Development Lands");

(c) some office equipment, accounts receivable and prepaid expenses relating to the Rental Properties' operations;

(d) marketable securities ("Marketable Securities") that represent portfolio investments of DC in respect of which DC does not have "significant influence" within the meaning of section 3050 of the CICA Handbook; and

(e) cash and term deposits.

9. The liabilities of DC include:

(a) accounts payable and accrued liabilities relating to the Rental Properties operations and the Development Lands;

(b) shareholder loans; and

(c) long term debt payable to an arm's length creditor.

10. DC is expected to have an RDTOH balance and a significant CDA balance immediately prior to the commencement of the Proposed Transactions.

PROPOSED TRANSACTIONS

Establishment of the NewCos and the SubCos

11. Each of Individual A, Individual B and Individual C will incorporate a new corporation under the BCA. Individual A's corporation will be referred to as "NewCo A"; Individual B's corporation will be referred to as "NewCo B"; and Individual C's corporation will be referred to as "NewCo C". Each of the NewCos will be a taxable Canadian corporation. On incorporation, none of the NewCos will have issued any shares, acquired any assets, or incurred any liabilities.

12. The Articles of Incorporation of each of the NewCos will provide that such NewCo's authorized capital will include an unlimited number of the following separate classes of shares:

(a) Class A voting, fully participating common shares ("Class A Common Shares");

(b) Class B non-voting, redeemable, retractable preferred shares ("Class B Non-Voting Preferred Shares"); and

(c) Class C voting, redeemable, retractable preferred shares ("Class C Voting Preferred Shares").

13. The Class B Non-Voting Preferred Shares of each of the NewCos will have the following attributes:

(a) each share will be redeemable, subject to applicable law, at any time at the option of such NewCo at a redemption amount equal to the aggregate FMV of the consideration paid to such NewCo on issuance thereof divided by the number of shares issued as consideration therefor (plus any declared but unpaid dividends);

(b) each share will be retractable, subject to applicable law, at any time at the option of the holder at a retraction amount equal to the redemption amount described above;

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

(d) there will be a provision restricting the payment of dividends on other classes of shares so that no such dividends may be paid on any other class of shares of such NewCo if the resulting realizable value of the net assets of such NewCo after payment of the dividends would be less than the aggregate of the redemption amounts of all of the Class B Shares Non-Voting Preferred Shares of such NewCo then outstanding;

(e) the holder of each share will be entitled, upon the liquidation, dissolution or winding-up of such NewCo, to a payment in priority to all other classes of common shares of such NewCo and on a pari passu basis with other classes of preferred shares of such NewCo of an amount equal to the redemption amount therefor 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

(f) the holder of each share will not be entitled to vote at meetings of the shareholders of such NewCo, other than as provided under the BCA.

14. The Class C Voting Preferred Shares of each of the NewCos will have the same attributes as those of the Class B Non-Voting Preferred Shares described above with the exception that each of the Class C Voting Preferred Share will be entitled to one vote in all circumstances. For greater certainty, no dividends may be paid on any other class of shares of such NewCo if the resulting realizable value of the net assets of such NewCo after payment of such dividends would be less than the aggregate of the redemption amounts of all of the Class C Voting Preferred Shares of such NewCo then outstanding. The Class C Voting Preferred Shares of such NewCo will rank pari passu with the Class B Non-Voting Preferred Shares on the liquidation or wind-up of such NewCo.

15. Each of NewCo A, NewCo B and NewCo C will incorporate a new wholly-owned subsidiary corporation under the BCA. NewCo A's wholly-owned subsidiary corporation will be referred to as "SubCo A"; NewCo B's wholly-owned subsidiary corporation will be referred to as "SubCo B"; and NewCo C's wholly-owned subsidiary corporation will be referred to as "SubCo C". Each of the SubCos will be a taxable Canadian corporation.

16. The Articles of Incorporation of each of the SubCos will provide that such SubCo's authorized capital will include an unlimited number of the following separate classes of shares.

(a) Class A voting, fully participating common shares ("SubCo Common Shares"); and

(b) Class B non-voting, redeemable, retractable preferred shares ("SubCo Preferred Shares").

The SubCo Preferred Shares of each SubCo will have the same attributes as the Class B Non-Voting Preferred Shares of the NewCos described in Paragraph 13 with the additional requirement that, for the purpose of subsection 191(4), the terms and conditions of each such share will specify an amount in respect of each such share at the time of its issuance. The amount to be specified in respect of each share will be pursuant to a resolution of the board of directors of such SubCo, will be expressed as a dollar amount, will not be determined by a formula and will not exceed the FMV of the property received by such SubCo in consideration for the issuance.

On incorporation, NewCo A will subscribe for at least one SubCo A Common Share for nominal consideration. Similarly, NewCo B will subscribe for at least one SubCo B Common Share for nominal consideration and NewCo C will subscribe for at least one SubCo B Common Share for nominal consideration. On incorporation, none of the SubCos will have acquired any assets, or incurred any liabilities other than the nominal consideration each such corporation received for issuing its SubCo Common Shares.

Transfer of the shares of DC to the NewCos

17. On a contemporaneous basis with the transfer of shares described in Paragraph 18, each of Individual A and Individual C will transfer:

(a) his or her XXXXXXXXXX Common Shares of DC to his or her respective NewCo and, as consideration therefor, such NewCo will issue a number of Class A Common Shares to the particular transferor having an aggregate FMV equal to the aggregate FMV of the Common Shares of DC so transferred to such NewCo; and

(b) his or her DC Preferred Shares to his or her respective NewCo and, as consideration therefor, such NewCo will issue a number of Class B Non-Voting Preferred Shares to the particular transferor having an aggregate FMV and an aggregate redemption amount equal to the aggregate FMV of the DC Preferred Shares so transferred to such NewCo.

NewCo A or NewCo C, as the case may be, and the particular transferor will jointly elect, in prescribed form and within the time determined under subsection 85(6), for the provisions of subsection 85(1) to apply to each transfer of shares described in (a) and (b) above. Specifically, the agreed amount in each joint election will not be less than the least of the amounts specified in subparagraphs 85(1)(c.1)(i) and (ii) and in each case, the agreed amount will not exceed the FMV of the particular share of DC so transferred to the particular NewCo and such amount will not be less than the amount permitted under paragraph 85(1)(b).

For the purposes of the Act, the increase to the PUC of the Class A Common Shares of such NewCo that are issued as consideration for the Common Shares of DC transferred to it will not exceed the amount of PUC attributable to the Common Shares of DC for which such NewCo's Class A Common Shares were issued.

For the purposes of the Act, the increase to the PUC of the Class B Non-Voting Preferred Shares of such NewCo that are issued as consideration for the DC Preferred Shares transferred to it will not exceed the amount of PUC attributable to the DC Preferred Shares for which such NewCo's Class B Non-Voting Preferred Shares were issued.

18. On a contemporaneous basis with the transfer of shares described in Paragraph 17, Individual B will transfer:

(a) her XXXXXXXXXX Common Shares of DC to NewCo B and, as consideration therefor, NewCo B will issue XXXXXXXXXX Class A Common Shares and XXXXXXXXXX Class C Voting Preferred Shares to Individual B having an aggregate FMV equal to the aggregate FMV of the Common Shares of DC so transferred to NewCo B. In particular, the XXXXXXXXXX Class A Common Shares to be issued by NewCo B will have an aggregate FMV of $XXXXXXXXXX and the aggregate FMV and aggregate redemption amount of the XXXXXXXXXX Class C Voting Preferred Shares to be issued by NewCo B will be equal to the amount by which the aggregate FMV of the Common Shares of DC transferred to NewCo B exceeds the aggregate FMV of the XXXXXXXXXX Class A Common Shares; and

(b) her DC Preferred Shares to NewCo B and, as consideration therefor, NewCo B will issue a number of Class B Non-Voting Preferred Shares to Individual B having an aggregate FMV and an aggregate redemption amount equal to the aggregate FMV of the DC Preferred Shares so transferred to NewCo B.

NewCo B and Individual B will jointly elect, in prescribed form and within the time determined under subsection 85(6), for the provisions of subsection 85(1) to apply to the transfer of shares described in (a) and (b) above. Specifically, the agreed amount in each joint election will not be less than the least of the amounts specified in subparagraphs 85(1)(c.1)(i) and (ii) and in each case, the agreed amount will not exceed the FMV of the particular share of DC so transferred to NewCo B and such amount will not be less than the amount permitted under paragraph 85(1)(b).

For the purposes of the Act, the total increase to the PUC of the Class A Common Shares and the Class C Voting Preferred Shares of NewCo B that are issued as consideration for the Common Shares of DC transferred to it will not exceed the amount of PUC attributable to the Common Shares of DC for which NewCo B's Class A Common Shares and Class C Voting Preferred Shares were issued.

For the purposes of the Act, the increase to the PUC of the Class B Non-Voting Preferred Shares of NewCo B that are issued as consideration for the DC Preferred Shares transferred to it will not exceed the amount of PUC attributable to the DC Preferred Shares for which NewCo B's Class B Non-Voting Preferred Shares were issued.

As a result of NewCo B issuing the number of Class C Voting Preferred Shares to Individual B as described in (a) above, such shares will represent approximately XXXXXXXXXX% of the total outstanding votes in the election of directors of NewCo B while the number of Class A Common Shares issued to Individual B as described in (a) above will represent approximately XXXXXXXXXX% of the total outstanding votes in the election of directors of NewCo B.

Reduction of the PUC of the DC Preferred Shares

19. In accordance with the provisions of the BCA, the shareholders of DC will resolve to reduce the stated capital (and consequently paid-up capital) in respect of the outstanding DC Preferred Shares from $XXXXXXXXXX to nil. DC will not pay any amount on the reduction of the stated capital and there will be no redemption, acquisition or cancellation of any DC Preferred Shares in connection therewith. For greater certainty, the reduction to the stated capital of the outstanding DC Preferred Shares will not exceed the aggregate PUC of such shares at the time of the reduction.

Transfer of the Transferred Assets

20. Immediately prior to the transfers of property described in Paragraph 22, the property of DC will be classified into three types of property for 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, term deposits, accounts receivable, rights arising from prepaid expenses, and any marketable securities other than the Marketable Securities that are held as portfolio investments;

(b) business 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 a business (other than a specified investment business) carried on by DC; and

(c) investment property, including specifically the Marketable Securities, 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 specified investment business.

For greater certainty, for purposes of this distribution:

(d) tax accounts of DC, such as the balance of non-capital losses, RDTOH or CDA, if any, will not be considered property;

(e) no amount will be considered to be a liability unless it represents a true legal liability which is capable of quantification; and

(f) the amount of any deferred income tax will not be considered a liability for the purposes of the Proposed Transactions.

21. In determining the net FMV of each of the three types of property of DC immediately before the transfers of property described in Paragraph 22, 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, which include accounts payable, accrued liabilities, the current portion of long-term debt, shareholder's loans and income taxes payable owing by DC, will be allocated to the cash or near cash property 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) liabilities, other than current liabilities, of DC that relate to a particular property then 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

(c) if any liabilities remain after the allocations described in (a) and (b) above are made ("excess unallocated liabilities"), such excess unallocated liabilities then will 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.

It is expected that DC will have only cash and near cash type property and investment type property immediately before the proposed distribution.

22. DC will transfer a pro rata portion (i.e. 33 and1/3rd percent) of each of its three types of property (to the extent it has property of that type as determined in accordance with Paragraphs 20 and 21) to each of the SubCo's ("Transferred Assets"). For greater certainty, the Transferred Assets transferred to a particular SubCo may include an undivided co-ownership interest (as tenants in common) in one or more of the Rental Properties and/or Development Lands described in Paragraph 8. As consideration for the transfer of the Transferred Assets transferred to such SubCo, each of the SubCos will:

(a) assume an appropriate portion of the liabilities of DC outstanding at that time; and

(b) issue a number of its SubCo Preferred Shares to DC, which will have an aggregate redemption amount equal to the amount by which the aggregate FMV of the Transferred Assets that are transferred to that particular SubCo exceeds the aggregate amount of liabilities of DC assumed by that particular SubCo;

such that immediately following such property transfers and liability assumptions, the net FMV of each of the three types of property of DC so transferred to each of SubCo A, SubCo B and SubCo C, as the case may be, will for greater certainty, approximate that proportion of the net FMV of all property of that type owned by DC determined immediately before such transfers that:

(d) the aggregate FMV of the DC shares owned by the NewCo which owns all the shares of the particular SubCo immediately before the transfer,

is of

(e) the aggregate FMV of all of the outstanding shares of DC immediately before the transfer.

For the purposes of this Paragraph, the expression "approximate that proportion" means that the discrepancy of that proportion, if any, will not exceed one percent (1%), determined as a percentage of the net FMV of each type of property which SubCo A, SubCo B or SubCo C, as the case may be, received as compared to what SubCo A, SubCo B or SubCo C would have received had such corporation received its appropriate pro rata share of the FMV of the business property.

23. In respect of the transfers of Transferred Assets described in Paragraph 22, DC and each of SubCo A, SubCo B or SubCo C, as the case may be, will jointly elect, in prescribed form and within the time determined under subsection 85(6), for the provisions of subsection 85(1) to apply to each transfer of property included in the Transferred Assets and so transferred to such SubCo provided that such property is an eligible property. 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) and (iii) in the case of any eligible capital property;

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

(c) the amounts specified in subparagraphs 85(1)(c.1)(i) and (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 each such property and it will not be less than the amount permitted under paragraph 85(1)(b).

For the purposes of the joint elections under subsection 85(1) described in this Paragraph, 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) 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 aggregate capital costs of all property of that class immediately before the disposition.

For the purposes of the Act, the increase to the PUC of the SubCo Preferred Shares issued to DC by a particular SubCo as consideration for the property transferred to it as described in Paragraph 22 will not exceed the amount by which the aggregate of the agreed amounts under subsection 85(1) in respect of such transferred property to that particular SubCo exceeds the aggregate amount of liabilities of DC assumed by that particular SubCo.

Repurchases/Redemptions and Winding-up of the SubCos

24. Each of SubCo A, SubCo B and SubCo C, as the case may be, will, on a contemporaneous basis, redeem from DC all of its SubCo Preferred Shares for an amount equal to the aggregate of the redemption amounts and fair market value of such shares. As consideration therefor, each of SubCo A, SubCo B and SubCo C, as the case may be, will issue to DC in consideration therefor a non-interest-bearing demand promissory note having a principal amount and fair market value equal to the aggregate redemption amounts of such SubCo's shares so redeemed. In particular, SubCo A's demand promissory will be referred to as the "SubCo A Note"; SubCo B's demand promissory will be referred to as the "SubCo B Note"; and SubCo C's demand promissory will be referred to as "SubCo C Note". DC will accept each such SubCo's promissory note as full and absolute payment of the redemption amounts in respect of such SubCo's redeemed shares, with the risk of the notes being dishonoured.

25. Immediately following the share redemptions described in Paragraph 24, each of SubCo A, SubCo B and SubCo C will, by special resolution, resolve to wind-up and dissolve into such SubCo's NewCo in accordance with the provisions of the BCA. As a consequence of the wind-up, all of the property of each of the SubCos will be distributed to the respective NewCo and each such NewCo will assume any liabilities owing by its particular SubCo, including such SubCo's promissory note owing to DC as described in Paragraph 24.

26. DC will redeem all of the outstanding DC Preferred Shares and will purchase for cancellation all of the outstanding Common Shares of DC held by each of the NewCos by way of separate resolutions as follows:

(a) first, DC will redeem all of the DC Preferred Shares and purchase for cancellation a sufficient number of its Common Shares owned by each NewCo (on a pro rata basis) which will result in total deemed dividends paid by DC, pursuant to subsection 84(3), in an amount equal to DC's CDA balance immediately before that time; and

(b) second, immediately after the redemptions and purchases for cancellation described in Paragraph 26(a), DC will purchase for cancellation all of its remaining Common Shares held by each of the NewCos.

For greater certainty, following the repurchase for cancellation of the Common Shares of DC during the first stage as described in (a) above, each NewCo will continue to own:

(c) 33 and 1/3rd of the votes that could be cast under all circumstances at an annual meeting of shareholders of DC;

(d) shares of DC having an aggregate FMV equal to 33 and 1/3rd of the aggregate FMV of all of the remaining outstanding shares of DC; and

(e) 33 and 1/3rd of the outstanding Common Shares of DC.

27. DC will elect, in prescribed manner and prescribed form at or before the earlier of the time and the day referred to in subsection 83(2), to have the provisions of subsection 83(2) apply to the full amount of each of the deemed dividends resulting from the redemptions and repurchases of its shares described in Paragraph 26(a).

28. As consideration for the redemption of the DC Preferred Shares and purchases for cancellation of the Common Shares of DC described in Paragraph 26(a), DC will issue to each of the NewCos a non-interest bearing demand promissory note having a principal amount and fair market value equal to the aggregate redemption amounts and/or purchase price of such shares of DC owned by the particular NewCo and so redeemed or purchased for cancellation. In particular, the demand promissory issued to NewCo A will be referred to as the "NewCo A Capital Dividend Note"; the demand promissory issued to NewCo B will be referred to as the "NewCo B Capital Dividend Note"; and the demand promissory issued to NewCo C will be referred to as the "NewCo C Capital Dividend Note". Similarly, as consideration for the purchases for cancellation of the Common Shares of DC described in Paragraph 26(b), DC will issue to each of the NewCos a non-interest bearing demand promissory note having a principal amount and fair market value equal to the aggregate purchase price of such shares of DC owned by the particular NewCo and so purchased for cancellation. In particular, the demand promissory issued to NewCo A will be referred to as the "NewCo A Cancellation Note"; the demand promissory issued to NewCo B will be referred to as the "NewCo B Cancellation Note"; and the demand promissory issued to NewCo C will be referred to as the "NewCo C Cancellation Note".

Each NewCo will accept its particular NewCo Capital Dividend Note and NewCo Cancellation Note as full and absolute payment for the aggregate redemption amounts and/or aggregate purchase price of its shares of DC with the risk of the notes being dishonoured.

29. DC will pay the principal amount of the NewCo Capital Dividend Notes and the NewCo Cancellation Notes by transferring to each of NewCo A, NewCo B and NewCo C the respective SubCo Redemption Note which will be accepted by each NewCo in full payment of DC's obligations. Each of NewCo A, NewCo B and NewCo C will pay the principal amount of its respective SubCo Redemption Note by transferring to DC its NewCo Capital Dividend Note and NewCo Cancellation Note, which will be accepted by DC in full payment of that particular NewCo's obligation. The respective NewCo Capital Dividend Notes, NewCo Cancellation Notes and SubCo Redemption Notes will be marked thereon "paid in full" and cancelled.

30. Each of the NewCos will, by special resolution, resolve to liquidate and dissolve DC pursuant to the provisions of the BCA. In due course, DC will file tax returns, and, after the receipt of any dividend refund or other tax refunds, and attending to other administrative matters, file articles of dissolution. Upon receipt of the Certificate of Dissolution, DC will be formally dissolved.

NewCo B Share Acquisition

31. Each of B's Children will acquire XXXXXXXXXX Class A Common Shares of NewCo B from Individual B at a purchase price equal to the FMV of those shares for cash consideration. As a result, Individual B's XXXXXXXXXX Class C Voting Preferred Shares of NewCo B will represent approximately XXXXXXXXXX% of the total outstanding votes in the election of directors of NewCo B and the XXXXXXXXXX Class A Common Shares of NewCo B that B's Children will collectively own will represent approximately XXXXXXXXXX% of the total outstanding votes in the election of directors of NewCo B. Accordingly, B's Children, as a group, will own sufficient voting shares of NewCo B to have de jure control of NewCo B.

None of the purposes of B's Children acquiring his/her XXXXXXXXXX Class A Common Shares of NewCo B is to receive a capital dividend on such shares. In particular, due to the terms and conditions of the Class C Voting Preferred Shares of NewCo B, it will not be possible for NewCo B to pay capital dividends on the Class A Common Shares of NewCo B if such payment would impair the value of the Class C Voting Preferred Shares of NewCo B. In addition, NewCo B will not pay capital dividends on any of the Class A Common Shares of NewCo B, if ever, at any time during the next five years.

ADDITIONAL INFORMATION

32. The Proposed Transactions described herein will occur in the order presented unless otherwise indicated, with the exception of the filing of the applicable election forms described in Paragraphs 17, 18 and 23, which will be filed before the applicable due date.

33. Upon completion of the Proposed Transactions, NewCo A, NewCo B and NewCo C will operate as separate entities, each carrying on its own specified investment business with the particular Transferred Assets received by such corporation, subject to the possibility of two of the NewCos entering into a joint venture development arrangement whereby the undivided ownership interests of those NewCos in one of the Development Lands will be combined with assets from certain other arm's length co-venturers for development of that parcel. However, the creation of joint venture operations described herein, will not, by itself result in the disposition of any property received by any of the NewCos from the DC on the distribution described herein.

34. No property has or will become property of DC and no liabilities have been, or will be, incurred or discharged by DC in contemplation of and before the distribution described in Paragraph 22 except in the ordinary course of DC's business or as otherwise described herein.

35. Except as specifically described in the Proposed Transactions, there is no expectation or intention that DC, any of the NewCos or any of the SubCos will dispose of any property as part of a series of transactions or events that includes the Proposed Transactions, other than in the ordinary course of such corporation's business.

36. None of the shares of DC, any of the NewCos or any of the SubCos will be at any time during a series of transactions or events that includes the Proposed Transactions:

(a) the subject of 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.

37. None of DC, any of the NewCos or any of the SubCos is, or will be, during a series of transactions or events that includes the Proposed Transactions, a financial institution or a corporation described in any of paragraphs (a) to (f) of the definition of "financial intermediary corporation" in subsection 191(1).

38. DC, each of the NewCos and each of the SubCos will have the financial capacity to honour, upon presentation for payment, the amount payable under any promissory note issued by the particular corporation as part of the Proposed Transactions.

PURPOSES OF THE PROPOSED TRANSACTIONS

39. The principal purpose of the Proposed Transactions is to divide the assets of DC among the three individual shareholders of DC such that each such individual will have, through his or her NewCo, direct and separate ownership of his or her pro rata share of DC's property. This will enable each such individual to formulate and implement, in an independent manner, his or her own long term strategic plans for the future carrying on of his or her pro rata share of DC's specified investment business and will allow individual estate and succession plans to be formulated independently by each such individual.

The only purpose of the Proposed Transaction described in Paragraph 31 is to effect an estate "freeze" in respect of Individual B's pro rata share of the property of DC, involving B's Children.

RULINGS

Provided that the preceding statements constitute a complete and accurate disclosure of all of 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 set forth below.

A. Subject to the application of subsection 69(11), provided that the appropriate joint elections are filed in the prescribed form and manner within the time specified in subsection 85(6), the provisions of subsection 85(1) will apply to the transfer:

(a) of the Common Shares and DC Preferred Shares to the NewCos described in Paragraphs 17 and 18, and

(b) of the Transferred Assets to the SubCos described in Paragraph 22, to the extent that each property so transferred is an eligible property,

such that the agreed amounts in respect of each transfer will be deemed to be the proceeds of disposition for the particular transferred property to each transferor and the cost to each transferee for the particular transferred property. For greater certainty, paragraph 85(1)(e.2) will not apply to any of the transfers.

B. The provisions of subsection 88(1) will apply to the winding-up of SubCo A into NewCo A, SubCo B into NewCo B and SubCo C into NewCo C as described in Paragraph 25, such that:

(a) the particular SubCo will be deemed, pursuant to paragraph 88(1)(a), to have disposed of its assets (other than any interest in a partnership) in each case for an amount equal to the cost amount to the SubCo of the particular asset immediately before the winding-up;

(b) the particular NewCo will be deemed, pursuant to paragraph 88(1)(b), to have disposed of the SubCo Common Shares of the particular SubCo that such NewCo owns for proceeds of disposition equal to the greater of the amounts described in subparagraphs 88(1)(b)(i) and (ii); and

(c) the particular NewCo will be deemed, pursuant to paragraph 88(1)(c), to have acquired the assets of the particular SubCo that are distributed to that NewCo on the winding-up for an amount equal to the proceeds of disposition to the SubCo of each property.

C. Subsection 84(3) will apply:

(a) on the redemption by each of the SubCos of such SubCo's SubCo Preferred Shares owned by DC described in Paragraph 24, to deem each such SubCo to have paid and DC to have received;

(b) on the redemption of the DC Preferred Shares owned by each of the NewCos described in Paragraph 26(a), to deem DC to have paid and each such NewCo to have received;

(c) on the purchase for cancellation of the Common Shares of DC owned by each of the NewCos described in Paragraph 26(a), to deem DC to have paid and each such NewCo to have received;

(d) on the purchase for cancellation of the Common Shares of DC owned by each of the NewCos described in Paragraph 26(b), to deem DC to have paid and each such NewCo to have received;

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

D. Provided that DC elects pursuant to subsection 83(2) in respect of the full amount of each dividend described in (b) and (c) of Ruling C, in prescribed manner and form, each such dividend will be deemed to be a capital dividend.

E. To the extent that each deemed dividend referred to in (a) and (d) of Ruling C is a taxable dividend, each such dividend:

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

(b) will be deductible, pursuant to subsection 112(1), by the corporation deemed to have received the dividend;

(c) will not be a dividend to which any of subsections 112(2.1), (2.2), (2.3) or (2.4) will apply;

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

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

(f) will not be subject to tax under Part IV except to the extent that such payer corporation is entitled to a dividend refund for its taxation year in which it paid such dividend.

F. The provisions of subsection 112(3) will apply to reduce any loss that may otherwise be determined for a particular holder as a result of the redemptions and purchases for cancellation of shares described in Paragraphs 24 and 26.

G. Provided that, as part of the series of transactions or events that includes the Proposed Transactions described above, there is not:

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

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

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

(d) an acquisition of shares of DC in the circumstances described in subparagraph 55(3.1)(b)(iii); or

(e) an acquisition of property in the circumstances described in subparagraph 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 and, for greater certainty, subsection 55(3.1) will not apply to deny the exemption under paragraph 55(3)(b).

H. The repayment of the respective Newco Capital Dividend Notes and the Newco Cancellation Notes held by such NewCo and the respective SubCo Redemption Notes held by DC described in Paragraph 29, will not, in and of themselves, give rise to a forgiven amount nor will DC or any of the NewCos otherwise realize any gain or incur any loss as a result thereof.

I. Provided that the Common Shares of DC and the DC Preferred Shares constitute capital property to each holder thereof immediately prior to the commencement of the Proposed Transactions, the transfer of such shares to such holder's NewCo described in Paragraphs 17 and 18 will not, in and by themselves, cause such shares to not be capital property to the particular recipient NewCo.

J. The provisions of subsections 15(1), 56(2), 56(4) or 246(1) will not apply to any of the Proposed Transactions, in and of themselves.

K. The provisions of subsection 245(2) will not be applied as a result of the Proposed Transactions, in and by themselves, to re-determine the tax consequences confirmed in the rulings given above.

The above rulings are subject to the limitations and qualifications set out in Information Circular 70-6R5 dated May 17, 2002 and are binding on CRA provided that the Proposed Transactions (with the possible exception of the dissolution of DC) 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 and the Regulations which, if enacted into law, could have an effect on the rulings provided herein.

Unless otherwise confirmed in the above rulings, nothing in this letter should be construed as implying that the CRA has confirmed, reviewed or has made any determination in respect of:

(a) the paid-up capital of any share or the adjusted cost base or fair market value of any property referred to herein; or

(b) the balance of CDA or RDTOH of any corporation;

(c) other tax consequence relating to the facts, Proposed Transactions or any transaction or event taking place either prior to the Proposed Transactions or subsequent to the Proposed Transactions, whether described in this letter or not, other than those specifically described in the rulings given above, including whether any of the Proposed Transactions would also be included in a series of transactions or events that include other transactions or events that are not described in this letter.

Yours truly,

XXXXXXXXXX
Section Manager
for Division Director
Reorganizations and Resources Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch