2008 Ruling 2008-0267251R3 - Estate Freeze

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: 1. Whether s. 85(1)(e.2) applies to transfers of property on estate freeze? 2. Whether 74.4(4) will preclude application of s. 74.4 attribution rule?

Position: 1. No 2. Yes

Reasons: 1. Freeze shares possess required attributes and there will be no legal impediments to redeeming shares on timely basis. 2. Terms of trust preclude designated persons from receiving or otherwise obtaining use of trust property.

XXXXXXXXXX 									2008-026725

XXXXXXXXXX , 2008

Dear Sirs:

Re: XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX (collectively the "Taxpayers")
Advance Income Tax Ruling Request

We are writing in response to your letter of XXXXXXXXXX 008 in which you requested an advance income tax ruling on behalf of the Taxpayers. We also acknowledge the information provided in subsequent correspondence and various telephone conversations. You have advised us that to the best of your knowledge and that of the Taxpayers, none of the issues involved in this ruling request are:

(i) in an earlier return of the Taxpayers or any person who is related to the Taxpayers;
(ii) being considered by a tax services office or taxation centre in connection with a tax return filed previously by any of the Taxpayers or any person who is related to any of the Taxpayers;
(iii) under objection by any of the Taxpayers or any person who is related to the any of the Taxpayers;
(iv) before the courts; or
(v) the subject of a ruling previously issued by the Income Tax Rulings Directorate.

Unless otherwise noted, all statutory references herein are to the Income Tax Act, R.S.C. 1985, c. 1 (5th Supplement), as amended (hereinafter referred to as the "Act").

DEFINITIONS

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

(a) "ACB" means "adjusted cost base", which has the meaning assigned by section 54;

(b) "Accumulation Period" means the maximum period of time permitted under the laws of XXXXXXXXXX for the accumulation of income in trust;

(c) "agreed amount" means the amount determined pursuant to paragraph 85(1)(a), which, for greater certainty, is adjusted in accordance with paragraphs 85(1)(b) to 85(1)(e.4) inclusive;

(d) "Child #1" means XXXXXXXXXX , born on XXXXXXXXXX ;

(e) "Child #2" means XXXXXXXXXX , born on XXXXXXXXXX ;

(f) "Class A Redemption Amount," in respect of a Class A Preferred Share of Freezeco, is the amount described in paragraph (a) in the description of the Class A Preferred Shares in Paragraph 14;

(g) "Class B Redemption Amount," in respect of a Class B Preferred Share of Freezeco, is the amount described in paragraph (a) in the description of the Class B Preferred Shares in Paragraph 14;

(h) "CRA" means Canada Revenue Agency;

(i) "designated person" has the meaning assigned by subsection 74.5(5);

(j) "Division Date" means earlier of (i) the date of death of the last to die of Father, Child #1 and Child #2 and (ii) such earlier date selected by the trustees of the Trust, in their absolute discretion, by means of an instrument in writing;

(k) "fair market value" means the highest price available in an open and unrestricted market between informed and prudent parties dealing at arm's length, expressed in terms of an amount of money;

(l) "Family Beneficiaries" means the beneficiaries of the Family Trust who are described in Paragraphs 12(b)(i) and 12(b)(ii);

(m) "Family Trust" means XXXXXXXXXX , an inter vivos personal trust to be established by the Settlor as more fully described in Paragraph 12;

(n) "Father" means XXXXXXXXXX ;

(o) "Foundation X" means the XXXXXXXXXX , a registered charity;

(p) "Foundations" means the beneficiaries of the Family Trust who are described in Paragraphs 12(b)(iii) and 12(b)(iv);

(q) "Freezeco" means a new corporation to be incorporated under the XXXXXXXXXX ;

(r) XXXXXXXXXX

(s) "Holdco" means XXXXXXXXXX ;

(t) "Investco #1" means XXXXXXXXXX ;

(u) "Investco #2" means XXXXXXXXXX ;

(v) "Issue of Father" means Child #1, Child #2, the issue of Child #1 and the issue of Child #2;

(w) "ITAR" means the Income Tax Application Rules, R.S.C. 1985, c. 2

(5th Supplement), as amended;

(x) "Newco" means XXXXXXXXXX , a corporation to be incorporated under the XXXXXXXXXX that will be a resident in Canada for the purposes of the Act;

(y) "Newco Shares" means the common and preferred shares of Newco to be acquired by Investco #2 as described in Paragraph 10;

(z) XXXXXXXXXX

(aa) "Paragraph" means a numbered paragraph in this letter;

(bb) "personal trust" has the meaning assigned by subsection 248(1) of the Act;

(cc) "Proposed Transactions" means the transactions described in Paragraphs 12 to 19 of this letter;

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

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

(ff) "Pubco #1" means XXXXXXXXXX ;

(gg) "Pubco #2" means XXXXXXXXXX ;

(hh) "PubHoldco" means XXXXXXXXXX ;

(ii) "public corporation" has the meaning assigned by subsection 89(1);

(jj) "Public Shares" means the common shares of PubHoldco, Pubco #1 and Pubco #2 held by Investco #1 immediately before the transaction described in Paragraph 16;

(kk) "registered charity" has the meaning assigned by subsection 248(1);

(ll) "related persons" has the meaning assigned by subsection 251(2) and, for greater certainty, any reference in this letter to persons being related to one another means that those persons are related persons within the meaning of subsection 251(2);

(mm) "Settlor" means XXXXXXXXXX , a sister of Father;

(nn) "Spouse" means XXXXXXXXXX ;

(oo) "Subco #1" means XXXXXXXXXX ;

(pp) "Subco #2" means XXXXXXXXXX ;

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

(rr) "Trust Fund" means the property of the Family Trust;

(ss) "V-Day" means December 31, 1971; and

(tt) XXXXXXXXXX

FACTS

1. Father was born on XXXXXXXXXX . On XXXXXXXXXX he became a resident of Canada for the purposes of the Act and has remained a resident of Canada to the present time, living in the City of XXXXXXXXXX . Father is married to Spouse. Father and Spouse have two adult children, Child #1, a non-resident of Canada for the purposes of the Act, and Child #2, a resident of Canada for the purposes of the Act. Father files his Canadian income tax returns with the XXXXXXXXXX Tax Centre and his Canadian income tax affairs are administered by the XXXXXXXXXX Tax Services Office.

2. In XXXXXXXXXX , Father carried out an estate freeze of his interest in XXXXXXXXXX . Each of these corporations is a private corporation and a taxable Canadian corporation. The estate freeze was the subject of advance income tax ruling 970399, issued on XXXXXXXXXX , 1997, as amended by supplemental advance income tax ruling 971586, issued on XXXXXXXXXX , 1997, and by supplemental advance income tax ruling 973011, issued on XXXXXXXXXX , 1997.

3. Investco #1 is a private corporation and a taxable Canadian corporation and is governed by the XXXXXXXXXX . Its taxation year ends on XXXXXXXXXX . Father holds all of the issued and outstanding shares of Investco #1, consisting of XXXXXXXXXX common shares. The Canadian federal income tax returns for Investco #1 are filed with the XXXXXXXXXX Taxation Centre. Its Canadian federal income tax affairs are administered by the XXXXXXXXXX Tax Services Office.

4. The principal assets of Investco #1 are:

(a) all of the XXXXXXXXXX common shares of PubHoldco, a private corporation and a taxable Canadian corporation that are not deemed to have been owned by Investco #1 prior to V-Day pursuant to subsection 26(5) of the ITAR, the ACB and PUC of which is $XXXXXXXXXX ;

(b) XXXXXXXXXX common shares of Pubco #1, a public corporation, consisting of:

(i) XXXXXXXXXX 00 common shares that are deemed to have been owned by Investco #1 prior to V-Day pursuant to subsection 26(5) of the ITAR with an ACB of $XXXXXXXXXX ; and
(ii) XXXXXXXXXX common shares that were acquired after V-Day with an ACB of $XXXXXXXXXX ;

(c) XXXXXXXXXX common shares of Pubco #2, a public corporation, that are not deemed to have been owned by Investco #1 prior to V-Day pursuant to subsection 26(5) of the ITAR, the ACB of which is $XXXXXXXXXX ;

(d) XXXXXXXXXX Class A shares of XXXXXXXXXX , a corporation resident in Canada for the purposes of the Act that is related to Investco #1;

(e) all of the XXXXXXXXXX Class A shares and XXXXXXXXXX Class B shares of XXXXXXXXXX , a corporation related to Investco #1 and that is resident in XXXXXXXXXX for the purposes of the Act;

(f) an amount due from XXXXXXXXXX of $XXXXXXXXXX as at XXXXXXXXXX that does not bear interest and with no stated terms of repayment; and

(g) rental property and leasehold property.

5. The principal assets of PubHoldco are:

(a) XXXXXXXXXX common shares of Pubco #1 with an ACB of $XXXXXXXXXX ;

(b) XXXXXXXXXX common shares of Pubco #2 with an ACB of $XXXXXXXXXX ; and

(c) an amount due from Investco #1 of $XXXXXXXXXX as at XXXXXXXXXX , that does not bear interest and has no stated terms of repayment.

6. Investco #2 is a private corporation and a taxable Canadian corporation. Investco #2 was incorporated on XXXXXXXXXX and is governed by the XXXXXXXXXX . Its taxation year ends on XXXXXXXXXX . Father holds all of the issued and outstanding shares of Investco #2, which consists of XXXXXXXXXX common shares. The Canadian federal income tax returns for Investco #2 are filed with the XXXXXXXXXX Taxation Centre. Its Canadian federal income tax affairs are administered by the XXXXXXXXXX Tax Services Office.

7. The principal assets of Investco#2 are:

(a) all of the XXXXXXXXXX common shares of Holdco, a corporation resident in XXXXXXXXXX for the purposes of the Act, the ACB of which is significantly less than their fair market value;

(b) an amount due from Investco #1 of $XXXXXXXXXX as at XXXXXXXXXX , that does not bear interest and has no stated terms of repayment;

(c) an amount due from XXXXXXXXXX , a related corporation, of $XXXXXXXXXX as at XXXXXXXXXX , that does not bear interest and has no stated terms of repayment; and

(d) common and preferred shares of XXXXXXXXXX , a corporation resident in XXXXXXXXXX , the ACB of which is approximately $XXXXXXXXXX .

8. The principal assets of Holdco are:

(a) all of the shares of Subco #1, a corporation that is resident in XXXXXXXXXX for the purposes of the Act;

(b) a loan receivable from Subco #1 with a balance owing of $XXXXXXXXXX as at XXXXXXXXXX , that does not bear interest and is payable on demand; and

(c) XXXXXXXXXX % of the shares of Subco #2, a corporation that is resident in the XXXXXXXXXX for the purposes of the Act.

9. Subco #1 is the parent corporation of a number of corporations that are not resident in Canada, the majority of which are resident in XXXXXXXXXX for the purposes of the Act, XXXXXXXXXX . Subco #2 owns real property comprising a XXXXXXXXXX .

10. As part of a plan to consolidate and reorganize a number of XXXXXXXXXX businesses indirectly owned or controlled by Father, Investco #2 will transfer its shares of Holdco to Newco. The parties will elect pursuant to subsection 85(1) in respect of this transfer so that Investco #2 will be deemed to have received proceeds of disposition for the shares of Holdco equal to their ACB at the time of the transfer. At the same time, XXXXXXXXXX , a corporation related to Investco #2, will transfer to Newco its XXXXXXXXXX operations comprising of all of the shares of XXXXXXXXXX , a private corporation and a taxable Canadian corporation, XXXXXXXXXX % of the shares of Subco #2 and XXXXXXXXXX % of the shares of XXXXXXXXXX , a corporation resident in the XXXXXXXXXX for the purposes of the Act. In exchange for the shares of Holdco, Investco #2 will receive common shares and preferred shares of Newco. As a consequence of these transfers, Investco #2 will hold approximately XXXXXXXXXX % of both the common shares and preferred shares of Newco and XXXXXXXXXX will hold the remainder of the common and preferred shares of Newco.

11. As a result of the consolidation, Newco will become the parent corporation of a number of corporations, that operate XXXXXXXXXX businesses, being (a) XXXXXXXXXX , a taxable Canadian corporation, which carries on a XXXXXXXXXX business in Canada, (b) XXXXXXXXXX , a corporation that is a resident of the XXXXXXXXXX for the purposes of the Act, carrying on a XXXXXXXXXX business in the XXXXXXXXXX , and (c) XXXXXXXXXX , a corporation that is a resident of XXXXXXXXXX for the purposes of the Act, carrying on a XXXXXXXXXX business in XXXXXXXXXX.

PROPOSED TRANSACTIONS

12. The Family Trust will be settled with XXXXXXXXXX by the Settlor. The Family Trust will be a personal trust. The Family Trust will be established and shall be governed by and construed under the laws of the Province of XXXXXXXXXX . The provisions of the Family Trust will include the following:

(a) the trustees of the Family Trust will be XXXXXXXXXX . At all times there are to be at least XXXXXXXXXX trustees of the Family Trust. If there is, at any time, less than XXXXXXXXXX trustees, a new trustee or trustees is to be appointed. The power of appointing an additional or substitute trustee or trustees (who shall not be required to remain in or be residents of the province of XXXXXXXXXX or any other specific jurisdiction) shall be vested in Father, or in the case of his mental incapacity or death, in his legal personal representatives. Father, or in the case of his mental incapacity or death, his legal personal representatives, shall have the absolute power from time to time, at any time or times to remove without cause any trustee as a trustee upon giving not less than XXXXXXXXXX days notice addressed to each of the trustees;

(b) the beneficiaries of the Family Trust will be:

(i) Issue of Father,
(ii) any corporation incorporated under the laws of Canada, or under the laws of any province or territory of Canada, all of the shares of the capital stock of which are held by one or more persons described in (i) above, whether or not the corporation was incorporated at the time of the settlement of the Family Trust,
(iii) Foundation X, so long as it is a registered charity, and
(iv) any charitable foundation or other charity created by any one or more of Father and the children or other issue of Father, so long as it is a registered charity at the time, whether or not the charitable foundation or other charity was incorporated or created at the time of the settlement of the Family Trust.

(c) the Family Trust will terminate on the earliest of: (i) the later of (A) the date of death of the last to die of Father, Child #1 and Child #2, and (B) the date when all Issue of Father alive on the Division Date have attained the age of XXXXXXXXXX years; (ii) the date on which the Family Trust no longer holds assets (i.e., all of the assets have been distributed to beneficiaries in accordance with the terms of the Family Trust), and (iii) the date that is XXXXXXXXXX years following the date of death of the last to die of the Issue of Father who are alive at the time the Deed of Settlement of the Family Trust is executed;

(d) subject to paragraph (g) below, until the Division Date, the trustees may pay and apply all or such part or parts of the net income of the Trust Fund, as the trustees shall from time to time in their absolute discretion determine, to or for the benefit of any one or more of the beneficiaries to the exclusion of any one or more of the beneficiaries. Any net income from the Trust Fund which is not paid or applied in any year or within XXXXXXXXXX months thereafter shall be accumulated by the trustees and added to the capital of the Trust Fund to be dealt with as part thereof. If after the expiration of the Accumulation Period, the trustees continue to hold the Trust Fund, then thereafter the trustees shall pay and apply all of the net income for the Trust Fund, as the trustees shall from time to time in their absolute discretion determine, to or for the benefit of any one or more of the beneficiaries to the exclusion of any one or more of the beneficiaries;

(e) subject to paragraph (g) below, the trustees will have the discretion to distribute all or part of the capital of the Family Trust at any time to any one or more of the Family Beneficiaries, to the exclusion of any one or more of the Family Beneficiaries, or, if there are no Issue of Father alive, to any one or more of the Foundations. While Father is alive, charitable donations may be made by the Family Trust to any one or more of the Foundations;

(f) on the Division Date, the trustees shall divide the Trust Fund among the Family Beneficiaries as the trustees shall, in their absolute discretion, determine. If there are no Issue of Father then alive, the trustees shall pay or transfer all of the Trust Fund to any one or more of the Foundations as the trustees shall, in their absolute discretion, determine. Should a beneficiary become entitled to receive a share of the Trust Fund on the Division Date and the beneficiary is under the age of XXXXXXXXXX years, the trustees shall hold such share in trust and shall keep such share invested. The trustees shall pay all or such part or parts of the net income derived from such share and such part or parts of the capital of such share, as the trustees from time to time, in their absolute discretion shall determine, to or for the benefit of the beneficiary until he or she attains the age of XXXXXXXXXX years when the remaining amount of such share shall be paid to him or her for his or her or own use absolutely;

(g) notwithstanding the provisions described in paragraphs (d), (e) and (f) above, those described in paragraph (h) below, and any other provisions in the Family Trust deed, while Father is alive, a beneficiary who has not attained the age of 18 years, or a corporate beneficiary any of the shareholders of which has not attained the age of 18 years, may not receive or otherwise obtain the use of any of the income or capital of the Family Trust;

(h) if on or after the Division Date, any beneficiary acquires an interest in any share of the Trust Fund before attaining the age of majority, the trustees shall keep invested such share until he or she attains the age of majority; however discretion is provided to the trustees to pay amounts out of such capital and the income earned on such capital for the benefit of such beneficiary or to pay or transfer all of the capital of the Trust Fund to which the beneficiary is entitled to or for the benefit of such beneficiary;

(i) in making any payment or transfer to, or in applying any amounts to or for the benefit of any beneficiary under the age of majority, the trustees are authorized and empowered, after the death of Father, to make such payment or transfer, or apply such amounts, to any one or more of the following persons provided such person shall not be the Settlor:

(i) such beneficiary;
(ii) any parent of such beneficiary;
(iii) any person having custody of such beneficiary;
(iv) any person who is the guardian of the property of such beneficiary; or
(v) any other person or persons, whether or not such person has custody of such beneficiary, who in the absolute discretion of the trustees, has the care of such beneficiary;

(j) subject to paragraph (l) below, the trustees may in their absolute discretion transfer and convey the whole or any share of the Trust Fund, save and except any such share which shall have indefeasibly vested in possession in one or more of the beneficiaries, to any new trust or settlement to be held by the trustees of such new trust or settlement with and subject to the powers and provisions of such new trust or settlement provided that such new trust or settlement shall contain a provision similar to that described in paragraph (g) above, shall not infringe on the rule against perpetuities applicable to the Family Trust, and one or more of the beneficiaries alive at the date of such transfer and conveyance shall be one or more of the beneficiaries of such new trust or settlement;

(k) every discretion or power conferred on the trustees by the Family Trust deed or by law shall be an absolute discretion or power and in cases where there are less than XXXXXXXXXX trustees, no decision may be made, or action taken, until there are XXXXXXXXXX trustees, and every decision required at any time or from time to time to be made by the trustees may be made by a majority of the trustees, and no trustee shall be held liable for any loss or damage occurring as a result of such trustee concurring or refusing or failing to concur in an exercise of any such discretion or power; and

(l) the settlement made shall be irrevocable by the Settlor and no part of the capital or income of the Trust Fund shall revert for or be paid or lent or applied to or for the benefit of the Settlor in any manner or in any circumstances whatsoever.

13. The Settlor will make a gift to the Family Trust of $XXXXXXXXXX cash by Deed of Gift.

14. Freezeco will be incorporated under the XXXXXXXXXX . Freezeco will be a private corporation and a taxable Canadian corporation. The authorized share capital of Freezeco will consist of an unlimited number of common shares, an unlimited number of Class A Preferred Shares and an unlimited number of Class B Preferred Shares. The share conditions for the Class A Preferred Shares and the Class B Preferred Shares of Freezeco will be as follows:

Class A:

(a) redeemable and retractable at any time for an aggregate amount (the "Class A Redemption Amount") equal to the fair market value of the property received in consideration for the issuance of the Class A Preferred Shares, determined as of the time of issuance, less:

(i) the aggregate amount of all distributions made in respect of the Class A Preferred Shares on a reduction of the stated capital account maintained in respect of the Class A Preferred Shares, and
(ii) the aggregate amount of all non-cumulative, non-preferential special dividends described in paragraph (b) below paid in respect of the Class A Preferred Shares;

the Class A Redemption Amount will be subject to adjustment should the fair market value of the property received in consideration for the issuance of the Class A Preferred Shares be established to be incorrect;

(b) non-cumulative, non-preferential dividends, which may be declared at the discretion of the directors, not to exceed an annual aggregate amount of XXXXXXXXXX % of the Class A Redemption Amount and, in addition to or in lieu of such dividends, non-cumulative, non-preferential special dividends which may be declared at the discretion of the directors in an amount up to the Class A Redemption Amount, determined as at the time of the special dividend;

(c) voting; and

(d) priority over common shares, and in parity with the Class B Preferred Shares, as to the payment of dividends and the receipt of the Class A Redemption Amount on a winding-up or dissolution.

Class B:

(a) redeemable and retractable at any time for an aggregate amount (the "Class B Redemption Amount") equal to the fair market value of the property received in consideration for the Class B Preferred Shares less:

(i) the aggregate amount of all distributions made in respect of the Class B Preferred Shares on a reduction of the stated capital account maintained in respect of the Class B Preferred Shares, and
(ii) the aggregate amount of all non-cumulative, non-preferential special dividends described in paragraph (b) below paid in respect of the Class B Preferred Shares;
the Class B Redemption Amount will be subject to adjustment should the fair market value of the property received in consideration for the issuance of the Class B Preferred Shares be established to be incorrect;

(b) non-cumulative, non-preferential dividends which may be declared at the discretion of the directors not to exceed an annual aggregate amount of XXXXXXXXXX % of the Class B Redemption Amount and, in addition to or in lieu of such dividends, non-cumulative, non-preferential special dividends which may be declared at the discretion of the directors in an amount up to the Class B Redemption Amount, determined as at the time of the special dividend;

(c) voting; and

(d) priority over common shares, and in parity with the Class A Preferred Shares, as to the payment of dividends and the receipt of the Class B Redemption Amount on a winding-up or dissolution.

The share conditions of the common shares will provide that a dividend or other distribution may not be paid to the holders of the common shares if, after the dividend or distribution, there would be insufficient assets in Freezeco to permit the purchase, redemption or cancellation of the Class A Preferred Shares and the Class B Preferred Shares then outstanding in accordance with their terms.

15. On incorporation, the Family Trust will subscribe for XXXXXXXXXX common shares of Freezeco for a subscription price of $XXXXXXXXXX .

16. Investco #1 will transfer the Public Shares to Freezeco. As sole consideration for the transfer of the Public Shares, Freezeco will issue to Investco #1 XXXXXXXXXX Class A Preferred Shares of Freezeco that will have a fair market value, and a Class A Redemption Amount, equal to the aggregate fair market value of the Public Shares. Freezeco will add to the stated capital account maintained for its Class A Preferred Shares an amount equal to the aggregate of the lesser of the ACB and the fair market value of each Public Share transferred.

17. In connection with the transfer described in Paragraph 16, Investco #1 and Freezeco will jointly elect 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 with an agreed amount, for each property, equal to the lesser of Investco #1's ACB for the property and the fair market value of the property at the time of the transfer.

18. Investco #2 will transfer the Newco Shares to Freezeco. As sole consideration for the transfer of the Newco Shares, Freezeco will issue to Investco #2 XXXXXXXXXX Class B Preferred Shares of Freezeco that will have a fair market value, and a Class B Redemption Amount, equal to the fair market value of the Newco Shares. Freezeco will add to the stated capital account maintained for its Class B Preferred Shares an amount equal to the ACB of the Newco Shares transferred.

19. In connection with the transfer described in Paragraph 18, Investco #2 and Freezeco will jointly elect 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 with an agreed amount equal to Investco #2's ACB for the Newco Shares.

OTHER INFORMATION

20. A portion of the common shares of both Pubco #1 and Pubco #2 currently held by Investco #1 were acquired by Investco #1 from Father. Father controls Pubco #1 and Pubco #2. Father holds the majority of the voting rights attached to the shares of XXXXXXXXXX , which in turn holds the majority of the voting rights attached to the shares of XXXXXXXXXX , which, in turn, holds the majority of the issued and outstanding shares of Pubco #1, which, in turn, holds the majority of the issued and outstanding shares of Pubco #2.

21. PubHoldco acquired from Father a portion of the common shares of both Pubco #1 and Pubco #2 currently held by PubHoldco.

22. Investco #2 acquired the shares of Holdco from Father in XXXXXXXXXX . Father and Investco #2 elected pursuant to subsection 85(1) in respect of the transfer. The Form T2057 filed in connection with the election reported the agreed amount to be an amount equal to $XXXXXXXXXX , which was an estimate of Father's ACB of the Holdco shares as discussed in Paragraph 23.

23. XXXXXXXXXX

24. The percentage interests of common shares and preferred shares of Newco that will be issued to Investco #2 and XXXXXXXXXX will be based on the relative fair market values of the assets that each corporation transfers to Newco. A valuator has been engaged to determine such values.

25. The fair market value of the XXXXXXXXXX common shares of Pubco #1 was approximately $XXXXXXXXXX as at XXXXXXXXXX (based on the trading price of those shares at that date) and the value of the XXXXXXXXXX common shares of Pubco #2 was approximately $XXXXXXXXXX as at XXXXXXXXXX . Based on these values, the fair market value of the PubHoldco shares held by Investco #1 is expected to be less than their ACB at the time the PubHoldco shares are transferred to Freezeco. As a result, any capital loss that would otherwise be realized by Investco #1 on the transfer of the PubHoldco shares to Freezeco in Paragraph 16 will be deemed to be nil pursuant to paragraph 40(3.4)(a).

26. Freezeco will not declare or pay dividends or make other distributions to the holders of the common shares if after the dividend or distribution there would be insufficient assets in Freezeco to satisfy the aggregate of the Class A Redemption Amount and the Class B Redemption Amount at that time. Freezeco will not acquire any of its Class A Preferred Shares or Class B Preferred Shares by purchase, redemption or cancellation for an amount per share which is less than, in the case of a Class A Preferred Share, the lesser of the Class A Redemption Amount and the fair market value of the share, and, in the case of a Class B Preferred Share, the lesser of the Class B Redemption Amount and the fair market value of the share.

27. If, at any particular time, the fair market value of Freezeco's assets (net of liabilities) is less than the aggregate of the Class A Redemption Amount and the Class B Redemption Amount of the Class A Preferred Shares and Class B Preferred Shares then outstanding, the price at which Freezeco may purchase, redeem or cancel its Class A Preferred Shares shall be reduced in parity with the price at which Freezeco may purchase, redeem or cancel its Class B Preferred Shares.

28. There will be no agreements, arrangements or other circumstances that would cause a delay in the redemption of a Class A Preferred Share of Freezeco or a Class B Preferred Share of Freezeco made at the request of Investco #1 or Investco #2, as the case may be.

29. There will be no restrictions on the transferability of the Class A Preferred Shares or the Class B Preferred Shares of Freezeco other than restrictions that are required for Freezeco to qualify as a private company under applicable corporate laws.

30. The terms of the Family Trust will not permit Settlor to determine which beneficiaries of the Family Trust will receive property after the Family Trust is created and will not provide that property of the Family Trust may only be disposed with the consent of Settlor or in accordance with Settlor's directions.

31. Each of the trustees named in Paragraph 12 is a resident of Canada for the purposes of the Act. XXXXXXXXXX

PURPOSES OF THE PROPOSED TRANSACTIONS

32. The overall purpose of the Proposed Transactions is to effect an estate freeze in respect of business interests of Father that were not the subject of the previous ruling described in Paragraph 2, so that any future increase in value in respect of the interests will accrue to the holder of the common shares of Freezeco, namely, the Family Trust. The reason for the use of the Family Trust is to provide flexibility as to who will receive the benefit of the growth in the value of the common shares of Freezeco. Corporations owned by Child #1 or Child #2 will become beneficiaries of the Family Trust in the event that Child #1 or Child #2 is a non-resident at the time a distribution would otherwise have been made to that child which would have been subject to subsections 107(5) and 107(2.1).

33. XXXXXXXXXX

RULINGS

Provided that the preceding statements constitute a complete and accurate disclosure of all of the relevant facts and additional information, the proposed transactions and the purposes 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. Upon the filing of the appropriate elections within the time limits prescribed by subsection 85(6), the provisions of subsection 85(1) will apply to:

(i) the transfers by Investco #1 to Freezeco of the common shares of PubHoldco, the common shares of Pubco #1 and the common shares of Pubco #2, all of which are described in Paragraph 16; and
(ii) the transfer of the Newco Shares by Investco #2 to Freezeco described in Paragraph 18,

with the result that:

(iii) pursuant to paragraph 85(1)(a), Investco #1's proceeds of disposition for the common shares of PubHoldco, the common shares of Pubco #1 and the common shares of Pubco #2 and Freezeco's cost for such shares will be deemed, subject to subsection 26(5) of the ITAR where applicable, to be the agreed amounts in respect of such shares;
(iv) pursuant to paragraph 85(1)(g), Investco #1's cost for the XXXXXXXXXX Class A Preferred Shares of Freezeco will be deemed to be the lesser of the aggregate fair market value of the Class A Preferred Shares immediately after the transfer and the aggregate of the agreed amounts described in (iii) above;
(v) pursuant to paragraph 85(1)(a), Investco #2's proceeds of disposition for the Newco Shares and Freezeco's cost for such shares, subject to subsection 26(5) of the ITAR where applicable, will be deemed to be the agreed amount in respect of such shares; and
(vi) pursuant to paragraph 85(1)(g), Investco #2's cost for the XXXXXXXXXX Class B Preferred Shares of Freezeco will be deemed to be the lesser of the fair market value of the Class B Preferred Shares immediately after the transfer and the agreed amount described in (v) above.

B. For greater certainty, the provisions of paragraph 85(1)(e.2) will not apply to the transfers described in Paragraphs 16 and 18.

C. Provided that the terms and conditions of the Family Trust are as described in Paragraph 12, and provided that a designated person has not received or obtained the use of any of the income or capital of the Family Trust, and no deduction has been made by the Family Trust in computing its income under subsection 104(6) or (12) in respect of amount paid or payable to, or included in the income of, that person while being a designated person in respect of Father, then by virtue of the provisions of subsection 74.4(4), subsection 74.4(2) will not apply in respect of:

(i) the previous transfers by Father of common shares of Pubco #1 and Pubco #2 to Investco #1 or PubHoldco described in Paragraphs 20 and 21, and the proposed transfer by Investco #1 of the Public Shares to Freezeco described in Paragraph 16 (viewing the previous and proposed transfers as together constituting an indirect transfer from Father to Freezeco); and

(ii) the previous transfer by Father of all of his shares of Holdco to Investco #2 described in Paragraph 22, the transfer by Investco #2 of all of the shares of Holdco to Newco described in Paragraph 10, and the proposed transfer by Investco #2 of Newco shares to Freezeco described in Paragraph 18 (viewing the previous and proposed transfers as together constituting an indirect transfer from Father to Freezeco).

D. The provisions of subparagraph 104(4)(b)(ii) will apply to the Family Trust such that the earliest day on which the Family Trust will be deemed, pursuant to subsection 104(4), to dispose of its capital property (other than depreciable property) or land included in its inventory will be the day that is 21 years after the day on which the Family Trust will be created.

E. Provided that the terms and conditions of the Family Trust are as described in Paragraph 12, the provisions of subsections 74.1(2), 74.3(1) and 75(2) of the Act will not apply in respect of:

(i) the settlement of the Family Trust and the $XXXXXXXXXX gift to the Family Trust as described in Paragraphs 12 and 13;
(ii) the transfer of the Public Shares in exchange for the Class A Preferred Shares of Freezeco described in Paragraph 16;
(iii) the transfer of the Newco Shares in exchange for the Class B Preferred Shares of Freezeco described in Paragraph 18; and
(iv) the acquisition of the XXXXXXXXXX common shares of Freezeco by the Family Trust described in Paragraph 15 above.

F. Paragraph (g) of the definition of "taxable preferred share" in subsection 248(1) will not be applied:

(i) as a result of the transfer by Investco #1 of the Public Shares to Freezco, as described in Paragraph 16, in and of itself, to deem the common shares of Investco #1 to be taxable preferred shares at the time immediately following such transfer, or

(ii) as a result of the transfer by Investco #2 of the Newco Shares to Freezco, as described in Paragraph 18, in and of itself, to deem the common shares of Investco #2 to be taxable preferred shares at the time immediately following such transfer.

G. The provisions of subsections 15(1), 56(2), and 246(1) of the Act will not apply to any of the Proposed Transactions described in Paragraphs 15, 16, 18, in and by themselves, nor will those provisions apply solely because a future increase in the fair market value of the assets of Freezeco (net of any liabilities of Freezeco), to an amount exceeding the aggregate of the Class A Redemption Amount and the Class B Redemption Amount of the Class A Preferred Shares and Class B Preferred Shares then outstanding, may be reflected in the fair market value of the common shares of Freezeco and not the fair market value of the Class A Preferred Shares or Class B Preferred Shares of Freezeco.

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

These rulings are given subject to the limitations and qualifications set forth in Information Circular 70-6R5 issued on May 17, 2002, and are binding on the CRA provided that the Proposed Transactions are completed on or before XXXXXXXXXX .

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

COMMENTS

In addition, nothing in this letter should be construed as implying that the CRA has agreed to or reviewed:

(a) the determination of the ACB, PUC or fair market value of any shares or other property referred to herein; and
(b) any tax consequences relating to the facts and Proposed Transactions described herein other than those described in the rulings given above.

Price Adjustment Clause

You have informed us that the consideration given by Freezeco, as described in Paragraphs 16 and 18, will be subject to a price adjustment clause. Nothing in this letter should be construed as confirmation, express or implied, that any adjustment to the consideration given for the Public Shares and the Newco Shares by Freezeco in Paragraphs 16 and 18, respectively, will be effective retroactively. Furthermore, the rulings in this letter are not intended to apply to the operation of a price adjustment clause, since its coming into effect will be due to circumstances that do not constitute proposed transactions that are seriously contemplated. The general position of the CRA with respect to price adjustment clauses is stated in Interpretation Bulletin IT-169.

Yours truly,

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