2015 Ruling 2014-0552871R3 - 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.

Principal Issues: Whether the proposed transactions qualify for the butterfly exemption found in paragraph 55(3)(b).

Position: Yes

Reasons: See below.

XXXXXXXXXX							2014-055287

XXXXXXXXXX, 2015

Dear Sirs:

Re: Advance Income Tax Ruling

XXXXXXXXXX

We are writing in response to your request for an advance income tax ruling. We also acknowledge the additional information provided in your letters and in various email correspondence, as well as information provided during our telephone conversations (XXXXXXXXXX).

PRELIMINARY MATTERS

To the best of your knowledge and that of the Taxpayers, none of the issues involved in this letter are:

(a) dealt with in a previously filed return of the Taxpayers or a related person;

(b) being considered by a tax services office or taxation centre in connection with a previously filed tax return of a Taxpayer or a related person;

(c) under objection by one or any of a Taxpayer or a related person;

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

(e) the subject of a ruling previously considered by the Income Tax Rulings Directorate.

Unless otherwise stated, all references herein to a part, section, subsection, paragraph or subparagraph is a reference to the relevant provision of the Income Tax Act, R.S.C. 1985 (5th Suppl.) c.1, (the “Act”) as amended, or the Income Tax Regulations, C.R.C., c. 945, as appropriate and all references to monetary amounts are in Canadian dollars.

DEFINITIONS

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

“ACB” means “adjusted cost base” as that term is defined in section 54;

“ACo” means XXXXXXXXXX, one of the predecessor companies of DC;

“Act1” means the XXXXXXXXXX;

“agreed amount” means the amount that a transferor and transferee have agreed on in a joint election under subsection 85(1) in respect of a transfer of eligible property;

“arm's length” has the meaning assigned by subsection 251(1);

“capital dividend” means a dividend to which subsection 83(2) applies;

“Capital Dividend” means the dividend deemed to be paid by DC to either TC1 or TC2 as a result of the purchase for cancellation of common shares of DC described in Paragraph 53 in respect of which DC has made an election pursuant to subsection 83(2);

“capital property” has the meaning assigned by section 54;

“Canco1” means XXXXXXXXXX;

“Canco1 Loan Note” means the demand promissory note issued by Canco1 to DC;

“CCPC” means a “Canadian-controlled private corporation” as defined in subsection 125(7);

“CDA” means “capital dividend account” as that term is defined in subsection 89(1);

“Class X Preferred Share” means a Class X Preferred Share of the capital stock issued by TC1 and TC2, which will have the following terms:

(a) voting;

(b) redeemable and retractable at an amount per share (the “Redemption Amount”) equal to the aggregate FMV of the property transferred to the issuer as consideration for the share, at the time of its transfer to the issuer, plus declared but unpaid dividends thereon;

(c) the holder of the share shall be entitled to receive, as and when declared from time to time by the board of directors, non-cumulative dividends not exceeding an amount equal to XXXXXXXXXX% per year calculated on the Redemption Amount;

(d) the holder of the share shall rank in priority to any class of shares issued by the issuer on the dissolution or winding-up of the issuer to the extent of the Redemption Amount. No dividends or other distribution will be paid on shares ranking junior to the share if the effect of such dividends or other distribution would be to reduce the net realizable value of the assets of the issuer to an amount less than the aggregate Redemption Amount of the issued and outstanding Class X Preferred Shares at that time; and for the purposes of subsection 191(4), an amount to be specified in respect of each Class X Preferred Share shall be the amount specified under the description of the rights, privileges, restrictions and conditions attaching to the Class X Preferred Shares in the articles of amendment of the issuer. This amount will be expressed as a fixed dollar amount that will not be determined by formula, will not be subject to a price adjustment clause and will not exceed the FMV of the property received by the issuer as consideration for the issuance of such share;

“Collectibles” means XXXXXXXXXX owned by DC;

“CRA” means the Canada Revenue Agency;

“DC” means XXXXXXXXXX;

“Director” has the meaning assigned by subsection 1(1) of Act1;

“disposition” has the meaning assigned by subsection 248(1);

“distributing corporation” has the meaning assigned in the definition of “distribution” in subsection 55(1);

“distribution” has the meaning assigned by subsection 55(1);

“dividend rental agreement” has the meaning assigned to that term in subsection 248(1);

“eligible dividend” has the meaning assigned to that term in subsection 89(1);

“eligible property” has the meaning assigned to that term in subsection 85(1.1);

“FMV” means fair market value for purposes of the Act;

“forgiven amount” has the meaning assigned by subsections 80(1) and 80.01(1);

“GRIP” means “general rate income pool” as that term is defined in subsection 89(1);

“GP” means XXXXXXXXXX, a company that is not related to DC;

“Inactive Subsidiaries” means XXXXXXXXXX;

“Individual1” means XXXXXXXXXX;

“LP” means XXXXXXXXXX;

“Mr. A” means XXXXXXXXXX;

“Mr. B” means XXXXXXXXXX;

“Mr. C” means XXXXXXXXXX;

“Mr. D” means XXXXXXXXXX;

“Mr. E” means XXXXXXXXXX;

“Mr. F” means XXXXXXXXXX;

“Ms. A” means XXXXXXXXXX;

“MTA” means the master transaction agreement entered into by, among others, the shareholders of DC dated XXXXXXXXXX;

“Nominee Subsidiary” means XXXXXXXXXX, a wholly-owned subsidiary of DC;

“Numberco” means XXXXXXXXXX and the issued and outstanding shares of the capital stock of Numberco are owned as follows: (a) XXXXXXXXXX special shares owned by Mr. B; and (b) XXXXXXXXXX voting common shares and XXXXXXXXXX non-voting common shares owned by Mr. D;

“Paragraph” refers to a numbered paragraph in this letter;

“Parties” means the parties to the MTA and “Party” means one of them;

“pre-1972 CSOH” means “pre-1972 capital surplus on hand” as that term is defined in subsection 88(2.1);

“proceeds of disposition” has the meaning assigned by section 54;

“Proposed Transactions” means the transactions described in the “Proposed Transactions” section of this letter;

“PUC” means “paid-up capital” as that term is defined in subsection 89(1);

“RDTOH” means “refundable dividend tax on hand” as that term is defined in subsection 129(3);

XXXXXXXXXX Portfolio” means the XXXXXXXXXX;

“related” in respect of a person has the meaning assigned by subsection 251(2), as modified for the purpose of section 55 by paragraph 55(5)(e);

“restricted financial institution” has the meaning assigned by subsection 248(1);

“Retained Subsidiary” means XXXXXXXXXX;

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

“Shareholder1” means XXXXXXXXXX;

“Shareholder2” means XXXXXXXXXX;

“significant influence” has the meaning assigned by section 3051.04 of the Accounting Standards for Private Enterprises or by IAS 28 of the International Financial Reporting Standards;

“specified financial institution” has the meaning assigned by subsection 248(1);

“Subco1” means XXXXXXXXXX;

“Subco2” means XXXXXXXXXX;

“Subco3” means XXXXXXXXXX;

“specified investment business” has the meaning assigned by subsection 125(7);

“taxable Canadian corporation” has the meaning assigned by subsection 89(1);

“taxable dividend” has the meaning assigned by subsection 89(1);

“TC1” means XXXXXXXXXX;

“TC1 Common Shares” means the common shares of TC1;

“TC1DC Expenses Note” means one of the two promissory notes issued by TC1 to DC upon the redemption of the Class X Preferred Shares held by DC as described in Paragraph 52, which will have a principal amount equal to the amount of the purchase for cancellation proceeds received by TC1 referred to in Paragraph 53;

“TC1DC Note” means one of the two promissory notes issued by TC1 to DC upon the redemption of the Class X Preferred Shares held by DC as described in Paragraph 52, which will have a principal amount equal to the difference between the aggregate Redemption Amount of the Class X Preferred Shares redeemed and the amount of the TC1DC Expenses Note;

“TC2” means XXXXXXXXXX;

“TC2 Common Shares” means the common shares of TC2;

“TC2DC Expenses Note” means one of the two promissory notes issued by TC2 to DC upon the redemption of the Class X Preferred Shares held by DC as described in Paragraph 52, which will have a principal amount equal to the amount of the purchase for cancellation proceeds received by TC2 referred to in Paragraph 53;

“TC2DC Note” means one of the two promissory notes issued by TC2 to DC upon the redemption of the Class X Preferred Shares held by DC, which will have a principal amount equal to the difference between the aggregate Redemption Amount of the Class X Preferred Shares redeemed and the amount of the TC2DC Expenses Note;

“TC” means TC1 or TC2 and “TCs” means both TC1 and TC2;

“Trademarks” means trademarks XXXXXXXXXX owned by DC;

“transferee corporation” has the meaning assigned in the definition of “distribution” in subsection 55(1) and for the purposes of paragraph 55(3.1)(b), in paragraph 55(3.2)(h);

“Trust” means XXXXXXXXXX; and

XXXXXXXXXX.

FACTS

1. DC is a taxable Canadian corporation and a CCPC. The authorized capital of DC currently consists of an unlimited number of common shares and an unlimited number of special shares.

2. XXXXXXXXXX

3. DC is a holding corporation that holds the following assets:

(a) all of the issued and outstanding shares in the capital stock of the subsidiaries listed in Paragraphs 5, 5.1 and 6;

(b) all of the issued and outstanding shares in the capital stock of Subco1;

(c) all of the issued and outstanding shares in the capital stock of Subco2;

(d) XXXXXXXXXX

(e) XXXXXXXXXX

(f) the Trademarks;

(g) the Collectibles;

(h) cash and cash equivalents, tenant receivables, income and sales taxes receivable (if any), and prepaid expenses; and

(i) other assets including furniture, fixtures and equipment.

4. The properties comprising the XXXXXXXXXX Portfolio are held by DC on capital account and not as inventory. XXXXXXXXXX

5. The Retained Subsidiary is a wholly-owned subsidiary of DC having no assets, liabilities, revenue or expenses and will be retained by the TCs after the Proposed Transactions.

5.1 The Nominee Subsidiary is a wholly-owned subsidiary of DC having no assets, liabilities, revenue or expenses. Nominee Subsidiary was historically used as the nominee owner of XXXXXXXXXX. Nominee Subsidiary will be retained by the TCs after the Proposed Transactions so that it may continue to act as nominee.

6. The Inactive Subsidiaries have no assets, liabilities, revenue or expenses and will be dissolved as part of the Proposed Transactions.

7. The taxation year end of DC is XXXXXXXXXX.

7.1 As at XXXXXXXXXX, DC had a RDTOH balance of $XXXXXXXXXX, a GRIP balance of approximately $XXXXXXXXXX, and a balance of approximately $XXXXXXXXXX in the CDA.

8. Subco1 is a taxable Canadian corporation and a CCPC. Subco1 was incorporated under Act1.

9. In XXXXXXXXXX, Subco1 sold marketable securities with an aggregate FMV approximately equal to XXXXXXXXXX of the total FMV of all its marketable securities for cash. As of XXXXXXXXXX, the marketable securities and the cash of Subco1 had an aggregate FMV of $XXXXXXXXXX.

9.1 Subco2 is a taxable Canadian corporation and a CCPC. Subco2 was incorporated under Act1. Subco2 owns XXXXXXXXXX common shares in the capital stock of Subco3 representing all of the issued and outstanding common shares of Subco3. Subco3 is a taxable Canadian corporation and a CCPC. Subco3 was incorporated under Act1. Subco3 is the only limited partner of LP and holds a XXXXXXXXXX% limited partnership interest in LP. GP is the general partner and holds a XXXXXXXXXX% interest in LP.

10. Shareholder1 was incorporated under Act1. Shareholder1 is a taxable Canadian corporation and a CCPC. The issued and outstanding shares of the capital stock of Shareholder1 are owned as follows:

(a) XXXXXXXXXX common share owned by Mr. E;

(b) XXXXXXXXXX common share owned by Mr. F;

(c) XXXXXXXXXX common share owned by Ms. A; and

(d) XXXXXXXXXX special shares held by the estate of Mr. C.

11. Shareholder2 was incorporated under Act1. Shareholder2 is a taxable Canadian corporation and a CCPC. The issued and outstanding shares of the capital stock of Shareholder2 are owned as follows:

(a) XXXXXXXXXX common shares owned by Numberco;

(b) XXXXXXXXXX special (voting) shares owned by Numberco; and

(c) XXXXXXXXXX Class Y Special (Non-voting) shares owned by the Trust.

12. The shareholders of Shareholder1 and the shareholders of Shareholder2 deal at arm’s length with each other. Each of Shareholder1 and Shareholder2 owns XXXXXXXXXX common shares of DC, which represent XXXXXXXXXX% of all the issued and outstanding shares in the capital stock of DC (XXXXXXXXXX common shares).

13. TC1 is a taxable Canadian corporation and a CCPC. TC1 was incorporated under Act1. Shareholder1 owns XXXXXXXXXX% of the issued and outstanding shares of each class in the capital stock of TC1. TC1 was formed for the purpose of carrying out the Proposed Transactions. TC1 is authorized to carry on the same business and investment activities that are currently being carried on by DC.

14. TC2 is a taxable Canadian corporation and a CCPC. TC2 was incorporated under Act1. Shareholder2 owns XXXXXXXXXX% of the issued and outstanding shares of each class in the capital stock of TC2. TC2 was formed for the purpose of carrying out the Proposed Transactions. TC2 is authorized to carry on the same business and investment activities that are currently being carried on by DC.

15. Reserved.

16. Canco1 was incorporated under Act1. The issued and outstanding shares of the capital stock of Canco1 are owned as follows:

(a) XXXXXXXXXX common shares are owned by Individual1;

(b) XXXXXXXXXX common shares are owned by Shareholder2; and

(c) XXXXXXXXXX common share is owned by Individual1 and Shareholder2 jointly.

17. Prior to XXXXXXXXXX, DC owed approximately $XXXXXXXXXX to Canco1. There was no formal written agreement that governed this loan. It was interest bearing but otherwise unsecured, subordinated and payable on demand with no specific repayment terms. This loan from Canco1 was effectively being used by DC as an operating line of credit.

XXXXXXXXXX Transactions

The transactions described in Paragraphs 18 to 27 all occurred on XXXXXXXXXX.

Shareholder1 and Shareholder2 Sign MTA

18. Shareholder1 and Shareholder2, among others, entered into the MTA where the Parties agreed to reorganize DC and its subsidiaries so as to achieve a division of the assets and liabilities between Shareholder1 and Shareholder2 on a tax-deferred basis.

Disposition of Marketable Securities by Subco1

19. Shareholder2 acquired all the marketable securities held by Subco1. Subco1 also transferred to Shareholder2 such amount of cash as was then held by Subco1 that resulted in Shareholder2 acquiring XXXXXXXXXX% of the FMV of the aggregate assets of Subco1 after reserving for taxes and liabilities and the dividend referred to in Paragraph 21. The receipt of the cash and the purchase price of the marketable securities were satisfied by Shareholder2 issuing to Subco1 a promissory note with a principal amount equal to the total of the FMV of the acquired marketable securities and of the amount of cash received ($XXXXXXXXXX). The promissory note is payable on demand and is not convertible into other property.

20. Subco1 lent cash to Shareholder1 in an amount equal to $XXXXXXXXXX evidenced by a promissory note issued by Shareholder1 that is not convertible into other property.

21. Following the transactions described in the previous two Paragraphs, Subco1 paid a cash dividend to DC in the amount of $XXXXXXXXXX.

Acquisition of Canco1 and Equalization Payments

22. Canco1 declared and paid to its shareholders, Shareholder2 and Individual1, each a dividend in the amount of $XXXXXXXXXX.

23. Simultaneous with the acquisition by Shareholder2 of all the marketable securities held by Subco1, Shareholder1 acquired from Shareholder2 all of the issued and outstanding shares in the capital stock of Canco1 that were owned by Shareholder2 for FMV consideration which the parties have determined to be $XXXXXXXXXX. Shareholder1 paid with the cash borrowed from Subco1 on the loan referred to in Paragraph 20 above.

24. Shareholder1 repaid short term loans owing to DC in the amount of $XXXXXXXXXX.

25. Shareholder2 used the consideration received on the sale of the shares of Canco1 to repay its existing indebtedness to DC in the approximate amount of $XXXXXXXXXX. Shareholder2 repaid short term loans owing to DC in the amount of $XXXXXXXXXX.

26. DC paid to Canco1 an amount of $XXXXXXXXXX in full satisfaction of its existing indebtedness to Canco1. DC loaned funds in the amount of $XXXXXXXXXX to Canco1 against the receipt of the Canco1 Loan Note issued by Canco1 to DC.

27. Canco1 paid to Individual1 and Shareholder2 an amount of $XXXXXXXXXX and $XXXXXXXXXX respectively in full satisfaction of its indebtedness owed to them.

XXXXXXXXXX Transaction

28. On XXXXXXXXXX, prior to the end of DC’s taxation year, DC paid a dividend to Shareholder1 and Shareholder2, in an aggregate amount of $XXXXXXXXXX.

PROPOSED TRANSACTIONS

Proposed Pre-Butterfly Transactions

Dissolution of Subco1

29. DC will, by way of a special resolution, resolve to wind-up and dissolve Subco1 pursuant to Act1. Subco1 will also discharge all other remaining liabilities, which include XXXXXXXXXX, in a timely manner prior to its dissolution.

30. As a result of the winding-up, Subco1 will distribute its remaining assets to DC including:

(a) $XXXXXXXXXX in the form of a promissory note issued by Shareholder1; and

(b) $XXXXXXXXXX in the form of a promissory note issued by Shareholder2.

31. Reserved.

32. Reserved.

Wind-up of Inactive Subsidiaries

33. DC will by way of special resolutions, resolve to wind-up and dissolve the Inactive Subsidiaries pursuant to Act1. Articles of dissolution will be filed by the Inactive Subsidiaries with the Director.

XXXXXXXXXX

34. XXXXXXXXXX

TCs – Articles of Amendment

35. Articles of amendment will be filed on behalf of TC1 and TC2 such that the authorized share capital of TC1 and TC2 will consist of:

(a) unlimited Class X Preferred Shares; and

(b) unlimited common shares.

36. The terms and conditions of the relevant purchase agreement which provides that Class X Preferred Shares be issued as consideration will include a price adjustment clause.

Nominee Subsidiary – Stock Split

37. The Nominee Subsidiary will undergo a stock split so that there is an even number of shares outstanding.

Proposed Butterfly Transaction

38. Shareholder1 will transfer its XXXXXXXXXX common shares of DC to TC1. As consideration therefor, TC1 will issue a number of TC1 Common Shares to Shareholder1, having an aggregate FMV equal to the aggregate FMV of the common shares of DC transferred to TC1. The aggregate amount added to the PUC of the TC1 Common Shares issued to Shareholder1 will equal the aggregate PUC attributable to the XXXXXXXXXX common shares of DC transferred to TC1 by Shareholder1.

39. Shareholder1 and TC1 will jointly elect under subsection 85(1), in prescribed form and within the time limits prescribed by subsection 85(6), in respect of the transfer of the common shares of DC to TC1. The agreed amount specified in respect of the transfer will be equal to the aggregate ACB to Shareholder1 of the XXXXXXXXXX common shares of DC so transferred. For greater certainty, the aggregate ACB of the XXXXXXXXXX common shares of DC will not be greater than the FMV of such shares at the time of the transfer.

40. Shareholder2 will transfer its XXXXXXXXXX common shares of DC to TC2 for a purchase price equal to the aggregate FMV of such shares. As consideration therefor, TC2 will issue a number of TC2 Common Shares to Shareholder2, having an aggregate FMV equal to the aggregate FMV of the common shares of DC transferred to TC2. The aggregate amount added to the PUC of the TC2 Common Shares issued to Shareholder2 will equal the aggregate PUC attributable to the XXXXXXXXXX common shares of DC transferred to TC2 by Shareholder2.

41. Shareholder2 and TC2 will jointly elect under subsection 85(1), in prescribed form and within the time limits prescribed by subsection 85(6), in respect of the transfer of the common shares of DC to TC2. The agreed amount specified in respect of the transfer will be equal to the aggregate ACB to Shareholder2 of the XXXXXXXXXX common shares of DC so transferred. For greater certainty, the aggregate ACB of the XXXXXXXXXX common shares of DC will not be greater than the FMV of such shares at the time of the transfer.

42. Immediately before the transfer of property described below, the property owned by DC will be classified into the following three types of property and the aggregate net FMV of each type of property will be determined in the following manner:

(a) The property of each of DC and any corporation or partnership referred to in (b) (in this letter, Subco2, Subco3 and LP) will be classified into the following types of property:

(i) “cash or near-cash” property, comprising of all of the current assets of DC, including XXXXXXXXXX (other than portfolio investments);

(ii) investment property, comprising of 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 from a specified investment business;

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

For greater certainty:

(iv) tax accounts or other tax related amounts, such as the balance of non-capital losses, net capital losses, CDA, GRIP and RDTOH will not be considered property;

(v) advances that are payable on demand or that are due within the next 12 months will be considered cash or near-cash property;

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

(vii) the amount of any deferred tax will not be considered to be a property or a liability, as the case may be;

(viii) any amount of taxes payable pursuant to an assessment or reassessment (whether such assessments or reassessments have been objected to or not) and any amount of taxes that is the subject of a proposed assessment (to the extent that any such amount is accrued as a liability) will be classified as a current liability and will, to the extent that any objection in respect of such unpaid taxes has not been resolved, be deducted from the net FMV of the cash or near cash property; and

(ix) any amount in respect of refunds of taxes, and interest thereon, actually receivable will be treated as cash or near-cash property and any potential refunds of taxes and interest thereon will, due to their contingent nature, be ignored;

(b) the aggregate net FMV of each type of property of a corporation or partnership, being any corporation or partnership over which DC has significant influence and any corporation or partnership over which such corporation or partnership has significant influence, will be determined as follows:

(i) an amount equal to the result of the multiplication of the FMV of its equity or receivable in a corporation or partnership over which it has the ability to exercise significant influence by the fraction corresponding to the proportion that the net FMV of the corresponding type of property of such corporation or partnership represents of the aggregate net FMV of all the property owned by such corporation or partnership (as determined in accordance with the methodologies described herein); for greater certainty, the amount will be negative if the net FMV of the corresponding type of property of such corporation or partnership is negative and the resulting negative amount might result in a negative net FMV;

(ii) its current liabilities, which include loans payable on demand, will reduce the aggregate FMV of its cash or near-cash properties in the proportion that the FMV of each such property is of the aggregate FMV of its cash or near-cash properties; if the aggregate amount of its current liabilities exceed the aggregate FMV of its cash or near-cash properties, the aggregate net FMV of its cash or near-cash properties will be negative by such excess;

(iii) its accounts receivable, trade receivables, inventories and prepaid expenses will be reclassified as business property (and not cash or near-cash property) to the extent that they will be collected, sold or used in the ordinary course of the business to which such property relates and that the aggregate FMV of the remaining cash or near-cash properties does not become negative;

(iv) a liability, other than a current liability, that relates to a particular property will reduce the FMV of the particular property (and effectively the aggregate FMV of the type of properties to which the particular property belongs); any excess of such liability over the FMV of a particular property plus liabilities that pertain to a particular type of property, but not to a particular property, will then reduce the FMV of properties of that type and the net FMV of property of such type may become negative; and

(v) if any liabilities remain after the allocations described above are made, such excess unallocated liabilities will then be allocated to the cash or near-cash property, investment property and business property of such corporation or partnership, based on the relative net FMV of each type of property prior to the allocation of such excess unallocated liabilities, taking into account only the types of property that have a positive amount of net FMV;

(c) the aggregate net FMV of each type of property owned by DC will be determined as described in (b)(i) to (v) above; for greater certainty, where the aggregate net FMV of a type of property of a corporation or partnership over which it has the ability to exercise significant influence is negative and DC owns equity or a receivable in that corporation or partnership, the negative amount will reduce the aggregate FMV of the corresponding type of property of DC and if the aggregate net FMV of a type of property of DC is negative, such negative amount will reduce the aggregate net FMV of its other types of property on the basis of the relative aggregate net FMV of such type of property.

42.1 Based on the methodologies described above, it is anticipated that DC will have three types of property at the time of the transfers.

43. For purposes of determining the types of property:

(a) the assets and liabilities in the XXXXXXXXXX will be classified as business property;

(b) the non-current portion of the XXXXXXXXXX will be classified as business property, as the XXXXXXXXXX business continues to be carried on. Any current portion of the XXXXXXXXXX will be classified as cash or near-cash property;

(c) the Canco1 Loan Note will be classified as “cash or near-cash” property;

(d) the Collectibles will be classified as investment property; and

(e) the Trademarks will be classified as business property.

44. In determining the net FMV of each type of property of DC, the liabilities of DC will be allocated to, and deducted in the calculation of, the net FMV of the particular property:

(a) current liabilities will be allocated to each “cash or near-cash” property in the proportion that the FMV of such property is of the FMV of all “cash or near-cash” property;

(b) liabilities, other than current liabilities, that relate to a particular property will be allocated to the particular property (and effectively to the type of property to which the property belongs) to the extent of its FMV;

(c) liabilities, other than current liabilities, that relate to a particular type of property, but not to a particular property, will be allocated to that type of property to the extent of its FMV; and

(d) any remaining liabilities will then be allocated among all types of property in the proportion to the remaining net FMV of each type of property is of the aggregate FMV of all types of property, determined after the allocation of liabilities in (a) to (c) above.

45. DC will contemporaneously transfer the transferred properties to TC1 and TC2 such that, immediately following such property transfer, the aggregate net FMV of each type of property of DC transferred to TC1 or TC2, will be equal to or approximate the proportion determined by the formula:

A x B / C

where:

A is the net FMV (determined as described in the following Paragraph), immediately before the transfer, of all property of that type owned at that time by DC

B is the FMV, immediately before the transfer, of all of the shares of the capital stock of DC owned at that time by TC1 or TC2 as the case may be, and

C is the FMV, immediately before the transfer, of all the issued and outstanding shares of the capital stock of DC

For purposes of this Paragraph, the expression “approximate the proportion” above 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 that TC1 and TC2 has received on such transfer as compared to what it would have received had it received its appropriate pro rata share of the net FMV of that type of property.

46. As consideration for the transfer of their proportionate share of the transferred properties, each of TC1 and TC2 will:

(a) assume certain undertakings of DC to which paragraph 12(1)(a) applies (if any);

(b) assume other liabilities relating to the transferred properties; and

(c) issue XXXXXXXXXX Class X Preferred Shares to DC with an aggregate Redemption Amount equal to the aggregate FMV of the transferred properties acquired by such TC, less the amount of liabilities assumed by each TC as described in ((a)) and ((b)) above.

47. XXXXXXXXXX

48. With respect to the consideration paid by DC to TC1 and TC2 for the assumption of DC’s undertakings, if any, DC and each of TC1 and TC2 will, if desirable, jointly elect under subsection 20(24), in the manner and within the time referred to in subsection 20(25).

49. For greater certainty, the Class X Preferred Shares of the capital stock of TC1 and TC2 that are issued to DC will represent more than XXXXXXXXXX% but less than XXXXXXXXXX% of the issued share capital of each of TC1 and TC2 having full voting rights in all circumstances and such shares will also represent more than XXXXXXXXXX% of the FMV of all the issued shares of the capital stock of each TC.

50. DC will jointly elect with TC1 or TC2, as the case may be, in the prescribed form and within the time limit referred to in subsection 85(6), to have the provisions of subsection 85(1) apply to the transfer of the transferred properties that are an eligible property. The agreed amount for purposes of subsection 85(1) in respect of such property transferred will be as follows:

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

(b) in the case of the 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).

51. Each of TC1 and TC2 will add to the stated capital maintained for the Class X Preferred Shares of its capital stock, an amount that will not exceed the amount by which the aggregate of, in the case of eligible properties, the agreed amounts, and in the case of other properties, the FMV of the properties transferred to each TC exceeds the liabilities assumed by such TC. For greater certainty, the increase to the PUC of the Class X Preferred Shares will not exceed the maximum amount that could be added to the PUC of each such shares, having regard to subsection 85(2.1).

52. Each of TC1 and TC2 will redeem its XXXXXXXXXX Class X Preferred Shares owned by DC. As consideration, TC1 and TC2 will each issue to DC two non-interest bearing promissory notes with principal amounts in aggregate equal to the respective aggregate Redemption Amounts of the Class X Preferred Shares so redeemed. The first set of notes, TC1DC Expenses Note and TC2DC Expenses Note, will each have a principal amount equal to the amount of the purchase for cancellation proceeds referred to in Paragraph 53 below. The second set of notes, TC1DC Note and TC2DC Note, will each have a principal amount equal to the difference between the respective aggregate Redemption Amounts of the Class X Preferred Shares so redeemed and the amount of the purchase for cancellation proceeds referred to in Paragraph 53 below.

53. DC will purchase for cancellation sufficient common shares of DC held by TC2 in order to pay a capital dividend in the amount of approximately $XXXXXXXXXX. DC will elect pursuant to subsection 83(2) to treat the entire deemed dividend as a capital dividend paid on the common shares of DC (the “Capital Dividend”). DC will simultaneously purchase for cancellation the same number of common shares held by TC1. DC will not make an election pursuant to subsection 83(2) in respect of this other deemed dividend. DC will pay the amount owing on the repurchase of common shares held by TC1 and TC2 by issuing promissory notes to TC1 and TC2 respectively. These promissory notes will be set-off against the TC1DC Expenses Note and the TC2DC Expenses Note referred to in Paragraph 52 above.

54. The shareholders of DC will, by way of special resolution, resolve to wind-up and dissolve DC pursuant to the Act1. DC will assign and distribute the TC1DC Note to TC1 and the TC2DC Note to TC2. As a result of the assignment and distribution of the TC1DC Note and the TC2DC Note, the obligations of TC1 and TC2 under the notes will be extinguished and the notes will be cancelled.

54.1 DC will elect, in the manner and form required under subsection 83(2), to treat the portion of the winding-up dividend referred to in subparagraph 88(2)(b)(i) as a separate capital dividend paid on the common shares of DC. Pursuant to subparagraph 88(2)(b)(iv), TC1 and TC2 will each be deemed to have received a proportionate capital dividend from DC.

54.2 To the extent that there is GRIP in DC, DC will designate, pursuant to subsection 89(14), a portion of the winding-up dividend referred to in subsection 88(2)(b)(iii), which is deemed to be a separate dividend, to be an eligible dividend by notifying TC1 and TC2 in writing, in a timely manner, that the dividend is an eligible dividend.

55. After the transactions described above, DC will not own or acquire any property or carry on any activity or undertaking. Articles of dissolution will be filed by DC with the Director.

Post-Butterfly Transactions and Covenants

Acquisition of Subco2 and the Collectibles

56. TC2 will acquire from TC1 the XXXXXXXXXX common shares of Subco2 owned by TC1 for FMV consideration which the TCs have determined to be $XXXXXXXXXX subject to the adjustments provided in the MTA.

57. TC2 will acquire from TC1, the part of the Collectibles owned by TC1 for FMV consideration which the TCs have determined to be $XXXXXXXXXX plus tax.

58. TC1 will include in its income for the year any taxable capital gain or recapture which results from the disposition of the shares of Subco2 and the interest in the Collectibles.

Acquisition of the Retained Subsidiary and the Canco1 Loan Note

59. TC2 will acquire the XXXXXXXXXX common shares of the Retained Subsidiary owned by TC1 for the nominal consideration of $XXXXXXXXXX which represents the FMV of such common shares.

60. TC1 will acquire from TC2 its interest in the Canco1 Loan Note for FMV consideration which the TCs have determined to be $XXXXXXXXXX.

ADDITIONAL INFORMATION

61. The MTA provides that certain post-closing transactions shall not be permitted for a XXXXXXXXXX year period after the Proposed Transactions including:

(a) the sale of any shares of Shareholder1 or Shareholder2 (or their respective TCs), or any property XXXXXXXXXX% or more of the FMV of which is derived from shares of Shareholder1 or Shareholder2 (or their respective TCs), to a person not related (as such term is defined for purposes of paragraph 55(3)(b)) to the seller of such shares;

(b) an acquisition of control of Shareholder1 or Shareholder2 (or their respective TCs); or

(c) the sale by Shareholder1 or Shareholder2 (or their respective TCs) to a person not related (as such term is defined for purposes of paragraph 55(3)(b)) to Shareholder1 or Shareholder2 or their respective TCs, as applicable, of property (other than money or non-convertible debt) acquired by the respective TC pursuant to the Proposed Transactions having an aggregate FMV greater than XXXXXXXXXX% of the total FMV of all property (other than money or non-convertible debt) acquired by the respective TC pursuant to the Proposed Transactions net of liabilities.

62. XXXXXXXXXX

62.1 XXXXXXXXXX

63. Other than as described in the Facts and Proposed Transactions, no property has been or will be acquired or disposed of by DC, or a corporation controlled by it, in contemplation of and before the Proposed Transactions.

64. Other than as described in the Facts and Proposed Transactions, neither TC1 nor TC2 has any expectation or intention, subsequent to the Proposed Transactions, of disposing of any property owned by it, as part of a series of transactions or events that includes the Proposed Transactions, to a person who is not a related person or to a partnership.

65. There was no acquisition of control of Shareholder1, Shareholder2, TC1 or TC2 in contemplation of and before the Proposed Transactions.

66. None of the shareholders of the Shareholder1, Shareholder2, TC1 or TC2 are contemplating the sale or transfer of any shares of the capital stock of those corporations.

67. None of the shareholders of DC are contemplating the sale or transfer of any shares of the capital stock of DC.

68. There will not be any material change in the composition of DC's assets or liabilities (except as contemplated in the Proposed Transactions) from the date of the MTA until the date the Proposed Transactions described herein are completed.

69. None of the shares of DC nor any of the shares of any TC is or 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 agreement.

70. None of DC, Shareholder1, Shareholder2 and the TCs is or will be, at any time during a series of transactions or events that includes the Proposed Transactions, a restricted financial institution or a specified financial institution.

71. Each of DC and the TCs has the financial capacity to honor, upon presentation for payment, the amount payable under a promissory note issued by it as part of the Proposed Transactions.

PURPOSE OF THE PROPOSED TRANSACTIONS

The shareholders of DC wish to carry on separate businesses independently. By mutual agreement, Mr. D and Mr. E (and their respective families) decided to split up the business of DC and to each carry on half of the business of DC independently. XXXXXXXXXX. The Proposed Transactions will allow the shareholders of DC to divide the assets of DC equally, on a tax deferred basis, so that each can independently carry on and manage their part of the XXXXXXXXXX business through TC1 and TC2.

After the Proposed Transactions are complete, the separate existence of TC1 and TC2 will also facilitate independent estate planning for the indirect individual shareholders of TC1 and TC2 at some future date.

XXXXXXXXXX

XXXXXXXXXX

RULINGS

Provided that the above statements of Facts, Proposed Transactions, Additional Information and Purpose of Proposed Transactions are accurate and constitute complete disclosure of all relevant information, our rulings are as follows:

A. Subject to the application of subsection 69(11), provided the appropriate joint elections are filed in the prescribed form and manner within the prescribed time specified in subsection 85(6) and provided each particular property so transferred is an eligible property in respect of which shares have been issued as full or partial consideration therefor, the provisions of subsection 85(1) will apply to:

(a) the transfers by each of Shareholder1 and Shareholder2 of all of their shares in the capital stock of DC to TC1 and TC2, respectively, as described in Paragraphs 38 to 41; and

(b) DC’s transfers of property to TC1 and TC2 as described in Paragraph 45, such that the agreed amount in respect of each such transfer will be deemed pursuant to paragraph 85(1)(a) to be the transferor’s proceeds of disposition of the particular property and the transferee’s cost thereof. For greater certainty, paragraph 85(1)(e.2) will not apply to the transfers referred to herein.

B. XXXXXXXXXX

C. As a result of the redemption by TC1 of the Class X Preferred Shares of its capital stock owned by DC and the redemption by TC2 of the Class X Preferred Shares of its capital stock owned by DC as described in Paragraph 52, by virtue of subsection 84(3),

(a) TC1 will be deemed to have paid, and DC will be deemed to have received, a taxable dividend equal to the amount by which the amount paid by TC1 in respect of the redemption of the Class X Preferred Shares of its capital stock owned by DC exceeds the PUC of such class of shares immediately before the redemption; and

(b) TC2 will be deemed to have paid, and DC will be deemed to have received, a taxable dividend equal to the amount by which the amount paid by TC2 in respect of the redemption of the Class X Preferred Shares of its capital stock owned by DC exceeds the PUC of such class of shares immediately before the redemption.

D. As a result of the purchase for cancellation of some of the common shares of DC as described in Paragraph 53,

(a) by virtue of subsection 84(3), DC will be deemed to have paid, and TC1 will be deemed to have received, a taxable dividend equal to the amount by which the amount paid by DC in respect of the purchase for cancellation of the shares in the capital of DC owned by TC1 exceeds the PUC of such shares immediately before such purchase for cancellation;

(b) provided that DC elects pursuant to subsection 83(2) in respect of the full amount of the Capital Dividend described in Paragraph 53, in prescribed form and manner, such dividend will be deemed to be a capital dividend;

(c) there will not be an acquisition of control of DC arising from the simultaneous purchase for cancellation by DC of the same number of common shares owned by TC1 and TC2.

E. As a result of the distribution by DC in the course of its winding-up,

(a) by virtue of paragraph 88(2)(b) and subsection 84(2), but subject to (b), (c) and (d) below, DC will be deemed to have paid a dividend (the “winding up dividend”) on its common shares equal to the amount by which

(i) the aggregate FMV of the property of DC distributed to TC1 and TC2 in respect of the common shares of DC on the winding-up exceeds

(ii) the amount, if any, by which the PUC in respect of such common shares of DC is reduced on the distribution, and

each of TC1 and TC2 will be deemed to have received a dividend equal to that proportion of the amount of the excess that the number of common shares of DC held by TC1 and TC2, as the case may be, is of the number of such shares issued and outstanding immediately before the distribution;

(b) pursuant to subparagraph 88(2)(b)(i), such portion of the winding-up dividend paid on the common shares of DC referred to in (a) that does not exceed the CDA of DC determined immediately before the payment of the winding-up dividend will be deemed, for purposes of the subsection 83(2) election, to be a full amount of a separate dividend and provided that DC elects pursuant to subsection 83(2) in respect of the full amount of this separate dividend, in prescribed form and manner, such dividend will be deemed to be a capital dividend;

(c) pursuant to subparagraph 88(2)(b)(ii), the portion of the winding-up dividend on the common shares of DC that is equal to the DC's pre-1972 CSOH, as determined immediately before the payment of the winding-up dividend, shall be deemed not to be a dividend;

(d) pursuant to subparagraph 88(2)(b)(iii), the winding-up dividend on the common shares of DC, to the extent that it exceeds the portion thereof referred to in (b) herein that is deemed to be a separate dividend and the portion referred to in (c) herein that is deemed not to be a dividend, will be deemed to be a separate dividend that is a taxable dividend; and

(e) pursuant to subparagraph 88(2)(b)(iv), each of TC1 and TC2 will be deemed to have received its proportionate share of the winding up dividend described in (b) and (c) herein.

F. The taxable dividends received by DC and the TCs as described in Ruling C, Ruling D and Ruling E:

(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(2.1), (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 for cancellation, as the case may be, by virtue of paragraph (j) of the definition of “proceeds of disposition” in section 54;

(d) will, by virtue of subsection 112(3), reduce the loss, if any, in respect of the disposition of the shares on which the dividend is deemed to be received;

(e) will not give rise to tax under Part IV except as provided in paragraph 186(1)(b);

(f) will not be subject to tax under Part IV.1 by virtue of paragraph (c) of the definition of “excepted dividend” in subsection 187.1; and

(g) will not be subject to tax under Part VI.1 by virtue of paragraph (a) of the definition of “excluded dividend” in subsection 191(1) in the case of the dividend deemed to be received by each of TC1 and TC2 from DC and provided that an amount is specified for the purposes of subsection 191(4) (and thus deemed to be an “excluded dividend”), in the case of the dividend deemed to be received by DC from a TC.

G. The set-off and cancellation of the TC1DC Expenses Note and the TC2DC Expenses Note will not, in and of itself, result in a forgiven amount within the meaning of subsections 80(1) or 80.01(1). In addition, DC will not realize any gain or loss as a result of the set-off of the TC1DC Expenses Note and the TC2DC Expenses Note.

H. The extinguishment of the TC1DC Note and the TC2DC Note will not, in and of itself, result in a forgiven amount within the meaning of subsections 80(1) or 80.01(1). In addition, DC will not realize any gain or loss as a result of the extinguishment of the TC1DC Note and the TC2DC Note.

I. Provided that, as part of the series of transactions or events that includes the Proposed Transactions, 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 property in the circumstances described in subparagraph 55(3.1)(b)(iii);

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

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

which has not been described herein, then by virtue of paragraph 55(3)(b), subsection 55(2) will not apply to the taxable dividends referred to in Ruling C, Ruling D and Ruling E and, for greater certainty, subsection 55(3.1) will not apply to exclude the application of paragraph 55(3)(b).

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

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

The above rulings are subject to the limitations and qualifications set out in Information Circular 70-6R6 dated August 29, 2014 and are binding on CRA provided that the Proposed Transactions are completed within 6 months of the date of this letter. 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.

OTHER COMMENTS

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 PUC of any share or the ACB or FMV of any property referred to herein;

b. The balance of the CDA, GRIP, or RDTOH of any corporation; or

c. Any 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 includes other transactions or events that are not described in this letter.

Nothing in this letter should be construed as confirmation, express or implied, that, for the purposes of any of the rulings given above, any adjustment to the fair market value of the properties transferred or the redemption amount of the shares issued as consideration, whether pursuant to a price adjustment clause or otherwise, will be effective retroactively to the time of the transfer and issuance of shares. In addition, any subsequent adjustment could affect Ruling I above. Furthermore, none of the rulings given in this letter are intended to apply to or in the event of the operation of a price adjustment clause, since such adjustment 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 Income Tax Folio S4-F3-C1 Price Adjustment Clauses.

DC may have a balance in its RDTOH at its year-end immediately following the purchase for cancellation of DC’s common shares and the wind-up of DC, respectively. Consequently, the purchase for cancellation by DC of its common shares owned by the TCs and the winding-up of DC could give rise to what is referred to as a “circular” calculation of RDTOH. Consequently, we must inform you that, in our view, this could result in the TCs and DC being subject to Part IV tax under paragraph 186(1)(b). It is also our view that the circularity problem causes uncertainty as to which corporation is ultimately entitled to a dividend refund and which corporation is ultimately liable for Part IV tax. Since the problem will affect the assessment of the income tax returns of DC and each of the TCs, the district taxation office at which each of the corporations files its T2 income tax return will have to be consulted in order to determine which corporation will receive the dividend refund and which corporation will be subject to the Part IV tax liability under paragraph 186(1)(b) described in these comments.

An invoice for our fees in connection with this ruling request will be forwarded to you under separate cover.

Yours Truly,

XXXXXXXXXX

for Division Director

Reorganizations Division

Income Tax Rulings Directorate

Legislative Policy and Regulatory Affairs Branch