2021 Ruling 2021-0887311R3 - Multi-Wing 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 butterfly dividend is exempt from 55(2) as a result of qualifying under 55(3)(b)?

Position: Yes.

Reasons: Proposed transactions meet the requirements of paragraph 55(3)(b).

XXXXXXXXXX 2021-088731

Dear XXXXXXXXXX,

Re: Advance Income Tax Ruling
XXXXXXXXXX

We are writing in response to your request dated XXXXXXXXXX and the revised request dated XXXXXXXXXX for an advance income tax ruling (ruling) on behalf of the taxpayers described below (the Taxpayers). We also acknowledge the additional information provided in your various email correspondence (XXXXXXXXXX).

We understand that to the best of your knowledge and that of the Taxpayers, none of the Proposed Transactions and/or issues involved in this ruling are the same as, or substantially similar to, transactions and/or issues that are:

i. in a previously filed return of the Taxpayers or a related person and;

A. being considered by the Canada Revenue Agency in connection with such return;

B. under objection by the Taxpayers or a related person; or

C. the subject of a current or completed court process involving the Taxpayers or a related person; or

ii. the subject of a ruling previously considered by the Income Tax Rulings Directorate.

The tax account numbers, Tax Services Offices and the Tax Centres and addresses of the Taxpayers involved are as follows:

XXXXXXXXXX

Unless otherwise stated:

i. a reference 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, c.1 (5th Supp.), as amended (the “Act”);

ii. all terms and conditions used in this Ruling request that are defined in the Act (or in the Regulations) have the meaning given in such definition;

iii. all references to monetary amounts are in Canadian dollars; and

iv. the singular should be read as plural and vice versa where the circumstances so require.

DEFINITIONS

Unless otherwise specified, the following terms have the meanings specified below:

“ACB” means “adjusted cost base” as that expression is defined in section 54 and subsection 248(1);

“Act1” refers to the XXXXXXXXXX Business Corporations Act, XXXXXXXXXX as amended;

“Act2” refers to the Companies Act XXXXXXXXXX as amended;

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

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

“CCPC” or “Canadian-controlled private corporation” has the meaning assigned by subsection 125(7);

“CDA” or “capital dividend account” has the meaning assigned by subsection 89(1);

“Child 1” means XXXXXXXXXX, daughter of Father, sibling of Child 2 and Child 3 and an individual who is resident in Canada for the purposes of the Act;

“Child 2” means XXXXXXXXXX, son of Father, sibling of Child 1 and Child 3 and an individual who is resident in Canada for the purposes of the Act;

“Child 3” means XXXXXXXXXX, son of Father, sibling of Child 1 and Child 2 and an individual who is a non-resident. Child3 ceased to be resident in Canada in January 2001;

“Child1Co” means XXXXXXXXXX, incorporated under Act1, as described in Paragraph 14;

“Child2Co” means XXXXXXXXXX, incorporated under Act1, as described in Paragraph 18;

“Child3Co” means XXXXXXXXXX, all the shares of which are owned by Child 3;

“Children” means collectively, Child 1, Child 2 and Child 3;

“Class D Preferred Shares” means the preferred shares issued by Childco1 and Childco2 respectively, as described in Paragraph 8;

“CRA” refers to the Canada Revenue Agency;

“DC” means XXXXXXXXXX, incorporated under Act2, as described in Paragraph 1;

“DC Common Shares” means the common shares of DC, as described in Paragraph 2;

“DC Preferred Shares” means the first preference shares of DC, as described in Paragraph 2;

“DC Purchase Note 1” means the non-interest bearing promissory note issued by DC to TC1 on the purchase for cancellation of the DC Common Shares held by TC1, as described in Paragraph 40;

“DC Purchase Note 2” means the non-interest bearing promissory note issued by DC to TC2 on the purchase for cancellation of the DC Common Shares held by TC2, as described in Paragraph 40;

“DC Transfers” refers to the transfers of property by DC to each of TC1Sub and TC2Sub on the distribution, as described in Paragraph 33;

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

“dividend rental arrangement” has the meaning assigned by subsection 248(1);

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

“eligible property” has the meaning assigned by subsection 85(1.1);

“ERDTOH” or “eligible refundable dividend tax on hand” has the meaning assigned by subsection 129(4);

“FMV” means “fair market value” being the highest price available in an open and unrestricted market between informed and prudent parties acting at arm’s length and under no compulsion to act, expressed in terms of cash;

“Father” means XXXXXXXXXX, who is the father of Child 1, Child 2 and Child 3 and who is resident in Canada for the purposes of the Act;

“FatherCo” means XXXXXXXXXX, all the shares of which are owned by Father;

“financial intermediary corporation” has the meaning assigned by subsection 191(1);

“Foundation” means XXXXXXXXXX, a registered charitable foundation resident in Canada;

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

“Investment Portfolio” has the meaning assigned by Paragraph 9(c);

“NERDTOH” or “non-eligible refundable dividend tax on hand” has the meaning assigned by subsection 129(4);

“net capital loss” has the meaning assigned by subsection 111(8);

“non-capital loss” has the meaning assigned by subsection 111(8);

“Paragraph” means a numbered paragraph in this letter;

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

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

“Proposed Transactions” means the transactions described in Paragraphs 22 to 44;

“PUC” or “paid-up capital” has the meaning assigned by subsection 89(1);

“Real Estate” means the residential rental properties located at XXXXXXXXXX;

“related” means, in relation to a particular person, another person who is related to the particular person by virtue of subsection 251(2), modified for the purposes of section 55 by paragraph 55(5)(e) where applicable;

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

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

“significant influence” has the meaning assigned by XXXXXXXXXX;

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

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

“stated capital” means the amount of capital determined in respect of a class or series of shares in accordance with Act1 or Act2, as the case may be;

“Subco” refers to XXXXXXXXXX, a corporation incorporated in the United States of America, as described in Paragraph 11;

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

“taxable preferred share” has the meaning assigned by subsection 248(1);

“taxation year” has the meaning assigned by subsection 249(1);

“TC1” refers to XXXXXXXXXX, a corporation to be incorporated under Act1, as described in Paragraph 23, and a transferee corporation in respect of the distribution described in Paragraph 33;

“TC1Sub” refers to a corporation to be incorporated under Act1, as described in Paragraph 25;

“TC1Sub Butterfly Shares” means the Class A special shares in the capital stock of TC1Sub as described in Paragraph 25;

“TC1Sub Redemption Note” means the non-interest bearing promissory note issued by TC1Sub to DC on the redemption of the TC1Sub Preferred Shares held by DC, as described in Paragraph 36;

“TC2” refers to XXXXXXXXXX, a corporation to be incorporated under Act1, as described in Paragraph 23, and a transferee corporation in respect of the DC Transfers described in Paragraph 33;

“TC2Sub” refers to a corporation to be incorporated under Act 1, as described in Paragraph 26;

“TC2Sub Butterfly Shares” means the Class A special shares in the capital stock of TC2Sub as described in Paragraph 26;

“TC2Sub Redemption Note” means the non-interest bearing promissory note issued by TC2Sub to DC on the redemption of the TC2Sub Preferred Shares held by DC, as described in Paragraph 36;

“TC” refers to either TC1 or TC2, as the context may require, and “TCs” refers collectively to TC1 and TC2;

“TCSub” refers to either TC1Sub or TC2Sub, as the context may require, and “TCSubs” refers collectively to TC1Sub and TC2Sub; and

“TCC” means “taxable Canadian corporation” as that expression is defined by subsection 89(1).

FACTS

1. DC is a corporation incorporated under Act2 on XXXXXXXXXX. DC is a TCC and CCPC, and will be at all relevant times. DC’s taxation year and fiscal period ends on XXXXXXXXXX.

2. The authorized share capital of DC consists of an unlimited number of the following classes of shares:

(a) Common shares (DC Common Shares) – voting, fully participating, non-cumulative discretionary dividends, and having no par value;

(b) First preference shares (DC Preferred Shares) – voting, fixed rate non-cumulative dividends payable at a rate of XXXXXXXXXX% times the redemption value per month and ranking in priority to all other classes of shares, redeemable at the option of the company or the holder, subject to a price adjustment clause, and non-participating;

(c) Second preference shares – non-voting, fixed rate non-cumulative dividends payable at a rate of XXXXXXXXXX% times the redemption value per month and ranking in priority to all other shares except the DC Preferred Shares, redeemable at the option of the company or the holder, subject to a price adjustment clause, and non-participating; and

(d) Third preference shares – non-voting, fixed rate non-cumulative dividends payable at a rate of XXXXXXXXXX% times the redemption value per month and ranking in priority to all other shares except the DC Preferred Shares and the second preference shares, redeemable at the option of the company or the holder, subject to a price adjustment clause, and non-participating.

3. The history of the share ownership of DC is as follows:

(a) On incorporation, Father froze the value of DC and subscribed for XXXXXXXXXX DC Preferred Shares for $XXXXXXXXXX and XXXXXXXXXX second preference shares with a redemption value of $XXXXXXXXXX per share. On this same day Child 1, Child 2 and Child 3 each subscribed for XXXXXXXXXX DC Common Shares for $XXXXXXXXXX.

(b) On XXXXXXXXXX, Child 3 transferred his XXXXXXXXXX DC Common Shares to Child3Co.

(c) On XXXXXXXXXX, Child3Co transferred its XXXXXXXXXX DC Common Shares to FatherCo, after which these shares were immediately purchased for cancellation.

(d) On XXXXXXXXXX, Father transferred XXXXXXXXXX of the DC Preferred Shares to FatherCo, which were subsequently redeemed by DC on XXXXXXXXXX. The redemption of these shares was determined not have been in contemplation of the distribution.

(e) In each of XXXXXXXXXX, Father transferred XXXXXXXXXX of the second preference shares to the Foundation. Immediately after the Foundation acquired the shares, DC redeemed them resulting in a deemed dividend to the Foundation pursuant to subsection 84(3). In the result, Father and the Foundation ceased to hold second preference shares of DC as of XXXXXXXXXX.

4. DC’s issued and outstanding shares are held as follows:

	Shareholder	Shares				PUC	ACB
	Father		XXXX DC Preferred Shares	XXXX	XXXX
	Child 1		XXXX DC Common Shares		XXXX	XXXX
	Child 2		XXXX DC Common Shares		XXXX	XXXX

5. Father is DC’s controlling shareholder and he is related to DC pursuant to subparagraph 251(2)(b)(i). Child 1 and Child 2 are related to Father by virtue of paragraphs 251(2)(a) and (6)(a) and each is related to DC pursuant to subparagraph 251(2)(b)(iii).

6. DC carries on a specified investment business, which involves the XXXXXXXXXX. DC holds its assets as capital property.

7. Father is XXXXXXXXXX. Since DC was incorporated, Father has directed the investment decisions for DC for the benefit of the Children, in accordance with XXXXXXXXXX.

8. In XXXXXXXXXX, Father directed DC to transfer a portion of its portfolio investments to each of Child1Co and Child2Co under section 85, to provide each of Child 1 and Child 2 with the opportunity to independently formulate and implement investment management strategies (the XXXXXXXXXX transfer). DC received non-voting redeemable special shares (Class D Preferred Shares) as consideration for the transfer. DC continues to hold the Class D preferred shares originally issued on the XXXXXXXXXX transfer.

9. As at XXXXXXXXXX, the FMV of DC’s assets, net of liabilities, was approximately $XXXXXXXXXX, which included the Investment Portfolio with a FMV of approximately $XXXXXXXXXX. DC’s balance sheet as at XXXXXXXXXX consisted of the following:

(a) Cash maintained to cover operating expenses;

(b) Common shares of Subco;

(c) Investments which consist of XXXXXXXXXX (the Investment Portfolio);

(d) Class D Preferred Shares of each of Child1Co and Child2Co;

(e) XXXXXXXXXX;

(f) Life insurance policy on Father;

(g) Nominal accounts payable and accrued liabilities;

(h) Income taxes receivable; and

(i) Notes payable to Child 1 and Child 2 in the amount of $725,707 and $725,707, respectively.

There is not expected to be any material change in the composition of DC’s assets or liabilities, or in the FMV of the assets or the amount of the liabilities from the date of this letter until the date the Proposed Transactions are completed, except for fluctuations in the value of DC’s assets due to market conditions.

10. As at XXXXXXXXXX, DC had an ERDTOH balance of $XXXXXXXXXX, a NERDTOH balance of $XXXXXXXXXX, GRIP of $XXXXXXXXXX and a CDA balance of $XXXXXXXXXX. These balances are not expected to materially change prior to the DC Transfers.

11. Subco was incorporated by DC under the laws of XXXXXXXXXX in the United States in XXXXXXXXXX. Subco is a resident of the United States for income tax purposes and its taxation year and fiscal period ends on XXXXXXXXXX.

12. The authorized share capital of Subco consists of an unlimited number of common shares without par value. The issued and outstanding share capital consists of XXXXXXXXXX common shares, all of which are held by DC as capital property. DC has been the sole shareholder of Subco since its incorporation. The ACB and PUC of the shares held by DC is $XXXXXXXXXX.

13. Subco owns XXXXXXXXXX. As at XXXXXXXXXX, the value of Subco’s assets, net of liabilities, was approximately $XXXXXXXXXX. Subco holds no other significant assets. There is not expected to be any material change in the composition of Subco’s assets or liabilities, or in the FMV of Subco’s assets or the amount of its liabilities, from the date of this letter until the date the Proposed Transactions are completed, except for fluctuations in the FMV due to conditions in the real estate market.

14. Child1Co is a corporation incorporated under Act1 on XXXXXXXXXX. Child1Co is a TCC and CCPC, and will be at all relevant times. Child1Co’s taxation year and fiscal period ends on XXXXXXXXXX. Child1Co was incorporated to facilitate the XXXXXXXXXX transfer of property from DC, as described in paragraph 8, above.

15. Child1Co’s issued and outstanding shares are held as follows:

	Shareholder	Shares				PUC	ACB
	Child 1	XXXX voting common shares	XXXX	XXXX
	DC		XXXX Class D Preferred Shares	XXXX	XXXX

16. Child 1 controls Child1Co by virtue of Child 1’s ownership of the common shares, which are held as capital property. The XXXXXXXXXX Class D Preferred Shares of Child1Co held by DC are non-voting and redeemable at $XXXXXXXXXX per share.

17. Child1Co’s assets consist solely of the original portfolio investments. The portfolio investments are held as capital property. There is not expected to be any material change in the composition of Child1Co’s assets or liabilities, or in the FMV of its assets or the amount of its liabilities, from the date of this letter until the date the Proposed Transactions are completed, except for fluctuations in the FMV of the portfolio investments due to market conditions.

18. Child2Co is a corporation incorporated under the Act1 on XXXXXXXXXX. Child2Co is a TCC and CCPC, and will be at all relevant times. Child2Co’s taxation year and fiscal period ends on XXXXXXXXXX. Child2Co was incorporated in order to facilitate the XXXXXXXXXX transfer of property from DC, as described in paragraph 8, above.

19. Child2Co’s issued and outstanding shares are held as follows:

	Shareholder	Shares				PUC	ACB
	Child 2	XXXX voting common shares	XXXX	XXXX
	DC		XXXX Class D Preferred Shares	XXXX	XXXX

20. Child 2 controls Child2Co by virtue of Child’s ownership of the common shares, which are held as capital property. The XXXXXXXXXX class D Preferred Shares held by DC are non-voting and redeemable at $XXXXXXXXXX per share.

21. Child2Co’s assets consist solely of the original portfolio investments. The portfolio investments are held as capital property. There is not expected to be any material change in the composition of Child2Co’s assets or liabilities, or in the FMV of its assets or the amount of its liabilities from the date of this letter until the Proposed Transactions are completed, except for fluctuations in the FMV of the portfolio investments due to market conditions.

PROPOSED TRANSACTIONS

Increase in Stated Capital and CDA

22. In accordance with Act2, DC will resolve to increase the legal stated capital, and consequently the PUC, of the DC Common Shares held by Child 1 and Child 2 by an amount approximating (but not exceeding) its CDA balance at that time. DC will elect in prescribed manner and prescribed form and within the time referred to in subsection 83(2), such that the full amount of the deemed dividend arising as a result of this increase of stated capital/PUC will be deemed to be paid out of DC’s CDA.

Incorporation of TCs and TCSubs

23. Child 1 will incorporate TC1 and Child 2 will incorporate TC2 under Act1. The TCs will be at all relevant times and for all purposes of the Act, TCCs and CCPCs. Each TC will have an authorized share capital consisting of an unlimited number of shares of each of the following classes:

(a) Class A and B common shares with 1 vote per share, fully participating, and having no par value;

(b) Class C and D common shares, non-voting, fully participating, and having no par value;

(c) Class A special shares redeemable by the company at the FMV of consideration received by the corporation upon issuance of these shares, retractable at the option of the holder, entitled to non-cumulative fixed-rate dividend of XXXXXXXXXX% per annum, containing a price adjustment clause to avoid gifting or shareholder benefit issues, and having XXXXXXXXXX vote per share;

(d) Class B special shares redeemable by the company at the FMV of consideration received by the corporation upon issuance of these shares, retractable at the option of the holder, entitled to non-cumulative fixed-rate dividend of XXXXXXXXXX% per annum, containing a price adjustment clause to avoid gifting or shareholder benefit issues, and non-voting;

(e) Class C and D special shares redeemable at $XXXXXXXXXX per share, retractable at the option of the holder, entitled to discretionary dividends, and non-voting; and

(f) Class E and F special shares redeemable at $XXXXXXXXXX per share, retractable at the option of the holder, having no dividend entitlement, and having XXXXXXXXXX vote per share.

The voting and non-voting common shares are differentiated by liquidation priority. Each class of common shares allows holders to receive dividends at the discretion of the board of directors and allows directors to declare and pay dividends on a particular class of share to the exclusion of any other class of shares.

24. Child 1 and Child 2 will each subscribe for XXXXXXXXXX Class A common shares of TC1 or TC2, as the case may be, for $XXXXXXXXXX. Each Child will serve as the sole director of their respective TC.

25. TC1 will incorporate TC1Sub under Act1. TC1Sub will be a CCPC and a TCC. The authorized share capital of TC1Sub will consist of an unlimited number of Class A, B, C and D common shares and Class A, B, C, D, E and F special shares. The relevant share capital for purposes of the Proposed Transactions will have the following share attributes:

(a) Class A common shares with XXXXXXXXXX vote per share, fully participating, having no par value and entitling the holder to receive dividends at the discretion of the board of directors and allows directors to declare and pay dividends on a particular class of share to the exclusion of any other class of shares; and

(b) Class A special shares redeemable by the company at the FMV of consideration received by the corporation upon issuance of these shares, retractable at the option of the holder, entitled to non-cumulative fixed-rate dividend of XXXXXXXXXX% per annum, containing a price adjustment clause to avoid gifting or shareholder benefit issues, and having 1 vote per share (TC1Sub Butterfly Shares).

26. TC2 will incorporate TC2Sub under Act1. TC2Sub will be a CCPC and a TCC. The authorized share capital of TC2Sub will consist of an unlimited number of Class A, B, C and D common shares and Class A, B, C, D, E and F special shares. The relevant share capital for purposes of the Proposed Transactions will have the following share attributes:

(a) Class A common shares with XXXXXXXXXX vote per share, fully participating, having no par value and entitling the holder to receive dividends at the discretion of the board of directors and allows directors to declare and pay dividends on a particular class of share to the exclusion of any other class of shares; and

(b) Class A special shares redeemable by the company at the FMV of consideration received by the corporation upon issuance of these shares, retractable at the option of the holder, entitled to non-cumulative fixed-rate dividend of XXXXXXXXXX% per annum, containing a price adjustment clause to avoid gifting or shareholder benefit issues, and having 1 vote per share (TC2Sub Butterfly Shares).

27. Each of TC1 and TC2 will subscribe for XXXXXXXXXX Class A common shares of TC1Sub or TC2Sub, as the case may be, such that TC1Sub and TC2Sub will be subsidiary wholly-owned corporations of TC1 and TC2, respectively.

Transfer of DC Common Shares to TC1 and TC2

28. Child 1 will transfer a number of DC Common Shares, the FMV of which will be equal to the property transferred by DC to TC1Sub, as described in Paragraph 33 to TC1. As consideration for the transfer, Child 1 will receive Class B special shares in the capital stock of TC1 with an aggregate FMV equal to the aggregate FMV of the DC Common Shares at the time of the transfer to TC1.

Child 1 and TC1 will jointly elect, in prescribed form and within the time limit referred to in subsection 85(6), to have the rules in subsection 85(1) apply to the transfer of the DC Common Shares to TC1. The agreed amount will be the lesser of the amounts described in subparagraphs 85(1)(c.1)(i) and (ii).

TC1 will add an amount to the corporate stated capital account maintained for the Class B special shares issued by TC1 as a result of the aforesaid transfers, equal to the PUC attributable to the DC Common Shares so transferred to TC1. For greater certainty, the amount of the increase in PUC of the Class B special shares will not exceed the maximum amount that could be added to the PUC of the shares, without being subject to adjustment under paragraph 84.1(1)(a).

29. Child 2 will transfer a number of DC Common Shares, the FMV of which will be equal to the property transferred by DC to TC2Sub, as described in Paragraph 33. As consideration for the transfer, Child 2 will receive Class B special shares in the capital of TC2 with an aggregate FMV equal to the aggregate FMV, at the time of the transfer, of the DC Common Shares transferred to TC2.

Child 2 and TC2 will jointly elect, in prescribed form and within the time limit referred to in subsection 85(6), to have the rules in subsection 85(1) apply to the transfer of the DC Common Shares to TC2. The agreed amount will be the lesser of the amounts described in subparagraphs 85(1)(c.1)(i) and (ii).

TC2 will add an amount to the corporate stated capital account maintained for the Class B special shares issued by TC2 as a result of the aforesaid transfers, equal to the PUC attributable to the DC Common Shares so transferred to TC2. For greater certainty, the amount of the increase in PUC of the Class B special shares will not exceed the maximum amount that could be added to the PUC of the shares, without being subject to adjustment under paragraph 84.1(1)(a).

Types of Property

30. The proposed transactions involve the transfer of a proportionate share of the net FMV of each type of property of DC to each TC based on the relative FMV of the DC Common Shares held by TC1 and TC2 immediately before the transfer (the DC Transfers).

31. Immediately prior to the DC Transfers described in Paragraph 33, the property of DC will be determined on a consolidated look-through basis by including the appropriate pro rata share of the property of each entity over which DC exercises significant influence. For greater certainty, the only entity over which DC exercises significant influence is Subco. For this purpose, the property of DC and Subco will be classified into three types of property for the purposes of the definition of “distribution” in subsection 55(1):

(a) cash or near-cash property, consisting of current assets, including cash, accounts receivable, the cash surrender value of the life insurance policy on Father and prepaid expenses;

(b) investment property, consisting of assets, 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; and

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

Based on the classification of property described above, it is expected that DC will have only cash or near cash property and investment property.

For greater certainty, and for purposes of the DC Transfers:

(d) any tax accounts such as any non-capital loss, net capital loss, the balance of any ERDTOH, NERDTOH or CDA, will not be considered property or a liability, as the case may be;

(e) deferred expenses, which are capitalized and amortized for accounting purposes but fully deducted for tax purposes, will not be considered property;

(f) 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; and

(g) for the purposes of determining the aggregate net FMV of each type of property of DC, the aggregate FMV of the shares of the capital stock of Subco and any indebtedness receivable by DC from Subco will be allocated among the types of property by multiplying the aggregate FMV of the shares of the capital stock of Subco or debt by the proportion that the aggregate net FMV of each type of property owned by Subco (as determined in accordance with Paragraph 32) is of the aggregate net FMV of all the property owned by the corporation.

32. In determining, on a consolidated look-through basis, the net FMV of each type of property of DC immediately before the DC Transfers, the liabilities of DC and Subco will be allocated to, and will be deducted in the calculation of, the net FMV of each type of property in the following manner:

(a) In determining, the net FMV of each type of property of Subco immediately before the DC Transfers, the liabilities of Subco (other than any amounts owing to DC) will be allocated to, and deducted in the calculation of, the net FMV of each such type of property of Subco in the following manner:

(i) current liabilities will be allocated to each cash or near-cash property of the corporation in the proportion that the FMV of each such property is of the FMV of all cash or near-cash property of Subco. To the extent that this allocation of current liabilities exceeds the aggregate FMV of the corporation’s cash or near cash property, Subco will be considered to have a negative net FMV of cash or near cash property.

(ii) liabilities, other than current liabilities, that relate to a particular investment property will be allocated to that particular property to the extent of the its FMV. The liabilities that pertain to investment property, but not to a particular investment property, will then be allocated to investment property. To the extent that the total amount of liabilities that are to be allocated to investment property exceeds the total FMV of that type of property, Subco will be considered to have a negative net FMV of investment property;

(iii) if any liabilities remain after allocating the liabilities described in Paragraphs 32(a)(i)and (ii), such excess unallocated liabilities will then be allocated to the cash or near cash property and investment property of Subco based on the relative net FMV of each type of property prior to the allocation of such excess unallocated liabilities. In the event that the net FMV of any particular type of property is negative, after the application of Paragraphs 32(a)(i) and (ii), that type of property will be deemed, for this purpose, to have a net FMV of nil, such that none of the unallocated liabilities will be allocated to that type of property of Subco.

(b) In determining, on a consolidated look-through basis, the net FMV of each type of property of DC immediately before the DC Transfers, DC will include the appropriate pro rata share of the net FMV of each type of property of Subco and, for greater certainty, the appropriate negative amount of such type of property, as determined in accordance with Paragraph 32(a), and any liabilities of DC will be allocated to, and be deducted in the calculation of, the net FMV of each type of property of DC in the following manner:

(i) current liabilities will be allocated to the cash or near-cash property of DC in the proportion that the FMV of each such property is of the FMV of all cash or near-cash property of DC. To the extent that current liabilities exceed the FMV of cash or near cash property, the cash or near cash property will be deemed to be nil.

(ii) liabilities, other than current liabilities, that relate to a particular investment property will be allocated to that particular property to the extent of the property’s FMV and any excess of such liabilities over the FMV of a particular investment property and liabilities that pertain to investment property, but not to a particular investment property, will be allocated to investment property, but not in excess of the net FMV of such type after the allocation of liabilities to a particular property.

(iii) if any liabilities remain after the allocation of liabilities described in Paragraphs 32(b)(i) and (ii), such excess unallocated liabilities will then be allocated among the types of property of DC, on the basis of the relative net FMV of each type of property prior to the allocation of such excess unallocated liabilities, but after the allocation of liabilities as described in Paragraphs 32(b)(i) and (ii).

For greater certainty, and for purposes of determining the net FMV of each type of property of DC:

(c) any amount owing by DC that is payable on demand or within 12 months of the DC Transfers is considered a current liability;

(d) the amount of any loan or advance owing by Subco (other than to DC) and that is due in less than 12 months or is payable on demand, is considered a current liability; and

(e) no amount will be considered a liability unless it represents a true legal liability capable of quantification.

DC Transfers

33. Immediately following the determination of the net FMV of each type of property of DC, as described in Paragraphs 31 and 32, DC will contemporaneously transfer to each of TC1Sub and TC2Sub, a share of the net FMV of each type of property owned by it at that time, such that immediately following the transfer of the properties and the assumption of DC’s liabilities, the aggregate net FMV of each type of property transferred by DC to TC1Sub or TC2Sub, as the case may be, will be equal to or approximate that proportion of each type of property determined by the formula:

A x B/C

where:

A is the net FMV (determined as described above), immediately before the DC Transfers, of all property of that type owned at that time by DC;

B is the FMV, immediately before the DC Transfers, of all the issued and outstanding 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 DC Transfers, of all the issued and outstanding shares of the capital stock of DC.

For the purposes of this Paragraph, the expression “approximate that proportion” means that the discrepancy from that proportion, if any, will not exceed XXXXXXXXXX, determined as a percentage of the net FMV of each type of property that TC1Sub and TC2Sub, as the case may be, has received on such transfer, as compared to what each such TCSub would have received had it received its particular exact pro rata share of the net FMV of that type of property.

It is the intention of the parties that only cash and near cash owned by DC, the shares of Child1Co and Child2Co and the Investment Portfolio will be part of the DC Transfers and that the shares of Child1Co will be transferred to TC1Sub and the shares of Child2Co will be transferred to TC2Sub. For greater certainty, shares of Subco will not be transferred as part of the DC Transfers, such that DC will remain the sole shareholder of Subco.

34. As consideration for DC Transfers, as described in Paragraph 33, each TCSub will:

(a) assume such liabilities of DC, as appropriate, so that each TCSub will receive a proportionate share of the net FMV of each type of property owned by DC; and

(b) issue to DC a number of its TC1Sub Butterfly Shares or TC2Sub Butterfly Shares, as the case may be, having an aggregate redemption amount and aggregate FMV equal to the FMV of the property received by such TCSub less the amount of liabilities of DC assumed by the particular TCSub.

Each of TC1Sub and TC2Sub will be connected with DC within the meaning of subsection 186(4).

35. DC will jointly elect with TC1Sub and TC2Sub, as the case may be, in the prescribed form and within the time referred to in subsection 85(6), to have the provisions of subsection 85(1) apply to the transfer of each eligible property by DC to such TCSub. The agreed amount in respect of each eligible property so transferred will not be greater than the FMV of such property nor will it be less than the lesser of the FMV and the cost amount to DC of such property. For greater certainty, the agreed amount in respect of each such transferred property will be an amount not less than the lesser of the amounts described in subparagraphs 85(1)(c.1)(i) and (ii), as prescribed in respect of capital property (other than depreciable property of a prescribed class) and inventory.

The amount of the liabilities of DC assumed by TC1Sub or TC2Sub, as the case may be, which are allocated to a particular eligible property that is subject to an election under subsection 85(1), will not exceed the agreed amount for that particular property. The amount of liabilities assumed by TC1Sub or TC2Sub, as the case may be, which are allocated to a particular property that is not subject to an election under subsection 85(1), will not exceed the FMV of any such property.

Each TC1Sub and TC2Sub will add to the stated capital account maintained for the TC1Sub Preferred Shares and the TC2Sub Preferred Shares, as the case may be, an amount equal to the aggregate of (a) the agreed amounts, in the case of each eligible property transferred to such TCSub, and (b) the aggregate FMV, in the case of each property transferred to such TCSub that is not an eligible property, less (c) the aggregate amount of DC’s liabilities assumed by such TCSub.

For greater certainty, the amount to be added to the stated capital account of the TC1Sub Preferred Shares and the TC2Sub Preferred Shares will not exceed the maximum amount that could be added to the PUC of such shares without a reduction taking place pursuant to subsection 85(2.1).

Redemption of TC1Sub and TC2Sub Butterfly Shares

36. Each of TC1Sub and TC2Sub will redeem, as the case may be, the TC1Sub Butterfly Shares or the TC2Sub Butterfly Shares owned by DC, for an amount equal to the aggregate redemption amount and FMV of such shares. As sole consideration for each such share redemption, TC1Sub and TC2Sub, as the case may be, will issue a non-interest bearing demand promissory note to DC, the TC1Sub Redemption Note and the TC2Sub Redemption Note, respectively, having a principal amount and FMV equal to the aggregate redemption amount and FMV of the shares so redeemed. DC will accept the TC1Sub Redemption Note and TC2Sub Redemption Note, respectively, as payment in full for the redemption of the particular shares.

Winding-Up and Dissolution of TC1Sub and TC2Sub

37. Immediately following the share redemptions described in Paragraph 36 above, TC1 and TC2, as the case may be, will resolve to wind-up and dissolve TC1Sub and TC2Sub2, respectively, under the applicable provisions of Act1.

38. All properties of TC1Sub and TC2Sub will be distributed and all liabilities of TC1Sub and TC2Sub2, if any, will be either discharged or assumed by TC1 or TC2, respectively. For greater certainty, the TC1Sub Redemption Note will be assumed by TC1, and the TC2Sub Redemption Note will be assumed by TC2.

39. Articles of dissolution for each of TC1Sub and TC2Sub will be filed with the appropriate corporate registry office no later than XXXXXXXXXX following the winding-up and, upon receipt of a certificate of dissolution, TC1Sub and TC2Sub will cease to exist as of the date specified therein.

Cancellation of DC Common Shares held by TC1 and TC2

40. On a contemporaneous basis, DC will purchase for cancellation all of the outstanding DC Common Shares owned by each of TC1 and TC2. As sole consideration therefore, DC will issue to each of TC1 and TC2, a non-interest bearing demand promissory note (DC Purchase Note 1 and DC Purchase Note 2, respectively), having a principal amount and FMV equal to the sum of the FMV of the DC Common Shares held by such TC. Each of TC1 and TC2 will accept DC Purchase Note 1 and DC Purchase Note 2, respectively, as payment in full for the shares so repurchased, and subsequently, such shares will be cancelled.

41. To the extent that there is a positive GRIP balance in DC at the time of the repurchase of the DC Common Shares, DC will designate, pursuant to subsection 89(14), to treat a portion of such dividend under subsection 84(3) as an eligible dividend by notifying each of TC1 and TC2 in writing, within the time limit prescribed in subsection 89(14), that the portion of such dividend is an eligible dividend. For greater certainty, to the extent that there is GRIP in DC, the amount of GRIP so allocated to each TC shall be done on a pro rata basis on the relative FMV of the DC Common Shares held by the TCs immediately before such shares are purchased for cancellation.

42. Reserved

Set-off of Intercompany Notes

43. DC and TC1 will enter into an agreement under which DC and TC1 will set-off DC Purchase Note 1 in full against TC1Sub Redemption Note, and such notes will be cancelled without payment.

44. DC and TC2 will enter into an agreement under which DC and TC2 will set-off DC Purchase Note 1 in full against TC2Sub Redemption Note, and such notes will be cancelled without payment.

ADDITIONAL INFORMATION

45. Except as described in this letter, no property has been or will be acquired, and no liabilities have been or will be incurred or paid by DC or Subco in contemplation of and before the Proposed Transactions, other than in a transaction described in subparagraphs 55(3.1)(a)(i) to (iv).

46. There has not been and will not be, as part of a series of transactions or events that includes the Proposed Transactions, any disposition or acquisition of property in circumstances described in subparagraphs 55(3.1)(b)(i) or (iii), or an acquisition of control in the circumstances described in subparagraph 55(3.1)(b)(ii).

47. There will not be as part of a series of transactions or events that includes the Proposed Transactions, any disposition of the DC Preferred Shares by Father.

48. At any time before and during the series of transactions and events that include the Proposed Transactions, none of the shares of any of DC, TC1, TC2, TC1Sub or TC2Sub, as the case may be, will be:

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

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

(c) the subject of a dividend rental arrangement;

(d) the subject of any secured undertaking of the type described in paragraph 112(2.4)(a); or

(e) issued for consideration that is or includes:

(i) an obligation of the type described in subparagraph 112(2.4)(b)(i), other than an obligation of a corporation that is related (otherwise than by reason of a right referred to in paragraph 251(5)(b)); or

(ii) any right of the type described in subparagraph 112(2.4)(b)(ii).

49. The DC Common Shares are not taxable preferred shares.

50. At all times during the series of transactions, DC and Fatherco were related pursuant to subparagraph 251(2)(cii)

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

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

53. Each of DC, TC1, TC2, TC1Sub and TC2Sub will have the financial capacity to honour, upon presentation for payment, the amount payable under its respective demand promissory note issued or assumed as part of the Proposed Transactions.

PURPOSES OF THE PROPOSED TRANSACTIONS

54. The purpose of the Proposed Transactions is to divide a portion of the net assets of DC between Child 1 and Child 2 so that each such person will have separate ownership (through TC1 or TC2) of the property that is subject to the DC Transfers. This will enable each of Child 1 and Child 2 to formulate and implement, in an independent manner, their own management strategies with respect to that property.

55. The purpose of the incorporation of TC1Sub and TC2Sub as described in Paragraphs 25 and 26 respectively is to prevent the circularity of Part IV tax on the dividends received in the course of the proposed transactions. The purpose of the winding-up of the TC1Sub and TC2Sub, as described in Paragraph 37, is to enable TC1 and TC2, as the case may be, to have received an indirect transfer of property, as stipulated in the definition of “distribution” in subsection 55(1).

RULINGS GIVEN

Provided that the preceding statements constitute a complete and accurate disclosure of all relevant facts, proposed transactions and purposes of the Proposed Transactions, and provided that the Proposed Transactions are completed in the manner described above, we confirm the following:

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 Child 1 and Child 2 of their respective DC Common Shares to TC1 and TC2, as the case may be, as described in Paragraphs 28 and 29 respectively; and

(b) the transfers of each eligible property owned by DC to TC1Sub and TC2Sub, as the case may be, as part of the DC Transfers, as described in Paragraph 33,

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. On the redemption by TC1Sub and TC2Sub of their respective TC1Sub Butterfly Shares and TC2Sub Butterfly Shares owned by DC, as described in Paragraph 36, and by virtue of paragraphs 84(3)(a) and (b), TC1Sub and TC2Sub will be deemed to have paid, and DC will be deemed to have received, a taxable dividend at that time equal to the amount, if any, by which the amount paid in respect of the redemption of the TC1Sub Butterfly Shares and TC2Sub Butterfly Shares, as the case may be, exceeds the aggregate PUC in respect of those particular shares immediately before the redemption.

C. As a result of the purchase for cancellation of the DC Common Shares owned by TC1 and TC2, as described in Paragraph 40, and by virtue of paragraphs 84(3)(a) and (b), DC will be deemed to have paid, and TC1 and TC2 will be deemed to have received, a taxable dividend at that time equal to the amount, if any, by which the amount paid in respect of the purchase for cancellation of the DC Common Shares exceeds the aggregate PUC in respect of those shares immediately before the purchase for cancellation.

D. The taxable dividends described in Rulings B and C:

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

(b) will, pursuant to subsection 112(1), be deductible by the recipient corporation in computing its taxable income in 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, pursuant to paragraph (j) of the definition of “proceeds of disposition” in section 54, be excluded in determining the proceeds of disposition to the recipient corporation of the shares so redeemed or purchased;

(d) will, pursuant to 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 be subject to tax under Parts IV.1 or VI.1; and

(f) will not be subject to tax under Part IV except to the extent of the amount, if any, determined under paragraph 186(1)(b).

E. The provisions of subsection 88(1) will apply on the winding-up of TC1Sub into TC1 and TC2Sub into TC2, as the case may be, as described in Paragraphs 37 through 39, such that:

(a) each property of the particular TCSub distributed to its respective parent TC on the winding-up will be deemed by paragraph 88(1)(a) to have been disposed of by that TCSub for proceeds of disposition determined under that paragraph;

(b) the shares in the capital stock of TC1Sub held by TC1, and TC2Sub held by TC2, immediately before the winding-up, will be deemed by paragraph 88(1)(b) to have been disposed of by such particular TC for proceeds of disposition determined under that paragraph; and

(c) each property of the particular TCSub distributed to its particular parent TC, as the case may be, on the winding-up, will be deemed to have been acquired by its particular parent TC at a cost determined in accordance with paragraph 88(1)(c).

F. Provided that as part of the series of transactions or events that includes any of the Proposed Transactions, there is not:

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

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

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

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

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 Rulings B and C above, and, for greater certainty, subsection 55(3.1) will not apply to deny the exemption under paragraph 55(3)(b) in respect of those dividends.

G. The set-off and cancellation of TC1 Redemption Note and DC Purchase Note 1, and TC2 Redemption Note and DC Purchase Note 2, as described in Paragraphs 43 and 44, respectively, will not, in and of itself, give rise to a “forgiven amount” within the meaning of either subsection 80(1) or section 80.01. In addition, neither DC, TC1 nor TC2, as the case may be, will realize any gain or incur a loss as a result of such set-off and cancellation.

H. The provisions of subsection 15(1), 56(2), 69(1) and 246(1) will not apply to any of the Proposed Transactions, in and by themselves.

I. 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 herein.

These rulings are given subject to the limitations and qualifications set forth in Information Circular 70-6R12 issued on April 1, 2022, and are binding on the CRA, provided that the Proposed Transactions are completed no later than six (6) months after the date of this letter.

The above rulings are based on the law as it reads at the date of this letter and do not take into account any proposed amendments to the Act and the Regulations, which if enacted, 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, ERDTOH or NERDTOH of any corporation;

(c) any other tax consequence relating to the facts, Proposed Transactions, additional information, or any transaction or event taking place either prior to the Proposed Transactions or subsequent to the Proposed Transactions;

(d) 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 FMV 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. The general position of the CRA with respect to price adjustment clauses is stated in Income Tax Folio S4-F3-C1 Price Adjustment Clauses.

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

Yours truly,

XXXXXXXXXX
Manager
For Division Director
Reorganizations Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch