2012 Ruling 2011-0408991R3 - 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: Split-up butterfly transaction.

Position: Favourable Rulings given.

Reasons: In compliance with the law and previous positions.

XXXXXXXXXX  	 	2011-040899
	 			XXXXXXXXXX 

XXXXXXXXXX , 2012

Dear Sir:

Re: Advance Income Tax Rulings
XXXXXXXXXX

This is in reply to your letter of XXXXXXXXXX in which you requested an advance income tax ruling on behalf of the above-noted taxpayers. We also acknowledge the information provided in your emails of XXXXXXXXXX and XXXXXXXXXX .

We understand that to the best of your knowledge and that of the taxpayers involved, none of the issues described herein is:

(i) dealt with in an earlier tax return of any of the taxpayers or any related person;

(ii) being considered by a Tax Services Office or Taxation Centre in connection with a previously filed tax return of the taxpayers or a related person;

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

(iv) before the courts or, if a judgment has been issued, the time limit for appeal to a higher court has not expired; or

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

Except as otherwise stated, a reference in this ruling to a part, section, subsection, paragraph or subparagraph is a reference to the relevant provision of the Income Tax Act.

Unless otherwise indicated, all references to monetary amounts are in Canadian dollars.

Throughout this letter, the corporate and individual taxpayers will be referred to as follows:

"A" refers to XXXXXXXXXX ;

"B" refers to XXXXXXXXXX ;

"C" refers to XXXXXXXXXX ;

"D" refers to XXXXXXXXXX ;

"E" refers to XXXXXXXXXX ;

"F" refers to XXXXXXXXXX ;

"G" refers to XXXXXXXXXX ;

"H" refers to XXXXXXXXXX ;

"I" refers to XXXXXXXXXX ;

"Holdco1" refers to XXXXXXXXXX ;

"Holdco2" refers to XXXXXXXXXX ;

"DC" refers to XXXXXXXXXX ;

"TC" refers to XXXXXXXXXX ;

"Opco" refers to XXXXXXXXXX .

DEFINITIONS

a) "ACB" has the meaning assigned to the expression "adjusted cost base" in section 54;

b) "Act" refers to the Income Tax Act (Canada);

c) "agreed amount" means the amount that a transferor and a transferee have agreed upon in a joint election under subsection 85(1) in respect of a transfer of an eligible property;

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

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

f) "CCPC" refers to "Canadian-controlled private corporation", as defined in subsection 125(7);

g) "CDA" has the meaning assigned to the expression "capital dividend account" in subsection 89(1);

h) "CRA" means the Canada Revenue Agency;

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

j) "dividend rental arrangement" has the meaning assigned by subsection 248(1);

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

l) "FMV" means "fair market value";

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

n) "guarantee agreement" has the meaning assigned by subsection 112(2.2);

o) "GRIP" refers to "general rate income pool", as defined in subsection 89(1);

p) "Paragraph" means a numbered paragraph in this Ruling;

q) "Property1" refers to the XXXXXXXXXX Property #1XXXXXXXXXX ;

r) "Property2" refers to the XXXXXXXXXX Property #2XXXXXXXXXX ;

s) "Property3" refers to the XXXXXXXXXX PropertyXXXXXXXXXX ;

t) "Proposed Transactions" means the proposed transactions which are described in Paragraphs 10 to 23;

u) "PUC" means "paid-up capital" within the meaning assigned by subsection 89(1);

v) "RDTOH" refers to "refundable dividend tax on hand", as defined in subsection 129(3);

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

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

y) "taxable preferred share" has the meaning assigned by subsection 248(1);

z) "taxation year" has the meaning assigned by subsection 249(1).

FACTS

1. DC is a corporation incorporated pursuant to the laws XXXXXXXXXX on XXXXXXXXXX . DC is and will be, at any relevant time and for all purposes of the Act, a CCPC and a taxable Canadian corporation. DC's taxation year and fiscal period end on XXXXXXXXXX of every year.

2. The authorized share capital of DC consists of:

(i) An unlimited number of Common Shares;
(ii) An unlimited number of Class A Special Shares;
(iii) An unlimited number of Class B Special Shares; and
(iv) An unlimited number of Class C Special Shares.

3. The issued and outstanding share capital of DC is as follows:

Shareholder	Number and Class of Shares	PUC and ACB		Estimated
										FMV as of
										XXXXXXX

A		XXXXX Class B Special		  $XXXX		$XXXX
B		XXXXX Class B Special		  $XXXX 		$XXXX
C		XXXXX Common			  $XXXX 		$XXXX
D		XXXXX Common			  $XXXX  		$XXXX
E		XXXXX Common			  $XXXX  		$XXXX
F		XXXXX Common			  $XXXX		$XXXX
G		XXXXX Common			  $XXXX 		$XXXX 

The shareholders of DC hold their shares as capital property.

The Class B Special Shares of the capital stock of DC that are outstanding are (i) voting; (ii) redeemable and retractable at the Class B Redemption Amount of $XXXXXXXXXX /share; and (iii) entitled to dividends if and when declared by the directors.

The Common Shares of the capital stock of DC are participating and voting.

With the exception of the redemption of some Class B Special Shares of the capital stock of DC held respectively by A and B, there has been no change to the shareholding of DC described above since XXXXXXXXXX. Furthermore, there has been no change to common shareholding of DC since the implementation of an estate freeze in XXXXXXXXXX.

4. XXXXXXXXXX .

5. The significant assets of DC include:

(i) cash;

(ii) investment assets in the form of three (3) XXXXXXXXXX properties (Property1, Property2 and Property3); and

(iii) a XXXXXXXXXX per cent (XXXXXXXXXX %) equity interest (Common Shares) together with certain indebtedness in Opco which is a corporation engaged in the business of XXXXXXXXXX . DC has significant influence over Opco. The Common Shares of the capital stock of Opco owned by DC do not constitute taxable preferred shares.

The XXXXXXXXXX properties include XXXXXXXXXX . The XXXXXXXXXX is capital property and XXXXXXXXXX are depreciable properties.

6. XXXXXXXXXX .

7. TC is a corporation incorporated pursuant to the XXXXXXXXXX on XXXXXXXXXX . To date, no shares have been issued by TC for the purpose of the proposed transactions described below. TC will be, at any relevant time and for all purposes of the Act, a CCPC and a taxable Canadian corporation. TC's taxation year and fiscal period end on XXXXXXXXXX of each year.

8. The authorized share capital of TC consists of:

(i) An unlimited number of Common Shares;
(ii) An unlimited number of Non-Voting Common Shares;
(iii) An unlimited number of Class A Special Shares;
(iv) An unlimited number of Class B Special Shares;
(v) An unlimited number of Class C Special Shares;
(vi) An unlimited number of Class D Special Shares;
(vii) An unlimited number of Class E Special Shares;
(viii) An unlimited number of Class F Special Shares; and
(ix) An unlimited number of Class G Special Shares.

The Common Shares of the capital stock of TC are participating and voting.

The Class A Special Shares and the Class B Special Shares of the capital stock of TC are (i) issuable only for the purpose of payment by TC for property purchased by TC; (ii) voting; (iii) redeemable and retractable at an amount (the "Class A Redemption Amount" or the "Class B Redemption Amount") that is equal to the FMV of the property purchased by TC; and (iv) entitled to dividends if and when declared by the directors of TC.

The description of the Class A Special Shares includes the following paragraph:

XXXXXXXXXX ;

9. At the time the proposed transactions described below are implemented, DC is not expected to have any balance of CDA, GRIP or non-capital losses but is expected to have an RDTOH balance of approximately $XXXXXXXXXX .

PROPOSED TRANSACTIONS

10. XXXXXXXXXX .

11. C will transfer all of his XXXXXXXXXX Common Shares of the capital stock of DC to TC. C will jointly elect with TC in 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. The agreed amount will be an amount equal to the lesser of the amounts described in subparagraphs 85(1)(c.1)(i) and (ii). Consideration for the transfer of the XXXXXXXXXX Common Shares of the capital stock of DC will consist of XXXXXXXXXX Common Shares of the capital stock of TC with a FMV equal to the FMV of the XXXXXXXXXX Common Shares of the capital stock of DC transferred. TC will add an amount equal to the PUC of the XXXXXXXXXX Common Shares of the capital stock of DC transferred to the stated capital of the Common Shares of the capital stock of TC.

12. D will transfer all of her XXXXXXXXXX Common Shares of the capital stock of DC to TC. D will jointly elect with TC in 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. The agreed amount will be an amount equal to the lesser of the amounts described in subparagraphs 85(1)(c.1)(i) and (ii). Consideration for the transfer of the XXXXXXXXXX Common Shares of the capital stock of DC will consist of XXXXXXXXXX Common Shares of the capital stock of TC with a FMV equal to the FMV of the XXXXXXXXXX Common Shares of the capital stock of DC transferred. TC will add an amount equal to the PUC of the XXXXXXXXXX Common Shares of the capital stock of DC transferred to the stated capital of the Common Shares of the capital stock of TC.

13. A will transfer all of hisXXXXXXXXXX Class B Special Shares of the capital stock of DC to TC. A will jointly elect with TC in 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. The agreed amount will be an amount equal to the lesser of the amounts described in subparagraphs 85(1)(c.1)(i) and (ii). Consideration for the transfer of the XXXXXXXXXX Class B Special Shares of the capital stock of DC will consist of XXXXXXXXXX Class B Special Shares of the capital stock of TC with a FMV and Class B Redemption Amount equal to the FMV of the XXXXXXXXXX Class B Special Shares of the capital stock of DC transferred. TC will add an amount equal to the PUC of the XXXXXXXXXX Class B Special Shares of the capital stock of DC transferred to the stated capital of the Class B Special Shares of the capital stock of TC.

14. The shares issued to A, C and D pursuant to paragraphs 11 to 13 above will represent the only issued and outstanding shares in the capital stock of TC.

15. Immediately before the distribution of property described in paragraph 18 below, the property owned by DC will be determined and will be classified into the following three types of property for the purposes of the distribution, as follows:

(i) cash or near-cash property, comprising all of the current assets of DC, including cash, short-term certificates of deposit, prepaid expenses and trade accounts receivable;

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

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

As DC has significant influence over Opco, DC will be required to use the consolidated look-through method for determining the appropriate proportion of each of the three types of property (cash or near cash, business and investment property) that the shares of the capital stock of Opco and the indebtedness receivable by DC from Opco will represent. For greater certainty, the FMV of the shares of the capital stock of Opco and of any indebtedness receivable by DC from Opco will be allocated between the three types of property by multiplying the FMV of the shares of the capital stock of Opco or the amount of indebtedness receivable therefrom, as the case may be, by the proportion that the net FMV of each type of property owned by Opco is of the aggregate net FMV of all of the property owned by Opco.

16. In determining the net FMV of its cash or near cash property, investment property and business property immediately before the distribution described in paragraph 18 below, the liabilities of DC will be allocated to, and be deducted in the calculation of, the net FMV of each such type of property of DC in the following manner:

(i) current liabilities of DC will be allocated to cash or near cash property (including any cash, accounts receivable and prepaid expenses) in the proportion that the FMV of each such property is of the FMV of all cash or near cash property. The allocation of current liabilities as described herein will not exceed the aggregate FMV of all cash or near cash property of DC;

(ii) liabilities of DC, other than current liabilities, that relate to a particular property will then be allocated to the particular property (and effectively to the type to which the particular property belongs) to the extent of its FMV. Liabilities that pertain to a type of property, but not to a particular property, will then be allocated to that type of property, but not in excess of the net FMV of such type of property after the allocation of liabilities to a particular property, as described herein; and

(iii) if any liabilities (hereinafter referred to as "excess unallocated liabilities") remain after the allocations described in steps (i) and (ii) are made, such excess unallocated liabilities (including any excess current liabilities, if any), will then be allocated to the cash or near cash property, investment property, and business property of DC based on the relative net FMV of each type of property prior to the allocation of such excess unallocated liabilities.

17. For purposes of determining the net FMV of the property of DC as described in paragraphs 15 and 16, the following principles will apply:

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

(ii) the amount of any deferred income tax will not be considered a liability because such amount does not represent a legal obligation of DC;

(iii) any tax accounts of DC or other tax-related amounts, such as the balance of any GRIP, RDTOH, CDA of DC and any losses available for carry forward, if any, will not be considered property of DC; and

(iv) XXXXXXXXXX .

18. DC will transfer to TC a pro rata portion of the net FMV of each type of property owned by DC, as determined in accordance with paragraphs 15, 16, and 17, such that immediately following such property transfers and liability assumptions, the net FMV of each of the three types of property of DC so transferred to TC will, for greater certainty, approximate the proportion determined by the formula:

A x B/C

where:

A is the net FMV, 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 TC; and

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

For the purposes of this paragraph, the expression "approximate the proportion" means that a discrepancy of the proportion, if any, will not exceed one percent (1%), as determined as a percentage of the net FMV of each type of property that TC will receive as compared to what TC would have received had it received its appropriate pro rata share of the net FMV of that type of DC's property.

19. As consideration for the property transferred by DC to TC, TC will:

(i) assume an appropriate amount of liabilities of DC (so that on a net basis TC will receive its pro rata share of each type of property owned by DC); and

(ii) issue to DC a number of Class A Special Shares of its capital stock having an aggregate Class A Redemption Amount and aggregate FMV equal to the FMV of the property received at the time of the transfer, less the amount of the liabilities of DC assumed by TC as described in (i).

For greater certainty, the Class A Special Shares of the capital stock of TC that are issued to DC as described above will represent more than 10% but less than 50% of the issued share capital of TC having full voting rights in all circumstances and such shares will also represent more than 10% of the FMV of all the issued shares of the capital stock of TC. Consequently, TC will be connected with DC by virtue of paragraph 186(4)(b).

For the purposes of subsection 191(4), the resolution of the Board of Directors of TC will designate, at the time of the issue of the Class A Special Shares, an amount for which each Class A Special Share is to be redeemed, acquired or cancelled. The amount specified, for the purposes of subsection 191(4), in respect of each such share, at the time of issuance, will be expressed as a fixed dollar amount, will not be determined by a formula or be subject to change thereafter and will not exceed the FMV of the consideration for which the share will be issued.

20. In respect of the transfers described in paragraph 18 above, DC will jointly elect with TC, in 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 each type of property that is an eligible property. The agreed amount for purposes of subsection 85(1) in respect of such property transferred will be as follows:

(i) 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);

(ii) 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

(iii) 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).

TC will add to the stated capital maintained for the Class A Special Shares of its capital stock, an amount that will not exceed the amount by which the aggregate of the agreed amounts, in the case of eligible properties, and the FMV, in the case of other properties, of the properties transferred to TC exceeds the liabilities assumed by TC. For greater certainty, the increase to the stated capital of the Class A Special Shares of the capital stock of TC issued to DC will not exceed the maximum amount that could be added to the PUC of the shares, pursuant to subsection 85(2.1).

The agreed amount in respect of each of the properties so transferred will be less than or equal to its FMV at the time of the transfer. The amount of the liabilities to be allocated to the property that is subject to the election under subsection 85(1) will not exceed the agreed amount elected for that property. The amount of liabilities to be allocated to the property that is not subject to the election under 85(1) will not exceed the FMV of any such property.

21. TC will redeem all of the issued Class A Special Shares of its capital stock held by DC at the Class A Redemption Amount of such Class A Special Shares in exchange for consideration consisting of a debt evidenced by a non-interest bearing promissory note, payable on demand, which will have a principal amount and FMV equal to the aggregate Class A Redemption Amount of the Class A Special Shares redeemed (the "TC Redemption Note"). DC will accept the TC Redemption Note as payment in full for the Class A Special Shares redeemed.

22. DC will then redeem the XXXXXXXXXX Class B Special Shares of its capital stock held by TC and purchase for cancellation the XXXXXXXXXX Common Shares of its capital stock held by TC on a contemporaneous basis. As consideration for the redemption of the XXXXXXXXXX Class B Special Shares of its capital stock held by TC, DC will issue a non-interest bearing promissory note, payable on demand, to TC (the "DC Note1") having a principal amount and FMV equal to the aggregate Class B Redemption Amount and FMV of the XXXXXXXXXX Class B Special Shares of its capital stock held by TC. As consideration for the purchase for cancellation of the XXXXXXXXXX Common Shares of its capital stock held by TC, DC will issue a non-interest bearing promissory note, payable on demand, to TC (the "DC Note2") having a principal amount and FMV equal to the aggregate FMV of the XXXXXXXXXX Common Shares of the capital stock of DC held by TC and purchased for cancellation. TC will accept the DC Note1 and the DC Note2 as payment in full for the Class B Special Shares redeemed and the Common Shares purchased for cancellation, respectively.

As a result of the redemption and the purchase for cancellation of the shares described above, B will acquire control of DC such that subsection 249(4) will apply to deem the taxation year of DC to have ended immediately before the time that control of DC is acquired by B.

23. The principal amount owing by TC to DC under the TC Redemption Note will be set-off against the principal amounts owing by DC to TC under the DC Note1 and the DC Note2 such that each such note will be cancelled in full satisfaction of the obligations under the other such note or notes.

ADDITIONAL INFORMATION

24. The location of the Tax Services Office and Taxation Centre where the returns of DC are filed is XXXXXXXXXX . The address of DC's head office is the following:

DC
XXXXXXXXXX

25. The location of the Tax Services Office and Taxation Centre where the returns of TC are filed is XXXXXXXXXX . The address of TC's head office is the following:

TC
XXXXXXXXXX

26. DC and TC are not and will not be at the time of the Proposed Transactions, specified financial institutions.

27. None of the shares of DC or TC are or will be, at any time throughout the series of transactions that includes the Proposed Transactions:

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

(ii) 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,

(iii) the subject of a "dividend rental arrangement".

28. Except as described herein, no liabilities have been or will be incurred and no assets have been or will be acquired by or disposed of by DC or a corporation controlled by DC in contemplation of and before the proposed transfer of properties described in Paragraph 18 above, other than in the normal course of business.

29. 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 this letter until the date the Proposed Transactions described herein are completed.

30. Except as described in this letter, none of the shareholders of DC are contemplating the sale or transfer of any shares of DC and none of TC's shareholders will be contemplating the sale or transfer of any shares of TC.

31. Except as described in this letter, it is not contemplated that subsequent to the implementation of the transactions described herein under Proposed Transactions that DC and TC will transfer or sell any of its assets to any other person except in the normal course of its business.

32. DC may pay dividends on the shares of its capital stock owned by A and B before the Proposed Transactions.

PURPOSES OF THE PROPOSED TRANSACTIONS

33. The purpose of the proposed transactions is to permit the families of A and B to separate their interests in DC while A and B are alive so that each family can manage their own rental properties.

34. The income tax impact of the proposed net asset butterfly is that the assets formerly held by DC can be equally divided between the two families without incurring any current income tax liability.

RULINGS GIVEN

Provided that the preceding statements constitute a complete and accurate disclosure of all relevant Facts, Proposed Transactions, Additional Information 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 time limits specified in subsection 85(6), the provisions of subsection 85(1) will apply to the transfers by each of A, C and D of all of their shares in the capital stock of DC to TC as described in paragraphs 11 to 13 above. For greater certainty, paragraph 85(1)(e.2) shall not apply to such transfers.

B. Subject to the application of subsection 69(11), provided the appropriate joint election is filed in the prescribed form and manner within the time limits specified in subsection 85(6) and provided that each particular property so transferred is an eligible property in respect of which shares have been issued as full or partial consideration therefore, the provisions of subsection 85(1) will apply to the transfer by DC of each eligible property to TC as described in paragraph 18 such that the agreed amount in respect of each transfer of eligible property will be deemed to be the transferor's proceeds of disposition and the transferee's cost thereof pursuant to paragraph 85(1)(a). For greater certainty, paragraph 85(1)(e.2) shall not apply to such transfers.

C. On the redemption by TC of its Class A Special Shares issued to DC, as described in paragraph 21 above, by virtue of paragraphs 84(3)(a) and 84(3)(b), TC 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 by TC in respect of the redemption of those shares issued by TC and held by DC exceeds the PUC of those shares immediately before the redemption.

D. On the redemption by DC of the XXXXXXXXXX Class B Special Shares held by TC in the capital stock of DC and the purchase for cancellation of the XXXXXXXXXX Common Shares held by TC in the capital stock of DC, as described in paragraph 22 above, by virtue of paragraphs 84(3)(a) and 84(3)(b), DC will be deemed to have paid and TC will be deemed to have received, a taxable dividend on the Class B Special Shares and Common Shares of DC held by TC equal to the amount by which the aggregate fair market value of the property of DC distributed to TC in respect of each such class of shares exceeds the proportionate share of the PUC of such class of shares immediately before the redemption or purchase for cancellation.

E. To the extent that a dividend described in Rulings C or D above is a taxable dividend, each such dividend:

(i) will be excluded in determining the proceeds of disposition 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;

(ii) will be included in the recipient's income pursuant to subsection 82(1) and paragraph 12(1)(j);

(iii) will be deductible pursuant to subsection 112(1) in computing the taxable income of the recipient for the year in which the dividend is deemed to have been received and such deduction will not be prohibited by any of subsections 112(2.1), (2.2), (2.3) or (2.4);

(iv) will, pursuant to the provision of subsection 112(3), reduce any loss that would otherwise be realized as a result of the disposition of the shares on which the dividend is deemed to be received;

(v) will only be subject to tax under Part IV to the extent that the payor of the dividend is entitled to a dividend refund for the taxation year in which it paid such dividend;

(vi) 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

(vii) 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 TC from DC and provided that an amount is specified for the purposes of subsection 191(4) as mentioned in Paragraph 19 above (and thus deemed to be an "excluded dividend"), in the case of the dividend deemed to be received by DC from TC.

F. The set-off of the TC Redemption Note held by DC and the DC Note1 and DC Note 2 held by TC, as described in paragraph 23 above, will not, in and of itself, give rise to a "forgiven amount", within the meaning thereof in subsection 80(1) or 80.01(1), and neither DC nor TC will realize any gain or sustain any loss as a result of such set-off.

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

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

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

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

(iv) an acquisition of property in the circumstances described in subparagraph 55(3.1)(b)(iii);

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

(vi) 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 Rulings C and D and, for greater certainty, subsection 55(3.1) will not apply to exclude the application of paragraph 55(3)(b).

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

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

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

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

COMMENTS

Unless otherwise expressly confirmed, 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 CDA, GRIP or RDTOH of any corporation;

(c) any other tax consequences relating to the Facts, 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.

As a result of the redemptions and the purchase for cancellation provided for in Paragraph 21 and 22 of the Proposed Transactions, a problem of circularity may arise when computing the Part IV tax and the dividend refund of each corporation. You do not propose to enter into transactions that would avoid the potential circularity issue. Therefore, we do not provide any comment on that possible issue.

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

Yours truly,

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