2011 Ruling 2010-0353931R3 - Standard 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: Standard butterfly. No contentious issues.

Position: Rulings given.

Reasons: Complies with paragraph 55(3)(b).

XXXXXXXXXX

XXXXXXXXXX , 2011

Dear XXXXXXXXXX :

Re: XXXXXXXXXX (Business Number XXXXXXXXXX )
Advance Income Tax Ruling Request

This is in reply to your letter of XXXXXXXXXX , in which you requested an advance income tax ruling on behalf of the taxpayer. We also acknowledge our subsequent telephone conversations and correspondence concerning your request. The information or documents submitted with your request are part of this letter only to the extent described herein. You have advised that to the best of your knowledge, and that of the responsible officers of the taxpayer, none of the issues involved in this ruling request is

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

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

(c) under objection by the taxpayer or a related person;

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

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

You have also advised that to the best of your knowledge, and that of the responsible officers of the taxpayer, that the Proposed Transactions will not result in the taxpayer or any related person described herein being unable to pay its existing outstanding tax liabilities.

DEFINITIONS

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

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

"adjusted cost base" (also referred to as "ACB") has the meaning assigned by subsection 248(1);

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

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

"Canadian-controlled private corporation" (also referred to as "CCPC") has the meaning assigned by subsection 125(7);

"capital dividend account" (also referred to as "CDA") has the meaning assigned by subsection 89(1);

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

"Companies Act" means the XXXXXXXXXX ;

"cost amount" has the meaning assigned by subsection 248(1);

"CRA" means the Canada Revenue Agency;

"DC" means XXXXXXXXXX ;

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

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

"Distribution Property 1" has the meaning assigned in Paragraph 21;

"Distribution Property 2" has the meaning assigned in Paragraph 21;

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

"fair market value" (also referred to as "FMV") means the highest price, expressed in terms of money or money's worth, obtainable in an open and unrestricted market between knowledgeable, informed and prudent parties acting at arm's length, neither party being under any compulsion to transact;

"Individual 1" means XXXXXXXXXX ;

"Individual 2" means XXXXXXXXXX ;

"Individual 3" means XXXXXXXXXX ;

"paid-up capital" (also referred to as "PUC") has the meaning assigned by subsection 89(1);

"Paragraph" refers to a numbered paragraph in this letter;

"proceeds of disposition" has the meaning assigned by section 54;

"Proposed Transactions" means the transactions described in Paragraphs 10 to 27;

"refundable dividend tax on hand" (also referred to as "RDTOH") has the meaning assigned by subsection 129(3);

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

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

"share of the capital stock of a family farm corporation" has the meaning assigned by subsection 70(10);

"SI" means XXXXXXXXXX , a CCPC;

"significant influence" has the meaning assigned by section 3050 of the CICA Handbook;

"specified investment business" (also referred to as "SIB") has the meaning assigned by subsection 125(7);

"stated capital" has, in relation to DC, NC1, and NC2, the meaning assigned by the Companies Act;

"taxable Canadian corporation" (also referred to as "TCC") has the meaning assigned by subsection 89(1); and

"taxable dividend" has the meaning assigned by subsection 89(1).

FACTS

1. DC is a CCPC and a TCC. DC was incorporated on XXXXXXXXXX under the Companies Act. DC's fiscal and taxation year ends XXXXXXXXXX , and its BN is XXXXXXXXXX . DC deals with the XXXXXXXXXX Tax Services Office and files its federal corporate tax returns at the XXXXXXXXXX Tax Center.

2. DC's issued and outstanding common shares ("DC Common Shares) and Class A preferred shares ("DC Preferred Shares) are owned as follows:

(a) Individual 1 owns XXXXXXXXXX DC Common Shares and XXXXXXXXXX DC Preferred Shares,

(b) Individual 2 owns XXXXXXXXXX DC Common Shares and XXXXXXXXXX DC Preferred Shares, and

(c) Individual 3 owns XXXXXXXXXX DC Common Shares and XXXXXXXXXX DC Preferred Shares.

3. The share attributes of the DC Preferred Shares are as follows: non-voting, non-participating, XXXXXXXXXX % non-cumulative dividend entitlement, retraction/redemption value equal to $XXXXXXXXXX per share.

4. DC carries on the business of farming on certain lands that DC owns and/or leases in the Province ofXXXXXXXXXX . DC's principal farming business activities include farming XXXXXXXXXX .

5. Individual 1, Individual 2 and Individual 3 each hold their DC Common Shares and DC Preferred Shares as capital property and each such share has a FMV greater than its ACB. None of the aforementioned shares was acquired by the particular holder in contemplation of the Proposed Transactions. Currently, each of the issued and outstanding DC Common Shares and DC Preferred Shares is a share of the capital stock of a family farm corporation.

6. Individual 1, Individual 2 and Individual 3 are all siblings. Each of the aforementioned individuals is, and has always been, resident in Canada for the purposes of the Act. Individual 1, Individual 2, and Individual 3 all deal with the XXXXXXXXXX Tax Services Office and file their tax returns with the XXXXXXXXXX Tax Center.

7. Individual 2 and Individual 3 are currently actively engaged in the farming business of DC on a regular and continuous basis. Individual 1 is not currently actively engaged in the farming business of DC.

8. The assets and liabilities of DC consist of:

(a) cash, prepaid expenses, inventory, GST/HST/ITC's receivable, and advances receivable;

(b) land used for: XXXXXXXXXX ;

(c) buildings;

(d) shares of SI;

(e) machinery and equipment; and

(f) current and long-term debt related to operations and capital and it is expected that DC will have outstanding debts at the time the Proposed Transactions are carried out.

DC owns XXXXXXXXXX % of the issued and outstanding shares of SI. The remaining issued and outstanding shares of SI are owned as follows: Individual 3 owns XXXXXXXXXX % of the shares of SI and unrelated individuals own XXXXXXXXXX % of the shares of SI. In addition, DC is a major supplier of SI. DC has significant influence over SI for the purposes of the allocation of the FMV of the property of SI among the types of property for purposes of the distribution.

9. DC has no CDA balance and no RDTOH balance. It is not expected that DC will have any balance in its RDTOH at the end of its taxation year in which the Proposed Transactions are completed.

PROPOSED TRANSACTIONS

10. A new corporation ("NC1") will be incorporated under the Companies Act. This new company will be a TCC, a CCPC, and a limited liability company.

11. The authorized share capital of NC1 will consist of XXXXXXXXXX common shares ("NC1 Common Shares") authorized with no par-value and XXXXXXXXXX Class A preferred shares ("NC1 Preferred Shares") with the following share attributes: dividend entitlement, non-voting, redeemable and retractable at a redemption amount equal to the amount by which the aggregate FMV of the Distribution Property 1 at the time of its transfer to NC1 as described in Paragraph 21 less the FMV of the non-share consideration to be provided by NC1 in exchange for the Distribution Property 1, divided by the number of NC1 Preferred Shares issued as consideration for such transfer, plus all declared but unpaid dividends thereon. The NC1 Preferred Shares are subject to a price adjustment clause.

Upon incorporation of NC1, Individual 1 will subscribe for 1 NC1 Common Share for a nominal amount.

12. A second new corporation ("NC2") will be incorporated under the Companies Act. This new company will be a TCC, a CCPC, and a limited liability company.

13. The authorized share capital of NC2 will consist of XXXXXXXXXX common shares ("NC2 Common Shares") authorized with no par-value and XXXXXXXXXX Class A preferred shares ("NC2 Preferred Shares") with the following share attributes: dividend entitlement, non-voting, redeemable and retractable at a redemption amount equal to the amount by which the aggregate FMV of the Distribution Property 2 at the time of its transfer to NC2 as described in Paragraph 21 less the FMV of the non-share consideration to be provided by NC2 in exchange for the Distribution Property 2, divided by the number of NC2 Preferred Shares issued as consideration for such transfer, plus all declared but unpaid dividends thereon. The NC2 Preferred Shares are subject to a price adjustment clause.

Upon incorporation of NC2, Individual 2 will subscribe for 1 NC2 Common Share for a nominal amount.

14. Each of Individual 1 and Individual 2 will contemporaneously transfer all of his DC Common Shares and DC Preferred Shares to NC1 and NC2, respectively. As consideration therefor, NC1 will issue XXXXXXXXXX NC1 Common Shares to Individual 1 and NC2 will issue XXXXXXXXXX NC2 Common Shares to Individual 2.

15. The NC1 Common Shares and NC2 Common Shares will each have an aggregate FMV equal to the aggregate FMV, at the time of the transfer, of the DC Common Shares and DC Preferred Shares transferred by each of Individual 1 and Individual 2 to NC1 and NC2, respectively.

16. Each of Individual 1 and NC1 and Individual 2 and NC2 will jointly elect in prescribed form and within the time period referred to in subsection 85(6) to have the provisions of subsection 85(1) apply to the transfer described in Paragraph 14. The agreed amount for the purposes of each election will not be less than the lesser of the two amounts specified in paragraph 85(1)(c.1), nor will such amount exceed the aggregate FMV of the DC Common Shares and DC Preferred Shares transferred to each of NC1 and NC2, as the case may be.

17. The addition to the stated capital of the NC1 Common Shares issued to Individual 1 and the NC2 Common Shares issued to Individual 2, as described in Paragraph 14, will be equal to the aggregate PUC of the DC Common Shares and DC Preferred Shares so transferred by Individual 1 to NC1 and by Individual 2 to NC2, respectively. For greater certainty, the increase to the PUC of the NC1 Common Shares and the NC2 Common Shares will not exceed the maximum amount that could be added to the PUC of such shares, having regard to paragraph 84.1(1)(a).

18. Immediately before the transfer of property described in Paragraph 21, the property of DC will be determined on a consolidated basis by including the appropriate pro rata share of the property of SI over which DC has significant influence, and such property will be classified into three types of property for the purposes of the definition of distribution in subsection 55(1), as follows:

(a) cash or near cash property, comprising all of the current assets of DC, including cash, accounts receivable, GST/HST/ITC's receivable, advances receivable, prepaid expenses, and inventory;

(b) business property, comprising all of the assets of DC, 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 SIB); and

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

For greater certainty, for the purposes of the distribution, the following principles will apply:

(d) the FMV of the shares of SI will be allocated between the three types of property by multiplying the FMV of the shares of SI by the proportion that the net FMV of each type of property owned by SI is of the aggregate net FMV of all of the property owned by SI;

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

(f) the amount of any deferred income tax will not be considered a liability for the purposes of the distribution because such amount does not represent a legal obligation of DC; and

(g) tax accounts or other tax related amounts of DC, such as the balance of non-capital losses, net capital losses, RDTOH or CDA, if any, will not be considered property or a liability, as the case may be.

19. [Reserved]

20. For the purpose of determining, on a consolidated basis, the net FMV of DC's three types of property immediately before the transfer of property described in Paragraph 21:

(a) In determining the net FMV of each of the three types of property of SI, immediately before the transfer of property described in Paragraph 21, the liabilities of SI will be allocated to, and will be deducted in the calculation of the net FMV of each type of property of SI as follows:

(i) current liabilities of SI will be allocated to the cash or near-cash property of SI in the proportion that the FMV of each such property is of the FMV of all cash or near-cash property owned by SI to the extent that such allocation does not exceed the aggregate FMV of all cash or near-cash property of SI. To the extent that the total amount of current liabilities so allocated exceeds the total FMV of SI's cash or near cash property, SI will be considered to have a negative amount of cash or near-cash property;

(ii) liabilities, other than current liabilities, of SI that relate to a particular property will then be allocated to that particular property (and effectively to the type of property to which the property belongs) to the extent of its FMV. Any excess of such liabilities over the FMV of a particular property and liabilities that pertain to the same type of property, but not to a particular property, will then be allocated to that particular type of property, but not in excess of the total FMV of such type of property. To the extent that the liabilities pertaining to a particular type of property exceed the total FMV of that type of property of SI, SI will be considered to have a negative amount of that type; and

(iii) if any liabilities remain after the allocations described in (a)(i) and (a)(ii) are made ("excess SI unallocated liabilities"), such excess SI unallocated liabilities will then be allocated to the cash or near-cash property, investment property and business property, if any, of SI, based on the relative net FMV of each type of property prior to the allocation of such excess SI unallocated liabilities but after the allocations described in (a)(i) and (a)(ii). However, where SI is considered to have a negative amount of a type of property because of (a)(i) or (a)(ii), for the purposes of allocating such excess SI unallocated liabilities, the net FMV of that type of property will be deemed to be nil resulting in none of such excess SI unallocated liabilities being allocated to that type of property; and

(b) in determining the net FMV of each type of property of DC, immediately before the transfer of property described in Paragraph 21, DC will include the appropriate pro rata share of the net FMV of each type of property of SI, or such negative amount of such type of property, as determined in accordance with (a) above, and any liabilities of DC will then be allocated to, and will be deducted in the calculation of the net FMV of each type of property of DC as follows:

(i) current liabilities of DC will be allocated to the cash or near-cash property of DC in the proportion that the FMV of each such property is of the FMV of all cash or near-cash property of DC. The total amount of current liabilities so allocated, 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 of property to which the particular property belongs) to the extent of its FMV. Any excess of such liabilities over the FMV of a particular property and liabilities that pertain to a particular type of property, but not to a particular property, will then be allocated to that particular 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 remain after the allocations described in (b)(i) and (b)(ii) are made ("excess DC unallocated liabilities"), such excess DC unallocated liabilities will then be allocated to the cash or near-cash property, investment property and business property, if any, of DC, based on the relative net FMV of each type of property prior to the allocation of such excess DC unallocated liabilities.

21. Immediately following the determination of the net FMV of DC's three types of property as described in Paragraphs 18 and 20, DC will contemporaneously transfer to each of NC1 and NC2 a pro rata portion (i.e., one-third) of the net FMV of each type of property owned by DC (the "Distribution Property 1" in the case of NC1 and the "Distribution Property 2" in the case of NC2) as determined in accordance with Paragraphs 18 and 20, such that, immediately after the transfers and liability assumptions described in Paragraph 22(a), the net FMV of each of the three types of property of DC so transferred to NC1 and NC2 will approximate that proportion of the net FMV of all of that type of property of DC, determined immediately before such transfers that:

(a) the aggregate FMV, immediately before the transfer, of all of the DC Common Shares and DC Preferred Shares owned by each of NC1 and NC2 at that time, as the case may be,

is of

(b) the aggregate FMV, immediately before the transfer, of all of the issued and outstanding shares of DC at that time.

For the purposes of this Paragraph, the expression "approximate that proportion" means the discrepancy from that proportion, if any, that will not exceed 1%, determined as a percentage of the net FMV of each type of property that each of NC1 and NC2 has received 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 of DC.

22. As consideration for the transfer of property by DC to each of NC1 and NC2 as described in Paragraph 21, as the case may be, each of NC1 and NC2 will:

(a) assume debt of DC that is allocable to the property of DC transferred to it as described in Paragraph 21, and

(b) issue to DC a number of NC1 Preferred Shares, in the case of NC1, and a number of NC2 Preferred Shares, in the case of NC2, having an aggregate FMV and aggregate redemption amount equal to the aggregate FMV of the property of DC received by NC1 or NC2, as the case may be, less the amount of the liabilities of DC assumed by the particular corporation as described in (a).

23. DC and NC1 and DC and NC2 will jointly elect in prescribed form and within the time referred to in subsection 85(6), to have the provisions of subsection 85(1) apply to the transfer to each of NC1 and NC2 of any eligible property of DC that has a FMV in excess of its cost amount as described in Paragraph 21. 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 aggregate of such elected amounts will be greater than the aggregate amount of DC's liabilities so assumed for such properties.

Specifically, the agreed amount under such election in respect of each eligible property so transferred will be within the limits prescribed as follows:

(a) in the case of eligible capital property, an amount equal to the least of the amounts specified in subparagraphs 85(1)(d)(i), (ii) and (iii);

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

(c) in the case of property described in paragraph 85(1)(c.1), an amount equal to the lesser of the amounts specified in subparagraphs 85(1)(c.1)(i) and (ii), and

(d) in the case of inventory described in paragraph 85(1)(c.2), the amount determined in that paragraph.

In the case of accounts receivable, the amounts will be transferred under section 22.

24. The addition to the stated capital of the NC1 Preferred Shares and the NC2 Preferred Shares issued to DC, as described in Paragraph 22(b), will be equal to the amount by which the aggregate of the cost of the property transferred, determined pursuant to subsection 85(1), where relevant, by DC to NC1 and NC2, as the case may be, exceeds the principal amount of the liabilities of DC assumed by NC1 and NC2. For greater certainty, the increase to the PUC of NC1 Preferred Shares and the NC2 Preferred Shares will not exceed the maximum amount that could be added to the PUC of such shares, having regard to subsection 85(2.1).

25. Immediately following the transfer of property described in Paragraph 21, NC1 and NC2 will redeem from DC all of the NC1 Preferred Shares and NC2 Preferred Shares, respectively, for an amount equal to the aggregate redemption amount and FMV of such shares. As consideration therefor, NC1 and NC2 will each issue to DC a demand non-interest bearing promissory note having a principal amount and FMV equal to the aggregate redemption amount and FMV of the NC1 Preferred Shares and the NC2 Preferred Shares (the "NC1 Redemption Note" and the "NC2 Redemption Note") so redeemed, as the case may be. DC will accept the NC1 Redemption Note and the NC2 Redemption Note as full satisfaction for the redemption price of its NC1 Preferred Shares and NC2 Preferred Shares so redeemed with the risk of the notes being dishonored.

26. DC will purchase for cancellation all of the DC Common Shares and redeem all of the DC Preferred Shares held by NC1 and NC2 and will issue to each of NC1 and NC2, as payment therefor, a demand non-interest bearing promissory note having a principal amount and FMV equal to the aggregate FMV of the DC Common Shares and DC Preferred Shares so purchased from NC1 and NC2, (the "DC Purchase Note1", in the case of NC1, the "DC Purchase Note2", in the case of NC2), as the case may be. Each of NC1 and NC2 will accept the DC Purchase Note1 and the DC Purchase Note2, respectively, as full satisfaction for the purchase price of its DC Common Shares and DC Preferred Shares so purchased with the risk of the note being dishonored.

27. DC will pay the principal amount of the DC Purchase Note1 and the DC Purchase Note2 by transferring to NC1 and NC2 their respective redemption notes that will be accepted by NC1 and NC2 in full payment of DC's obligation. NC1 and NC2 will pay the principal amount of the NC1 Redemption Note and the NC2 Redemption Note, respectively, by transferring to DC their DC purchase notes that will be accepted by DC in full payment of NC1 and NC2's obligation. The DC Purchase Note1, the DC Purchase Note2, the NC1 Redemption Note, and the NC2 Redemption Note will all be marked paid in full and cancelled.

ADDITIONAL INFORMATION

28. The Proposed Transactions described herein will occur in the order presented unless otherwise indicated, with the exception of the filing of the applicable election forms described in Paragraphs 16 and 23, which will be filed by the applicable due date following completion of the

Proposed Transactions.

29. None of the corporations referred to herein (including the corporations to be incorporated as described in the Proposed Transactions) is or will be, at any time during a series of transactions that includes the Proposed Transactions herein described, a specified financial institution (as defined in subsection 248(1)) or a restricted financial institution (as defined in subsection 248(1)).

30. Except as described herein, no property has been or will be acquired by DC and no liabilities have been or will be incurred by DC in contemplation of and before the distribution otherwise than on a basis which would not cause the provisions of paragraph 55(3.1)(a) to operate to deny the exception in paragraph 55(3)(b) to the dividends resulting from the Proposed Transactions described in Paragraphs 25 and 26.

31. There will not be at any time prior to the completion of the Proposed Transactions, any agreements or undertakings which constitute or include a "guarantee agreement", as defined in subsection 112(2.2), in respect of any of the issued shares referred to herein (including the shares to be issued as described in the Proposed Transactions).

32. Each of DC, NC1 and NC2 will not have entered into a "dividend rental arrangement", as defined in subsection 248(1), in respect of any of the issued shares referred to herein (including the shares to be issued as described in the Proposed Transactions).

33. None of the issued shares referred to herein (including the shares to be issued as described in the Proposed Transactions) will be issued or acquired as part of a transaction or event or series of transactions or events of the type described in subsection 112(2.5).

34. None of the corporations described above (including the corporations to be incorporated as described in the Proposed Transactions) is or will be, at any time before the completion of the Proposed Transactions described above, a corporation described in any of the paragraphs (a) to (f) of the definition "financial intermediary corporation" in subsection 191(1).

35. Each of DC, NC1 and NC2 will have the financial capacity to honour, upon presentation for payment, the amount payable under the promissory note issued by it as part of the Proposed Transactions.

PURPOSE OF THE PROPOSED TRANSACTIONS

36. The purpose of the Proposed Transactions is to allow Individual 1, Individual 2, and Individual 3 to separate their interests in DC in order to pursue their separate estate planning goals, reduce conflict within the family of the individuals, and forestall future internal and operational problems.

RULINGS

Provided that the preceding statements constitute a complete and accurate disclosure of all of the relevant facts, proposed transactions, and the purpose of the Proposed Transactions, and provided that the Proposed Transactions are completed in the manner described above, our rulings are as set forth below.

A. The provisions of subsection 85(1) will apply to the transfers of the DC Common Shares and DC Preferred Shares held by Individual 1 and Individual 2 to NC1 and NC2, respectively, as described in Paragraph 14, such that the agreed amount in respect of each such transfer will be deemed to be the transferor's proceeds of disposition and the respective transferee's cost thereof. For greater certainty, paragraph 85(1)(e.2) will not apply to the transfers referred to herein.

B. The provisions of subsection 85(1) will apply to, subject to the application of subsection 69(11), the transfer of each eligible property by DC to NC1 and NC2 described in Paragraph 21, such that the agreed amount in respect of each such transfer will be deemed to be the transferor's proceeds of disposition and the transferee's cost thereof. For greater certainty, paragraph 85(1)(e.2) will not apply to the transfers referred to herein.

In respect of depreciable property, to the extent that the transferor's capital cost exceeds the transferor's proceeds of disposition of the property, the transferee's capital cost of each such property will be determined in accordance with subsection 85(5).

For the purposes of the joint elections described herein, the reference to the "undepreciated capital cost to the taxpayer of all property of that class immediately before the disposition" found in subparagraph 85(1)(e)(i) shall be interpreted to mean that proportion of the undepreciated capital cost to the taxpayer of all property of that class immediately before the disposition, that the FMV at that time of the property that is transferred is of the FMV at that time of all property of that class.

C. On the redemption by NC1 of the NC1 Preferred Shares and by NC2 of the NC2 Preferred Shares described in Paragraph 25, and on the purchase for cancellation and redemption by DC of the DC Common Shares and the DC Preferred Shares described in Paragraph 26, by virtue of subsection 84(3):

(a) Each of NC1 and NC2 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 NC1 and NC2 in respect of the redemption of the NC1 Preferred Shares and the NC2 Preferred Shares owned by DC exceeds the PUC of such shares immediately before the redemption, as the case may be;

(b) DC will be deemed to have paid, and each of NC1 and NC2 will be deemed to have received, a taxable dividend at that time equal to the amount, if any, by which the amount paid by DC in respect of the purchase for cancellation of the DC Common Shares and the redemption of the DC Preferred Shares owned by NC1 and NC2 exceeds the PUC of such shares immediately before the purchase for cancellation or the redemption, as the case may be; and

(c) The taxable dividends deemed to have been received by each of NC1, NC2, and DC as described in (a) and (b) above:

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

(ii) will be deductible by the particular recipient pursuant to subsection 112(1) in computing its taxable income in the year in which such dividend is deemed to have been received and, for greater certainty, the provisions of subsection 112(2.1), (2.2), (2.3) or (2.4) will not apply to deny the subsection 112(1) deduction in respect of such dividend;

(iii) will be excluded from the proceeds of disposition of the shares so redeemed or purchased for cancellation by virtue of paragraph (j) of the definition of "proceeds of disposition" in section 54;

(iv) will, by virtue of subsection 112(3), reduce the loss, if any, in respect of the disposition of the shares on which such dividend is deemed to have been received, and

(v) will not be subject to tax under Part IV.1 or Part VI.1.

D. Provided that as part of a series of transactions or events that includes the dividends described in Ruling C(a) and (b), 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); or

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

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

E. The set-off and cancellation of the DC Purchase Note1 held by NC1, the DC Purchase Note2 held by NC2, and the NC1 Redemption Note and the NC2 Redemption Note held by DC, as described in Paragraph 27, will not, in and of itself, result in a "forgiven amount" within the meaning of subsection 80(1) or 80.01(1).

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

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

The above rulings are subject to the limitations and qualifications set out in Information Circular 70-6R5 issued by the CRA dated May 17, 2002 and are binding on the CRA provided that the Proposed Transactions are completed by XXXXXXXXXX . The above rulings are based on the law as it presently reads and do not take into account any proposed amendments to the Act and the Regulations which, if enacted into law, could have an effect on the rulings provided herein.

OTHER COMMENTS

1. Unless otherwise confirmed in the above rulings, nothing in this letter should be construed as implying that the CRA has confirmed, reviewed, made any determination, or accepted any method for the 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 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.

(d) For greater certainty, our rulings should not be construed as providing comfort that any of the shares of DC, NC1, or NC2 is, or will be, a "share of the capital stock of a family farm corporation" (as defined in subsections 70(10) and 110.6(1)).

2. In Paragraphs 11 and 13, you have indicated that the NC1 Preferred Shares and the NC2 Preferred Shares will include a price adjustment clause. Nothing in this letter should be construed as confirmation, express or implied, that, for the purpose of any of the rulings given above, any adjustment to the FMV of the properties transferred and the redemption amount of the shares issued as consideration, will be effective retroactively to the time of the transfer and issuance of shares. In addition, any such adjustment could affect the ruling given in Ruling D above. Furthermore, none of the rulings given in this letter are intended to apply to the operation of a price adjustment clause, since its coming into effect will be due to circumstances that do not constitute proposed transactions that are seriously contemplated. The general position of the CRA with respect to price adjustment clauses is stated in Interpretation Bulletin IT-169.

Yours truly,

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