2000 Ruling 1999-0010893 - XXXXXXXXXX ruling

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.

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the Department.

Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle du ministère.

Principal Issues: Standard 55(3)(a) butterfly. Issue as to whether certain shares continued to be grandfathered for the purpose of paragraph 131(11)(b) of S.C. 1998, c. 19.

Position: Favourable rulings given.

Reasons: The law.

XXXXXXXXXX
XXXXXXXXXX 1999-001089
XXXXXXXXXX

Attention : XXXXXXXXXX

XXXXXXXXXX, 2000

Dear Sirs:

Re: XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX
Advance Income Tax Ruling

This is in reply to your letter of XXXXXXXXXX, and your subsequent correspondence requesting an advance income tax ruling on behalf of the above noted taxpayers. You have advised that to the best of your knowledge and that of the taxpayers involved none of the issues involved in this ruling request:

(a) is involved in an earlier return of the taxpayers or a related person,

(b) is being considered by a tax services office or taxation centre in connection with a tax return already filed by the taxpayers or a related person,

(c) is under objection,

(d) is before the courts or, if a judgement has been issued, the time limit for appeal has not expired, and

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

Unless otherwise indicated, all statutory references herein are to provisions of the Income Tax Act (Canada), R.S.C. 1985 (5th Supp.) c.1, as amended from time to time and consolidated to the date of this letter (herein referred to as the "Act") and unless otherwise expressly stated:

(a) "Aco" refers to XXXXXXXXXX;

(b) "adjusted cost base" ("ACB") has the meaning assigned by section 54;

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

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

(e) XXXXXXXXXX;

(f) "Bco" refers to XXXXXXXXXX;

(g) "Canadian-controlled private corporation" has the meaning assigned by subsection 125(7);

(h) "capital" has the meaning assigned thereto by the BCA;

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

(j) "CCRA" refers to the Canada Customs and Revenue Agency;

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

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

(m) "Opco" refers to XXXXXXXXXX;

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

(o) "personal trust" has the meaning assigned by subsection 248(1);

(p) "related persons" has the meaning assigned by subsection 251(2);

(q) "refundable dividend tax on hand" ("RDTOH") has the meaning assigned by subsection 129(3);

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

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

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

Our understanding of the facts, proposed transactions and purpose of the proposed transactions is set out as follows:

FACTS

1. Aco is a Canadian-controlled private corporation created by amalgamation under the XXXXXXXXXX. The immediate predecessors of Aco were XXXXXXXXXX ("Xco"), a corporation that was created by amalgamation under the XXXXXXXXXX and XXXXXXXXXX, a corporation incorporated under the XXXXXXXXXX. Aco files its federal income tax returns at the XXXXXXXXXX Taxation Centre but otherwise deals with the XXXXXXXXXX Tax Services Office.

2. The shareholders of Aco are XXXXXXXXXX ("Mr. A"), his four children, XXXXXXXXXX ("Child A"), XXXXXXXXXX ("Child B"), XXXXXXXXXX ("Child C") and XXXXXXXXXX ("Child D") (collectively referred to as the "Children"), Bco and XXXXXXXXXX ("Mr. B"). Mr. A is the controlling shareholder of Aco, holding directly XXXXXXXXXX% of the voting shares thereof.

The authorized share capital of Aco includes the following:

XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX

The number of each class of shares issued and outstanding by Aco, the PUC per share in respect thereof and ACB of such shares owned by each shareholder are as follows:

Shareholder Shares PUC ACB
per Share per Share

Mr. A XXXXXXXXXX

Child A XXXXXXXXXX
Child B XXXXXXXXXX
Child C XXXXXXXXXX
Bco XXXXXXXXXX
Mr. B, as trustee XXXXXXXXXX
Mr. B, as trustee XXXXXXXXXX
XXXXXXXXXX

The shares of Aco represent capital property to the holders thereof. The Aco shares are held by Mr. B in his capacity as a bare trustee under a voting trust arrangement ("Voting Trust #1") for each of the Children who are the sole beneficiaries of Voting Trust #1 and the beneficial owners of the shares. The only function of Mr. B as bare trustee is to hold legal title to the shares and to vote and deal with the shares only as directed by each of the Children as to the shares held by him on their respective behalf. Mr. B has no discretion in dealing with these shares and all amounts received by Mr. B as bare trustee, whether dividends or proceeds of disposition, are for the account of the beneficial owners and Mr. B is also required to deliver the shares to each respective Child upon demand. Mr. B is herein referred to as the "Bare Trustee" with respect to this voting trust arrangement. For the purpose of the proposed transactions described below, where the Bare Trustee is referred to as transferring shares held by him under Voting Trust #1 and/or making any elections under the Act in respect thereof, any transfer agreements or elections in respect thereof will be executed by each of the Children as to the shares that are beneficially owned by each Child.

Aco owns marketable securities (the "Securities"), the total fair market value of which is approximately $XXXXXXXXXX, that were issued by persons that are dealing at arm's length with Aco and its shareholders. The Securities are held by Aco as capital property and are comprised of marketable securities, the fair market value of which exceeds their cost amount (the "Gain Securities") and marketable securities, the fair market value of which is less than their cost amount (the "Loss Securities"). Aco has an RDTOH balance of approximately $XXXXXXXXXX at the end of its last taxation year.

3. Opco is a Canadian-controlled private corporation incorporated under the XXXXXXXXXX. Opco owns and operates a XXXXXXXXXX business established in XXXXXXXXXX and the balance of its RDTOH account at the end of its last taxation year was Nil. Opco files its federal income tax returns at the XXXXXXXXXX Taxation Centre but otherwise deals with the XXXXXXXXXX Tax Services Office. Mr. A is the controlling shareholder of Opco, holding directly XXXXXXXXXX% of the voting shares of Opco. The other shareholders of Opco are Bco and the Children.

The authorized share capital of Opco includes the following:

XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX

The Class XXXXXXXXXX Preferred Shares are redeemable and retractable for an amount equal to the fair market value of the consideration received by the company for their issuance and entitle the holder to non-cumulative dividends at a rate equal to the greater of XXXXXXXXXX% per annum and XXXXXXXXXX% in excess of the prime rate charged by the XXXXXXXXXX.

The number of each class of shares issued and outstanding by Opco, the PUC per share in respect thereof and the ACB of such shares owned by each shareholder are as follows:

Shareholder Shares PUC ACB
per Share per Share

Mr. A XXXXXXXXXX

Child A, as trustee XXXXXXXXXX
Child B, as trustee XXXXXXXXXX
Child C XXXXXXXXXX
Child D, as trustee XXXXXXXXXX
Bco XXXXXXXXXX
XXXXXXXXXX

The shares of Opco represent capital property to the holders thereof. Each of Child A, Child B and Child D holds their XXXXXXXXXX shares of Opco as a trustee for a separate discretionary family trust (the "Family Trust"), the beneficiaries of which are the respective children and spouse of such trustee. Each of the Family Trusts is a personal trust. There are no other beneficiaries of any of the Family Trusts, other than those identified herein, and each of the beneficiaries of each such Family Trust is a related person to Mr. A such that Mr. A is deemed pursuant to subparagraph 55(5)(e)(ii) to be related to each Family Trust for the purposes of section 55.

4. Bco is a Canadian-controlled private corporation amalgamated under XXXXXXXXXX. Bco is a holding company, the principal asset of which is its shares of Opco. The balance of Bco's RDTOH account at the end of its last taxation year was $XXXXXXXXXX. Bco files its federal income tax returns at the XXXXXXXXXX Taxation Centre but otherwise deals with the XXXXXXXXXX Tax Services Office. Mr. A is the controlling shareholder of Bco, holding directly XXXXXXXXXX% of the voting shares thereof. The other shareholders of Bco are the Children, Mr. B and Aco.

The authorized capital of Bco includes the following:

XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX

The number of each class of shares issued and outstanding by Bco, the PUC per share in respect thereof and the ACB of such shares owned by each shareholder are as follows:

Shareholder Shares PUC ACB
per Share per Share

Mr. A XXXXXXXXXX

Child B XXXXXXXXXX
Child C XXXXXXXXXX
Child D XXXXXXXXXX
Aco XXXXXXXXXX
Mr. B, as trustee XXXXXXXXXX
Mr. B, as trustee XXXXXXXXXX
XXXXXXXXXX

The shares of Bco represent capital property to the holders thereof. The Bco shares are held by Mr. B in his capacity as a bare trustee under a voting trust arrangement ("Voting Trust #2") for each of the Children who are the sole beneficiaries of Voting Trust #2 and the beneficial owners of the shares. The only function of Mr. B as bare trustee is to hold legal title to the shares and to vote and deal with the shares only as directed by each of the Children as to the shares held by him on their respective behalf. Mr. B has no discretion in dealing with these shares and all amounts received by Mr. B as bare trustee, whether dividends or proceeds of disposition, are for the account of the beneficial owners and Mr. B is also required to deliver the shares to each respective Child upon demand. Mr. B is herein referred to as the "Bare Trustee" with respect to this voting trust arrangement. For the purpose of the proposed transactions described below, where the Bare Trustee is referred to as transferring shares held by him under Voting Trust #2 and/or making any elections under the Act in respect thereof, any transfer agreements or elections in respect thereof will be executed by each of the Children as to the shares that are beneficially owned by each Child.

5. Mr. A, each of the Children, each of the Family Trusts, Voting Trust #1, Voting Trust #2 and the Bare Trustee are residents of Canada and none of the Children are minors.

6. Aco is currently the owner and beneficiary under one or more life insurance policies (the "Aco Insurance") which insure the lives of each of the Children. One of the main purposes of the Aco Insurance is to fund Aco's repurchase of any Aco shares that are owned directly or beneficially by a Child upon the death of such Child. Prior to the creation of Aco on XXXXXXXXXX as a result of the amalgamation described in 1 above, Xco was the owner and beneficiary under one or more life insurance policies insuring the lives of each of the Children (such life insurance being referred to as the "Original Insurance"). The Original Insurance was in force on XXXXXXXXXX and one of the main purposes of the Original Insurance was to fund Xco's repurchase of any Xco shares that were owned directly or beneficially by a Child (the "Original Shares") upon the death of such Child. Pursuant to a shareholders agreement entered into on XXXXXXXXXX between a predecessor of Aco and its shareholders, the proceeds of the Aco Insurance are required to fund Aco's repurchase of any Aco shares that are owned directly or beneficially by a Child upon the death of such Child.

All the XXXXXXXXXX Preferred shares (XXXXXXXXXX in total) and XXXXXXXXXX Common shares of Aco (XXXXXXXXXX in total) that are presently owned directly or beneficially by the Children, as described in 2 above, have been so owned continuously by them since the time they were acquired as consideration for the Original Shares of Xco that were owned by them immediately before the time of the amalgamation described above. The Original Shares of Xco owned by each Child immediately before the time of the amalgamation described above had been owned by each such Child continuously since XXXXXXXXXX. The Aco shares will continue to be owned directly or beneficially by the Children until the time of the proposed transactions described in this letter. For greater certainty, while after XXXXXXXXXX the life insurance policies under the Original Insurance have been replaced with new or updated insurance policies as those policies were set to expire, the purpose of the Aco Insurance, as described above, has not changed such that the XXXXXXXXXX Preferred shares and XXXXXXXXXX Common shares of Aco are grandfathered shares pursuant to paragraph 131(11)(b) of S.C. 1998, c.19.

7. Bco is currently the beneficiary under one or more life insurance policies which insure the lives of each of the Children (the "Bco Insurance"). One of the main purposes of the Bco Insurance is to fund its repurchase of any Bco shares owned directly or beneficially by a Child, as described in 4 above, upon the death of such Child. Prior to XXXXXXXXXX, Bco was the beneficiary under one or more similar life insurance policies insuring the lives of each of the Children (the "Original Bco Insurance"). The Original Bco Insurance was in force on XXXXXXXXXX and one of the main purposes of the Original Bco Insurance was to fund Bco's repurchase of any Bco shares that were owned directly or beneficially by a Child upon the death of such Child. Pursuant to a shareholders agreement entered into on XXXXXXXXXX between Bco and its shareholders, the proceeds of the Bco Insurance are required to fund Bco's repurchase of any Bco shares that are owned directly or beneficially by a Child upon the death of such Child.

All the XXXXXXXXXX Common shares (XXXXXXXXXX in total), all the XXXXXXXXXX Preferred shares (XXXXXXXXXX in total), and all the XXXXXXXXXX Preferred shares (XXXXXXXXXX in total) that are presently owned directly or beneficially by the Children, as described in 4 above, have been so owned continuously by each of them since XXXXXXXXXX and will continue to be owned by each of them until the time of the proposed transactions described in this letter. For greater certainty, while after XXXXXXXXXX the life insurance policies under the Original Bco Insurance have been replaced with new or updated insurance policies as those policies were set to expire, the purpose of the Bco Insurance, as described above, has not changed such that the XXXXXXXXXX Common shares, XXXXXXXXXX Preferred shares and the XXXXXXXXXX Preferred shares of Bco are grandfathered shares pursuant to paragraph 131(11)(b) of S.C. 1998, c.19.

PROPOSED TRANSACTIONS

8. Mr. A will incorporate a new corporation under the XXXXXXXXXX ("Holdco") that will be a Canadian-controlled private corporation and a taxable Canadian corporation resident in Canada. No shares will be issued on incorporation. The authorized share capital of Holdco shall consist of several classes of shares, including; XXXXXXXXXX with each class of shares so described having the same rights and restrictions as the shares of the same class name authorized by Aco as described in 2 above. The authorized share capital of Holdco will also include a class of preferred shares without par value (the "XXXXXXXXXX Preferred Shares") which will be redeemable and retractable for an amount equal to the fair market value of any consideration received by Holdco for their issuance. The holders of the XXXXXXXXXX Preferred Shares will also be entitled to non-cumulative preferential dividends at a rate equal to the greater of XXXXXXXXXX% per annum and XXXXXXXXXX% in excess of the prime rate charged by the XXXXXXXXXX.

9. Mr. A will also incorporate four new corporations under the XXXXXXXXXX ("Investco A", "Investco B", "Investco C" and "Investco D", collectively, the "Investcos") each of which will be a Canadian-controlled private corporation and a taxable Canadian corporation resident in Canada. No shares will be issued on incorporation. The authorized capital of each of Investco A, Investco B, Investco C and Investco D shall consist of several classes of shares, including; XXXXXXXXXX with each class of shares so described having the same rights and restrictions as the shares of the same class name authorized by Aco as described in 2 above.

10. Each of Mr. A, the Bare Trustee, Child A, Child B and Child C (herein collectively referred to as the "Aco Transferor" and individually as an "Aco Transferor") will transfer all the shares of Aco owned or held by them, as described in 2 above, to Holdco. As sole consideration for each particular class of shares transferred to Holdco by a particular Aco Transferor, Holdco will issue to each such Aco Transferor an identical number of shares of the same class name as each particular class of shares of Aco that were transferred to it by the particular Aco Transferor and that have a fair market value equal to the shares of such class that were transferred to Holdco by the particular Aco Transferor.

Each Aco Transferor and Holdco shall jointly elect in prescribed form and within the time limit referred to in subsection 85(6), to have the provisions of subsection 85(1) apply to each such share transfer. The agreed amount in respect of each such share transfer by a particular Aco Transferor will be equal to the ACB to the particular Aco Transferor of each such class of shares of Aco owned by the particular transferor and transferred to Holdco immediately before such transfer. For greater certainty, the shares of Aco owned by each Aco Transferor are eligible property and the elected amount will be within the limits prescribed by paragraph 85(1)(c.1).

The aggregate capital and PUC of each particular class of shares issued by Holdco will not exceed the aggregate capital and PUC, respectively, of the shares of the same class name of Aco that were owned by the Aco Transferors immediately before the transfer. Holdco will hold the Aco shares as capital property. After the above share transfers are complete the number of each class of shares issued and outstanding by Holdco, the PUC per share in respect thereof and the ACB of such shares owned by each Aco Transferor shall be as follows:

Shareholder Shares PUC ACB
per Share per Share

Mr. A XXXXXXXXXX

Child A XXXXXXXXXX
Child B XXXXXXXXXX
Child C XXXXXXXXXX
Bare Trustee XXXXXXXXXX
XXXXXXXXXX

11. After the above share transfers are complete, Mr. A, the Bare Trustee (on behalf of Child A) and Child A will transfer the following shares of Holdco to Investco A:

Transferor Number and Class of Shares

Mr. A XXXXXXXXXX

Bare Trustee (on behalf of Child A) XXXXXXXXXX
XXXXXXXXXX
Child A XXXXXXXXXX

As sole consideration for the transfer of such shares to Investco A by each of Mr. A, the Bare Trustee (on behalf of Child A) and Child A (herein collectively referred to as the "Investco A Transferors" and individually as an "Investco A Transferor"), as the case may be, Investco A will issue to each such Investco A Transferor an identical number of shares of the same class name as each particular class of shares of Holdco that were transferred to it by the particular Investco A Transferor and that have a fair market value equal to that of the particular class of Holdco shares so transferred.

Each of the Investco A Transferors and Investco A shall jointly elect in prescribed form within the time limit referred to in subsection 85(6), to have the provisions of subsection 85(1) apply to these transfers. The agreed amount in respect of each such share transfer by a particular Investco A Transferor will be equal to the ACB to the particular Investco A Transferor of each such class of shares of Holdco owned by the particular transferor and transferred to Investco A immediately before such transfer. For greater certainty the shares of Holdco transferred by each Investco A Transferor are eligible property and the elected amount will be within the limits prescribed by paragraph 85(1)(c.1). The aggregate capital and PUC of each class of shares issued by Investco A will not exceed the aggregate capital and PUC, respectively, of the shares of the same class name of Holdco that were owned by each particular Investco A Transferor immediately before the transfer.

After such transfers, XXXXXXXXXX. Each of the Investco A Transferors will hold their respective Investco A shares as capital property.

12. Mr. A, the Bare Trustee (on behalf of Child B) and Child B will transfer the following shares of Holdco to Investco B:

Transferor Number and Class of Shares

Mr. A XXXXXXXXXX

Bare Trustee (on behalf of Child B) XXXXXXXXXX
XXXXXXXXXX
Child B XXXXXXXXXX

As sole consideration for the transfer of such shares to Investco B by each of Mr. A, the Bare Trustee (on behalf of Child B) and Child B (herein collectively referred to as the "Investco B Transferors" and individually as an "Investco B Transferor"), as the case may be, Investco B will issue to each such Investco B Transferor an identical number of shares of the same class name as each particular class of shares of Holdco that were transferred to it by the particular Investco B Transferor and that have a fair market value equal to that of the particular class of Holdco shares so transferred.

Each of the Investco B Transferors and Investco B shall jointly elect in prescribed form within the time limit referred to in subsection 85(6), to have the provisions of subsection 85(1) apply to these transfers. The agreed amount in respect of each such share transfer by a particular Investco B Transferor will be equal to the ACB to the particular Investco B Transferor of each such class of shares of Holdco owned by the particular transferor and transferred to Investco B immediately before such transfer. For greater certainty the shares of Holdco transferred by each Investco B Transferor are eligible property and the elected amount will be within the limits prescribed by paragraph 85(1)(c.1).

The aggregate capital and PUC of each class of shares issued by Investco B will not exceed the aggregate capital and PUC, respectively, of the shares of the same class name of Holdco that were owned by each particular Investco B Transferor immediately before the transfer.

After such transfers, XXXXXXXXXX. Each of the Investco B Transferors will hold their respective Investco B shares as capital property.

13. Mr. A, the Bare Trustee (on behalf of Child C) and Child C will transfer the following shares of Holdco to Investco C:

Transferor Number and Class of Shares

Mr. A XXXXXXXXXX

Bare Trustee (on behalf of Child C) XXXXXXXXXX
XXXXXXXXXX
Child C XXXXXXXXXX

As sole consideration for the transfer of such shares to Investco C by each of Mr. A, the Bare Trustee (on behalf of Child C) and Child C (herein collectively referred to as the "Investco C Transferors" and individually as an "Investco C Transferor"), as the case may be, Investco C will issue to each such Investco C Transferor an identical number of shares of the same class name as each particular class of shares of Holdco that were transferred to it by the particular Investco C Transferor and that have a fair market value equal to that of the particular class of Holdco shares so transferred.

Each of the Investco C Transferors and Investco C shall jointly elect in prescribed form within the time limit referred to in subsection 85(6), to have the provisions of subsection 85(1) apply to these transfers. The agreed amount in respect of each such share transfer by a particular Investco C Transferor will be equal to the ACB to the particular Investco C Transferor of each such class of shares of Holdco owned by the particular transferor and transferred to Investco C immediately before such transfer. For greater certainty, the shares of Holdco transferred by each Investco C Transferee are eligible property and the elected amount will be within the limits prescribed by paragraph 85(1)(c.1).

The aggregate capital and PUC of each class of shares issued by Investco C will not exceed the aggregate capital and PUC, respectively, of the shares of the same class name of Holdco that were owned by each particular Investco C Transferor immediately before the transfer. After such transfers, XXXXXXXXXX. Each of the Investco C Transferors will hold their respective Investco C shares as capital property.

14. Mr. A and the Bare Trustee (on behalf of Child D) will transfer the following shares of Holdco to Investco D:

Transferor Number and Class of Shares

Mr. A XXXXXXXXXX

Bare Trustee (on behalf of Child D) XXXXXXXXXX
XXXXXXXXXX

As sole consideration for the transfer of such shares to Investco D by each of Mr. A and the Bare Trustee (on behalf of Child D) (herein collectively referred to as the "Investco D Transferors" and individually as an "Investco D Transferor"), as the case may be, Investco D will issue to each such Investco D Transferor an identical number of shares of the same class name as each particular class of shares of Holdco that were transferred to it by the particular Investco D Transferor and that have a fair market value equal to that of the particular class of Holdco shares so transferred.

Each of the Investco D Transferors and Investco D shall jointly elect in prescribed form within the time limit referred to in subsection 85(6), to have the provisions of subsection 85(1) apply to these transfers. The agreed amount in respect of each such share transfer by a particular Investco D Transferor will be equal to the ACB to the particular Investco D Transferor of each such class of shares of Holdco owned by the particular transferor and transferred to Investco D immediately before such transfer. For greater certainty, the shares of Holdco transferred by each Investco D Transferor are eligible property and the elected amount will be within the limits prescribed by paragraph 85(1)(c.1).

The aggregate capital and PUC of each class of shares issued by Investco D will not exceed the aggregate capital and PUC, respectively, of the shares of the same class name of Holdco that were owned by each particular Investco D Transferor immediately before the transfer. After such transfers, XXXXXXXXXX. Each of the Investco D Transferors will hold their respective Investco D shares as capital property.

15. Aco will then reorganize its capital by filing articles of amendment under the XXXXXXXXXX to authorize up to XXXXXXXXXX Common shares with a par value of $XXXXXXXXXX each (the "Common Shares") and XXXXXXXXXX Preferred shares with a par value of $XXXXXXXXXX each (the "Preferred Shares"). The Preferred Shares will be redeemable and retractable for an amount equal to the fair market value of the consideration received by Aco for their issue and will entitle a holder to receive dividends, if and when declared, at the discretion of its directors. The terms of the Preferred Shares will also entitle a holder to receive the Redemption Amount in priority over the holders of Common Shares on liquidation, dissolution, winding-up or distribution of the assets of Aco and will entitle a holder to one vote per share. The Common Shares will entitle a holder to one vote per share, to receive dividends at the discretion of the directors and will entitle the holders thereof to receive any remaining property of Aco on liquidation, dissolution, winding-up or distribution of the assets of Aco. The terms of the Common Shares will also entitle a holder to receive dividends equal to the amount of any life insurance proceeds received by Aco under the Aco Insurance.

16. Holdco will then transfer all of the shares of Aco that are currently owned by it (such shares having been acquired by Holdco as a result of the share transfers described in 10 above) to Aco for 1 newly issued Common Share and XXXXXXXXXX newly issued Preferred Shares of Aco that have, in the aggregate, a fair market value equal to the aggregate fair market value at the time of the transfer, of all the shares of Aco transferred to it by Holdco. No joint election under the provisions of subsection 85(1) will be made in respect of this share exchange. The aggregate fair market value and redemption amount of the XXXXXXXXXX Preferred Shares issued by Aco will be equal to the fair market value of all the Aco shares transferred to it by Holdco at the time of the exchange, less an amount equal to the cash surrender value of the Aco Insurance which will be attributed to the 1 Common Share. The fair market value of the Common Share will at the time of issue equal the cash surrender value of the Aco Insurance notwithstanding that such share is also entitled to a distribution of the balance of the remaining assets of Aco after the Preferred Share entitlement.

The aggregate redemption amount of the XXXXXXXXXX Preferred Shares is expected to be approximately $XXXXXXXXXX while the cash surrender value of the Aco Insurance is approximately $XXXXXXXXXX. The amount of capital and PUC to be added to the 1 Common Share and XXXXXXXXXX Preferred Shares issued by Aco, as the case may be, will not in the aggregate exceed the aggregate capital and PUC, respectively of the Aco shares that were transferred to it by Holdco. For greater certainty, no non-share consideration will be paid by Aco as part of this share exchange.

17. Aco will transfer the Gain Securities and Loss Securities to Holdco for the following total consideration:

(a) the assumption of liabilities of Aco in the aggregate amount of approximately $XXXXXXXXXX; and

(b) the issuance of XXXXXXXXXX Preferred Shares of Holdco having an aggregate fair market value equal to the fair market value at the time of the Securities less the amount of Aco liabilities assumed by Holdco as described in (a) (approximately $XXXXXXXXXX).

Aco and Holdco shall jointly elect 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 the Gain Securities. The agreed amount in respect of each Gain Security so transferred to Holdco will be equal to its ACB to Aco immediately before the transfer which amount will be less than its fair market value at that time. For greater certainty, the Gain Securities are eligible property and the agreed amount in respect of each Gain Security so transferred will be within the limits prescribed by paragraph 85(1)(c.1) and will not exceed the amount of liabilities of Aco assumed by Holdco as consideration for the transfer of the particular Gain Security as described in (a) above. No election under subsection 85(1) will be made in respect of the transfer of any of the Loss Securities and any accrued losses arising on the transfer of the Loss Securities by Aco to Holdco will become suspended losses of Aco by the operation of subsection 40(3.4).

The amount that will be added to the capital account of the XXXXXXXXXX Preferred Shares issued by Holdco as described herein will equal the fair market value of all the Securities received by Holdco less the amount of liabilities assumed by Holdco as described in (a) above. The aggregate PUC of the XXXXXXXXXX Shares issued in respect of the Gain Securities will be reduced in accordance with subsection 85(2.1).

Following the transfers described herein, Aco will continue to hold the XXXXXXXXXX Preferred Shares of Bco and the Aco Insurance.

18. Aco will redeem all XXXXXXXXXX of its Preferred Shares owned by Holdco by issuing to Holdco a non-interest bearing demand promissory note (the "Aco Note") having a principal amount and fair market value equal to the aggregate Redemption Amount and fair market value of the XXXXXXXXXX Preferred Shares so redeemed. As a result of the deemed dividend that will arise on the redemption of the XXXXXXXXXX Preferred Shares of Aco, Holdco will be liable for Part IV tax to the extent that Aco receives a refund of its RDTOH. It is expected that Aco will be entitled to a full refund of its RDTOH balance under subsection 129(1) at that time such that Holdco will be liable for Part IV tax of the same amount by virtue of the operation of paragraph 186(1)(b).

19. Holdco will declare and pay dividends on its issued and outstanding shares, all of which are held by the Investcos, aggregating $XXXXXXXXXX. These dividends will be paid by the issuance by Holdco to each of the Investcos of a non-interest bearing demand promissory note, which in the aggregate will have a fair market value and principal amount of $XXXXXXXXXX (collectively referred to as the "Holdco Investco Notes"). As a result of these dividends Holdco will be entitled to a refund of its full RDTOH balance under subsection 129(1) at that time and the Investcos, in the aggregate, will be liable for Part IV tax of the same amount by virtue of the operation of paragraph 186(1)(b).

20. Bco will redeem XXXXXXXXXX Preferred shares held by Child B, XXXXXXXXXX Preferred shares held by Child C and XXXXXXXXXX Preferred shares of its capital held by Child D for their redemption amount of $XXXXXXXXXX per share. These share redemptions will trigger aggregate deemed dividends in the amount of $XXXXXXXXXX and, as a result of these deemed dividends, Bco will be entitled to a refund of its RDTOH balance in the amount of $XXXXXXXXXX.

21. After completion of the transactions described above, Aco and Bco will amalgamate in accordance with the provisions of the XXXXXXXXXX to form a new corporation (hereinafter referred to as "Amalco"). On the amalgamation:

(a) all of the property and liabilities of Aco and Bco (except shares in the capital stock of either such corporation held by the other such corporation and amounts receivable from, or payable to, each other) will become property and liabilities of Amalco;

(b) all shares in the capital stock of Aco owned by Bco and all shares in the capital stock of Bco owned by Aco will be cancelled without any payment in respect thereof; and

(c) all of the shareholders who owned shares in the capital stock of Aco or Bco (other than Aco or Bco) immediately before the amalgamation will only receive shares in the capital stock of Amalco in exchange for their shares of Aco and/or Bco, as the case may be, as described below.

On the amalgamation, Holdco as the holder of the 1 Common Share of Aco and the holders of the XXXXXXXXXX shares of Bco outstanding at that time will each receive an identical number of shares of Amalco of the same class name and with identical terms and conditions as each particular class of shares of Aco or Bco, as the case may be, that were owned by the particular holder immediately before the amalgamation and that have a fair market value equal to that of the particular class of shares of Aco or Bco, as the case may be, so converted on the amalgamation. The holder of the 1 XXXXXXXXXX Common share of Amalco will only be entitled to receive an amount on liquidation, wind-up, or dissolution equal to the fair market value of the 1 XXXXXXXXXX Common share of Aco immediately before the amalgamation (i.e., the proceeds from the Aco Insurance). The aggregate capital and PUC of each class of shares issued by Amalco will not exceed the aggregate capital and PUC, respectively, of the shares of the same class name owned by the holders of the shares of Aco or Bco, as the case may be, at that time, excluding any such shares that were owned by either of Aco or Bco in one another immediately before the amalgamation.

The shareholders of Amalco immediately after the amalgamation of Aco and Bco will be as follows:

Shareholder Shares
Holdco XXXXXXXXXX Common

Mr. A XXXXXXXXXX Preferred

Child B XXXXXXXXXX Preferred
Child C XXXXXXXXXX Preferred
Child D XXXXXXXXXX Preferred
Mr. B, as Bare Trustee XXXXXXXXXX Common
Mr. B, as Bare Trustee XXXXXXXXXX Preferred

The authorized share capital of Amalco shall also include a class of preferred shares (the "XXXXXXXXXX Preferred Shares") that will be without par value and which will be redeemable and retractable for an amount equal to the fair market value of the consideration received by Amalco for their issuance. The holder of the XXXXXXXXXX Preferred Shares will also be entitled to receive non-cumulative preferential dividends at a rate equal to the greater of XXXXXXXXXX% per annum and XXXXXXXXXX% in excess of the prime rate charged by the XXXXXXXXXX.

22. By operation of paragraph 87(1)(a) the taxation year of each of the predecessor corporations, Aco and Bco, shall end at the end of the day immediately before the amalgamation. Holdco, as a newly incorporated company, will choose a fiscal period, and thereby its taxation year, that will end on the day immediately before the amalgamation of Aco and Bco but after the payment of the dividends described in 19 above. The reason for each of: the choice of fiscal period of Holdco, the timing of the redemption of the Preferred Shares of Aco described in 18, the payment of the dividends to the Investcos described in 19 and the redemption of XXXXXXXXXX Preferred shares of Bco described in 20 is to avoid the uncertainty arising from the circularity of the RDTOH calculation that would otherwise result from the fact that as part of the proposed transactions Holdco would be deemed to pay a dividend to Aco in the same taxation year as it receives a deemed dividend from Aco and vice versa and, similarly, in respect of the fact that Opco would be deemed to pay a dividend to Amalco in the same taxation year as it receives a deemed dividend from Amalco and vice versa. The result of the dividends and deemed dividends arising pursuant to the transactions described in 18, 19 and 20 and the timing of the amalgamation of Aco and Bco and the choice of fiscal period of Holdco is that prior to the transaction described in 23 below and thereafter, the RDTOH balance of each of Amalco, Holdco and Opco will be NIL.

23. On the first business day following the end of Holdco's taxation year, Holdco will redeem all XXXXXXXXXX of its XXXXXXXXXX Preferred Shares owned by Amalco and will issue to Amalco a non-interest bearing demand promissory note (the "Holdco Note") having a principal amount and fair market value (expected to be approximately $XXXXXXXXXX) equal to the aggregate redemption amount and fair market value of the XXXXXXXXXX Preferred Shares so redeemed.

24. The principal amount owing to Amalco by Holdco under the Holdco Note, as described in 23 above, will be set off against a portion of the principal amount owing to Holdco by Amalco (formerly Aco) under the Aco Note, as described in 18 above, and the Holdco Note will be cancelled and considered to be paid in full. Amalco will continue to be indebted to Holdco for any remaining principal amount owing under the Aco Note which is in excess of the principal amount and fair market value of the Holdco Note so cancelled, which amount is expected to be approximately $XXXXXXXXXX. Amalco will use any cash it receives from Aco's RDTOH refund (now Amalco's), as described in 18 above, and from the collection of its receivables, to repay the balance of the Aco Note in full.

25. Opco will transfer the real estate upon which its XXXXXXXXXX business is located and operated to Amalco. As sole consideration for the transfer Amalco will issue to Opco XXXXXXXXXX Preferred Shares having an aggregate redemption amount and fair market value equal to the fair market value of the transferred real estate at that time. Opco and Amalco shall jointly elect 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 in the election in respect of the real estate so transferred will equal its ACB to Opco immediately before the transfer, which amount will be less than its fair market value at that time. For greater certainty, the real estate owned by Opco is a capital property and an eligible property and the elected amount will be within the limits prescribed by paragraph 85(1)(c.1).

The amount that will be added to the capital account of the XXXXXXXXXX Shares issued by Amalco will equal the fair market value of the real estate received by Amalco from Opco. The aggregate PUC of the XXXXXXXXXX Shares will be reduced to the agreed amount in the election in accordance with subsection 85(2.1).

26. Opco will redeem all XXXXXXXXXX Preferred Shares owned by Amalco and will issue to Amalco a non-interest bearing demand promissory note (the "Opco Note") having a principal amount and fair market value equal to the aggregate Redemption Amount and fair market value of the XXXXXXXXXX Preferred Shares of Opco so redeemed.

27. The Bare Trustee (on behalf of each Child) will transfer to Opco, on a pro-rata basis, XXXXXXXXXX Preferred Shares of Amalco in exchange for XXXXXXXXXX Preferred Shares of Opco. The terms and conditions of the XXXXXXXXXX Preferred Shares of Opco are identical to the terms and conditions of the XXXXXXXXXX Preferred Shares of Amalco such that the aggregate redemption amount and fair market value of the XXXXXXXXXX Preferred Shares issued by Opco will be equal to the aggregate redemption amount and fair market value of the XXXXXXXXXX Preferred Shares of Amalco transferred to Opco. The Bare Trustee and Opco shall jointly elect in prescribed form and within the time limit referred to in subsection 85(6), to have the provisions of subsection 85(1) apply to each transfer. The agreed amount in respect of the XXXXXXXXXX Preferred Shares so transferred by the Bare Trustee to Opco in respect of each Child will equal the ACB of such shares immediately before the transfer, and such amount will be less than the fair market value of those shares at that time. For greater certainty, the XXXXXXXXXX Preferred Shares of Amalco so transferred are capital property and eligible property and the agreed amount will be within the limits prescribed by paragraph 85(1)(c.1). The amount that will be added to the capital and PUC of the XXXXXXXXXX Shares issued by Opco will be equal to the proportionate amount that relates to the capital and PUC of the XXXXXXXXXX Shares of Amalco received by Opco.

28. Amalco will redeem all XXXXXXXXXX Preferred Shares and all XXXXXXXXXX Preferred Shares owned by Opco and will issue to Amalco a non-interest bearing demand promissory note (the "Amalco Note") having a principal amount and fair market value equal to the sum of the aggregate redemption amount and fair market value of the XXXXXXXXXX Preferred Shares and the XXXXXXXXXX Preferred shares so redeemed.

29. The principal amount owing by Amalco to Opco under the Amalco Note, as described in 28, and the principal amount owing by Opco to Amalco under the Opco Note, as described in 26, will be set off against each other and the notes will be marked paid in full and cancelled. Immediately before the set-off, the principal amount owing by Amalco to Opco under the Amalco Note will be equal to the principal amount owing by Opco to Amalco under the Opco Note.

ADDITIONAL INFORMATION

30. There have been no significant transactions, other than those hereinbefore described, that have been completed prior to the time of this letter nor are there any other significant transactions, proposed or contemplated, other than those hereinbefore described, that will take place as part of the series of transactions or events that includes the proposed transactions. In this regard, there is no intention by any shareholder to dispose of the shares of any of the corporations referred to herein to a person or partnership who was not a related person to Aco, Holdco, Opco or Amalco, as the case may be, immediately prior to such disposition.

PURPOSE OF THE PROPOSED TRANSACTIONS

31. The purpose of the proposed reorganization is to separate the corporate group's investment properties, real estate and XXXXXXXXXX business assets into separate corporate entities for commercial liability purposes without affecting the entitlement of the individual shareholders of Aco and Bco to the use of the grandfathering rules with respect to subsection 112(3).

RULINGS GIVEN

Provided that the foregoing statements constitute a complete and accurate disclosure of all the relevant facts, proposed transactions and purpose 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 subsections 20(1.2) and 26(5) of the Income Tax Application Rules, to the application of paragraph 88(2.2)(b) (which applies for the purpose stated in the preamble to subsection 88(2.2)) and subject also to subsections 13(21.2) and 69(11) as they may apply to the transfers referred to herein, the provisions of subsection 85(1) will apply to:

(i) the transfer of the shares of Aco owned by each Aco Transferor to Holdco, as described in 10 above;

(ii) the transfer of the Holdco shares by Mr. A, the Bare Trustee (on behalf of Child A) and Child A to Investco A as described in 11 above;

(iii) the transfer of the Holdco shares by Mr. A, the Bare Trustee (on behalf of Child A) and Child B to Investco B as described in 12 above;

(iv) the transfer of the Holdco shares by Mr. A, the Bare Trustee (on behalf of Child C) and Child C to Investco C as described in 13 above;

(v) the transfer of the Holdco shares by Mr. A and the Bare Trustee (on behalf of Child D) to Investco D as described in 14 above;

(vi) the transfer of the Gain Securities by Aco to Holdco, as described in 17 above;

(vii) the transfer of the real estate by Opco to Amalco, as described in 25 above; and

(viii) the transfer of the XXXXXXXXXX Preferred Shares of Amalco held by the Bare Trustee to Opco, as described in 27 above;

such that the agreed amount in respect of each such transfer shall be deemed to be the proceeds of disposition to the transferor and the cost thereof to the transferee pursuant to paragraph 85(1)(a). For greater certainty, paragraph 85(1)(e.2) will not apply to the transfers referred to herein.

B. On the redemptions by:

(i) Aco of its XXXXXXXXXX Preferred Shares owned by Holdco as described in 18 above;

(ii) Holdco of its XXXXXXXXXX Preferred Shares owned by Amalco as described in 23 above;

(iii) Opco of its XXXXXXXXXX Preferred shares owned by Amalco as described in 26 above; and

(iv) Amalco of its XXXXXXXXXX Preferred Shares and XXXXXXXXXX Preferred Shares owned by Opco as described in 28 above;

the amount, if any, by which the amount paid by each such corporation to the particular shareholder to redeem its shares, as the case may be, exceeds the aggregate PUC of those shares so redeemed immediately before the redemption,

(v) will be deemed pursuant to paragraph 84(3)(a) to be a dividend paid by the particular issuer of such shares; and

(vi) will be deemed pursuant to paragraph 84(3)(b) to be a dividend received by the particular holder of such shares.

C. With respect to each deemed dividend referred to in B above

(i) the amount of each such dividend shall be excluded from the proceeds of disposition of the shares so redeemed by virtue of paragraph (j) of the definition "proceeds of disposition" in section 54;

(ii) each such dividend shall be a taxable dividend;

(iii) each such dividend shall be included in the particular recipient's income pursuant to subsection 82(1) and paragraph 12(1)(j);

(iv) each such dividend shall be deductible by the particular recipient corporation pursuant to subsection 112(1) in computing its taxable income for the year in which the dividend is deemed to have been received.

D. To the extent that the actual dividends paid by Holdco to each of the Investcos as described in 19 above are taxable dividends, each such dividend:

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

(ii) shall be deductible by the particular recipient corporation pursuant to subsection 112(1) in computing its taxable income for the year in which the dividend is received.

E. With respect to the dividends described in B and D above:

(i) by virtue of subsections 186(2) and 186(4) each particular recipient of a dividend therein described will be connected with the particular payer thereof, such that each particular recipient corporation shall not be subject to tax under Part IV in respect of such dividend except as provided for in paragraph 186(1)(b), and

(ii) each such dividend shall be an "excepted dividend" within the meaning assigned by paragraph (b) of the definition of "excepted dividend" in section 187.1 to the particular recipient thereof, and each such dividend will be an "excluded dividend" within the meaning assigned by paragraph (a) of the definition of "excluded dividend" in subsection 191(1) to the particular payer thereof and, therefore, each such dividend shall not be subject to tax under Part IV.1 or Part VI.1.

F. By virtue of paragraph 55(3)(a), the provisions of subsection 55(2) will not apply to any of the taxable dividends described in Ruling C or D provided that there is no disposition of property or increase in interest described in any of subparagraphs 55(3)(a)(i) to (v) which is part of the series of transactions or events that includes the proposed transactions described above. For greater certainty, the proposed transactions described above, in and by themselves, will not be considered to result in any disposition of property or increase in interest described in any of subparagraphs 55(3)(a)(i) to (v).

G. The amalgamation of Aco and Bco as described in 21 above will be an amalgamation for the purposes of subsection 87(1).

H. The set-off of a portion of the principal amount owing to Amalco (formerly Aco) by Holdco under the Holdco Note against the full amount of the principal amount owing to Holdco by Amalco under the Aco Note, as described in 24, will not, in and by itself, give rise to a "forgiven amount" within the meaning of subsection 80(1).

I. The set-off of the principal amount owing by Amalco to Opco under the Amalco Note against the principal amount owing by Opco to Amalco under the Opco Note, as described in 29 above, will not give rise to a "forgiven amount" within the meaning of subsection 80(1).

J. Provided that all of the shares of Aco that are held by Holdco immediately before the share exchange described in 16 above are held as capital property by Holdco, the provisions of subsection 86(1) will apply to the exchange of all the shares of Aco owned by Holdco for 1 newly issued Common Share and XXXXXXXXXX newly issued Preferred Shares of Aco as described in 16 above. For greater certainty, subsection 86(2.1) will not apply to such share exchange.

K. Provided that

(i) the XXXXXXXXXX Preferred shares and XXXXXXXXXX Common shares of Aco that were owned by the Children and/or the Bare Trustee (on behalf of each Child), as described in 2 above; and

(ii) the XXXXXXXXXX Common shares, XXXXXXXXXX Preferred shares, and XXXXXXXXXX Preferred shares of Bco that were owned by the Children and/or the Bare Trustee (on behalf of each Child), as described in 4 above;

were grandfathered shares to such holder, as described in 6 or 7 above, paragraph 131(11)(b) of S.C. 1998, c.19, subsection 131(12) of S.C. 1998, c. 19 will apply to deem:

(i) the shares of Holdco which are to be issued to each of the Children and/or the Bare Trustee (on behalf of each Child), as described in 10 above, as consideration for the transfer of the grandfathered shares of Aco owned by each such individual at that time to be the same shares as the grandfathered shares of Aco owned by each such individual for the purpose of paragraph 131(11)(b) of S.C. 1998, c. 19; and

(ii) the shares of Amalco which are to be issued to each of the Children and/or the Bare Trustee (on behalf of each Child), as described in 21 above, in exchange for the grandfathered shares of Bco owned by each such individual at that time to be the same shares as the grandfathered shares of Bco owned by each such individual for the purpose of paragraph 131(11)(b) of S.C. 1998, c. 19.

L. The provisions of subsections 15(1), 56(2) and 246(1) will not apply to the proposed transactions described above, in and by themselves.

M. The provisions of subsection 245(2) will not be applied as a result of the proposed transactions described above, in and by themselves, to redetermine any of the tax consequences confirmed in the rulings issued herein.

The above rulings are given subject to the limitations and qualifications set out in Information Circular 70-6R3 dated December 31, 1996 and are binding on the CCRA 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.

Nothing in this letter should be construed as confirmation of the income tax consequences of any of the transactions described in this letter other than as specifically described. In addition, nothing in this letter should be construed as confirmation, express or implied, of the fair market value or ACB of any property or the PUC of any share. For greater certainty, the XXXXXXXXXX. Common shares of Holdco which were issued as consideration for the XXXXXXXXXX Common shares of Aco that are not grandfathered shares as described in paragraph 6 above will not be grandfathered shares.

Yours truly,

for Director
Reorganizations and International Division
Income Tax Rulings Directorate
Policy and Legislation Branch