2000 Ruling 1999-0010923 - Spin-off, 73(4) Rollover, Amalgation

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: Does GAAR apply to transactions undertaken to "spin-off" qualifying assets from a distributing corporation to a new company in order to take advantage of the farm rollover under 73(4) where that new company and the distributing corporation will later be amalgamated.

\POSITION: No

Reasons: The transactions do not result in a "misuse or abuse" within the meaning of subsection 245(4).

XXXXXXXXXX
XXXXXXXXXX 1999-001092
XXXXXXXXXX

Attention: XXXXXXXXXX

XXXXXXXXXX, 2000

Dear Sir:

Re: XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX

This is in reply to your letter of XXXXXXXXXX in which you requested various advance income tax rulings on behalf of the above-noted taxpayers. We also acknowledge your letters of XXXXXXXXXX.

We understand that, to the best of your knowledge and that of the taxpayers involved, none of the issues involved in the requested rulings is being considered by a taxation services office or a taxation centre in connection with a tax return already filed, or is under objection or appeal.

XXXXXXXXXX have filed their XXXXXXXXXX tax returns at the XXXXXXXXXX Taxation Centre and are within the jurisdiction of the XXXXXXXXXX Tax Services Office. Prior years' returns were filed at the XXXXXXXXXX Taxation Centre.

FACTS

1. XXXXXXXXXX, are Canadian residents for purposes of the Income Tax Act (Canada) ("the Act").

2.

XXXXXXXXXX

3. The XXXXXXXXXX group of companies is engaged primarily in the XXXXXXXXXX constitutes "farming" as defined in subsection 248(1) of the Act. The XXXXXXXXXX qualifies for the manufacturing and processing profits deduction allowed under section 125.1 of the Act.

4. XXXXXXXXXX is actively engaged in the business of farming on a regular and continuous basis and is largely responsible for the success of the business. From its inception, XXXXXXXXXX has been the key decision maker. Furthermore, he has been involved in the day-to-day management of the farming operations and has held the position of President since the early XXXXXXXXXX.

5. Each of XXXXXXXXXX is a "private corporation" and a "taxable Canadian corporation" as defined in subsection 89(1) of the Act.

6. XXXXXXXXXX are governed by the provisions of the XXXXXXXXXX Business Corporations Act ("XXXXXXXXXX"). XXXXXXXXXX was incorporated on XXXXXXXXXX. Both XXXXXXXXXX have a floating fiscal year ending on XXXXXXXXXX.

XXXXXXXXXX

7. XXXXXXXXXX was created on XXXXXXXXXX on the amalgamation of the predecessor XXXXXXXXXX. The predecessor XXXXXXXXXX was incorporated on XXXXXXXXXX under the Canada Business Corporations Act ("CBCA") and was continued under the XXXXXXXXXX, just prior to the aforementioned amalgamation.

8.

XXXXXXXXXX

The amalgamation and the redemption of shares that took place in XXXXXXXXXX are not part of the series of proposed transactions that are described herein, nor were they undertaken in contemplation of the proposed transactions described herein.

9. Under the articles of amalgamation, XXXXXXXXXX is authorized to issue an unlimited number of common shares. All of the XXXXXXXXXX issued and outstanding common shares of XXXXXXXXXX are held by XXXXXXXXXX. The shares of XXXXXXXXXX constitute capital property, as that term is defined in the Act, to XXXXXXXXXX.

10. The aggregate paid-up capital ("PUC"), as that term is defined in the Act, and stated capital of the common shares of XXXXXXXXXX is $XXXXXXXXXX. The adjusted cost base ("ACB"), as that term is defined in the Act, of the shares to XXXXXXXXXX is $XXXXXXXXXX.

11. XXXXXXXXXX is an investment company and provides management services to its subsidiaries. XXXXXXXXXX has the following controlled subsidiaries (common share ownership percentage indicated):

%
XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX

XXXXXXXXXX

XXXXXXXXXX was incorporated XXXXXXXXXX by an unrelated individual, who, at that time, owned XXXXXXXXXX % of the Class B shares of XXXXXXXXXX. The shares of XXXXXXXXXX were transferred to XXXXXXXXXX to utilize the individual's capital gains exemption. On XXXXXXXXXX purchased the common shares of XXXXXXXXXX for $XXXXXXXXXX.

Prior to XXXXXXXXXX paid a stock dividend of XXXXXXXXXX Class A shares (redemption value $XXXXXXXXXX) to the individual. The Class A shares are being redeemed at the rate of XXXXXXXXXX shares each quarter, with the most recent redemption being made XXXXXXXXXX. At this time, there are XXXXXXXXXX Class A shares outstanding.

XXXXXXXXXX owns all of the outstanding share capital of XXXXXXXXXX.

To summarize, XXXXXXXXXX has the following minority common share investments:

%
XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX
12. In addition to its controlling interest in the various subsidiaries noted above,

XXXXXXXXXX

13. XXXXXXXXXX owns undeveloped land that is zoned for commercial use. Some of the land is adjacent to developed property and can be severed and sold, but most of the land will require an investment in servicing. There are no expectations for sales in the near term. In the past, the income on sales of lots has been reported as business income for income tax purposes. XXXXXXXXXX owns the following shares in XXXXXXXXXX:

Number Class Terms PUC ACB
(% Total) $ $

XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX

XXXXXXXXXX

XXXXXXXXXX

XXXXXXXXXX

14. XXXXXXXXXX also owns XXXXXXXXXX common shares or XXXXXXXXXX% of the outstanding common shares of XXXXXXXXXX. The remaining common shares are held as follows:

XXXXXXXXXX

15. In XXXXXXXXXX acquired a life insurance policy on the lives of XXXXXXXXXX. As at XXXXXXXXXX, the policy had a cash surrender value (CSV) of $XXXXXXXXXX. A further premium was paid on XXXXXXXXXX after which the CSV increased to approximately $XXXXXXXXXX.

XXXXXXXXXX
16. The authorized capital of XXXXXXXXXX consists of

XXXXXXXXXX

17. The XXXXXXXXXX preference shares are redeemable at the option of the company and at the option of the holder upon giving thirty days notice of the requested redemption date. The XXXXXXXXXX preference shares are redeemable/retractable at a price of $XXXXXXXXXX per share plus accrued and unpaid dividends. The XXXXXXXXXX preference shares have a cumulative dividend rate of $XXXXXXXXXX per share. None of the XXXXXXXXXX shares have been redeemed to date.

18. The issued and outstanding shares of XXXXXXXXXX are held as follows:

Class # Shareholder ACB PUC
$ $

XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX

XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX

XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX

XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX

19.

XXXXXXXXXX

The process of redeeming the shares owned by XXXXXXXXXX is not part of the series of transactions described in this letter, nor was such process undertaken in contemplation of the proposed transactions described herein.

20. The primary business of XXXXXXXXXX comprises XXXXXXXXXX operations. XXXXXXXXXX.

21. XXXXXXXXXX uses the cash method, as described under subsection 28(1) of the Act, in computing its income from farming.

22. XXXXXXXXXX carries on its farming activities in XXXXXXXXXX only. The XXXXXXXXXX operation is carried out on the same land ("the XXXXXXXXXX land') as the farming business.

XXXXXXXXXX

23.

XXXXXXXXXX

24. On XXXXXXXXXX transferred XXXXXXXXXX valued at approximately $XXXXXXXXXX to XXXXXXXXXX received XXXXXXXXXX common shares of XXXXXXXXXX as consideration for the XXXXXXXXXX. XXXXXXXXXX will file a timely joint election under section 85 of the Act. The agreed amount in respect of the XXXXXXXXXX is expected to be approximately $XXXXXXXXXX (i.e., the cost amount to XXXXXXXXXX). As previously noted, the transactions regarding the acquisition of shares of XXXXXXXXXX and the transfer of XXXXXXXXXX were not undertaken in contemplation of the proposed transactions described herein.

25. The other intangible assets of XXXXXXXXXX comprise purchased goodwill and franchise rights. There have been a number of transactions over the years that have given rise to the purchased goodwill. For example, XXXXXXXXXX has acquired the assets of various XXXXXXXXXX businesses where part of the purchase price was allocated to goodwill. The cost of the goodwill was treated as an eligible capital expenditure for income tax purposes. The franchise rights were purchased from XXXXXXXXXX.

26. XXXXXXXXXX also owns XXXXXXXXXX preference shares and XXXXXXXXXX warrants in a company, XXXXXXXXXX was required to make an investment of $XXXXXXXXXX in the shares and warrants of XXXXXXXXXX in order to exploit the results of the R&D (e.g., XXXXXXXXXX).

XXXXXXXXXX

27.

XXXXXXXXXX

XXXXXXXXXX

28.

XXXXXXXXXX

29.

XXXXXXXXXX

The acquisition of the shares of XXXXXXXXXX was not made in contemplation of the proposed transactions described herein.

XXXXXXXXXX

30. XXXXXXXXXX is incorporated under the laws of XXXXXXXXXX and its principal business activity is the XXXXXXXXXX.

XXXXXXXXXX

31. XXXXXXXXXX is incorporated under XXXXXXXXXX. The company's principal business is XXXXXXXXXX.

XXXXXXXXXX
32. XXXXXXXXXX is incorporated under the laws of XXXXXXXXXX. Its only assets consist of a receivable from XXXXXXXXXX and its XXXXXXXXXX% common share interest in XXXXXXXXXX.*

General

33. A commitment has been made to allow employees to participate in the future growth of the XXXXXXXXXX group of companies. Only one employee may acquire shares of any of the XXXXXXXXXX group of companies as part of the series of transactions that includes the proposed transactions described in this letter.

34. Neither XXXXXXXXXX is a specified financial institution or a restricted financial institution as defined in subsection 248(1) of the Act. Further, neither corporation is a financial intermediary corporation as defined in subsection 191(1) of the Act.

35. None of the issued shares referred to herein (including the shares to be issued as described in the proposed transactions) is or will be:

• subject to a guarantee agreement within the meaning referred to in subsection 112(2.2) of the Act;
• part of a dividend rental arrangement within the meaning referred to in subsection 112(2.3) of the Act; or
• 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) of the Act.

36. No balances will exist in respect of refundable dividend tax on hand ("RDTOH") for XXXXXXXXXX at the time that the transfers described in paragraphs 49, 50, 57 and 58 are undertaken. XXXXXXXXXX does not have a balance in its capital dividend account ("CDA"). XXXXXXXXXX has a balance of $XXXXXXXXXX in its CDA as at XXXXXXXXXX. Neither company will have any RDTOH prior to the end of its taxation year in which the proposed transactions are completed.

PROPOSED TRANSACTIONS

37. XXXXXXXXXX will redeem its outstanding XXXXXXXXXX preference shares, held by XXXXXXXXXX, for cash consideration equal to the stated redemption price of $XXXXXXXXXX per share. The total redemption value and PUC of the XXXXXXXXXX preference shares is $XXXXXXXXXX and $XXXXXXXXXX, respectively.

38. XXXXXXXXXX will amend its articles to authorize three new classes of shares:

XXXXXXXXXX

will issue XXXXXXXXXX shares to XXXXXXXXXX for FMV consideration.

XXXXXXXXXX will amend its articles to authorize the issuance of XXXXXXXXXX shares. XXXXXXXXXX will issue XXXXXXXXXX shares to XXXXXXXXXX for FMV consideration.

The reason for the XXXXXXXXXX shares being issued to XXXXXXXXXX and for the XXXXXXXXXX shares being issued to XXXXXXXXXX is to XXXXXXXXXX.

39. Two new corporations (herein referred to as Farm Holdco, and Familyco) will be created under the provisions of the XXXXXXXXXX. Each corporation will be a private corporation, and a taxable Canadian corporation, as defined in subsection 89(1) of the Act. No shares will be issued on incorporation. A third corporation, XXXXXXXXXX ("XXXXXXXXXX Co"), was incorporated under the XXXXXXXXXX.

40. The authorized share capital of XXXXXXXXXX Co will consist of an unlimited number of common shares and an unlimited number of non-voting XXXXXXXXXX preference shares. The XXXXXXXXXX preference shares will be redeemable and retractable for a specified amount equal to the fair market value of the property for which the shares are issued, have a non-cumulative dividend rate of XXXXXXXXXX % and be eligible to receive on liquidation or winding-up their redemption or retraction price inclusive of all declared and unpaid dividends.

41. The authorized share capital of Farm Holdco will consist of an unlimited number of common shares and an unlimited number of two separate classes of preference shares. The XXXXXXXXXX preference shares will be non-voting, redeemable and retractable for a specified amount equal to the fair market value of the property for which the shares are issued, have a discretionary non-cumulative dividend rate not to exceed XXXXXXXXXX % and be eligible to receive on liquidation or winding-up their redemption or retraction price inclusive of all declared and unpaid dividends. The XXXXXXXXXX preference shares will have the same terms and conditions as the XXXXXXXXXX shares, except that they will be voting.

42. Familyco will have authorized share capital consisting of an unlimited number of voting non-participating shares (XXXXXXXXXX) and an unlimited number of non-voting participating shares (XXXXXXXXXX).

Transfer of Assets to XXXXXXXXXX Co by XXXXXXXXXX

43. XXXXXXXXXX will transfer a portion of its common shares of XXXXXXXXXX to XXXXXXXXXX Co. The value of the shares transferred to XXXXXXXXXX Co will be equal to the net FMV of the assets to be transferred under paragraph 46.

44. XXXXXXXXXX Co and XXXXXXXXXX will jointly elect in prescribed form within the time limit referred to in subsection 85(6) of the Act, to have the provisions of subsection 85(1) of the Act apply to the transfer of the common shares of XXXXXXXXXX. The agreed amount in respect of the shares so transferred will be equal to the ACB thereof.

45. As consideration for the XXXXXXXXXX common shares, XXXXXXXXXX will receive common shares of XXXXXXXXXX Co with an equivalent FMV. The stated capital of the common shares of XXXXXXXXXX Co received will be equal to the PUC attributable to the common shares of XXXXXXXXXX transferred to XXXXXXXXXX Co by XXXXXXXXXX.

46. XXXXXXXXXX will transfer to XXXXXXXXXX Co all of its farming assets that are property referred to in paragraphs (a), (b) and (c) of the definition of "share of the capital stock of a family farm corporation" in subsection 70(10) of the Act.

47. As consideration for the assets transferred, XXXXXXXXXX Co will assume certain liabilities and will issue XXXXXXXXXX preference shares of XXXXXXXXXX Co to XXXXXXXXXX having an aggregate redemption amount and FMV equal to the amount by which the FMV of the property of XXXXXXXXXX transferred to XXXXXXXXXX Co exceeds the liabilities so assumed. The amount of such non-share consideration allocated to a particular property will not exceed the amount agreed upon pursuant to paragraph 85(1)(a) of the Act in respect of the property. The amount added to the stated capital account maintained by XXXXXXXXXX Co in respect of the XXXXXXXXXX preference shares that it issues will be equal to the amount by which the aggregate amounts agreed upon in respect of the assets transferred exceeds the related liabilities assumed by XXXXXXXXXX Co (i.e., as computed under subsection 85(2.1) of the Act).

48. XXXXXXXXXX and XXXXXXXXXX Co will file a joint election under subsection 85(1) of the Act within the time referred to in subsection 85(6) of the Act with respect to any capital property (including depreciable property), any inventory (other than real property), and any eligible capital property being transferred. The agreed amount for each transferred property included in the subsection 85(1) election will be expressed in dollars, and will in the case of each capital property (other than depreciable property) and inventory, be equal to the lesser of the cost amount to XXXXXXXXXX of the property and the FMV thereof; in the case of depreciable property, be equal to the least of the amounts described in paragraph 85(1)(e) of the Act; and in the case of eligible capital property, be equal to the least of the amounts described in paragraph 85(1)(d) of the Act. The subsection 85(1) election referred to herein will exclude any accounts receivable, and any cash or prepaid expenses.

49. XXXXXXXXXX Co will redeem its XXXXXXXXXX preference shares issued to XXXXXXXXXX at their aggregate redemption amount by issuing to XXXXXXXXXX a demand non-interest bearing promissory note having a principal amount and FMV equal to the aggregate redemption amount of the XXXXXXXXXX Co XXXXXXXXXX preference shares. XXXXXXXXXX will accept the XXXXXXXXXX Co note in full payment of the redemption amount.

50. XXXXXXXXXX will purchase for cancellation all of its common shares owned by XXXXXXXXXX Co and, at the same time, will purchase for cancellation that portion of the common shares held by XXXXXXXXXX required to maintain XXXXXXXXXX equity interest at XXXXXXXXXX % (i.e., the percentage held prior to the series of transactions that includes the proposed transactions described in this letter). The deemed dividend arising on the purchase for cancellation of the XXXXXXXXXX common shares held by XXXXXXXXXX will be subject to tax under Part IV of the Act. XXXXXXXXXX will also redeem that portion of the XXXXXXXXXX preference shares owned by XXXXXXXXXX as is required to maintain the proportionate value of the XXXXXXXXXX interest in XXXXXXXXXX at the same level as prior to the series of transactions. As consideration, XXXXXXXXXX will issue to each of XXXXXXXXXX a demand promissory note having a principal amount and FMV equal to the respective FMV of the shares held by each of them which were canceled.

51. The obligations under the promissory notes held by each of XXXXXXXXXX and XXXXXXXXXX Co, which will be an equal amount, will be offset against one another and the notes will be cancelled.

Transfer to Farm Holdco

52. XXXXXXXXXX will transfer a portion of his common shares of XXXXXXXXXX to Farm Holdco. It is noted that, prior to this transaction, Farm Holdco will not have any issued share capital. The FMV of the common shares transferred by XXXXXXXXXX to Farm Holdco will be equal to the combined FMV of

(i) the shares of XXXXXXXXXX Co owned by XXXXXXXXXX;

(ii) the shares of XXXXXXXXXX owned by XXXXXXXXXX; and

(iii) the shares of XXXXXXXXXX owned by XXXXXXXXXX, subject to a determination that the shares meet the definition of "share of the capital stock of a family farm corporation" under subsection 70(10) of the Act,

less the amount of liabilities to be assumed, if any, as described in paragraph 55 below.

53. As sole consideration for the shares of XXXXXXXXXX will receive voting XXXXXXXXXX preference shares of Farm Holdco having a FMV equal to the FMV of the XXXXXXXXXX shares transferred at that time. Farm Holdco will add to its stated capital account maintained for its XXXXXXXXXX preference shares an amount equal to the PUC of the XXXXXXXXXX shares transferred to it.

54. XXXXXXXXXX and Farm Holdco will jointly elect in prescribed form within the time limit referred to in subsection 85(6) of the Act, to have the provisions of subsection 85(1) apply to the transfer of the shares of XXXXXXXXXX. The agreed amount in respect of the shares so transferred will be equal to the ACB of those shares immediately before the transfer, which amount will not exceed the FMV of such shares.

55. XXXXXXXXXX will transfer to Farm Holdco the shares of XXXXXXXXXX and, subject to the determination described in paragraph 52(iii) above, of XXXXXXXXXX. As consideration, Farm Holdco may assume certain liabilities of XXXXXXXXXX and will issue XXXXXXXXXX preference shares having a redemption amount and FMV equal to the amount by which the FMV of the assets transferred by XXXXXXXXXX exceeds the liabilities so assumed. The amount of such non-share consideration allocated to a particular property will not exceed the amount agreed upon pursuant to paragraph 85(1)(a) of the Act in respect of the property. The amount added to the stated capital account maintained by Farm Holdco in respect of the XXXXXXXXXX preference shares that it issues will be equal to the amount by which the aggregate amounts agreed upon in respect of the assets transferred exceeds the liabilities assumed by Farm Holdco (i.e., as computed under subsection 85(2.1) of the Act).

56. XXXXXXXXXX and Farm Holdco will jointly elect in prescribed form within the time limit referred to in subsection 85(6) of the Act to have the provisions of subsection 85(1) of the Act apply to the transfer of eligible property of XXXXXXXXXX to Farm Holdco. The agreed amount for each transferred property included in the subsection 85(1) election will be expressed in dollars, and will be equal to the lesser of the cost amount to XXXXXXXXXX of the property and the FMV thereof.

57. XXXXXXXXXX will purchase for cancellation its common shares held by Farm Holdco in exchange for a demand promissory note having a principal amount and FMV equal to the FMV of the common shares purchased.

58. Farm Holdco will redeem its XXXXXXXXXX preference shares held by XXXXXXXXXX in exchange for a demand promissory note having a principal amount and FMV equal to the redemption value and FMV of the preference shares.

59. The obligations under the promissory notes held by each of XXXXXXXXXX and Farm Holdco, which will be an equal amount, will be offset against one another and the notes will be cancelled.

Rollover of Family Farm Corporation Shares and Estate Freeze

60. [Reserved]

61. XXXXXXXXXX will exchange his remaining common shares of XXXXXXXXXX for new XXXXXXXXXX preference shares of XXXXXXXXXX. No non-share consideration will be received by XXXXXXXXXX on the exchange. The redemption value and FMV of the XXXXXXXXXX preference shares will be equal to the FMV of the common shares exchanged therefor. XXXXXXXXXX will add to its stated capital account maintained for its XXXXXXXXXX preference shares an amount equal to the PUC of the XXXXXXXXXX common shares received in exchange.

62. [Reserved]

63. XXXXXXXXXX will subscribe for common shares of Farm Holdco for FMV consideration.

64. A family trust ("the Trust") will be created. XXXXXXXXXX and two other individuals will be the initial Trustees. All decisions made by the trustees will require a majority approval. The trustee(s) will have full discretion as to the distribution of both income and capital of the Trust. The Trust will be settled by a person who is neither a trustee nor a beneficiary of the Trust. The beneficiaries of the Trust will be: XXXXXXXXXX.

65. The Trust will subscribe for XXXXXXXXXX shares of XXXXXXXXXX for FMV consideration, being $XXXXXXXXXX, immediately after the completion of the steps described above. The Trust will obtain a loan, with interest payable at prescribed rates, to purchase the shares. XXXXXXXXXX, an employee and unrelated person, may subscribe for XXXXXXXXXX shares, for FMV consideration.

66. XXXXXXXXXX will transfer all of his XXXXXXXXXX preference shares of Farm Holdco to Familyco in exchange for XXXXXXXXXX shares and XXXXXXXXXX shares of Familyco. XXXXXXXXXX and Familyco will jointly elect in prescribed form within the time limit referred to in subsection 85(6) of the Act, to have the provisions of subsection 85(1) of the Act apply to the transfer of the preference shares of Farm Holdco. The agreed amount in respect of the shares so transferred will be equal to the ACB immediately before the transfer, which amount will not exceed the FMV of such shares. The combined PUC of the XXXXXXXXXX shares will not exceed the PUC of the preference shares of Farm Holdco transferred to Familyco.

67. XXXXXXXXXX will transfer, by way of gift, all or part of the XXXXXXXXXX shares of Familyco to his Canadian resident children, in equal proportions.

PURPOSE OF PROPOSED TRANSACTIONS

68. The primary objective of the proposed transactions is to segregate the farming operations from the processing activities so as to allow for the tax-deferred transfer of the farming business to XXXXXXXXXX Canadian resident children. The value of the farming business transferred to the children will be "frozen" at today's values. The transactions, which include an estate freeze, will also allow XXXXXXXXXX children (either directly or indirectly as beneficiaries of the Trust) and/or employees of the XXXXXXXXXX group to acquire a participating interest in the future growth of the farming and processing business carried on by the XXXXXXXXXX group of companies.

OTHER INFORMATION

69. XXXXXXXXXX are all transactions that are not part of the series of proposed transactions covered by this ruling application. Furthermore, none of these transactions was undertaken in contemplation of the proposed transactions, but rather, occurred in the normal course of business.

70. Given the potential for duplication of payroll deductions and the fact that the operations are likely to be merged within a year, employees will not be moved in connection with the separation of the processing and farming assets. To the extent that employees perform services for another company in the group, there will be an inter-company charge equal to the cost of those services.

71. It is noted that on the completion of the proposed transactions, XXXXXXXXXX, or after his death, his personal representatives, will have direct or indirect voting control of XXXXXXXXXX and Familyco. Under XXXXXXXXXX continued competent and prudent management, inordinate financial pressure (e.g., to satisfy the retraction rights of preference shareholders) will not be exerted on any one corporation without due consideration of its commercial liquidity requirements. The non-voting common equity shareholders would, nevertheless, have rights as shareholders even though they are not entitled to vote for the directors of a particular corporation. For example, these shareholders could take legal action against the directors if they felt that the directors were not acting in their best interest.

72. It is planned that, within one year of the proposed transactions, XXXXXXXXXX will be amalgamated with XXXXXXXXXXCo.

RULINGS

Provided that the preceding statements constitute a complete and accurate disclosure of all of the relevant facts, proposed transactions and purposes of the proposed transactions, our rulings are as follows:

A. The provisions of subsection 85(1) of the Act will apply, subject to the application of subsection 69(11) of the Act, to the transfer:

(a) by XXXXXXXXXX of the common shares of XXXXXXXXXX to XXXXXXXXXX Co as described in paragraph 43;

(b) by XXXXXXXXXX of its properties that are eligible properties to XXXXXXXXXX Co as described in paragraph 46;

(c) by XXXXXXXXXX of the common shares of XXXXXXXXXX to Farm Holdco as described in paragraph 52;

(d) by XXXXXXXXXX of its properties that are eligible properties to Farm Holdco as described in paragraph 55; and

(e) by XXXXXXXXXX of the XXXXXXXXXX preference shares of Farm Holdco to Familyco as described in paragraph 66

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) of the Act and in respect of depreciable property, the transferee's capital cost of each such property will be determined in accordance with subsection 85(5) of the Act.

B. Subsection 85(2.1) of the Act will apply to determine the PUC of the shares issued as consideration for the transfers of property described in paragraphs 43, 46 and 55.

C. Subsection 84.1(1) of the Act will apply to determine the PUC of the shares issued as consideration for the transfers of property described in paragraphs 52 and 66.

D. As a result of the redemption by XXXXXXXXXX Co of the XXXXXXXXXX preference shares held by XXXXXXXXXX, described in paragraph 49 above:

(a) XXXXXXXXXX Co will be deemed, pursuant to paragraph 84(3)(a) of the Act, to have paid a dividend equal to the amount, if any, by which the amount paid to redeem the particular shares exceeds the PUC of such shares immediately before the redemption; and

(b) a dividend will be deemed to have been received at that time by XXXXXXXXXX, pursuant to paragraph 84(3)(b) of the Act, equal to the amount, if any, by which the amount paid to redeem the particular shares exceeds the PUC of such shares immediately before the redemption.

E. As a result of the purchase for cancellation of the common shares of XXXXXXXXXX held by XXXXXXXXXX Co, described in paragraph 50 above:

(a) XXXXXXXXXX will be deemed, pursuant to paragraph 84(3)(a) of the Act, to have paid a dividend to XXXXXXXXXX Co equal to the amount, if any, by which the amount paid to purchase the particular shares exceeds the PUC of such shares immediately before the purchase; and

(b) a dividend will be deemed to have been received at that time by XXXXXXXXXX Co, pursuant to paragraph 84(3)(b) of the Act, equal to the amount, if any, by which the amount paid to purchase the particular shares exceeds the PUC of such shares immediately before the purchase.

F. As a result of the purchase for cancellation of the common shares of XXXXXXXXXX held by Farm Holdco, described in paragraph 57 above:

(a) XXXXXXXXXX will be deemed, pursuant to paragraph 84(3)(a) of the Act, to have paid a dividend to Farm Holdco equal to the amount, if any, by which the amount paid to purchase the particular shares exceeds the PUC of such shares immediately before the purchase; and

(b) a dividend will be deemed to have been received at that time by Farm Holdco, pursuant to paragraph 84(3)(b) of the Act, equal to the amount, if any, by which the amount paid to purchase the particular shares exceeds the PUC of such shares immediately before the purchase.

G. As a result of the redemption by Farm Holdco of the preference shares held by XXXXXXXXXX, described in paragraph 58 above:

(a) Farm Holdco will be deemed, pursuant to paragraph 84(3)(a) of the Act, to have paid a dividend equal to the amount, if any, by which the amount paid to redeem the particular shares exceeds the PUC of such shares immediately before the redemption; and

(b) a dividend will be deemed to have been received at that time by XXXXXXXXXX, pursuant to paragraph 84(3)(b) of the Act, equal to the amount, if any, by which the amount paid to redeem the particular shares exceeds the PUC of such shares immediately before the redemption.

H. The deemed dividends referred to in Rulings D, E, F and G above, to the extent that they are taxable dividends, will:

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

(b) by virtue of the application of paragraph (j) of the definition "proceeds of disposition" in section 54 of the Act, will be excluded from the proceeds of disposition of the shares and any loss arising from the disposition of those shares will be reduced by the amount of such dividends pursuant to subsection 112(3).

I. No taxes under Part IV of the Act will be payable in respect of a dividend described in Rulings D, E, F and G above, except as provided in paragraph 186(1)(b) of the Act.

J. Part IV.1 of the Act will not apply to the deemed dividends described in Rulings D, E, F and G above because the dividends will be excepted dividends pursuant to paragraph (b) of the definition of "excepted dividend" in section 187.1 of the Act.

K. Part VI.1 of the Act will not apply to the deemed dividends described in Rulings D, E, F and G above because the dividends will be excluded dividends pursuant to paragraph (a) of the definition "excluded dividend" in subsection 191(1) of the Act.

L. By virtue of the provisions of paragraph 55(3)(a) of the Act, the provisions of subsection 55(2) of the Act will not apply to the deemed dividends described in Rulings D, E, F and G above, provided that, as part of the series of transactions that includes the proposed transactions described herein, there is no:

(a) disposition of property as described in subparagraph 55(3)(a)(i);

(b) significant increase in the total direct interest in any corporation as described in subparagraph 55(3)(a)(ii);

(c) disposition of property in the circumstances described in subparagraph 55(3)(a)(iii);

(d) disposition of property in the circumstances described in subparagraph 55(3)(a)(iv); or

(e) significant increase in the total of all direct interests in the dividend payer as described in subparagraph 55(3)(a)(v)

which has not been described herein.

M. The provisions of section 51 of the Act will apply with respect to the disposition by XXXXXXXXXX of all of his common shares of XXXXXXXXXX for XXXXXXXXXX preference shares of XXXXXXXXXX, (as described in paragraph 61 above) such that:

(i) the cost of the XXXXXXXXXX preference shares will be equal to the ACB of the common shares;

(ii) the PUC of the XXXXXXXXXX preference shares will be equal to the PUC of the common shares; and

(iii) XXXXXXXXXX will be deemed not to have disposed of his XXXXXXXXXX common shares.

N. The provisions of section 80 of the Act will not apply on the cancellation of the obligations under the promissory notes, as described in paragraphs 51 and 59 above.

O. Provided that each XXXXXXXXXX share of Familyco will, immediately before the transactions described in paragraph 67 above, qualify as a "share of the capital stock of a family farm corporation" as defined in subsection 70(10) of the Act, the provisions of subsection 73(4) of the Act will apply with respect to the disposition by XXXXXXXXXX of the XXXXXXXXXX shares of Familyco, described in paragraph 67 above, such that he will be deemed to have disposed of those XXXXXXXXXX shares of Familyco for proceeds of disposition equal to the amount determined under subparagraph 73(4)(a)(iii) of the Act and such that his Canadian resident children to whom he gifted the shares will be deemed to have acquired them for an amount equal to the proceeds of disposition to XXXXXXXXXX, as described in paragraph 74(4)(c).

P. The provisions of subsections 15(1), 69(1) and 246(1) of the Act will not be applicable to the proposed transactions in and of themselves.

Q. Subsection 245(2) will not be applied, as a result of the proposed transactions, in and of themselves, to redetermine the income tax consequences described in the rulings given.

These rulings are given subject to the limitations and qualifications set out in Information Circular 70-6R3 dated December 30, 1996 and are binding provided that the proposed transactions are completed before XXXXXXXXXX.

These rulings are based on the Act as it currently reads and do not take into account any future amendments, whether currently proposed or not, to the Act.

Nothing in this letter should be construed as confirmation of the tax consequences of any of the transactions described in this letter other than as specifically discussed.

Yours truly,

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