2000 Ruling 1999-0012953 - Butterfly; Classfication of Property

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: 1. classification of mortgage (other than current portion)
2. classification of rental properties

Position: 1. investment property, not business property, 5 year term
2. investment properties since ITAct made Opco a SIB on terminating
full-time employees

Reasons: 1. caselaw; property not "risked" in business; mortgage related to capital
property, not inventory (unlike Freeway Properties case)
2. since property was sold, Opco no longer needed more than 5 full-time
employees / function of Act

XXXXXXXXXX
XXXXXXXXXX 							991843
XXXXXXXXXX 							1999-001295
XXXXXXXXXX 							XXXXXXXXXX
									XXXXXXXXXX
Attention:  XXXXXXXXXX 

XXXXXXXXXX, 2000

Dear Sirs:

Re: XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX
Advance Income Tax Ruling

We are writing in response to your letter of XXXXXXXXXX wherein you requested an advance income tax ruling on behalf of the above taxpayers. We also acknowledge receipt of the information provided in your letters of XXXXXXXXXX and during our telephone conversations. We also acknowledge your letter dated XXXXXXXXXX (wherein the proposed transactions were restructured), as well as your letter of XXXXXXXXXX (wherein we received various representations and the details of the vendor-take-back mortgage which were requested on XXXXXXXXXX and in subsequent telephone conversations) and your letters of XXXXXXXXXX.

To the best of your knowledge, and that of the taxpayers involved, none of the issues contained herein is:

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

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

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

(iv) subject to a ruling previously issued by the Income Tax Rulings Directorate; or

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

In this letter, the following terms have the meanings specified:

(a) "Act" means the Income Tax Act, R.S.C 1985 (5th Supp.) c.1, as amended to the date hereof, and, unless otherwise stated, every reference herein to a Part, section, subsection, paragraph or subparagraph is a reference to the relevant provision of the Act;

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

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

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

(e) "capital dividend account" (also referred to as "CDA") has the meaning assigned by section 83;

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

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

(h) "depreciable property" has the meaning assigned by subsection 13(21);

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

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

(k) XXXXXXXXXX;

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

(m) "personal services business" has the meaning assigned by subsection 125(7);

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

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

(p) "specified investment business" has the meaning assigned by subsection 125(7);

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

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

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

FACTS

1. The following taxpayers will be referred to:

XXXXXXXXXX ("Opco")
XXXXXXXXXX ("Aco")
XXXXXXXXXX ("Bco")
XXXXXXXXXX ("Cco")
XXXXXXXXXX ("X")
XXXXXXXXXX ("Y")
XXXXXXXXXX ("Z")
XXXXXXXXXX ("Z2")

XXXXXXXXXX ("D").

XXXXXXXXXX ("E").

XXXXXXXXXX ("J")
XXXXXXXXXX ("Pre-Cco")
XXXXXXXXXX ("Pre-Opco #1")
XXXXXXXXXX ("#Co")
XXXXXXXXXX ("Pre-Opco #2")
XXXXXXXXXX ("Trust")

XXXXXXXXXX ("J").

2. E and J are brothers.

3. J and D are father and daughter.

4. J and Z2 were husband and wife.

5. E and Y are husband and wife.

6. X is not related to J, Y or E within the meaning of subsection 251(2).

7. Z is a testamentary trust, formed on the death of Z2.

8. Aco is a CCPC and a taxable Canadian corporation. Aco was incorporated in XXXXXXXXXX pursuant to the laws of the province of XXXXXXXXXX. The issued and outstanding shares in the capital of Aco are as follows:

	X	XXXXXXXXXX common shares

9. Bco is a CCPC and a taxable Canadian corporation. Bco was incorporated in XXXXXXXXXX pursuant to the laws of the province of XXXXXXXXXX. The issued and outstanding shares in the capital of Bco are as follows:

	E	XXXXXXXXXX common shares

10. Cco is a CCPC and a taxable Canadian corporation. Cco was incorporated on XXXXXXXXXX pursuant to the laws of the province of XXXXXXXXXX. The issued and outstanding shares in the capital of Cco are as follows:

	J	XXXXXXXXXX voting, Class A shares
		XXXXXXXXXX non-voting Class B shares
	D	XXXXXXXXXX non-voting Class B shares
	Trust	XXXXXXXXXX common shares (voting)

11. Pre-Opco #2 was a private corporation incorporated in 1967 pursuant to the laws of the province of Ontario. The issued and outstanding shares in the capital of Pre-Opco #2 were as follows:

	X	1 common share
	Y	1 common share
	testator of Z	1 common share

12. Pre-Cco is a CCPC and a taxable Canadian corporation. Pre-Cco was incorporated on XXXXXXXXXX pursuant to the laws of the province of XXXXXXXXXX. The issued and outstanding shares in the capital of Pre-Cco are as follows:

	J	XXXXXXXXXX voting, Class A shares
		XXXXXXXXXX non-voting Class B shares

Trust XXXXXXXXXX common shares

13. Pre-Opco #1 was a CCPC and a taxable Canadian corporation. Pre-Opco #1 was incorporated in XXXXXXXXXX pursuant to the laws of the province of XXXXXXXXXX. The issued and outstanding shares in the capital of Pre-Opco #1 were as follows:

		Aco				XXXXXXXXXX common shares
		Bco				XXXXXXXXXX common shares
		Pre-Cco			XXXXXXXXXX common shares

14. All of the taxpayers are residents of Canada.

15. In XXXXXXXXXX, Pre-Opco #1 acquired a property at XXXXXXXXXX ("property #1") in XXXXXXXXXX for $XXXXXXXXXX.

16. In XXXXXXXXXX, two rental properties located in XXXXXXXXXX ("property #2") and XXXXXXXXXX ("property #3"), were owned as follows:

	Pre-Opco #2	XXXXXXXXXX%
	Aco	XXXXXXXXXX
	Bco	XXXXXXXXXX
	Pre-Cco	XXXXXXXXXX
	XXXXXXXXXX %

Each percentage represents an undivided interest in the properties.

17. In XXXXXXXXXX, three rental properties located in XXXXXXXXXX ("property #4"), XXXXXXXXXX ("property #5") and XXXXXXXXXX ("property #6"), were owned as follows:

	Aco		XXXXXXXXXX %
	Bco		XXXXXXXXXX
	Pre-Cco		XXXXXXXXXX
			XXXXXXXXXX %

Each percentage represents an undivided interest in the properties.

18. Pursuant to an Agreement of Purchase and Sale dated XXXXXXXXXX, the beneficial ownership of the five rental properties referred to in paragraphs 15, 16 and 17 was transferred to Pre-Opco #1 at fair market value. The taxpayers elected pursuant to the provisions of subsection 85(1) that for income tax purposes, the vendors' proceeds of disposition and Pre-Opco #1's cost of acquisition of the properties would be an amount equal to the vendor's cost amount of such assets. The appropriate elections were executed and filed.

19. The purchase price paid by Pre-Opco #1 for properties #2 and 3 was the assumption of liabilities and the issuance of shares in the capital of Pre-Opco #1 as follows:

			Pre-Opco #2			XXXXXXXXXX Class B shares
			Aco				XXXXXXXXXX Class B shares
			Bco				XXXXXXXXXX Class B shares
			Pre-Cco			XXXXXXXXXX Class B shares

20. The purchase price paid by Pre-Opco #1 for properties #4, 5 and 6 was the assumption of liabilities and the issuance of shares in the capital of Pre-Opco #1 as follows:

Aco XXXXXXXXXX Class C share
Bco XXXXXXXXXX Class C share
Pre-Cco XXXXXXXXXX Class C share

21. On XXXXXXXXXX Pre-Opco #1 amalgamated with its wholly-owned subsidiary, #Co, to form Opco.

22. Common shares, Class B shares and Class C shares in the capital of Opco were issued to Aco, Bco, Pre-Cco and Pre-Opco #2 to reflect their pre-amalgamation holdings in Pre-Opco #1. The provisions attaching to each class of shares of Opco were identical to the provisions that attached to the shares of Pre-Opco #1.

23. On XXXXXXXXXX the shareholdings of Opco were as follows:

										 Redemption    Redemption
Shareholder	Shares	Number			PUC		ACB	     Amount      Per share

Pre-Opco #2		Class B			XXXXXXXXXX 

Aco			Common		XXXXXXXXXX
		Class B	XXXXXXXXXX
		Class C		XXXXXXXXXX 

Bco			Common		XXXXXXXXXX
		Class B			XXXXXXXXXX
		Class C	XXXXXXXXXX 

Pre-Cco			Common	XXXXXXXXXX
		Class B		XXXXXXXXXX
			Class C	XXXXXXXXXX 

24. Pre-Cco subsequently transferred its XXXXXXXXXX common shares, its XXXXXXXXXX Class B shares, and its 1 Class C share of Opco to Cco.

25. On XXXXXXXXXX Opco and Pre-Opco #2 amalgamated. The amalgamated corporation continued its name as Opco.

26. The shareholders of Pre-Opco #2 (being X, Y and Z) each received one Class A Preferred share of Opco in exchange for their shares of Pre-Opco #2.

27. The shareholders of the predecessor Opco (being Aco, Bco and Cco) each received XXXXXXXXXX common shares, XXXXXXXXXX Class B Preferred shares and 1 Class C Preferred share of Opco. The provisions attaching to each class of shares of Opco were identical to the provisions that attached to the shares of the predecessor Opco.

28. The inter-company shareholding of Pre-Opco #2's 5 Class B shares of Opco was cancelled. The stated capital and PUC of Opco's issued and outstanding Class B shares were reduced by $XXXXXXXXXX.

29. The share capital of Opco includes:

Authorized:

( Unlimited number of Class A Preferred shares, XXXXXXXXXX % non-cumulative, voting, and redeemable.

( Unlimited number of Class B Preferred shares, variable, XXXXXXXXXX % noncumulative, non-voting, and redeemable.

* Unlimited number of Class C Preferred shares, variable, XXXXXXXXXX % non-cumulative, non-voting, and redeemable.

Unlimited number of common shares.

Issued:

( XXXXXXXXXX Class A Preferred shares. One to each of X, Y and Z. The Class A shares are redeemable at $XXXXXXXXXX per share. Each share has a paid-up capital of $XXXXXXXXXX (i.e., $XXXXXXXXXX in aggregate).

( XXXXXXXXXX Class B Preferred shares (XXXXXXXXXX shares to each of Aco, Bco and Cco). The Class B shares are redeemable at $XXXXXXXXXX per share. Each share has a PUC of $XXXXXXXXXX (i.e., $XXXXXXXXXX in aggregate).

( XXXXXXXXXX Class C Preferred shares (one to each of Aco, Bco and Cco). The Class C shares are redeemable at $XXXXXXXXXX per share. Each share has a PUC of $XXXXXXXXXX (i.e., $XXXXXXXXXX in aggregate).

( XXXXXXXXXX common shares (XXXXXXXXXX to each of Aco, Bco and Cco). Each common share has a PUC of $XXXXXXXXXX (i.e., $XXXXXXXXXX in aggregate).

30. On XXXXXXXXXX the shareholdings of Opco were as follows:

									  Redemption	    Redemption
	Shareholder	Shares	Number	PUC	ACB	Amount	Per share
	X	Class A		XXXXXXXXXX
	Y	Class A		XXXXXXXXXX
	Z	Class A		XXXXXXXXXX 

	Aco	Common		XXXXXXXXXX
	Class B		XXXXXXXXXX
	Class C		XXXXXXXXXX 

	Bco	Common		XXXXXXXXXX
	Class B		XXXXXXXXXX
	Class C		XXXXXXXXXX 

	Cco	Common		XXXXXXXXXX
		Class B		XXXXXXXXXX
		Class C		XXXXXXXXXX 

31. The attributes of the shares issued by Opco are summarized as follows:

	Redemption	Redemption
Shares	   Number	  PUC	  ACB	Amount	Per share
Common		XXXXXXXXXX
Class C		XXXXXXXXXX
Class A		XXXXXXXXXX
Class B		XXXXXXXXXX 

32. The shares of Opco constitute capital property for each of the shareholders.

33. Opco's assets consist primarily of rental properties #1, 2, 3, 5 and 6.

34. Each rental property referred to in paragraph 33 constitutes a capital property of Opco.

35. There are no mortgages on properties #1, 2, 3, 5 and 6.

36. Under an Agreement of Purchase and Sale dated XXXXXXXXXX, Opco sold property #4 to an arm's length purchaser for $XXXXXXXXXX. The proceeds from the sale of the property #4 were received as follows: cash of $XXXXXXXXXX and a vendor-take-back mortgage ("the VTB mortgage") of $XXXXXXXXXX.

37. The fair market value of the VTB mortgage on XXXXXXXXXX was $XXXXXXXXXX.

38. The VTB mortgage bears interest at the rate of XXXXXXXXXX % per annum, calculated semi-annually not in advance, repayable in blended monthly payments of $XXXXXXXXXX, including both principal and interest, and is for a term of XXXXXXXXXX years.

39. The VTB mortgage is an open mortgage and the mortgagee has the privilege of paying a larger amount or all of the principal sum at any time without notice or bonus.

40. The sale of property #4 was reported in Opco's XXXXXXXXXX fiscal period, the profit therefrom was reported as a capital gain. Opco has claimed a capital gains reserve in respect of the sale of property #4 pursuant to the provisions of paragraph 40(1)(a) of the Act.

41. Following the sale of property #4, Opco no longer required the services of all of its full-time employees. The employee who had been employed as the full-time custodian/superintendent of property #4 was terminated and E, J and X ceased performing full-time employment duties and began to perform part-time employment duties in connection with properties #1, 2, 3, 5 and 6 immediately after the end of Opco's XXXXXXXXXX taxation year. At that time, Opco ceased to have more than 5 full time employees and became a specified investment business.

PROPOSED TRANSACTIONS

42. Aco and X, Bco and Y, and Cco and Z, respectively, will incorporate Asub, Bsub, and Csub, respectively, under the XXXXXXXXXX. Each corporation will be a taxable Canadian corporation and a private corporation. Asub, Bsub and Csub are referred to collectively as the "Transferee Corporations".

43. The authorized share capital of Asub, Bsub and Csub, respectively, will include:

• an unlimited number of common shares
• an unlimited number of Class A redeemable and retractable non-voting Preferred shares, bearing a non-cumulative dividend rate of XXXXXXXXXX % per annum on the redemption price
• an unlimited number of Class B redeemable and retractable voting Preferred shares, bearing a non-cumulative dividend rate of XXXXXXXXXX % per annum on the redemption price

The Class A and B preferred shares will rank equally and will be entitled to preference over the Common shares on liquidation, dissolution or winding-up.

44. No shares of Asub, Bsub or Csub will be issued on their incorporation.

45. Aco will transfer all of its shares of Opco to Asub. As sole consideration for such transfer, Asub will issue to Aco XXXXXXXXXX Common shares of its capital stock. Asub will add to the stated capital account maintained for its Common shares an amount equal to the paid-up capital of the shares of Opco acquired on such transfer.

46. Aco and Asub will 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 the transfer of the Opco shares to Asub as described in paragraph 45. The agreed amount in respect of the shares so transferred will be equal to the ACB of the Opco shares thereof. The fair market value of the transferred shares will exceed the agreed amount.

47. X will transfer his 1 Class A Preferred share of Opco to Asub. As sole consideration for such transfer, Asub will issue to X 1 Class A Preferred share of its capital stock having a fair market value equal to the fair market value at that time of the share of Opco transferred to Asub. Asub will add to the stated capital account maintained for its Class A Preferred shares an amount equal to the paid-up capital of the share of Opco acquired on such transfer.

48. X and Asub will 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 the transfer of the Opco shares to Asub as described in paragraph 47. The agreed amount in respect of the share so transferred will be equal to X's ACB of the Opco share thereof. The fair market value of the transferred share will exceed the agreed amount.

49. Bco will transfer all of its shares of Opco to Bsub. As sole consideration for such transfer, Bsub will issue to Bco XXXXXXXXXX Common shares of its capital stock. Bsub will add to the stated capital account maintained for its Common shares an amount equal to the paid-up capital of the shares of Opco acquired on such transfer.

50. Bco and Bsub will 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 the transfer of the Opco shares to Bsub as described in paragraph 49. The agreed amount in respect of the shares so transferred will be equal to the ACB of the Opco shares thereof. The fair market value of the transferred shares will exceed the agreed amount.

51. Y will transfer her 1 Class A Preferred share of Opco to Bsub. As sole consideration for such transfer, Bsub will issue to Y 1 Class A Preferred share of its capital stock having a fair market value equal to the fair market value at that time of the share of Opco transferred to Bsub. Bsub will add to the stated capital account maintained for its Class A Preferred shares an amount equal to the paid-up capital of the share of Opco acquired on such transfer.

52. Y and Bsub will 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 the transfer of the Opco shares to Bsub as described in paragraph 51. The agreed amount in respect of the share so transferred will be equal to Y's ACB of the Opco share thereof. The fair market value of the transferred share will exceed the agreed amount.

53. Cco will transfer all of its shares of Opco to Csub. As sole consideration for such transfer, Csub will issue to Cco XXXXXXXXXX Common shares of its capital stock. Csub will add to the stated capital account maintained for its Common shares an amount equal to the paid-up capital of the shares of Opco acquired on such transfer.

54. Cco and Csub will 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 the transfer of the Opco shares to Csub as described in paragraph 53. The agreed amount in respect of the shares so transferred will be equal to the ACB of the Opco shares thereof. The fair market value of the transferred shares will exceed the agreed amount.

55. Z will transfer its 1 Class A Preferred share of Opco to Csub. As sole consideration for such transfer, Csub will issue to Z 1 Class A Preferred share of its capital stock having a fair market value equal to the fair market value at that time of the share of Opco transferred to Csub. Csub will add to the stated capital account maintained for its Class A Preferred shares an amount equal to the paid-up capital of the share of Opco acquired on such transfer.

56. Z and Csub will 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 the transfer of the Opco shares to Csub as described in paragraph 55. The agreed amount in respect of the share so transferred will be equal to Z's ACB of the Opco share thereof. The fair market value of the transferred share will exceed the agreed amount.

57. Immediately before the transactions described in paragraph 58, the property owned by Opco will be classified into the following two categories for purposes of the distribution to be made pursuant to paragraph 55(3)(b):

(i) cash or near cash property, comprising all the current assets of Opco including cash, bank deposits, term deposits, marketable securities (other than portfolio investments) and similar instruments and including the current portion of the VTB mortgage; and

(ii) investment property, comprising all of the assets of Opco, other than cash or

near cash property, any income from which would be income from property or from a specified investment business, including marketable securities and similar instruments held as portfolio investments, and including the VTB mortgage (other than the current portion thereof) and properties #1, 2, 3, 5 and 6.

For greater certainty, any tax accounts of Opco, such as the balance of any losses available for carryforward, if any, will not be considered property of Opco for purposes of the proposed transactions described herein.

58. Opco will transfer all of its property to the Transferee Corporations in such proportions that the fair market value of each type of property (as described in paragraph 57) transferred to each Transferee Corporation will be equal to that proportion of all the property of Opco of that type determined immediately before such transfer that:

(a) the aggregate fair market value immediately before such transfer of all of the shares of Opco owned by the particular Transferee Corporation,

is of

(b) the aggregate fair market value immediately before such transfer of all of the issued and outstanding shares of Opco.

In determining the fair market value of any particular property of Opco, such fair market value will include accrued and unpaid interest, if any, but exclude any provision for income taxes on such interest and unrealized capital gains.

59. Based on the appraised fair market values of the real properties of Opco, the investment properties of Opco will be segregated, immediately before the transfers of property described in 60, 61 and 62, into three packages. The value of each package will be equal to one-third of the net fair market value of the investment property of Opco that will be transferred in the course of the butterfly transaction, and will contain the net fair market value amount of the investment property in proportion to the respective ownership of Aco, Bco, and Cco.

60. The package of investment properties to be transferred to Asub (the "Asub package") will include property #2, and XXXXXXXXXX % of the VTB mortgage.

61. The package of investment properties to be transferred to Bsub (the "Bsub package") will include properties #1 and 3, and XXXXXXXXXX% of the VTB mortgage.

62. The package of investment properties to be transferred to Csub (the "Csub package") will include properties #5 and 6.

63. Opco will transfer the Asub package to Asub, the Bsub package to Bsub, and the Csub package to Csub, respectively, for consideration, respectively, equal to the fair market value of such properties on the date of such transfer, which is agreed to be $XXXXXXXXXX each.

64. In consideration for transfers described in paragraphs 60, 61 and 62, each of the Transferee Corporations will assume a proportion of the liabilities of Opco equal to the proportion of the fair market value of property acquired by that particular Transferee Corporation and each of the Transferee Corporations will issue XXXXXXXXXX Class B Preferred shares of its capital stock to Opco having an aggregate redemption amount and fair market value equal to that of the property of Opco transferred to Asub, Bsub and Csub less any liabilities of Opco assumed by Asub, Bsub and Csub on the transfers.

The terms and conditions of the Class B Preferred shares of each Transferee Corporation will, at the time of their issue to Opco, specify an amount in respect of each share, including an amount for which the share is to be redeemed, acquired or cancelled. The amount to be specified in respect of each Class B Preferred share of each Transferee Corporation will be expressed as a dollar amount, will not be determined by a formula and will be equal to the fair market value of the property received by each Transferee Corporation as consideration for their share.

Immediately following the transfers set out in this paragraph, Opco will be connected to each of Asub, Bsub and Csub on the basis that it will own more than 10% of the issued share capital of each of Asub, Bsub and Csub which have full voting rights under all circumstances and which have a fair market value which exceeds more than 10% of the fair market value of all the issued shares of the capital stock of each of Asub, Bsub and Csub.

65. Opco and each of the Transferee Corporations will elect, jointly and in prescribed form, and within the time limits referred to in subsection 85(6), to have the provisions of subsection 85(1) apply to the transfer of each property of Opco that is an eligible property. The amount agreed upon in such elections in respect of each eligible property so transferred which constitutes capital property will be equal to the lesser of the amounts described in subparagraphs 85(1)(c.1)(i) and (ii) of the Act.

The liabilities assumed by each of the Transferee Corporations may be allocated to specific properties. In no case will the liabilities allocated to a particular property exceed the agreed amount in respect of that property.

For greater certainty, the agreed amount for any eligible property included in the subsection 85(1) elections referred to herein will not exceed the fair market value of each such property or be less than the amount of any liabilities assumed by the particular Transferee Corporation in respect thereof.

66. Each Transferee Corporation will add to the stated capital account maintained for its Class B Preferred shares an amount equal to the aggregate cost (as determined under section 85, where relevant) of the properties acquired by that corporation less any liabilities assumed by the particular Transferee Corporation on the transfers.

67. Asub, Bsub and Csub will each redeem all of the Class B Preferred shares issued to Opco in consideration for the issuance to Opco by each of Asub, Bsub and Csub of a non-interest bearing demand promissory note (the "Asub Note", the "Bsub Note" and the "Csub Note", respectively - collectively, the "Holdco Notes"). Each of the Holdco Notes will have a principal amount and fair market value of $XXXXXXXXXX, which will be equal to the aggregate redemption amount of the Class B Preferred shares so redeemed. Opco will accept the Holdco Notes issued by each of the Transferee Corporations as full payment of the redemption amount of the Class B Preferred shares of such Transferee Corporation.

68. On the day following the redemption of the Class B Preferred shares of Asub, Bsub and Csub as described in paragraph 67, the shareholders of Opco, will, by special resolution, resolve to wind up and dissolve Opco under the applicable provisions of the XXXXXXXXXX. In connection with the winding-up, Opco will distribute to Asub, Bsub and Csub, respectively, the Asub Note, the Bsub Note and the Csub Note. No agreement or resolution relating to the winding-up of Opco or the distribution of its property will provide for the cancellation of any shares of Opco.

69. As a result of the assignment and distribution of the above notes, the obligations under the notes will be cancelled.

70. Following the completion of the transactions described in paragraphs 42 to 69, all properties of Opco will have been distributed and all liabilities either discharged or assumed by each of Asub, Bsub and Csub. Articles of Dissolution will then be filed and Opco will be dissolved.

PURPOSE OF THE PROPOSED TRANSACTIONS

71. The purpose of the proposed transactions is to distribute Opco's property pro rata to Asub, Bsub, and Csub, so that each of Aco, Bco and Cco can own their various separate property interests independently from one another.

ADDITIONAL INFORMATION

72. The Common shares of Opco acquired by Asub, Bsub and Csub (and described in paragraphs 45, 49 and 53 above) will not be acquired in the ordinary course of that corporation's business. Similarly, the Class B Preferred shares (described in paragraphs 43 and 64 above) of the Transferee Corporations will not be acquired by Opco in the ordinary course of Opco's business.

73. None of the issued shares referred to herein (including shares to be issued as part of the proposed transactions) is or will be subject to a guarantee agreement within the meaning referred to in subsection 112(2.2).

74. None of the shares referred to herein (including the shares to be issued as part of the proposed transactions) is or will be part of a dividend rental arrangement within the meaning referred to in subsection 112(2.3).

75. None of the shares referred to herein (including the shares to be issued as part of the proposed transactions) has been or 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).

76. No assets have been or will be acquired or disposed of and no liabilities have been or will be incurred by Opco in contemplation of the proposed transactions except as described herein.

77. The Transferee Corporations will operate as specified investment businesses for the taxation years ending after this reorganization.

78. It is not contemplated that any of the parties will sell or transfer any property to a partnership or person who is not related to the vendor or transferor as part of the series of transactions or events described herein, other than in the ordinary course of business. In particular, it is not contemplated that the VTB mortgage will be sold, transferred or repaid prior to the expiration of its five-year term. Similarly, Opco does not contemplate incurring any liabilities either before or after the transactions described herein.

79. The proposed transactions will have no effect on any outstanding tax liabilities of any of the parties hereto.

80. Although for the taxation year ended XXXXXXXXXX Opco earned investment income, it will have no net income and no RDTOH at the end of the taxation year in which the above reorganization occurs.

RULINGS GIVEN

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. Upon the redemption by the Transferee Corporations of the Class B Preferred shares owned by Opco as described in paragraph 67 above:

(a) by virtue of paragraphs 84(3)(a) and 84(3)(b), each of the Transferee Corporations will be deemed to have paid, and Opco will be deemed to have received, a taxable dividend at that time equal to the amount, if any, by which the amount paid to redeem exceeds the PUC of those shares immediately before the redemption;

(b) to the extent that the dividends described in (a) above are taxable dividends, such dividends will be included in the income of the recipient corporation pursuant to paragraph 12(1)(j) and will be deductible in computing the taxable income of the recipient corporation for the year in which the dividends are deemed to have been received pursuant to subsection 112(1) and such deduction will not be denied by any of the provisions of subsections 112(2.1), (2.2), (2.3) or (2.4); and

(c) the amount of the deemed dividends described in (a) and (b) above will be excluded from the proceeds of disposition of the shares and any loss arising from such disposition of those shares will be reduced by the amount of such dividends pursuant to subsection 112(3).

B. By virtue of paragraph 186(4)(b), each of Asub, Bsub and Csub will be connected with Opco and Opco will be connected with each of Asub, Bsub and Csub immediately before the transactions described in paragraphs 67 to 69. Consequently,

(a) provided that each of Asub, Bsub and Csub is not entitled to a dividend refund in respect of its taxation year in which it is deemed to pay the dividend referred to in Ruling A(a), Opco will not be subject to Part IV tax in respect of such dividend, and

(b) each of Asub, Bsub and Csub shall, pursuant to paragraph 186(1)(b), be subject to tax under Part IV in an amount equal to that proportion of the dividend refund to which Opco will become entitled for its taxation year in which the dividends referred to in Ruling A(a) are deemed to be paid, that the amount of each such dividend received by the particular corporation is of the aggregate of all taxable dividends paid by Opco in its taxation year in which such dividend is paid.

C. Provided that the amount paid on the redemption of the Class B Preferred shares of the Transferee Corporations is equal to the amount specified in respect of such shares as described in paragraph 64 above, the dividends described in Ruling A(a) will not be subject to tax under Part IV.1 or Part VI.1 on the basis that such dividend will be a dividend deemed by paragraph 191(4)(d) to be an "excluded dividend" as defined in subsection 191(1) and an "excepted dividend" as defined in section 187.1.

D. The provisions of subsections 15(1), 56(2), 56(4), 69(4) and 246(1) will not apply as a result of the proposed transactions described in paragraphs 42 to 69, in and by themselves.

E. Provided that as part of the series of transactions or events that includes the proposed transactions, there is not:

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

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

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

(d) an acquisition of property in the circumstances described in paragraph 55(3.1)(d),

which has not been described herein, then by virtue of paragraph 55(3)(b), subsection 55(2) will not apply to the taxable dividends referred to in Ruling A above. For greater certainty, subsection 55(3.1) will not apply to preclude the application of paragraph 55(3)(b) to the transactions proposed;

F. The cancellation of the obligations under the Holdco Notes on the dissolution of Opco will not give rise to a "forgiven amount" within the meaning of subsection 80(1) or section 80.01 of the Act.

G. As a result of the proposed transactions described herein, in and by themselves, subsection 245(2) of the Act will not be applied to redetermine the tax consequences confirmed in the rulings given.

The above rulings are given subject to the limitations and qualifications set out in Information Circular 70-6R3 dated December 30, 1996 and are binding on the Canada Customs and Revenue Agency (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 which, if enacted into law, could have an effect on the rulings provided herein.

CAVEAT

Nothing in this ruling should be construed as implying that the CCRA has agreed to or reviewed:

(a) the determination of the fair market value or ACB of any particular asset or the PUC of any shares referred to herein;

(b) the determination of the balance of the capital dividend account or the refundable dividend tax on hand of any corporation; or

(c) any tax consequences relating to the facts and proposed transactions described herein other than those specifically described in the rulings given above.

Yours truly,

for Director
Resources, Partnerships and Trusts Division
Income Tax Rulings Directorate
Policy and Legislation Branch