2000 Ruling 2000-0022483 - 21 Year Rule

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:

Complete reorganization in order to mitigate tax consequences of the 21 year deemed disposition rule. As minor & unborn children were involved the value of the contingent capital interests were determined & set aside in a separate trust.

Issue 1) - is section 107(2) available on distribution out of original trust?

Issue 2) will variation cause a disposition or resettlement?

Position:

1) 107(2) is available.

2) No resettlement or disposition due to variation.

Reasons:

1) Consistent with prior positions taken - see file 990557.

2) Consistent with previous positions taken - acceleration of interest do not cause resettlement

XXXXXXXXXX
XXXXXXXXXX 		2000-002248
XXXXXXXXXX 

Attention: XXXXXXXXXX

XXXXXXXXXX, 2000

Dear Sirs:

Re: Advance Income Tax Ruling
XXXXXXXXXX

This is in reply to your letter of XXXXXXXXXX, in which you requested an advance income tax ruling in respect of the income tax consequences arising from the proposed transactions described below. We also acknowledge your correspondence of XXXXXXXXXX. We understand that, to the best of your knowledge, and that of the taxpayers on whose behalf this ruling is requested, none of the issues contained in this advance income tax ruling are:

(a) contained in earlier returns of the taxpayers or a related person;

(b) being considered by a tax services office and/or a tax centre in connection with a tax return previously filed by the taxpayers or a related person;

(c) under objection by the taxpayers or related person;

(d) before the courts; or

(e) the subject of a ruling previously issued by the Directorate to the taxpayers or a related person.

DEFINITIONS

1. In this letter, unless otherwise indicated, all statute references are to the Canadian Income Tax Act and Regulations (R.S.C. 1985, 5th supplement, c.1 as amended) ("Act"), and the following terms have the meaning specified:

(a) "Adjusted Cost Base" ("ACB") has the meaning assigned by section 54;

(b) "Adult Grandchild" means XXXXXXXXXX, the adult child of Child C, resident in the province of XXXXXXXXXX;

(c) "Canadian-Controlled Private Corporation" ("CCPC") has the meaning assigned by subsection 125(7);

(d) "Paid-Up Capital" ("PUC") has the meaning assigned by subsection 89(1);

(e) "Mr. X" means XXXXXXXXXX, and resident in the province of XXXXXXXXXX;

(f) "Mrs. X" means XXXXXXXXXX, spouse of Mr. X, and resident in the province of XXXXXXXXXX;

(g) "Child A" means XXXXXXXXXX, and resident in the province of XXXXXXXXXX;

(h) "Child B" means XXXXXXXXXX, and resident in the province of XXXXXXXXXX;

(i) "Child C" means XXXXXXXXXX, and resident in the province of XXXXXXXXXX;

(j) "Children" refers collectively to Child A, Child B and Child C;

(k) "Minor Grandchild" means XXXXXXXXXX, the minor child of Child C, and resident in the province of XXXXXXXXXX;

(l) "Mco" means XXXXXXXXXX, a body corporate, incorporated pursuant to the XXXXXXXXXX , as amended (the "XXXXXXXXXX Act"), and is a CCPC controlled by Mr. X. Through a series of subsidiary companies, Mco carries on XXXXXXXXXX businesses; and

(m) "Mr. S" means XXXXXXXXXX.

Our understanding of the relevant facts, proposed transactions and purposes thereof is as follows:

FACTS

2. Mr. X and Mrs. X have three children, Child A, Child B, and Child C. Each of the Children is over 18 years of age and is in good health.

3. Child C has two children (Adult Grandchild and Minor Grandchild). No other Children currently have children. There are no other descendants of Mr. X and Mrs. X other than the Children, Adult Grandchild and Minor Grandchild.

4. The authorized capital of Mco consists of:

(a) XXXXXXXXXX

(b) XXXXXXXXXX

(c) XXXXXXXXXX

(d) XXXXXXXXXX

5. In XXXXXXXXXX Mr. X carried out an estate freeze of his business interests. As part of the freeze, Mr. X received XXXXXXXXXX Shares of Mco. The XXXXXXXXXX Preferred Shares were subsequently redeemed.

At that time Mr. X also created three trusts, one for each of his Children, by trust deed dated XXXXXXXXXX (the "XXXXXXXXXX Trusts"). The terms of the XXXXXXXXXX Trusts are identical save for the identity of the beneficiaries. As an example, the terms of the XXXXXXXXXX Trust established for Child A are as follows:

(a) settlor - Mr.X;

(b) settled property - $XXXXXXXXXX;

(c) trustees - Mr. X, Mrs. X and Mr. S. Mr. S retired as a trustee in XXXXXXXXXX leaving Mr. and Mrs. X as the co-trustees. Both Mr. X and Mrs. X, as co-trustees of the XXXXXXXXXX Trusts, have exercised equal authority and activity in trust decisions;

(d) time of division - the time of division of the Child A XXXXXXXXXX Trust is the later of:

(i) the death of the survivor of Mr. X and Mrs. X, and

(ii) the date that the primary beneficiary attains the age of XXXXXXXXXX years (each of the Children is XXXXXXXXXX years of age); and

(e) beneficiaries - Child A is an income and capital beneficiary (and is referred to herein as the "primary beneficiary" of the Child A XXXXXXXXXX Trust). If Child A dies prior to the time of division then the assets in the Child A XXXXXXXXXX Trust are held for her children to be distributed to her children alive at the time of division and if Child A were to die prior to the time of division and there were no children of hers alive at her death, then the assets of the Child A XXXXXXXXXX Trust are to be divided among and held in trust for the siblings of Child A then alive and if any siblings had died prior to Child A, but had left children alive then the share of the deceased sibling would be held in trust for the children of the deceased sibling. The share held in trust for the siblings alive on Child A's death or for the children of the deceased sibling is to be distributed at the time of division.

The terms of the XXXXXXXXXX Trusts established for the other Children are the same, except that Child B is the primary beneficiary of her XXXXXXXXXX Trust, and Child C is the primary beneficiary of his XXXXXXXXXX Trust.

6. Each of the XXXXXXXXXX Trusts is a "personal trust" as that term is defined in subsection 248(1).

7. As part of the XXXXXXXXXX estate freeze each XXXXXXXXXX Trust acquired one common share of Mco for $XXXXXXXXXX per share. This share is being held by each XXXXXXXXXX Trust as "capital property" as that term is defined in section 54.

8. The XXXXXXXXXX Trusts have not received any income or realized any capital gains and the assets of each XXXXXXXXXX Trust consist only of the one common share of Mco and $XXXXXXXXXX in cash representing the balance of the settled assets. The XXXXXXXXXX Trusts hold all the issued and outstanding common shares of Mco.

9. Pursuant to subsection 104(4), the XXXXXXXXXX Trusts will be deemed to have disposed of their assets on XXXXXXXXXX.

PROPOSED TRANSACTIONS

10. The trustees and the Children (the primary beneficiaries of the XXXXXXXXXX Trusts) wish to distribute the assets of the XXXXXXXXXX Trusts having accrued gains prior to the XXXXXXXXXX deemed disposition date. In order to do so the terms of the XXXXXXXXXX Trusts need to be varied to ensure that the distribution is made in accordance with the terms of the XXXXXXXXXX Trusts as modified. Due to the existence of a minor contingent beneficiary (Minor Grandchild) and the possibility of unborn contingent beneficiaries, it is necessary to obtain a court order pursuant to the Variation of Trusts Act, XXXXXXXXXX as amended (the "Variation of Trusts Act") to vary the XXXXXXXXXX Trusts to permit the distribution to the Children, Adult Grandchild and Minor Grandchild as discussed below. In order to obtain the order it is necessary to protect the interests of the unborn and minor contingent beneficiaries to the satisfaction of the court. To meet this requirement the value of the contingent interests in the XXXXXXXXXX Trusts will be determined after obtaining a valuation by a qualified actuary and valuator and pursuant to negotiations with the lawyer for the Adult Grandchild, and the unborn and minor contingent beneficiaries and shall be approved by a Judge of the Supreme Court of XXXXXXXXXX (individually the value of the contingent interests in each Child's XXXXXXXXXX Trust will be referred to as "Contingent Value A", "Contingent Value B" and "Contingent Value C" respectively, collectively referred to as the "Total Contingent Value").

In accordance with the Order of the Supreme Court of XXXXXXXXXX, the Total Contingent Value of the unborn, Minor Grandchild and Adult Grandchild contingent beneficiaries (collectively known as the "Contingent Beneficiaries") will be protected through a combination of the creation of three separate trusts which will be established for the benefit of the Contingent Beneficiaries of the XXXXXXXXXX Trusts (one for each of the XXXXXXXXXX Trusts) (herein referred to as the "Contingent Trusts") and by the distribution directly to living Contingent Beneficiaries of certain assets of the Child C XXXXXXXXXX Trust (Child C is the only primary beneficiary with living children). The details of the proposed transactions are as set out below.

11. Each XXXXXXXXXX Trust will incorporate a company pursuant to the XXXXXXXXXX (for the purposes of this ruling the company to be formed by the Child A XXXXXXXXXX Trust will be referred to as "AHoldco", the company formed by the Child B XXXXXXXXXX Trust as "BHoldco" and the company formed by the Child C XXXXXXXXXX Trust as "CHoldco", collectively referred to as the "Holdcos" or individually as "Holdco") and upon incorporation the XXXXXXXXXX Trusts will receive one common share in the capital stock of their Holdco with the par value of $XXXXXXXXXX per share. The capital stock of AHoldco and BHoldco will consist of: common shares with a par value of $XXXXXXXXXX per share and voting preferred shares with a par value of $XXXXXXXXXX per share. The capital stock of CHoldco will consist of common shares with a par value of $XXXXXXXXXX per share, XXXXXXXXXX preferred shares ("XXXXXXXXXX Preferred Shares") with a par value of $XXXXXXXXXX per share and voting preferred shares with a par value of $XXXXXXXXXX per share.

12. The capital of Mco shall be amended by the creation of a substantial number of non-voting, non-cumulative preferred shares with a par value of $XXXXXXXXXX per share, redeemable and retractable at the par value (the "XXXXXXXXXX Preferred Shares") and a substantial number of non-voting, non-cumulative preferred shares with a par value of $XXXXXXXXXX per share, redeemable and retractable at a premium over the par value (the "XXXXXXXXXX Preferred Shares").

13. Mco will pay a stock dividend of XXXXXXXXXX Preferred Shares on the common shares of Mco held by the XXXXXXXXXX Trusts in an amount not exceeding the capital dividend account available for payment. Mco shall make the filings in the form prescribed and in the time required pursuant to subsection 83(2) so that the whole of the dividend created by the stock dividend (as calculated in accordance with section 89 and the definition of "amount" in subsection 248(1)) shall be payable as a capital dividend to the XXXXXXXXXX Trusts.

This stock dividend will be in aggregate equal to XXXXXXXXXX Contingent Value B plus the estimated amount of taxes payable by the Child B XXXXXXXXXX Trust in respect of the stock dividend and any other taxes and expenses incurred by the Child B XXXXXXXXXX Trust as a result of the proposed transactions. Mco will then pay a further stock dividend on its common shares of XXXXXXXXXX Preferred Shares with a premium on redemption calculated so that the aggregate value of the XXXXXXXXXX Preferred Shares and the XXXXXXXXXX Preferred Shares so issued will be equal to $XXXXXXXXXX the estimated amount of tax payable by the Child C XXXXXXXXXX Trust in respect of the stock dividend and any other taxes and expenses incurred by the Child C XXXXXXXXXX Trust as a result of the proposed transactions. These stock dividends will not alter the value of the interest of any specified shareholder of Mco. Each XXXXXXXXXX Trust will receive the same number of XXXXXXXXXX Preferred Shares and the same number of XXXXXXXXXX Preferred Shares as stock dividends.

14. The Child C XXXXXXXXXX Trust will then redeem the XXXXXXXXXX Preferred Shares issued to it and the Child A XXXXXXXXXX Trust will then redeem a portion of the XXXXXXXXXX Preferred Shares issued to it. In consideration therefor, the Child A XXXXXXXXXX Trust and the Child C XXXXXXXXXX Trust will receive a demand, non-interest bearing promissory note of Mco with a principal amount and fair market value equal to the redemption value of the XXXXXXXXXX Preferred Shares being redeemed. The promissory notes will be convertible into XXXXXXXXXX Preferred Shares of Mco. The Child A XXXXXXXXXX Trust and the Child C XXXXXXXXXX Trust will then immediately exercise the conversion right and Mco will issue to the Child A XXXXXXXXXX Trust and the Child C XXXXXXXXXX Trust that number of XXXXXXXXXX Preferred Shares having a fair market value, redemption value and par value equal to the amount of the respective promissory notes. The Child A XXXXXXXXXX Trust will have redeemed that portion of the XXXXXXXXXX Preferred Shares held by it in Mco as is necessary so that it will, following the conversion of the promissory note to XXXXXXXXXX Preferred Shares, hold in aggregate XXXXXXXXXX Preferred Shares having a value equal to Contingent Value A plus the estimated amount of taxes and expenses to be incurred by the Child A XXXXXXXXXX Trust in respect of the proposed transactions. The Child C XXXXXXXXXX Trust will have redeemed all of the XXXXXXXXXX Preferred Shares held by it in Mco so that it will, following the conversion of the promissory note to XXXXXXXXXX Preferred Shares, hold in aggregate XXXXXXXXXX Preferred Shares having a value equal to Contingent Value C plus the estimated amount of taxes and expenses to be incurred by the Child C XXXXXXXXXX Trust in respect of the proposed transactions.

15. Pursuant to an Order of the Supreme Court of XXXXXXXXXX under the Variation of Trusts Act, each XXXXXXXXXX Trust will settle a Contingent Trust with XXXXXXXXXX Preferred Shares as described in paragraph 16 below. Each Contingent Trust will be resident in Canada and will have the following terms:

(a) trustees - Mr. X and the primary beneficiary of the particular XXXXXXXXXX Trust;

(b) beneficiaries - the beneficiaries of the Contingent Trust will be the Contingent Beneficiaries of the XXXXXXXXXX Trust. As an example, the beneficiaries of the Contingent Trust settled by the Child A XXXXXXXXXX Trust will consist of the children of Child A and if there are no such children alive at the time of division, then the beneficiaries will be the other children of Mr. and Mrs. X (Child A's siblings) and the children of any other child of Mr. and Mrs. X (Child A's siblings) who has died (i.e. identical to the provisions of the Child A XXXXXXXXXX Trust);

(c) time of division - the earlier of:

(i) the death of the survivor of Mr. X and Mrs. X, and

(ii) the date determined by the trustees provided that such date may not be earlier than 90 days prior to the 21st anniversary of the creation of the Contingent Trust; and

(d) the Contingent Trust will contain a provision designed to meet the requirements of subsection 74.4(4) to avoid the application of subsection 74.4(2) to the XXXXXXXXXX Trust.

16. The trustees of the XXXXXXXXXX Trusts will transfer to the Contingent Trusts that number of XXXXXXXXXX Preferred Shares of Mco as is required pursuant of the Order of the Supreme Court of XXXXXXXXXX to protect the interests of the Contingent Beneficiaries.

17. Each XXXXXXXXXX Trust will transfer to its respective Holdco all assets held by that XXXXXXXXXX Trust including the common share of Mco and any XXXXXXXXXX Preferred Shares of Mco that they hold (the "Transferred Assets") provided that each XXXXXXXXXX Trust will retain that number of XXXXXXXXXX Preferred Shares as is estimated to be needed to pay the taxes or costs incurred by the XXXXXXXXXX Trust as part of these transactions.

The Child A and Child B XXXXXXXXXX Trusts will receive as consideration for the Transferred Assets, XXXXXXXXXX common shares of its respective Holdco with a par value of $XXXXXXXXXX per share and a total fair market value equal to the fair market value of the Transferred Assets. The Child C XXXXXXXXXX Trust will receive as consideration for the Transferred Assets, XXXXXXXXXX common shares with a par value of $XXXXXXXXXX per share XXXXXXXXXX Preferred Shares with a par value of $XXXXXXXXXX per share, and a total fair market value equal to the fair market value of the Transferred Assets. Each XXXXXXXXXX Trust and its respective Holdco will jointly elect in accordance with the provisions of subsection 85(1) and within the time frame referred to in subsection 85(6), such that the assets being transferred will be transferred to their respective Holdco at an agreed amount equal to the ACB of such assets to each XXXXXXXXXX Trust, which amount will be less than or equal to the fair market value of the Transferred Assets. The aggregate addition to the PUC of the share capital of each Holdco will not exceed the ACB of the Transferred Assets and shall not exceed the PUC of any shares of Mco transferred to each Holdco. The ACB of the Transferred Assets to each XXXXXXXXXX Trust is the same as the ACB as determined for the purposes of section 84.1. Together with the common share issued upon incorporation, the Child A and Child B XXXXXXXXXX Trusts will hold XXXXXXXXXX common shares of their respective Holdco and the Child C XXXXXXXXXX Trust will hold XXXXXXXXXX common shares and XXXXXXXXXX Preferred Shares of CHoldco. In each case, each XXXXXXXXXX Trust will at this point own all issued and outstanding shares of their respective Holdco.

18. Pursuant to an Order of the Supreme Court of XXXXXXXXXX, the Child A XXXXXXXXXX Trust and the Child B XXXXXXXXXX Trust will then distribute to Child A and Child B in satisfaction of their respective capital interests, the assets of these XXXXXXXXXX Trusts less any XXXXXXXXXX Preferred Shares or other assets that are estimated to be required to be held by these XXXXXXXXXX Trusts for the purposes of paying the tax liability and other costs associated with the proposed transactions. Pursuant to the Order of the Supreme Court of XXXXXXXXXX, the Child C XXXXXXXXXX Trust will then distribute to Child C in satisfaction of his capital interest, and his two children (Adult Grandchild and Minor Grandchild) in partial satisfaction of their respective capital interests, the assets of the Child C XXXXXXXXXX Trust less any XXXXXXXXXX Preferred Shares or other assets that are estimated to be required to be held by the Child C XXXXXXXXXX Trust for the purposes of paying the taxes or other costs related to the proposed transactions. The allocation of the assets of the Child C XXXXXXXXXX Trust among Child C, Adult Grandchild and Minor Grandchild will be determined after obtaining a valuation by a qualified actuary and valuator and pursuant to negotiations with the lawyer for the Contingent Beneficiaries and shall be approved by the Order of the Supreme Court of XXXXXXXXXX.

The aggregate value of the shares or other assets distributed to Adult Grandchild and Minor Grandchild, and the XXXXXXXXXX Preferred Shares held in the Contingent Trust established by the Child C XXXXXXXXXX Trust shall be equal to Contingent Value C.

19. The shares distributed to Minor Grandchild will be distributed to Child C as the legal guardian of his child's property. Child C will be holding these shares as legal guardian of the property while Minor Grandchild is a minor. Separate share certificates will be issued to Adult Grandchild as he is of age. The shares held for Minor Grandchild will be vested indefeasibly in him.

20. Mr. X will subscribe for and each of the Holdcos will issue to him XXXXXXXXXX voting preferred shares with a par value and redemption value of $XXXXXXXXXX per share. The subscription price in each case will be the aggregate par value of the XXXXXXXXXX voting preferred shares, ie $XXXXXXXXXX.

21. The XXXXXXXXXX Trusts will be wound up following the filing of the appropriate income tax returns and elections with the Canada Customs and Revenue Agency ("CCRA").

PURPOSE OF THE PROPOSED TRANSACTIONS

22. The application of the 21-year deemed disposition rule in subsection 104(4) to the XXXXXXXXXX Trusts would cause a significant disruption in the ongoing operations of the family owned and controlled operating companies. Raising the necessary funds to pay the income tax as a result of the application of the rule, would dramatically interfere with financing arrangements of, and generally have a destructive impact on, the group of companies. Therefore, a decision has been made to distribute the assets prior to the 21st anniversary of the creation of the XXXXXXXXXX Trusts. In order to make the necessary distributions, the XXXXXXXXXX Trusts must be amended pursuant to the Variation of Trust Act upon application to the Supreme Court of XXXXXXXXXX. The court will require that the interest of the minor and unborn and unascertained beneficiaries be protected. The interests of these contingent beneficiaries are represented by a lawyer appointed for this purpose. The Contingent Trusts and the preferred share structure ensure that the interests of the Contingent Beneficiaries of the Child A XXXXXXXXXX Trust and the Child B XXXXXXXXXX Trust have been protected by placing in the Contingent Trusts for their benefit, shares of Mco having a value equal to the Contingent Value A and Contingent Value B respectively.

Child C's situation is different because he is the only Child having living children. Therefore, the value of the contingent interests in the Child C XXXXXXXXXX Trust is greater than those in the other XXXXXXXXXX Trusts. To account for this, the proposal is to transfer to the Contingent Trust established by the Child C XXXXXXXXXX Trust, XXXXXXXXXX Preferred Shares of Mco having a fair market value equal to $XXXXXXXXXX. The excess of Contingent Value C over $XXXXXXXXXX (the "Excess Value") will be accounted for by issuing to the living children of Child C (Adult Grandchild and Minor Grandchild) XXXXXXXXXX Preferred Shares of CHoldco with a redemption and retraction price equal to the Excess Value. These XXXXXXXXXX Preferred Shares will have preference on liquidation and on dividends over any other class of share of CHoldco and impose sufficient restrictions on CHoldco so as not to impair their redemption price. On retraction, CHoldco has the option to either pay the redemption price equal to the Excess Value in cash or settle a redemption by issuing that number of fully participating, non-voting, redeemable common shares that, were they issued presently, would have a value equal to the Excess Value. The terms of these XXXXXXXXXX Preferred Shares allows CHoldco the option of either putting the shareholders in the same equity position they would have been in had the grandchildren received common shares upon the distribution or, alternatively, paying out the Excess Value in cash.

As the grandchildren are young, it was thought to be in the best interests of all concerned to defer the decision of whether they should share in any growth of CHoldco until some time in the future. The features of the XXXXXXXXXX Preferred Shares allow this decision to be postponed while protecting their entitlement to the Excess Value. If there had been other living children of any of the primary beneficiaries, a similar distribution would have been made to them in partial settlement of their capital interest in the XXXXXXXXXX Trust. However, there are no other living grandchildren.

23. The reason for the series of stock dividends is to maximize the use of the capital dividend account and the refundable dividend tax on hand as part of this transaction and to equalize the value of the interest held by each of the three family groups (Child A, Child B and Child C). As part of this transaction, each of the three family groups will receive the same value of the preferred shares of Mco (but in different combinations of XXXXXXXXXX Preferred Shares and XXXXXXXXXX Preferred Shares). This merely ensures that there is no shift in the value of Mco between the three family groups.

24. The purpose of the transfers to the Holdcos is merely to provide for a method of treating the primary beneficiaries equally after the reorganization on distributions from Mco. It may become advisable because of the particular needs of a primary beneficiary to pay the primary beneficiary a dividend out of Mco through the Holdco. The Holdco structure allows the dividend to flow to the holding company on a tax efficient basis (subject to Part IV tax). A dividend could then be paid out of the Holdco depending on the personal needs of the shareholders. This allows the Children to be treated equally without imposing an immediate tax burden on those Children who would not otherwise wish to use the funds for personal purposes.

25. With respect to the issuing of the convertible promissory notes in paragraph 14 above, the reason that convertible promissory notes are being used on the redemption of the XXXXXXXXXX Preferred Shares rather than simply issuing XXXXXXXXXX Preferred Shares, is to avoid an inappropriate result under subsections 84(5) and 86(2.1). Subsection 84(5) provides special rules when a portion of a deemed dividend under subsection 84(3) is paid in a corporation's own shares. Subsection 84(3) provides a deemed dividend for the "amount" paid exceeding PUC. According to subsection 84(5), the "amount" paid through the issue of the XXXXXXXXXX Preferred Shares for this purpose would be equal to the increase in PUC of the XXXXXXXXXX Preferred Shares by virtue of their issue on the redemption of the XXXXXXXXXX Preferred Shares. Subsections 86(2.1) and 51(3) however provide a formula to calculate a reduction in the PUC of the XXXXXXXXXX Preferred Shares at or after an exchange where section 86 or section 51 applies. The effect of subsections 86(2.1) and 51(3) is to permit the deficiency in the PUC of the old shares (the XXXXXXXXXX Preferred Shares) to flow through to the new shares (the XXXXXXXXXX Preferred Shares). Applying this formula to the facts above, there would not be an increase in the PUC of the XXXXXXXXXX Preferred Shares if they were issued on the redemption of the XXXXXXXXXX Preferred Shares. In other words, there would be a grind of the PUC of the XXXXXXXXXX Preferred Shares if issued on the redemption. Therefore, the convertible promissory notes will be issued on the redemption of the XXXXXXXXXX Preferred Shares to ensure that the appropriate deemed dividend will be incurred and that on the subsequent conversion of the promissory notes, XXXXXXXXXX Preferred Shares can be issued with the appropriate PUC.

RULINGS GIVEN

Provided that the preceding statements are accurate and constitute complete disclosure of all relevant facts, proposed transactions and purpose thereof and the proposed transactions are carried out as herein described, our advance income tax rulings are as follows:

A. Subsection 107(2) will apply to the distribution of the assets of the XXXXXXXXXX Trusts to the Children, Adult Grandchild and Minor Grandchild pursuant to paragraph 18 above.

B. The variations of the XXXXXXXXXX Trusts, if so approved by the Supreme Court of XXXXXXXXXX, will not, in and by themselves, result in a disposition for income tax purposes of any property of the XXXXXXXXXX Trusts or any beneficiary's interest in the XXXXXXXXXX Trusts for the purposes of sections 106 or 107.

C. Provided that joint elections are filed in prescribed form, and within the time set forth in subsection 85(6), the provisions of subsection 85(1) will apply to the transfers described in paragraph 17 above, such that the agreed amounts in respect of each transfer shall be deemed to be the transferor's proceeds of disposition and the transferee's costs thereof pursuant to paragraph 85(1)(a) and, for greater certainty, paragraph 85(1)(e.2) will not apply to the transfers referred to herein.

D. The provisions of subsections 15(1), 56(2), 105(1) and 246(1) will not be applied as a result of the proposed transactions, in and by themselves.

E. Subsection 75(2) will not apply to attribute income, losses, taxable capital gains or allowable capital losses of the Contingent Trusts to Mr. X, Mrs. X or the particular primary beneficiary of the XXXXXXXXXX Trusts as a result of the proposed transactions, in and by themselves.

F. As a result of the redemptions of the XXXXXXXXXX Preferred Shares by the Child A XXXXXXXXXX Trust and the Child C XXXXXXXXXX Trust as described in paragraph 14 above, by virtue of paragraphs 84(3)(a) and 84(3)(b):

(i) Mco will be deemed to have paid, and the Child A XXXXXXXXXX Trust will have been deemed to have received, taxable dividends equal to the amount by which the amount paid in respect to the redemption of the XXXXXXXXXX Preferred Shares exceeds the PUC thereof; and

(ii) Mco will be deemed to have paid, and the Child C XXXXXXXXXX Trust will have been deemed to have received, taxable dividends equal to the amount by which the amount paid in respect to the redemption of the XXXXXXXXXX Preferred Shares exceeds the PUC thereof.

G. Provided that the fair market value of the XXXXXXXXXX Preferred Shares issued in settlement of the promissory notes is equal to the face value of the promissory notes, section 80 will not apply on the conversion described in paragraph 14 above.

H. For greater certainty, subsection 104(4) will not apply to cause there to be a deemed disposition of the XXXXXXXXXX Preferred Shares of CHoldco held by Child C for Minor Grandchild by virtue of paragraph (g) of the definition of "trust" in subsection 108(1) with respect to any trust so found.

I. The proposed transactions will not, in and by themselves, cause the Contingent Trusts to fail to meet the definition of a "personal trust" as defined in subsection 248(1).

J. The proposed transactions will not, in and by themselves, cause the XXXXXXXXXX Trusts to cease to meet the definition of a "personal trust" as defined in subsection 248(1).

K. Subsection 15(1.1) will not apply to the stock dividends paid pursuant to paragraph 13 above.

L. Subsection 83(2) will apply to the payment of the capital dividend to the extent of the capital dividend account of Mco immediately before the dividend becomes payable pursuant to paragraph 13 above and, for greater certainty, subsection 83(2.1) will not be applied to re-characterize the payment of the dividend made pursuant to subsection 83(2) as a taxable dividend.

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

The above rulings, are given subject to the general limitations and qualifications set out in Information Circular 70-6R3, Advance Income Tax Rulings, and are binding on the CCRA provided the proposed transactions are completed within six months of the date of this letter. These rulings are based on the Act in its present form and do not take into account the effects of any proposed amendments thereto.

OPINIONS GIVEN

N. If the provisions of draft subsections 107(2) and 107(2.001) and the draft definitions of "trust" in subsection 108(1) and "disposition" in subsection 248(1) are enacted as proposed in the Notice of Ways and Means Motion dated June 5, 2000, it is our opinion that:

(i) subject to draft subsection 107(2.001), draft subsection 107(2) will apply to the distribution of the assets of the XXXXXXXXXX Trusts to the Children, Adult Grandchild and Minor Grandchild pursuant to paragraph 18 above; and

(ii) subject to draft subparagraph (g)(iii) of the definition of 'trust' in subsection 108(1), subsection 104(4) will not apply to cause there to be a deemed disposition of the XXXXXXXXXX Preferred Shares of CHoldco held by Child C for Minor Grandchild by virtue of paragraph (g) of the definition of "trust" in subsection 108(1) with respect to any trust so found.

The opinions expressed above are provided in accordance with paragraph 22 of Information Circular 70-6R2. Such opinions do not constitute advance income tax rulings and are not binding on the CCRA.

COMMENTS

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

(a) the determination of the FMV or ACB of any property referred to herein or the PUC of any shares referred to herein; or

(b) any tax consequences arising from the facts or proposed transactions described above other than those specifically confirmed in the rulings given. In particular, we are not commenting on any tax consequences that may arise on the possible conversion of XXXXXXXXXX Preferred Shares to non-voting common shares of CHoldco as described in paragraph 22 above.

Yours truly,

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

Schedule of Taxpayers and Account Numbers

Taxpayer Name 		SIN or Business Number	Taxation Services
				Office

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