2000 Ruling 2000-0024123 - estate freeze

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: Estate Freeze

Position: Accepted, no attribution,

Reasons: Individuals involved all adults - father and children

XXXXXXXXXX
XXXXXXXXXX 2000-002412
XXXXXXXXXX

Attention: XXXXXXXXXX

XXXXXXXXXX, 2000

Dear Sirs:

Re: XXXXXXXXXX ("Holdco")
XXXXXXXXXX ("Opco")
Advance Income Tax Ruling

We are writing in response to your letter of XXXXXXXXXX in which you requested advance income tax rulings on behalf of the above-noted taxpayers. We acknowledge our telephone conversations in connection herewith.

We understand that to the best of your knowledge and that of Holdco and Opco, none of the issues contained herein:

(a) is in an earlier return of Holdco or Opco or a related person;

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

(c) is under objection by Holdco or Opco or a related person;

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

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

DEFINITIONS

In this letter unless otherwise expressly stated:

(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) "ACB" means "adjusted cost base" and 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" has the meaning assigned by subsection 125(7);

(e) "CBCA" means the Canada Business Corporations Act;

(f) "capital dividend account" has the meaning assigned by subsection 89(1);

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

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

(i) "guarantee agreement" has the meaning assigned by subsection 112(2.2);

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

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

(l) XXXXXXXXXX;

(m) "qualified small business corporation share" has the meaning assigned by subsection 110.6(1);

(n) "restricted financial institution" has the meaning assigned by subsection 248(1);

(o) "series of transaction or events" has the extended meaning assigned by subsection 248(10);

(p) "small business corporation" has the meaning assigned by subsection 248(1);

(q) "specified financial institution" has the meaning assigned by subsection 248(1);

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

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

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

FACTS

1. Opco is a corporation incorporated under the CBCA on XXXXXXXXXX and is a Canadian-controlled private corporation and a taxable Canadian corporation. Opco has a number of wholly-owned subsidiaries (the "Subsidiaries"), the primary activity of which is XXXXXXXXXX.

2. The issued and outstanding share capital of Opco consists of XXXXXXXXXX common shares held by XXXXXXXXXX and XXXXXXXXXX preferred shares and XXXXXXXXXX preferred shares held by Holdco. The paid-up capital of the issued shares of Opco is as follows:

Class of Shares Paid-up capital

XXXXXXXXXX common shares $ XXXXXXXXXX

XXXXXXXXXX preferred shares XXXXXXXXXX

XXXXXXXXXX preferred shares XXXXXXXXXX

The rights of the Opco shares are as follows:

(a) the common shares are voting and participating;

(b) the XXXXXXXXXX preferred shares are redeemable and retractable for an amount of $XXXXXXXXXX per share, have a XXXXXXXXXX% non-cumulative dividend entitlement and entitle their holders to XXXXXXXXXX% of the votes cast at a shareholders' meeting; and

(c) the XXXXXXXXXX preferred shares are redeemable and retractable for the amount for which they were issued, have a XXXXXXXXXX% non-cumulative dividend entitlement and entitle their holders to XXXXXXXXXX% of the votes cast at a shareholders' meeting.

3. Holdco is a Canadian-controlled private corporation and a taxable Canadian corporation. Holdco was formed on XXXXXXXXXX as a result of the amalgamation of XXXXXXXXXX under the CBCA. Holdco's assets consists of marketable securities, term deposits, the XXXXXXXXXX preferred shares and XXXXXXXXXX preferred shares of Opco and the common shares of XXXXXXXXXX ("Realtyco").

The issued and outstanding share capital of Holdco consists of XXXXXXXXXX preferred shares and XXXXXXXXXX preferred shares held by XXXXXXXXXX common shares held by XXXXXXXXXX common shares held by XXXXXXXXXX common shares held by XXXXXXXXXX and 1 common share held by XXXXXXXXXX. The paid-up capital of the issued shares of Holdco are as follows:

Class of Shares Paid-up capital

XXXXXXXXXX common shares $ XXXXXXXXXX

XXXXXXXXXX preferred shares XXXXXXXXXX

XXXXXXXXXX preferred shares XXXXXXXXXX

The rights of the Holdco shares are as follows:

(a) the common shares are voting and participating;

(b) the XXXXXXXXXX preferred shares are redeemable and retractable for an amount of $XXXXXXXXXX per share, have a XXXXXXXXXX% non-cumulative dividend entitlement and are non-voting; and

(c) the XXXXXXXXXX preferred shares are redeemable and retractable for an amount of $XXXXXXXXXX per share, have a XXXXXXXXXX% non-cumulative dividend entitlement and entitle their holder to a minimum of XXXXXXXXXX% and a maximum of XXXXXXXXXX% of the votes cast at a shareholders' meeting.

4. Realtyco is a corporation incorporated under the XXXXXXXXXX and is a Canadian-controlled private corporation and a taxable Canadian corporation. Realtyco has various real estate holdings which are rented to and used by the Subsidiaries in their business (the "Operating Properties") and other properties which are held for other purposes (the "Other Properties").

5. The issued and outstanding share capital of Realtyco consists of XXXXXXXXXX common shares which are all held by Holdco.

6. In XXXXXXXXXX froze his interest in Holdco and received XXXXXXXXXX preferred shares and XXXXXXXXXX preferred shares in exchange for his common shares in Holdco. In turn, Holdco froze its interest in Opco and received XXXXXXXXXX preferred shares in exchange for its common shares in Opco.

As part of the reorganization resulting from the freezes:

(a) Holdco transferred its operating subsidiaries to Opco;

(b) Holdco subscribed for XXXXXXXXXX preferred shares in Opco for $XXXXXXXXXX;

(c) each of XXXXXXXXXX subscribed for XXXXXXXXXX common shares in Holdco for nominal consideration;

(d) XXXXXXXXXX subscribed for 1 common share in Holdco for nominal consideration; and

(f) XXXXXXXXXX subscribed for XXXXXXXXXX common shares in Opco for nominal consideration.

7. In the period XXXXXXXXXX, Opco paid no dividends to Holdco. Holdco received dividends totaling $XXXXXXXXXX on its XXXXXXXXXX preferred shares of Opco between the years XXXXXXXXXX. In addition, Holdco received amounts totaling $XXXXXXXXXX between XXXXXXXXXX on the redemption of XXXXXXXXXX of its Opco XXXXXXXXXX preferred shares.

8. Holdco paid dividends on its shares held by XXXXXXXXXX in the amount of $XXXXXXXXXX in XXXXXXXXXX and in the amount of $XXXXXXXXXX in XXXXXXXXXX.

9. In the period from XXXXXXXXXX, Opco made advances to Holdco totaling approximately $XXXXXXXXXX (the "Upstream Advances").

10. XXXXXXXXXX are husband and wife and XXXXXXXXXX are their adult children. XXXXXXXXXX are all residents of Canada for purposes of the Act and they hold their shares in Holdco and Opco as capital property.

ADDITIONAL INFORMATION

11. Holdco is the owner and beneficiary of a $XXXXXXXXXX insurance policy on the life of XXXXXXXXXX. The policy was obtained prior to XXXXXXXXXX for the purpose of funding the acquisition of shares, upon the death of XXXXXXXXXX, from his estate.

12. Holdco and Opco are neither restricted financial institutions nor specified financial institutions.

13. There are not, and will not be at any time prior to the completion of the Proposed Transactions, any guarantee agreement in respect of any of the shares described herein.

14. Neither Holdco nor Opco has entered, or will enter, into a dividend rental arrangement in respect of any of the shares to be redeemed as part of the Proposed Transactions.

15. None of the shares described herein will be issued or acquired as part of a series of transactions described in subsection 112(2.5).

PROPOSED TRANSACTIONS

16. XXXXXXXXXX will incorporate a new corporation under the CBCA ("XXXXXXXXXX"). XXXXXXXXXX will be a Canadian-controlled private corporation and a taxable Canadian corporation.

The authorized share capital of XXXXXXXXXX will consist of the following shares:

(a) XXXXXXXXXX shares which are voting and participating;

(b) XXXXXXXXXX shares which are voting and non-participating;

(c) XXXXXXXXXX shares which are voting, entitled to a XXXXXXXXXX% non-cumulative annual dividend and are redeemable for an amount equal to the fair market value of the property for which the shares are issued;

(e) XXXXXXXXXX shares which are non-voting, entitled to a XXXXXXXXXX% non-cumulative annual dividend and are redeemable and retractable for an amount equal to the fair market value of the property for which the shares are issued;

(f) XXXXXXXXXX shares which are voting, entitled to a XXXXXXXXXX% non-cumulative annual dividend and are redeemable and retractable for an amount equal to the fair market value of the property for which the shares are issued; and

(g) XXXXXXXXXX shares which are non-voting, entitled to a XXXXXXXXXX% non-cumulative annual dividend and are redeemable for an amount equal to the fair market value of the property for which the shares are issued.

On incorporation of XXXXXXXXXX will subscribe for XXXXXXXXXX shares for $XXXXXXXXXX.

17. XXXXXXXXXX will transfer to XXXXXXXXXX his XXXXXXXXXX preferred shares and XXXXXXXXXX preferred shares of Holdco. As sole consideration for the transfer of the XXXXXXXXXX preferred shares and XXXXXXXXXX preferred shares of Holdco, XXXXXXXXXX will issue to XXXXXXXXXX shares with a fair market value equal to the fair market value of the transferred shares.

XXXXXXXXXX will add to the stated capital account maintained for its XXXXXXXXXX shares an amount equal to the aggregate of the paid-up capital of the XXXXXXXXXX preferred shares and the XXXXXXXXXX preferred shares of Holdco transferred.

18. In connection with the transfer, XXXXXXXXXX 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. The agreed amount in respect of the shares transferred will be equal to the adjusted cost base of such shares to XXXXXXXXXX at the time of the transfer.

19. Each of XXXXXXXXXX will incorporate a new corporation under the CBCA (XXXXXXXXXX, respectively). Each of XXXXXXXXXX will be a Canadian-controlled private corporation and a taxable Canadian corporation.

The authorized share capital of each of XXXXXXXXXX will consist of the following shares:

(a) XXXXXXXXXX shares which are voting and participating;

(b) XXXXXXXXXX shares which are voting and non-participating and redeemable for the fair market value for which they are issued;

(c) XXXXXXXXXX shares which are voting, entitled to a XXXXXXXXXX% non-cumulative annual dividend and are redeemable for an amount equal to the fair market value of the property for which the shares are issued;

(d) XXXXXXXXXX shares which are non-voting, entitled to a XXXXXXXXXX% non-cumulative annual dividend and are redeemable and retractable for an amount equal to the fair market value of the property for which the shares are issued;

(e) XXXXXXXXXX preferred shares which are voting, entitled to a XXXXXXXXXX% non-cumulative annual dividend and are redeemable and retractable for an amount equal to the fair market value of the property for which the shares are issued; and

(f) XXXXXXXXXX preferred shares which are non-voting, entitled to a XXXXXXXXXX% non-cumulative dividend and are redeemable and retractable for an amount equal to the fair market value of the property for which the shares are issued.

20. Each of XXXXXXXXXX will transfer to their respective holding companies, XXXXXXXXXX, their XXXXXXXXXX common shares of Holdco. As sole consideration for the transfer from each of XXXXXXXXXX of their common shares of Holdco to XXXXXXXXXX, as the case may be, each of XXXXXXXXXX will issue to the respective transferor XXXXXXXXXX shares that have an aggregate fair market value equal to the fair market value of the shares transferred by the respective transferor to XXXXXXXXXX, as the case may be.

Each of XXXXXXXXXX will add to the stated capital account maintained for its XXXXXXXXXX shares an amount equal to the paid-up capital of the Holdco common shares transferred.

21. XXXXXXXXXX will transfer to XXXXXXXXXX, his XXXXXXXXXX common shares of Opco. As sole consideration for the transfer from XXXXXXXXXX of his XXXXXXXXXX common shares of Opco, XXXXXXXXXX will issue to XXXXXXXXXX shares that have an aggregate fair market value equal to the fair market value of the shares transferred.

XXXXXXXXXX will add to the stated capital account maintained for its XXXXXXXXXX shares an amount equal to the paid-up capital of the Opco common shares transferred.

22. In connection with each transfer of shares described in paragraphs 20 and 21 above, the transferor and transferee will jointly elect in prescribed form within the time limit referred to subsection 85(6), to have the provisions of subsection 85(1) apply to the transfer. The agreed amount in respect of the shares so transferred will, in each case, neither be in excess of the fair market value nor less than the adjusted cost base of such shares to the transferor at the time of their disposition (the adjusted cost base of a particular share will not be less than the fair market value at that time). The agreed amounts will also be determined in light of the amount of any deduction available to the particular transferor pursuant to subsection 110.6(2.1) in respect to this transfer.

23. XXXXXXXXXX will subscribe for XXXXXXXXXX shares in each of XXXXXXXXXX for $XXXXXXXXXX in each case.

24. Pursuant to filing of articles of amendment under the CBCA, Holdco will reorganize its capital. The share capital of Holdco will be reorganized by the creation of new classes of shares and the exchange of the existing shares for these new shares.

The new shares of Holdco will consist of:

(a) XXXXXXXXXX shares that will be voting, participating in respect of any dividends declared and redeemable for an amount equal the fair market value of the property for which they are issued;

(b) XXXXXXXXXX shares that will be voting and participating;

(c) XXXXXXXXXX shares that will be voting, participating but not with respect to capital dividends, and convertible to XXXXXXXXXX shares;

(d) XXXXXXXXXX shares that will be voting, participating, retractable for the fair market value of the property for which they are issued and convertible to XXXXXXXXXX shares;

(e) XXXXXXXXXX preferred shares that will be voting, entitled to non-cumulative dividends at the discretion of the directors, redeemable and retractable for an amount equal to the fair market value of the property for which the shares are issued (the "New Holdco XXXXXXXXXX preferred shares");

(f) XXXXXXXXXX preferred shares that will be non-voting, entitled to non-cumulative dividends at the discretion of the directors, redeemable and retractable for an amount equal to the fair market of the property for which the shares are issued (the "New Holdco XXXXXXXXXX preferred shares"); and

(g) XXXXXXXXXX preferred shares that will be voting, entitled to non-cumulative dividends at a dividend rate equal to the prescribed rate in effect from time to time and redeemable and retractable for an amount equal to the fair market of the property for which the shares are issued (the "New Holdco XXXXXXXXXX preferred shares").

The terms and conditions of the shares will not permit any dividends to be paid on any class of shares of Holdco, other than the New Holdco XXXXXXXXXX preferred shares, that may result in the reduction to the fair market value of the New Holdco XXXXXXXXXX preferred shares. In addition, the terms and conditions of the XXXXXXXXXX shares will provide that dividends may be declared thereon without the necessity of declaring dividends on the other classes of the issued and outstanding shares of Holdco and will provide that dividends declared are to be paid after XXXXXXXXXX days to the holder of record on the XXXXXXXXXX day following the declaration date.

XXXXXXXXXX will exchange its XXXXXXXXXX preferred shares and XXXXXXXXXX preferred shares for XXXXXXXXXX New Holdco XXXXXXXXXX preferred shares with a fair market value equal to the fair market value of the XXXXXXXXXX preferred shares and XXXXXXXXXX preferred shares at the time of the exchange.

Holdco will include in the stated capital account of its New Holdco XXXXXXXXXX preferred shares an amount equal to the paid-up capital of the XXXXXXXXXX preferred shares and XXXXXXXXXX preferred shares.

Each of XXXXXXXXXX will exchange their common shares of Holdco for the same number of New Holdco XXXXXXXXXX preferred shares, as the number of common shares held, with a redemption amount and fair market value equal to the fair market value of the common shares at the time of the exchange.

Holdco will include in the stated capital of its New Holdco XXXXXXXXXX preferred shares an amount equal to the paid-up capital of the common shares exchanged.

Elections under subsection 85(1) will not be filed with respect to the exchange of shares described herein.

Immediately following the exchange, all of the previously issued and outstanding XXXXXXXXXX preferred shares, XXXXXXXXXX preferred shares and common shares of Holdco will be cancelled.

25. Following the exchange described in paragraph 24 above, XXXXXXXXXX will subscribe for XXXXXXXXXX shares of Holdco for $XXXXXXXXXX, XXXXXXXXXX will subscribe for XXXXXXXXXX shares of Holdco for $XXXXXXXXXX, XXXXXXXXXX will subscribe for XXXXXXXXXX shares of Holdco for $XXXXXXXXXX and XXXXXXXXXX will subscribe for XXXXXXXXXX shares of Holdco for $XXXXXXXXXX.

26. Pursuant to filing of articles of amendment under the CBCA, Opco will reorganize its capital. The share capital of Opco will be reorganized by the creation of new classes of shares and the exchange of the existing shares for these new shares.

The new shares of Opco will consist of:

(a) XXXXXXXXXX shares that will be voting and participating;

(b) XXXXXXXXXX shares that will be voting, participating in respect of dividends and redeemable for the fair market value of the property for which the shares are issued;

(c) XXXXXXXXXX shares that will be non-voting and participating;

(d) XXXXXXXXXX preferred shares that will be voting, entitled to non-cumulative dividends at the discretion of the directors, redeemable and retractable for the fair market value of the property for which they are issued (the "New Opco XXXXXXXXXX preferred shares");

(e) XXXXXXXXXX preferred shares that will be non-voting, entitled to non-cumulative dividends at the discretion of the directors, redeemable and retractable for an amount equal the fair market value of the property for which the shares are issued (the "New Opco XXXXXXXXXX preferred shares"); and

(f) XXXXXXXXXX preferred shares that will be non-voting, entitled to non-cumulative dividends at a dividend rate equal to the prescribed rate in effect from time to time and retractable for an amount equal to the fair market of the property for which the shares are issued (the "New Opco XXXXXXXXXX preferred shares").

The terms and conditions of the shares will not permit any dividends to be paid on any class of shares of Opco, other than the New Opco XXXXXXXXXX preferred shares, that may result in the reduction to the fair market value of the New Opco XXXXXXXXXX preferred shares. In addition, the terms and conditions of the XXXXXXXXXX shares will provide that dividends may be declared thereon without the necessity of declaring dividends on the other classes of the issued and outstanding shares of Opco and will provide that dividends declared are to be paid after XXXXXXXXXX days to the holder of record on the XXXXXXXXXX day following the declaration date.

Holdco will exchange its XXXXXXXXXX preferred shares and XXXXXXXXXX preferred shares of Opco for New Opco XXXXXXXXXX preferred shares with a redemption amount and fair market value equal to the fair market value of the XXXXXXXXXX preferred shares and XXXXXXXXXX preferred shares of Opco at the time of the exchange.

Opco will include in the stated capital account of its New Opco XXXXXXXXXX preferred shares an amount equal to the aggregate paid-up capital of the XXXXXXXXXX preferred shares and XXXXXXXXXX preferred shares.

XXXXXXXXXX will exchange its XXXXXXXXXX common shares of Opco it holds for New Opco XXXXXXXXXX preferred shares with a redemption amount and a fair market value equal to the fair market value of his XXXXXXXXXX Opco common shares at the time of the exchange.

Opco will include in the stated capital account of its New Opco XXXXXXXXXX preferred shares an amount equal to the paid-up capital of the XXXXXXXXXX common shares.

Elections under subsection 85(1) will not be filed with respect to the exchange of shares described herein.

Immediately following the exchange, all of the previously issued and outstanding XXXXXXXXXX preferred shares, XXXXXXXXXX preferred shares and common shares will be cancelled.

27. XXXXXXXXXX will subscribe for XXXXXXXXXX shares of Opco for $XXXXXXXXXX and Holdco will subscribe for XXXXXXXXXX shares of Opco for $XXXXXXXXXX.

28. Holdco will transfer a number of Realtyco shares to Opco having a fair market value equal to the fair market value of all the shares of Realtyco less the fair market value of the Other Properties and Operating Properties that will be retained (the properties to be retained will be defined as the "Retained Real Estate"). As sole consideration for the transfer from Holdco of the Realtyco shares, Opco will issue to Holdco New Opco XXXXXXXXXX preferred shares that are retractable and redeemable in the aggregate at an amount equal to the fair market value of the Realtyco shares transferred to Opco.

The number of Realtyco shares to be transferred to Opco will exceed XXXXXXXXXX% of all the issued and outstanding shares of Realtyco.

Opco will add to the stated capital account maintained for its New Opco XXXXXXXXXX preferred shares an amount equal to the paid-up capital of the Realtyco shares transferred.

29. In connection with the transfer of the Realtyco shares described in paragraph 28 above, the transferor and transferee will jointly elect in prescribed form within the time limit referred to subsection 85(6), to have the provisions of subsection 85(1) apply to the transfer. The agreed amount in respect of the shares so transferred will be equal to the adjusted cost base to the transferor, immediately before the transfer, which amount will be less than the fair market value of such shares.

30. Realtyco will transfer, at fair market value, to Holdco the Retained Real Estate. As sole consideration for the transfer of the Retained Real Estate to Holdco, Holdco will issue to Realtyco New Holdco XXXXXXXXXX preferred shares that are redeemable and retractable in the aggregate at an amount equal to the fair market value of the Retained Real Estate transferred to Holdco.

Holdco will add to the stated capital account maintained for its New Holdco XXXXXXXXXX preferred shares an amount equal to the agreed amount in respect of the transfer of the Retained Real Estate.

31. In connection with the transfer of the Retained Real Estate described in paragraph 30 above, the transferor and transferee will jointly elect in prescribed form within the time limit referred to subsection 85(6), to have the provisions of subsection 85(1) apply to the transfer of each property that is an eligible property transferred to Holdco. The agreed amount in respect of such property so transferred will, in each case, be equal to the lesser of the cost amount or fair market value of such property immediately before the transfer. The fair market value of each property transferred will equal or exceed the agreed amount.

32. Holdco will redeem all of the New Holdco XXXXXXXXXX preferred shares held by Realtyco for an amount equal to the redemption amount of such shares. This amount will be satisfied by the issuance of a non-interest-bearing demand promissory note (the "Holdco Note") with a principal amount equal to the redemption amount.

The amount, if any, by which the amount paid by Holdco to redeem its New Holdco XXXXXXXXXX preferred shares exceeds the paid-up capital of such New Holdco XXXXXXXXXX preferred shares immediately before the redemption, will be deemed to be a dividend paid by Holdco.

33. Realtyco will purchase for cancellation all of its shares held by Holdco. In consideration, Realtyco will issue to Holdco a non-interest-bearing demand promissory note (the "Realtyco Note") with a principal amount equal to the aggregate fair market value of the shares of Realtyco purchased for cancellation.

The amount, if any, by which the amount paid by Realtyco to purchase its shares held by Holdco, exceeds the paid-up capital of the shares immediately before the purchase, will be deemed to be a dividend paid by Realtyco.

34. The Holdco Note will be set off against the Realtyco Note and they will be cancelled.

35. Opco will redeem a number of its New Opco XXXXXXXXXX preferred shares and New Opco XXXXXXXXXX preferred shares held by Holdco for an amount equal to the aggregate redemption amount of such shares. This amount will be satisfied by the issuance of a non-interest-bearing demand promissory note (the "Opco Note") with a principal amount equal to the redemption amount.

The amount, if any, by which the amount paid by Opco to redeem its New Opco XXXXXXXXXX preferred shares or New Opco XXXXXXXXXX preferred shares exceeds the paid-up capital of the New Opco XXXXXXXXXX preferred shares or the New Opco XXXXXXXXXX preferred shares, as the case may be, immediately before the redemption, will be deemed to be a dividend paid by Opco.

36. The Opco Note will be set off against the Upstream Advances and the note and the Upstream Advances will be cancelled to the extent they are set off.

ADDITIONAL INFORMATION

37. The shareholders of Holdco will enter into an agreement pursuant to which they agree that:

(a) upon the death of the survivor of XXXXXXXXXX, each of XXXXXXXXXX will vote as a shareholder of Holdco to appoint each of XXXXXXXXXX as directors of Holdco. The directors will then cause Holdco to immediately redeem the XXXXXXXXXX preferred shares and XXXXXXXXXX shares held by XXXXXXXXXX with proceeds received by Holdco from the insurance policy described in paragraph 11 above. Holdco will elect, pursuant to subsection 83(2), in prescribed manner and prescribed form that the full amount of the deemed dividend arising on the redemption of the XXXXXXXXXX preferred shares to be a capital dividend; and

(b) upon the death of the survivor of XXXXXXXXXX, each of XXXXXXXXXX will convert XXXXXXXXXX shares or XXXXXXXXXX shares, as the case may be, into XXXXXXXXXX shares.

38. The shareholders of Opco will enter into an agreement pursuant to which they agree that:

(a) upon the death of the survivor of XXXXXXXXXX, Holdco will retract any of its New Opco XXXXXXXXXX preferred shares and New Opco XXXXXXXXXX preferred shares which may be outstanding at that time for its respective redemption amount;

(b) upon the death of the survivor of XXXXXXXXXX, Opco will redeem its XXXXXXXXXX shares; and

(c) upon the death of the survivor of XXXXXXXXXX will each have a right of first refusal with respect to the sale by Realtyco of any of its Other Properties.

PURPOSES OF THE PROPOSED TRANSACTIONS

39. The purposes of the proposed transactions are:

(a) to allow XXXXXXXXXX to provide for a distribution of their estate among their children in accordance with their estate planning objectives; and

(b) to enable XXXXXXXXXX to have certainty with respect to his control and ownership of Opco including the real estate used in the operations.

RULINGS

Provided that the above statements are accurate and constitute complete disclosure of all of the relevant facts, proposed transactions and the purposes of the proposed transactions, we confirm the following:

A. On the transfer of each eligible property of:

(i) XXXXXXXXXX to XXXXXXXXXX described in paragraph 17 above;

(ii) each of XXXXXXXXXX to her respective holding corporation described in paragraph 20 above;

(iii) XXXXXXXXXX to XXXXXXXXXX described in paragraph 21 above;

(iv) Holdco to Opco described in paragraph 28 above; and

(v) Realtyco to Holdco described in paragraph 30 above

the provisions of subsection 85(1) will apply with the result that the amount agreed upon by the transferor and the transferee in their joint election in respect of the transferred property will be deemed pursuant to paragraph 85(1)(a) to be the proceeds of disposition thereof to the transferor and cost thereof to the transferee.

B. Provided that the XXXXXXXXXX common shares, XXXXXXXXXX preferred shares and the XXXXXXXXXX preferred shares of Holdco constitute capital property to its particular holder and the particular holder does not make an election pursuant to subsection 85(1) with respect to such exchange, subsection 86(1) will apply to the exchange of shares described in paragraph 24 above, with the result that:

(i) each particular holder will be deemed by paragraph 86(1)(c) to have disposed of its or her shares of Holdco for proceeds of disposition equal to the cost to that holder of such shares; and

(ii) each particular holder will be deemed by paragraph 86(1)(b) to have acquired its or her New Holdco XXXXXXXXXX preferred shares or New Holdco XXXXXXXXXX preferred shares, as the case may be, for a cost equal to that particular holder's adjusted cost base of its or her original shares in Holdco.

C. Provided that the XXXXXXXXXX common shares, XXXXXXXXXX preferred shares and XXXXXXXXXX preferred shares of Opco constitute capital property to the particular holder and the particular holder does make an election pursuant to subsection 85(1) with respect to such exchange, subsection 86(1) will apply to the exchange of shares described in paragraph 26 above, with the result that:

(i) each particular holder will be deemed by paragraph 86(1)(c) to have disposed of his or its shares of Opco for proceeds of disposition equal to the cost to that holder of such shares; and

(ii) each particular holder will be deemed by paragraph 86(1)(b) to have acquired his or its New Opco XXXXXXXXXX preferred shares or New Opco XXXXXXXXXX preferred shares, as the case may be, for a cost equal to that particular holder's adjusted cost base of his or its original shares in Opco.

D. The taxable dividends described in paragraphs 32, 33 and 35:

(a) will not be subject to tax under Part IV of the Act except as provided in paragraph 186(1)(b); and

(b) will not be subject to tax under Part VI.1 of the Act because the dividend will be an excluded dividend pursuant to paragraph (a) of the definition of "excluded dividend" in subsection 191(1).

E. By virtue of paragraph 55(3)(a), the provisions of subsection 55(2) will not apply to the taxable dividends described in Ruling D above, provided that as part of the series of transactions or events as part of which the dividends are received, there is no disposition or significant increase of interest as described in subparagraphs 55(3)(a)(i) to (v) which has not been described herein as a proposed transaction.

F. The provisions of subsection 15(1) will not apply to the dividends deemed to be paid to Holdco on the redemptions described in paragraph 35 above, provided that such redemptions do not result in a reduction in the fair market value of the shares of Opco held by Ralphco.

G. The provisions of subsection 245(2) will not be applied as a result of the proposed transactions, in and by themselves, to re-determine the tax consequences confirmed 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 issued by Revenue Canada 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.

COMMENTS

1. Nothing in this letter should be construed as confirmation that the Canada Customs and Revenue Agency has reviewed or accepted:

(a) any tax consequences arising from the facts or proposed transactions described herein other than those specifically confirmed in the rulings given;

(b) the adjusted cost base or the fair market value of any shares of a corporation or other property described herein; or

(c) that any of the shares described herein is a qualified small business corporation share or that any deduction under subsection 110.6(2.1) will be available.

Yours truly,

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