2000 Ruling 2000-0033793 - Butterfly Reorganization

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: Characterization of farm residences as business property; application of paragraph 85(1)(b) where liabilities of the distributing corporation exceed the aggregate cost amount of the distributed properties.

Position: Residences treated as business property on the basis that they were occupied by employees of the distributing corporation. We permitted liabilities in excess of the cost of the distributed properties to be assumed by the transferee corporations as part consideration for the redemption of preferred shares issued to the distributing corporation.

Reasons: IT-268R3, paragraph 15 states that it is always a question of fact whether a particular property is used in a farming business; assumption of excess liabilities in the manner described herein conforms to CCRA policy as confirmed in Q.7, 1996 CMTC.

XXXXXXXXXX 		2000-003379

Attention: XXXXXXXXXX

XXXXXXXXXX, 2000

Dear Sirs:

Re: XXXXXXXXXX ("Opco") -XXXXXXXXXX

XXXXXXXXXX ("Mr. X") -XXXXXXXXXX

XXXXXXXXXX ("Mr. Y") - XXXXXXXXXX

XXXXXXXXXX ("Mr. Z") - 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-noted taxpayers.

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; or

(iv) before the courts or, if a judgement 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, c.1 (5th Supp.), as amended to the date hereof, and, unless otherwise stated, every statutory reference herein to a 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) "BCA" means the Business Corporations Act (XXXXXXXXXX);

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

(f) "capital dividend account" (also referred to as the "CDA") has the meaning assigned by section 89;

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

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

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

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

(k) "Opco" means XXXXXXXXXX;

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

(m) "private corporation" has the meaning assigned by subsection 89(1);

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

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

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

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

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

(s) "stated capital account" has the meaning assigned by section 26 of the BCA;

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

(u) "taxable dividend" has the meaning assigned by subsection 89(1);

(v) "taxable preferred share" has the meaning assigned by subsection 248(1); and

(w) "undepreciated capital cost" has the meaning assigned by subsection 13(21).

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

Facts

1. Opco is a taxable Canadian corporation and a Canadian-controlled private corporation. It was incorporated pursuant to the laws of the Province of XXXXXXXXXX on XXXXXXXXXX and has been continued under the BCA. Opco has carried on the business of farming from the time of incorporation to the present. Opco reports income from its farming business in accordance with the cash method referred to in subsection 28(1) and its taxation year end is XXXXXXXXXX.

2. Opco's authorised share capital is as follows:

• unlimited number of Class XXXXXXXXXX voting, non-participating, no par value Common shares
• unlimited number of Classes XXXXXXXXXX non-voting, fully participating, no par value Common shares
• unlimited number of Class XXXXXXXXXX non-voting, cumulative, preferred shares
• unlimited number of Class XXXXXXXXXX non-voting, non-cumulative, retractable, Preferred shares
• unlimited number of Class XXXXXXXXXX non-voting, non-cumulative, retractable, Preferred shares

3. The owners of the issued and outstanding shares of Opco, the PUC and ACB of those shares are as follows:

		Class Of	No. of
	Shareholder	Shares	Shares	 PUC	       ACB
		    $	        $
Mr. X	                    XXXXXXXXXX
Mr. Y	                    XXXXXXXXXX
Mr. Z	                    XXXXXXXXXX
Mr. X	                    XXXXXXXXXX
Mr. Y	                    XXXXXXXXXX
Mr. Z	                    XXXXXXXXXX 

None of the shares of Opco were acquired in contemplation of the proposed transactions set forth below. The Opco shares represent capital property to each of Mr. X, Mr. Y and Mr. Z.

4. Mr. X, Mr. Y and Mr. Z are brothers.

5. The property of Opco includes land and buildings, machinery and equipment, livestock, feed, grains, cash, accounts receivable and patronage reserves. The land and buildings include residences occupied by Mr. X and Mr. Z, located on different quarter sections of land owned by Opco. Each of the residences is used primarily in the business of farming by Opco.

6. Mr. X, Mr. Y and Mr. Z have at various times advanced funds to Opco by way of loan (the "Shareholder Loans"). The amounts owing by Opco under these Shareholder Loans at XXXXXXXXXX were as follows:

		Shareholder		 Loan Balance

Mr. X		$ XXXXXXXXXX
Mr. Y		   XXXXXXXXXX
Mr. Z		   XXXXXXXXXX 

		Total		$  XXXXXXXXXX 

7. The above-noted Shareholder Loans are non-interest bearing and payable on demand.

8. In addition to the Shareholder Loans, the liabilities of Opco include an operating line of credit which is payable on demand, two term loans which mature in XXXXXXXXXX and a mortgage which matures in XXXXXXXXXX. The aggregate liabilities of Opco exceed the aggregate cost amount of its assets.

9. Opco did not have a balance in its CDA account on XXXXXXXXXX. Opco will not have a balance in its RDTOH account at the end of the taxation year in which the proposed transactions, described below, are implemented. Opco previously wound up its net income stabilization accounts.

Proposed Transactions

10. Each of Mr. X, Mr. Y and Mr. Z will incorporate a new corporation, "XCO", "YCO" and "ZCO" respectively, under the provisions of the BCA. Each of XCO, YCO and ZCO will be a taxable Canadian corporation and a Canadian-controlled private corporation.

11. The authorised share capital of XCO, YCO and ZCO (collectively referred to as the "Transferee Corporations") will consist of:

(a) an unlimited number of Class XXXXXXXXXX voting, fully-participating, voting Common shares;

(b) an unlimited number of Class XXXXXXXXXX non-voting, fully-participating, Common shares; and

(c) an unlimited number of Class XXXXXXXXXX Preferred shares and Class XXXXXXXXXX Preferred shares, each having the following attributes:

(i) redeemable and retractable for a redemption amount equal to the fair market value of the property received therefor (net of liabilities assumed) by the corporation at the time of issuance;

(ii) the Class XXXXXXXXXX Preferred shares are entitled to a non-cumulative dividend at the fixed rate of XXXXXXXXXX% per annum (or such greater amount as may be set by the directors of the corporation from time to time, not to exceed a reasonable amount) of the redemption amount and the Class XXXXXXXXXX Preferred shares are entitled to a non-cumulative dividend at the fixed rate of XXXXXXXXXX% per annum of the redemption amount;

(iii) entitled to a return of the redemption amount on a liquidation, dissolution, or winding-up of the corporation in preference to the Common shares;

(iv) may be purchased, redeemed or cancelled by the corporation in the manner provided in the BCA at the option of either the corporation or the holder for a price not less than the lesser of:

(A) the aggregate redemption amount of such shares to be purchased at the particular time; and

(B) the realizable value of the net assets of the corporation immediately before such purchase;

(v) any preference, right, condition or limitation attaching to the Preferred shares can only be amended by a special resolution of the holders of each class of shares of the corporation each voting separately as a class;

(vi) a restriction on the payment of dividends on other classes of shares so that no such dividends may be paid on any other class of shares of the corporation so as to reduce the value of the Preferred shares then outstanding; and

(vii) Class XXXXXXXXXX Preferred shareholders will be entitled to one vote per share at all meetings of the shareholders. The Class XXXXXXXXXX Preferred shares will be non-voting.

The Articles of Incorporation of the Transferee Corporations will also provide that, subject to the restrictions contained in subparagraph (vi), dividends may be declared and paid on any class of shares of the corporation to the exclusion of any other class of shares of the corporation.

12. XCO will issue XXXXXXXXXX Class XXXXXXXXXX Common shares to Mr. X at a total subscription price and paid-up capital of $XXXXXXXXXX.

13. YCO will issue XXXXXXXXXX Class XXXXXXXXXX Common shares to Mr. Y at a total subscription price and paid-up capital of $XXXXXXXXXX.

14. ZCO will issue XXXXXXXXXX Class XXXXXXXXXX Common shares to Mr. Z at a total subscription price and paid-up capital of $XXXXXXXXXX.

15. Mr. X will transfer to XCO all of his issued shares in the capital of Opco at fair market value. As the sole consideration, XCO will issue XXXXXXXXXX Class XXXXXXXXXX Preferred shares to Mr. X with a redemption amount and a fair market value equal to the fair market value of the Opco shares transferred to XCO. XCO will add to the stated capital account maintained for its Class "D" Preferred shares an amount equal to the paid-up capital of the Opco shares transferred to it. XCO and Mr. X will jointly elect in prescribed form and within the time period 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 so transferred will be equal to their ACB to Mr. X immediately before the transfer, which will be greater than nil and will not exceed the fair market value of the shares.

16. Mr. Y will transfer to YCO all of his issued shares in the capital of Opco at fair market value. As the sole consideration, YCO will issue XXXXXXXXXX Class XXXXXXXXXX Preferred shares to Mr. Y with a redemption amount and fair market value equal to the fair market value of the Opco shares transferred to YCO. YCO will add to the stated capital account maintained for its Class XXXXXXXXXX Preferred shares an amount equal to the paid-up capital of the Opco shares transferred to it. YCO and Mr. Y will jointly elect in prescribed form and within the time period 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 so transferred will be equal to their ACB to Mr. Y immediately before the transfer, which will be greater than nil and will not exceed the fair market value of the shares.

17. Mr. Z will transfer to ZCO all of his issued shares in the capital of Opco at fair market value. As the sole consideration, ZCO will issue XXXXXXXXXX Class XXXXXXXXXX Preferred shares to Mr. Z with a redemption amount and fair market value equal to the fair market value of the Opco shares transferred to ZCO. ZCO will add to the stated capital account maintained for its Class XXXXXXXXXX Preferred shares an amount equal to the paid-up capital of the Opco shares transferred to it. ZCO and Mr. Z will jointly elect in prescribed form and within the time period 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 so transferred will be equal to their ACB to Mr. Z immediately before the transfer, which will be greater than nil and will not exceed the fair market value of the shares.

18. Immediately before the transactions described in paragraph 20 below, the property owned by Opco will be classified into the following three types for purposes of the distribution to be made pursuant to paragraph 55(3)(b):

(a) cash or near-cash property, comprising all of the current assets of Opco, including cash, accounts receivable, inventories and rights arising from prepaid expenses;

(b) business property, comprising all of the assets of Opco, other than cash or near-cash property, any income from which would be income from a business (other than a specified investment business); and

(c) investment property, comprising all of the assets of Opco other than cash or near cash property, any income from which would constitute income from property or from a specified investment business.

For the purpose of determining the types of property referred to above, patronage reserves (relating to dividends receivable on purchases made by Opco from the XXXXXXXXXX and Opco's account with the XXXXXXXXXX) as well as residences occupied by Mr. X and Mr. Z will be categorized as business property.

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

It is expected that Opco will have no investment property.

19. In determining the net fair market value of each type of property owned by Opco immediately before the transactions described in paragraph 20 below, the liabilities of Opco will be allocated to, and deducted in the calculation of, the net fair market value of each type of property of Opco as follows:

(a) current liabilities of Opco (including the shareholder loans referred to in paragraph 6 and the current portion of any long-term debt) will be allocated to cash or near cash property of Opco in the proportion that the fair market value of each such property is of the fair market value of all cash or near cash property of Opco (such allocation will result in a net fair market value of cash or near cash property of nil);

(b) liabilities of Opco, other than current liabilities, that relate to a particular property will be allocated to the particular property (and effectively to the type to which the particular property belongs) to the extent of its fair market value. The liabilities that pertain to a type of property, but not to a particular property will then be allocated to that type of property, but not in excess of the net fair market value of such type of property after the allocation of liabilities to a particular property, as described herein;

(c) if any liabilities remain after the allocations described in steps (a) and (b) above ("excess unallocated liabilities"), such excess unallocated liabilities will then be allocated to each type of property of Opco based on the relative net fair market value of each type of property prior to the allocation of such excess unallocated liabilities (since the net fair market value of its cash and near cash property will be nil and provided that its investment property is also nil, Opco will allocate all excess unallocated liabilities against its business property).

For the purpose of calculating the net fair market value of the types of property of Opco, deferred taxes, if any, will be ignored.

20. Opco will transfer all of its property to the Transferee Corporations at its fair market value. Each Transferee Corporation will receive a specified portion of the property of Opco such that the net fair market value of each type of property transferred to each corporation as part of the proposed transactions described herein will satisfy the requirements set out in paragraph 21 below. As consideration for the transferred properties, each of the Transferee Corporations will:

(a) assume liabilities of Opco in an amount not exceeding the aggregate of the amounts agreed upon by Opco and the particular Transferee Corporation in their respective elections described in paragraph 22 below, in respect of the transferred properties; and

(b) as the balance of the consideration for the transfer of properties, issue to Opco that number of its Class XXXXXXXXXX Preferred shares which will have an aggregate fair market value and an aggregate redemption and retraction value equal to the amount by which the aggregate fair market value of the transferred properties transferred to the particular Transferee Corporation exceeds the aggregate fair market value of the liabilities assumed by that Transferee Corporation.

In no case will the liabilities allocated to a particular asset exceed the agreed amount in respect of that asset.

21. Any liabilities of Opco which are not assumed by the Transferee Corporations on the transfers described in paragraph 20 above, will be assumed by the Transferee Corporations on the redemption of the Class XXXXXXXXXX Preferred shares as described in paragraph 24 below. Such liabilities will be assumed in such proportions that, following the proposed transactions described herein, the net fair market value of each type of property so transferred to each Transferee Corporation will be equal to the proportion of the net fair market value of all properties of Opco of that type, determined immediately before such transfers that:

(a) the aggregate fair market value (immediately before the transfers described in paragraph 20) of the Opco shares owned by the particular Transferee Corporation

is of

(b) the aggregate fair market value (immediately before the transfers described in paragraph 20) of all the issued and outstanding shares in the capital stock of Opco.

22. In respect of the transfer of properties described in the paragraph 20 above, Opco and each of XCO, YCO and ZCO will jointly elect pursuant to subsection 85(1) (in prescribed form and within the time specified in subsection 85(6)), to transfer each property that is an eligible property at the following agreed amounts, expressed in dollars:

(a) in the case of depreciable property of a prescribed class, an amount which is not less than the least of the amounts specified in subparagraphs 85(1)(e)(i) to 85(1)(e)(iii) and not greater than the fair market value of the property;

(b) in the case of capital property, other than depreciable property of a prescribed class, an amount that is equal to the lesser of the cost amount to Opco of the property and the fair market value thereof; and

(c) in the case of cattle, grain or feed inventories, the amount determined under paragraph 85(1)(c.2).

23. Each of the Transferee Corporations will add to the stated capital account in respect of the Class XXXXXXXXXX Preferred shares so issued an amount equal to the aggregate agreed amounts of the property of Opco transferred to that particular Transferee Corporation less the amount of the liabilities of Opco assumed by that Transferee Corporation as described in paragraph 20(a) above.

24. Each of the Transferee Corporations will redeem its Class XXXXXXXXXX Preferred shares held by Opco at their fair market value and each will pay the respective redemption amount by assuming a portion of the remaining liabilities of Opco (where necessary to satisfy the requirements set out in paragraph 21) and by issuing a non-interest bearing demand promissory note (the "X Note", the "Y Note" and the "Z Note" - collectively referred to as the "Holdco Notes") having a principal amount and fair market value equal to the fair market value of the shares so redeemed less the amount of any remaining liabilities, if any, assumed by the particular Transferee Corporation (the principal amount and fair market value of each of the X Note, the Y Note and the Z Note will be equal). Opco will accept the assumption of the remaining liabilities and the receipt of the Holdco Notes as full payment of the redemption amount of the Class XXXXXXXXXX Preferred shares redeemed by each of the Transferee Corporations.

25. Thereafter, the Transferee Corporations, as the shareholders of Opco, will, by special resolution, resolve to liquidate and dissolve Opco pursuant to the provisions of the BCA. Under the terms of the winding-up, Opco will assign and distribute the X Note to XCO, the Y Note to YCO and the Z Note to ZCO. As a result of the assignment and distribution of the Holdco Notes, the obligations under the notes will be cancelled. 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. Following the distribution of all the property of Opco, Articles of Dissolution will be filed and Opco will be dissolved.

Additional Information

26. None of the corporations referred to herein is a specified financial institution or a restricted financial institution.

27. None of the issued shares referred to herein (including the 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).

28. None of the issued 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).

29. None of the issued 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).

30. The Common shares of Opco referred to herein are not, and will not, as a result of the proposed transactions, be taxable preferred shares.

31. 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.

32. None of the parties is contemplating an acquisition of control of any of the corporations described herein, except as set out in the proposed transactions.

33. None of the parties is contemplating a sale or transfer of any property to a person who is not related to the vendor or transferor or to a partnership, as part of the series of transactions or events described herein, other than as described herein or in the ordinary course of business.

34. The proposed transactions will not effect any outstanding tax liabilities of any of the parties hereto.

35. Opco will be related to each of the Transferee Corporations for purposes of Parts IV.1 and VI.1 of the Act.

Purpose of the Proposed Transactions

36. Difficulties have arisen between Mr. X, Mr. Y and Mr. Z concerning the ongoing management of Opco as each has differing objectives with respect to the farming operations and wishes to carry on farming operations separately. Mr. X, Mr. Y and Mr. Z also wish to undertake a split-up of Opco to facilitate further estate planning in accordance with their own personal objectives.

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. The provisions of subsection 85(1) will apply, subject to the application of subsections 13(21.2) and 69(11) and of subsections 20(1.2) and 26(5) of the Income Tax Application Rules, to the transfer of eligible properties by Opco to the Transferee Corporations, in respect of which an election under subsection 85(1) is made, such that the agreed amount in respect of each transfer of such property will be deemed to be Opco's proceeds of disposition and the Transferee Corporation's cost thereof pursuant to paragraph 85(1)(a), and, in respect of depreciable property, each Transferee Corporation's cost of such property will be determined in accordance with subsection 85(5).

For the purpose of the joint elections described in paragraph 22, the reference to "the undepreciated capital cost to the taxpayer of all property of that class immediately before the disposition" in subparagraph 85(1)(e)(i) will be read as "the proportion of the undepreciated capital cost to the taxpayer of all property of that class that the capital cost of the property immediately before the disposition is of the capital cost of all property of that class immediately before the disposition."

For greater certainty, paragraph 85(1)(e.2) will not apply to the transfers.

B. On the redemption by the Transferee Corporations of the Class XXXXXXXXXX Preferred shares held by Opco and as a result of the distributions by Opco in the course of its winding-up:

(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 the particular Class XXXXXXXXXX shares exceeds the PUC of those shares immediately before the redemption;

(b) (i) pursuant to paragraph 88(2)(b) and subsection 84(2), but subject to (ii) to (iv) herein, each of the Transferee Corporations will be deemed to have received a dividend (the "winding-up dividend") on their shares of Opco equal to the proportion of the amount by which the aggregate fair market value of the property of Opco distributed by Opco to the Transferee Corporations on the winding-up in respect of such shares exceeds the amount by which the PUC of that class of shares is reduced that the number of shares of such class, held by that Transferee Corporation is of the number of shares of that class,

(ii) pursuant to subparagraph 88(2)(b)(i), such portion of the winding-up dividend referred to in (b)(i) as does not exceed Opco's CDA determined immediately before the payment of the winding-up dividend shall be deemed to be the full amount of a separate dividend,

(iii) pursuant to subparagraph 88(2)(b)(ii), the portion of the winding-up dividend that is equal to the lesser of:

(A) Opco's pre-1972 capital surplus on hand as determined immediately before the payment of the winding-up dividend, and

(B) the amount by which the winding-up dividend exceeds the portion, if any, in respect of which Opco will elect under subsection 83(2),

shall be deemed not to be a dividend, and

(iv) pursuant to subparagraph 88(2)(b)(iii), the winding-up dividend, to the extent that it exceeds the portion thereof referred to in (ii) herein that is deemed to be a separate dividend and the portion referred to in (iii) herein that is deemed not to be a dividend, shall be deemed to be a separate dividend that is a taxable dividend;

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

(d) 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);

(e) the deemed dividends referred to in (a) and (b) above will not be subject to tax under Parts IV.1 or VI.1 of the Act on the basis that the dividends will be "excepted dividends" within the meaning of section 187.1 and "excluded dividends" within the meaning of subsection 191(1); and

(f) by virtue of subsections 186(2) and 186(4), the Transferee Corporations will be connected with Opco and Opco will be connected with each of the Transferee Corporations. Consequently, the Transferee Corporations and Opco will not be subject to tax in respect of the dividends referred to in (a) and (b) above, under Part IV of the Act except as provided for in paragraph 186(1)(b).

C. 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 B above, and for greater certainty, subsection 55(3.1) will not apply to deny the exemption under paragraph 55(3)(b).

D. The settlement of the Holdco Notes will not give rise to a "forgiven amount" within the meaning of subsection 80(1) or section 80.01.

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

F. As a result of the proposed transactions described herein, in and by themselves, subsection 245(2) 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 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 Canada Customs and Revenue Agency has reviewed or is making a determination in respect of:

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

(b) 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
Reorganizations and International Division
Income Tax Rulings Directorate
Policy and Legislation Branch

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