2001 Ruling 2000-0042353 - split-up butterfly

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: Split-up butterfly-one wing

Position: routine

Reasons:

XXXXXXXXXX 						2000-004235

XXXXXXXXXX, 2001

Dear XXXXXXXXXX:

Re: XXXXXXXXXX

This is in reply to your letter of XXXXXXXXXX, wherein you requested an advance income tax ruling on behalf of the above-noted taxpayer.

You have been advised by your clients that none of the issues contained herein is:

(i) in an earlier return of the taxpayer or related persons;

(ii) being considered by a Tax Services Office or Taxation Centre in connection with a previously filed return of the taxpayer or related persons;

(iii) under objection by the taxpayer or related persons;

(iv) before the courts;

or

(v) the subject of a ruling previously issued by the Directorate.

Definitions

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

"Amalco I" means XXXXXXXXXX, the corporation formed on XXXXXXXXXX, as a result of the amalgamation of Canco 1 and XXXXXXXXXX;

"Amalco II" means XXXXXXXXXX, the corporation formed on XXXXXXXXXX, as a result of the amalgamation of XXXXXXXXXX;

"Canco 1" means the former XXXXXXXXXX;

"Canco 2" means XXXXXXXXXX;

XXXXXXXXXX means the former XXXXXXXXXX;

XXXXXXXXXX means the former XXXXXXXXXX;

XXXXXXXXXX means the former XXXXXXXXXX;

XXXXXXXXXX;

"DCo" means XXXXXXXXXX;

"XXXXXXXXXX" means the late XXXXXXXXXX, an individual who previously resided in Canada, and who died in XXXXXXXXXX;

"XXXXXXXXXX" means the Estate XXXXXXXXXX, a testamentary trust, created on the death of XXXXXXXXXX in favour of his two surviving brothers, XXXXXXXXXX, in equal proportions. The trustees are XXXXXXXXXX;

"XXXXXXXXXX" means the late XXXXXXXXXX, an individual who previously resided in Canada and who died on XXXXXXXXXX;

"TRUST" means the XXXXXXXXXX, a testamentary trust created on the death of XXXXXXXXXX in favour of his then surviving brother, XXXXXXXXXX, on the basis whereby all the assets of the Trust would be distributed in equal proportions to their niece, XXXXXXXXXX, (the "Niece") an individual resident in Canada, their nephew, XXXXXXXXXX an individual resident in Canada and their nephew, XXXXXXXXXX, an individual resident in XXXXXXXXXX. The trustees of the TRUST are XXXXXXXXXX;

"XXXXXXXXXX" means the late XXXXXXXXXX, an individual who previously resided in Canada and who died on XXXXXXXXXX;

"XXXXXXXXXX " means the XXXXXXXXXX, a testamentary trust, created on the death of XXXXXXXXXX in favour of Niece, XXXXXXXXXX (collectively referred to as the "siblings"). The trustees are Niece and XXXXXXXXXX;

"Act" means the Income Tax Act, R.S.C. 1985 (5th Supp.), c.1 as amended to date. All statutory references contained herein are to the provisions of the Act unless otherwise specified;

"adjusted cost base" ("ACB") has the meaning assigned by section 54;

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

"capital property" has the meaning assigned by section 54;

"CBCA" means the Canada Business Corporations Act, R.S.C. 1985, C-44, as amended;

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

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

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

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

"dividend rental arrangement" has the meaning assigned by subsection 248(1);

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

"FMV" means fair market value;

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

XXXXXXXXXX

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

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

XXXXXXXXXX

"refundable dividend tax on hand" ("RDTOH") has the meaning assigned by subsection 129(3);

"related persons" has the meaning assigned by section 251;

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

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

"specified investment business" ("SIB") has the meaning assigned in subsection 125(7) and subsection 248(1);

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

and

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

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

FACTS

1. Amalco I was formed on XXXXXXXXXX, under the CBCA, as a result of the amalgamation of Canco 1 and XXXXXXXXXX .

Canco 1 was incorporated on XXXXXXXXXX under the CBCA. Canco 1 was a private corporation, a CCPC and a taxable Canadian corporation. Canco 1's issued share capital consisted of:

Number and class of share Shareholder PUC

XXXXXXXXXX Class A share TRUST $XXXXXXXXXX

XXXXXXXXXX common shares TRUST $XXXXXXXXXX

Canco 1 was an investment holding company.

XXXXXXXXXX was incorporated on XXXXXXXXXX under the CBCA. XXXXXXXXXX was a private corporation, a CCPC and a taxable Canadian corporation. XXXXXXXXXX issued share capital consisted of:

Number and class of shares Shareholder PUC

XXXXXXXXXX Class B preferred Canco 1 $XXXXXXXXXX

XXXXXXXXXX Class E preferred Canco 1 $ XXXXXXXXXX

XXXXXXXXXX common shares Canco 1 $ XXXXXXXXXX

XXXXXX Class D preferred Estate XXXXXXXX $ XXXXXXXXXX

XXXXX Class E preferred shares Estate XXXXXXXX $ XXXXXXXXXX

The Class B, D and E preferred shares were non-voting, non-cumulative, non-participating, redeemable at $XXXXXXXXXX per share, respectively. XXXXXXXXXX was an investment holding company except for carrying on a XXXXXXXXXX business which it carried on through a corporate partnership.

Under the amalgamation, the XXXXXXXXXX Class D shares and XXXXXXXXXX Class E shares held by XXXXXXXXXX in XXXXXXXXXX became XXXXXXXXXX Class D shares and XXXXXXXXXX Class E shares in Amalco I with the identical attributes. The TRUST also holds shares in Amalco I with attributes identical to those of the shares that it held in Canco 1. The XXXXXXXXXX common shares, XXXXXXXXXX Class E preferred shares and XXXXXXXXXX Class B preferred shares held by Canco 1 in XXXXXXXXXX were cancelled without any repayment of capital. Amalco I currently owes $XXXXXXXXXX to the TRUST.

2. Amalco II was formed on XXXXXXXXXX, under the XXXXXXXXXX, as a result of the amalgamation of XXXXXXXXXX.

XXXXXXXXXX was incorporated on XXXXXXXXXX under the XXXXXXXXXX and continued under XXXXXXXXXX was a private corporation, a CCPC and a taxable Canadian corporation. XXXXXXXXXX issued share capital consisted of:

Number and class of shares Shareholder PUC

XXXXXXXXXX common shares Canco 1 $XXXXXXXXXX

XXXXXXXX Class E preferred shares Canco 1 $XXXXXXXXXX

XXXXXXXX Class E preferred shares Estate XXXXXXX $XXXXXXX

The Class E preferred shares were non-voting, non-participating, redeemable at $XXXXXXXXXX per share, non-retractable and entitled to non-cumulative monthly dividends of XXXXXXXXXX was an investment holding company.

XXXXXXXXXX was incorporated on XXXXXXXXXX under the XXXXXXXXXX and continued under Part XXXXXXXXXX was a private corporation, a CCPC and a taxable Canadian corporation. XXXXXXXXXX issued share capital consisted of:

Number and class of shares Shareholder PUC

XXXXXXXX Class C preferred XXXXXXXXX $XXXXXXXXXX

XXXXXXXX common shares XXXXXXXXXX $ XXXXXXXXXX

XXXXXXXX Class D preferred XXXXXXXXXX $XXXXXXXXXX

XXXXXXXXXX Class B shares Canco 1 $XXXXXXXXXX

The Class C and D preferred shares were non-participating, non-voting, redeemable and entitled to non-cumulative dividends of XXXXXXXXXX % per annum. The Class B shares were non-voting preferred shares, redeemable and retractable for $XXXXXXXXXX had a substantial net capital loss carried forward from years prior to XXXXXXXXXX . It also had substantial investment assets.

Upon the amalgamation, Amalco I continued to hold XXXXXXXXXX common shares, XXXXXXXXXX Class B preferred shares, XXXXXXXXXX Class D preferred shares and XXXXXXXXXX Class E preferred shares in Amalco II, and the Estate XXXXXXXXXX maintained its XXXXXXXXXX Class E preferred shares. The XXXXXXXXXX common shares and XXXXXXXXXX Class C preferred shares owned by XXXXXXXXXX in XXXXXXXXXX were cancelled without any repayment of capital.

3. Canco 2 was incorporated on XXXXXXXXXX under the CBCA. Canco 2 is a private corporation, a CCPC and a taxable Canadian corporation. Canco 2's issued share capital consists of :

Number and class of shares Shareholder PUC

XXXXXXXX common share Estate XXXXXXXXXX $XXXXXXXXXX

XXXXXXXX Class C preferred Estate XXXXXXXXXX $ XXXXXXXXXX

The Class C preferred shares are non-voting, non-participating, non-cumulative and redeemable at $XXXXXXXXXX per share.

4. XXXXXXXXXX was incorporated on XXXXXXXXXX under the CBCA. XXXXXXXXXX is a private corporation, a CCPC and a taxable Canadian corporation. Its issued share capital consists of:

Number and class of shares Shareholder PUC

XXXXXXXXXX Class B preferred Amalco II $XXXXXXXXXX

XXXXXXXXXX common shares Amalco II $XXXXXXXXXX

The Class B preferred share is redeemable, carries a dividend rate of XXXXXXXXXX %, and is non-cumulative, non-participating, and voting.

XXXXXXXXXX carries on the active business of XXXXXXXXXX

5. DCo was incorporated by Niece, the sole incorporator, on XXXXXXXXXX under the XXXXXXXXXX. DCo is a private corporation, a CCPC and a taxable Canadian corporation. Its authorized capital consists of unlimited numbers of common shares and unlimited numbers of Classes A, B, and C special shares. None of its shares have been issued nor has it commenced any activities to date.

6. The shares of all of the above named companies are capital properties to each of the shareholders.

7. None of the companies named herein is a specified financial institution.

8. No property has or will become property of Amalco I, its subsidiaries, or any predecessors thereof, in contemplation of and before the proposed transaction outlined below, except as described herein and otherwise as a result of a disposition of property for consideration that consists only of money or indebtedness that is not convertible into other property, or any combination thereof.

9. No shares of any of the corporations referred to herein will be disposed of, except as described herein, as part of the series of transactions or events that includes the proposed transactions outlined below.

10. None of the corporations referred to herein will dispose of more than 10% of their respective property which is owned immediately following the proposed transactions outlined below, as part of the series of transactions or events that includes the proposed transactions outlined herein.

11. None of the shares of any of the companies described herein has been or will be, at any time during the implementation of the proposed transactions described below, (i) the subject of any guarantee agreement, (ii) a share issued or acquired as part of a series of transactions or events of the type described in subsection 112(2.5), or (iii) the subject of a dividend rental arrangement.

12. On XXXXXXXXXX Class E shares in Amalco II held by the Estate XXXXXXXXXX were repurchased for their FMV. The repurchase resulted in a deemed dividend and a capital loss which will be carried back to XXXXXXXXXX final tax year under subsection 164(6). This dividend also resulted in a dividend refund to Amalco II.

Further, on XXXXXXXXXX Class E shares and XXXXXXXXXX Class D shares owned by the Estate XXXXXXXXXX were repurchased by Amalco I. The repurchase resulted in a deemed dividend and a capital loss which will be carried back to XXXXXXXXXX final tax year under subsection 164(6). These transactions would have been undertaken regardless of whether the proposed transactions are undertaken. Further, the proposed transactions involving the butterfly would have been undertaken regardless of these transactions.

PROPOSED TRANSACTIONS

12A. The common shares and the Class A share of Amalco I will be split on a 3-for-1 basis. There will be no change in the interests, rights and privileges of the shareholders and no concurrent changes in the capital structure of Amalco I.

13. Amalco II will be wound up into Amalco I and its net assets distributed to Amalco I on the winding-up. Amalco II will elect to have subsection 80.01(4) apply to any debt cancellation between itself and Amalco I.

14. The XXXXXXXXXX Class B preferred and XXXXXXXXXX common issued shares of XXXXXXXXXX held by Amalco I, as a result of the above transactions, will be split on a 3- or-1 basis. There will be no change in the interests, rights, or privileges of the shareholder and no concurrent changes in the capital structure of XXXXXXXXXX.

15. One-third of the Class A shares and one-third of the common shares of Amalco I will be delivered to Niece in accordance with the requirements of the terms of the TRUST and the Will of the late XXXXXXXXXX.

15A. One-third of the XXXXXXXXXX Class D shares of Amalco I will be distributed to Niece by the Estate XXXXXXXXXX in satisfaction of her capital interest therein.

16. The authorized capital of DCo will be changed by Articles of Amendment to include a number of classes of preferred shares, including Class D preferred shares and Class E preferred shares.

The Class E preferred shares will have the following attributes:

• each share will be redeemable, subject to applicable law, at any time at the option of DCo, at a redemption amount equal to $XXXXXXXXXX;
• each share will be retractable, subject to applicable law, at any time at the option of the holder, at a retraction amount equal to $XXXXXXXXXX;
• the holder of each share will be entitled to one vote per share;
• the holder of each share will be entitled to a non-cumulative cash dividend as and when declared by the board of director from time to time;
• there will be a provision restricting the payment of dividends of other classes of shares so that no such dividends may be paid on any other class of shares of DCo if the resulting realizable value of the net assets of DCo after payment of the dividends would be less than the aggregate of the redemption amounts of all the DCo Class E preferred shares then outstanding; and
• for the purpose of subsection 191(4), the terms and conditions of the shares to be issued will, at the time of their issue, specify an amount in respect of each share for which the share is to be redeemed, acquired or cancelled and the amount to be specified in respect of each share will be expressed as a dollar amount and will be equal to the FMV of the property received by DCo as consideration for such share.

The Class D preferred shares will have the following attributes:

• each share will be redeemable, subject to applicable law, at any time at the option of DCo at a redemption amount equal to the difference between the FMV of the properties distributed as described in paragraph 20 below and the amount of the liabilities assumed and the redemption value of the Class E shares issued, as described in paragraph 20 below, divided by the number of shares issued as consideration thereof;
• each share will be retractable, subject to applicable law, at any time at the option of the holder at a retraction amount equal to the redemption amount described above;
• the holder of each share will be entitled to a non-cumulative cash dividend as and when declared by the board of directors from time to time;
• there will be a provision restricting the payment of dividends on other classes of shares so that no such dividends may be paid on any other class of shares of DCo if the resulting realizable value of the net assets of DCo after payment of the dividends would be less than the aggregate of the redemption amounts of all of the DCo Class D preferred shares then outstanding;
• for the purpose of subsection 191(4), the terms and conditions of the shares to be issued as described herein will, at the time of their issue, specify an amount in respect of each share for which the share is to be redeemed, acquired or cancelled and the amount to be specified in respect of each share will be expressed as a dollar amount and will be equal to the FMV of the consideration for which the share was issued; and
• the holder of each share will not be entitled to vote.

17. Thereafter, Niece will transfer all of her shares of Amalco I to DCo in consideration for XXXXXXXXXX common shares of that transferee. Niece and DCo will file a joint election under subsection 85(1) in prescribed form and within the time limit referred to in subsection 85(6) with respect to this transfer of Amalco I shares. The agreed amount specified in the election will be her ACB of the Amalco I shares transferred and will not exceed the FMV of the Amalco I shares.

18. The addition to the stated capital of the common shares of DCo will not exceed the ACB, as determined pursuant to subsection 84.1(2), of the shares of Amalco I to Niece immediately before the transfer.

19. Immediately before the transfer of property described in the following paragraph, the property of Amalco I will be determined on a consolidated basis by including the appropriate pro-rata share of the assets of any corporation over which Amalco I has the ability to exercise significant influence, which assets will be classified into the following three types of property for the purpose of the definition "distribution" in subsection 55(1):

(a) cash and near-cash property, comprising all the current assets, including any cash and accounts receivable;

(b) business property, comprising all of the assets, other than cash or near-cash property, any income of which would, for purposes of the Act, be income from a business (other than a SIB); and

(c) investment property, comprising all of the assets, other than cash or near-cash property, any income of which would, for purposes of the Act, be income from property or a SIB.

For greater certainty, any tax accounts will not be considered property for purposes of the Proposed Transactions described herein.

For purposes of this paragraph, Amalco I will be considered to have significant influence over a corporation if it has significant influence over that corporation, or over any other corporation that has significant influence over that corporation.

In determining the net FMV of each type of property owned by Amalco I, immediately before the transfers of property described below, the liabilities of Amalco I will be allocated to, and deducted in the calculation of the net FMV of, each type of property of Amalco I as follows:

(a) current liabilities of Amalco I will be allocated to each cash or near-cash property. The allocation of current liabilities as described herein will not exceed the aggregate FMV of all the cash or near-cash property of Amalco I;

(b) liabilities, other than current liabilities that relate to a particular property, will then be allocated to the particular property (and effectively to the type to which the particular property belongs) to the extent of its FMV. 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 FMV of such type of property after the allocation of liabilities to a particular property, as described herein; and

(c) any liabilities ("excess unallocated liabilities"), that remain after the allocations described in steps (a) and (b) are made (including excess current liabilities, if any), will then be allocated to the cash or near-cash property, business property, and investment property of Amalco I based on the relative net FMV of each type of property prior to the allocation of such excess unallocated liabilities.

20. Amalco I will transfer a portion of each type of property including 1/3 of the shares of XXXXXXXXXX to DCo in consideration for its assumption of the appropriate amount of each liability of Amalco I and the issuance of XXXXXXXXXX Class E Shares and sufficient number of Class D preferred shares of DCo.

Consequently, Amalco I will own shares of the capital stock of DCo that will give Amalco I at least XXXXXXXXXX% of the votes that could be cast under all circumstances at an annual meeting of shareholders and having a FMV of at least XXXXXXXXXX% of the FMV of all the issued shares of the capital stock of DCo.

Furthermore, DCo will own shares of the capital stock of Amalco I that will give DCo at least XXXXXXXXXX% of the votes that could be cast under all circumstances at an annual meeting of shareholders and having a FMV of at least XXXXXXXXXX% of the FMV of all the issued shares of the capital stock of Amalco I and, in respect of each class of shares, shares of that class having a FMV of at least XXXXXXXXXX% of the FMV of all the issued shares of that class of shares.

The FMV, of each type of property received by DCo, will be equal to the amount determined by the formula:

A * B/C

where

"A" is the FMV (net of related debt), immediately before the transfer, of all property of that type owned at that time by Amalco I,

"B" is the FMV, immediately before the transfer, of all the shares of the capital stock of Amalco I owned by DCo, and

"C" is the FMV, immediately before the transfer, of all the issued shares of the capital stock of Amalco I.

Amalco I and DCo will jointly elect under subsection 85(1) in prescribed form and within the subsection 85(6) time limit with respect to these asset transfers. The agreed amounts specified in the elections will be within the limits stipulated under paragraphs 85(1)(c) through (e.4). The agreed amounts will not be in excess of the FMV of the properties transferred.

The addition to the stated capital of the Class D preferred shares and the Class E preferred shares of DCo will not exceed the agreed amount of the properties transferred less the liabilities assumed.

21. The Class D and Class E preferred shares of DCo issued in consideration for the asset transfer from Amalco I to DCo described in the preceding paragraph will be redeemed at their FMV in consideration for non-interest-bearing promissory notes payable on demand by DCo to Amalco I.

22. The shares of Amalco I to be transferred to DCo via the proposed transaction described in paragraph 17 hereof will be repurchased for cancellation (in two stages if Amalco I has a CDA, whereby the first stage will be equal to that CDA) in consideration for non-interest-bearing demand promissory notes with principal amounts aggregating the FMV of the shares cancelled and payable on demand by Amalco I to DCo. Amalco I will elect to have the first stage's dividend deemed to be paid to DCo on the repurchase of its shares, paid from its CDA to the extent of 1/3 of such CDA at the time of the share repurchase, in the event that there is a balance of CDA available to Amalco I.

23. Amalco I and DCo will offset their above-described promissory notes and the notes will be cancelled.

24. DCo's 1/3 interest in the Class B preferred and common shares of XXXXXXXXXX will be exchanged for new Class G and H preferred shares to be created by Articles of Amendment; these Class G and H shares will rank equally and will be preferred over all other share classes as to capital distribution and dividends. They will be cumulative, non-voting, and non-participating. The Class H preferred shares will be redeemable and retractable at XXXXXXXXXX% of the FMV at the time of distribution of all the property (other than money and indebtedness that is not convertible into other property) received on the distribution described above. All or a portion of the Class H preferred shares may be redeemed. The Class G preferred shares will be redeemable and retractable at the FMV of the shares of XXXXXXXXXX owned by DCo immediately before the exchange, less the redemption and retraction value of the Class H preferred shares.

The Class G and H preferred shares will be entitled to an annual dividend of XXXXXXXXXX of the prime interest lending rate of XXXXXXXXXX at the end of the calendar year for which the dividend will accrue. XXXXXXXXXX and XXXXXXXXXX will personally guarantee the payment of dividends and the redemption and retraction value which will not occur for XXXXXXXXXX years following their issue date. This guarantee will be contained in an unanimous shareholders agreement.

PURPOSE OF THE PROPOSED TRANSACTIONS

25. The purpose of the proposed transactions is to allow Niece to hold, through DCo, her pro-rata share of the net fair market value of the property of Amalco I, independently of her brothers.

RULINGS

Provided that the above statements constitute a complete and accurate disclosure of all of the relevant facts, the purposes of the proposed transactions and the proposed transactions, we rule as follow:

A. Provided that the requisite elections are filed in the prescribed form and within the prescribed time period, and provided that the property transferred meets the definition of eligible property, the provisions of subsection 85(1) will apply to the transfer of property, described in paragraphs 17 and 20 above, such that the agreed amounts in respect of each such property will be deemed to be the transferor's proceeds of disposition and the transferee's cost pursuant to paragraph 85(1)(a).

B. On the winding-up of Amalco II into Amalco I, described in paragraph 13 above, subsection 88(1) will apply so that:

(i) the assets of Amalco II will be deemed to be disposed of to Amalco I at their respective cost amounts to Amalco II immediately before the winding-up; and

(ii) the shares of Amalco II will be deemed to be disposed of by Amalco I immediately before the winding-up for proceeds equal to the greater of the PUC in respect of the shares immediately before the winding-up and their ACB to Amalco I immediately before the winding-up.

C. On the purchase for cancellation of the shares of DCo and on the redemption of the shares of Amalco I, as described in paragraphs 21 and 22, the amounts by which the amounts paid to repurchase or redeem the particular shares exceeds their PUC will be deemed to be dividends paid by the issuer of such shares and received by the holder thereof pursuant to subsection 84(3) and to the extent that such dividends are taxable dividends:

(i) they will be included in the income of the recipient pursuant to subsection 82(1) and deductible in computing taxable incomes of the recipients by virtue of subsection 112(1);

(ii) they will be excluded in determining proceeds of disposition of the share to the recipient of the shares so redeemed or repurchased, pursuant to paragraph (j) of the definition "proceeds of disposition" in section 54;

(iii) they will not be subject to tax under Part IV.1 and Part VI.1.

and

(iv) they will not be subject to tax under Part IV except as provided in paragraph 186(1)(b).

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

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

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

(iii) an acquisition of any shares of a distributing corporation in the circumstances described in subparagraph 55(3.1)(b)(iii);

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

(v) n acquisition of property in the circumstances described in paragraph 55(3.1)(d);

which has not been described herein, by virtue of paragraph 55(3)(b), subsection 55(2) will not apply to the taxable dividends referred to in Ruling C above and, for greater certainty, subsection 55(3.1) will not apply to deny the exemption under paragraph 55(3)(b).

E. The cancellation of the Amalco I and DCo promissory notes, described in paragraph 23 above, will not give rise to a "forgiven amount" within the meaning of subsections 80(1) and 80(1.1).

F. The cancellation of inter-company debts that occurs on the winding-up of Amalco II into Amalco I, described in paragraph 13 above, will not give rise to the application of section 80, if Amalco I files an election in prescribed form and within the time constraints described in subsection 80.01(4).

G. Paragraph 107(2)(a) will apply to the disposition of the assets, described in paragraph 15 above, from the TRUST to Niece to deem the TRUST to have disposed of the property for proceeds of disposition equal to the cost amounts to the TRUST of the assets immediately before that time.

H. The 3-for-1 split of shares of XXXXXXXXXX described in paragraph 14 above will be considered not to be a disposition for purposes of the Act.

I. Provided that the Class B preferred and common shares of XXXXXXXXXX represent capital property to DCo, the provisions of subsection 51(1) will apply to the conversion of Class B preferred shares and common shares of XXXXXXXXXX into Class G preferred shares and Class H preferred shares, described in paragraph 24 above, such that the conversion will be deemed not to be a disposition of the Class B preferred shares and the common shares.

J. Subsections 15(1), 69(4), and 246(1) will not apply to the proposed transactions, in and of themselves.

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

These rulings are given subject to the qualifications and limitations set forth in Information Circular 70-6R4 issued on January 29, 2001, and are binding on the Canada Customs and Revenue Agency provided that the proposed transactions described herein are completed before XXXXXXXXXX.

These rulings are based on the Act in its present form and do not take into account any amendments thereto which if enacted could have an effect on the rulings provided herein.

COMMENTS

Nothing in this letter should be construed as implying that the Canada Customs and Revenue Agency has agreed to or reviewed:

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

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

Yours truly,

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