2000 Ruling 2000-0043633 - 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: A routine butterfly

Position: no issues

Reasons: n/a

XXXXXXXXXX 						2000-004363

XXXXXXXXXX, 2000

Dear Sirs:

Re: XXXXXXXXXX

This is in reply to your letters 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 parties involved none of the issues contained in this letter:

• is in an earlier income tax return of the taxpayers or a related person;
• is being considered by a Tax Services Office or Taxation Centre in connection with a tax return already filed;
• is under objection by the taxpayers or a related person; or
• is before the Courts.

DEFINITIONS

In this letter, unless otherwise expressly stated, the following terms have the meanings specified:

(a) "XXXXXXXXXX Family" means a reference to all of the following: XXXXXXXXXX (father), XXXXXXXXXX (mother), XXXXXXXXXX (son) and XXXXXXXXXX (wife of son);

(b) "XXXXXXXXXX Family" means a reference to all of the following: XXXXXXXXXX (father), XXXXXXXXXX (mother), XXXXXXXXXX (son) and XXXXXXXXXX (wife of son);

(c) "the Distributing Corporation" means XXXXXXXXXX, which is incorporated under the laws of the Province of XXXXXXXXXX having a business number of XXXXXXXXXX;

(d) "the Transferee Corporation" means a corporation to be incorporated by the XXXXXXXXXX Family to be the recipient of assets on the butterfly distribution;

(e) "the Transferee Subsidiary" means a corporation to be incorporated by the Transferee Corporation to facilitate the butterfly distribution;

(f) "XXXXXXXXXX" refers to XXXXXXXXXX whose social insurance number is XXXXXXXXXX;

(g) "XXXXXXXXXX" refers to XXXXXXXXXX, the wife of XXXXXXXXXX, whose social insurance number is XXXXXXXXXX;

(h) "XXXXXXXXXX" refers to XXXXXXXXXX, the son of XXXXXXXXXX, whose social insurance number is XXXXXXXXXX;

(i) "XXXXXXXXXX" refers to XXXXXXXXXX, the wife of XXXXXXXXXX, whose social insurance number is XXXXXXXXXX;

(j) "XXXXXXXXXX" refers to XXXXXXXXXX whose social insurance number is XXXXXXXXXX is the brother of XXXXXXXXXX;

(k) "XXXXXXXXXX" refers to XXXXXXXXXX, the wife of XXXXXXXXXX, whose social insurance number is XXXXXXXXXX;

(l) "XXXXXXXXXX" refers to XXXXXXXXXX, the son of XXXXXXXXXX, whose social insurance number is XXXXXXXXXX;

(m) "XXXXXXXXXX" refers to XXXXXXXXXX, the wife of XXXXXXXXXX, whose social insurance number is XXXXXXXXXX;

(n) "FMV" means fair market value;

(o) "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;

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

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

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

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

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

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

(v) "Distribution Date" is the anticipated date for the completion of the transactions described below which is XXXXXXXXXX;

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

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

(x.1) "NISA" means "net income stabilization account" as defined in subsection 248(1);

(x.2) "NISA Fund No. 1" means the portion of a taxpayer's NISA other than its NISA Fund No. 2;

(x.3) "NISA Fund No. 2" has the meaning assigned by subsection 248(1);

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

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

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

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

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

(dd) "stated capital" has the meaning assigned by and calculated in accordance with the provisions of the Business Corporations Act, S.A. 1981 ("ABCA"); and

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

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

FACTS

1. All of the individual shareholders are citizens and residents of Canada for purposes of the Act and all reside in XXXXXXXXXX in the area served by the XXXXXXXXXX Tax Services Office.

2. The Distributing Corporation is a Canadian-controlled private corporation and a taxable Canadian corporation and was incorporated on XXXXXXXXXX under the laws of the Province of XXXXXXXXXX.

The operations of the Distributing Corporation consist of the following farm activities:

a) XXXXXXXXXX;

b) XXXXXXXXXX; and

c) other miscellaneous but insignificant farming activities.

3. The taxation year of the Distributing Corporation ends on XXXXXXXXXX.

4. The authorized and issued capital of the Distributing Corporation and the amount of the paid-up, stated capital and redemption amount per share (where applicable) of each class of shares which are outstanding is as follows:

Authorized:

XXXXXXXXXX (normal common voting shares, not entitled to dividends if the payment of dividends would reduce the realizable value of the corporation's assets below the amount required to redeem all Preferred shares),

An unlimited number of XXXXXXXXXX Common (non-voting common shares, not entitled to dividends if the payment of dividends would reduce the realizable value of the corporation's assets below the amount required to redeem all Preferred shares),

An unlimited number of XXXXXXXXXX Preferred (redeemable at $XXXXXXXXXX/share, retractable, voting, priority on liquidation and entitled to dividends),

XXXXXXXXXX Preferred Redeemable Voting (redeemable at $XXXXXXXXXX/share, retractable, priority on liquidation and entitled to dividends),

XXXXXXXXXX Preferred Redeemable Non-Voting (redeemable at $XXXXXXXXXX/share, retractable, priority on liquidation and entitled to dividends),

An unlimited number of XXXXXXXXXX Preferred Redeemable Voting (redeemable at $XXXXXXXXXX/share, retractable, priority on liquidation and entitled to dividends),

An unlimited number of XXXXXXXXXX Preferred Redeemable Non-Voting (redeemable at $XXXXXXXXXX/share, retractable, priority on liquidation and entitled to dividends),

An unlimited number of XXXXXXXXXX Preferred Redeemable Non-Voting (redeemable at $XXXXXXXXXX/share, retractable, priority on liquidation and entitled to dividends),

An unlimited number of XXXXXXXXXX Preferred Redeemable Non-Voting (redeemable at $XXXXXXXXXX /share, retractable, priority on liquidation and entitled to dividends),

An unlimited number of XXXXXXXXXX Preferred Redeemable Non-Voting (redeemable at $XXXXXXXXXX/share, retractable, priority on liquidation and entitled to dividends),

An unlimited number of XXXXXXXXXX Preferred Redeemable Non-Voting (redeemable at $XXXXXXXXXX/share, retractable, priority on liquidation and entitled to dividends),

An unlimited number of XXXXXXXXXX Preferred Redeemable Non-Voting (redeemable at $XXXXXXXXXX/share, retractable, priority on liquidation and entitled to dividends),

An unlimited number of XXXXXXXXXX Preferred Redeemable Non-Voting (redeemable at $XXXXXXXXXX /share, retractable, priority on liquidation and entitled to dividends), and

An unlimited number of XXXXXXXXXX Preferred Redeemable Non-Voting (redeemable at $XXXXXXXXXX/share, retractable, priority on liquidation and entitled to dividends).

ISSUED AND OUTSTANDING SHARES
Paid-up Redemption
Class No. outstanding Stated capital capital amount

XXXXXXXXXX

Name of shareholder Class Number

XXXXXXXXXX

5. The Distributing Corporation calculates its income for tax purposes on the cash basis as permitted under section 28 for its farming business.

6. It is anticipated that there may be RDTOH, before completion of the transactions described below.

7. Immediately before the transfers of property described below, the property of the Distributing Corporation will be classified into three types of property for the purposes of a distribution pursuant to paragraph 55(3)(b), as follows:

(a) cash or near-cash property, comprised of the current assets of the Distributing Corporation including cash, deposits, accounts receivable, inventory, patronage reserves, materials and supplies, and rights arising from the prepayment of certain expenses ("prepaid expenses") and the cash surrender value of life insurance policies;

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

(c) investment property, comprising all of the assets of the Distributing Corporation other than cash or near-cash property, any income from which would, for the purposes of the Act, constitute income from property or from a specified investment business.

8. For the purposes of determining the types of property:

(a) NISA's will be considered business property;

(b) shares and reserves in Co-operative organizations from or to which Distributing Corporation purchases goods or sells used or created in its business will be classified as business property; and

(c) any amount receivable from any shareholder or the Transferee Corporation will be considered cash or near-cash since they represent funds which will be turned into cash within 12 months.

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

(a) current liabilities of the Distributing Corporation (including the estimated current portion of long-term debt) will be allocated to each cash or near-cash property in the proportion that the FMV of each such property is of the FMV of all 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 the Distributing Corporation;

(b) any accounts receivable (this would not include those intercorporate receivables classified as cash), inventory, GST and prepaid expenses of the Distributing Corporation, that are initially classified in accordance with paragraph (a) as cash or near-cash property, that will relate to a business that will be carried on by the Distributing Corporation or the Transferee Corporation and that will be collected, sold, or consumed by such corporation in the ordinary course of that business, may then be reclassified as business property and the net FMV thereof, determined after the allocation of current liabilities described in (a) herein, would be included in the net FMV of business property and would not be included in the net FMV of cash or near-cash property;

(c) liabilities, other than current liabilities (which current liabilities will include the estimated current portion of long-term debts), 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

(d) any liabilities ("excess unallocated liabilities"), that remain after the allocations described in steps (a) to (c) 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 the Distributing Corporation based on the relative net FMV of each type of property prior to the allocation of such excess unallocated liabilities.

10. For the purpose of calculating the net FMV of the types of property of the Distributing Corporation:

(a) deferred taxes will not be considered;

(b) deferred revenue will be considered to be a liability to the extent that the amount of such deferred revenue gives rise to a legal obligation to repay such amount should the services not be provided or goods not delivered; and

(c) all term loans (other than the current portion) will be considered to relate to business property; these debts have been incurred in support of the purchase of equipment, land, or other farming assets.

11. After the netting of liabilities as described above, it is anticipated that there will be only two types of property:

(a) cash and near-cash; and

(b) business property, being all of the other assets.

12. No property has or will become property of the Distributing Corporation and no liabilities have been or will be incurred by the Distributing Corporation in contemplation of and before the transfers described below, except as described herein.

13. Except as outlined herein, the Distributing Corporation has no specific intention of disposing of any assets currently owned to an unrelated person following the proposed transactions and the Distributing Corporation will not dispose of any of its assets as part of the series of proposed transactions except as described herein.

14. None of the shareholders of the Distributing Corporation or the Transferee Corporation will dispose of their shares of the Distributing Corporation or the Transferee Corporation as part of the series of proposed transactions except as disclosed herein.

15. The shares of the Distributing Corporation held by its existing shareholders were not acquired in contemplation of the proposed transactions. The various classes of preferred shares were issued on successive freezes to bring family members into the shareholdings of the Distributing Corporation.

16. Other than shares of farm co-operatives which it holds in connection with its farming business, the Distributing Corporation will not, prior to undertaking the transactions described below, own shares of any other corporation.

17. None of the corporations referred to herein is, or will be, a specified financial institution.

18. None of the shares which are referred to herein (including the shares to be issued as described in the proposed transactions) is or will be the subject of a guarantee agreement.

19. None of the corporations referred to herein has, or will have, entered into a dividend rental arrangement in respect of any of the shares to be redeemed as part of the proposed transactions.

20. None of the issued shares referred to herein (including the shares to be issued as described in 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).

21. None of the corporations referred to herein will be a corporation described in any of paragraphs (a) to (f) of the definition "financial intermediary corporation" in subsection 191(1).

22. Each of the Distributing Corporation and the Transferee Corporation will have the financial capacity to honour, upon presentation for payment, the amount payable under the promissory note issued by it as part of the proposed transactions.

PROPOSED TRANSACTIONS

23. The XXXXXXXXXX Family will cause to be incorporated the Transferee Corporation. The authorized share capital of the Transferee Corporation will consist of the following classes of shares:

XXXXXXXXXX (normal voting common shares, not entitled to dividends if the payment of dividends would reduce the realizable value of the corporation's assets below the amount required to redeem all Preferred shares),

An unlimited number of XXXXXXXXXX Common (normal non-voting common shares, not entitled to dividends if the payment of dividends would reduce the realizable value of the corporation's assets below the amount required to redeem all Preferred shares),

An unlimited number of XXXXXXXXXX Preferred (non-voting, redeemable, retractable, voting, priority on liquidation and entitled to dividends),

XXXXXXXXXX Preferred Redeemable Voting (redeemable, retractable, priority on liquidation and entitled to dividends),

XXXXXXXXXX Preferred Redeemable Non-Voting (redeemable at $XXXXXXXXXX/share, retractable, priority on liquidation and entitled to dividends),

An unlimited number of XXXXXXXXXX Preferred Redeemable Voting (redeemable at $XXXXXXXXXX/share, priority on liquidation and entitled to dividends),

An unlimited number of XXXXXXXXXX Preferred Redeemable Non-Voting (redeemable at $XXXXXXXXXX/share, retractable, priority on liquidation and entitled to dividends),

An unlimited number of XXXXXXXXXX Preferred Redeemable Non-Voting (redeemable at $XXXXXXXXXX/share, retractable, priority on liquidation and entitled to dividends),

An unlimited number of XXXXXXXXXX Preferred Redeemable Non-Voting (redeemable at $XXXXXXXXXX/share, retractable, priority on liquidation and entitled to dividends),

An unlimited number of XXXXXXXXXX Preferred Redeemable Non-Voting (redeemable at $XXXXXXXXXX/share, retractable, priority on liquidation and entitled to dividends),

An unlimited number of XXXXXXXXXX Preferred Redeemable Non-Voting (redeemable at $XXXXXXXXXX/share, retractable, priority on liquidation and entitled to dividends),

An unlimited number of XXXXXXXXXX Preferred Redeemable Non-Voting (redeemable at $XXXXXXXXXX/share, retractable, priority on liquidation and entitled to dividends),

An unlimited number of XXXXXXXXXX Preferred Redeemable Non-Voting (redeemable at $XXXXXXXXXX/share, retractable, priority on liquidation and entitled to dividends), and

An unlimited number of XXXXXXXXXX Preferred Redeemable Non-Voting (redeemable at $XXXXXXXXXX/share, retractable, priority on liquidation and entitled to dividends).

24. Each member of the XXXXXXXXXX Family will transfer to the Transferee Corporation all of his or her shares in the capital of the Distributing Corporation for a purchase price equal to the FMV of such shares.

25. The Transferee Corporation will pay the purchase price by issuing the following shares:

Transferor Shares transferred Consideration PUC

XXXXXXXXXX

The aggregate addition to the stated capital of the Transferee Corporation in respect of all of the shares it issues to the XXXXXXXXXX Family will be equal to the aggregate PUC of the shares of the Distributing Corporation so transferred. No non-share consideration will be paid.

26. On incorporation under the XXXXXXXXXX, the Transferee Corporation will be a Canadian-controlled private corporation and a taxable Canadian corporation.

27. Each member of the XXXXXXXXXX Family and the Transferee Corporation will jointly elect under subsection 85(1), in prescribed form and within the time limits prescribed by subsection 85(6), in respect of the shares so transferred. The agreed amount specified in each election will be equal to the adjusted cost base to the transferor of the transferred shares, which amounts will not exceed the FMV of the transferred shares.

28. The Transferee Corporation will incorporate another corporation (hereinafter referred to as the "Transferee Subsidiary"). It will be a Canadian-controlled private corporation and a taxable Canadian corporation. Its authorized share capital consists of one class of common shares ( "TS Common Shares") and one class of preferred shares ("the TS Preferred Shares"). The TS Preferred shares will be redeemable, retractable, entitled to dividends at a reasonable rate determined by reference to the redemption amount of the shares, and have a priority on liquidation to the common shares in the event of the dissolution or winding-up of the Transferee Subsidiary.

29. The Transferee Corporation will subscribe for XXXXXXXXXX TS Common Share on incorporation of the Transferee Subsidiary for the sum of XXXXXXXXXX per share.

30. The Distributing Corporation will sell at FMV to Transferee Subsidiary cash or near-cash, property, investments, and business property which consists of:

(a) a fraction of the net FMV of cash or near-cash property, if any, of the Distributing Corporation immediately prior to the transfer, the numerator of which fraction is the fair market value of the shares of the Distributing Corporation owned by the Transferee Corporation and the denominator of which fraction is the fair market value of all of the shares of the Distributing Corporation;

(b) a fraction of the net FMV of the business property of the Distributing Corporation used in carrying on the farming business, the numerator of which fraction is the fair market value of the shares of the Distributing Corporation owned by the Transferee Corporation and the denominator of which fraction is the fair market value of all of the shares of the Distributing Corporation;

(c) a fraction of the net FMV of the investment property, if any, (it is expected there will be none), the numerator of which fraction is the fair market value of the shares of the Distributing Corporation owned by the Transferee Corporation and the denominator of which fraction is the fair market value of all of the shares of the Distributing Corporation.

31. As a result of such transfers, the net FMV of the cash or near-cash property, business property and investment property received by Transferee Subsidiary (after allocating and deducting, in the manner described in paragraph 9 above, the assumed liabilities of the Distributing Corporation) will be equal to the proportion of the net FMV of the cash or near-cash property, investment property, and business property, respectively, of the Distributing Corporation, immediately before the transfer, that the aggregate of the FMV, immediately before the transfer, of all shares of the capital stock of Distributing Corporation owned by the Transferee Corporation at that time is of the FMV immediately before the transfer of all of the issued shares of the capital stock of the Distributing Corporation at that time (the "Butterfly Proportion").

32. In consideration for such transfer the Transferee Subsidiary may assume certain liabilities of the Distributing Corporation and will issue to the Distributing Corporation TS Preferred Shares, having an aggregate redemption and retraction amount and FMV equal to the amount by which the FMV of the transferred properties that will be received by the Transferee Subsidiary exceeds the FMV of the liabilities assumed by the Transferee Subsidiary.

33. As a result of the transfers described herein, the Transferee Subsidiary will receive its proportionate share of each type of the property of the Distributing Corporation.

34. In respect of the transfer described in the paragraph 31 above, the Distributing Corporation and the Transferee Subsidiary, as the case may be, will jointly elect pursuant to subsection 85(1), in prescribed form and within the time limits prescribed by subsection 85(6), to transfer each asset that is an eligible property, within the meaning of subsection 85(1.1), and that has a FMV in excess of its cost amount to the Distributing Corporation, at an agreed amount that is not less than:

(a) the least of the amounts specified in subparagraphs 85(1)(d)(i), (ii) or (iii) in the case of eligible capital property;

(b) the least of the amounts specified in subparagraphs 85(1)(e)(i), (ii) or (iii) in the case of depreciable property of a prescribed class;

(c) the lesser of the amounts specified in subparagraphs 85(1)(c. 1)(i) or (ii) in the case of capital property (other than depreciable property of a prescribed class), inventory, NISA Fund No. 2, or any other property described in paragraph 85(1)(c. 1); and

(d) the amount specified in paragraph 85(l)(c.2) in respect of inventory owned in connection with the carrying on of a business the income from which is calculated on the cash basis and, for greater certainty, this will apply to inventories utilized in the farming business.

In each case, the agreed amount will not exceed the FMV of the respective property, nor will it be less than the amount permitted under paragraph 85(1)(b).

For the purposes of the joint election described herein, the reference to the undepreciated capital cost to the taxpayer of all property of that class immediately before the disposition found in paragraph 85(1)(e)(i) shall be interpreted to mean that proportion of the undepreciated capital cost to the taxpayer of all of the property of that class that the FMV of the assets that are transferred immediately before the disposition is of the FMV of all property of that class immediately before the disposition.

The subsection 85(1) election referred to herein will exclude any cash, accounts receivable, NISA Fund No. 1, and prepaid expenses.

35. The Transferee Subsidiary will add to its stated capital account in respect of the TS Preferred Shares issued by it an amount equal to the aggregate of the cost amounts of the property transferred from the Distributing Corporation less the FMV of the liabilities of the Distributing Corporation assumed by the Transferee Corporation.

36. The liabilities assumed will be allocated to specific properties transferred; the amount of liabilities to be allocated to a property transferred pursuant to subsection 85(1) will not exceed the elected amount in respect of that property and the amount of liabilities allocated to property other than a property transferred pursuant to subsection 85(1) will not exceed the FMV of the property.

37. Immediately after the transfer of the assets to Transferee Subsidiary, and before the end of that day, the Transferee Subsidiary will redeem its TS Preferred Shares held by the Distributing Corporation and will issue to the Distributing Corporation a non-interest-bearing demand promissory note (the "Transferee Subsidiary Note") having a principal amount and FMV equal to the redemption price of the TS Preferred Shares of the Transferee Subsidiary redeemed. The Distributing Corporation will accept the Transferee Subsidiary Note in full payment of the redemption price of the Preferred Shares redeemed.

38. The Transferee Subsidiary will then be wound up into its parent, the Transferee Corporation. As a result of the windup, the Transferee Corporation Note will become a liability of the Transferee Corporation (hereinafter referred to as "the Transferee Note").

39. Immediately following the foregoing windup of the Transferee Subsidiary into the Transferee Corporation, the Distributing Corporation will purchase for cancellation, at FMV, all of the shares of the Distributing Corporation owned by it. The Distributing Corporation will pay the purchase or redemption price for such shares by issuing to the Transferee Corporation a non-interest-bearing demand promissory note having a principal amount and FMV equal to the FMV of the shares so purchased for cancellation as consideration ("the Distributing Corporation Note"). The Transferee Corporation will accept the Distributing Corporation Note in full payment of the purchase price of the shares sold to the Distributing Corporation.

40. Each of the Distributing Corporation and the Transferee Corporation has the financial capacity to honour, upon presentation for payment, the amount payable under the Transferee Corporation Note or the Distributing Corporation Note, as the case may be.

41. By agreement the Distributing Corporation and the Transferee Corporation will set off the Distributing Corporation Note and the Transferee Corporation Note and they will be cancelled.

42. In the event that, in order to achieve the proportionate transfers outlined above, some of the property acquired by the Transferee Corporation in the course of the reorganization is property required by the Distributing Corporation to carry on its business that it will carry on after the reorganization, such property which in any case will be less than 10% of the net fair market value of all of the property (other than cash and indebtedness that is not convertible into other property) acquired by the Transferee Corporation, will be sold for cash proceeds by the Transferee Corporation to the Distributing Corporation.

43. After the completion of the transactions, the Distributing Corporation and the Transferee Corporation will carry on business independent of each other.

PURPOSE OF THE PROPOSED TRANSACTIONS

XXXXXXXXXX are close to retirement. XXXXXXXXXX wishes to concentrate on the part of the farming business to be retained by the Distributing Corporation (the XXXXXXXXXX operation) XXXXXXXXXX wishes to carry on with the operational part of the farming business (the XXXXXXXXXX business XXXXXXXXXX). As a consequence, after the divisive reorganization, the parties will operate their separate businesses.

RULINGS

Provided that the preceding statements constitute a complete and accurate disclosure of all of the relevant facts, proposed transactions and purposes of the proposed transactions, we confirm as follows:

A. Provided that the requisite elections are made in prescribed form within the prescribed time period, the provisions of subsection 85(1) will apply to the transfer of eligible property by the Distributing Corporation to the Transferee Subsidiary such that the agreed amount in respect of each transfer of such property will be deemed to be the Distributing Corporation's proceeds of disposition and the Transferee Subsidiary's cost thereof pursuant to paragraph 85(1)(a), and in respect of depreciable property, Transferee Subsidiary's cost of such property will be determined in accordance with subsection 85(5).

For the purpose of the election described in paragraph 34, 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 FMV of the property immediately before the disposition is of the FMV of all property of the at class immediately before the disposition".

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

B. As a result of the redemption by the Transferee Subsidiary of its TS Preferred Shares held by the Distributing Corporation and the purchase for cancellation of the shares of the Distributing Corporation held by the Transferee Corporation, and by virtue of paragraphs 84(3)(a) and 84(3)(b):

(a) the Transferee Subsidiary will be deemed to have paid, and the Distributing Corporation will be deemed to have received, a taxable dividend equal to the amount by which the amount paid on the redemption of the Transferee Subsidiary shares exceeds the PUC thereof; and

(b) the Distributing Corporation will be deemed to have paid, and the Transferee Corporation will be deemed to have received, a taxable dividend equal to the amount by which the amount paid in respect of the purchase for cancellation of the Distributing Corporation shares exceeds the PUC thereof.

C. The taxable dividends described in B above:

(a) will be deductible by the recipient corporation in computing its taxable income pursuant to subsection 112(1) and, for greater certainty, the subsection 112(1) deduction in respect of such dividends will not be denied by the provisions of subsections 112(2.1), (2.2), (2.3) or (2.4);

(b) by virtue of paragraph (j) of the definition "proceeds of disposition" in section 54, the amount of the deemed dividends described in B above, will be excluded from the proceeds of disposition of the shares, and any loss arising from the disposition of those shares will be reduced by the amount of such dividends pursuant to subsection 112(3);

(c) no taxes under Part IV. 1 will be payable by a holder in respect of a dividend referred to in B above, as each such dividend will be an excepted dividend as defined in section 187.1;

(d) no taxes under Part VI. 1 will be payable by an issuer of the preferred shares in respect of a dividend referred to in B above, as each such dividend will be an excluded dividend by virtue of the fact that the recipients have a substantial interest in the payor; and

(e) by virtue of subsections 186(2) and 186(4), the Transferee Corporation will be connected with the Distributing Corporation, and the Distributing Corporation will be connected with the Transferee Corporation and no taxes under Part IV will be payable in respect of a dividend referred to in B above, except to the extent provided in paragraph 186(1)(b).

D. Provided that as part of the series or 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)(b)(iii); or

(d) an acquisition of property in the circumstances described in paragraphs 55(3.1)(c) and 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).

E. Subsection 245(2) will not be applied to the proposed transactions, in and by themselves, to redetermine the tax consequences as described 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, and are binding on the Canada Customs and Revenue Agency provided that the proposed transactions are completed before XXXXXXXXXX.

The above rulings are based on the law as it presently stands and do not take into account any proposed amendments to the Act which, if enacted, could have an effect on the rulings provided herein.

COMMENTS

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 FMV or ACB of any asset or the PUC of any shares referred to herein;

(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