2001 Ruling 2000-0044193 - XXXXXXXXXX - 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: Standard Spilt-up full wing butterfly

Position: Rulings given.

Reasons: The law.

XXXXXXXXXX 2000-004419

XXXXXXXXXX, 2001

Dear XXXXXXXXXX:

Re: XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX
Advance Income Tax Ruling

This is in reply to your letter of XXXXXXXXXX, wherein you requested an advance income tax ruling on behalf of the above-noted taxpayers. You have advised us that to the best of your knowledge and that of the taxpayers involved none of the issues involved in this ruling request:

(a) is in an earlier return of the taxpayers or a related person;

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

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

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

(e) is the subject of a ruling previously considered by the Directorate.

Entity/Shareholder Definitions

In this letter unless otherwise indicated:

"Shareholder 1" means XXXXXXXXXX;

"Shareholder 2" means XXXXXXXXXX;

"Shareholder 3" means XXXXXXXXXX;

"DC" means XXXXXXXXXX as more fully described in paragraphs 1 and 2 hereof; and

"Aco" means XXXXXXXXXX as more fully described in paragraph 6 hereof.

Other Definitions

In this letter, unless otherwise indicated, all dollar amounts referred to herein are in Canadian dollars and unless otherwise indicated:

(a) "Act" means the Income Tax Act (Canada), R.S.C. 1985 (5th Supp.) c.1, as amended from time to time and consolidated to the date of this letter and, unless otherwise expressly stated, every reference to a part, section or subsection, paragraph or subparagraph and clause or subclause 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" means the amount that a transferor and transferee have agreed upon in their election under subsection 85(1) in respect of a transfer of "eligible property";

(d) "BCA" means the Business Corporations Act (XXXXXXXXXX);

(e) "BCA1" means the Canada Business Corporations Act;

(f) "capital dividend account" (also referred to as "CDA") has the meaning assigned by subsection 89(1);

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

(h) "CCRA" means the Canada Customs and Revenue Agency:

(i) "commercial obligation" has the meaning assigned by subsections 80(1) and 80.01(1);

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

(k) "dividend refund" has the meaning assigned by subsection 129(1);

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

(m) "financial intermediary corporation" has the meaning assigned by subsection 191(1);

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

(o) "ITAR" means the Income Tax Application Rules, R.S.C. 1985, c.2 (5th Supp.), as amended;

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

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

(r) "private holding corporation" has the meaning assigned by subsection 191(1);

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

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

(u) "related persons" has the meaning assigned by subsection 251(2);

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

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

(x) "significant influence" has the meaning assigned by section 3050 of the Canadian Institute of Chartered Accountants Handbook;

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

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

(aa) "specified person" has the meaning assigned by paragraph (h) of the definition "taxable preferred share" in subsection 248(1);

(bb) "stated capital account" has the meaning assigned thereto by the BCA or the BCA1, as the case may be;

(cc) "substantial interest" has the meaning assigned by subsection 191(2);

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

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

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

FACTS

1. DC is a private corporation and a taxable Canadian corporation incorporated under the BCA. DC carries on a specified investment business and has no business activities other than the investment of its funds. Prior to XXXXXXXXXX DC had a substantial interest in Aco. DC's taxation year ends on XXXXXXXXXX and its CCRA business number is #XXXXXXXXXX. DC's income tax returns are filed with the XXXXXXXXXX Taxation Centre and it deals with the XXXXXXXXXX Tax Services Office.

2. As at XXXXXXXXXX the authorized share capital of DC was comprised of an unlimited number of voting common shares and four separate classes, of an unlimited number each, of special non-voting shares without par value referred to as the Class A, Class B, Class C and Class D shares. Each class of special shares was entitled to an XXXXXXXXXX% annual non-cumulative dividend and was redeemable and retractable. As at XXXXXXXXXX the issued and outstanding shares of DC were owned as follows:

Share Type Shareholder 1 Shareholder 2 Shareholder 3
Common XXXXXXXXXX
Class A XXXXXXXXXX
Class B XXXXXXXXXX
Class C XXXXXXXXXX
Class D XXXXXXXXXX

Shareholder 1, Shareholder 2 and Shareholder 3 are herein individually referred to as a "DC Shareholder" and collectively as the "DC Shareholders". The above shares are collectively referred to as the "Original DC Shares" and are capital property to each DC Shareholder.

On XXXXXXXXXX Articles of Amendment were filed pursuant to the provisions of the BCA to reorganize the capital of DC such that all the issued and outstanding Class A, Class B, Class C and Class D shares of DC that were owned by each DC Shareholder, were exchanged on a one for one basis for additional common shares of DC. Each of the DC Shareholders received an equal number of common shares of DC and each Shareholder now holds XXXXXXXXXX common shares of DC, being 1/3 of the issued common shares of DC. The above common shares are collectively referred to as the "DC Shares" and are capital property to each DC Shareholder.

The aggregate amount added to the stated capital account of the common shares of DC under the BCA as a result of these exchanges was equal to the aggregate amount of the stated capital of the Class A, Class B, Class C and Class D shares of DC that were owned by the DC shareholders and outstanding immediately before the exchanges. These share exchanges were intended to take place pursuant to section 86 and no section 85 elections will be filed in respect thereof. Pursuant to subsection 86(2.1) the aggregate paid-up capital of the Class A, Class B, Class C and D shares of DC so exchanged, together with the paid-up capital of theXXXXXXXXXX existing common shares of DC, will effectively become the aggregate paid-up capital of the common shares of DC immediately after the reorganization of capital of DC. The purpose of this reorganization of capital was to facilitate administrative matters relating to the implementation of the proposed transactions described below.

3. Shareholder 1 acquired its Original DC Shares as a consequence of the death of XXXXXXXXXX had acquired her Original DC Shares from her spouse (XXXXXXXXXX) as a consequence of his death in XXXXXXXXXX and Shareholder 2 and Shareholder 3 acquired their Original DC Shares as consideration for the transfers of their respective shares of Aco (see paragraph 6 below) to DC in XXXXXXXXXX. Prior to the transfer of the Aco shares to DC each of XXXXXXXXXX, Shareholder 1 and Shareholder 2 had continuously owned such shares since prior to XXXXXXXXXX. Consequently, no shares of DC, other than as described in paragraph 2 above, have been acquired by any person in contemplation of the proposed transactions.

4. The executors and sole beneficiaries of Shareholder 1 are the XXXXXXXXXX adult children (the "Children") of XXXXXXXXXX. The Children are entitled to share equally in the assets of Shareholder 1. Each of the DC Shareholders and the Children is resident in Canada for the purpose of the Act.

5. None of the DC Shareholders is a related person in respect of the other DC Shareholders for the purposes of the Act.

6. Aco is a private corporation and a taxable Canadian corporation incorporated under the BCA. Aco is in the business of XXXXXXXXXX. As part of a XXXXXXXXXX series of transactions, in which XXXXXXXXXX (arm's length corporation) acquired shares of Aco the shares of Aco that were owned by DC at that time were converted into XXXXXXXXXX Class A Voting Shares. The Class A Voting Shares of Aco that were issued to DC were redeemable for $XXXXXXXXXX per share and have gradually been redeemed. As at XXXXXXXXXX, DC owned XXXXXXXXXX Class A Voting Shares of Aco that gave DC a substantial interest in Aco. However, the XXXXXXXXXX Class A Voting Shares of Aco owned by DC were, in accordance with a redemption schedule, redeemed by Aco on XXXXXXXXXX. Therefore, at the time of the classification of the types of property owned by DC and the proposed transfer of such property to the DC Shareholders, as described in paragraphs 14 to 16 below, DC will not own any shares of Aco. The XXXXXXXXXX acquisition of shares of Aco by XXXXXXXXXX and the redemptions of the Class A Voting Shares of Aco held by DC, as described above, have occurred, independent of the proposed transactions described herein and for greater certainty were not made in contemplation of the proposed transactions described herein.

7. DC's current assets consist mainly of cash, accrued interest receivable, guaranteed investment certificates, bankers' acceptances, income taxes and G.S.T. receivable, the current portion of various long-term debt instruments and an advance in the amount of $XXXXXXXXXX made to Shareholder 3 on XXXXXXXXXX which is repayable on demand, is not convertible into any other property and bears interest at the rate of XXXXXXXXXX%. DC's non-current assets consist of various portfolio investments, which include shares of Canadian and foreign corporations, government and corporate bonds and a mortgage. For greater certainty and notwithstanding the above, to the extent that the full amount, or any portion of any non-current asset (i.e., any bond, mortgage or other similar investment) will mature within XXXXXXXXXX or can otherwise be redeemed by DC without penalty within XXXXXXXXXX, the particular non-current asset, or portion thereof, will be treated as a cash or near cash property for the purposes of the classification of the three types of property of DC described in paragraph 14 below. DC also owns an interest in two life insurance policies and XXXXXXXXXX for investment purposes. One of the life insurance policies owned by DC insures the life of Shareholder 2 and the other insures the life of Shareholder 3. Included among DC's assets is XXXXXXXXXX of unserviced vacant land near XXXXXXXXXX (the "XXXXXXXXXX Land"). The XXXXXXXXXX Land has a value of approximately $XXXXXXXXXX and is currently leased to a farmer. DC also has a minimal amount of liabilities (i.e., income taxes payable) all of which are classified as current liabilities. There is not expected to be any material change in the composition of DC's assets or liabilities between the date of this letter and the date the proposed transactions described in this letter are undertaken.

8. DC's RDTOH balance as at XXXXXXXXXX was $XXXXXXXXXX and is expected to be positive at the time the proposed transactions described in this letter are undertaken.

PROPOSED TRANSACTIONS

9. Shareholder 1 will incorporate a new corporation under the provisions of the BCA1 ("Transferee 1"). Shareholder 2 owns all the shares of a new corporation, XXXXXXXXXX ("Transferee 2"), that was incorporated on XXXXXXXXXX under the BCA. Transferee 2 will be used for purposes of the proposed transactions. Shareholder 3 will incorporate a new corporation under the provisions of the BCA ("Transferee 3").

Transferee 1, Transferee 2 and Transferee 3 are collectively referred to as the ("Transferee Corporations"). Each Transferee Corporation is, or will be when incorporated, a taxable Canadian corporation and will be a Canadian-controlled private corporation. The sole undertaking of each Transferee Corporation will be the investment of its funds such that each of the Transferee Corporations referred to herein will be a private holding corporation.

10. The authorized share capital of each Transferee Corporation either does or will consist of:

(a) a class of common shares; and

(b) a class of special shares designated as Class A Special Shares with the following attributes:

(i) voting;

(ii) redeemable and retractable at a redemption amount ("Redemption Amount") per share equal to the amount determined by dividing the fair market value of the consideration for which the Class A Special Shares are issued by the number of such shares so issued. There will be a price adjustment clause to adjust the Redemption Amount if it is determined that the fair market value of the consideration for which the Class A Special Shares are issued is other than what it is determined to be at the time of the issuance of the Class A Special Shares; and

(iii) entitled to an annual non-cumulative dividend, not to exceed XXXXXXXXXX% per annum of their Redemption Amount, to be paid at the discretion of the directors.

11. Shareholder 1 will transfer to Transferee 1 all of its common shares of DC. As the sole consideration for the transfer, Transferee 1 will issue common shares to Shareholder 1. The common shares of Transferee 1 issued to Shareholder 1 will be capital property. Shareholder 1 will control Transferee 1 throughout the series of transactions described herein.

Shareholder 1 and Transferee 1 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 common shares of DC so transferred will be equal to the lesser of the amounts described in subparagraphs 85(1)(c.1)(i) and (ii). The amount to be added to the stated capital account under the BCA1 of the common shares of Transferee 1 issued as consideration for the DC common shares will not be greater than the amount determined as B for the purposes of paragraph 84.1(1)(a).

12. Shareholder 2 will transfer to Transferee 2 all of its common shares of DC. As the sole consideration for the transfer, Transferee 2 will issue common shares to Shareholder 2. The common shares of Transferee 2 issued to Shareholder 2 will be capital property. Shareholder 2 will control Transferee 2 throughout the series of transactions described herein.

Shareholder 2 and Transferee 2 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 common shares of DC so transferred will be equal to the lesser of the amounts described in subparagraphs 85(1)(c.1)(i) and (ii). The amount to be added to the stated capital account under the BCA of the common shares of Transferee 2 issued as consideration for the DC common shares will not be greater than the amount determined as B for the purposes of paragraph 84.1(1)(a).

13. Shareholder 3 will transfer to Transferee 3 all of its common shares of DC. As the sole consideration for the transfer, Transferee 3 will issue common shares to Shareholder 3. The common shares of Transferee 3 issued to Shareholder 3 will be capital property. Shareholder 3 will control Transferee 3 throughout the series of transactions described herein.

Shareholder 3 and Transferee 3 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, expressed in dollars, in respect of the common shares of DC so transferred will be equal to the lesser of the amounts described in subparagraphs 85(1)(c.1)(i) and (ii). The amount to be added to the stated capital account under the BCA of the common shares of Transferee 3 issued as consideration for the DC common shares will not be greater than the amount determined as B for the purposes of paragraph 84.1(1)(a).

14. Immediately before the transfers of property described in paragraph 16 below, all the property owned by DC will be classified into the following three types of property 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 DC, including cash, accounts receivable, inventories, the amount or any portion of DC's non-current assets described in paragraph 7 above that will mature within 1 year or that can otherwise be redeemed by DC without penalty within 1 year, the interests in the two life insurance policies and rights arising from prepaid expenses;

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

As a result of the above DC will not own any business property at the time of such determinations. For greater certainty, any tax accounts of DC, including the balance of its RDTOH and capital dividend account, if any, will not be considered property of DC for the purposes of the transactions described below.

15. In determining the net fair market value of each type of property owned by DC immediately before the transfers of property described in paragraph 16 below, the liabilities of DC will be allocated to, and deducted in the calculation of, the net fair market value of each type of property of DC as follows:

(a) current liabilities of DC, if any, will be allocated to cash or near cash property of DC 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 DC;

(b) liabilities of DC, other than current liabilities, if any, 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 DC based on the relative net fair market value of each type of property prior to the allocation of such excess unallocated liabilities.

For greater certainty, deferred income taxes of DC, if any, will not be considered a liability of DC for the purposes of the proposed transactions described below. Also, it is anticipated that DC will not have any liabilities other than current liabilities which will be fully allocated to the cash or near cash property as described above. Consequently, following the allocation of DC's liabilities as described herein the property of DC will consist of cash or near cash property and investment property.

16. DC will transfer at fair market value to each of Transferee 1, Transferee 2 and Transferee 3 one-third of the net fair market value of each type of property then owned by DC.

As consideration for the transfer of property described herein, each particular Transferee Corporation will issue to DC that number of its Class A Special Shares which will have an aggregate fair market value and an aggregate redemption and retraction value equal to the aggregate fair market value of the transferred properties so transferred to the particular Transferee Corporation by DC.

The amount to be added to the stated capital account under the BCA of the Class A Special Shares issued by each particular Transferee Corporation will be equal to the aggregate fair market value of the transferred property received by each particular Transferee Corporation for their issue. No liabilities of DC will be assumed by any particular Transferee Corporation as DC will retain an amount of cash equal to the aggregate amount of its liabilities such that it will be able to repay such liabilities in full. Subsection 85(2.1) will apply to determine the paid-up capital of the Class A Shares in each instance.

For greater certainty, in determining which particular investment property will be transferred to a particular Transferee Corporation,

(i) the interest in the life insurance policy held by DC in respect of the life of Shareholder 2 will be transferred to Transferee 2;

(ii) the interest in the life insurance policy held by DC in respect of the life of Shareholder 3 will be transferred to Transferee 3;

(iii) XXXXXXXXXX held by DC will be transferred to Transferee 2 with the remaining XXXXXXXXXX transferred to Transferee 3; and

(iv) an undivided interest in the XXXXXXXXXX Land will be transferred to each of Transferee 2 and Transferee 3 but not to Transferee 1.

17. Immediately following the completion of the transactions described in paragraph 16 above, DC will be "connected" to each Transferee Corporation within the meaning of subsection 186(4) on the basis that DC will own more than 10% of the issued share capital of each such Transferee Corporation having full voting rights under all circumstances and having a fair market value exceeding more than 10% of the fair market value of all of the issued shares of the capital stock of each such Transferee Corporation. Also, immediately following the completion of the transactions described in paragraph 1 above neither DC nor any Transferee Corporation will have a substantial interest in any corporation that is not a private holding corporation. For greater certainty, DC will not control any Transferee Corporation.

18. In respect of the transfers of property described in 16 above, DC and each of Transferee 1, Transferee 2, and Transferee 3, as the case may be, will jointly elect pursuant to subsection 85(1) (in prescribed form and within the time specified in subsection 85(6)), to transfer each such property that is an eligible property of DC at an agreed amount, expressed in dollars, equal to the lesser of the amounts described in subparagraphs 85(1)(c.1)(i) and (ii).

19. Immediately following the transactions described in paragraph 16 above, each Transferee Corporation will redeem all its Class A Special Shares held by DC at their fair market value, being the aggregate of the Redemption Amounts of the Class A Special Shares so redeemed, and will issue to DC as consideration therefor a demand non-interest bearing promissory note with a principal amount and fair market value equal to the aggregate Redemption Amounts of the Class A Special Shares so redeemed (each particular Transferee Corporation's note is hereinafter referred to as the "Transferee 1 Note", the "Transferee 2 Note" and the "Transferee 3 Note", as the case may be, and collectively referred to as the "Transferee Notes"). DC will accept the receipt of each Transferee Corporation's note as full payment of the aggregate Redemption Amount of the Class A Special Shares so redeemed by each particular Transferee Corporation.

20. At the end of the day on which the Class A Special Shares of each particular Transferee Corporation are redeemed, as described above, each particular Transferee Corporation will cause its first taxation year to end.

21. On the day following the day described in paragraph 20 above, the Transferee Corporations, as the shareholders of DC, will, by special resolution, resolve to liquidate and dissolve DC pursuant to the provisions of the BCA. Under the terms of the winding-up, DC will assign and distribute the Transferee 1 Note to Transferee 1, the Transferee 2 Note to Transferee 2 and the Transferee 3 Note to Transferee 3. As a result of the assignment and distribution of the Transferee Notes by DC, the obligation of each particular Transferee Corporation under its Transferee Note will be cancelled. No agreement or resolution relating to the winding up of DC or the distribution of its property will provide for the cancellation of any shares of DC. At such time DC will not have any balance of pre-1972 capital surplus on hand.

22. Prior to the distribution of the Transferee Notes as described in paragraph 21 above, DC will elect, pursuant to subsection 83(2), in prescribed manner and prescribed form, that the full amount of any resulting dividend referred to in subparagraph 88(2)(b)(i) be deemed to be a capital dividend.

23. Following the receipt of the dividend refund to which DC will become entitled as a result of the proposed transactions described herein, DC will distribute one-third of such amount to each of the Transferee Corporations. The refund will not arise until after the end of the fiscal period in which the proposed transactions described above are completed.

24. Following the completion of all of the proposed transactions described herein, all the properties of DC will have been distributed and all liabilities discharged and Articles of Dissolution will be filed and DC will be dissolved.

Additional Information

25. None of the corporations referred to herein is, or will be, at any time during the series of transactions herein described, a specified financial institution or a restricted financial institution.

26. No assets have been or will be acquired or disposed of and no liabilities have been or will be incurred by DC in contemplation of the proposed transactions, except in the ordinary course of business or as described herein.

27. 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.

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 subject to a guarantee agreement.

29. 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.

30. 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).

31. Each of the Transferee Corporations 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.

32. The common shares of DC referred to herein are not, and will not, as a result of the proposed transactions, be taxable preferred shares.

33. 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.

34. None of the corporations referred to herein is, or will be, at any time during the series of transactions herein described, a corporation described in any of paragraphs (a) to (f) of the definition of financial intermediary corporation.

PURPOSE OF THE PROPOSED TRANSACTIONS

35. The purpose of the proposed transactions is to divide the assets of DC equally among its three shareholders on a tax deferred basis so that each of Shareholder 1, Shareholder 2 and Shareholder 3 will be able to independently manage the assets and independently plan or manage their personal estates.

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. On the redemption by each Transferee Corporation of its respective Class A Special Shares held by DC as described in 19 above, and as a result of the distributions by DC in the course of its winding-up as described in 21 above:

(a) by virtue of paragraphs 84(3)(a) and 84(3)(b), each Transferee Corporation will be deemed to have paid, and DC will be deemed to have received, a taxable dividend at that time equal to the amount, if any, by which the amount paid by the particular Transferee Corporation to redeem its Class A Special 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 (iii) herein, each Transferee Corporation will be deemed to have received a dividend (the "winding-up dividend") on their shares of DC equal to the proportion of the amount by which the aggregate fair market value of the property of DC distributed by DC to the particular Transferee Corporation 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 DC's CDA determined immediately before the payment of the winding-up dividend shall be deemed, for the purposes of the subsection 83(2) election referred to in paragraph 22 above, to be the full amount of a separate dividend,

(iii) 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, 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) above;

(i) will not be subject to tax under Part IV.1 of the Act on the basis that the dividends will be "excepted dividends" within the meaning of section 187.1;

(ii) will not be subject to tax under Part VI.1 of the Act on the basis that the dividends will be "excluded dividends" within the meaning of subsection 191(1) provided that the Transferee Corporations are private holding corporations at the time such dividends are paid; and

(f) the deemed dividends referred to in (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

(g) by virtue of subsection 186(4), each Transferee Corporation will be connected with DC and DC will be connected with each Transferee Corporation. Consequently, the Transferee Corporations and DC 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).

B. Provided that as part of the series of transactions or events that includes the proposed transactions described herein, 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 property in the circumstances described in paragraph 55(3.1)(c); or

(iv) an acquisition of property in the circumstances described in paragraph 55(3.1)(d),

which has not been described in the proposed transactions described above, then by virtue of paragraph 55(3)(b), subsection 55(2) will not apply to the taxable dividends referred to in ruling A above. For greater certainty, subsection 55(3.1) will not apply to preclude the application of paragraph 55(3)(b) to the transactions proposed herein.

C. The settlement of the Transferee 1 Note, Transferee 2 Note and Transferee 3 Note as described in paragraph 21 above will not give rise to a "forgiven amount" within the meaning of subsection 80(1) or section 80.01.

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

E. 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 70-6R4 dated January 29, 2001 and are binding on the CCRA 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.

Comments

1. You have advised in paragraph 10 above, that there is a price adjustment clause to adjust the Redemption Amount of each Transferee Corporation's Class A Shares if it is determined that the fair market value of the consideration for which such shares were issued is other than what it is determined to be at the time of their issue. Nothing in this letter should be construed as confirmation, express or implied, that, for the purpose of any of the rulings given above, any adjustment to the fair market value of the properties transferred and the redemption amount of the shares issued as consideration, will be effective retroactively to the time of the transfer and issuance of shares. In addition, any such adjustment could affect the ruling given in Ruling B above. Furthermore, none of the rulings given in this letter are intended to apply to the operation of a price adjustment clause, since its comming into effect will be due to circumstances that do not constitute proposed transactions that are seriously contemplated. The general position of the CCRA with respect to price adjustment clauses is stated in Interpretation Bulletin IT-169.

2. You have advised that shortly after the implementation of the proposed transactions described above Transferee 1 may be dissolved and distribute its assets to Shareholder 1. Thereafter, Shareholder 1, in the normal administration of the estate, may distribute its assets, including the property received from Transferee 1, to its beneficiaries who are described in paragraph 4 above.

Nothing in this letter should be construed as confirming that the CCRA has agreed that such transactions will not occur as part of the series of transactions which includes the proposed transactions described herein such that either paragraph 55(3.1)(b) or (c) may apply to deny the paragraph 55(3)(b) exception for the dividends received by the Transferee Corporations. However, in the event that paragraph 55(3.1)(c) is applicable it would not apply, in and by itself, to deny the paragraph 55(3)(b) exception in respect of the dividends received by Transferee 2, Transferee 3 or DC.

3. Nothing in this ruling should be construed as implying that the CCRA 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;

(b) any tax consequences relating to the facts and proposed transactions described herein, including the possible application of subsection 55(2) to any of the redemptions of the Aco shares, other than those specifically described in the rulings given above;

(c) any tax consequences relating to a subsequent disposition of any shares or property by any of the corporations referred to herein, and nothing in this ruling should be construed as implying that any such subsequent transactions will not, for the purposes of subsection 55(3.1), be considered to be part of a series of transactions or events described herein.

Yours truly,

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

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