2001 Ruling 2000-0050983 - Re-freeze transactions

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: Application of 55(2) and GAAR to re-freeze transactions.

Position: Dividends not subject to subsection 55(2) by virtue of paragraph 55(3)(a), GAAR not applicable.

Reasons: Paragraph 55(3)(a) satisfied. Not offensive in policy terms, similar to position on original freezes.

XXXXXXXXXX 2000-005098

XXXXXXXXXX, 2001

Dear XXXXXXXXXX:

Re: XXXXXXXXXX
Advance Income Tax Ruling

We are writing in response to your letter of XXXXXXXXXX, wherein you requested an advance income tax ruling on behalf of the above-referenced taxpayer. We acknowledge receipt of your correspondence dated XXXXXXXXXX and our telephone conversations in connection herewith.

To the best of your knowledge, and that of the taxpayers involved, none of the issues contained herein is:

(i) dealt with in an earlier return of any such taxpayer or a related person;

(ii) being considered by a tax services office or taxation centre in connection with a previously filed tax return of any such taxpayer or a related person;

(iii) under objection by any such taxpayer or a related person;

(iv) subject to a ruling previously issued by the Income Tax Rulings Directorate; or

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

DEFINITIONS

In this letter, unless otherwise expressly stated:

(a) "Act" means the Income Tax Act, R.S.C. 1985, c.1 (5th Supp.), as amended, and unless otherwise stated, every reference herein to a section, subsection, paragraph or subparagraph is a reference to the relevant provision of the Act;

(b) "ACB" means "adjusted cost base" as that expression is defined in section 54 and subsection 248(1);

(c) "agreed amount" has the meaning assigned by subsection 85(1);

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

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

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

(g) "Existing Trust" means the XXXXXXXXXX;

(h) "Family" means the XXXXXXXXXX, including XXXXXXXXXX ("Mr. B"), XXXXXXXXXX ("Mrs. B"), and their adult children XXXXXXXXXX;

(i) "Holdco" means XXXXXXXXXX;

(j) "Mr. C" means XXXXXXXXXX, a Canadian resident individual who is not related to any member of the Family;

(k) "Mr. D" means XXXXXXXXXX, a Canadian resident individual who is not related to any member of the Family;

(l) "Mr. E" means XXXXXXXXXX, an individual who is not related to any member of the Family;

(m) "Opco" means XXXXXXXXXX;

(n) "PUC" means paid-up capital as that expression is defined in subsection 89(1);

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

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

(q) "small business corporation" has the meaning assigned in subsection 248(1);

(r) "stated capital" has the meaning assigned to that term in the BCA;

(s) "Subco" means XXXXXXXXXX, a wholly-owned subsidiary of Holdco; and

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

Our understanding of the facts, proposed transactions and purpose of the proposed transactions is as set forth below.

Facts

1. Mr. B, Mrs. B, Mr. C, Mr. D, Holdco, Opco and the Existing Trust are all resident in Canada for the purposes of the Act. Mr. B and Mrs. B are married. Mr. B and Mrs. B have four adult children who are all residents of Canada for purposes of the Act. The four children are: XXXXXXXXXX.

2. Opco is a Canadian-controlled private corporation, small business corporation and a taxable Canadian corporation which was incorporated under the BCA. The issued and outstanding shares of Opco consist of:

a) XXXXXXXXXX common shares having an aggregate PUC of $XXXXXXXXXX;

b) XXXXXXXXXX Class C non-voting preferred shares which are redeemable for an amount of $XXXXXXXXXX per share and which are entitled to a non-cumulative dividend of $XXXXXXXXXX per share per annum.

The holders of these shares are as follows:

Common Shares Number PUC Aggregate Redemption
of Shares ACB /Retraction
Value
Holdco XXXXXXXXXX

Mr. C XXXXXXXXXX

Mr. D XXXXXXXXXX

Total XXXXXXXXXX

Class C non-voting
preferred shares

Holdco XXXXXXXXXX

3. XXXXXXXXXX.

4. Holdco is a Canadian-controlled private corporation, small business corporation and a taxable Canadian corporation which was incorporated under the BCA. The issued and outstanding shares of Holdco are:

a) XXXXXXXXXX Class B voting common shares having an aggregate PUC of $XXXXXXXXXX;

b) XXXXXXXXXX Class A non-voting preferred shares which are redeemable and retractable for the redemption price of $XXXXXXXXXX per share and which are entitled to a non-cumulative dividend of XXXXXXXXXX% per month on the redemption price;

c) XXXXXXXXXX Class B non-voting preferred shares which are redeemable and retractable for the redemption price of $XXXXXXXXXX per share and which are entitled to a non-cumulative dividend of XXXXXXXXXX% per month on the redemption price;

d) XXXXXXXXXX Class C voting preferred shares which are redeemable for the redemption price of $XXXXXXXXXX per share and which are entitled to a non-cumulative dividend of XXXXXXXXXX% per month on the redemption price;

e) XXXXXXXXXX Class D non-voting preferred shares which are redeemable and retractable for the redemption price of $XXXXXXXXXX per share and which are entitled to a non-cumulative dividend of XXXXXXXXXX% per month on the redemption price

The holders of these shares are as follows:

Class B Common Number of PUC Aggregate Redemption
Shares Shares ACB /Retraction
Value

Mrs. B XXXXXXXXXX

Existing Trust XXXXXXXXXX
Total XXXXXXXXXX

Class A non-voting
preferred shares

Mr. B XXXXXXXXXX

Class B non-voting
preferred shares

Mr. B XXXXXXXXXX

Class C voting
preferred shares

Mr. B XXXXXXXXXX

Class D non-voting
preferred shares

Mrs. B XXXXXXXXXX

Existing Trust XXXXXXXXXX
Total XXXXXXXXXX

Mr. B controls Holdco by virtue of his ownership of the Class C voting preferred shares.

5. Holdco is a holding company which owns shares in Opco and Subco. Holdco also invests in various public securities.

6. Subco owns real property that is used in XXXXXXXXXX Opco. Subco's only operations are the leasing of the real property to Opco and the maintenance of the property.

7. The common shares of Holdco are capital property in the hands of each of the shareholders.

8. The Existing Trust was established under the laws of XXXXXXXXXX. The Existing Trust has the following attributes:

• The settlor of the Existing Trust was XXXXXXXXXX.
• The terms of the Existing Trust are irrevocable.
• The Existing Trust is fully discretionary as to income and capital distributions.
• The trustees are Mr. B, Mrs. B and Mr. E.
• All decisions of the trustees from time to time are to be determined by a majority vote.
• The sole capital beneficiaries of the Existing Trust are the children of Mr. B and Mrs. B and their issue.
• The sole income beneficiaries of the Existing Trust are Mr. B and the children of Mr. B and Mrs. B.
• Paragraph XXXXXXXXXX of the Deed of Settlement grants the trustees, in their unfettered discretion from time to time, the power to transfer and convey the whole or any share of the trust funds, except any share which has vested indefeasibly in one or more of the beneficiaries, to any other trust or settlement. Any amounts so transferred shall be held by the trustees of such trust or settlement with and subject to the powers and provisions of such other trust or settlement provided that (i) such other trust or settlement does not infringe the rules against perpetuities applicable to the Existing Trust, and (ii) one or more of the beneficiaries of the Existing Trust (who are not trustees thereof) alive at the date of such transfer and conveyance shall be one or more of the beneficiaries of such other trust or settlement.

9. Due to the existence of ambiguity in the interpretation of paragraph XXXXXXXXXX of the Deed of Settlement of the Existing Trust, the trustees of the Existing Trust have applied to the Court of Queen's Bench of XXXXXXXXXX the "Court") seeking an order (the "Court Order") pursuant to XXXXXXXXXX the rules of the Court, declaring that the proper interpretation of paragraph XXXXXXXXXX of the Deed of Settlement for the Existing Trust has never authorized or permitted the trustees thereunder to transfer and convey the whole or any share of the trust fund to any other trust or settlement whose beneficiaries could include persons who are not listed as beneficiaries under the Deed of Settlement for the Existing Trust as described in paragraph 8 above.

Proposed Transactions:

10. A new holding company ("Trust Holdco") will be incorporated under the BCA and will be a taxable Canadian corporation and a Canadian-controlled private corporation. The authorized capital of Trust Holdco will include:

(a) Class A voting common shares;

(b) Class B voting common shares; and

(c) voting preferred shares which are entitled to non-cumulative dividends and which are redeemable at the amount paid-up thereon.

Mr. B will subscribe for XXXXXXXXXX Class B common shares and XXXXXXXXXX voting preferred shares of Trust Holdco. Mrs. B will subscribe for XXXXXXXXXX Class A common shares of Trust Holdco. Mr. B will control Trust Holdco by virtue of his ownership of the preferred shares.

11. A new holding company ("Tier II Holdco") will be incorporated under the BCA and will be a taxable Canadian corporation and a Canadian-controlled private corporation. The authorized capital of Tier II Holdco will include:

(a) Class A voting common shares;

(b) Class B voting common shares;

(c) an unlimited number of non-voting Class A preferred shares which are entitled to non-cumulative dividends and which are redeemable and retractable at an amount equal to the fair market value of the consideration received at the time of their issue;

(d) an unlimited number of non-voting Class B preferred shares which are entitled to non-cumulative dividends and which are redeemable and retractable at an amount equal to the fair market value of the consideration received at the time of their issue; and

(e) XXXXXXXXXX voting Class C preferred shares which are entitled to non-cumulative dividends and which are redeemable at the amount paid-up thereon.

Mr. B will subscribe for XXXXXXXXXX voting Class C preferred shares of Tier II Holdco. Mr. B will control Tier II Holdco by virtue of his ownership of the Class C preferred shares. Tier II Holdco will become a holding company for the Existing Trust's interest in Holdco.

12. A new holding company ("Mrs. B Holdco") will be incorporated under the BCA and will be a taxable Canadian corporation and a Canadian-controlled private corporation. The authorized capital of Mrs. B Holdco will include:

(a) Class A voting common shares;

(b) Class B voting common shares;

(c) an unlimited number of non-voting Class A preferred shares which are entitled to non-cumulative dividends and which are redeemable and retractable at an amount equal to the fair market value of the consideration received at the time of their issue; and

(d) an unlimited number of non-voting Class B preferred shares which are entitled to non-cumulative dividends and which are redeemable and retractable at an amount equal to the fair market value of the consideration received at the time of their issue.

Mrs. B Holdco will become a holding company for Mrs. B's interest in Holdco. No shares of Mrs. B Holdco will be issued prior to the transactions described in paragraph 20 below.

13. A new holding company ("Mr. B Holdco") will be incorporated under the BCA and will be a taxable Canadian corporation and a Canadian-controlled private corporation. The authorized capital of Mr. B Holdco will include:

(a) Class A voting common shares;

(b) Class B voting common shares;

(c) an unlimited number of non-voting Class A preferred shares which are entitled to non-cumulative dividends and which are redeemable and retractable at an amount equal to the fair market value of the consideration received at the time of their issue; and

(d) an unlimited number of non-voting Class B preferred shares which are entitled to non-cumulative dividends and which are redeemable and retractable at an amount equal to the fair market value of the consideration received at the time of their issue.

Mr. B Holdco will become a holding company for Mr. B's interest in Holdco (other than his Class C voting preferred shares of Holdco, which he will continue to hold personally). No shares of Mr. B Holdco will be issued prior to the transactions described in paragraph 21 below.

14. XXXXXXXXXX (the "New Trust") will be settled under the laws of XXXXXXXXXX. The terms of the new trust will include:

a) The settlor will be an individual who is not a trustee or beneficiary of the New Trust.

b) The trustees of the New Trust will consist of Mr. B, Mrs. B and a third trustee, who may be a person who is not related to any member of the Family.

c) The terms of the New Trust will require a trustee to resign should the trustee become non-resident of Canada.

d) The sole income beneficiaries will be Trust Holdco, Mr. B, Mrs. B and the issue of Mr. & Mrs. B (who have attained the age of eighteen (18) years). The sole capital beneficiaries will be Mr. B, Mrs. B, and the issue of Mr. & Mrs. B.

e) The trustees shall have unfettered discretion to make payments of income or capital of the trust fund to or for the benefit of any one or more of the income beneficiaries at any time prior to the distribution date. In making any such payments or applications of the income and/or capital, the trustees may, in their absolute discretion, completely exclude any one or more of the income beneficiaries.

f) The trustees shall have unfettered discretion and authority to distribute any property in the trust fund to any one or more of the beneficiaries in satisfaction of all or any part of any capital interest of such beneficiary. Any exercise of such discretion and authority shall be binding on all of the beneficiaries whether or not it would have the effect of conferring an advantage on any one or more of the beneficiaries at the expense of any one or more of the other beneficiaries or could otherwise be considered as not being an impartial exercise by the trustees or as not maintaining an even hand among the beneficiaries.

g) All decisions of the trustees of the New Trust will be determined by a majority vote with a provision ensuring that there will be a minimum of XXXXXXXXXX trustees at all times.

h) The settlement agreement will grant the trustees of the New Trust the power to transfer and convey the whole or any share of the trust funds, other than any share which has vested indefeasibly to one or more beneficiaries, to another trust or settlement provided that one or more of the beneficiaries of the New Trust (who are not trustees of the New Trust) alive at the date of such transfer shall be the sole beneficiaries of such other trust or settlement.

i) The terms of the New Trust will provide that the New Trust be wound up at the earlier of (a) the discretion of the trustees of the New Trust, and

(b) XXXXXXXXXX days prior to the XXXXXXXXXX anniversary of the settlement of the New Trust.

15. The Existing Trust will transfer its XXXXXXXXXX Class B common shares and XXXXXXXXXX Class D preferred shares in Holdco to Tier II Holdco in exchange for XXXXXXXXXX Class A common shares of Tier II Holdco. In connection with the transfer, the trustees of the Existing Trust and Tier II Holdco will jointly elect in prescribed form within the time limit referred to in subsection 85(6), to have the provisions of subsection 85(1) apply to the transfer. Tier II Holdco will add to the stated capital account maintained for its common shares an amount equal to the aggregate of the paid-up capital of the common and preferred shares of Holdco transferred.

16. Holdco will file Articles of Amendment under the BCA to:

a) limit the maximum number of Class A common shares that Holdco can issue to XXXXXXXXXX;

b) limit the maximum number of Class B common shares that Holdco can issue to XXXXXXXXXX;

c) limit the maximum number of Class C preferred shares that Holdco can issue to XXXXXXXXXX;

d) to authorize Holdco to issue an unlimited number of Class E preferred shares issuable in a series, with the following series authorized:

i) XXXXXXXXXX Series 1, Class E preferred shares

ii) XXXXXXXXXX Series 2, Class E preferred shares;

The Series 1 and Series 2, Class E preferred shares of Holdco will have the following attributes:

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

(ii) entitled to a non-cumulative preferential dividend at the fixed rate of XXXXXXXXXX% per month. In addition a discretionary dividend may be payable in the amount and in the manner determined by the directors; provided however, that in no event shall the annual rate of such discretionary dividend exceed the rate of interest prescribed by the Minister of National Revenue for the purposes of the Act in effect on the last day of March of each year plus 1%;

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

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

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

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

(v) any rights, privileges, restrictions and conditions attaching to the shares of each series can only be amended by a special resolution passed by the holders of XXXXXXXXXX the shares of each series then outstanding;

(vi) will contain a restriction on the payment of dividends on other junior ranking classes of shares so that no such dividends may be paid on any such class of shares of the corporation so as to reduce the value of the Class E preferred shares then outstanding; and
(vii) the holders thereof will not be entitled to attend and vote at meetings of the shareholders.

17. Tier II Holdco will exchange its XXXXXXXXXX Class B common shares and XXXXXXXXXX Class D preferred shares in Holdco for XXXXXXXXXX Class E, Series 2 preferred shares of Holdco pursuant to section 86 of the Act. Holdco will add to the stated capital account maintained for its Class E, Series 2 preferred shares an amount equal to the aggregate of the paid-up capital of the common and preferred shares of Holdco so exchanged. The XXXXXXXXXX Class E, Series 2 preferred shares of Holdco will have an aggregate fair market value, redemption amount and retraction value equal to the fair market value of the exchanged shares.

18. Mrs. B will transfer her XXXXXXXXXX Class B common shares and XXXXXXXXXX Class D preferred shares in Holdco to Holdco for consideration consisting solely of XXXXXXXXXX Class E, Series 1 preferred shares of Holdco. In connection with the transfer, Mrs. B and Holdco will jointly elect in prescribed form within the time limit referred to in subsection 85(6), to have the provisions of subsection 85(1) apply to the transfer. Holdco will add to the stated capital account maintained for its Class E, Series 1 preferred shares an amount equal to the aggregate of the paid-up capital of the common and preferred shares of Holdco so transferred. The XXXXXXXXXX Class E, Series 1 preferred shares of Holdco will have a fair market value, redemption amount and retraction value equal to the fair market value of the transferred shares.

19. The trustees of the New Trust will subscribe for XXXXXXXXXX Class A common shares of Holdco at an aggregate subscription price of $XXXXXXXXXX, which amount will also be the aggregate stated capital and paid-up capital of these shares. The trustees will pay cash for such shares using funds borrowed from a person who is not related to any member of the Family. The XXXXXXXXXX Class A common shares will be the only issued and outstanding common shares of Holdco.

20. Following the transfer described in 18 above, Mrs. B will transfer her XXXXXXXXXX Class E, Series 1 preferred shares in Holdco to Mrs. B Holdco for consideration consisting solely of XXXXXXXXXX Class A common shares of Mrs. B Holdco. In connection with the transfer, the parties will jointly elect in prescribed form within the time limit referred to in subsection 85(6), to have the provisions of subsection 85(1) apply to the transfer. The agreed amount in respect of the shares so transferred will be equal to the ACB of such shares to Mrs. B at the time of the transfer. Mrs. B Holdco will add to the stated capital account maintained for its common shares an amount equal to the paid-up capital of the preferred shares of Holdco so transferred.

21. Mr. B will transfer his XXXXXXXXXX pre-1972 Class B preferred shares in Holdco to Mr. B Holdco for consideration consisting solely of XXXXXXXXXX Class A common shares of Mr. B Holdco. In connection with the transfer, the parties will jointly elect in prescribed form within the time limit referred to in subsection 85(6), to have the provisions of subsection 85(1) apply to the transfer. The agreed amount in respect of the shares so transferred will be equal to the ACB of such shares to Mr. B at the time of the transfer. Mr. B Holdco will add to the stated capital account maintained for its Class A common shares an amount equal to the paid-up capital of the preferred shares of Holdco so transferred.

22. Concurrent with the transfer described in 21 above, Mr. B will transfer his XXXXXXXXXX Class A preferred shares and remaining XXXXXXXXXX Class B preferred shares in Holdco to Mr. B Holdco for consideration consisting solely of XXXXXXXXXX Class B common shares of Mr. B Holdco. In connection with the transfer, the parties will jointly elect in prescribed form within the time limit referred to in subsection 85(6), to have the provisions of subsection 85(1) apply to the transfer. The agreed amount in respect of the shares so transferred will be equal to the ACB of such shares to Mr. B at the time of the transfer. Mr. B Holdco will add to the stated capital account maintained for its Class B common shares an amount equal to the aggregate of the paid-up capital of the preferred shares of Holdco transferred.

23. Within the first fiscal quarter following the completion of the proposed transactions described in 9 to 22 above, Opco will pay a cash dividend on its common shares held by Holdco. The minority shareholders will receive their pro-rata share of this dividend.

24. Following the receipt of the dividend described in 23 above, Holdco will have cash available which it will use to

(a) redeem a portion of the XXXXXXXXXX Class A preferred shares and XXXXXXXXXX Class B preferred shares held by Mr. B Holdco for an amount equal to the redemption amount of such shares;

(b) redeem a portion of the XXXXXXXXXX Class E, Series 1 preferred shares held by Mrs. B Holdco for an amount equal to the redemption amount of such shares; and

(c) redeem a portion of its XXXXXXXXXX Class E, Series 2 preferred shares held by Tier II Holdco for an amount equal to the redemption amount of such shares.

25. Following the redemption of the preferred shares as described in 24 above,

(a) Holdco will pay any required dividends on its remaining preferred shares and will declare and pay dividends on its Class A common shares owned by the New Trust; and

(b) Tier II Holdco will pay any required dividends on its remaining preferred shares and will declare and pay dividends on its XXXXXXXXXX Class A common shares owned by the Existing Trust.

26. Following the receipt of the dividends described in 25(a) above, the trustees of the New Trust will cause the New Trust to allocate and pay the dividends to Trust Holdco. The New Trust will designate such dividends in respect of Trust Holdco under subsection 104(19).

27. Following the receipt of the dividend described in 25(b) above, the trustees of the Existing Trust will cause the Existing Trust to allocate and pay the dividends to the adult children of Mr. and Mrs. B as income beneficiaries thereof.

28. Following the steps described in 24 to 26 above, Mr. B and Mrs. B will, as the need arises, begin to draw dividends from Mr. B Holdco, Mrs. B Holdco and Trust Holdco to fund their personal lifestyles.

Additional Information

29. There is no current intention for Holdco to dispose of any of the shares of Opco held by it.

Purposes of the Proposed Transactions:

30. The Family has concluded that the existing wealth accruing to the capital beneficiaries of the Existing Trust is substantial and perhaps sufficient. The Family would like to "re-freeze" the growth in the Holdco common shares to allow future growth to accrue to individuals other than the capital beneficiaries of the Existing Trust. Consequently, it is proposed that the future growth of Holdco will accrue to the New Trust, of which Mr. B and Mrs. B are both income and capital beneficiaries. This will permit Mr. B and Mrs. B to receive capital allocations from the New Trust, in turn allowing Mr. B and Mrs. B to make substantial personal charitable donations. These charitable donations may include the gifting of shares and other capital assets allocated by the New Trust. Such donations would not be possible but for the creation of the New Trust.

Furthermore, the New Trust will allow greater flexibility in determining where the future growth and capital appreciation in the common shares of Holdco should ultimately vest and provide the trustees of the New Trust the latitude to make this determination.

Mr. B has reviewed the personal cash flow needs of he and Mrs. B and determined that their existing share ownership and wealth may not be sufficient. Trust Holdco will be incorporated to provide a corporate entity to be owned by Mr. B and Mrs. B and controlled by Mr. B, which will be able to receive income allocations from the New Trust.

Rulings Requested and Given

Provided that the preceding statements constitute a complete and accurate disclosure of all of the relevant facts, proposed transactions and purpose of the proposed transactions, and provided that the proposed transactions are completed in the manner described above, our rulings are as follows:

A. On the redemption by Holdco of the Holdco preferred shares held by Mr. B Holdco, Mrs. B Holdco and Tier II Holdco, as described in paragraph 24 above:

(a) paragraphs 84(3)(a) and (b) will apply to deem Holdco to have paid and each of Mr. B Holdco, Mrs. B Holdco and Tier II Holdco, as the case may be, to have received a dividend equal to the amount by which the amount paid on the redemption of the shares held by the particular shareholder exceeds the PUC thereof immediately prior to the redemption;

(b) paragraph (j) of the definition of "proceeds of disposition" in section 54 will apply to exclude the amount of such deemed dividend from the proceeds of disposition which Mr. B Holdco, Mrs. B Holdco and Tier II Holdco would otherwise be considered to have received as a result of such redemption; and

(c) the provisions of subsection 40(3.6) will apply to deny any loss to Mr. B Holdco, Mrs. B Holdco and Tier II Holdco which otherwise would be determined as a result of the redemption of such shares. In computing the adjusted cost base of any other shares of Holdco owned by Mr. B Holdco, Mrs. B Holdco and Tier II Holdco, as the case may be, the amount to be added by virtue of paragraph 40(3.6)(b) will be nil.

B. Provided that the Court Order described in paragraph 9 is obtained and that as part of the series of transactions or events that includes the proposed transactions described herein, there is not any disposition of property or increase in interest of a person or partnership in a corporation described in any of subparagraphs 55(3)(a)(i) to (v), then, by virtue of paragraph 55(3)(a) of the Act, the provisions of subsection 55(2) will not apply to either the deemed dividends referred to in Ruling A above or to the cash dividend received by Holdco on the Opco common shares as described in paragraph 23 above. For greater certainty, the proposed transactions described in paragraphs 9 to 28 herein, in and by themselves, will not be considered to result in any disposition of property or any increase in interest of a person or partnership in a corporation described in any of subparagraphs 55(3)(a)(i) to (v).

C. With respect to the dividends described in paragraph 26 above, by virtue of subsections 186(2) and 186(4) Trust Holdco, the recipient of the dividend therein described will be connected with Holdco, such that Trust Holdco shall not be subject to tax under Part IV in respect of such dividend except as provided for in paragraph 186(1)(b).

D. Subsection 245(2) will not be applied as a result of the proposed transactions, in and by themselves, to redetermine any of the tax consequences confirmed in the rulings granted herein.

The above ruling is given subject to the limitations and qualifications set out in Information Circular 70-6R4 dated January 29, 2001 and is binding on the Canada Customs and Revenue Agency provided that the proposed transactions are completed by XXXXXXXXXX.

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

Nothing in this letter should be considered as confirmation of the income tax consequences of any of the transactions described in this letter other than as specifically described. In particular, we have not commented on the application of subsection 74.4(2) of the Act.

In addition, nothing in this letter should be construed as confirmation, express or implied, of the fair market value or adjusted cost base of any property or the paid-up capital of any share.

Yours truly,

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