2001 Ruling 2000-0055923 - Butterfly Reorganization

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CRA.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ARC.

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the Department.

Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle du ministère.

Principal Issues: Circularity problem with RDTOH

Position: T/ps were advised that their request for a change in year-end, in order to avoid the RDTOH "circularity" problem, must be obtained from TSO

Reasons: Change in year-end will avoid "circularity" problem

XXXXXXXXXX 2000-005592

XXXXXXXXXX, 2001

Dear Mesdames:

Re: XXXXXXXXXX ("XXXXXXXXXX/Aco")
XXXXXXXXXX ("XXXXXXXXXX/Bco")
XXXXXXXXXX ("XXXXXXXXXX/Cco")
XXXXXXXXXX ("XXXXXXXXXX/Brother 1")
XXXXXXXXXX ("XXXXXXXXXX/Brother 2")
Advance Income Tax Ruling Request

We are writing in response to your letter of XXXXXXXXXX in which you requested advance income tax rulings on behalf of the above-noted taxpayers. We acknowledge your letters of XXXXXXXXXX and our telephone conversations in connection herewith.

We understand that to the best of your knowledge and that of XXXXXXXXXX/Aco, XXXXXXXXXX/Bco, and XXXXXXXXXX /Cco none of the issues contained herein:

(a) is in an earlier return of XXXXXXXXXX/Aco, XXXXXXXXXX/Bco, XXXXXXXXXX/Cco 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 XXXXXXXXXX/Aco, XXXXXXXXXX/Bco, XXXXXXXXXX/Cco or a related person;

(c) is under objection by XXXXXXXXXX/Aco, XXXXXXXXXX/Bco, XXXXXXXXXX/Cco or a related person;

(d) is before the courts or,

(e) is the subject of a ruling previously issued by the Income Tax Rulings Directorate.

You advised that the proposed transactions described herein, will have no impact on outstanding tax liabilities of XXXXXXXXXX/Aco, XXXXXXXXXX/Bco, XXXXXXXXXX/Cco or a related person.

DEFINITIONS

In this letter unless otherwise expressly stated:

(a) "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 provisions of the Act;

(b) "adjusted cost base" has the meaning assigned by section 54 and subsection 248(1);

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

(d) "BCA-XXXXXXXXXX " means Business Corporations Act of XXXXXXXXXX;

(e) "CBCA" means Canada Business Corporations Act;

(f) "CCRA" means, on or after November 1, 1999, the Canada Customs and Revenue Agency, and before November 1, 1999, Revenue Canada, Taxation;

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

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

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

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

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

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

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

(n) "forgiven amount" has the meaning assigned by subsections 80(1) and 80.01(1);

(o) "ITAR" means the Income Tax Application Rules;

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

(q) "Paragraph" means a numbered paragraph in this letter;

(r) "pre-1972 CSOH" means "pre-1972 capital surplus on hand" which has the meaning assigned by subsection 88(2.1);

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

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

(u) "Regulations" means the Income Tax Regulations;

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

(w) "specified investment business" has the meaning assigned by subsection 248(1); and

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

REFERENCES

XXXXXXXXXX/Aco

XXXXXXXXXX

XXXXXXXXXX/Bco

XXXXXXXXXX

XXXXXXXXXX/Cco

XXXXXXXXXX

XXXXXXXXXX /Brother 1

XXXXXXXXXX

XXXXXXXXXX /Brother 2

XXXXXXXXXX

FACTS

1. XXXXXXXXXX/Brother 1 and XXXXXXXXXX/Brother 2 are siblings and are residents of Canada for purposes of the Act.

2. XXXXXXXXXX/Aco is a taxable Canadian corporation and private corporation incorporated under the Canada Corporations Act on XXXXXXXXXX and continued under the CBCA on XXXXXXXXXX/Aco was continued under the BCA-XXXXXXXXXX on XXXXXXXXXX.

3. XXXXXXXXXX/Aco's authorized share capital consists of an unlimited number of XXXXXXXXXX common shares and XXXXXXXXXX preferred shares. The issued and outstanding share capital of XXXXXXXXXX/Aco consists of XXXXXXXXXX common shares which are owned XXXXXXXXXX each by XXXXXXXXXX/Brother 1 and XXXXXXXXXX/Brother 2. The adjusted cost base of the XXXXXXXXXX common shares held by each of XXXXXXXXXX/Brother 1 and XXXXXXXXXX/Brother 2 is $XXXXXXXXXX to each shareholder.

4. As the result of the proposed transactions carried out pursuant to advance income rulings issued on XXXXXXXXXX, 1993 (XXXXXXXXXX) the shareholdings of XXXXXXXXXX/Aco were as follows:

XXXXXXXXXX shares XXXXXXXXXX preferred shares
Shareholder Number Paid-up capital Number Paid-up capital Redemption
Amount

XXXXXXXXXX

XXXXXXXXXX ("XXXXXXXXXX/Father") and XXXXXXXXXX ("XXXXXXXXXX/Mother") were the father and mother of XXXXXXXXXX/Brother 1 and XXXXXXXXXX/Brother 2.

5. The Estate of XXXXXXXXXX (the "Estate of XXXXXXXXXX/Father") was a testamentary trust created upon the death of XXXXXXXXXX/Father on XXXXXXXXXX and which was a resident of Canada for purposes of the Act. The capital beneficiaries of the Estate of XXXXXXXXXX/Father were XXXXXXXXXX/Brother 1 and XXXXXXXXXX/Brother 2. XXXXXXXXXX/Brother 1 and XXXXXXXXXX/Brother 2 were to receive their interest in the Estate of XXXXXXXXXX/Father upon the death of XXXXXXXXXX Mother. XXXXXXXXXX/Mother died in XXXXXXXXXX and in the course of the winding up of the Estate of XXXXXXXXXX /Father, XXXXXXXXXX/Brother 1 and XXXXXXXXXX/Brother 2 each received XXXXXXXXXX common shares and XXXXXXXXXX preferred shares in XXXXXXXXXX/Aco. The XXXXXXXXXX preferred shares of XXXXXXXXXX/Aco held by XXXXXXXXXX/Brother 1 and XXXXXXXXXX/Brother 2 have since been redeemed by XXXXXXXXXX/Aco. The adjusted cost base to each of XXXXXXXXXX/Brother 1 and XXXXXXXXXX/Brother 2 of their XXXXXXXXXX common shares of XXXXXXXXXX/Aco was $XXXXXXXXXX before the transactions described in Paragraph 6.

6. The Estate of XXXXXXXXXX (the "Estate of XXXXXXXXXX/Mother") was a testamentary trust created upon her death on XXXXXXXXXX and which was a resident of Canada for purposes of the Act. XXXXXXXXXX/Brother 1 and XXXXXXXXXX/Brother 2 were the executors and capital and income beneficiaries of the Estate of XXXXXXXXXX/Mother. XXXXXXXXXX/Aco purchased for cancellation XXXXXXXXXX of its XXXXXXXXXX common shares held by the Estate of XXXXXXXXXX/Mother before the estate was wound up on XXXXXXXXXX. At that time, XXXXXXXXXX/Brother 1 and XXXXXXXXXX/Brother 2 each received XXXXXXXXXX common shares of XXXXXXXXXX/Aco with an adjusted cost base to each of XXXXXXXXXX/Brother 1 and XXXXXXXXXX/Brother 2 of $XXXXXXXXXX.

7. XXXXXXXXXX/Aco's primary business activity and source of income have been from investments in common shares of public corporations. XXXXXXXXXX/Aco carries on a specified investment business.

8. XXXXXXXXXX/Aco's assets consist of cash, investments, taxes recoverable, loans receivable from related corporations and an investment in XXXXXXXXXX ("XXXXXXXXXX/Dco"). The investments are portfolio investments as defined in subparagraph 3050.02(b) of the CICA Handbook. Some of the portfolio investments have been held since prior to 1972. At the time of the proposed transactions, the fair market value of each portfolio investment is expected to exceed its adjusted cost base to XXXXXXXXXX /Aco.

The loans receivable are non-interest-bearing with no fixed terms of repayment and are due from XXXXXXXXXX/Bco, XXXXXXXXXX/Cco and XXXXXXXXXX/Dco.

9. XXXXXXXXXX/Dco is a Canadian-controlled private corporation and a taxable Canadian corporation. XXXXXXXXXX/Dco's issued and outstanding share capital consists of XXXXXXXXXX common shares with a par value of $XXXXXXXXXX per share. The shares of XXXXXXXXXX/Dco are held as to XXXXXXXXXX% by XXXXXXXXXX/Aco and XXXXXXXXXX% each by XXXXXXXXXX/Bco and XXXXXXXXXX/Cco.

10. XXXXXXXXXX/Dco's primary business activity and source of income have been from the rental of a revenue producing property. XXXXXXXXXX/Dco's assets consist of cash, land and building located at XXXXXXXXXX and land located at XXXXXXXXXX/Dco's liabilities consist of accounts payable, advances from affiliated companies and a mortgage on its land and building. The terms of the mortgage call for monthly payments of XXXXXXXXXX. The advances from affiliated companies are non-interest-bearing and have no specific terms of repayment.

11. Each of XXXXXXXXXX /Bco and XXXXXXXXXX/Cco is a Canadian-controlled private corporation and a taxable Canadian corporation. XXXXXXXXXX /Bco and XXXXXXXXXX/Cco were incorporated under the CBCA and continued under the BCA-XXXXXXXXXX on XXXXXXXXXX, respectively.

The authorized share capital of each of XXXXXXXXXX/Bco and XXXXXXXXXX/Cco consists of an unlimited number of the following shares:

(a) XXXXXXXXXX preferred shares with non-cumulative dividends of XXXXXXXXXX% per month, redeemable and retractable at the amount paid thereon and non-voting;

(b) XXXXXXXXXX preferred shares with non-cumulative dividends of XXXXXXXXXX% per month, redeemable and retractable at the amount paid thereon and voting;

(c) XXXXXXXXXX preferred shares with non-cumulative dividends of XXXXXXXXXX% month, redeemable at $XXXXXXXXXX per share, non-voting;

(d) XXXXXXXXXX voting common shares; and

(e) XXXXXXXXXX non-voting common shares.

The XXXXXXXXXX preferred shares will specify an amount, for the purposes of subsection 191(4) to be designated by a resolution of the directors at the time of their issue, not to exceed the fair market value of the consideration received for their issue. The amount so specified will not be described by reference to a formula or subject to change thereafter. In this regard the "specified amount" will not be subject to the price adjustment clause described in Paragraph 28.

All the issued and outstanding shares of XXXXXXXXXX/Bco are held by XXXXXXXXXX/Brother 1 and all the issued and outstanding shares of XXXXXXXXXX/Cco are held by XXXXXXXXXX/Brother 2.

12. As at XXXXXXXXXX/Aco's XXXXXXXXXX year-end, it had RDTOH of approximately $XXXXXXXXXX and an amount of approximately $XXXXXXXXXX in its capital dividend account. It is anticipated that these amounts will be changed at the time of the winding-up of XXXXXXXXXX/Cco described in Paragraph 25.

13. As at XXXXXXXXXX/Bco's XXXXXXXXXX year-end, it had RDTOH of approximately $XXXXXXXXXX and a nil balance in its capital dividend account.

As at XXXXXXXXXX/Cco's XXXXXXXXXX year-end, it had RDTOH of approximately $XXXXXXXXXX and an amount of approximately $XXXXXXXXXX in its capital dividend account.

It is anticipated that the RDTOH and the capital dividend accounts of each of XXXXXXXXXX/Bco and XXXXXXXXXX/Cco will be changed at the time of the time of the redemption of its XXXXXXXXXX preferred shares described in Paragraph 24.

14. The types of property for the purposes of the distribution of XXXXXXXXXX/Aco, immediately before the transfers of property described in Paragraph 21 (the "Butterfly Transfer"), will be properties of the following types:

(a) cash or near-cash property comprising of all the current assets for financial statement purposes including any cash, deposits, accounts receivable, inventory and rights arising from prepaid expenses (hereinafter referred to as "prepaid expenses");

(b) business property including goodwill and intangible assets relating to the business of each corporation, comprising of all of the assets of each corporation, other than cash or near-cash 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, if any, comprising of all of the assets of each corporation, other than cash or near-cash property, any income from which would, for the purposes of the Act, be income from property or from a specified investment business.

For greater certainty:

(a) any tax accounts, such as the balance of any RDTOH or capital dividend account of XXXXXXXXXX/Aco or any corporation over which XXXXXXXXXX/Aco has significant influence will not be considered property for purposes of the Butterfly Transfer; and

(b) the portfolio investments and the advances from affiliated companies will be classified as investment property for the purposes of the Butterfly Transfer.

15. Each of XXXXXXXXXX/Bco and XXXXXXXXXX/Cco has requested the CCRA's concurrence with a change in their respective year-ends from XXXXXXXXXX to a day immediately before XXXXXXXXXX. You have advised that the request for the change in year-ends is for financial statement preparation convenience and would have been made whether or not the proposed transactions were carried out.

The change in year-ends, to a date immediately before the day of the winding-up of XXXXXXXXXX/Aco, would allow XXXXXXXXXX/Aco, XXXXXXXXXX/Bco and XXXXXXXXXX/Cco to avoid the so-called circularity problem with respect to RDTOH, which is described in the paper given by Mr. R. Read on pages 18:23/24 of the 1988 Conference Report of the Canadian Tax Foundation, with respect to the dividends arising from the redemption of the XXXXXXXXXX preferred shares of XXXXXXXXXX/Bco and XXXXXXXXXX/Cco and the winding-up of XXXXXXXXXX/Aco.

PROPOSED TRANSACTIONS

16. Each of XXXXXXXXXX/Bco and XXXXXXXXXX /Cco will file articles of amendment under the BCA-XXXXXXXXXX to create a new class of preferred shares ("XXXXXXXXXX preferred shares"). The XXXXXXXXXX preferred shares will be non-voting, entitled to non-cumulative dividends at the rate of XXXXXXXXXX% per month on the redemption amount at the discretion of its directors, and redeemable and retractable for an amount equal to the fair market value of the consideration received by the corporation for the issuance of such shares.

17. XXXXXXXXXX/Brother 1 will transfer all of the XXXXXXXXXX/Aco common shares that he owns to XXXXXXXXXX/Bco. As sole consideration for such transfer, XXXXXXXXXX/Bco will issue to XXXXXXXXXX/Brother 1 XXXXXXXXXX preferred shares with a fair market value equal to the fair market value at the time of transfer of the shares transferred by XXXXXXXXXX/Brother 1 to XXXXXXXXXX/Bco. XXXXXXXXXX/Bco will add to the stated capital account maintained for its XXXXXXXXXX preferred shares an amount equal to the paid-up capital of the shares transferred.

18. XXXXXXXXXX/Brother 1 and XXXXXXXXXX/Bco 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 adjusted cost base to XXXXXXXXXX/Brother 1 immediately before the transfer, which amount will be less than the fair market value of such shares.

19. XXXXXXXXXX/Brother 2 will transfer all of the XXXXXXXXXX/Aco common shares that he owns to XXXXXXXXXX Cco. As sole consideration for such transfer, XXXXXXXXXX/Cco will issue to XXXXXXXXXX/Brother 2 XXXXXXXXXX preferred shares with a fair market value equal to the fair market value at the time of transfer of the shares transferred by XXXXXXXXXX/Brother 2 to XXXXXXXXXX/Cco. XXXXXXXXXX/Cco will add to the stated capital account maintained for its XXXXXXXXXX preferred shares an amount equal to the paid-up capital of the shares transferred.

20. XXXXXXXXXX/Brother 2 and XXXXXXXXXX/Cco 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 adjusted cost base to XXXXXXXXXX/Brother 2 immediately before the transfer, which amount will be less than the fair market value of such shares.

21. XXXXXXXXXX/Aco will transfer to each of XXXXXXXXXX/Bco and XXXXXXXXXX/Cco a pro-rata share (50%) of the shares of XXXXXXXXXX/Dco that it owns, 50% of its cash or near cash property and 50% of its investment property in a manner such that the fair market value of each type of property, as described in Paragraph 14, so transferred to XXXXXXXXXX/Bco or XXXXXXXXXX/Cco, as the case may be, will be equal to that proportion of the fair market value of all property of that type of XXXXXXXXXX/Aco, immediately before the transfer, that:

(a) the aggregate fair market value, immediately before the Butterfly Transfer, of the XXXXXXXXXX/Aco shares owned by XXXXXXXXXX/Bco or XXXXXXXXXX/Cco, as the case may be,

is of

(b) the fair market value, immediately before the Butterfly Transfer of all the issued shares of the capital stock of XXXXXXXXXX/Aco.

22. As consideration for the property so transferred on the Butterfly Transfer, each of XXXXXXXXXX/Bco and XXXXXXXXXX/Cco will:

(a) assume a pro-rata share of the liabilities of XXXXXXXXXX/Aco and the liabilities assumed by a transferee will not exceed the aggregate of the agreed amounts, determined under Paragraph 23, in respect of any property transferred to that transferee, and

(b) issue to XXXXXXXXXX/Aco XXXXXXXXXX preferred shares having an aggregate redemption price and aggregate fair market value equal to the amount by which the aggregate fair market value of the properties so transferred exceeds the pro-rata share of the liabilities assumed.

Each of XXXXXXXXXX/Bco and XXXXXXXXXX/Cco will add to the stated capital account maintained for its XXXXXXXXXX preferred shares an amount equal to the aggregate of the cost amounts of the properties transferred less the amount of the liabilities assumed by XXXXXXXXXX/Bco or XXXXXXXXXX/Cco, as the case may be.

23. XXXXXXXXXX/Aco and each of XXXXXXXXXX/Bco and XXXXXXXXXX/Cco 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 of each property of XXXXXXXXXX/Aco that is an eligible property transferred to XXXXXXXXXX/Bco or XXXXXXXXXX/Cco, as the case may be. The agreed amount in respect of such property so transferred will be an amount equal to the adjusted cost base of the property at the time of the transfer to XXXXXXXXXX/Aco. The agreed amount in each case will not exceed the fair market value at the time of the transfer.

24. Each of XXXXXXXXXX/Bco and XXXXXXXXXX/Cco will redeem its respective XXXXXXXXXX preferred shares owned by XXXXXXXXXX/Aco at the aggregate redemption price thereof, which amount will be equal to their respective fair market value. The redemption price will be paid and satisfied by the issuance of a non-interest-bearing demand promissory note by each of XXXXXXXXXX/Bco and XXXXXXXXXX/Cco (the "XXXXXXXXXX/Bco Note" and the "XXXXXXXXX/Cco Note"), each of which will have a fair market value and principal amount equal to the redemption price of the XXXXXXXXXX preferred shares issued by XXXXXXXXXX/Bco and XXXXXXXXXX/Cco, respectively. XXXXXXXXXX/Aco will accept each such note in full payment of the respective redemption price.

Each of XXXXXXXXXX/Bco and XXXXXXXXXX/Cco will end its taxation year immediately after the redemption of its XXXXXXXXXX preferred shares on XXXXXXXXXX, provided that the CCRA has agreed with its requests to change year-ends.

25. On the following business day after the year-end of XXXXXXXXXX/Bco and XXXXXXXXXX/Cco, XXXXXXXXXX/Aco will be wound up, distributing to XXXXXXXXXX/Bco and XXXXXXXXXX/Cco, respectively, the XXXXXXXXXX/Bco Note and the XXXXXXXXXX/Cco Note and 50% of XXXXXXXXXX/Aco's dividend refund receivable arising on the winding-up dividend. As a consequence of the distribution of the XXXXXXXXXX/Bco Note to XXXXXXXXXX/Bco and the XXXXXXXXXX/Cco Note to XXXXXXXXXX/Cco the said notes will be settled and extinguished.

No agreement or resolution relating to the winding-up of XXXXXXXXXX/Aco or the distribution of its property will provide for the cancellation of any shares of XXXXXXXXXX/Aco.

26. Prior to the distribution described in Paragraph 25, XXXXXXXXXX/Aco will elect, pursuant to subsection 83(2), in prescribed manner and prescribed form, that the full amount of any dividend referred to in subparagraph 88(2)(b)(i) be deemed to be a capital dividend. The resolution approving payment of the capital dividend will provide that to the extent that the amount of the capital dividend payable exceeds the balance of XXXXXXXXXX/Aco's capital dividend account at the time the dividend becomes payable, the directors of XXXXXXXXXX/Aco will elect to treat the excess as a separate dividend that is a taxable dividend that became payable at that time.

ADDITIONAL INFORMATION

27. Undertakings with respect to transfers, dispositions and corporate arrangements:

(a) none of the shares of XXXXXXXXXX/Aco, XXXXXXXXXX/Bco or XXXXXXXXXX/Cco have been or will be the subject of a guarantee agreement;

(b) none of the shares of XXXXXXXXXX/Aco, XXXXXXXXXX/Bco or XXXXXXXXXX/Cco have 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);

(c) no property has or will become property of XXXXXXXXXX/Aco or XXXXXXXXXX/Dco and no liabilities have been or will be incurred by XXXXXXXXXX/Aco or XXXXXXXXXX/Dco in contemplation of and before the distribution described in Paragraph 21;

(d) none of XXXXXXXXXX/Aco, XXXXXXXXXX/Bco or XXXXXXXXXX/Cco has any specific intention to dispose of any of its assets which it presently owns to an unrelated person following the Proposed Transactions, nor do they have any intention of disposing of any of their assets as part of a series of transactions which includes the Proposed Transactions, otherwise than on a basis which would not cause the provisions in paragraphs 55(3.1)(c) or 55(3.1)(d) to deny the exception paragraph 55(3)(b) to the dividends resulting from the transactions described in Paragraphs 24 and 25;

(e) none of XXXXXXXXXX/Aco, XXXXXXXXXX/Bco or XXXXXXXXXX/Cco have, 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; and

(f) none of XXXXXXXXXX/Aco, XXXXXXXXXX/Bco or XXXXXXXXXX/Cco is, or will be at the time of the proposed transactions, a specified financial institution.

28. The sale agreements with respect to the transfers of the common shares of XXXXXXXXXX/Aco held by XXXXXXXXXX /Brother 1 and XXXXXXXXXX/Brother 2 to XXXXXXXXXX/Bco and XXXXXXXXXX/Cco, respectively, described in Paragraphs 17 and 19, respectively, and the transfers of property from XXXXXXXXXX/Aco to XXXXXXXXXX /Cco and XXXXXXXXXX/Bco described in Paragraph 21, will contain price adjustment clauses which will allow the parties thereto to alter the sale price as well as the consideration paid thereon.

PURPOSE OF THE PROPOSED TRANSACTIONS

29. The purpose of the proposed transactions is to allow XXXXXXXXXX/Brother 1 and XXXXXXXXXX/Brother 2 to separate their interests in XXXXXXXXXX /Aco in order to provide each of them with full independence in dealing with their respective personal investment goals and interests.

RULINGS

Provided that the above statements are accurate and constitute complete disclosure of all of the relevant facts, proposed transactions and the purpose of the proposed transactions, we confirm the following:

A. Subject to the application of the provisions of subsection 26(5) of the ITAR to the transfers, the provisions of subsection 85(1) will apply to:

(i) the transfer of the common shares of XXXXXXXXXX/Aco by XXXXXXXXXX/Brother 1 to XXXXXXXXXX/Bco, as described in Paragraph 17; and

(ii) the transfer of the common shares of XXXXXXXXXX/Aco by XXXXXXXXXX/Brother 2 to XXXXXXXXXX/Cco as described in Paragraph 19

such that the amounts agreed upon in respect of each transfer will be deemed to be the transferor's proceeds of disposition and the transferee's cost thereof pursuant to paragraph 85(1)(a).

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

B. The application of paragraph 84.1(1)(a) of the Act to:

(i) the transfer of the common shares of XXXXXXXXXX/Aco by XXXXXXXXXX /Brother 1 to XXXXXXXXXX/Bco, as described in Paragraph 17;

(ii) the transfer of the common shares of XXXXXXXXXX/Aco by XXXXXXXXXX /Brother 2 to XXXXXXXXXX/Cco, as described in Paragraph 19

will not result in a reduction of the paid-up capital of the XXXXXXXXXX preferred shares of XXXXXXXXXX/Bco issued to XXXXXXXXXX/Brother 1, or in a reduction of the paid-up capital of the XXXXXXXXXX preferred shares of XXXXXXXXXX/Cco issued to XXXXXXXXXX/Brother 2.

C. Subject to the application of the provisions of subsection 69(11) and subsection 26(5) of the ITAR to the transfers, the provisions of subsection 85(1) will apply to the transfer of each eligible property by XXXXXXXXXX/Aco to each of XXXXXXXXXX/Bco and XXXXXXXXXX/Cco as described in Paragraph 21, with the result that the agreed amounts in respect of each transfer will be deemed, pursuant to paragraph 85(1)(a), to be the proceeds of disposition of that property to XXXXXXXXXX/Aco and the cost of that property to the respective transferee.

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

D. The provisions of subsection 85(2.1) will not apply to reduce the paid-up capital of the XXXXXXXXXX/Bco and XXXXXXXXXX/Cco XXXXXXXXXX preferred share to be issued to XXXXXXXXXX/Aco by a particular transferee as described in Paragraph 22.

E. On the redemption by XXXXXXXXXX/Bco and XXXXXXXXXX/Cco of their XXXXXXXXXX preferred shares held by XXXXXXXXXX/Aco, as described in Paragraph 24, and as a result of the distributions by XXXXXXXXXX/Aco in the course of its winding-up, as described in Paragraph 25:

(i) by virtue of paragraphs 84(3)(a) and 84(3)(b), each of XXXXXXXXXX/Bco and XXXXXXXXXX/Cco will be deemed to have paid, and XXXXXXXXXX/Aco will be deemed to have received, a taxable dividend equal to the amount by which the amount paid in respect of the redemption of the XXXXXXXXXX preferred shares of XXXXXXXXXX/Cco and XXXXXXXXXX/Bco, as the case may be, exceeds the aggregate paid-up capital thereof;

(ii) (A) pursuant to paragraph 88(2)(b) and subsection 84(2), but subject to (B) to (E) below, XXXXXXXXXX/Aco will be deemed to have paid, and each of XXXXXXXXXX/Bco and XXXXXXXXXX/Cco to have received, a dividend (the "winding-up dividend") on the common shares of XXXXXXXXXX/Aco equal to the proportion of amount by which the amount of the funds and property distributed by XXXXXXXXXX/Aco to each of XXXXXXXXXX/Bco and XXXXXXXXXX/Cco in respect of the common shares of XXXXXXXXXX/Aco on the winding-up exceeds the amount by which the paid-up capital of the common shares of XXXXXXXXXX/Aco is reduced as a result of the distribution, that the number of common shares of XXXXXXXXXX/Aco held by XXXXXXXXXX/Bco or XXXXXXXXXX/Cco, as the case may be, is of the number of common shares outstanding immediately before the distribution;

(B) pursuant to subparagraph 88(2)(b)(i), such portion of the winding-up dividend referred to in (ii)(A) as does not exceed XXXXXXXXXX/Aco's capital dividend account determined immediately before the payment of the winding-up dividend will be deemed, for the purposes of the subsection 83(2) election referred to in Paragraph 26 to be the full amount of a separate dividend;

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

(a) XXXXXXXXXX/Aco's pre-1972 CSOH as determined immediately before the payment of the winding-up dividend and,

(b) the amount by which the winding-up dividend exceeds the portion thereof in respect of which XXXXXXXXXX/Aco will elect under subsection 83(2) will be deemed not to be a dividend; and

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

(iii) the dividends referred to in (i) and (ii) will be deductible by each recipient pursuant to subsection 112(1). For greater certainty, the provisions of subsections 112(2.1), 112(2.2), 112(2.3) and 112(2.4) will not apply to deny the subsection 112(1) deduction in respect of such dividends; and

(iv) by virtue of the application of paragraph (j) of the definition of "proceeds of disposition" in section 54, the amount of a deemed dividend referred to in (i) and (ii) 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).

F. By virtue of subsection 186(2) and paragraph 186(4)(a), each of XXXXXXXXXX/Cco and XXXXXXXXXX/Bco will be connected with XXXXXXXXXX/Aco. Consequently, XXXXXXXXXX/Aco will be subject to Part IV tax pursuant to paragraph 186(1)(b) in respect of the taxable dividends referred to paragraph (i) of Ruling E.

G. By virtue of subsection 186(2) and paragraph 186(4)(a), XXXXXXXXXX/Aco will be connected with XXXXXXXXXX/Bco and XXXXXXXXXX/Cco. Consequently, each of XXXXXXXXXX/Bco and XXXXXXXXXX/Cco will be subject to Part IV tax pursuant to paragraph 186(1)(b) in respect of the taxable dividend referred to in subparagraph (ii)(D) of Ruling E.

H. Part IV.1 of the Act will not apply to the deemed dividends described in Ruling E because the dividends will be excepted dividends pursuant to paragraph (c) of the definition of "excepted dividend" in section 187.1.

I. Provided that the amount paid on the redemption of the XXXXXXXXXX preferred shares of XXXXXXXXXX/Bco and XXXXXXXXXX/Cco is equal to the amount specified in respect of such shares as described in Paragraph 11, the dividends described in subparagraph (i) in Ruling E will not be subject to tax under Part VI.1 of the Act on the basis that such dividends will be deemed by paragraph 191(4)(d) to be an "excluded dividend" as defined in subsection 191(1).

J. By virtue of the provisions of paragraph 55(3)(b), the provisions of subsection 55(2) will not apply to the deemed dividends described in Ruling E above, provided that, as part of the series of transactions that includes the proposed transactions described herein, there is no:

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

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

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

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

which has not been described herein.

K. The extinguishment of the XXXXXXXXXX/Bco Note and the XXXXXXXXXX Cco Note, as described in Paragraph 25, will not give rise to a forgiven amount. None of XXXXXXXXXX/Aco, XXXXXXXXXX/Bco and XXXXXXXXXX/Cco will realize any gain or incur any loss as a result of the transfer and assignment to XXXXXXXXXX/Bco and XXXXXXXXXX/Cco of the XXXXXXXXXX/Bco Note and XXXXXXXXXX/Cco Note by XXXXXXXXXX/Aco and the resultant extinguishment and cancellation of such notes as described in Paragraph 25.

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

M. Subsection 245(2) will not be applied to the proposed transactions, in and by themselves, to redetermine the tax consequences confirmed in the rulings given.

These rulings are given subject to the limitations and qualifications set out in Information Circular 70-6R4 dated January 29, 2001 issued by CCRA and are binding provided that the proposed transactions are completed before XXXXXXXXXX.

These rulings are based on the Act as it currently reads and do not take into account any future amendments, whether currently proposed or not, to the Act.

COMMENTS

1. Nothing in this ruling should be construed as confirmation, express or implied, of:

(a) the determination of the fair market value or ACB of any property referred to herein, or the paid-up capital of any shares;

(b) any tax consequences arising from the facts or proposed transactions described above other than those specifically confirmed in the rulings given; or

(c) that we have agreed that XXXXXXXXXX/Bco and XXXXXXXXXX/Cco may change the end of its respective fiscal period. In accordance with paragraph 900(2)(c) of the Regulations, permission to change the fiscal period of XXXXXXXXXX/Bco and XXXXXXXXXX/Cco can only be given by the Director-Taxation in the relevant Tax Services Office of the CCRA.

2. Nothing in this letter should be construed as confirming that, for the purposes of any of the rulings given herein, any adjustment to:

(a) the redemption amount of the XXXXXXXXXX preferred shares of XXXXXXXXXX/Bco or XXXXXXXXXX/Cco issued as described in Paragraphs 17 and 19; or

(b) the redemption amount of the XXXXXXXXXX preferred shares of each of XXXXXXXXXX/Bco and XXXXXXXXXX/Cco issued as described in Paragraph 22,

pursuant to a price adjustment clause referred in Paragraph 28 above, 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 H above. Furthermore, the rulings in this letter are not intended to apply to the operation of a price adjustment clause, since its coming into effect will be due to circumstances that do not constitute proposed transactions that are seriously contemplated. The general position of the Department with respect to price adjustment clauses is as stated in Interpretation Bulletin IT-169.

Yours truly,

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