2001 Ruling 2001-0070563 - Butterfly Ruling

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:

1. Standard gross asset butterfly.

Position:

1. n/a

Reasons:

1. n/a

XXXXXXXXXX 						2001-007056

XXXXXXXXXX, 2001

Dear Sirs:

Re: XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX
Advance Income Tax Ruling

This is in reply to your letter of XXXXXXXXXX in which you requested an advance income tax ruling on behalf of the above-noted taxpayers. In your letters of XXXXXXXXXX you provided additional information concerning the facts and proposed transactions described in your original letter. We also acknowledge the information provided during our various telephone conversations (XXXXXXXXXX).

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

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

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

(iii) is under objection by one of the taxpayers or a related person;

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

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

Definitions

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

(a) Unless otherwise indicated, all references to statute are to the Income Tax Act (Canada), R.S.C. 1985 (5th Supp.), c.1, as amended (the "Act");

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

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

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

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

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

(g) "fair market value" means the highest price, expressed in terms of money or money's worth, obtainable in an open and unrestricted market between knowledgeable, informed and prudent parties acting at arm's length, neither party being under any compulsion to transact;

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

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

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

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

(l) "RDTOH" means refundable dividend tax on hand as that expression is defined in subsection 129(3);

(m) "related" has the meaning assigned by section 251;

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

(o) "significant influence" has the meaning assigned by section 3050 of the CICA Handbook;

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

(q) "stated capital" has the meaning assigned by the provisions of CBCA;

(r) "subsidiary wholly-owned corporation" has the meaning assigned by subsection 87(1.4);

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

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

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

Facts

1. XXXXXXXXXX ("DC1") is a taxable Canadian corporation and a private corporation which is governed by the CBCA. Its issued and outstanding share capital consists of:

(a) XXXXXXXXXX common shares;
(b) XXXXXXXXXX Class E non-voting, redeemable and retractable shares, entitled to a XXXXXXXXXX% non-cumulative dividend; and
(c) XXXXXXXXXX Class F non-voting, redeemable and retractable shares, entitled to a XXXXXXXXXX% non-cumulative dividend.

The issued and outstanding shares of DC1 are held as follows:

Shareholder Common Class E Class F
Shares Shares Shares

XXXXXXXXXX ("TC1") XXXXXXXXXX
XXXXXXXXXX ("TC2") XXXXXXXXXX

DC1 is controlled by TC1 which holds XXXXXXXXXX% of each class of its issued and outstanding shares.

The assets of DC1 consist of:

(i) cash;

(ii) marketable securities, which include shares in public corporations and bonds of public corporations;

(iii) investments in mutual funds which are not listed for trading on any stock exchange or over the counter ("private mutual funds");

(iv) minority investments in private unrelated corporations; and

(v) all of the issued and outstanding shares of XXXXXXXXXX ("DC2").

DC1 holds the assets described in (ii) to (v) above as capital property.

As of XXXXXXXXXX, DC1 had the following amounts owing to its shareholders and corporations related to them:

(A) $XXXXXXXXXX was owing to TC1 (the "DC1 Note1") while $XXXXXXXXXX was owing to XXXXXXXXXX ( the "Aco Note"); and

(B) $XXXXXXXXXX was owing to TC2 (the "DC1 Note2") while $XXXXXXXXXX was owing to XXXXXXXXXX (the "Bco Note").

DC1's tax affairs are administered by the XXXXXXXXXX Tax Services Office and its corporate tax returns are filed at the XXXXXXXXXX Taxation Centre.

None of the shares of DC1 has been acquired by any person in contemplation of the proposed transactions described below.

2. DC2 is a taxable Canadian corporation and a private corporation which is governed by the CBCA. All of the issued and outstanding shares of DC2 are owned by DC1. DC2 was formed as a result of the amalgamation of XXXXXXXXXX ("Cco"), XXXXXXXXXX ("Dco") and XXXXXXXXXX.("Eco"), each of which was then a subsidiary wholly-owned corporation of DC1. None of the shares of DC2 has been acquired by any person in contemplation of the proposed transactions described below.

On or about XXXXXXXXXX, one of DC2's predecessors, Dco, was reassessed ("Reassessment") by the Ministry XXXXXXXXXX ("Ministry") XXXXXXXXXX The amount of the Reassessment, including accrued interest, is $XXXXXXXXXX ("DC2 Tax Liability"). DC2 has objected to the Reassessment and the matter has not been resolved or settled ("Tax Litigation").

DC2's tax affairs are administered by the XXXXXXXXXX Tax Services Office and its corporate tax returns are filed at the XXXXXXXXXX Taxation Centre.

The assets of DC2 consist of

(a) cash and term deposits;

(b) marketable securities which include shares in public corporations and bonds of public corporations;

(c) investments in mutual funds which are not listed for trading on any stock exchange or over the counter ("private mutual funds");

(d) investments in partnerships which are not listed for trading on any stock exchange or over the counter ("private partnerships");

(e) minority investments in private unrelated corporations;

(f) approximately XXXXXXXXXX shares of XXXXXXXXXX ("Pubco1); and

(g) approximately XXXXXXXXXX shares of XXXXXXXXXX ("Pubco2").

DC2 holds the assets described in (b) to (g) above as capital property.

In addition, DC2 has provided financial assistance to an unrelated corporation, XXXXXXXXXX (the "Borrower"). DC2 borrowed money (the "DC2 Loan") from the XXXXXXXXXX (the "Bank") and reloaned it to the Borrower ("DC2 Loan Receivable") on identical terms and conditions as the DC2 Loan. The shareholders of the Borrower have guaranteed the DC2 Loan. The Borrower makes the DC2 Loan payments directly to the Bank and such payments reduce both the DC2 Loan and the DC2 Loan Receivable by the same amount. These transactions were entered into to facilitate the financing of Borrower.

Currently there is no intercorporate debt between DC1 and DC2.

Pubco1 is a public corporation whose share capital includes XXXXXXXXXX shares and XXXXXXXXXX shares. The Pubco1 XXXXXXXXXX shares are listed for trading on the XXXXXXXXXX Stock Exchange XXXXXXXXXX The assets of Pubco1 include the shares of XXXXXXXXXX. One of Pubco1's other subsidiary corporations owns approximately XXXXXXXXXX shares of Pubco2.

Pubco2 is a US corporation whose headquarters is in XXXXXXXXXX and it operates XXXXXXXXXX . The share capital of Pubco2 includes XXXXXXXXXX shares and XXXXXXXXXX shares. The Pubco2 XXXXXXXXXX shares are listed for trading on the XXXXXXXXXX.

DC1 and its related group control Pubco1 but they do not control Pubco2.

3. Each of TC1 and TC2 is a taxable Canadian corporation and a private corporation which is governed by the CBCA. All of the issued and outstanding shares of TC1 are owned by XXXXXXXXXX ("Individual A") while all of the issued and outstanding shares of TC2 are owned by XXXXXXXXXX ("Individual B"). Individual A and Individual B are residents of Canada for purposes of the Act.

The tax affairs of TC1 and TC2 are administered by the XXXXXXXXXX Tax Services Office and their federal corporate tax returns are filed at the XXXXXXXXXX Taxation Centre.

4. XXXXXXXXXX, Individual A and Individual B are related pursuant to paragraph XXXXXXXXXX of the Act. Consequently, DC1, DC2, TC1 and TC2 are related to each other pursuant to paragraphs XXXXXXXXXX of the Act. However, for the purposes of section 55, Individual A and Individual B are not related to each other and TC2 is not related to TC1, DC1 or DC2 by virtue of subparagraph 55(5)(e)(i) of the Act.

5. On or about XXXXXXXXXX, the stated capital of DC1's XXXXXXXXXX shares was increased from $XXXXXXXXXX to $XXXXXXXXXX. The amount of $XXXXXXXXXX which was added to the stated capital of the XXXXXXXXXX shares is less than three times the balance in DC1's RDTOH account, determined immediately before the increase to its stated capital. No amount was paid to the shareholders of DC1 on this increase to stated capital. XXXXXXXXXX As at XXXXXXXXXX it is expected that each of DC1 and DC2 will have a balance in its RDTOH account.

Proposed Transactions

6. TC1 will cause Tempco1 to be incorporated under the provisions of the CBCA. Tempo1 will be a taxable Canadian corporation and a private corporation. The authorized share capital of Tempco1 will include an unlimited number of:

(a) voting, fully participating common shares, and

(b) Class A non-voting, redeemable and retractable preferred shares ("Tempco1 Class A Preferred Shares").

On the incorporation of Tempco1, TC1 will subscribe for XXXXXXXXXX Tempco1 common shares for a subscription price of $XXXXXXXXXX per share.

7. TC2 will cause Tempco2 to be incorporated under the provisions of the CBCA. Tempo2 will be a taxable Canadian corporation and a private corporation. The authorized share capital of Tempco2 will include an unlimited number of:

(a) voting, fully participating common shares, and

(b) Class A non-voting, redeemable and retractable preferred shares ("Tempco2 Class A Preferred Shares").

On the incorporation of Tempco2, TC2 will subscribe for XXXXXXXXXX Tempco2 common shares for a subscription price of $XXXXXXXXXX per share.

8. DC2 will cause two new corporations ("Subco1" and "Subco2") to be incorporated under the provisions of the CBCA. Each of Subco1 and Subco2 will be a taxable Canadian corporation and a private corporation. The authorized share capital of each of Subco1 and Subco2 will include an unlimited number of:

(a) voting, fully participating common shares, and

(b) Class A non-voting, redeemable and retractable preferred shares ("Subco1 Class A Preferred Shares" and "Subco2 Class A Preferred Shares", as the case may be).

On the incorporation of Subco1 and Subco2, DC2 will subscribe for XXXXXXXXXX common shares in each of Subco1 and Subco2 for a subscription price of $XXXXXXXXXX per share.

9. Immediately before the transfers of property described in paragraph 10 below, the property of DC2 (other than the Pubco1 shares, the Pubco2 shares and the investments in partnerships described in paragraph 2 above) will be classified into the following types of property for the purposes of paragraph 55(3)(b):

(a) cash or near cash property, comprising all of the current assets of DC2 including any cash, marketable securities (other than those held as portfolio investments), accounts receivable (which, for greater certainty, will not include the non-current portion of the DC2 Loan Receivable), inventory and prepaid expenses;

(b) investment property, comprising all of the assets of DC2 (other than cash or near cash property), any income from which would constitute income from property or from a specified investment business including marketable securities held as portfolio investments, the non-current portion of the DC2 Loan Receivable, investments in private mutual funds described in paragraph 2(c) above and minority investments in private unrelated corporations; and

(c) business property, comprising all of the assets of DC2, (other than cash or near cash property), any income from which would be income from a business (other than a specified investment business).

It is anticipated that DC2 will not own any business property immediately before the transfers of property described in paragraph 10 below.

For the purposes of this paragraph and paragraph 15 below, a corporation will be considered to have significant influence over a corporation if it has significant influence over that corporation or over any other corporation that has significant influence over that corporation. DC2 will not have significant influence over any corporation, other than Pubco1 and Pubco2.

For greater certainty, any tax accounts of DC2, including the balance of its RDTOH, its capital dividend account and any losses available for carryforward, will not be considered property of DC2 for the purposes of the proposed transactions described below.

10. DC2 will then transfer at fair market value to each of Subco1 and Subco2 a proportionate share of:

(a) its shares of Pubco1;

(b) its shares of Pubco2;

(c) its investment in each private partnership described in paragraph 2(d) above;

(d) its cash or near cash property;

(e) its business property, if any, and

(f) its investment property;

such that the fair market value of each type of property described in (a) to (f) above so transferred to each such transferee as described herein will be equal to that proportion of the fair market value of all the property of DC2 of that type determined immediately before such transfer that:

(i) the aggregate fair market value, immediately before such transfer, of all of the shares of DC1 owned by TC1, in the case of Subco1, or owned by TC2, in the case of Subco2, as the case may be,

is of

(ii) the aggregate fair market value immediately before such transfer of all of the issued and outstanding shares of DC1.

11. As consideration for the transfers of property described in paragraph 10 above, each of Subco1 and Subco2 will issue to DC2 that number of its Class A Preferred Shares, as the case may be, having an aggregate redemption amount and retraction amount and fair market value equal to the aggregate fair market value of the property of DC2 transferred to Subco1 or Subco2, as the case may be, at the time of the transfer described in paragraph 10 above. For greater certainty, no liabilities of DC2 will be assumed by either of Subco1 or Subco2 as consideration for the transfer. The aggregate amount of the liabilities of DC2 immediately before the transfers described in paragraph 10 above, will not exceed the aggregate cost amount of the properties transferred to Subco1 and Subco2.

12. In respect of the transfers described in paragraph 10 above, DC2 and each of Subco1 and Subco2 will file a joint election under subsection 85(1) in prescribed form and within the time referred to in subsection 85(6), but prior to the dissolution of any such corporation as described in paragraphs 14 and 24 below, with respect to each property that is a capital property of DC2. The agreed amount in respect of each such property for the purposes of the Act will not exceed the fair market value of the property at the time of the disposition nor will it be less than the lesser of the cost amount of the property to DC2 immediately before the transfer and the fair market value thereof at that time.

13. For purposes of the CBCA, the aggregate amount that will be added to the stated capital account of the Subco1 Class A Preferred Shares and the Subco2 Class A Preferred Shares issued by each of Subco1 and Subco2 as described in paragraph 11 above, as the case may be, will not exceed the aggregate cost (as determined under section 85, where applicable) of the property transferred by DC2 to Subco1 or Subco2, as the case may be, as described in paragraph 12.

14. Immediately following the transfers of property described in paragraph 10 above, DC1 will, by special resolution, resolve to liquidate and dissolve DC2 pursuant to the applicable provisions of the CBCA. All property of DC2, including the Subco1 common shares, the Subco1 Class A Preferred Shares, the Subco2 common shares and the Subco2 Class A Preferred Shares will be distributed to DC1 and all liabilities of DC2, including the DC2 Tax Liability, will be assumed by DC1 on the wind-up of DC2. Any intercorporate debts between DC1 and DC2 will be repaid in full prior to the wind-up of DC2.

DC2 will not file the Articles of Dissolution with the appropriate Corporate Registry because of the existing Tax Litigation with the Ministry as described in paragraph 2 above. However, immediately after the distribution of assets as described herein but before the formal dissolution of DC2, DC2 will not own or acquire any property or carry on any activity or undertaking (other than such activity as may be required to pursue the Tax Litigation with the Ministry). Within a reasonable time following the resolution of the Tax Litigation and the discharge of the DC2 Tax Liability, Articles of Dissolution will be filed with the appropriate Corporate Registry and upon receipt of the Certificate of Dissolution, DC2 will be dissolved.

15. Immediately following the distribution of the property of DC2 to DC1 as described in paragraph 14 above and immediately before the transfers of property described in paragraph 16 below, the property of DC1 (other than the Subco1 common shares, the Subco1 Class A Preferred Shares, the Subco2 common shares and the Subco2 Class A Preferred Shares) will be classified into the following types of property for the purposes of paragraph 55(3)(b):

(a) cash or near cash property, comprising all of the current assets of DC1, including any cash, marketable securities (other than those held as portfolio investments), accounts receivable, inventory and prepaid expenses;

(b) investment property, comprising all of the assets of DC1 (other than cash or near cash property), any income from which would constitute income from property or from a specified investment business, including marketable securities held as portfolio investments, investments in private mutual funds described in paragraph 1(iii) above and minority investments in private unrelated corporations; and

(c) business property, comprising all of the assets of DC1, (other than cash or near cash property), any income from which would be income from a business (other than a specified investment business).

It is anticipated that DC1 will not own any business property immediately before the transfers of property described in paragraph 16 below. For greater certainty, immediately before the transfers of property described in paragraph 16 below, DC1 will not have significant influence over any corporation other than Subco1, Subco2 and any corporation over which Subco1 or Subco2 has significant influence.

For greater certainty, any tax accounts of DC1, including any balance of its RDTOH, its capital dividend account and any losses available for carryforward, will not be considered property of DC1 for the purposes of the transactions described below.

16. Immediately following the determination of its types of property as described in paragraph 15 above and contemporaneously with the transfer of property described in paragraph 17 below, DC1 will transfer at fair market value to Tempco1:

(a) all of its Subco1 common shares and Subco1 Class A Preferred Shares; and

(b) a proportionate share of its cash or near cash property, its business property, if any, and its investment property;

such that the fair market value of each type of property owned by DC1 at that time and transferred to Tempco1 as described herein will be equal to that proportion of the fair market value of all the property of DC1 of that type determined immediately before such transfer that:

(c) the aggregate fair market value, immediately before such transfer, of all of the shares of DC1 owned by TC1,

is of

(d) the aggregate fair market value immediately before such transfer of all of the issued and outstanding shares of DC1 (such proportion is hereinafter referred to as the TC1 Proportion).

As consideration for the property transferred to Tempco1 as described herein, Tempco1 will:

(e) assume the DC1 Note1 owing by DC1 to TC1 and the Aco Note owing by DC1 as described in paragraph 1 above: and

(f) issue to DC1 that number of its Class A Preferred Shares having an aggregate redemption amount and retraction amount and fair market value equal to the amount by which the aggregate fair market value of the property of DC1 that was transferred to Tempco1 as described herein exceeds the principal amount of the liabilities of DC1 assumed by Tempco1 as described in (e) above.

For greater certainty, other than as described in (e) above, no liabilities of DC1 will be assumed by Tempco1 as consideration for the property transfers described herein. The aggregate amount of liabilities of DC1 immediately before the transfers described herein and in paragraph 17 below, will not exceed the aggregate cost amount of the property transferred to Tempco1 and Tempco2 as described herein and in paragraph 17 below.

17. Immediately following the determination of its types of property as described in paragraph 15 above and contemporaneously with the transfer of property described in paragraph 16 above, DC1 will transfer at fair market value to Tempco2:

(a) all of its Subco2 common shares and Subco2 Class A Preferred Shares; and

(b) a proportionate share of its cash or near cash property, its business property, if any, and its investment property;

such that the fair market value of each type of property owned by DC1 at that time and transferred to Tempco2 as described herein will be equal to that proportion of the fair market value of all the property of DC1 of that type determined immediately before such transfer that:

(c) the aggregate fair market value, immediately before such transfer, of all of the shares of DC1 owned by TC2,

is of

(d) the aggregate fair market value immediately before such transfer of all of the issued and outstanding shares of DC1 (such proportion is hereinafter referred to as the TC2 Proportion).

As consideration for the property transferred to Tempco2 as described herein, Tempco2 will:

(e) assume the DC1 Note2 owing by DC1 to TC2 and the Bco Note owing by DC1 as described in paragraph 1 above; and

(f) issue to DC1 that number of its Class A Preferred Shares having an aggregate redemption amount and retraction amount and fair market value equal to the amount by which the aggregate fair market value of the property of DC1 that was transferred to Tempco2 as described herein exceeds the principal amount of the liabilities of DC1 assumed by Tempco2 as described in (e) above.

For greater certainty, other than as described in (e) above, no liabilities of DC1 will be assumed by Tempco2 as consideration for the property transfers described herein. The aggregate amount of liabilities of DC1, immediately before the transfers described herein and in paragraph 16 above, will not exceed the aggregate cost amount of the property transferred to Tempco2 and Tempco1 as described herein and in paragraph 16 above.

18. In respect of the transfers described in paragraphs 16 and 17 above, DC1 and each of Tempco1 and Tempco2 will file a joint election under subsection 85(1) in prescribed form and within the time referred to in subsection 85(6), but prior to the dissolutions described in paragraphs 21 and 23 below, with respect to each property that is a capital property of DC1. The agreed amount in respect of each such property for the purposes of the Act will not exceed the fair market value of the property at the time of the disposition nor will it be less than the lesser of the cost amount of the property to DC1 immediately before the transfer and the fair market value thereof at that time, as the case may be. In each case, the agreed amount will not be less than the amount permitted under paragraph 85(1)(b) of the Act.

19. For the purposes of the CBCA, the aggregate amount that will be added to the stated capital account of the Tempco1 Class A Preferred shares and the Tempco2 Class A Preferred Shares issued by each of Tempco1 and Tempco2, as described in paragraphs 16 and 17 above, as the case may be, will not exceed the amount by which the aggregate cost (as determined under section 85, where applicable) of the property of DC1 transferred to Tempco1 and Tempco2, as the case may be, exceeds the principal amount of the liabilities assumed by the particular transferee as described in paragraph 16(e) or 17(e) above, as the case may be.

20. Each of Tempco1 and Tempco2 will redeem at fair market value all of its outstanding Class A Preferred Shares held by DC1 and each will issue to DC1, as payment therefor, a demand non-interest bearing promissory note having a principal amount and fair market value equal to the aggregate redemption amount and fair market value of its Class A Preferred Shares so redeemed ("Tempco1 Note" and "Tempco2 Note", as the case may be). DC1 will accept the Tempco1 Note and the Tempco2 Note as full satisfaction for the redemption price of the Tempco1 Class A Preferred Shares and the Tempco2 Class A Preferred Shares, as the case may be.

21. Following the transactions described in paragraph 20 above, TC1 and TC2, as the shareholders of DC1, will, by special resolution, resolve to liquidate and dissolve DC1 pursuant to the applicable provisions of the CBCA. No agreement or resolution relating to the winding up of DC1 or the distribution of its property will provide for the cancellation of any shares of DC1.

On the wind-up of DC1, the Tempco1 Note will be distributed to TC1 and the Tempco2 Note will be distributed to TC2. All liabilities of DC1, including the DC2 Tax Liability, will be assumed by TC1 and TC2 such that

(a) the aggregate of the liabilities of DC1 assumed by TC1 as described herein together with the liabilities of DC1 which were assumed by Tempco1 as described in paragraph 16(e) above, will be equal to the TC1 Proportion of all of the liabilities of DC1; and

(b) the aggregate of the liabilities of DC1 assumed by TC2 as described herein together with the liabilities of DC1 which were assumed by Tempco2 as described in paragraph 17(e) above, will be equal to the TC2 Proportion of all of the liabilities of DC1.

DC1 will file an election in prescribed manner and prescribed form pursuant to subsection 83(2) on or before the date of the winding up in respect of the full amount of the dividend referred to in subparagraph 88(2)(b)(i) of the Act which is deemed to be paid out of its capital dividend account.

22. Any dividend refund to which DC1 becomes entitled as a result of the proposed transactions described herein will be distributed (under the terms of the winding-up) to each of TC1 and TC2 in the same proportions as described in paragraphs 16 and 17 above. Following the distribution of such dividend refund, Articles of Dissolution will be filed with the appropriate Corporate Registry and upon receipt of the Certificate of Dissolution, DC1 will be dissolved.

23. Following the transactions described in paragraph 21 above, Tempco1 and Tempco2 will be wound up into TC1 and TC2, respectively, pursuant to the applicable provisions of the CBCA. On the winding-up of Tempco1, all property of Tempco1, including the Subco1 common shares and the Subco1 Class A Preferred Shares, will be distributed to TC1 and all liabilities of Tempco1, including the DC1 Note1 and the Tempco1 Note, will be assumed by TC1. On the winding-up of Tempco2, all property of Tempco2, including the Subco2 common shares and the Subco2 Class A Preferred Shares, will be distributed to TC2 and all liabilities of Tempco2, including the DC1 Note2 and the Tempco2 Note, will be assumed by TC2.

Each of TC1 and TC2 will elect, in prescribed form and within the time referred to in paragraph 80.01(4)(c), to have the rules in subsection 80.01(4) apply with respect to the settlement of

(a) the DC1 Note 1 owing to TC1 or the DC1 Note2 owing to TC2, as the case may be, that was assumed by Tempco1 or Tempco2, as the case may be, as consideration for the transfers of property described in paragraph 16(e) and 17(e) above; and

(b) the Tempco1 Note and the Tempco2 Note which were distributed to TC1 and TC2, as the case may be, on the winding-up of DC1 as described in paragraph 21 above.

24. Following the transactions described in paragraph 23 above, Subco1 and Subco2 will be wound up into TC1 and TC2, respectively, pursuant to the applicable provisions of the CBCA. On the winding-up of Subco1, all property of Subco1, including the Pubco1 shares and the Pubco2 shares, will be distributed to TC1 and all liabilities of Subco1, if any, will be assumed by TC1. On the winding-up of Subco2, all property of Subco2, including the Pubco1 shares and the Pubco2 shares, will be distributed to TC2 and all liabilities of Subco2, if any, will be assumed by TC2.

25. The agreements respecting the transfers of property described in paragraphs 10, 16 and 17 will each contain a price adjustment clause which will allow the parties thereto to alter the transfer price as well as the consideration paid in the event that the taxation authorities do not concur with the fair market value assigned to the property transferred by the parties.

Additional Information

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

27. No property has been or will be acquired by any of DC1, DC2, Subco1 or Subco2, and no liabilities have been or will be incurred by DC1, DC2, Subco1 or Subco2, in contemplation of and before the transfers of property as described in paragraphs 10, 16 and 17 above, except as described herein.

28. There are not, and will not be at any time prior to the completion of the proposed transactions, any agreements or undertakings which constitute or include a "guarantee agreement" in respect of any of the Tempco1 Class A Preferred Shares, the Tempco2 Class A Preferred Shares, the DC1 common shares, the DC1 Class E preferred shares or the DC1 Class F preferred shares.

29. None of Tempco1, Tempco2, or DC1 has, or will have, entered into a "dividend rental arrangement" in respect of any of the Tempco1 Class A Preferred Shares, the Tempco2 Class A Preferred Shares, the DC1 common shares, the DC1 Class E preferred shares or the DC1 Class F preferred shares.

30. None of the Tempco1 Class A Preferred Shares, the Tempco2 Class A Preferred Shares, the DC1 common shares, the DC1 Class E preferred shares or the DC1 Class F preferred shares 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) of the Act.

31. None of the corporations described above is or will be, at any time before the completion of the proposed transactions described above, a corporation described in any of the paragraphs (a) to (f) of the definition "financial intermediary corporation" in subsection 191(1) of the Act.

32. Each of Tempco1 and Tempco2 will have the financial capacity to honour, upon presentation for payment, the amount payable under the promissory note(s) issued by it as part of the proposed transactions.

Purpose of the Proposed Transactions

33. The purpose of the proposed transactions is to transfer to each of TC1 and TC2 its proportionate share of the properties of DC1 and DC2 including the Pubco1 shares and the Pubco2 shares such that each of TC1 and TC2 will be able to separate its interests from one another to allow for easier succession planning and the ability to pursue different and independent courses of action.

Rulings

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 follows:

A. Subject to the application of subsection 26(5) of the Income Tax Application Rules, to the application of subsection 69(11) and of paragraph 88(2.2)(b) (which applies for the purpose stated in the preamble to subsection 88(2.2), the provisions of subsection 85(1) will apply to:

(a) the transfer of each capital property by DC2 to Subco1 and Subco2 as described in paragraph 10 above; and

(b) the transfer of each capital property by DC1 to Tempco1 and Tempco2 as described in paragraphs 16 and 17 above,

in respect of which a joint election under subsection 85(1) is made such that the agreed amount in respect of each transfer will be deemed to be the proceeds of disposition to the transferor and the cost thereof to the transferee pursuant to paragraph 85(1)(a).

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

B. On the redemption by Tempco1 and Tempco2 of the Tempco1 Class A Preferred Shares and the Tempco2 Class A Preferred Shares held by DC1 as described in paragraph 20 above, and as a result of the distributions by DC1 in the course of its winding-up as described in paragraphs 21 and 22 above:

(a) by virtue of paragraphs 84(3)(a) and 84(3)(b), each of Tempco1 and Tempco2 will be deemed to have paid, and DC1 will be deemed to have received, a taxable dividend at that time equal to the amount, if any, by which the amount paid by each of Tempco1 and Tempco2 to redeem its Class A Preferred Shares exceeds the PUC of those shares immediately before the redemptions;

(b)(i) pursuant to paragraph 88(2)(b) and subsection 84(2), but subject to (ii) to (iv) herein, each of TC1 and TC2 will be deemed to have received a dividend (the "winding-up dividend") on the common shares, Class E preferred shares and Class F preferred shares of DC1, as the case may be, equal to the proportion of the amount by which the aggregate fair market value of the property of DC1 distributed by DC1 to each of TC1 and TC2 on the winding-up exceeds the amount by which the PUC of the common shares, Class E preferred shares and Class F preferred shares of DC1, as the case may be, is reduced as a result of the distribution, that the number of shares of such class held by TC1 and TC2, as the case may be, is of the number of issued shares of such class outstanding immediately before the distribution;

(ii) pursuant to subparagraph 88(2)(b)(i), such portion of the winding-up dividend referred to in (b)(i) as does not exceed DC1's capital dividend account 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 21 above, to be the full amount of a separate dividend;

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

(A) DC1's pre-1972 capital surplus on hand as determined immediately before the payment of the winding-up dividend, and

(B) the amount by which the winding-up dividend exceeds the portion, if any, in respect of which DC1 will elect under subsection 83(2)

shall be deemed not to be a dividend; and

(iv) 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 and the portion referred to in (iii) herein that is deemed not to be a 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 be included in the income of the recipient corporation pursuant to paragraph 12(1)(j) and will be deductible in computing the taxable income of the recipient corporation for the year in which the dividends are deemed to have been received pursuant to subsection 112(1) and such deduction will not be denied by any of subsections 112(2.2) to (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) by virtue of subsection 186(2) and paragraph 186(4)(a) of the Act, each of Tempco1 and Tempco2 will be connected with DC1 and DC1 will be connected with each of TC1 and TC2. Consequently,

(i) provided that each of Tempco1 and Tempco2 is not entitled to a dividend refund (within the meaning of subsection 129(1) of the Act) in respect of its taxation year in which it is deemed to pay the dividend referred to in (a) above, DC1 will not be subject to Part IV tax in respect of such dividend, and

(ii) each of TC1 and TC2 shall, pursuant to paragraph 186(1)(b), be subject to Part IV tax in an amount equal to that proportion of the dividend refund to which DC1 will become entitled for its taxation year in which the dividends referred to in (b)(iv) above, are paid, that the amount of each such dividend received by TC1 and TC2, as the case may be, is of the aggregate of all taxable dividends paid by DC1 in its taxation year in which such dividend is paid; and

(f) the taxable dividends referred to in (a) and (b) above will not be subject to tax under Part VI.1 of the Act on the basis that each of the recipients will have a substantial interest, within the meaning assigned by paragraph 191(2)(a) of the Act, in the payer corporation at the time such taxable dividends are paid and, therefore, such dividends are "excluded dividends" within the meaning of paragraph 191(1)(a) of the Act.

C. Provided that as part of the series of transactions or events that includes the proposed transactions described herein, there is not:

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

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

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

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

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

D. Provided that each of TC1 and TC2, as the case may be, elects in prescribed form and within the time referred to in paragraph 80.01(4)(c) to have the provisions of subsection 80.01(4) apply with respect to the settlement of the DC1 Note1, the DC1 Note2, the Tempco1 Note and the Tempco2 Note as described in paragraph 23 above, the provisions of paragraphs 80.01(4)(c) and (d) will apply to the settlement of such notes as described herein.

E. The provisions of subsection 88(1) will apply to the winding-up of DC2 into DC1 as described in paragraph 14 above such that

(a) each property of DC2 distributed to DC1 on the winding-up of DC2 will be deemed by paragraph 88(1)(a) to have been disposed of by DC2 for proceeds of disposition determined under that paragraph;

(b) the shares in the capital stock of DC2 held by DC1 immediately before the winding-up will be deemed by paragraph 88(1)(b) to have been disposed of by DC1 for proceeds determined under that paragraph; and

(c) each property of DC2 distributed to DC1 on the winding-up of DC2 will be deemed by paragraph 88(1)(c) to have been acquired by DC1 for an amount equal to the amount deemed by paragraph 88(1)(a) to be DC2's proceeds of disposition of the property and no more.

F. The provisions of subsections 15(1), 56(2), 69(4) and 246(1) will not apply to any of the proposed transactions described in paragraphs 6 through 25 above, in and of themselves.

G. As a result of the proposed transactions described in paragraphs 6 through 25 above, in and of themselves, subsection 245(2) of the Act will not be applied to redetermine the tax consequences confirmed in the rulings given above.

These rulings are given subject to the limitations and qualifications set out in Information Circular 70-6R4 issued by Canada Customs and Revenue Agency ("CCRA") on January 29, 2001 and are binding on the CCRA provided that the proposed transactions, other than the filings of the Articles of Dissolution of DC2 and DC1 as described in paragraphs 14 and 22 above, are completed by XXXXXXXXXX.

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

Comments

1. Nothing in this ruling should be construed as implying that CCRA has agreed to or reviewed:

(a) the determination of the fair market value or the cost amount of any particular asset or the PUC of any shares referred to herein; or

(b) any tax consequences relating to the facts and proposed transactions described herein other than those specifically described in the rulings given above. In particular, we are not commenting on any tax consequences relating to the transactions described in paragraph 5 above.

2. You have informed us, in paragraph 25 above, that the transactions described in paragraphs 10, 16 and 17 above will be subject to a price adjustment clause. 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 C above. Furthermore, none of the rulings given in this letter are 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 CCRA with respect to price adjustment clauses is stated in Interpretation Bulletin IT-169.

Yours truly,

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