2001 Ruling 2001-0072903 - Butterfly

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

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

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

Principal Issues: Standard Butterfly Ruling.

Position: Favourable rulings provided.

Reasons: Complies with rules in section 55.

            2001-007290
XXXXXXXXXX 

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 taxpayers. We also 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 one of the taxpayers or a related person;

(ii) 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) under objection by one of the taxpayers 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) "capital property" has the meaning assigned by section 54;

(f) “CDA” means "capital dividend account" and has the meaning assigned by subsection 89(1);

(g) “cost amount” has the meaning assigned by subsection 248(1);

(h) “DC” refers to XXXXXXXXXX;

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

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

(k) “Family Corporation” refers to the XXXXXXXXXX Corporation;

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

(m) “Holdco” refers to XXXXXXXXXX;

(n) “Investco” refers to XXXXXXXXXX;

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

(p) “Mr. A” refers to XXXXXXXXXX;

(q) “Mr. B” refers to XXXXXXXXXX;

(r) “Mrs. A” refers to XXXXXXXXXX;

(s) “Mrs. B” refers to XXXXXXXXXX;

(t) “Mrs C” refers to XXXXXXXXXX;

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

(v) “private corporation” has the meaning assigned by subsection 89(1);

(w) “proceeds of disposition” has the meaning assigned by section 54;

(x) “RDTOH” means “refundable dividend tax on hand” as that expression is defined in subsection 129(3);

(y) “related persons” has the meaning assigned by subsection 251(2);

(z) “restricted financial institution” has the meaning assigned by subsection 248(1);

(aa) “series of transactions or events” includes the transactions or events referred to in subsection 248(10);

(bb) “significant influence” has the meaning assigned by section 3050 of the CICA Handbook;

(cc) “specified financial institution” (also referred to as “SFI”) has the meaning assigned by subsection 248(1);

(dd) “specified investment business” (“SIB”) has the meaning assigned by the definition in subsection 125(7) and subsection 248(1);

(ee) “specified person” has the meaning assigned by paragraph (h) of the definition of “taxable preferred share” contained in subsection 248(1);

(ff) “stated capital” has the meaning assigned by the BCA;

(gg) “taxable Canadian corporation” has the meaning assigned by subsection 89(1);

(hh) “taxable dividend” has the meaning assigned by subsection 89(1);

(ii) “Transferee1” means XXXXXXXXXX;

(jj) “Transferee2” means XXXXXXXXXX; and

(kk) “Xco” refers to XXXXXXXXXX.

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

Facts

1. Mr. A, Mrs. A, Mr. B and Mrs. B are all residents of Canada. Mrs. A is the spouse of Mr. A and Mrs. B is the spouse of Mr. B. Mrs. B is the sister of Mr. A.

2. DC is a private corporation and a taxable Canadian corporation which is governed by the BCA. It was incorporated on XXXXXXXXXX.

3. DC is a holding company the principal asset of which is a XXXXXXXXXX% undivided beneficial freehold ownership interest (the "Interest") in a parcel of land located at XXXXXXXXXX (the "Land"). The Land is XXXXXXXXXX in area and is subject to a long-term ground lease. Legal title to the Interest in the Land is held by a Canadian resident nominee as bare trustee for DC and other taxpayers that beneficially own undivided interests therein. The relationship among DC and the other beneficial owners of the freehold interest is one of tenancy in common.

4. The Interest is capital property of DC the income from which (being its XXXXXXXXXX% share of the rent payable under the ground lease) is income from property or a specified investment business for purposes of the Act. The fair market value of the Interest exceeds the adjusted cost base thereof to DC. DC acquired the Interest in XXXXXXXXXX from Xco, which had owned the Interest on XXXXXXXXXX and held it as capital property. Xco and DC jointly elected pursuant to subsection 85(1) with respect to this transfer.

5. The other assets of DC consist of a XXXXXXXXXX% interest in a US limited partnership known as XXXXXXXXXX, one other minor investment, a small amount of cash, and sundry receivables. The liabilities of DC consist of accounts payable. For the purposes of the classifications and determinations contemplated by paragraphs 17 and 18 below, DC will not have significant influence over any corporation or the limited partnership referred to above.

6. The taxation year of DC ends on XXXXXXXXXX. Its federal tax account number is XXXXXXXXXX and its federal income tax returns are filed at the XXXXXXXXXX tax services office. At the end of its XXXXXXXXXX taxation year, DC had refundable dividend tax on hand of $XXXXXXXXXX and a balance in its capital dividend account of $XXXXXXXXXX.

7. The issued share capital of DC consists of XXXXXXXXXX common shares the paid-up capital of which is $XXXXXXXXXX in the aggregate. Such shares are owned as follows:

DC Shareholders No. of Common Percentage of Issued
Shares Owned Capital

Transferee1 XXXXXXXXXX
Investco XXXXXXXXXX
Transferee2 XXXXXXXXXX
Holdco XXXXXXXXXX

Estate of Mrs. C XXXXXXXXXX

Mr. A XXXXXXXXXX

Mrs. A XXXXXXXXXX

Total XXXXXXXXXX

None of the current shareholders of DC has acquired any common shares of DC in contemplation of the proposed transactions described herein.

8. Transferee1 is a taxable Canadian corporation and a private corporation which is governed by the BCA. It was formed by an amalgamation of corporations on XXXXXXXXXX. Transferee1’s taxation year ends on XXXXXXXXXX. Its federal tax account number is XXXXXXXXXX and its federal tax returns are filed at the XXXXXXXXXX tax services office. At the end of Transferee1’s XXXXXXXXXX taxation year, the amount of its refundable dividend tax on hand was $XXXXXXXXXX, the balance in its capital dividend account was XXXXXXXXXX, and it had non-capital losses of $XXXXXXXXXX.

9. The common shares of DC owned by Transferee1 are capital property of Transferee1. The fair market value of such shares exceeds the paid-up capital thereof and the adjusted cost base thereof to Transferee1.

10. The issued share capital of Transferee1 consists of XXXXXXXXXX common shares and XXXXXXXXXX preference shares. Mr. A and the Family Corporation each own 50% of the shares of each such class. The Family Corporation is controlled by Mr. B and Mrs. B. Ownership of the issued share capital of the Family Corporation is divided among Mrs. B, Mr. B and their children.

11. Transferee2 is a taxable Canadian corporation and a private corporation which is governed by the BCA. It was incorporated on XXXXXXXXXX. Transferee2's taxation year ends on XXXXXXXXXX. Its federal tax account number is XXXXXXXXXX and its federal tax returns are filed at the XXXXXXXXXX tax services office. At the end of Transferee2’s XXXXXXXXXX taxation year, the amount of its refundable dividend tax on hand was $XXXXXXXXXX, the balance in its capital dividend account was $XXXXXXXXXX, and it had non-capital losses of $XXXXXXXXXX.

12. The common shares of DC owned by Transferee2 are capital property of Transferee2. The fair market value of such shares exceeds the paid-up capital thereof and the adjusted cost base thereof to Transferee2.

13. The issued share capital of Transferee2 consists of XXXXXXXXXX common shares which are owned equally by Mr. A, Investco and the Family Corporation. Ownership of the issued share capital of Investco is divided among Mr. A, Mrs. A and their children.

14. Holdco is a wholly-owned subsidiary of the Family Corporation.

15. Mrs. C was the mother of Mr. A and Mrs. B. The executors of her estate are Mr. A and Mrs. A.

Proposed Transactions:

16. Two new corporations will be incorporated under the BCA, one on behalf of Transferee1 (hereinafter referred to as "Newco1"), and the other on behalf of Transferee2 (hereinafter referred to as Newco2"). Each of Newco1 and Newco2 will be a taxable Canadian corporation and a private corporation. The authorized capital of each of Newco1 and Newco2 will consist of the following shares:

(a) an unlimited number of common shares; and

(b) an unlimited number of XXXXXXXXXX shares (the "Newco XXXXXXXXXX Shares") which will be first issued to DC as consideration for the transfers of property as described in paragraph 20 below.

On the incorporation of each Newco, one or more common shares of Newco1 will be issued to Transferee1 and one or more common shares of Newco2 will be issued to Transferee2.

17. Immediately before the transfers of property described in paragraph 19 below, the property owned by DC will be classified into the following three different types of property for the purposes of the definition of “distribution” in subsection 55(1) and paragraph 55(3)(b):

(a) cash or near cash property, comprising of all of the current assets of DC, including cash and short-term receivables, (which, for greater certainty, will not include long-term advances);

(b) investment property, comprising all of the assets of DC, 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 SIB; and

(c) business property, comprising all of the assets of DC, 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 SIB).

For greater certainty, the Interest in the Land and the interest in the U.S. limited partnership owned by DC will be classified as investment property.

For the purpose of calculating the fair market value of each type of property, as described above, DC will not have significant influence over any corporation.

Any tax accounts of DC, such as the amount of refundable dividend tax on hand, the balance of any capital dividend account, or any deferred income tax debit balance will not be considered property for purposes of the classification described herein.

18. In determining the net fair market value of each type of property of DC immediately before the transfers of property described in paragraph 19 below, the liabilities of DC will be allocated to, and deducted in the calculation of the net fair market value of each type of property of DC as follows:

(a) current liabilities of DC will be allocated to the cash or near-cash property of DC in the proportion that the fair market value of each such property is of the fair market value of all cash or near-cash property owned by DC. The allocation of current liabilities as described herein will not, however, exceed the total fair market value of the cash or near-cash property of DC.

(b) liabilities, other than current liabilities, of DC that relate to a particular property will then be allocated to the particular property (and effectively to the type of property to which the property belongs) to the extent of its fair market value. The liabilities pertaining to a type of property but not to a particular property will then be allocated to that type of property, but not in excess of the net fair market value of such type of property after the allocation of liabilities to a particular property as described herein; and

(c) if any liabilities (“excess DC unallocated liabilities”) that remain after the allocations described in steps (a) and (b) above are made, such excess DC unallocated liabilities will then be allocated to the cash or near cash property, investment property and business property, if any, of DC based on the relative net fair market value of each type of property prior to the allocation of such remaining liabilities, but after the allocation of the liabilities described in clauses (a) and (b) above.

19. Immediately following the determination of the net fair market value of its cash or near cash property, its business property and its investment property as described in paragraphs 17 and 18 above, DC will transfer a portion of each type of property owned by it at that time at fair market value to each of Newco1 and Newco2 (herein sometimes referred to collectively as the “Property Transferees” and individually as the “Property Transferee”) such that immediately following the transfers, the net fair market value of each type of property so transferred by DC to each Property Transferee, determined in accordance with the guidelines described in paragraph 17 and 18 above, will approximate that proportion of the net fair market value of all property of DC of that type determined immediately before such transfer that:

(a) the aggregate fair market value, immediately before the transfers, of all of the shares of DC owned by each of Transferee1 and Transferee2, as the case may be,

is of

(b) the aggregate fair market value, immediately before the transfers, of all the issued and outstanding shares of DC at that time.

For the purpose of this paragraph, the expression "approximate that proportion" means that the discrepancy from that proportion, if any, would not exceed 1%, determined as a percentage of the net fair market value of each type of property which the particular Property Transferee has received (or DC has retained) as compared to what the particular Property Transferee would have received (or DC would have retained) had it received (or retained) its appropriate pro rata share of the net fair market value of that type of property. However, the aggregate net fair market value of all property of DC transferred to the particular Property Transferee as described herein will be equal to that proportion determined by (a) and (b) above of the aggregate net fair market value of all property of DC immediately before the transfers.

DC will direct the nominee that holds legal title to the Interest to thereafter hold XXXXXXXXXX of the Interest for Newco1 and XXXXXXXXXX of the Interest for Newco2. The nominee will execute a new declaration of trust that will state that it holds those portions of the Interest in trust for each of Newco1 and Newco2.

20. As consideration for the transfers of property by DC to the Property Transferees, as described in paragraph 19 above:

(a) each Property Transferee will assume liabilities of DC allocable to the property transferred to such Property Transferee in the manner described in paragraph 18 above and which do not exceed in the aggregate:

i) the aggregate of the amounts agreed upon by DC and such Property Transferee in the election jointly made by them pursuant to subsection 85(1), as described in paragraph 21 below, and

ii) the aggregate fair market value of all property of DC transferred to such Property Transferee that is not the object of a joint election as described in paragraph 21 below; and

(b) each Property Transferee will issue to DC, Newco XXXXXXXXXX Shares of its capital stock having an aggregate fair market value and redemption price equal to the amount by which the aggregate fair market value of all property of DC transferred to such Property Transferee exceeds the amount of the liabilities assumed by such Property Transferee as consideration for such property as described in subparagraph (a) above. The fair market value, redemption and retraction price of each Property Transferee’s XXXXXXXXXX shares will be equal to the net fair market value of the consideration for which they are issued.

In accordance with XXXXXXXXXX of the BCA, the amount that will be added to the stated capital accounts of the Newco Special Shares of each Property Transferee issued to DC will not exceed the aggregate cost (determined under subsection 85(1), where applicable) of the property transferred to such Property Transferee, as described in paragraph 19 above, less the amount of the non-share consideration for such property, as described in (a) above.

21. In respect of the transfers described in paragraph 19 above, DC and each Property Transferee will jointly elect, in prescribed form and within the time referred to in subsection 85(6), to have the rules in subsection 85(1) apply to the transfer of each property transferred by DC to a particular Property Transferee, as described in paragraph 19 above, that is an eligible property the fair market value of which at the time of the transfer exceeds or may exceed the cost amount thereof to DC. The agreed amount in each such election in respect of a particular eligible capital property so transferred (other than depreciable property of a prescribed class):

(a) will not be less than an amount equal to the lesser of the amounts described in subparagraphs 85(1)(c.1)(i) and (ii);

(b) will not exceed the fair market value of the particular property; and

(c) will not be less than the amount of any liabilities assumed by the particular Property Transferee as consideration for the transfer of such property.

22. After the transfers described in paragraph 19 above, each Property Transferee will redeem all of the Newco XXXXXXXXXX Shares of its capital stock held by DC at the redemption price thereof. Each Property Transferee will pay the aggregate redemption price of the Newco XXXXXXXXXX Shares of its capital stock by issuing to DC a non-interest bearing promissory note, which will be payable on demand, and which will have a principal amount and fair market value equal to the aggregate redemption price of the Newco XXXXXXXXXX Shares of its capital stock so redeemed (such promissory notes are hereinafter referred to collectively as the “Transferee Notes” and individually as a “Transferee Note”). DC will accept the Transferee Note of each Property Transferee in full payment of the aggregate redemption price of the Newco XXXXXXXXXX Shares in the capital stock of the particular Property Transferee.

23. Shortly after the Newco XXXXXXXXXX Shares are redeemed, (i.e., by the end of the business day following the day on which the redemption occurs), Transferee1 as sole shareholder of Newco1 and Transferee2 as sole shareholder of Newco2 will each pass a special resolution requiring its subsidiary to be wound up pursuant to the provisions of the BCA. On the winding-up, all of the property of Newco1 will be distributed to Transferee1 and all of the property of Newco2 will be distributed to Transferee2. The distribution of Newco1 and Newco2’s portions of the Interest will be carried out by Newco1 and Newco2 each directing the nominee that holds legal title to its portion of the Interest to thereafter hold that same portion for Transferee1 and Transferee2, respectively. The nominee will execute new declarations of trust that will state that it holds XXXXXXXXXX of the Interest in trust for Transferee1 and XXXXXXXXXX of the Interest in trust for Transferee2. As well, on the winding-up, Transferee1 will assume all of the liabilities of Newco1, including its obligations to DC under its Transferee Note, and Transferee2 will assume all of the liabilities of Newco2, including its obligations to DC under its Transferee Note.

The first and final taxation year of each of Newco1 and Newco2 will then end and forthwith thereafter final federal and provincial income tax returns will be prepared and filed for both Newco1 and Newco2 and the consents required for their dissolution under the BCA XXXXXXXXXX will be sought. Articles of dissolution for each of Newco1 and Newco2 will be filed forthwith after the aforesaid consents to their dissolution are received whereupon Newco1 and Newco2 will be dissolved.

24. DC will purchase for cancellation all of the DC common shares of its capital stock owned by Transferee1 and Transferee2 at purchase prices equal to the fair market value thereof at that time. These purchases will take place in two stages, as follows:

(a) first, DC will purchase for cancellation a sufficient number of DC shares or part thereof owned by each of Transferee1 and Transferee2 which will result in a deemed dividend pursuant to the provisions of subsection 84(3), equal to that proportion of DC’s capital dividend account immediately before that time that the aggregate fair market value of all DC shares owned by Transferee1 or Transferee2, as the case may be, at that time is of the aggregate fair market value of all DC shares then outstanding. DC will elect, in prescribed manner and prescribed form and at or before the earlier of the time and the day referred to in subsection 83(2), to have the rules therein apply to the full amount of each such deemed dividend resulting from the purchase of such DC shares; and

(b) second, DC will purchase for cancellation all of the remaining DC shares held by Transferee1 and Transferee2.

DC will issue to each of Transferee1 and Transferee2, as consideration for the purchase of the DC shares owned by Transferee1 and Transferee2, two non-interest bearing promissory notes (hereinafter referred to as the “DC Notes” and individually as the “DC Note”). The first DC Note issued to each of Transferee1 and Transferee2 will have a principal amount and fair market value equal to the purchase price of the DC shares purchased from the particular transferee in the first stage as described in (a) above. The second DC Note issued to each of Transferee1 and Transferee2 will have a principal amount and fair market value equal to the purchase price of the DC shares purchased from the particular transferee in the second stage as described in (b) above. Transferee1 and Transferee2 will each accept the DC Notes issued to it in full payment of the aggregate purchase price of the DC shares sold by it in both stages.

25. DC and each of Transferee1 and Transferee2 will then set-off the principal amount of their mutual debt obligations (i.e., the two DC Notes issued by DC to each of Transferee1 and Transferee2 on the share purchases described in paragraph 24 above and the Transferee Note assumed by each of Transferee1 and Transferee2 on the winding-up as described in paragraph 23 above). The fair market value of the respective mutual debt obligations to be set-off will be equal to the principal amount owing in respect thereof at that time such that the mutual debt obligations will be fully settled or extinguished for an amount equal to the principal amounts in respect thereof at that time.

26. Immediately following the proposed transactions described above, the net fair market value of each type of property retained by DC, determined in the manner described in paragraphs 17 and 18 above, will approximate that proportion of the aggregate net fair market value of that type of property of DC, determined immediately before the transfers described in paragraph 19 above, that:

(a) the aggregate fair market value, immediately before the transfers of property described in paragraph 19 above, of the shares of DC owned by Investco, Holdco, the Estate of Mrs. C, Mr. A and Mrs. A,

is of

(b) the aggregate fair market value, immediately before the transfers of property, of all of the issued and outstanding shares of DC.

Additional Information:

27. None of the transactions or events described in the facts of this letter occurred as part of the same series of transactions or events as the proposed transactions described in this letter.

28. No liabilities have been incurred by, and no assets have been acquired by or disposed of by DC in contemplation of the proposed transactions described herein. Except as described in this letter, no liabilities will be incurred by, and no assets will be acquired by or disposed of by DC in contemplation of the proposed transactions described herein. No property of DC that is transferred pursuant to the proposed transactions described herein will be transferred to any other person as part of a series of transactions that includes the proposed transactions described herein.

29. None of DC, Transferee1 and Transferee2 is, or will be at the time the proposed transactions described herein are implemented, an SFI or a restricted financial institution.

30. None of the shares of DC, Transferee1 or Transferee2 will be, at any time during the implementation of the proposed transactions described herein,

(a) the subject of any undertaking or agreement that is referred to in subsection 112(2.2) as a “guarantee agreement”;

(b) a share that is issued or acquired as part of a transaction, event or series of transactions or events of the type described in subsection 112(2.5); or

(c) the subject of a dividend rental arrangement as that term is defined in subsection 248(1).

Purpose of Transactions:

31. The families of Mr. A and Mrs. B wish to have Transferee1 and Transferee2 acquire direct ownership of their respective economic interests in the Land so they can receive their respective share of the rent payable under the Land’s ground lease directly, rather than indirectly in the form of dividends from DC. This will provide the families with greater flexibility in the use of their share of the rent under the ground lease. It will also permit them to utilize the available non-capital losses of Transferee1 and Transferee2 to increase the after-tax return on their investment in the Land. The purpose of the proposed transactions is to effect the conversion of Transferee1 and Transferee2's indirect ownership interests to direct ownership interests on a tax-deferred basis.

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. Subject to the application of the provisions of subsection 26(5) of the ITAR, and to the application of subsection 69(11) and for the application of paragraph 88(2.2)(b), which applies for the purposes stated in the preamble to subsection 88(2.2), subsection 85(1) will apply to the transfer of each eligible property owned by DC to the particular Property Transferee, as described in paragraphs 19 & 20 above, provided each Particular Transferee and DC file a valid election in respect of such transfer, as described in paragraph 21 above, such that the agreed amount in respect of each such transfer shall be deemed to be the proceeds of disposition thereof to DC and the cost thereof to each such Property 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. The provisions of subsection 85(2.1) will not apply to reduce the paid-up capital of the Newco XXXXXXXXXX Shares issued to DC by Newco1 and Newco2, as described in subparagraph 20(b) above.

C. On the redemption by each Property Transferee of the Newco XXXXXXXXXX Shares issued by it, as described in paragraph 22 above, and on the purchase for cancellation of the DC common shares owned by each of Transferee1 and Transferee2, as described in paragraph 24 above:

(a) by virtue of paragraphs 84(3)(a) and 84(3)(b):

(i) each Property Transferee will be deemed to have paid, and DC will be deemed to have received, a taxable dividend at that time equal to the amount, if any, by which the amount paid in respect of the redemption of the Newco XXXXXXXXXX Shares issued by the particular Property Transferee exceeds the PUC of those shares immediately before the redemption;

(ii) DC will be deemed to have paid, and each of Transferee1 and Transferee2 will be deemed to have received, a capital dividend equal to the amount, if any, by which the amount paid in respect of the purchase of the DC common shares described in 24(a) above exceed the PUC of such shares immediately before their purchase for cancellation; and

(iii) DC will be deemed to have paid, and each of Transferee1 and Transferee2 will be deemed to have received, a taxable dividend at that time equal to the amount, if any, by which the amount paid in respect of the purchase of the DC common shares described in 24(b) above exceeds the PUC of the shares immediately before their purchase for cancellation;

(b) the amount of the deemed dividends described in (a)(i) to (a)(iii) above will be excluded from the proceeds of disposition of the shares so redeemed or
purchased for cancellation, as the case may be, by virtue of paragraph (j) of the definition of “proceeds of disposition” in section 54;

(c) the taxable dividends deemed to have been received by each of DC, Transferee1 and Transferee2 as described in (a)(i) and (a)(iii) above will

(i) be included in the recipient’s income pursuant to section 82 and paragraph 12(1)(j);

(ii) pursuant to subsection 112(1), be deductible in computing the taxable income of the recipient for the year in which the dividend is deemed to have been received and such deduction will not be denied by any of subsections 112(2.1), (2.2), (2.3) or (2.4);

(d) the deemed dividends referred to in (a)(i) and (a)(iii) above will not be subject to tax under Parts IV.1 or VI.1 of the Act on the basis that the dividends will be “excepted dividends” within the meaning of section 187.1 and “excluded dividends” within the meaning of subsection 191(1); and

(e) by virtue of subsection 186(2) and paragraph 186(4)(a), each Property Transferee will be connected with DC and DC will be connected with each of Transferee1 and Transferee2. Consequently, the Property Transferees and DC will not be subject to tax in respect of the dividends referred to in (a)(i) and (a)(iii) above under Part IV of the Act except as provided for in paragraph 186(1)(b).

D. The extinguishment of the DC Notes by DC and the Transferee Notes by each of Transferee1 and Transferee2 as described in paragraph 25 above will not, in and of itself, result in a forgiven amount within the meaning of either subsection 80(1) or section 80.01. In addition, none of DC, Transferee1 or Transferee2 will otherwise realize any gain or incur any loss as a result thereof.

E. Provided that as part of the series of transactions or events that includes the Proposed Transactions, there is not:

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

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

(c) an acquisition of property in the circumstances described in paragraph 55(3.1)(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 C(a)(i) and (iii) above, and for greater certainty, subsection 55(3.1) will not apply to deny the exemption under paragraph 55(3)(b).

F. The provisions of subsection 88(1) will apply to the winding-up of Newco1 and Newco2 into Transferee1 and Transferee2, respectively, as described in paragraph 23 above such that:

(a) each property of Newco1 and Newco2 distributed to Transferee1 and Transferee2, respectively, on the winding-up of the particular Newco will be deemed by paragraph 88(1)(a) to have been disposed of by Newco1 and Newco2 for proceeds of disposition determined under that paragraph;

(b) the shares in the capital stock of Newco1 and Newco2 held by Transferee1 and Transferee2, respectively, immediately before the winding-up will be deemed by paragraph 88(1)(b) to have been disposed of by Transferee1 and Transferee2 for proceeds determined under that paragraph; and

(c) each property of Newco1 and Newco2 distributed to Transferee1 and Transferee2 on the winding-up of such Newco will be deemed by paragraph 88(1)(c) to have been acquired by Transferee1 and Transferee2, as the case may be, for an amount equal to the amount deemed by paragraph 88(1)(a) to be Newco1 and Newco2’s proceeds of disposition of the property, as the case may be, and no more.

G. The provisions of subsections 15(1), 56(2), 56(4), and 246(1) will not apply as a result of the Proposed Transactions described herein, in and by themselves.

H. As a result of the Proposed Transactions described herein, in and by themselves, subsection 245(2) will not be applied to redetermine the tax consequences confirmed in the rulings given.

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

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

Comments

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 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