2002 Ruling 2001-0083623 - XXXXXXXXXX

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 CCRA.

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

Principal Issues: Standard paragraph 55(3)(a) exception from the application of subsection 55(2). Whether the acquisition of shares by Parent as part of the series caused subsection 55(4) to apply?

Position: Paragraph 55(3)(a) exception met. The taxpayer provided a statement that none of the main purposes of the acquisition of the shares by Parent was to cause two or more persons to be related to each other.

Reasons: The law.

XXXXXXXXXX 2001-008362

XXXXXXXXXX, 2002

Dear Sirs:

Re: XXXXXXXXXX
Advance Income Tax Ruling Request

This is in reply to your letter of XXXXXXXXXX, wherein you requested an advance income tax ruling on behalf of the above-noted taxpayers. We also acknowledge the receipt of additional information contained in your subsequent correspondence to us and our various telephone conversations (XXXXXXXXXX) concerning the facts and proposed transactions described in your ruling request. You have advised us that to the best of your knowledge and that of the taxpayers involved none of the issues involved in this ruling:

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

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

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

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

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

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

(a) "Act" means the Income Tax Act (Canada), R.S.C. 1985 (5th Supp.) c.1, as amended from time to time and consolidated to the date of this letter and, unless otherwise expressly stated, every reference to a part, section or subsection, paragraph or subparagraph and clause or subclause is a reference to the relevant provision of the Act and the regulations thereunder are referred to as the "Regulations";

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

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

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

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

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

(g) "CCRA" refers to the Canada Customs and Revenue Agency;

(h) "Child A" means XXXXXXXXXX;

(i) "Child B" means XXXXXXXXXX;

(j) "Child C" means XXXXXXXXXX;

(k) "Child A Family Trust" means a discretionary trust to be settled by Parent under which the beneficiaries will be Child A and certain other individuals, each of whom shall be a related person in regard to Parent;

(l) "Child B Family Trust" means a discretionary trust to be settled by Parent under which the beneficiaries will be Child B, and certain other individuals, each of whom shall be a related person in regard to Parent;

(m) "Child C Family Trust" means a discretionary trust to be settled by Parent under which the beneficiaries will be Child C and certain other individuals, each of whom shall be a related person in regard to Parent;

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

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

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

(q) "FMV" means fair market value;

(r) "Holdco A" means a new corporation to be incorporated under the BCA as described in paragraph 6 below;

(s) "Holdco B" means a new corporation to be incorporated under the BCA as described in paragraph 6 below;

(t) "Holdco C" means a new corporation to be incorporated under the BCA as described in paragraph 6 below;

(u) "Investco" means XXXXXXXXXX a corporation incorporated and subsisting under the BCA;

(v) "XXXXXXXXXX Trust" XXXXXXXXXX means a Canadian resident trust that was established for the benefit of Parent's children and grandchildren;

(w) "XXXXXXXXXX Trust" XXXXXXXXXX means a Canadian resident trust that was established for the benefit of Parent and Parent's children and grandchildren;

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

(y) "Parent" means XXXXXXXXXX;

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

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

(bb) "proceeds of disposition" has the meaning assigned by section 54;

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

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

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

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

(gg) "stated capital" has the meaning assigned thereto by the BCA;

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

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

(jj) "TIN#" means taxpayer identification number for CCRA purposes; and

(kk) "Trust Company" means XXXXXXXXXX.

FACTS

1. Parent is an individual resident in Canada. Child A, Child B and Child C (collectively referred to as the "Children") are the adult children of Parent, each of whom is also resident in Canada. XXXXXXXXXX.

2. Investco is a taxable Canadian corporation and a private corporation. Investco's tax affairs to date have been administered by CCRA's XXXXXXXXXX Tax Services Office and its corporate income tax returns have been filed at CCRA's XXXXXXXXXX Taxation Centre. Investco's current mailing address is: XXXXXXXXXX. The issued and outstanding share capital of Investco consists of:

(a) XXXXXXXXXX non-voting Class A Preference Shares ("Class A Shares") with a stated capital and paid-up capital equal to their redemption amount of $XXXXXXXXXX each and having a $XXXXXXXXXX non-cumulative annual dividend entitlement. Parent owns all of the Class A Shares;

(b) XXXXXXXXXX voting Class B Preference Shares ("Class B Shares") with a stated capital and paid-up capital equal to their redemption amount of $XXXXXXXXXX each and having a $XXXXXXXXXX non-cumulative annual dividend entitlement. Parent owns all of the Class B Shares.

(c) XXXXXXXXXX non-voting, Class C Preference Shares ("Class C Shares") with a stated capital and paid-up capital equal to their redemption/retraction amount of $XXXXXXXXXX each and having an $XXXXXXXXXX non-cumulative annual dividend entitlement. Child A and Child B own XXXXXXXXXX Class C Shares each;

(d) XXXXXXXXXX non-voting Class D Preference Shares ("Class D Shares") with a stated capital and paid-up capital equal to their redemption amount of $XXXXXXXXXX each. The Class D Shares are entitled to a non-cumulative annual dividend of $XXXXXXXXXX per share plus, after a dividend of $XXXXXXXXXX per share is paid on the Class E Shares and a dividend of $XXXXXXXXXX per share is paid on all the Common Shares, the Class D Shares are fully participating with the common shares as to any further dividends. On a winding-up of Investco, after the return of the stated capital, the holders of the Class D Shares have no further right to participate in the assets of the corporation. Parent owns all of the Class D Shares;

(e) XXXXXXXXXX non-voting Class E Preference Shares ("Class E Shares") with a stated capital and paid-up capital equal to their redemption/retraction amount of $XXXXXXXXXX each and having a $XXXXXXXXXX non-cumulative annual dividend entitlement. All of the Class E Shares are owned by Parent; and

(f) XXXXXXXXXX common shares ("Common Shares"), entitled to one vote each, with a stated capital and paid-up capital of $XXXXXXXXXX each. The Common Shares are fully participating with the Class D Shares with respect to dividends (after payment of preferential dividends on the preference shares) and entitle the holders to receive the remaining property of the corporation upon winding-up. All of the Common Shares are owned by the XXXXXXXXXX Trust.

3. The XXXXXXXXXX Class B Shares of Investco (which represent XXXXXXXXXX% of all the votes of Investco) were acquired by Parent as a capital distribution from the XXXXXXXXXX Trust on XXXXXXXXXX. Under subsection 107(2) the proceeds of disposition to the XXXXXXXXXX Trust of the XXXXXXXXXX Class B Shares were equal to their adjusted cost base. The XXXXXXXXXX Class B Shares of Investco were the only property held by the XXXXXXXXXX Trust. The XXXXXXXXXX Trust was to terminate on the death of Parent or a date in XXXXXXXXXX, whichever occurred earlier. However, the trustees had the power to terminate the XXXXXXXXXX Trust at anytime and, if the termination occurred while Parent was still alive, the trust property could only be distributed to Parent. The termination of the XXXXXXXXXX Trust had been under consideration for some time and was ultimately implemented on XXXXXXXXXX, after implementation of the transactions that were the subject of an earlier advance income tax ruling dated XXXXXXXXXX, 2000 (#XXXXXXXXXX ) and a supplementary ruling (#XXXXXXXXXX) dated XXXXXXXXXX, 2000.

The main purpose of the distribution of the XXXXXXXXXX Class B Shares of Investco to Parent was to avoid the possible double tax costs associated with Parent holding investments through a corporation at the time of Parent's death. The distribution of the XXXXXXXXXX Class B Shares of Investco to Parent will provide for a possible increase to the cost of certain non-depreciable capital property owned by Investco when Parent dies under paragraph 88(1)(c) and (d). Thus, the main purpose of the distribution was to ensure that paragraph 88(1)(d.3) will apply to an acquisition of Parent's controlling block of shares of Investco that would arise as a consequence of Parent's death. Consequently, none of the main purposes of the distribution of the XXXXXXXXXX Class B Shares of Investco was to cause two or more persons to be related to each other or to cause one corporation to control another corporation.

4. The trustees of the XXXXXXXXXX Trust are Parent, Child A, Child B and the Trust Company. Under the terms of the XXXXXXXXXX Trust agreement, Parent's children and their issue are discretionary income beneficiaries. The XXXXXXXXXX Trust will terminate on the death of the last to die of Parent's children. On termination the capital of the XXXXXXXXXX Trust is fully distributable to the remaining income beneficiaries (i.e. Parent's grandchildren).

5. The property of Investco consists principally of a portfolio of shares of public corporations, liquid investments and land and a building situated in XXXXXXXXXX (the "Investment Assets"). Investco's portfolio of public corporation shares includes XXXXXXXXXX Shares of XXXXXXXXXX. ("Opco"). The XXXXXXXXXX Shares of Opco were acquired by Investco in XXXXXXXXXX as part of the series of transactions that were the subject of the advance income tax ruling and supplementary ruling referred to in paragraph 3 above. The Investment Assets of Investco are held by Investco as capital property.

PROPOSED TRANSACTIONS

6. Parent will incorporate three new corporations under the BCA, Holdco A, Holdco B and Holdco C (collectively referred to as the "Holdcos"). No shares will be issued on the incorporation of the Holdcos. The authorized share capital of each Holdco shall be as follows:

(a) Voting Class B Shares (collectively the "Holdco Class B Shares") entitled to one vote each, with a redemption amount of $XXXXXXXXXX each and having a $XXXXXXXXXX non-cumulative annual dividend entitlement;

(b) Non-voting Class D Shares (collectively the "Holdco Class D Shares") with a redemption amount of $XXXXXXXXXX each and having a $XXXXXXXXXX non-cumulative annual dividend entitlement plus, after a dividend of $XXXXXXXXXX per share is paid on all the Holdco Common Shares, the Class D Shares are fully participating with the Holdco Common Shares in all further dividends in equal amounts per share and otherwise non-participating;

(c) Voting common shares (collectively the "Holdco Common Shares") entitled to one vote each. The Holdco Common Shares are fully participating with the Class D Shares with respect to dividends (paid in equal amounts per share) after the payment of preferential dividends on the Holdco Class B and D Shares and entitle the holders to receive the remaining property of the corporation upon winding-up; and

(d) Non-voting redeemable retractable preferred shares (the "Holdco Preferred Shares") having an aggregate redemption amount and aggregate FMV equal to the consideration for which such shares are issued.

The Holdcos' shares will have substantively the same rights and restrictions as the Investco shares of the same class name, described in paragraph 2 above.

7. Three new family trusts will be created by Parent such that each of the Children will have a separate trust created for their benefit and the benefit of that particular Child's family. Each of the family trusts will be settled by Parent contributing a silver coin and the amount necessary to allow each particular Child's family trust to acquire the Investco Common Shares from the XXXXXXXXXX Trust as described in paragraph 9 below. The terms of each family trust specify that there must be a minimum of XXXXXXXXXX and a maximum of XXXXXXXXXX trustees at all times. The trustees of the family trust that is set up for the benefit of Child A and Child A's family (the "Child A Family Trust") will be Parent, Child A and Child A's spouse. The trustees of the family trust that is set up for the benefit of Child B and Child B's family (the "Child B Family Trust") will be Parent, Child B and Child C and, the trustees of the family trust set up for the benefit of Child C and Child C's family (the "Child C Family Trust") will be Parent, Child C and Child B. The beneficiaries of each Child's family trust will be the Child for which that particular family trust was created and that Child's spouse and offspring, if any.

The terms of each family trust also specify that trustees of the particular trust will have full discretion with respect to the distribution of income or capital amongst the adult beneficiaries, up to a date (the "Division Date") which cannot exceed XXXXXXXXXX years following the date of the execution of the trust deed. On the Division Date, the trustees will have the discretion to distribute the trust property among one or more of the beneficiaries. If the trustees fail to exercise such discretion, all the trust property will be distributed to the particular Child for which the trust was created, if alive, failing which such property will be divided among the persons and the particular Child's estate as such Child may have by deed or will have appointed. There is no current intention to increase or decrease the number of proposed trustees or to change the persons who have been identified as the trustees as described above.

8. Investco will redeem all of its Class A Shares, Class C Shares and Class E Shares and will deliver to the holders thereof cash in the amount of the respective redemption amounts of such shares. As a result, the only issued and outstanding shares of Investco immediately after such redemptions will be the Class B Shares and the Class D Shares, held by Parent, and the Common Shares, held by the XXXXXXXXXX Trust.

9. The Child A Family Trust, Child B Family Trust and Child C Family Trust will each acquire from the XXXXXXXXXX Trust one-third of the Common Shares held by the XXXXXXXXXX Trust, being XXXXXXXXXX shares each, for a purchase price equal to the FMV of such Common Shares. The aggregate adjusted cost base of the XXXXXXXXXX Common Shares is $XXXXXXXXXX.

10. Parent will transfer one-third of the Class B Shares XXXXXXXXXX of the Class D Shares of Investco owned by Parent, being XXXXXXXXXX Class B Shares and XXXXXXXXXX Class D Shares, to each of Holdco A, Holdco B and Holdco C. As sole consideration for the XXXXXXXXXX Class B Shares of Investco, Holdco A, Holdco B and Holdco C will each issue XXXXXXXXXX Holdco Class B Shares to Parent having an aggregate FMV equal to the aggregate FMV of the Investco Class B Shares so received by that Holdco. As sole consideration for the XXXXXXXXXX Class D Shares of Investco, Holdco A, Holdco B and Holdco C, as the case may be, will each issue XXXXXXXXXX Holdco Class D Shares to Parent having an aggregate FMV equal to the aggregate FMV of the Investco Class D Shares received by that Holdco. Parent and each particular Holdco shall 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 their respective transfers. The agreed amount in respect of each transfer of Class B Shares or Class D Shares of Investco by Parent will be equal to one-third of the Parent's aggregate ACB of that class of shares owned by Parent immediately before such transfers. For greater certainty, the elected amount for each transfer will be within the limits prescribed by paragraph 85(1)(c.1).

The amount that each Holdco will add to its stated capital account in respect of its Holdco Class B Shares under the BCA will equal the aggregate PUC attributable to the Investco Class B Shares it will receive from Parent as consideration for such shares. The amount that each Holdco will add to its stated capital account in respect of its Holdco Class D Shares under the BCA will equal the aggregate PUC attributable to the Investco Class D shares it will receive from Parent as consideration for such shares.

11. The Child A Family Trust will transfer all of its Common Shares of Investco, being XXXXXXXXXX Common Shares, to Holdco A. As sole consideration therefore, Holdco A will issue XXXXXXXXXX Holdco A Common Shares to the Child A Family Trust having an aggregate FMV equal to the FMV of the Common Shares of Investco so received. Similarly, the Child B Family Trust and the Child C Family Trust will transfer all their Common Shares of Investco, being XXXXXXXXXX Common Shares each, to Holdco B and Holdco C, respectively, in return for the same number of Holdco B Common Shares or Holdco C Common Shares, as the case may be, having a FMV equal to the FMV of the Common Shares of Investco so received.

Each family trust and the respective Holdco to which the particular family trust transfers its Common Shares of Investco 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 their respective transfers. The agreed amount in respect of each such transfer will be equal to the ACB of the Common Shares of Investco transferred to the particular Holdco, being the purchase price paid in respect of such Common Shares by the particular family trust to the XXXXXXXXXX Trust. For greater certainty, the elected amount for each transfer will be within the limits prescribed by paragraph 85(1)(c.1).

The amount that each particular Holdco will add to the stated capital account of its Holdco Common Shares under the BCA in respect of the above transfer will equal the greater of the aggregate PUC attributable to the Common Shares of Investco it will receive from the particular family trust as consideration for such shares and the aggregate ACB to the particular family trust of such shares, such ACB to be determined in accordance with the rules in paragraphs 84.1(2)(a) and (a.1).

12. After the transfer of the shares described in paragraphs 10 and 11 above, Parent will own XXXXXXXXXX% of the voting shares of each Holdco giving Parent control of each Holdco. The shares of Investco acquired by each Holdco and the shares of Holdco that are acquired by Parent and by each family trust in the transactions described in paragraphs 9 and 10 above will be held by the particular holder as capital property.

13. Investco will transfer all of its property (the "Transferred Assets") to Holdco A, Holdco B and Holdco C, on the basis that each such Holdco will receive property of Investco having a FMV equal to one-third of the aggregate FMV of all of Investco's property at that time. The real property owned by Investco will be transferred in its entirety to Holdco C. Prior to the transfer of the beneficial interest in the real property from Investco to Holdco C, the legal title to the real property will be put in Holdco C XXXXXXXXXX As consideration for the one-third portion of Transferred Assets received by each of Holdco A, Holdco B and Holdco C, each Holdco will assume one-third of any liabilities (contingent or otherwise) owing by Investco at the time immediately before the transfer of the Transferred Assets (the "Investco Assumed Liabilities") and issue the Holdco Preferred Shares having an aggregate redemption amount and aggregate FMV equal to the aggregate FMV of the one-third portion of the Transferred Assets received by the particular Holdco less the one-third portion of the Investco Assumed Liabilities assumed by that particular Holdco. It is anticipated that the amount of any Investco Assumed Liabilities will be insignificant.

In connection with the one-third portion of Transferred Assets received by each of Holdco A, Holdco B and Holdco C, Investco and each particular Holdco, will jointly elect pursuant to the provisions of subsection 85(1), such that the elected amount in respect of any eligible property that is included in the Transferred Assets received by such Holdco, will be within the limits described in subsection 85(1). No gains or losses will be realized by Investco in respect of any such transfers.

The amount that each particular Holdco will add to the stated capital account of its Holdco Preferred Shares under the BCA in respect of transfers of the Transferred Assets to it described above, will be the aggregate of the elected amounts under subsection 85(1) and the FMV of any transferred asset in respect of which no joint election under subsection 85(1) was made less the one-third portion of the Investco Assumed Liabilities assumed by that particular Holdco.

14. Each Holdco will redeem its Holdco Preferred Shares held by Investco for the aggregate redemption amount of such shares. The amount payable by each Holdco in respect of such redemption will be paid and satisfied by the delivery of a non-interest-bearing promissory note issued by the particular Holdco (each a "Holdco Note", and collectively the "Holdco Notes") having a principal amount and FMV equal to the aggregate redemption amount of such shares. Investco will accept the Holdco Notes as absolute payment for the redemption amount of all of the Holdco's Holdco Preferred Shares. The first taxation year of each Holdco will end immediately after the redemption of its Holdco Preferred Shares. At the end of such taxation year each particular Holdco will have a nil balance in its RDTOH.

15. Immediately after the end of each Holdco's first taxation year, the shareholders of Investco will resolve to wind-up Investco. Under the terms of the winding-up agreement, Investco will assign and distribute to each Holdco that particular Holdco's Holdco Note and as a result, the obligations under each such Holdco Note will be cancelled. An election will be made pursuant to subsection 83(2) such that an amount equal to Investco's capital dividend account will be deemed to have been paid as a separate dividend to each Holdco on the winding-up of Investco. On the winding-up of Investco, any refund of RDTOH to which Investco becomes entitled will be distributed equally to each of the three Holdcos. Following the distribution of all of Investco's property, including any refund of its RDTOH, filing of final tax returns and receipt of relevant clearance certificates and consents, Articles of Dissolution will be filed and Investco will be dissolved without delay.

ADDITIONAL INFORMATION

16. There have been no significant transactions, other than those described above, that have been completed prior to the date of this letter nor are there any other significant transactions, proposed or contemplated, other than those described above, that will take place as part of the series of transactions or events that includes the proposed transactions. Specifically, there is no intention by any shareholder to dispose of the shares of any of the corporations referred to herein to a person or partnership that was not a related person to Investco or any Holdco, as the case may be, immediately prior to such disposition.

17. None of the corporations referred to herein (including the corporations to be incorporated as described in the proposed transactions) is or will be, at any time during the series of transactions herein described, a "specified financial institution" or a "restricted financial institution" as those terms are defined in subsection 248(1).

18. There 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", as defined in subsection 112(2.2), in respect of any of the issued shares referred to herein (including the shares to be issued as described in the proposed transactions).

19. None of the corporations referred to herein (including the corporations to be incorporated as described in the proposed transactions) will have entered into a "dividend rental arrangement", as defined in subsection 248(1), in respect of any of the issued shares referred to herein (including the shares to be issued as described in the proposed transactions).

20. None of the issued shares referred to herein (including the shares to be issued as described in the proposed transactions) 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).

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

PURPOSE OF THE PROPOSED TRANSACTIONS

22. The purpose of the proposed transactions is to divide the FMV of all the property of Investco equally among Holdco A, Holdco B and Holdco C so that future investment decisions may be made in respect of the assets of each Holdco independently of the investment decisions made in respect of the assets owned by the others. Further, since it is intended that any property owned by Parent at the time of Parent's death is to be distributed equally between each of Child A, Child B and Child C under the terms of Parent's will the proposed transactions will facilitate such future distribution in a tax effective manner. Specifically, the proposed transactions will generally facilitate the taking of appropriate steps to obtain an increase in the ACB of the eligible assets of each Holdco held at the time of Parent's death. Pursuant to paragraphs 88(1)(c) and (d) such increase would be limited to the FMV of the shares of the Holdco held by Parent at that time.

RULINGS GIVEN

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

A. Subsection 85(1), subject to the application of subsection 26(5) of the Income Tax Application Rules, will apply to the transfers by Parent of Investco Class B Shares and Class D Shares to each of Holdco A, Holdco B and Holdco C as described in paragraph 10 above, such that the agreed amount in respect of each such transfer shall 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 any such transfer referred to herein.

B. Subsection 85(1), subject to the application of subsection 26(5) of the Income Tax Application Rules, will apply to the transfers by each of Child A Family Trust, Child B Family Trust and Child C Family Trust of its Investco Common Shares to its respective Holdco as described in paragraph 11 above, such that the agreed amount in respect of each such transfer shall 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 any such transfer referred to herein.

C. Subsection 85(1), subject to the application of subsection 26(5) of the Income Tax Application Rules, will apply to the transfers by Investco of the Transferred Assets which are eligible property to each of Holdco A, Holdco B and Holdco C as described in paragraph 13 above, such that the agreed amount in respect of each such transfer shall 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 any such transfer referred to herein.

D. On the redemption by each Holdco of its Holdco Preferred Shares held by Investco as described in paragraph 14 above and the distributions by Investco in the course of its winding-up as described in paragraph 15 above:

(a) by virtue of paragraphs 84(3)(a) and (b) each particular Holdco will be deemed to have paid, and Investco 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 Holdco Preferred Shares exceeds the PUC thereof;

(b) pursuant to paragraph 88(2)(b) and subsection 84(2), but subject to (c), (d) and (e) below, each Holdco will be deemed to have received a dividend (the "winding-up dividend") on shares of each class of Investco equal to the amount by which the aggregate FMV of the property of Investco distributed to such Holdco on the winding-up in consideration for the cancellation of each such class of shares of Investco held by such Holdco exceeds the PUC of shares of that class owned by the particular Holdco that are cancelled;

(c) pursuant to subparagraph 88(2)(b)(i), such portion of the winding-up dividend referred to in (b) above as does not exceed Investco's CDA determined immediately before the payment of the winding-up dividend shall be deemed for the purpose of an election pursuant to subsection 83(2) to be the full amount of a separate dividend;

(d) pursuant to subparagraph 88(2)(b)(ii), the portion of the winding-up dividend that is equal to the lesser of (A) Investco'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 Investco will elect under subsection 83(2), shall be deemed not to be a dividend;

(e) pursuant to subparagraph 88(2)(b)(iii), the winding-up dividend, to the extent that it exceeds the portion thereof referred to in (c) above that is deemed to be a separate dividend and the portion referred to in (d) above that is deemed not to be a dividend, shall be deemed to be a separate dividend that is a taxable dividend;

(f) to the extent that the deemed dividends described in (a) and (b) above are taxable dividends, such dividends will be included in computing the income of the recipient corporation thereof pursuant to paragraph 12(1)(j) and will be deductible by such recipient in computing its taxable income pursuant to subsection 112(1) and such deduction will not be denied by any of the provisions of subsections 112(2.2), (2.3) or (2.4);

(g) the amount of the deemed dividends described in (a), (b) and (c) 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);

(h) by virtue of subsection 186(2) and 186(4), each Holdco will be connected with Investco and Investco will be connected with each Holdco. Consequently, none of the Holdcos or Investco will be subject to tax in respect of the dividends referred to in (a) and (b) above under Part IV except as provided for in paragraph 186(1)(b); and

(i) by virtue of paragraph 191(2)(a), each of the Holdcos will have a substantial interest in Investco and Investco will have a substantial interest in each of the Holdcos for the purpose of Part VI.1 and, accordingly, no tax will be payable pursuant to Part VI.1 in respect of the dividends referred to in (a) and (b) above.

E. By virtue of paragraph 55(3)(a), the provisions of subsection 55(2) will not apply to the taxable dividends referred to in Ruling D, provided there is not a disposition of property or an increase in interest described in any of subparagraphs 55(3)(a)(i) to (v) which is part of the series of transactions or events that includes the proposed transactions. For greater certainty, the proposed transactions described in paragraphs 6 to 15 above, in and by themselves, will not be considered to result in any of the events described in subparagraph 55(3)(a)(i) to (v).

F. The cancellation of the Holdco Notes as described in paragraph 15 hereof will not give rise to a "forgiven amount" within the meaning of subsection 80(1) or 80.01(1).

G. The provisions of subsections 15(1), 56(2), 69(4) and 246(1) will not apply to 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 described herein.

The above rulings are given subject to the limitations and qualifications set out in Information Circular 70-6R4 dated January 29, 2001 and are binding on the CCRA provided that the proposed transactions are completed by XXXXXXXXXX. These rulings are based on the law as it presently reads and do not take into account any proposed amendments to the Act which, if enacted into law, could have an effect on the rulings provided herein.

CAVEAT

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

(a) the determination of the FMV or ACB of any particular asset or the PUC of any shares referred to herein;

(b) the determination of the balance of the capital dividend account or the RDTOH; or

(c) any tax consequences relating to the facts and proposed transactions described herein other than those specifically described in the rulings given above.

Yours truly,

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