2002 Ruling 2001-0095293 - Internal Reorganization

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

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

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

Principal Issues:

1. Where shareholders A and B of Aco are unrelated to each other for the purposes of section 55 and the voting and non-participating shares of Aco owned by shareholder A are redeemed and subsequent to the share redemption, Aco spins off its assets to Bco which is controlled by shareholder B, whether the share redemption would be part of a series that includes the subsequent spin-off under subsection 248(10)?

2. Where the redemption of Aco shares owned by shareholder A as described in #1 above, has caused Aco and shareholder B to be related to each other, whether subsection 55(4) would apply to deem Aco and shareholder B not to be related to each other for the purposes of section 55?

Position:

1. It is a question of fact as to whether the share redemption and the subsequent spin-off have some connection to each other. In the case at hand, based on the taxpayer's representation, such share redemption would not be part of the series that includes the subsequent spin-off.

2. It is a question of fact as to whether one of the main purposes of redeeming shareholder A's shares in Aco was to cause Aco and shareholder B to be related to each other so that subsection 55(2) would not apply to a subsequent spin-off dividend. In the case at hand, based on the taxpayer's representation, subsection 55(4) would not apply to the share redemption transaction.

Reasons:

1. As stated above.

2. As stated above.

XXXXXXXXXX 2001-009529

XXXXXXXXXX, 2002

Dear Sirs:

Re: XXXXXXXXXX
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 judgment 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 the Directorate.

Definitions

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

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

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

(c) "affiliated persons" has the meaning assigned by subsection 251.1(1);

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

(e) "BCA" means the Business Corporations Act (XXXXXXXXXX), and, where applicable, its predecessor statutes;

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

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

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

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

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

(k) "distribution date" means the first to occur of:

(i) XXXXXXXXXX after the death of the last to die of the beneficiaries alive at the date hereof,

(ii) XXXXXXXXXX after the date of death of the last surviving beneficiary; and

(iii) such earlier date as the trustees may in writing determine upon the anticipated imminent happening or occurrence of the enactment of any law or the promulgation of any regulation or order or any action by or on the part of any governmental authority, agency or office of or in XXXXXXXXXX or Canada, the objective purpose or effect of which is

(I) to restrict in any way the use, investment or distribution of any income or capital of the Trust Property;

(II) the acquisition, expropriation or confiscation of any of the income or capital of the trust property, including by the imposition of income tax rates considered punitive by the trustees;

(III) the compulsory conversion of the income or capital of the trust property;

(IV) to compel the trustees to sell or otherwise dispose of any property and assets comprising the trust property; or

(V) the restriction, suspension or abrogation of any contract in relation to the trust property to which the trustees are a party.

(l) "FMV" represents fair market value which means the highest price available in an open and unrestricted market between informed prudent parties acting at arm's length and under no compulsion to act and contracting for a taxable purchase and sale;

(m) "former Act" has the meaning assigned by section 8 of the ITAR;

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

(o) "ITAR" refers to the Income Tax Application Rules;

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

(q) "personal trust" has the meaning assigned by subsection 248(1);

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

(s) "private foundation" has the meaning assigned by subsection 149.1(1);

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

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

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

(w) "registered charity" has the meaning assigned by subsection 248(1);

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

(y) "related group" has the meaning assigned by subsection 251(4);

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

(aa) "series of transactions" has the meaning assigned by subsection 248(10);

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

(cc) "stated capital" has the meaning assigned by the provisions of BCA;

(dd) "subsidiary wholly-owned corporation" has the meaning assigned by subsection 248(1);

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

(ff) "taxable Canadian property" has the meaning assigned by subsection 248(1);

(gg) "taxable dividend" has the meaning assigned by subsection 89(1); and

(hh) "valuation day" ("V-day") has the meaning assigned by section 24 of the ITAR.

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

Facts

1. XXXXXXXXXX ("Holdco1") is a TCC and a private corporation which was incorporated under the BCA on XXXXXXXXXX.

Holdco1's tax affairs are administered by the XXXXXXXXXX Tax Services Office and its corporate tax returns are filed at the XXXXXXXXXX Taxation Centre. The fiscal and taxation year end of Holdco1 is XXXXXXXXXX.

The issued and outstanding capital of Holdco1 consists of:

(a) XXXXXXXXXX Class A non-voting, redeemable, retractable and XXXXXXXXXX% non-cumulative dividend preference shares ("Holdco1 Class A Preference Shares") having an aggregate stated capital, PUC and redemption and retraction amounts of $XXXXXXXXXX , of which

(I) XXXXXXXXXX are owned by XXXXXXXXXX ("Individual A"), a non-resident of Canada, and

(II) 1 is owned by a lawyer XXXXXXXXXX ("Lawyer"), a person unrelated to Individual A;

(b) XXXXXXXXXX Class B voting, redeemable, retractable and XXXXXXXXXX% non-cumulative dividend preference shares ("Holdco1 Class B Preference Shares") having an aggregate stated capital, PUC and redemption and retraction amounts of $XXXXXXXXXX which are all owned by Individual A. Each share is entitled to one vote;

(c) XXXXXXXXXX Class C non-voting, redeemable, retractable and XXXXXXXXXX% non-cumulative dividend preference shares ("Holdco1 Class C Preference Shares") having an aggregate stated capital, PUC and redemption and retraction amounts of $XXXXXXXXXX which are all owned by Individual A; and

(d) XXXXXXXXXX common shares ("Holdco1 Common Shares") having an aggregate stated capital and PUC of $XXXXXXXXXX which are all owned by the XXXXXXXXXX ("Trust1"). Each share is entitled to one vote.

The Holdco1 Class C Preference Shares are entitled to participate equally with the Holdco1 Common Shares, on a share-by-share basis, on any dividends declared or paid in a year after a dividend of $XXXXXXXXXX is paid on each of the Holdco1 Class C Preference Shares and the Holdco1 Common Shares in the year. However, on the dissolution of Holdco1, the Holdco1 Class A, Class B and Class C Preference Shares will only be entitled to a return of their redemption amount plus any declared and unpaid dividends on such shares, while the Holdco1 Common Shares are entitled to the remaining assets of Holdco1.

The aggregate PUC of the Holdco1 shares described in (a), (b), (c) and (d) above is $XXXXXXXXXX.

The Holdco1 Class A Preference Shares, the Holdco1 Class B Preference Shares and the Holdco1 Class C Preference Shares are retractable for $XXXXXXXXXX per share within one year of the date the holder of such shares dies or leaves the employment of Holdco1.

All of the Holdco1 Class A Preference Shares, the Holdco1 Class B Preference Shares, the Holdco1 Class C Preference Shares and the Holdco1 Common Shares were issued by Holdco1 prior to 1972.

The Holdco1 share acquired by the Lawyer was issued to him so that he would qualify to be a director of Holdco1.

Each of Individual A and Trust1 holds his or its Holdco1 shares as capital property. The Holdco1 shares owned by Individual A are taxable Canadian property.

Holdco1 is an investment holding company, the principal assets of which consist of:

(i) XXXXXXXXXX Class B non-voting common shares of XXXXXXXXXX ("Pubco1");

(ii) XXXXXXXXXX Class B non-voting common shares of XXXXXXXXXX ("Pubco2");

(iii) all of the outstanding shares of XXXXXXXXXX ("Subco1");

(iv) shares of

(I) XXXXXXXXXX ("Aco"),
(II) XXXXXXXXXX ("Bco"); and

(v) notes receivable from related corporations.

Holdco1 holds its assets described above as capital property. Holdco1 acquired the Pubco1 shares and the Pubco2 shares after 1971.

Each of Pubco1 and Pubco2 is a TCC, a public corporation and is controlled by XXXXXXXXXX.

Individual A controls Holdco1. Holdco1, Subco1, Aco and Bco are related to each other for the purposes of section 55.

Holdco1 did not pay dividends on any of its issued and outstanding shares in its XXXXXXXXXX fiscal and taxation year.

It is expected that Holdco1 will have balance in its RDTOH at the end of its taxation year in which the proposed transactions described below are completed.

2. XXXXXXXXXX ("Holdco2") is a TCC and a private corporation which was incorporated under the BCA on XXXXXXXXXX.

Holdco2's tax affairs are administered by the XXXXXXXXXX Tax Services Office and its corporate tax returns are filed at the XXXXXXXXXX Taxation Centre. The fiscal and taxation year end of Holdco2 is XXXXXXXXXX.

The issued and outstanding capital of Holdco2 consists of:

(a) XXXXXXXXXX Class A non-voting, redeemable, retractable and XXXXXXXXXX % non-cumulative dividend preference shares (Holdco2 Class A Preference Shares") having a redemption and retraction amount of $XXXXXXXXXX each; and

(b) XXXXXXXXXX common shares ("Holdco2 Common Shares"),

all of which are owned by Individual A.

The aggregate stated capital and PUC of the Holdco2 Class A Preference Shares and Holdco2 Common Shares is $XXXXXXXXXX.

Holdco2 is an investment holding company, the principal assets of which consist of:

(i) XXXXXXXXXX Class B common shares of Aco;

(ii) XXXXXXXXXX Class B non-voting common shares of Pubco1;

(iii) XXXXXXXXXX Class B non-voting common shares of Pubco2; and

(iv) XXXXXXXXXX Class D and XXXXXXXXXX Class F preference shares of Bco.

Holdco2 holds the assets described in (i), (ii), (iii) and (iv) as capital property.

Holdco2, Holdco1, Aco and Bco are related to each other.

Individual A holds his Holdco2 shares as capital property.

3. Subco1 is a TCC and a private corporation which was formed under the BCA by an amalgamation of XXXXXXXXXX.

Subco1's tax affairs are administered by the XXXXXXXXXX Tax Services Office and its corporate tax returns are filed at the XXXXXXXXXX Taxation Centre. The fiscal and taxation year end of Subco1 is XXXXXXXXXX.

The issued and outstanding capital of Subco1 consists of:

(a) XXXXXXXXXX Class B voting, redeemable and XXXXXXXXXX % non-cumulative dividend special shares ("Subco1 Class B Special Shares") having a redemption amount equal to their issue price of $XXXXXXXXXX each; and

(b) XXXXXXXXXX common shares ("Subco1 Common Shares"),

		all of which are owned by Holdco1.

Subco1 is an investment holding company, the principal assets of which consist of:

(i) XXXXXXXXXX Class B common shares of Aco;

(ii) XXXXXXXXXX Class B non-voting common shares of Pubco1; and

(iii) XXXXXXXXXX Class B non-voting common shares of Pubco2.

Subco1 holds its assets described in (i), (ii) and (iii) above as capital property. Subco1 acquired its Pubco1 shares and Pubco2 shares after 1971.

4. Aco is a TCC and a private corporation which is governed by the BCA.

The issued and outstanding capital of Aco consists of:

(a) XXXXXXXXXX Class A common shares ("Aco Class A Common Shares");

(b) XXXXXXXXXX Class B common shares ("Aco Class B Common Shares"); and

(c) XXXXXXXXXX non-voting, redeemable and retractable preference shares ("Aco Preference Shares") having a redemption and retraction amount of $XXXXXXXXXX each.

All of the Aco Class A Common Shares and the Aco Class B Common Shares are owned by Holdco1, Holdco2, Subco1 and Bco, which are a related group. The Aco Preference Shares are owned by XXXXXXXXXX ("Cco"), which is a TCC controlled by Bco.

Aco is an investment holding company, the principal assets of which consist of:

(i) XXXXXXXXXX Class B multiple voting shares of XXXXXXXXXX ("Pubco3");

(ii) XXXXXXXXXX non-voting, redeemable and retractable preference shares of Cco. ("Cco Preference Shares") having a redemption and retraction amount of $XXXXXXXXXX each; and

(iii) cash and marketable securities.

Aco was formed by an amalgamation of Aco's predecessor corporations XXXXXXXXXX ("Dco") in XXXXXXXXXX. Prior to the amalgamation described herein,

(I) Aco's predecessor corporation XXXXXXXXXX transferred some of its Pubco3 shares to Cco pursuant to subsection 85(1) and received Cco Preference Shares as consideration; and

(II) Cco transferred the Pubco3 shares that it had acquired from Aco's predecessor corporation XXXXXXXXXX to Dco pursuant to subsection 85(1) and received Dco preference shares as consideration.

The formation of Aco in XXXXXXXXXX resulted in Aco owning Cco Preference Shares and Cco owning Aco Preference Shares.

Pubco3 is a TCC and a public corporation. Aco acquired the Pubco3 voting shares described in (i) above in a reorganization that was unrelated to the proposed transactions described below, which reorganization was the subject of an advance income tax ruling (2000-XXXXXXXXXX) issued on XXXXXXXXXX, 2000 (the "Tax Ruling").

Aco controls Pubco3 through its Pubco3 voting shares described in (i) above.

5. Bco is a CCPC and is controlled by XXXXXXXXXX ("Individual C"), the adult daughter of Individual A. Bco's principal assets consist of marketable securities and shares of related corporations. Individual C has XXXXXXXXXX adult siblings, XXXXXXXXXX. Individual C and her siblings are all residents in Canada.

6. Trust1 is an inter vivos trust and personal trust resident in Canada. It was settled in XXXXXXXXXX by XXXXXXXXXX ("Individual D"), the father of Individual A. Under the terms of Trust1, the beneficiaries of Trust1 are the issue of Individual A, provided that if there should be no issue of Individual A living upon the date of distribution, the capital and income of Trust1 are to be paid to the grandchildren of Individual D. The trustees of Trust1 consist of Individual A's XXXXXXXXXX adult children and XXXXXXXXXX ("Individual E") who are unrelated to Individual A. Trust1 requires a unanimous decision of the trustees to bind Trust1.

Trust1 used its own funds to acquire XXXXXXXXXX Holdco1 Common Shares from Individual A in XXXXXXXXXX.

Prior to XXXXXXXXXX, the trustees of Trust1 filed an election under subsection 104(5.3) in prescribed form and within the time period referred to therein to defer the application of the 21-year deemed disposition and reacquisition rules in subsection 104(4) to XXXXXXXXXX (the "particular day"). At the end of the particular day, Trust1 was deemed by subsection 104(4) to have disposed of its capital property including the Holdco1 Common Shares for proceeds of disposition equal to its FMV and to have reacquired it immediately after the particular day for that same amount. Trust1 included the gain from the disposition of such capital property in computing its income in its XXXXXXXXXX taxation year.

Individual A is related to each beneficiary of Trust1 who is or may (otherwise than by reason of death of another beneficiary under Trust1) be entitled to share in the income or capital of Trust1 for the purposes of section 55. Consequently, pursuant to subparagraph 55(5)(e)(ii), Individual A is related to Trust1 for the purposes of section 55.

Individual A and Trust1 are not dealing at arm's length with each other at any time including the proposed transactions described below.

Trust1's tax affairs are administrated by the XXXXXXXXXX Tax Services Office and its T3 trust returns are filed at the same tax services office.

7. In XXXXXXXXXX, Individual B acquired XXXXXXXXXX Holdco1 Class B preference shares from the treasury of Holdco1 having an aggregate stated capital, PUC and redemption amount of $XXXXXXXXXX. The purpose of such acquisition by Individual B was XXXXXXXXXX.

In XXXXXXXXXX or earlier, XXXXXXXXXX, there was a verbal agreement between Individual A and Individual B that the XXXXXXXXXX Holdco1 Class B preference shares held by Individual B should be eliminated so that none of such Holdco1 shares would be passed on to the children or grandchildren of Individual B. However, the divestment of Individual B's Holdco1 preference shares was delayed XXXXXXXXXX.

XXXXXXXXXX, the Holdco1 Class B preference shares held by Individual B were redeemed by Holdco1 at their redemption amount in XXXXXXXXXX. As a result of such share redemption, Individual A controls Holdco1.

You have represented that

(a) the proposed transactions described below were not related to the redemption of Individual B's Holdco1 Class B preference shares in XXXXXXXXXX, as the proposed transactions were not dependent upon, nor were they connected in any way to, the divestment of Individual B's Holdco1 Class B preference shares. Consequently, such divestment transaction was not part of the series of transactions that includes the proposed transactions described below; and

(b) none of the purposes of the redemption of Individual B's Holdco1 Class B preference shares was to cause Individual A and Holdco1 to be related to each other so that subsection 55(2) would not apply to the deemed dividends resulting from the proposed transactions described below.

Proposed Transactions

8. Individual A will incorporate two new corporations ("Newco1" and "Newco2") under the BCA. (Newco1 and Newco2 are collectively referred to hereafter as "Newcos"). Each of the Newcos will be a TCC and a private corporation. No shares will be issued as part of the incorporation of the Newcos.

Individual A will not be dealing at arm's length with the Newcos at any time which includes the proposed transactions.

The authorized capital of each of the Newcos will consist of XXXXXXXXXX Class A preference shares (the "Newco1 Class A Preference Shares" and the "Newco2 Class A Preference Shares"), one class of an unlimited number of Class B preference shares (the "Newco1 Class B Preference Shares" and the "Newco2 Class B Preference Shares") and one class of an unlimited number of common shares (the "Newco1 Common Shares" and the "Newco2 Common Shares") which will include the following attributes:

(a) both the Newco1 and 2 Class A Preference Shares:

(i) will be entitled toXXXXXXXXXX votes per share;

(ii) will be redeemable and retractable at a redemption amount of $XXXXXXXXXX per share; and

(iii) will be entitled to a non-cumulative dividend at XXXXXXXXXX% per annum of the redemption amount described herein and will have a preference on dissolution over the Newco1 or XXXXXXXXXX Common Shares, as the case may be;

(b) both the Newco1 and 2 Class B Preference Shares:

(i) will be non-voting;

(ii) will be redeemable and retractable, subject to applicable law, at any time for an amount equal to the aggregate FMV of the consideration for which the Newco1 Class B Preference Shares or the Newco2 Class B Preference Shares, as the case may be, are issued, divided by the number of such shares issued (the "Newco1 Class B Redemption Amount" and the "Newco2 Class B Redemption Amount"); and

(iii) will be entitled to a non-cumulative dividend at XXXXXXXXXX% per annum of the Newco1 Class B Redemption Amount or the Newco2 Class B Redemption Amount, as the case may be, and will have a preference on dissolution over the Newco1 or 2 Common Shares, as the case may be; and

(c) both the Newco1 and XXXXXXXXXX Common Shares will be entitled to 1 vote per share.

9. Individual A will settle two inter vivos trusts and personal trusts ("Trust2" and "Trust3") by contributing $XXXXXXXXXX to each of Trust2 and Trust3.

The trustees of Trust2 will consist of Individuals A, C and E, XXXXXXXXXX ("Individual F"), spouse of Individual A, and XXXXXXXXXX ("Individual G") and XXXXXXXXXX ("Individual H") who are unrelated to Individual A. Individuals E, G and H are resident in Canada while Individual F is a non-resident of Canada. The trustees of Trust3 will consist of all of the trustees of Trust2 other than Individual F. The decisions regarding each of Trust2 and Trust3 will be made by a majority of the trustees of the respective trust. Both trusts will be resident in Canada.

The beneficiaries under each of Trust2 and Trust3 will be Individual A's children, grandchildren and their descendents and, as at the distribution date, one or more private foundations which are registered charities, or other registered charities.

Trust2 will be created for the purposes of XXXXXXXXXX . Trust3 will be created for the purposes of XXXXXXXXXX.

Individual A will be related to each of the beneficiaries (other than a registered charity) under Trust2 and Trust3 for the purposes of section 55. Consequently, pursuant to subparagraph 55(5)(e)(ii), Individual A will be related to Trust2 and Trust3 for the purposes of section 55.

Individual A, Trust2 and Trust3 will not be dealing at arm's length with each other at any time including the time of the proposed transactions described herein.

10. Individual A will purchase from Trust1 its XXXXXXXXXX Holdco1 Common Shares at FMV and will pay cash for such share acquisition. The XXXXXXXXXX Holdco1 Common Shares of Individual A will be taxable Canadian property of Individual A.

An independent valuator has been engaged to estimate the FMV of the Holdco1 Common Shares.

11. Individual A will purchase from the Lawyer his 1 Holdco1 Class A Preference Share for XXXXXXXXXX, being its FMV.

12. Following the share acquisitions described in paragraphs 10 and 11 above, Holdco1, Holdco2 and Subco1 will be amalgamated to form Amalco pursuant to the provisions of the BCA.

The articles of amalgamation of Amalco will provide for XXXXXXXXXX authorized classes of shares: XXXXXXXXXX Class A preference shares (the "Amalco Class A Preference Shares"), an unlimited number of Class B preference shares (the "Amalco Class B Preference Shares") and an unlimited number of common shares (the "Amalco Common Shares") which will include the following attributes:

(a) each of the Amalco Class A Preference Shares:

(i) will be entitled to XXXXXXXXXX votes;

(ii) will be redeemable and retractable at a redemption amount of $XXXXXXXXXX; and

(iii) will be entitled to a non-cumulative dividend at XXXXXXXXXX% per annum of the redemption amount described herein and will have a preference on dissolution over the Amalco Common Shares;

(b) each of the Amalco Class B Preference Shares:

(i) will be non-voting;

(ii) will be redeemable and retractable, subject to applicable law, at any time for an amount equal to the sum of the aggregate FMV of the Pubco1 and Pubco2 shares owned by Amalco at the time of the merger described herein, divided by the number of Class B Preference Shares issued because of the merger, being XXXXXXXXXX (the "Amalco Class B Redemption Amount"); and

(iii) will be entitled to a non-cumulative dividend at XXXXXXXXXX% per annum of the Amalco Class B Redemption Amount and will have a preference on dissolution over the Amalco Common Shares; and

(c) each of the Amalco Common Shares will be entitled to 1 vote.

On the amalgamation of Holdco1, Holdco2 and Subco1:

(i) all of the property (except amounts receivable from any predecessor corporation or shares of the capital stock of any predecessor corporation) of Holdco1, Holdco2 and Subco1 immediately before the merger will become property of Amalco by virtue of the merger;

(ii) all of the liabilities (except amounts payable to any predecessor corporation) of Holdco1, Holdco2 and Subco1 immediately before the merger will become liabilities of Amalco by virtue of the merger; and

(iii) Individual A, being the sole shareholder of Holdco1 and Holdco2 immediately before the merger, will receive,

(I) as consideration for all of his Holdco1 shares,

(aa) XXXXXXXXXX Amalco Class A Preference Shares having an aggregate FMV and redemption and retraction amounts of $XXXXXXXXXX;

(bb) a number of Amalco Class B Preference Shares having an aggregate FMV and redemption and retraction amounts equal to the FMV of all of the shares of Pubco1 and Pubco2 owned by Holdco1 and Subco1 at the time of the merger; and

(cc) XXXXXXXXXX Amalco Common Shares.

The aggregate FMV of (aa), (bb) and (cc) described above will be approximately equal to the aggregate FMV of the Holdco1 shares owned by Individual A immediately before the merger; and,

(II) as consideration for all of his Holdco2 shares,

(dd) a number of Amalco Class B Preference Shares having an aggregate FMV and redemption and retraction amounts equal to the FMV of all of the shares of Pubco1 and Pubco2 owned by Holdco2 at the time of the merger; and

(ee) XXXXXXXXXX Amalco Common Shares.

The aggregate FMV of (dd) and (ee) described above will be approximately equal to the aggregate FMV of the Holdco2 shares owned by Individual A immediately before the merger.

The aggregate FMV of (aa), (bb), (cc), (dd), and (ee) described above will be equal to the aggregate FMV of the Holdco1 shares and the Holdco2 shares owned by Individual A immediately before the merger; and

(iv) the shares of Subco1 owned by Holdco1 will be cancelled for no consideration.

For the purposes of the BCA, the additions to the stated capital account of Amalco will be:

	(a.1)	$XXXXXXXXXX , in respect of the Amalco Common Shares;
	(b.1)	$XXXXXXXXXX , in respect of the Amalco Class A Preference Shares; and
	(c.1)	$XXXXXXXXXX , in respect of the Amalco Class B Preference Shares. 

The aggregate of the amounts in (a.1), (b.1) and (c.1) above will be equal to $XXXXXXXXXX which will be equal to the aggregate PUC of the Holdco1 shares and the Holdco2 shares owned by Individual A immediately before the merger.

13. Immediately following the amalgamation of Holdco1, Holdco2 and Subco1 described in paragraph 12 above, Individual A will

(a) transfer to Newco1 at FMV, a number of Amalco Class B Preference Shares having an aggregate FMV, redemption and retraction amount of approximately $XXXXXXXXXX;

(b) retain a number of Amalco Class B Preference Shares having an aggregate FMV, redemption and retraction amount of approximately $XXXXXXXXXX; and

(c) transfer to Newco2 at FMV, his remaining Amalco Class B Preference Shares (other than those Amalco Class B Preference Shares described in (b) above) having an estimated aggregate FMV of over $XXXXXXXXXX.

As the sole consideration for such transfers,

(d) Newco1 will issue to IndividualcShares,

having an aggregate FMV equal to the aggregate FMV of the Amalco Class B Preference Shares transferred to Newco1, and

(e) Newco2 will issue to Individual A,

(i) XXXXXXXXXX Newco2 Class A Preference Shares; and
(ii) XXXXXXXXXX Newco2 Common Shares,

having an aggregate FMV equal to the aggregate FMV of the Amalco Class B Preference Shares transferred to Newco2.

The Newco1 shares and the Newco2 shares received by Individual A described herein will be taxable Canadian property of Individual A.

No election will be filed under subsection 85(1) with respect to the transfers by Individual A of his Amalco Class B Preference Shares to Newco1 and Newco2 described herein.

Pursuant to the provisions of the BCA, the total additions to the stated capital account of each of Newco1 and Newco2 in respect of the issuance of the Class A Preference Shares and the Common Shares of each of Newco1 and Newco2, as the case may be, will be equal to the aggregate FMV, redemption and retraction amount of the Amalco Class B Preference Shares so transferred to it as described herein.

Individual A will realize a capital gain from the disposition of his Amalco Class B Preference Shares to each of Newco1 and Newco2 as described herein.

14. Immediately following the transactions described in paragraph 13 above, Amalco will

(a) transfer to Newco1 at FMV a number of Pubco1 shares having an aggregate FMV of approximately $XXXXXXXXXX and a number of Pubco2 shares having an aggregate FMV of approximately $XXXXXXXXXX for an aggregate amount of approximately $XXXXXXXXXX, which aggregate amount will be equal to the aggregate FMV, redemption and retraction amounts of the Amalco Class B Preference Shares owned by Newco1 at the time of the transfer;

(b) retain a number of Pubco1 shares having an aggregate FMV of approximately $XXXXXXXXXX and a number of Pubco2 shares having an aggregate FMV of approximately $XXXXXXXXXX for an aggregate amount of approximately $XXXXXXXXXX; and

(c) transfer to Newco2 at FMV its remaining Pubco1 shares and Pubco2 shares (other than those Pubco1 shares and Pubco2 shares described in (b) above) having an aggregate FMV equal to the aggregate FMV, redemption and retraction amounts of the Amalco Class B Preference Shares owned by Newco2 at the time of the transfer.

As the sole consideration for such transfers,

(d) Newco1 will issue to Amalco, Newco1 Class B Preference Shares having an aggregate FMV, redemption and retraction amounts equal to the aggregate FMV at that time of the Pubco1 shares and the Pubco2 shares transferred to Newco1; and

(e) Newco2 will issue to Amalco, Newco2 Class B Preference Shares having an aggregate FMV, redemption and retraction amounts equal to the aggregate FMV at that time of the Pubco1 shares and the Pubco2 shares transferred to Newco2.

15. Amalco and each of Newco1 and Newco2 will jointly elect in prescribed form and within the time period referred to in subsection 85(6) to have the provisions of subsection 85(1) apply to each transfer described in paragraph 14 above. The agreed amount in respect of the Pubco1 shares and the Pubco2 shares transferred by Amalco to each of Newco1 and Newco2 will be equal to the lesser of the amounts described in paragraphs 85(1)(c.1)(i) and (ii) of the Act.

Pursuant to the provisions of the BCA, the addition to the stated capital of each of Newco1 and Newco2 in respect of the issuance of the Class B Preference Shares of Newco1 and Newco2, as the case may be, will equal the aggregate of the cost (determined pursuant to subsection 85(1) of the Act, where relevant) of the Pubco1 shares and the Pubco2 shares transferred to it as described in paragraph 14 above.

16. Immediately following the transfers of property described in paragraph 14 above, each of Newco1 and Newco2 will redeem from Amalco all of its Class B Preference Shares for an amount equal to their FMV, being the aggregate of the Redemption amounts of its Class B Preference Shares so redeemed (the "Newco1 Redemption Amounts" and the "Newco2 Redemption Amounts"), and will issue to Amalco in consideration therefor a demand non-interest bearing promissory note with a principal amount and FMV equal to the Newco1 Redemption Amounts or the Newco2 Redemption Amounts, as the case may be, (the "Newco1 Redemption Note" and the "Newco2 Redemption Note"). Amalco will accept the Redemption Notes of each of Newco1 and Newco2 as full and absolute payment of the Redemption Amounts of its Newco1 Class B Preference Shares or Newco2 Class B Preference Shares, as the case may be, with the risk of the notes being dishonoured.

Newco1 and Newco2's first fiscal period and taxation year will end at the end of the day on which the Class B Preference Shares of Newco1 and Newco2 are redeemed as described herein.

On the day following the redemption of the Class B Preference Shares of Newco1 and Newco2 as described herein, Amalco will redeem from each of Newco1 and Newco2 all of its Amalco Class B Preference Shares owned by those corporations for an amount equal to their FMV, being the aggregate of the Redemption Amounts of the Amalco Class B Preference Shares so redeemed (the "Amalco Redemption Amounts1", in the case of Newco1, and the "Amalco Redemption Amounts2", in the case of Newco2), and will issue to each of Newco1 and Newco2 in consideration therefor a demand non-interest bearing promissory note with a principal amount and FMV equal to the Amalco Redemption Amounts1 or the Amalco Redemption Amounts2, as the case may be, (the "Amalco Redemption Note1", in the case of Newco1, and the "Amalco Redemption Note2", in the case of Newco2). Each of Newco1 and Newco2 will accept its respective Amalco Redemption Note as full and absolute payment of the Redemption Amounts of its Amalco Class B Preference Shares so redeemed with the risk of the note being dishonored.

Amalco will pay the principal amount of the Amalco Redemption Note1 and the Amalco Redemption Note2 by transferring to Newco1 the Newco1 Redemption Note and Newco2 the Newco2 Redemption Note, which will be accepted by each of Newco1 and Newco2 in full payment of Amalco's obligation. Newco1 will pay the principal amount of the Newco1 Redemption Note and Newco2 will pay the principal amount of the Newco2 Redemption Note by transferring to Amalco the Amalco Redemption Note1 and the Amalco Redemption Note2, as the case may be, which will be accepted by Amalco in full payment of Newco1's and Newco2's obligation. The Amalco Redemption Note1, the Amalco Redemption Note2, the Newco1 Redemption Note and the Newco2 Redemption Note will all thereupon be marked paid in full and cancelled.

17. Individual A will concurrently gift to

(a) Trust2, all of his Newco1 Common Shares;

(b) Trust3, all of his Newco2 Common Shares; and

(c) Individual C, all of his Newco1 Class A Preference Shares and Newco2 Class A Preference Shares.

Immediately before the transfers described herein, Trust2 and Trust3 will be related to Amalco, Newco1 and Newco2 for the purposes of section 55. Immediately after such transfers, Individual C will control both Newco1 and Newco2.

Additional Information

18. Newco1 and Newco2 will sell their investments from time to time for an amount equal to their FMV in order to raise cash to be used in accordance with the terms of Trust2 and Trust3, respectively, and in order to diversify their investments.

19. 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.

20. 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) of the Act, in respect of any of the issued shares referred to herein (including the shares to be issued as described in the proposed transactions).

21. Each of Amalco, Newco1 and Newco2 will not 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).

22. 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) of the Act.

23. 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 the paragraphs (a) to (f) of the definition "financial intermediary corporation" in subsection 191(1) of the Act.

24. Each of Amalco, Newco1 and Newco2 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.

25. Individual A has applied for a certificate under section 116 in respect of

(a) the transfer of his Amalco Class B Preference Shares to each of Newco1 and Newco2 described in paragraph 13 above; and

(b) the gifting of his Newco1 Common Shares to Trust2, Newco2 Common Shares to Trust3, and Newco1 and Newco2 Class A Preference Shares to Individual C described in paragraph 17 above.

Purpose of the Proposed Transactions

26. The proposed amalgamation of Holdco1, Holdco2 and Subco1 to form Amalco is to reduce the number of holding companies and to consolidate into Amalco, inter alia, the Pubco1 shares and the Pubco2 shares owned by each of Holdco1, Holdco2 and Subco1. This consolidation facilitates

(a) the transfers by Amalco of some of its Pubco1 shares and Pubco2 shares to each of Newco1 and Newco2;

(b) the contribution by Individual A to Trust2 and Trust3 by gifting his Newco1 Common Shares to Trust2 and Newco2 Common Shares to Trust3; and

(c) the indirect ownership of the Pubco3 shares by Individual A through Amalco.

27. The gifting by Individual A of his Newco1 Class A Preference Shares and Newco2 Class A Preference Shares to Individual C is to provide control of these corporations to her, consistent with the wishes of Individual A that his daughter control these corporations throughout her lifetime.

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. With respect to the amalgamation of Holdco1, Holdco2 and Subco1 described in paragraph 12 above:

(a) the provisions of subsection 87(1) will apply;

(b) provided that the Holdco1 shares and the Holdco2 shares were capital property to Individual A immediately before the amalgamation, and subject to the application of the provisions of subsections 26(3) and (5) of the ITAR, the provisions of subsection 87(4) of the Act, other than paragraphs (c), (d), and (e) thereof, will apply such that Individual A:

(i) will be deemed by paragraph 87(4)(a) to have disposed of his Holdco1 shares and Holdco2 shares for proceeds of disposition equal to the aggregate of his ACB of such shares immediately before the amalgamation; and

(ii) will be deemed by paragraph 87(4)(b) to have acquired his Amalco Class A Preference Shares, Amalco Class B Preference Shares and Amalco Common Shares at a cost equal to that proportion of the proceeds of disposition described in (i) above that

(I) the FMV, immediately after the amalgamation, of all Amalco shares of that particular class so acquired by Individual A,

		is of 	

(II) the FMV, immediately after the amalgamation, of all Amalco shares so acquired by Individual A.

For greater certainty, the provisions of subsection 26(21) of the ITAR will not be applicable in respect of the amalgamation of Holdco1, Holdco2 and Subco1 described in paragraph 12 above.

B. The cost amount of the Amalco Class B Preference Shares acquired by each of Newco1 and Newco2 in exchange for the issuance of its Common Shares and Class A Preference Shares described in paragraph 13 above, will be equal to the amount added to the stated capital account of such Common Shares and Class A Preference Shares of Newco1 or Newco2, as the case may be.

C. The provisions of subsection 85(1) will apply to the transfers by Amalco of its Pubco1 shares and Pubco2 shares to each of Newco1 and Newco2, as described in paragraph 14 above, 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. For greater certainty, subsection 69(11) and paragraph 85(1)(e.2) will not apply to the transfers referred to in this Ruling C.

D. Subsection 84(3) will apply on the redemption, as described in paragraph 16 above,

(a) of the Amalco Class B Preference Shares held by Newco1, to deem Amalco to have paid and Newco1 to have received;

(b) of the Amalco Class B Preference Shares held by Newco2, to deem Amalco to have paid and Newco2 to have received;

(c) of the Newco1 Class B Preference Shares held by Amalco, to deem Newco1 to have paid and Amalco to have received; and

(d) of the Newco2 Class B Preference Shares held by Amalco, to deem Newco2 to have paid and Amalco to have received,

a dividend on such shares equal to the amount, if any, by which the aggregate amount paid upon such redemption exceeds the aggregate PUC in respect of such shares immediately before such redemption, and any such dividend

(e) will be included in computing the income, pursuant to subsection 82(1) and paragraph 12(1)(j), of the person deemed to have received such dividend;

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

(g) will be excluded in determining the proceeds of disposition to the recipient of the shares so redeemed pursuant to paragraph (j) of the definition of "proceeds of disposition" in section 54, and any loss arising from such disposition of those shares will be reduced by the amount of such dividends pursuant to subsection 112(3); and

(h) will not be subject to tax under Part IV.1 and Part VI.1 of the Act on the basis that such dividends will be excepted dividends by virtue of paragraph (b) of the definition of "excepted dividend" in section 187.1 of the Act and excluded dividends by virtue of paragraph (a) of the definition of "excluded dividend" in subsection 191(1) of the Act, as Amalco, Newco1 and Newco2, as the case may be, will have a substantial interest, within the meaning assigned by subsection 191(2) of the Act, in the payer corporation immediately before the redemption of such shares.

E. (a) By virtue of subsection 186(2) and paragraph 186(4)(a) of the Act , each of Newco1 and Newco2 will be connected with Amalco. Provided that each of Newco1 and Newco2 is not entitled to a dividend refund in respect of its taxation year in which it is deemed to pay the dividend referred to in Ruling D above, Amalco will not be subject to Part IV tax under subsection 186(1) in respect of such dividend; and

(b) by virtue of subsection 186(2) and paragraph 186(4)(a) of the Act, Amalco will be connected with each of Newco1 and Newco2. Consequently, each of Newco1 and Newco2 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 Amalco will become entitled as a result of the payment of the dividends referred to in Ruling D above, that the amount of each such dividend received by Newco1 and Newco2, as the case may be, is of the aggregate of all taxable dividends paid by Amalco in its taxation year in which such dividend is paid.

F. The repayment of the Amalco Redemption Note1 held by Newco1, the Amalco Redemption Note2 held by Newco2, and the Newco1 Redemption Note and the Newco2 Redemption Note held by Amalco as described in paragraph 16 above will not give rise to a "forgiven amount" within the meaning of subsection 80(1) or 80.01(1).

G. 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 above, provided that there is no disposition or increase in interest described in any of subparagraphs 55(3)(a)(i) to (v) as part of a series of transactions or events that includes the proposed transactions described herein. For greater certainty, the proposed transactions described in paragraphs 8 to 17 above and the subsequent transactions described in paragraph 18 above, in and by themselves, will not be considered to result in any disposition or increase in interest described in any of subparagraphs 55(3)(a)(i) to (v).

H. 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 8 to 17 above, in and by themselves.

I. The provisions of subsection 245(2) will not be applied as a result of the proposed transactions described above, in and by themselves, 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 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. The aggregate increase in the PUC of the Common Shares and the Class A Preference Shares of each of Newco1 and Newco2 in respect of the issuance by each of Newco1 and Newco2 of its Common Shares and Class A Preference Shares described in paragraph 13 above, as the case may be, will be limited by paragraph 212.1(1)(b) to an amount equal to the aggregate PUC of the Amalco Class B Preference Shares, immediately before the transfer of such shares, transferred to each of Newco1 and Newco2, respectively, as described in paragraph 13 above.

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

(a) the determination of the FMV or the cost amount of any particular asset or the PUC or V-day value of any shares referred to herein;

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

(c) the country of residence of Individual A or Individual F for the purposes of the Act or a particular income tax convention which has entered into force between Canada and another country.

Yours truly,

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