2001 Ruling 2001-0095623 - 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 CCRA.

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

Principal Issues: Butterfly reorganization

Position: Routine

Reasons: Meets the requirements of the law

XXXXXXXXXX 2001-009562

XXXXXXXXXX, 2001

Dear XXXXXXXXXX:
Re:
				         Business No./		Tax Service Office/
	Social Insurance Number	 Taxation Centre    

XXXXXXXXXX

This is in reply to your letter of XXXXXXXXXX, and your E-mails of XXXXXXXXXX, wherein you requested an advance income tax ruling on behalf of the above-noted taxpayers.

You have been advised by your clients that to the best of their knowledge, none of the issues involved in this ruling, as they apply specifically to such parties:

(i) is in an earlier return;

(ii) is being considered by a tax services office or taxation centre in connection with a previously filed tax return;

(iii) is under objection;

(iv) is before the courts; or

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

DEFINITIONS

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

(a) unless otherwise indicated, all references to a statute are to the Income Tax Act, R.S.C. 1985, c.l (5th Supp.), as amended to the date hereof (the "Act"), and all monetary amounts are expressed in Canadian dollars;

(b) "adjusted cost base" has the meaning assigned by section 54;

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

(d) "arm's length" has the meaning assigned by section 251;

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

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

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

(h) "connected" has the meaning assigned by subsection 186(4);

(i) "Corporations Act" means the Business Corporations Act (XXXXXXXXXX);

(j) "Dco" has the meaning assigned by paragraph 0 below;

(k) "depreciable property" has the meaning assigned by subsection 13(21);

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

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

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

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

(p) "excepted dividend" has the meaning assigned by section 187.1;

(q) "excluded dividend" has the meaning assigned by subsection 191(1);

(r) "fair market value" means the highest price available in an open and unrestricted market between informed prudent parties acting at arm's length;

(s) "financial intermediary corporation" has the meaning assigned by subsection 191(1);

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

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

(v) "inventory" has the meaning assigned by subsection 248(1);

(w) "Mr. A" has the meaning assigned by paragraph 0 below;

(x) "Mr. B" has the meaning assigned by paragraph 0 below;

(y) "Mr. C" has the meaning assigned by paragraph 0 below;

(z) "Ms. D" has the meaning assigned by paragraph 0 below;

(aa) "Mr. E" has the meaning assigned by paragraph 0 below;

(bb) "Ms. F" has the meaning assigned by paragraph 0 below;

(cc) "Mr. G" has the meaning assigned by paragraph 0 below;

(dd) "Nco" has the meaning assigned by paragraph 0 below;

(ee) "Nco Common Shares" has the meaning assigned by paragraph 0 below;

(ff) "net capital loss" has the meaning assigned by subsection 111(8);

(gg) "non-capital loss" has the meaning assigned by subsection 111(8);

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

(hh.1) "prepaid expenses" means the rights arising out of the prepayment of expenses;

(ii) "principal amount" has the meaning assigned by subsection 248(1);

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

(kk) "Regulations" mean the Income Tax Regulations;

(ll) "short-term preferred share" has the meaning assigned by subsection 248(1);

(ll.1) "significant influence" has the meaning assigned by section 3050 of the CICA Handbook;

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

(nn) "specified investment business" has the meaning assigned by subsection 125(7);

(oo) "stated capital account" has the meaning assigned by section 24 of the Corporations Act;

(pp) "substantial interest" has the meaning assigned by subsection 191(2);

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

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

(ss) "taxable preferred share" has the meaning assigned by subsection 248(1);

(tt) "Vco" has the meaning assigned by paragraph 0 below;

(uu) "Vco Common Shares" has the meaning assigned by paragraph 0 below;

(vv) "Wco" has the meaning assigned by paragraph 0 below;

(ww) "Wco Common Shares" has the meaning assigned by paragraph 0 below;

(xx) "Xco" has the meaning assigned by paragraph 0 below;

(yy) "Xco Distribution Date" means the date on which the distribution by Xco, as described in paragraph 0 below, will occur other than the distribution of cash and near-cash property;

(zz) "Xco Y Redemption Note" has the meaning assigned by paragraph 0 below;

(aaa) "Xco Z Redemption Note" has the meaning assigned by paragraph 0 below;

(bbb) "Yco" has the meaning assigned by paragraph 0 below;

(ccc) "Yco Common Shares" has the meaning assigned by paragraph 0 below;

(ddd) "Ycosub" has the meaning assigned by paragraph 0 below;

(eee) "Ycosub Class A Shares" has the meaning assigned by paragraph 0 below;

(fff) "Ycosub Class A Redemption Amount" has the meaning assigned by paragraph 0 below;

(ggg) "Ycosub Common Shares" has the meaning assigned by paragraph 0 below;

(hhh) "Ycosub Redemption Note" has the meaning assigned by paragraph 0 below;

(iii) Zco" has the meaning assigned by paragraph 0 below;

(jjj) "Zco Common Shares" has the meaning assigned by paragraph 0 below;

(kkk) "Zcosub" has the meaning assigned by paragraph 0 below;

(lll) "Zcosub Class A Shares" has the meaning assigned by paragraph 0 below;

(mmm) "Zcosub Class A Redemption Amount" has the meaning assigned by paragraph 0 below;

(nnn) "Zcosub Common Shares" has the meaning assigned by paragraph 0 below; and

(ooo) "Zcosub Redemption Note" has the meaning assigned by paragraph 0 below.

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

FACTS

1. Each of XXXXXXXXXX ("Mr. C"), XXXXXXXXXX ("Ms. D"), XXXXXXXXXX ("Mr. E"), and XXXXXXXXXX ("Ms. F") is an individual resident in Canada for purposes of the Act. XXXXXXXXXX ("Mr. G") is an individual who is resident in China and is not resident in Canada for purposes of the Act.

Mr. C, Ms. D and Mr. G are siblings.

Mr. E and Ms. F are siblings.

XXXXXXXXXX ("Mr. A") is the father of Mr. C, Ms. D and Mr. G.

XXXXXXXXXX ("Mr. B") is the father of Mr. E and Ms. F.

2. XXXXXXXXXX ("Vco") is a Canadian-controlled private corporation and a taxable Canadian corporation and has a taxation year ending on XXXXXXXXXX. Vco was incorporated under the Corporations Act on XXXXXXXXXX.

3. Vco has authorized share capital consisting of XXXXXXXXXX Class A shares and an unlimited number of common shares (the "Vco Common Shares"). The Vco Common Shares are entitled to receive dividends, receive ratably the remaining property upon dissolution (subject to the prior rights attaching to the Class A shares) and to one vote per share.
Upon incorporation, XXXXXXXXXX Vco Common Shares were issued to each of Mr. A and Mr. B at a subscription price of $XXXXXXXXXX per share. Following incorporation, Mr. A transferred, by way of gift, XXXXXXXXXX Vco Common Shares to each of Mr. C, Ms. D and Mr. G. Likewise, Mr. B transferred, by way of gift, XXXXXXXXXX Vco Common Shares to each of Mr. E and Ms. F.
The issued and outstanding share capital of Vco consists of XXXXXXXXXX Vco Common Shares owned as follows:

Shareholder Number Class
Mr. C XXXXXXXXXX Vco Common Shares
Ms. D XXXXXXXXXX Vco Common Shares
Mr. G XXXXXXXXXX Vco Common Shares
Mr. E XXXXXXXXXX Vco Common Shares
Ms. F XXXXXXXXXX Vco Common Shares

The stated capital and paid-up capital of the XXXXXXXXXX Vco Common Shares is $XXXXXXXXXX.
The Vco Common Shares are neither short-term preferred shares nor taxable preferred shares.

4. Vco carries on the businesses of XXXXXXXXXX.

Vco requires more than 5 full-time employees in carrying on its XXXXXXXXXX business. Previously, the employees who provided services to Vco in respect of Vco's XXXXXXXXXX business were employed by corporations controlled by Mr. A and Mr. B including Dco. Recently, the employees whose services are rendered to Vco in respect of Vco's XXXXXXXXXX business were transferred to Vco so that these employees would be directly employed by Vco. Vco now employs more than 5 full-time employees in carrying on its XXXXXXXXXX business.

Vco's assets consist of accounts receivable, advances to related companies, prepaid expenses, XXXXXXXXXX inventories XXXXXXXXXX.

XXXXXXXXXX

Vco's liabilities include accounts payable, rental deposits, mortgages payable, advances from related companies, advances from shareholders and deferred income taxes.

All amounts owing by or to related persons have no specific terms of repayment.

5. XXXXXXXXXX ("Nco") is a Canadian-controlled private corporation and a taxable Canadian corporation and has a taxation year ending on XXXXXXXXXX. Nco was incorporated under the Corporations Act on XXXXXXXXXX.

Nco has authorized share capital consisting of an unlimited number of common shares (the "Nco Common Shares") and an unlimited number of preference shares (the "Nco Preferred Shares").

The issued and outstanding share capital of Nco consists of XXXXXXXXXX Nco Common Shares owned as follows:

Shareholder Number Class
Mr. C XXXXXXXXXX Nco Common Shares
Ms. D XXXXXXXXXX Nco Common Shares
Mr. G XXXXXXXXXX Nco Common Shares
Mr. E XXXXXXXXXX Nco Common Shares
Ms. F XXXXXXXXXX Nco Common Shares

The Nco Common Shares are neither short-term preferred shares nor taxable preferred shares.

6. XXXXXXXXXX ("Dco") is a Canadian-controlled private corporation and a taxable Canadian corporation. Dco is controlled by Mr. A and Mr. B. Mr. C, Ms. D, Mr. E, Ms. F and Mr. G are shareholders of Dco.

XXXXXXXXXX

The assets of the DN Partnership consist of advances to Dco and Nco which have no specific terms of repayment and XXXXXXXXXX which are held as inventory.

The liabilities of the DN Partnership include bank indebtedness, accounts payable, advances from related parties and deposits on XXXXXXXXXX sales.

7. Nco's assets consist of an interest in and advances to the DN Partnership. Nco's liabilities consist of accounts payable.

PROPOSED TRANSACTIONS

The following transactions will occur in the order presented below (unless otherwise indicated).

Amalgamation of Nco and Vco

8. Nco and Vco will amalgamate under the provisions of the Corporations Act to form "Xco" whereby:

(a) all of the property (except any amounts receivable from any predecessor corporation or shares of the capital stock of any predecessor corporation) of the predecessor corporations immediately before the amalgamation will become property of Xco by virtue of the amalgamation;

(b) all of the liabilities (except any amounts payable to any predecessor corporation) of the predecessor corporations immediately before the amalgamation will become liabilities of Xco by virtue of the amalgamation; and

(c) all of the shareholders (except any predecessor corporation) who owned shares of the capital stock of any predecessor corporation immediately before the amalgamation will receive shares of the capital stock of Xco because of the amalgamation.

Xco will be a Canadian-controlled private corporation and a taxable Canadian corporation and will be governed by the provisions of the Corporations Act.

9. Xco will be authorized to issue an unlimited number of common shares (the "Xco Common Shares").

The XXXXXXXXXX issued Vco Common Shares will be converted into XXXXXXXXXX Xco Common Shares, on the basis of XXXXXXXXXX Xco Common Shares for 1 Vco Common Share.

The XXXXXXXXXX issued Nco Common Shares will be converted into XXXXXXXXXX Xco Common Shares, on the basis of XXXXXXXXXX Xco Common Shares for 1 Nco Common Share.

10. Xco will add to the stated capital account maintained for the Xco Common Shares, an amount equal to the aggregate of the paid-up capital, immediately before the amalgamation, of the XXXXXXXXXX Vco Common Shares and the XXXXXXXXXX Nco Common Shares.

10.1 Xco will file articles of amendments to create two additional classes of shares being Class A common shares (the "Xco Class A Common Shares") and Class B special shares (the "Xco Class B Shares").

Each Xco Common share will be exchanged for 1 Xco Class A Common Share and 1 Xco Class B Share (such exchange referred to as the "Xco Common Share Exchange"). As a result of the Xco Common Share Exchange, the aggregate stated capital of the Xco Common Shares, immediately before such exchange, will be allocated pro-rata based on the fair market value to the Xco Class A Common Shares and the Xco Class B Shares.

The Xco Class A Common Shares will have the same rights and privileges as the Xco Common Shares except that the Xco Class A Common Shares will have two votes per share instead of one vote per share.

The Xco Class B Shares will be entitled to XXXXXXXXXX votes per share and will have a redemption amount (the "Xco Class B Redemption Amount") equal to:

that proportion of
- the fair market value of all the issued and outstanding shares of Xco (immediately before the Xco Common Share Exchange)
that

- the net fair market value (immediately before the Xco Common Share Exchange) of the business property of Xco to be transferred directly to Yco and Zco or indirectly through Ycosub and Zcosub (as described in paragraph 20)
is of

- the net fair market value (immediately before the Xco Common Share Exchange) of all the business property (as determined in paragraphs 18 and 19) of Xco
divided by

- the number of Xco Class B Shares issued on the Xco Common Share Exchange.

An amount will be specified with respect to the Xco Class B shares for the purposes of subsection 191(4) to be designated by a resolution of directors at the time of their issue and will not exceed the fair market value of the consideration received for their issue. The amount specified will not be described by a reference to a formula or subject to change thereafter.

Incorporation of Wco

11. A new corporation ("Wco") will be incorporated under the Corporations Act, which will be a Canadian-controlled private corporation and a taxable Canadian corporation.

Wco will be authorized to issue an unlimited number of common shares (the "Wco Common Shares"), none of which will be issued on incorporation.

Transfer of Shares of Xco to Wco

12. Each of Mr. C, Ms. D, Mr. E, Ms. F and Mr. G will transfer to Wco all of his or her Xco Class A Common Shares in consideration for Wco Common Shares having a fair market value equal to the fair market value of the Xco Common Shares so transferred.

Mr. G will apply for a clearance certificate under section 116 in respect of his transfer of Xco Common Shares to Wco.

The fair market value, immediately before the transfer described in paragraph 20, of each shareholder's shares of Wco will be equal to the product obtained when

a) the fair market value (immediately before the transfer described in paragraph 20) of all the shares of Wco
is multiplied by

b) the fair market value of the shares of Xco owned by such shareholder (immediately before the transfer described in this paragraph) divided by the fair market value of all the shares of Xco (immediately before the transfers described in this paragraph).

13. Wco will elect jointly with each shareholder of Xco, in prescribed form and within the time referred to in subsection 85(6), to have the provisions of subsection 85(1) apply to the transfer described in paragraph 12. The agreed amount in respect of the transfer will not be less than the lesser of the amounts specified in subparagraphs 85(1)(c.1)(i) and (ii). The agreed amount will not exceed the fair market value of the shares transferred to Wco.

Wco will add to the stated capital account maintained for the Wco Common Shares an amount not to exceed the paid-up capital of the Xco Common Shares transferred to Wco in consideration for Wco Common Shares.

14. [Reserved].

Incorporation of Yco and Zco

15. A new corporation ("Yco") will be incorporated under the Corporations Act. Yco will be a Canadian-controlled private corporation and a taxable Canadian corporation.

Yco will be authorized to issue an unlimited number of common shares (the "Yco Common Shares"), none of which will be issued on incorporation.

A new corporation ("Zco") will be incorporated under the Corporations Act. Zco will be a Canadian-controlled private corporation and a taxable Canadian corporation.

Zco will be authorized to issue an unlimited number of common shares (the "Zco Common Shares"), none of which will be issued on incorporation.

Transfer of Xco Shares to Yco and Zco

16. Mr. E and Ms. F will each transfer to Yco all of his or her Xco Class B Shares in consideration for XXXXXXXXXX Yco Common Shares each. Yco will elect jointly with each of Mr. E and Ms. F, in prescribed form and within the time referred to in subsection 85(6), to have the provisions of subsection 85(1) apply to the transfer described herein. The agreed amount in respect of the transfer will not be less than the lesser of the amounts specified in subparagraphs 85(1)(c.1)(i) and (ii). The agreed amount will not exceed the fair market value of the shares transferred to Yco.

Yco will add to the stated capital account maintained for the Yco Common Shares an amount not to exceed the paid-up capital of the Xco Class B Shares transferred to Yco in consideration for Yco Common Shares.

As a result of the transfer described in this paragraph, Yco will be entitled to more than 10% of the voting rights under all circumstances in respect of the issued share capital of Xco and the Xco Class B shares held by Yco will represent more than 10% of the fair market value of all of the issued share capital of Xco such that Xco will be connected with Yco by virtue of paragraph 186(4)(b).

Mr. C, Ms. D and Mr. G will each transfer to Zco all of his or her Xco Class B Shares in consideration for XXXXXXXXXX Zco Common Shares each. Zco will elect jointly with each of Mr. C, Ms. D and Mr. G, in prescribed form and within the time referred to in subsection 85(6), to have the provisions of subsection 85(1) apply to the transfer described herein. The agreed amount in respect of the transfer will not be less than the lesser of the amounts specified in subparagraphs 85(1)(c.1)(i) and (ii). The agreed amount will not exceed the fair market value of the shares transferred to Zco.

Mr. G will apply for a clearance certificate under section 116 in respect of his transfer of Xco Common Shares to Zco.

Zco will add to the stated capital account maintained for the Zco Common Shares an amount not to exceed the paid-up capital of the Xco Class B Shares transferred to Zco in consideration for Zco Common Shares.

As a result of the transfer described in this paragraph, Zco will be entitled to more than 10% of the voting rights under all circumstances in respect of the issued share capital of Xco and the Xco Class B Shares will represent more than 10% of the fair market value of all of the issued share capital of Xco such that Xco will be connected with Zco by virtue of paragraph 186(4)(b).

Incorporation of Ycosub and Zcosub

17. A new corporation ("Ycosub") will be incorporated under the Corporations Act. Ycosub will be a Canadian-controlled private corporation and a taxable Canadian corporation.

Ycosub will be authorized to issue an unlimited number of common shares (the "Ycosub Common Shares") and an unlimited number of Class A preference shares (the "Ycosub Class A Shares") which will be entitled to one vote per share and will be redeemable and retractable at an amount (the "Ycosub Class A Redemption Amount") equal to the result obtained when the fair market value of the property transferred to Ycosub on the date of issuance of the Ycosub Class A Shares less the amount of the non-share consideration, if any, paid, assumed or delivered by Ycosub for the acquisition of such property is divided by the number of Ycosub Class A Shares issued as consideration therefor. The Ycosub Class A Shares will specify an amount for the purposes of subsection 191(4) to be designated by a resolution of directors at the time of their issue not to exceed the fair market value of the consideration received for their issue. The amount specified will not be described by reference to a formula or subject to change thereafter.

On incorporation, Yco will acquire XXXXXXXXXX Ycosub Common Shares for $XXXXXXXXXX.

A new corporation ("Zcosub") will be incorporated under the Corporations Act. Zcosub will be a Canadian-controlled private corporation and a taxable Canadian corporation.

Zcosub will be authorized to issue an unlimited number of common shares (the "Zcosub Common Shares") and an unlimited number of Class A preference shares (the "Zcosub Class A Shares") which will be entitled to one vote per share and will be redeemable and retractable at an amount (the "Zcosub Class A Redemption Amount") equal to the result obtained when the fair market value of the property transferred to Zcosub on the date of issuance of the Zcosub Class A Shares less the amount of the non-share consideration, if any, paid, assumed or delivered by Zcosub for the acquisition of such property is divided by the number of Zcosub Class A Shares issued as consideration therefor. The Zcosub Class A Shares will specify an amount for the purposes of subsection 191(4) to be designated by a resolution of directors at the time of their issue not to exceed the fair market value of the consideration received for their issue. The amount specified will not be described by reference to a formula or subject to change thereafter.

On incorporation, Zco will acquire XXXXXXXXXX Zcosub Common Shares for $XXXXXXXXXX.

Types of Property Analysis

18. Immediately before the transfer of property described in paragraph 20 below, the assets of Xco will be classified into three types of property for the purposes of the definition "distribution" in subsection 55(1) as follows:

(a) cash or near-cash property, consisting of all of the current assets of Xco, including any cash, accounts receivable and prepaid expenses;

(b) business property, consisting of all of the assets of Xco, other than cash or near-cash property, any income from which would, for purposes of the Act, be income from a business (other than a specified investment business), including XXXXXXXXXX inventory; and

(c) investment property, consisting of all of the assets of Xco, other than cash or near-cash property, any income from which would, for purposes of the Act, be income from property or a specified investment business.

For greater certainty, any tax accounts, such as any non-capital loss, net capital loss, the balance of any refundable dividend tax on hand or capital dividend account of Xco, will not be considered property for purposes of the proposed transactions described herein.

For the purposes of the proposed transactions, the XXXXXXXXXX properties owned by Xco will be considered business property on the basis that Xco will employ more than 5 full-time employees up to the time of the distribution so that its XXXXXXXXXX business will be considered an "active business carried on by a corporation", within the meaning of that expression as used in subsection 125(7).

For greater certainty, for the purposes of the proposed transactions: (i) any mortgages or notes receivable, other than any current portion thereof, received as consideration on the sale of XXXXXXXXXX inventory will be considered business property, the current portion thereof being considered cash or near-cash property; and (ii) XXXXXXXXXX inventory will be considered business property.

Advances to related persons will be considered cash or near-cash property.

No amount will be considered a liability unless it represents a true legal liability capable of quantification. For greater certainty, the amount of any deferred income tax in the financial statements will not be considered a liability for purposes of the proposed transactions described herein.

Amounts owing to related persons will be considered current liabilities.

The fair market value of the interest in the DN Partnership and any indebtedness receivable by Xco from the DN Partnership will be allocated among the three types of property described above by multiplying the fair market value of the interest in the DN Partnership or amount of indebtedness receivable from the DN Partnership, as the case may be, by the proportion that the net fair market value of each type of property owned by the DN Partnership is of the net fair market value of all the property owned by the DN Partnership. The advances receivable by the DN Partnership from Dco and Nco will be considered cash or near-cash property to the DN Partnership. The XXXXXXXXXX inventory of the DN Partnership will be considered business property to it.

As a result of the classification of Xco's property as described in this paragraph, Xco will have cash and near-cash property and business property and Xco will have no investment property.

19. In determining the net fair market value of each type of property of Xco immediately before the transfer described in paragraph 20 below, the liabilities of Xco will be allocated to, and will be deducted in the calculation of the net fair market value of, each such type of property of Xco in the following manner:

(a) in determining, the net fair market value of each type property of Xco immediately before the transfer of property described in paragraph 20 below, any liabilities of Xco will be allocated to, and be deducted in the calculation of, the net fair market value of each type property of Xco in the following manner:

(i) current liabilities of Xco will be allocated to the cash or near-cash property (including cash, accounts receivable, advances to related persons, the current portion of mortgages or notes receivable received as consideration on the sale of housing inventory, and prepaid expenses, if any) of Xco 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 of Xco. The allocation of current liabilities as described herein will not exceed the fair market value of all the cash or near-cash property of Xco;

(ii) following the allocation of current liabilities to each cash or near-cash property in (a)(i) above, any remaining net fair market value of accounts receivable, the current portion of mortgages or notes receivable received as consideration on the sale of housing inventory, and prepaid expenses, if any, of Xco will be reclassified as business property and excluded from the cash or near-cash property, to the extent that such property will be collected, sold or used in the ordinary course of the business to which such property relates;

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

(iv) the excess, if any, of liabilities remaining after the allocations described in subparagraphs (a)(i) and (iii) above are made will be allocated to the cash or near-cash property, investment property and business property, if any, of Xco, on the basis of the relative net fair market value of each type of property prior to the allocation of such excess.

Xco Distribution

20. Xco will transfer to Ycosub and Zcosub property so that, immediately after the transfer, the net fair market value of the cash or near-cash property, the business property and investment property, if any, of Xco, calculated as described in paragraphs 18 and 19 above, which is transferred to Yco or Zco, as the case may be, or indirectly to Yco and Zco through Ycosub and Zcosub (including the payments made by Xco to each of Zco and Yco in consideration for Zco and Yco assuming certain obligations of Xco as described in this paragraph) will approximate that proportion of the net fair market value of that type of property of Xco, determined immediately before the transfer described in this paragraph, that:

(a) the fair market value of the Xco Class B Shares owned by Yco or Zco, as the case may be, immediately before the transfers described in this paragraph
is of

(b) the aggregate fair market value of all the issued and outstanding shares of Xco immediately before the transfers described in this paragraph.

The transfer of cash and near-cash property, if any, by Xco to Ycosub and Zcosub as part of the distribution will take place on a day that is no later than XXXXXXXXXX days after the Xco Distribution Date.

For purposes of this paragraph, the phrase "approximate that proportion" means the discrepancy from that proportion, if any, that would not exceed XXXXXXXXXX determined as a percentage of the net FMV of the property that Yco or Zco receives (directly or indirectly through Ycosub and Zcosub, respectively) compared to what it would have received had it received its appropriate pro-rata share of Xco's property.

The property transferred by Xco to Ycosub and Zcosub will include XXXXXXXXXX properties and related assets and a pro-rata amount of any cash and near-cash property (including the payment made by Xco directly to each of Yco and Zco as described in this paragraph). XXXXXXXXXX inventory and the interest in the DN Partnership will not be transferred to Ycosub or to Zcosub.

As fair market value consideration for the transfers of property described herein, each of Ycosub and Zcosub will:

(a) assume some of the liabilities of Xco, so that:

(i) the amount of liabilities to be allocated to such properties as will be the subject of the joint elections under subsection 85(1) described in paragraph 21 will not exceed the aggregate of the agreed amounts under the elections; and

(ii) the amount of liabilities to be allocated to each such property as will not be the subject of a joint election under subsection 85(1) described in paragraph 21 will not exceed the fair market value of such property; and

(b) issue to Xco XXXXXXXXXX Ycosub Common Shares or Zcosub Common Shares.

The Ycosub Common Shares or the Zcosub Common Shares, as the case may be, issued to Xco will be entitled to more than 10% of the voting rights under all circumstances in respect of the issued share capital of Ycosub or Zcosub, as the case may be, and will represent more than 10% of the fair market value of all of the issued share capital of Ycosub or Zcosub, as the case may be, such that each of Ycosub and Zcosub will be connected with Xco by virtue of paragraph 186(4)(b).

Paragraph 87(2)(j) will deem Xco to be the same corporation as, and a continuation of, each predecessor corporation of Xco for the purposes of paragraph 20(1)(m) and subsection 20(24). Xco will make a payment to each of Zco and Yco (by transferring property to each of Zco and Yco) in consideration for Zco and Yco assuming certain undertakings of Xco in respect of amounts included in computing Xco's income under paragraph 12(1)(a). The payments made by Xco to each of Zco and Yco will be considered to be part of the distribution, as further described in this paragraph, made by Xco to Zco and Yco. For the purposes of paragraph 20(24)(b), Zco and Yco receive the amounts in the course of business.

21. Xco will jointly elect with each of Ycosub and Zcosub, in prescribed form and within the time referred to in subsection 85(6), to have the provisions of subsection 85(1) apply to the transfer, as described in paragraph 20 above, of all eligible property of Xco so that the agreed amount in each joint election will not be less than:

(a) the least of the amounts specified in subparagraphs 85(1)(d)(i), (ii) and (iii), in the case of eligible capital property;

(b) the least of the amounts specified in subparagraphs 85(1)(e)(i), (ii) and (iii), in the case of depreciable property of a prescribed class; and

(c) the lesser of the amounts specified in subparagraphs 85(1)(c.1)(i) and (ii), in the case of property described in paragraph 85(1)(c.1).

In each case, the agreed amount will not exceed the fair market value of the property transferred, nor will it be less than the amount permitted under paragraph 85(1)(b).

For purposes of each election described in this paragraph, no portion of Xco's liabilities assumed by Ycosub or Zcosub, as the case may be, will be treated as being assumed in consideration for the transfer of a particular property by Xco to Ycosub or Zcosub, as the case may be, to the extent that the principal amount of the liabilities exceeds the agreed amount under subsection 85(1) in respect of that transfer.

The amount added to the stated capital account maintained for the Ycosub Common Shares or the Zcosub Common Shares, as the case may be, will equal the amount by which the aggregate cost to Ycosub or Zcosub, as the case may be, (determined pursuant to subsection 85(1), where relevant) of the properties transferred by Xco (as described in paragraph 20 above) exceeds the aggregate amount of liabilities assumed by Ycosub or Zcosub, as the case may be, as described in paragraph 20 above.

22. With respect to the assumption of the undertakings of Xco, if any, to which paragraph 12(1)(a) applies and which are assumed by Zco and Yco, as the case may be, as described in paragraph 20 above, Xco will jointly elect with each of Zco and Yco, as the case may be, under subsection 20(24), in the manner and within the time referred to in subsection 20(25).

Redemption of Ycosub and Zcosub Class A Shares

23. Ycosub will purchase for cancellation all of the Ycosub Common Shares held by Xco. Ycosub will satisfy the purchase price by issuing and delivering to Xco a non-interest-bearing note (the "Ycosub Redemption Note") payable on demand having a principal amount and fair market value equal to the fair market value of the Ycosub Common Shares purchased from Xco. Xco will accept such note as full payment of the purchase price.

Zcosub will purchase for cancellation all of the Zcosub Common Shares held by Xco. Zcosub will satisfy the purchase price by issuing and delivering to Xco a non-interest-bearing note (the "Zcosub Redemption Note") payable on demand having a principal amount and fair market value equal to the fair market value of the Zcosub Common Shares purchased from Xco. Xco will accept such note as full payment of the purchase price.

Wind-Up of Ycosub and Zcosub

24. Ycosub will be wound up into Yco under the provisions of the Corporations Act and will distribute all of its assets, rights and properties to Yco, and all the liabilities and obligations of Ycosub will be assumed by Yco, including the liability of Ycosub under the Ycosub Redemption Note.

Zcosub will be wound up into Zco under the provisions of the Corporations Act and will distribute all of its assets, rights and properties to Zco, and all the liabilities and obligations of Zcosub will be assumed by Zco, including the liability of Zcosub under the Zcosub Redemption Note.

Purchase for Cancellation of Xco Common Shares

25. Xco will redeem all of the Xco Class B Shares held by each of Yco and Zco for an amount equal to their fair market value, being the product obtained when the Xco Class B Redemption Amount is multiplied by the number of Xco Class B Shares so redeemed. Xco will satisfy the redemption price by issuing and delivering to Yco and Zco, as the case may be, a non-interest-bearing note (the "Xco Y Redemption Note" and the "Xco Z Redemption Note", respectively) payable on demand having a principal amount and fair market value equal to the redemption price of the Xco Class B Shares so redeemed. Yco and Zco, as the case may be, will accept such note as full payment of the redemption price.

Notes Set Off

26. The Ycosub Redemption Note and the Xco Y Redemption Note will be set off against each other in full satisfaction of the respective obligation thereunder (although the principal amount of one of the notes may be different from the other) and will be cancelled. The Zcosub Redemption Note and the Xco Z Redemption Note will be set off against each other in full satisfaction of the respective obligation thereunder (although the principal amount of one of the notes may be different from the other) and will be cancelled.

ADDITIONAL INFORMATION

27. No property has or will become property of Xco or of a predecessor of Xco and no liabilities have been or will be incurred by Xco or a predecessor of Xco in contemplation of and before the transfer described in paragraph 20 above, otherwise than as described herein. Xco will not dispose of any of its assets that will be owned by it immediately before the distribution described in paragraph 20 above, and not disposed of by it on the distribution, to an unrelated person as part of a series of transactions which includes the proposed transactions otherwise than as described herein or as a result of a disposition in the ordinary course of business. None of Yco, Ycosub, Zco or Zcosub will dispose of any of its assets as part of a series of transactions which includes the proposed transactions, otherwise than as described herein or as a result of a disposition in the ordinary course of business.

28. None of the shares of Nco, Vco, Wco, Xco, Yco, Ycosub, Zco, or Zcosub has been or will be, at any time during the implementation of the proposed transactions described herein,

(a) the subject of any undertaking 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.

29. None of Nco, Vco, Wco, Xco, Yco, Ycosub, Zco, or Zcosub will be a corporation described in any of paragraphs (a) to (f) of the definition of "financial intermediary corporation" in subsection 191(1). None of Nco, Vco, Wco, Xco, Yco, Ycosub, Zco, or Zcosub is or will be a specified financial institution prior to the completion of the proposed transactions.

30. Legal title to particular items of real property beneficially owned by Vco, and after the amalgamation described in paragraph 8 above, Xco, is held by other corporations as nominees or bare trustees for the beneficial owner. References to transfers of property are references to transfers of beneficial interests only.

PURPOSE OF THE PROPOSED TRANSACTIONS

31. The purpose of the proposed transactions is to effect a "split-up" of the XXXXXXXXXX business of Vco and Nco, with Mr. C, Ms. D and Mr. G owning certain of the XXXXXXXXXX properties through Zco and Mr. E and Ms. F owning certain of the XXXXXXXXXX properties through Yco. The two families will continue owning the business of XXXXXXXXXX inventory jointly through Wco and Xco because the inventory XXXXXXXXXX cannot be divided on a tax deferred basis under section 85 and in any event will be sold in the ordinary course of business.

RULINGS

Provided that the above statements constitute a complete and accurate disclosure of all the relevant statements of facts, purposes of the proposed transactions and the proposed transactions, we rule as follows:

Amalgamation of Nco and Vco

A. On the amalgamation of Nco and Vco, as described in paragraph 8 above,

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

(b) the provisions of subsection 87(4), other than paragraphs (c), (d) and (e) thereof, will apply, so that:

(i) each shareholder of each predecessor corporation, will be deemed by paragraph 87(4)(a) to have disposed of such shareholder's shares for proceeds of disposition equal to the shareholder's adjusted cost base of such shares immediately prior to the amalgamation; and

(ii) each such shareholder will be deemed by paragraph 87(4)(b) to have acquired the shares of Xco at a cost equal to the proceeds described in paragraph 87(4)(a).

B. By virtue of subsection 1102(14) of the Regulations, each property which immediately before the amalgamation described in paragraph 8 above, is depreciable property of a prescribed class or separate prescribed class of either of Nco or Vco and which is acquired by Xco on the amalgamation described in paragraph 0 above, will be depreciable property of the same prescribed class or separate prescribed class, as the case may be, of Xco.

C. Provided that the condition specified in paragraph 1100(2.2)(f) or (g) of the Regulations is satisfied, paragraph 1100(2.2)(h) of the Regulations will apply so that no amount will be included by Xco under paragraph 1100(2)(a) of the Regulations in respect of depreciable property of a prescribed class that is property acquired by Xco from Nco or Vco on the amalgamation described in paragraph 8 above.

C.1 For each Xco shareholder who holds Xco Common Shares as capital property, the provisions of subsection 86(1) will apply and the provisions of subsection 86(2) will not apply to the Xco Common Share Exchange described in paragraph 10.1 above, such that:

a. the cost of the Xco Class A Common Shares or the Xco Class B shares, as the case may be, received on the Xco Common Share Exchange will be deemed by paragraph 86(1)(b) to be an amount equal to that proportion of the aggregate adjusted cost base to the particular shareholder, immediately before the Xco Common Share Exchange, of the Xco Common Shares, that

i) the fair market value, immediately after the Xco Common Share Exchange, of the Xco Class A Common Shares or the Xco Class B Shares, as the case may be, is of

ii) the fair market value, immediately after the Xco Common Share Exchange, of all the shares of Xco received by the particular shareholder on the Xco Common Share Exchange.

b. a particular Xco shareholder will be deemed by paragraph 86(1)(c) to have disposed of his or her shares of Xco for aggregate proceeds of disposition equal to the aggregate cost to the particular Xco shareholder of the shares received on the Xco Common Share Exchange as determined in (a) above.

Transfer of Shares of Xco to Wco

D. The provisions of subsection 85(1) will apply to the transfer of Xco shares to Wco by each shareholder of Xco as described in paragraphs 12 and 13 above, such that the agreed amount in respect of the transfer will be deemed to be such shareholder's proceeds of disposition and Wco's cost thereof pursuant to paragraph 85(1)(a).

For greater certainty, the provisions of paragraph 85(1)(e.2) will not apply to the transfers described in paragraphs 12 and 13 above.

Transfer Xco Shares to Yco and Zco

E. The provisions of subsection 85(1) will apply to the transfer of Xco Class B Shares to Yco by each of Mr. E and Ms. F as described in paragraph 16 above, so that the agreed amount in respect of the transfer will be deemed to be the transferor's proceeds of disposition and the transferee's cost thereof under paragraph 85(1)(a).

For greater certainty, the provisions of paragraph 85(1)(e.2) will not apply to the transfers described in paragraph 16 above.

F. The provisions of subsection 85(1) will apply to the transfer of Xco Class B Shares to Zco by each of Mr. C, Ms. D and Mr. G as described in paragraph 16 above, so that the agreed amount in respect of the transfer will be deemed to be the transferor's proceeds of disposition and the transferee's cost thereof under paragraph 85(1)(a).

For greater certainty, the provisions of paragraph 85(1)(e.2) will not apply to the transfers described in paragraph 16 above.

Xco Distribution

G. The provisions of subsection 85(1) will apply to the transfers by Xco to each of Ycosub and Zcosub, as the case may be, as described in paragraph 20 above, of each eligible property which is the subject of an election described in paragraph 20 above, so that the agreed amount in respect of such transfer will be deemed to be the transferor's proceeds of disposition and the transferee's cost of the property transferred under paragraph 85(1)(a). For greater certainty, paragraph 85(1)(e.2) will not apply to the transfers referred to herein. For the purposes of a joint election in respect of depreciable property of a prescribed class, as described in paragraph 21, the reference to "the undepreciated capital cost to the taxpayer of all the property of the class immediately before the disposition . . ." in subparagraph 85(1)(e)(i) will be read to mean the proportion of the undepreciated capital cost to Xco of all the property of that class that the capital cost of the property so transferred immediately before the disposition is of the capital cost of all property of that class immediately before the disposition.

H. By virtue of subsection 20(24), Xco will be entitled to deduct in computing its income for the taxation year in which the assumption occurs, the fair market value of the undertakings of Xco to which paragraph 12(1)(a) applies that are assumed by Yco or Zco, as the case may be, as described in paragraph 20 above and which are the subject of an election described in paragraph 20 above, and the amount assumed will be deemed to be an amount described in paragraph 12(1)(a) in respect of Yco or Zco, as the case may be.

Redemptions and Wind-ups

I. Subsection 84(3) will apply on the purchase for cancellation by Ycosub of its Ycosub Common Shares held by Xco and by Zcosub of its Zcosub Common Shares held by Xco, as described in paragraph 23 above, to deem Ycosub and Zcosub, as the case may be, to have paid and Xco to have received a dividend equal to the amount, if any, by which the amount paid for the purchase of such shares exceeds the paid-up capital thereof immediately before the purchase, and each such dividend

(a) will be included in computing the income of Xco pursuant to subsection 82(1) and paragraph 12(1)(j);

(b) will be deductible by Xco 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);

(c) will be excluded in determining the proceeds of disposition to Xco of the shares so purchased pursuant to paragraph (j) of the definition "proceeds of disposition" in section 54;

(d) will not be subject to tax under Part IV, except as provided in paragraph 186(1)(b), as Ycosub and Zcosub will be connected with Xco by virtue of paragraph 186(4)(b); and

(e) will not be subject to tax under Parts IV.1 and VI.1.

J. The provisions of subsection 88(1) will apply on the winding-up of Ycosub and Zcosub into Yco and Zco, respectively, as described in paragraph 24 above so that:

(a) each property of Ycosub and Zcosub distributed to Yco or Zco, as the case may be, on the winding-up will be deemed by paragraph 88(1)(a) to have been disposed of by Ycosub and Zcosub for proceeds of disposition determined under that paragraph;

(b) the shares in the capital stock of Ycosub and Zcosub held by Yco or Zco, as the case may be, immediately before the winding-up, will be deemed by paragraph 88(1)(b) to have been disposed of by the holder for proceeds of disposition determined under that paragraph; and

(c) each property of Ycosub and Zcosub distributed to Yco or Zco, as the case may be, on the winding-up will be deemed to have been acquired by Yco or Zco for an amount equal to the amount deemed by paragraph 88(1)(a) to be Ycosub's or Zcosub's proceeds of disposition of the property.

K. Subsection 84(3) will apply on the redemption of the Xco Class B Shares held by Yco and Zco, as described in paragraph 25 above, to deem Xco to have paid and Yco and Zco, as the case may be, to have received a dividend equal to the amount, if any, by which the amount paid thereon exceeds the paid-up capital in respect of such shares immediately before such redemption, and such dividend

(a) will be included in computing the income of Yco or Zco, as the case may be, pursuant to subsection 82(1) and paragraph 12(1)(j);

(b) will be deductible by Yco or Zco, as the case may be, 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);

(c) will be excluded in determining the proceeds of disposition to Yco or Zco, as the case may be, of the shares pursuant to paragraph (j) of the definition "proceeds of disposition" in section 54;

(d) will not be subject to tax under Part IV, except as provided in paragraph 186(1)(b), as Xco will be connected with Yco and Zco, as the case may be, by virtue of paragraph 186(4)(b); and

(e) will not be subject to tax under Parts IV.1 and VI.1, by virtue of subsection 191(4) which deems the dividend to be an "excepted dividend" for the purposes of section 187.2 and an "excluded dividend" for the purposes of Part VI.1.

L. Provided that, as part of the series of transactions or events that includes the proposed transactions, there is not: \* MERGEFORMAT \* MERGEFORMAT

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

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

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

Notes Set-off

M. The set-off and cancellation of the Ycosub Redemption Note against the Xco Y Redemption Note described in paragraph 26 above, will not give rise to a "forgiven amount" within the meaning thereof in subsections 80(1) or 80.01(1), and neither Xco nor Yco will realize any gain or sustain any loss as a result of such set-off and cancellation.

The set-off and cancellation of the Zcosub Redemption Note against the Xco Z Redemption Note described in paragraph 26 above, will not give rise to a "forgiven amount" within the meaning thereof in subsections 80(1) or 80.01(1), and neither Xco nor Zco will realize any gain or sustain any loss as a result of such set-off and cancellation.

Regulations

N. By virtue of subsection 1102(14) of the Regulations, each property which immediately before the transfer described in paragraph 20 above, is depreciable property of a prescribed class or separate prescribed class of Xco and which is acquired by Ycosub or Zcosub, as the case may be, on the transfer described in paragraph 20 above, and by Yco on the winding-up of Ycosub, as described in paragraph 24 above, or by Zco on the winding-up of Zcosub, as described in paragraph 24 above, as the case may be, will be depreciable property of the same prescribed class or separate prescribed class, as the case may be, of Yco or Zco, as the case may be.

O. Provided that the condition specified in paragraph 1100(2.2)(f) or (g) of the Regulations is satisfied, paragraph 1100(2.2)(h) of the Regulations will apply so that no amount will be included by Yco or Zco under paragraph 1100(2)(a) of the Regulations in respect of depreciable property of a prescribed class that is property acquired by Ycosub or Zcosub, as the case may be, on the transfer described in paragraph 20 above, and by Yco on the winding-up of Ycosub, as described in paragraph 24 above, or by Zco on the winding-up of Zcosub, as described in paragraph 24 above, as the case may be.

Other Rulings

P. The provisions of subsections 15(1), 56(2), 56(4), 69(4) and 246(1) will not apply to any of the proposed transactions, in and of themselves.

Q. Subsection 245(2) will not be applied as a result of the proposed transactions, in and of themselves, to redetermine the tax consequences described in the rulings given.

R. Provided Yco continues to use the property acquired as a result of the transfer of property described in paragraph 20 above and the winding-up of Ycosub as described in paragraph 24 above, for the purpose of gaining or producing income therefrom, and provided that the interest on the liabilities assumed by Yco as described in paragraph 24 above was deductible in computing the income of Xco, Yco will be entitled to deduct in computing its income, pursuant to paragraph 20(1)(c), an amount, not in excess of a reasonable amount, equal to the amounts paid or payable as interest in a year or payable in respect of a year, depending upon the method regularly followed in computing its income, pursuant to a legal obligation to pay interest on any such liabilities.

S. Provided Zco continues to use the property acquired as a result of the transfer of property described in paragraph 20 above and the winding-up of Zcosub, as described in paragraph 24 above, for the purpose of gaining or producing income therefrom, and provided that the interest on the liabilities assumed by Zco as described in paragraph 24 above was deductible in computing the income of Xco, Zco will be entitled to deduct in computing its income, pursuant to paragraph 20(1)(c) an amount, not in excess of a reasonable amount, equal to the amounts paid or payable as interest in a year or payable in respect of a year, depending upon the method regularly followed in computing its income, pursuant to a legal obligation to pay interest on any such liabilities.

These rulings are given subject to the limitations and qualifications set forth in Information Circular 70-6R4 issued on January 29, 2001, and are binding on the Canada Customs and Revenue Agency provided that the proposed transactions are completed before 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

Nothing in this ruling should be construed as implying that the Canada Customs and Revenue Agency has agreed to or reviewed:

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

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

Yours truly,

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