2002 Ruling 2002-0119293 - Split up 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: Split-up butterfly

Position: Rulings granted

Reasons: Standard butterfly

XXXXXXXXXX 2002-011929

XXXXXXXXXX, 2002

Dear XXXXXXXXXX:

Re: XXXXXXXXXX
Advance Income Tax Ruling

This is in reply to your letter of XXXXXXXXXX in which you requested advance income tax rulings on behalf of the above named taxpayers. We acknowledge your letters of XXXXXXXXXX and the information provided during our telephone conversations in connection with your request.

We understand that, to the best of your knowledge and that of the taxpayers involved, none of the issues discussed in this ruling request is:

a. in an earlier return of the taxpayers or a related person;

b. being considered by a Tax Services Office or a Taxation Centre in connection with a previously filed tax return of any of the taxpayers or a related person;

c. under objection by any of the taxpayers or a related person;

d. subject to a ruling previously issued by the Income Tax Rulings Directorate to the taxpayers or a related person; or

e. before the courts or, if a judgment has been issued, the time limit for an appeal to a higher court has expired.

DEFINITIONS

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

(a) "ACB" means "adjusted cost base" as that expression is defined in section 54 and subsection 248(1);

(b) "Act" means the Income Tax Act, R.S.C. 1985 (5th Supp.), c.1, as amended to the date hereof, and, unless otherwise stated, every reference herein to a Part, section, subsection, paragraph, subparagraph is a reference to the relevant provision of the Act unless otherwise noted;

(c) "Agency" means the Canada Customs and Revenue Agency;

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

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

(f) "BCA" means the Business Corporations Act XXXXXXXXXX;

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

(h) "CDA" means "capital dividend account" as that expression is defined in subsection 89(1);

(i) "capital dividend" has the meaning assigned by subsection 83(2);

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

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

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

(m) "Preliminary Dividends" means the dividends to be paid as described in paragraphs 23 and 24 below;

(n) "prepaid expenses" means the rights arising out of the prepayment of expenses;

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

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

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

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

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

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

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

(v) "Settlement Agreement" means that agreement dated XXXXXXXXXX between Sib1, Sib2, Sib3, Canco1 and Canco2;

(w) "SIB" means "specified investment business" as that expression is defined in subsection 125(7);

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

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

(z) "stated capital" has the meaning assigned by XXXXXXXXXX of the BCA;

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

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

(cc) "Varied Will" means the Will, as varied by the court order described in paragraph 18 below; and

(dd) "Will" means the Last Will and Testament of the Deceased dated XXXXXXXXXX.

The following individuals and corporations will be referred to as follows:

(a) "Canco1" means XXXXXXXXXX;

(b) "Canco2" means XXXXXXXXXX;

(c) "DC" means the corporation resulting from the amalgamation of Canco1 and Canco2 pursuant to the BCA, as described in paragraph 25 below;

(d) "Deceased" means the Late XXXXXXXXXX who died on XXXXXXXXXX;

(e) "Estate" means the estate of the Deceased, whose business number is XXXXXXXXXX, whose address is XXXXXXXXXX, and who deals with the XXXXXXXXXX Tax Services Office and files its return with the XXXXXXXXXX Taxation Centre;

(f) "FCo" means XXXXXXXXXX;

(g) "Sib1" means XXXXXXXXXX;

(h) "Sib2" means XXXXXXXXXX;

(i) "Sib3" means XXXXXXXXXX;

(j) "Subco1" means XXXXXXXXXX;

(k) "Subco2" means XXXXXXXXXX;

(l) "TC1" means a taxable Canadian corporation to be incorporated pursuant to the BCA, all of the issued and outstanding shares of which will be owned by Sib1, as described in paragraphs 19 and 20 below; and

(m) "TC2" means a taxable Canadian corporation to be incorporated pursuant to the BCA, all of the issued and outstanding shares of which will be owned by Sib2, as described in paragraphs 19 and 20 below.

All references to monetary amounts are in Canadian dollars unless otherwise noted.

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

FACTS

1. Sib1, Sib2 and Sib3 are adult siblings who are all residents of Canada for purposes of the Act. The address, Tax Services Office, Taxation Centre and social insurance number for each is as follows:

	Address			TSO		Taxation 	SIN#
									Centre

	Sib1	                                          XXXXXXXXXX 

	Sib2	                                          XXXXXXXXXX 

Sib3 XXXXXXXXXX

2. The Deceased was a widow, the mother of Sib1, Sib2 and Sib3 and was, until the time of her death, a resident of Canada for purposes of the Act.

3. A bitter dispute has been ongoing between Sib1, Sib2 and Sib3 for several years with respect to the affairs of Canco1 and Canco2 and with respect to the Will, whereupon voting control of Canco1 and Canco2 would be left to Sib3. In order to settle the litigation regarding this dispute, the parties have entered into the Settlement Agreement that provides, among other things, that the assets of Canco1 and Canco2 will be distributed in a manner similar to that contemplated herein, subject to obtaining a favourable ruling from the Agency.

4. Canco1 is a taxable Canadian corporation and a Canadian-controlled private corporation with a XXXXXXXXXX year-end. It was incorporated under the XXXXXXXXXX prior to 1972 and was continued under the BCA. Canco1's business number is XXXXXXXXXX. The address of Canco1 is XXXXXXXXXX, and it deals with the XXXXXXXXXX Tax Services Office and files its return with the XXXXXXXXXX Taxation Centre.

5. Canco1's issued and outstanding shares consist of XXXXXXXXXX Class "A" voting common shares and XXXXXXXXXX Class "B" non-voting common shares. The Estate holds the XXXXXXXXXX Class "A" voting common shares and XXXXXXXXXX of the Class "B" non-voting common shares. Each of Sib1, Sib2 and Sib3 hold XXXXXXXXXX Class "B" non-voting common shares.

The XXXXXXXXXX Class "A" and XXXXXXXXXX Class "B" common shares of Canco1 owned by the Estate have PUC of $XXXXXXXXXX per share and ACB of $XXXXXXXXXX per share, or $XXXXXXXXXX in the aggregate.

The XXXXXXXXXX Class "B" non-voting common shares of Canco1 owned by each of Sib1, Sib2 and Sib3 have PUC and ACB of $XXXXXXXXXX per share, or $XXXXXXXXXX in the aggregate.

6. The only business carried on by Canco1 is a SIB. As at XXXXXXXXXX, the assets of Canco1 consisted of the following:

a. cash;

b. miscellaneous notes and mortgages receivable;

c. substantial commercial paper (bankers acceptances);

d. investments in various public corporation securities and mutual funds; and

e. XXXXXXXXXX% of the issued and outstanding shares of FCo.

As of XXXXXXXXXX, the total liabilities of Canco1 amounted to $XXXXXXXXXX, of which $XXXXXXXXXX was income taxes payable.

7. Canco2 is a taxable Canadian corporation and a Canadian-controlled private corporation with a XXXXXXXXXX year-end. It was incorporated under the XXXXXXXXXX prior to 1972 and was continued under the BCA. Canco2's business number is XXXXXXXXXX. The address of Canco2 is XXXXXXXXXX, and it deals with the XXXXXXXXXX Tax Services Office and files its return with the XXXXXXXXXX Taxation Centre.

8. Canco2's issued and outstanding shares consist of XXXXXXXXXX non-cumulative voting preferred shares, all of which are owned by the Estate and XXXXXXXXXX non-voting common shares, of which XXXXXXXXXX are owned by each of Sib1, Sib2 and Sib3.

The XXXXXXXXXX non-cumulative voting preferred shares of Canco2 owned by the Estate have a redemption amount, PUC, ACB and fair market value of $XXXXXXXXXX per share, or $XXXXXXXXXX in the aggregate.

The XXXXXXXXXX non-voting common shares owned by each of Sib1, Sib2 and Sib3 have PUC and ACB of $XXXXXXXXXX per share, or $XXXXXXXXXX in the aggregate.

9. The only business carried on by Canco2 is a SIB. As at XXXXXXXXXX, the assets of Canco2 consisted of the following:

a. cash;

b. miscellaneous mortgages, notes and other amounts receivable, including inter-company receivables from Subco1 and Subco2;

c. substantial commercial paper (bankers acceptances and treasury bills);

d. certain publicly traded securities;

e. XXXXXXXXXX% of the issued and outstanding shares of Subco1;

f. XXXXXXXXXX% of the issued and outstanding shares of Subco2; and

g. XXXXXXXXXX% of the issued and outstanding shares of FCo.

As at XXXXXXXXXX, the liabilities of Canco2 (excluding deferred exchange gain and deferred income taxes) amounted to $XXXXXXXXXX , of which $XXXXXXXXXX was income taxes payable.

10. The shares of Canco1 and Canco2 are capital property to Sib1 and Sib2 for the purposes of the Act.

11. Pursuant to the Will, Sib1, Sib2 and Sib3 are all named as the legal representatives of the Deceased. Among other things, the Will provided that the XXXXXXXXXX Class "A" voting common shares of Canco1 and the XXXXXXXXXX non-cumulative voting preferred shares of Canco2 would be bequeathed to Sib3 and that the value of such specific bequests would be deducted from Sib3's share of the residue, which otherwise was to be divided equally amongst Sib1, Sib2 and Sib3. The XXXXXXXXXX Class "B" non-voting common shares of Canco1 owned by the Estate form part of the residue of the Estate.

Although the Will provided for Sib3 to receive XXXXXXXXXX Class "A" voting shares of Canco1, under the Settlement Agreement, the parties have agreed that Sib3 will receive XXXXXXXXXX of these shares and that Sib1 and Sib2 will each receive XXXXXXXXXX of these shares.

12. FCo is a taxable Canadian corporation and a Canadian-controlled private corporation that holds various investments in public corporations and carries on a SIB. Although Canco1 and Canco2 together own XXXXXXXXXX% of the issued and outstanding shares of FCo, the other shareholders of FCo deal at arm's length with Canco1 and Canco2, such that neither Canco1 nor Canco2 has significant influence over FCo. The shares of FCo have substantial value because of the underlying value of the public securities owned by FCo.

13. Subco1 is a U.S. corporation (and not a limited liability company). The only business carried on by Subco1 is a SIB. Subco1 holds interests in various U.S. XXXXXXXXXX properties as long-term investments, both directly and through joint ventures.

14. Subco2 is a taxable Canadian corporation and a Canadian-controlled private corporation with a XXXXXXXXXX year-end. The only business carried on by Subco2 is a SIB. Subco2 holds interests in various Canadian XXXXXXXXXX properties as long-term investments.

15. As of XXXXXXXXXX, Canco1 had RDTOH of $XXXXXXXXXX and CDA of XXXXXXXXXX.

16. As of XXXXXXXXXX, Subco2 had RDTOH of $XXXXXXXXXX and Canco2 had RDTOH of $XXXXXXXXXX, for a combined total of $XXXXXXXXXX. Canco2 had no material CDA and Subco2 had CDA of $XXXXXXXXXX.

17. Except for the possible sale of marketable securities and reinvestment of the proceeds therefrom and reinvestment of the proceeds on maturity of treasury bills, bankers acceptances, etc. in the normal course of carrying on a SIB and the payment of liabilities, including payment of the Preliminary Dividends, and except for the transactions described in paragraph 37 below, there is no contemplated sale of any property by Canco1, Canco2 or DC to an unrelated third party.

PROPOSED TRANSACTIONS

18. Sib1, Sib2 and Sib3 will apply to the Court of Queen's Bench of XXXXXXXXXX to obtain an order to vary the terms of the Will. The court order will provide that the XXXXXXXXXX Class "A" voting shares of Canco1 will be distributed as follows: XXXXXXXXXX Class "A" voting shares to Sib3 and XXXXXXXXXX Class "A" voting shares to each of Sib1 and Sib2. This court order will be effective ab initio and nunc pro tunc.

19. Sib1 and Sib2 will incorporate TC1 and TC2, respectively, pursuant to the BCA. The authorized capital of each TC will include Class "A" voting common shares and XXXXXXXXXX classes of preferred shares (Class "C" preferred shares and Class "D" preferred shares) in an unlimited number. The preferred shares will have the following attributes:

a. redeemable and retractable for a redemption amount equal to the fair market value of the property received therefor (net of liabilities assumed) by the corporation at the time of issuance;

b. entitled to a non-cumulative dividend at the fixed rate of XXXXXXXXXX% per annum;

c. entitled to a return of the redemption amount on a liquidation, dissolution or winding-up of the corporation in preference to the common shares;

d. may be purchased, redeemed or cancelled by the corporation in the manner provided in the BCA at the option of either the corporation or the holder for a price not less than the lesser of:

(i) the aggregate redemption amount of such shares to be purchased at the particular time; and

(ii) the realizable value of the net assets of the corporation immediately before such purchase;

e. any preference, right, condition or limitation attaching to the preferred shares can only be amended by a special resolution of the holders of each class of shares of the corporation, each voting separately as a class;

f. a restriction on the payment of dividends on other classes of shares so that no dividends may be paid on any other class of shares of the corporation so as to reduce the value of the preferred shares then outstanding; and

g. the holders of the Class "D" preferred shares will be entitled to one vote per share at all meetings of the shareholders and the Class "C" preferred shares will be non-voting, except as provided by the BCA.

20. On incorporation, Sib1 will subscribe for XXXXXXXXXX Class "A" common shares of TC1 for nominal consideration and Sib2 will subscribe for XXXXXXXXXX Class "A" common shares of TC2 for nominal consideration.

21. In accordance with the Varied Will, the Estate will transfer its shares of Canco1 as follows:

a. XXXXXXXXXX Class "B" non-voting common shares to each of Sib1, Sib2 and Sib3;

b. XXXXXXXXXX Class "A" voting common shares to each of Sib1 and Sib2; and

c. XXXXXXXXXX Class "A" voting common shares to Sib3.

22. In accordance with the Varied Will, the Estate will transfer its XXXXXXXXXX non-cumulative voting preferred shares of Canco2 to Sib3.

23. To the extent that Canco1, Canco2 and Subco2 may have any significant amount of CDA prior to the transactions described below, they will each declare and pay a dividend on their common shares (being the Class "A" voting common shares and the Class "B" non-voting common shares, in the case of Canco1, and the non-voting common shares, in the case of Canco2) equal to the balance of their CDA immediately prior to the payment of such dividend and will elect, in prescribed manner and prescribed form pursuant to subsection 83(2), that the full amount of such dividend be deemed to be paid out of their respective CDAs.

Subco2 will pay a capital dividend to Canco2 which, in turn, will pay a corresponding capital dividend to its shareholders. Any such dividends will be paid by credit to the appropriate shareholder loan account in the accounting records of the particular corporation and, except for intercompany indebtedness between Subco2 and Canco2, will be considered a current liability for purposes of determining the net fair market value of each type of property as described in paragraph 28 below.

24. Canco1, Canco2 and Subco2 will each pay taxable dividends on their common shares (being the Class "A" voting common shares and the Class "B" non-voting common shares, in the case of Canco1, and the non-voting common shares, in the case of Canco2) equal to XXXXXXXXXX times the amount of their respective RDTOH calculated as of the date of the said dividend.

Any such dividends will be paid by credit to the appropriate shareholder loan account in the accounting records of the particular corporation and, except for intercompany indebtedness between Subco2 and Canco2, will be considered a current liability for purposes of determining the net fair market value of each type of property as described in paragraph 28 below.

25. Immediately following the payment of the Preliminary Dividends described in paragraphs 23 and 24 above, Canco1 and Canco2 will amalgamate to form DC pursuant to the BCA.

On the amalgamation, the following conditions will be satisfied:

a. all of the property (except amounts receivable from any predecessor corporation or shares of the capital stock of any predecessor corporation) of Canco1 and Canco2 immediately before the amalgamation will become property of DC by virtue of the amalgamation;

b. all of the liabilities (except amounts payable to any predecessor corporation) of Canco1 and Canco2 immediately before the amalgamation will become liabilities of DC by virtue of the amalgamation; and

c. all of the shareholders who owned shares of the capital stock of either Canco1 or Canco2 immediately before the amalgamation will receive shares of DC by virtue of the amalgamation.

DC will be authorized to issue Class "A" voting common shares, Class "B" non-voting common shares and Class "C" voting preferred shares.

The XXXXXXXXXX Class "A" voting common shares of Canco1, held by Sib1, Sib2 and Sib3, will be converted into a number of Class "A" voting common shares of DC. DC will add to the stated capital maintained for the Class "A" voting common shares an amount equal to the aggregate PUC, immediately before the amalgamation, of the XXXXXXXXXX Class "A" voting common shares of Canco1, or $XXXXXXXXXX.

The XXXXXXXXXX Class "B" non-voting common shares of Canco1, and the XXXXXXXXXX non-voting common shares of Canco2, all held equally by Sib1, Sib2 and Sib3, will be converted into a number of Class "B" non-voting common shares of DC. DC will add to the stated capital maintained for the Class "B" non-voting common shares an amount equal to the aggregate PUC, immediately before the amalgamation, of the XXXXXXXXXX Class "B" non-voting common shares of Canco1 and the XXXXXXXXXX non-voting common shares of Canco2, or $XXXXXXXXXX.

The number of Class "A" voting common shares and Class "B" non-voting common shares of DC to be issued will be based on the fair market value of all the common shares of Canco1 and Canco2 immediately before the amalgamation. The aggregate fair market value of the Class "A" and Class "B" common shares of DC received by each of Sib1, Sib2 and Sib3 will be equal to the aggregate fair market value of the respective common shares held by the particular shareholder in Canco1 and Canco2.

The XXXXXXXXXX non-cumulative voting preferred shares of Canco2 held by Sib3 will be converted into XXXXXXXXXX Class "C" voting preferred shares of DC, and will be redeemable for $XXXXXXXXXX per share. DC will add to the stated capital maintained for the Class "C" voting preferred shares an amount equal to the aggregate PUC, immediately before the amalgamation, of the XXXXXXXXXX voting preferred shares of Canco2, or $XXXXXXXXXX.

Sib3 will own more than 50% of the issued and outstanding voting shares of DC after the conversions described above.

DC will be a taxable Canadian corporation and will not have more than 5 full-time employees or exercise significant influence over FCo.

The transactions described in paragraphs 26 through 36 below will all occur in sequence immediately following the amalgamation.

26. Sib1 will transfer all of her Class "A" and Class "B" common shares of DC to TC1 at fair market value pursuant to subsection 85(1). The consideration paid by TC1 will be: (i) a promissory note equal to the adjusted cost base of the transferred shares (as determined pursuant to section 84.1) minus $XXXXXXXXXX; and (ii)

Class "C" preferred shares having an aggregate redemption and retraction amount equal to the amount by which the aggregate fair market value of the transferred shares of DC exceeds the amount of the non-share consideration. For purposes of the BCA, the addition to the stated capital of the TC1 Class "C" preferred shares will be $XXXXXXXXXX.

Sib1 and TC1 will jointly elect, pursuant to subsection 85(1) (in prescribed form and within the time specified in subsection 85(6)) to transfer the shares of DC to TC1 at an agreed amount equal to the lesser of the amounts described in subparagraphs 85(1)(c.1)(i) and (ii), which amount will not exceed their fair market value or be less than the amount permitted under paragraph 85(1)(b).

27. Sib2 will transfer all of her Class "A" and Class "B" common shares of DC to TC2 at fair market value pursuant to subsection 85(1). The consideration paid by TC2 will be: (i) a promissory note equal to the adjusted cost base of the transferred shares (as determined pursuant to section 84.1) minus $XXXXXXXXXX; and (ii) Class "C" preferred shares having an aggregate redemption and retraction amount equal to the amount by which the aggregate fair market value of the transferred shares of DC exceeds the amount of the non-share consideration. For purposes of the BCA, the addition to the stated capital of the TC2 Class "C" preferred shares will be $XXXXXXXXXX.

Sib2 and TC2 will jointly elect, pursuant to subsection 85(1) (in prescribed form and within the time specified in subsection 85(6)) to transfer the shares of DC to TC2 at an agreed amount equal to the lesser of the amounts described in subparagraphs 85(1)(c.1)(i) and (ii), which amount will not exceed their fair market value or be less than the amount permitted under paragraph 85(1)(b).

28. Immediately before the transfers of property described in paragraph 29 below, the property owned by DC will be determined on a consolidated basis by including the appropriate pro rata share of the assets of any corporation over which DC has the ability to exercise significant influence (DC and such corporations will be referred to in this paragraph as the "DC Group"), which assets will be classified into three types of property for purposes of the definition of "distribution" in subsection 55(1) as follows:

a. cash or near cash property, consisting of all the current assets of the DC Group, including cash in bank and investment accounts, mortgages and notes receivable, commercial paper (bankers acceptances, treasury bills etc.) and prepaid expenses;

b. investment property, consisting of all the assets of the DC Group, other than cash or near cash property, any income from which would, for the purposes of the Act, be income from property or a SIB, including investments in publicly-traded securities and mutual funds, shares of FCo and XXXXXXXXXX properties owned by Subco1 and Subco2; and

c. business property, consisting of all the assets of the DC Group, other than cash or near cash property, any income from which would, for the purposes of the Act, be income from a business, other than an SIB, of which there is expected to be none.

For greater certainty, any tax accounts, such as the balance of any non-capital losses of the DC Group, will not be considered property of DC for purposes of the proposed transactions described herein.

For greater certainty, DC will not have significant influence over any corporation other than Subco1 and Subco2.

The fair market value of the shares of Subco1 and Subco2 and of any indebtedness receivable by DC from Subco1 and/or Subco2 will be allocated between the three types of property described above by multiplying the fair market value of the shares of Subco1 and Subco2, as the case may be, and/or amount receivable from Subco1 and Subco2, as the case may be, by the proportion that the net fair market value of each type of property owned by Subco1 and Subco2 (as determined in this paragraph) is of the aggregate net fair market value of all of the property owned by Subco1 and/or Subco2, as the case may be.

In determining, on a consolidated basis, the net fair market value of each type of property of DC immediately before the transfers described in paragraph 29 below, the liabilities of DC and any corporation over which DC exercises significant influence will be allocated to, and will be deducted in the calculation of, the net fair market value of each such type of property of DC or such corporation, as the case may be, in the following manner:

d. in determining the net fair market value of each type of property of Subco1 and Subco2, immediately before the transfers described in paragraph 29 below, the liabilities of that particular corporation (other than any amount owing by such corporation to DC) will be allocated to, and will be deducted in the calculation of the net fair market value of each type of property of the particular corporation in the following manner:

(i) current liabilities of such corporation will be allocated to the cash or near cash property (including cash, commercial paper (bankers acceptances, treasury bills, etc.), mortgages, notes and other amounts receivable and prepaid expenses) of such corporation in the proportion that the fair market value of each such property is of the fair market value of all cash or near cash property owned by the particular corporation. To the extent that the allocation of current liabilities, as described herein, exceeds the aggregate fair market value of the cash or near cash property of the particular corporation, such corporation will be considered to have a "negative amount" of cash or near cash property;

(ii) liabilities, other than current liabilities, of such corporation that relate to a particular property, will then be allocated to the particular property (and effectively to the type of property to which the particular property belongs) to the extent of its fair market value.

Liabilities that pertain to a type of property but not to a particular property will then be allocated to that type of property. To the extent that the allocation of liabilities that pertain to a particular type of property, as described herein, exceeds the aggregate fair market value of all that particular type of property of the particular corporation, the particular corporation will be considered to have a "negative amount" of that type of property; and

(iii) any liabilities, other than current liabilities, of such corporation which do not relate to a particular type of property will then be allocated to the cash or near cash property and investment property of such corporations based on the relative net fair market value of each type of property prior to the allocation of such liabilities, but after the allocation of the liabilities described in subparagraphs (d)(i) and (d)(ii) above; and

e. in determining, on a consolidated basis, the net fair market value of each type of property of DC immediately before the transfers of property described in paragraph 29 below, DC will include the appropriate pro rata share of the net fair market value of each type of property of Subco1 and Subco2, as determined in accordance with paragraph (d) above, and any liabilities of DC will be allocated to, and be deducted in the calculation of, the net fair market value of each type of property of DC, as the case may be, in the following manner:

(i) current liabilities of DC will be allocated to the cash or near cash property (including cash, commercial paper (bankers acceptances, treasury bills, etc.), mortgages, notes and other amounts receivable and prepaid expenses) of DC in proportion that the fair market value of each such property is of the fair market value of all cash or near cash property. The allocation of current liabilities as described herein will not exceed the aggregate fair market value of the cash or near cash of DC (i.e., such allocation will not result in a net fair market value of cash or near cash property being less than nil);

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

(iii) if any liabilities remain after the allocations described in subparagraphs (e)(i) and (e)(ii) above are made ("excess unallocated liabilities"), such excess unallocated liabilities will then be allocated to the cash or near cash property and investment property of DC based on the relative net fair market value of each type of property prior to the allocation of such excess unallocated liabilities.

29. DC will transfer certain of its cash or near cash property and its investment property to each of TC1 and TC2 for a purchase price equal to the aggregate fair market value of the properties so transferred. The net fair market value of the aggregate cash or near cash property and the aggregate investment property received by each of TC1 and TC2 will be equal to the proportion of the net fair market value of all the property of each such type owned by DC immediately before the transfers described in this paragraph that the total fair market value of the issued and outstanding Class "A" and Class "B" common shares of DC owned by TC1 and TC2, as the case may be, is of the total fair market value of all of the issued and outstanding shares of DC.

As consideration for the transfer of DC's property, TC1 and TC2 will each issue XXXXXXXXXX Class "D" preferred shares to DC. The aggregate redemption and retraction amount of the Class "D" preferred shares in each case will be equal to the fair market value of the property acquired. Pursuant to XXXXXXXXXX of the BCA, the addition to the stated capital of the Class "D" preferred shares of each of TC1 and TC2 will be limited, in the case of property transferred under section 85, to the aggregate agreed amounts under subsection 85(1).

In respect of the transfer of the properties described above, DC will jointly elect with each of TC1 and TC2 pursuant to subsection 85(1) (in prescribed form and within the time specified in subsection 85(6)), to transfer each eligible property at an agreed amount equal to the lesser of the amounts described in subparagraphs 85(1)(c.1)(i) and (ii). In each case, the agreed amount will not exceed the fair market value of the respective property.

30. Immediately following the transfers of property described in paragraph 29 above, the XXXXXXXXXX Class "D" preferred shares of TC1 owned by DC will be redeemed for their aggregate fair market value and TC1 will issue to DC in consideration therefor a non-interest-bearing demand promissory note (the "TC1 Note") having a principal amount and fair market value equal to the aggregate fair market value of the XXXXXXXXXX Class "D" preferred shares. DC will accept the TC1 Note as full payment of the redemption amount of the XXXXXXXXXX Class "D" preferred shares with the risk of the note being dishonoured.

31. Immediately following the transfers of property described in paragraph 29 above, the XXXXXXXXXX Class "D" preferred shares of TC2 owned by DC will be redeemed for their aggregate fair market value and TC2 will issue to DC in consideration therefor a non-interest-bearing promissory note (the "TC2 Note") having a principal amount and fair market value equal to the aggregate fair market value of the XXXXXXXXXX Class "D" preferred shares. DC will accept the TC2 Note as full payment of the redemption amount of the XXXXXXXXXX Class "D" preferred shares with the risk of the note being dishonoured.

32. DC will repurchase and cancel the Class "A" and Class "B" common shares in its capital held by TC1 for an amount equal to their aggregate fair market value and DC will issue to TC1 in consideration therefor a non-interest-bearing demand promissory note (the "DC Note 1") having a principal amount and fair market value equal to the aggregate fair market value of the repurchased common shares.

TC1 will accept the DC Note 1 as full payment of the purchase price of the common shares purchased for cancellation with the risk of the note being dishonoured.

33. DC will repurchase and cancel the Class "A" and Class "B" common shares in its capital held by TC2 for an amount equal to their aggregate fair market value and DC will issue to TC2 in consideration therefor a non-interest-bearing demand promissory note (the "DC Note 2") having a principal amount and fair market value equal to the aggregate fair market value of the repurchased common shares. TC2 will accept the DC Note 2 as full payment of the purchase price of the common shares purchased for cancellation with the risk of the note being dishonoured.

34. TC1 will pay the principal amount of the TC1 Note by setting-off and cancelling the DC Note 1 and transferring same to DC in return for the cancellation and transfer back to TC1 of the TC1 Note. Both notes will be marked "paid in full" and cancelled.

35. TC2 will pay the principal amount of the TC2 Note by setting-off and cancelling the DC Note 2 and transferring same to DC in return for the cancellation and transfer back to TC2 of the TC2 Note. Both Notes will be marked "paid in full" and cancelled.

36. Immediately following the transactions described in 30 through 35 above, TC1, TC2 and DC will all take their first fiscal year-ends. It is intended that all transactions described in 26 through 35 above will occur on the one day immediately following the date of the amalgamation described in paragraph 25 above so that none of TC1, TC2 or DC will have RDTOH.

37. The Settlement Agreement provides that Sib3 is to retain all of the XXXXXXXXXX in Subco1 and Subco2 (and thus retain the shares of Subco1 and Subco2). The Settlement Agreement also provides that the FCo shares are to be transferred to Sib1, Sib2 and Sib3 in specie according to their respective proportionate interests. Because of the relative fair market values of the shares of Subco1, Subco2, the FCo shares and other investment assets of DC, TC1 and TC2 will initially receive more than their proportionate interest in the shares of FCo. Accordingly, after the completion of the proposed transactions described above, TC1 and TC2 will each sell back to DC the appropriate number of shares of FCo on a taxable basis so that TC1 and TC2 will each own the appropriate number of FCo shares.

The fair market value of the FCo shares to be sold by each of TC1 and TC2 will be significantly less than 10% of the fair market value of all property to be distributed to them.

ADDITIONAL INFORMATION

38. None of Canco1, Canco2, DC, TC1 or TC2 is, or will be, at any time during the series of transactions herein described, a specified financial institution or a restricted financial institution.

39. No property has or will become property of Canco1, Canco2 or DC, or any corporation controlled by any of them, and no liabilities have been or will be incurred by Canco1, Canco2 or DC, or any corporation controlled by any of them, in contemplation of and before the transfers of property described in paragraph 29 above, except as described herein.

40. Except as outlined herein, and except in the normal course of carrying on business, none of Canco1, Canco2, DC, TC1 or TC2 has any specific intention of disposing of any assets currently owned by it to an unrelated person following the proposed transactions and none of Canco1, Canco2, DC, TC1 or TC2 will dispose of any of its assets as part of a series of transactions which includes the proposed transactions, except as described in paragraph 37 above.

41. There are not and will not be at any time prior to the completion of the proposed transactions, any agreements or undertakings which constitute or include a "guarantee agreement", as defined in subsection 112(2.2), in respect of any of the shares of Canco1, Canco2, DC, TC1 or TC2.

42. None of Canco1, Canco2, DC, TC1 or TC2 has, or will have, entered into a "dividend rental arrangement", as defined in subsection 248(1), in respect of the shares to be redeemed or to be purchased for cancellation as part of the proposed transactions.

43. None of the shares of Canco1, Canco2, DC, TC1 or TC2 has been or will be issued or acquired as part of a series of transactions of the type described in subsection 112(2.5).

44. None of Canco1, Canco2, DC, TC1 or TC2 has been, or will be, at any time before the completion of the proposed transactions described herein, a corporation described in any of paragraphs (a) to (f) of the definition of "financial intermediary corporation" in subsection 191(1).

45. Each of DC, TC1 and TC2 will have the financial capacity to honour, upon presentation for payment, the amount payable under the promissory note issued by it as part of the proposed transactions.

46. None of the parties is contemplating an acquisition of control of any of Canco1, Canco2, DC, Subco1, Subco2, TC1 or TC2, or any other corporation, except as described herein.

PURPOSE OF THE PROPOSED TRANSACTIONS

Sib1, Sib2 and Sib3 wish to settle the litigation regarding the Estate and to separate their interests from each other in order to pursue their own individual investment and estate planning objectives.

RULINGS

Provided that the preceding statements constitute a complete and accurate disclosure of all the relevant facts, the proposed transactions, and the purpose of the proposed transactions, and provided further that the proposed transactions are carried out as described above, our rulings are as follows:

A. Subject to the application of subsections 20(1.2) and 26(5) of the ITAR, and paragraph 88(2.2)(b), which applies for the purpose stated in the preamble to subsection 88(2.2), the provisions of subsection 85(1) will apply to:

a. the transfer by Sib1 to TC1, as described in paragraph 26 above, of the Class "A" and Class "B" common shares of DC;

b. the transfer by Sib2 to TC2, as described in paragraph 27 above, of the Class "A" and Class "B" common shares of DC;

c. the transfers by DC to TC1, as described in paragraph 29 above, of each eligible property; and

d. the transfers by DC to TC2, as described in paragraph 29 above, of each eligible property;

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

B. Subsection 84(3) will apply:

a. on the redemptions, as described in paragraphs 30 and 31 above, of the Class "D" preferred shares of TC1 and TC2 held by DC, to deem each TC to have paid and DC to have received; and

b. on the purchases for cancellation, as described in paragraphs 32 and 33 above, of the DC Class "A" and Class "B" common shares held by TC1 and TC2, to deem DC to have paid and each TC to have received;

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

c. 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;

d. 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);

e. will be excluded in determining the proceeds of disposition to the recipient of the shares so redeemed or purchased pursuant to paragraph (j) of the definition of "proceeds of disposition" in section 54;

f. will reduce any loss arising from the redemption, acquisition or cancellation of those shares pursuant to subsection 112(3);

g. will not be subject to tax under Part IV, except as provided in paragraph 186(1)(b), as DC will be connected with each TC, and vice versa, by virtue of subsection 186(4); and

h. will not be subject to tax under Parts IV.1 and VI.1 by virtue of paragraph (b) of the definition of "excepted dividend" in section 187.1 and paragraph (a) of the definition of "excluded dividend" in subsection 191(1) because DC and each TC will have a substantial interest, within the meaning assigned by subsection 191(2), in the payer corporation immediately before the redemption or purchase for cancellation of such shares.

C. The repayment of the various promissory notes as described in paragraphs 34 and 35 above will not give rise to a "forgiven amount" within the meaning of subsection 80(1) or 80.01(1). None of DC, TC1 or TC2 will realize any gain or incur any loss as a result of the set-offs and cancellations.

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

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

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

c. an acquisition of shares in the circumstances described in subparagraph 55(3.1)(b)(iii);

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

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

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

E. The provisions of subsections 15(1) and 56(2) will not apply to any of the proposed transactions described above, in and by themselves.

F. As a result of the proposed transactions described above, in and by themselves, subsection 245(2) will not be applied to redetermine the tax consequences confirmed in the rulings given above.

These rulings are given subject to the limitations and qualifications set out in Information Circular 70-6R5 issued on May 17, 2002 and are binding on the Agency provided that the proposed transactions are completed before XXXXXXXXXX.

COMMENTS

Nothing in this letter should be construed as implying that the Agency has reviewed, accepted or otherwise agreed to:

a. the determination of the ACB, the fair market value or the PUC of any shares referred to herein; or

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

Yours truly,

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