2002 Ruling 2002-0124893 - 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 2002-012489

XXXXXXXXXX, 2002

Dear Sirs:

Re: XXXXXXXXXX
Advance Income Tax Rulings

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 various 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 involved in this ruling:

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

(ii) is being considered by a Tax Services Office or Taxation Centre in connection with a previously filed tax return of the taxpayer or a related person;

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

(iv) is before the courts; or

(v) is the subject of a ruling previously issued by the Income Tax Rulings Directorate to the taxpayer or a related person.

DEFINITIONS

In this letter, unless otherwise expressly stated:

(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, c.1 (5th Supp.), as amended to the date hereof, and unless otherwise stated, every reference herein to a Part, section, subsection, paragraph or subparagraph is a reference to the relevant provisions of the Act;

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

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

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

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

(g) "CCPC" means "Canadian-controlled private corporation" as that expression is defined in subsection 125(7);

(h) "CCRA" means the Canada Customs and Revenue Agency;

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

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

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

(l) "FMV" means "fair market value";

(m) "POD" means "proceeds of disposition" as that expression is defined in section 54;

(n) "pre-1972 CSOH" means "pre-1972 capital surplus on hand" as that expression is defined in subsection 88(2.1);

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

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

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

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

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

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

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

(v) "stated capital" has the meaning assigned in the BCA;

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

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

(y) "taxable preferred share" has the meaning assigned by subsection 248(1).

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

(a) "Child1" means XXXXXXXXXX;

(b) "Child2" means XXXXXXXXXX;

(c) "Child3" means XXXXXXXXXX;

(d) "Child4" means XXXXXXXXXX;

(e) "Child5" means XXXXXXXXXX;

(f) "Children" means Child1, Child2, Child3, Child4 and Child5;

(g) "Cousin1" means XXXXXXXXXX;

(h) "Cousin2" means XXXXXXXXXX;

(i) "DC" means XXXXXXXXXX;

(j) "Estate" means the estate of Parent;

(k) "Parent" means XXXXXXXXXX;

(l) "Sib1" means XXXXXXXXXX;

(m) "Sib2" means XXXXXXXXXX;

(n) "Subco1" means XXXXXXXXXX;

(o) "Subco2" means XXXXXXXXXX;

(p) "Subco3"means XXXXXXXXXX;

(q) "TC1" means the corporation to be incorporated by Sib1, as described in paragraph 14 below;

(r) "TC2" means the corporation to be incorporated by Sib2, as described in paragraph 14 below;

(s) "TC3" means the corporation to be incorporated by Cousin1, as described in paragraph 14 below; and

(t) "TC4" means the corporation to be incorporated by Cousin2, as described in paragraph 14 below.

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

FACTS

1. Sib1 and Sib2 are adult siblings. Child1, Child2 and Child3 are the adult children of Sib1. Child 4 and Child 5 are the adult children of Sib2. Cousin1 and Cousin2 are the first cousins of Sib1 and Sib2. Each of these individuals is a resident of Canada for the purposes of the Act. The social insurance number, address, Tax Services Office and Taxation Centre for each of these individuals is as follows:

Individual	SIN#		Address		TSO		Taxation Centre

Sib1		XXXXXXXXXX 	

Sib2		XXXXXXXXXX 

Child1		XXXXXXXXXX 

Child2		XXXXXXXXXX 

Child3		XXXXXXXXXX 

Child4		XXXXXXXXXX 

Child5		XXXXXXXXXX 

Cousin1 XXXXXXXXXX

Cousin2 XXXXXXXXXX

2. Parent was the mother of Sib1 and Sib2. The Estate arose on the death of Parent. The executors of the Estate are Sib1 and Sib2 and the Estate is a resident of Canada for the purposes of the Act. The Estate's business number is XXXXXXXXXX and its address is XXXXXXXXXX. The Estate deals with the XXXXXXXXXX Tax Services Office and files its returns with the XXXXXXXXXX.

3. The income and capital beneficiaries of the Estate are the Children, however, Parent's companion is entitled under Parent's will to live in Parent's condominium until his death. Furthermore, the Estate is required to maintain the condominium and pay all of its upkeep until the death of Parent's companion. Thus, $XXXXXXXXXX will be left in the Estate and the balance will be distributed to the Children as part of the proposed transactions.

4. DC was incorporated under the BCA and is a CCPC and a taxable Canadian corporation. DC's business number is XXXXXXXXXX and its head office is located at XXXXXXXXXX. DC deals with the XXXXXXXXXX Tax Services Office and files its returns with the XXXXXXXXXX Taxation Centre.

5. The authorized share capital of DC consists of an unlimited number of common shares and XXXXXXXXXX preference shares. The common shares of DC are voting and the preference shares have the following attributes:

(a) non-voting;
(b) redeemable and retractable for $XXXXXXXXXX per share;
(c) entitling the holder to cumulative dividends in an amount equal to XXXXXXXXXX% per year of the redemption amount; and
(d) on dissolution, entitling the holder to receive the redemption amount.

6. The issued and outstanding shares of DC consist of XXXXXXXXXX common shares and XXXXXXXXXX preference shares, which are held as follows:

Holder Class Number ACB PUC

Sib1 Common XXXXXXX $XXXXXXX $ XXXXXX
Preference XXXXXXX XXXXXXXX XXXXXX

Sib2	Common	XXXXXXXX  	$XXXXXXXX 	$ XXXXXX
	Preference	XXXXXXXX 	  XXXXXXX   	XXXXXX 

Estate	Common	XXXXXXXX 	$XXXXXX 		$  XXXXXX 

Cousin1Common	XXXXXXXX 	$XXXXXX 		$ XXXXXX
	Preference	XXXXXXXX           	  XXXXXX                     XXXXX   

Cousin2Common 	XXXXXXX 		$XXXXXX 		$  XXXXX
	Preference	XXXXXXX            	  XXXXXX    		   XXXXX   

Each of Sib1, Sib2, Cousin1, Cousin2 and the Estate hold their shares of DC as capital property.

7. DC is an investment holding company and carries on a specified investment business. DC's assets consist of:

(a) cash;

(b) marketable securities, consisting of government bonds, commons shares of a Canadian public corporation, Class A preference shares of a Canadian financial institution and units in a mutual fund (money market);

(c) income taxes receivable;

(d) a mortgage receivable in the amount of $XXXXXXXXXX, that bears interest at a rate of XXXXXXXXXX% and which is payable on demand;

(e) a loan receivable from a private corporation in the amount of $XXXXXXXXXX, that bears interest at a rate of XXXXXXXXXX% and that has no set terms of repayment;

(f) XXXXXXXXXX common shares, representing XXXXXXXXXX%, of Subco1, which in turn owns XXXXXXXXXX common shares, representing XXXXXXXXXX%, of Subco2; and

(g) XXXXXXXXXX common shares, representing XXXXXXXXXX%, of Subco3.

The amounts receivable, as described in paragraphs (d) and (e) above, are not receivable from persons related to DC. Each of Subco2 and Subco3 own rental properties. DC's assets, other than cash and equivalent assets, are held as capital properties.

8. Except for the possible sale of marketable securities and reinvestment of the POD therefrom and the reinvesment of the POD on the maturity of the treasury bills, bankers acceptances, etc. in the normal course of carrying on a business and the payment of liabilities, DC is not contemplating any sale of property to an unrelated third party, except as described in this letter.

9. As at XXXXXXXXXX, there was no RDTOH available in DC as dividends had been paid by DC to allow DC to receive a dividend refund. The balance of RDTOH is expected to be in excess of $XXXXXXXXXX immediately prior to the proposed transactions. For greater certainty, DC will not have a balance of CDA or any pre-1972 CSOH immediately prior to the proposed transactions.

10. The taxpayers identified in the ruling request have no known outstanding tax liabilities and the proposed transactions will have no impact on the tax liabilities of the taxpayers.

PROPOSED TRANSACTIONS

11. Prior to DC's XXXXXXXXXX year-end, DC will pay sufficient dividends on its common shares in order to completely eliminate the balance of its RDTOH. The dividends will be paid prior to the transfer of DC's shares, as described in paragraphs 15 to 20 below.

12. Prior to the transfers of property, as described in paragraph 22 below, DC will sell (through its broker) the Class A preference shares of the Canadian financial institution, which are taxable preferred shares, for cash consideration equal to their FMV, or $XXXXXXXXXX. After this sale, DC will not own any taxable preferred shares.

13. Prior to the transfers of property, as described in paragraphs 16, 18 and 22 below, the Estate will distribute its XXXXXXXXXX common shares of DC to the Children in satisfaction of all or part of their respective capital interests in the Estate. Each of the Children will receive XXXXXXXXXX common shares of DC. No elections will be filed under subsections 107(2.001) or (2.002) in respect of the distribution of the DC shares from the Estate.

14. TC1, TC2, TC3 and TC4 will be incorporated under the BCA. Each of TC1, TC2, TC3 and TC4 will be a taxable Canadian corporation and a private corporation. The authorized share capital of each will include an unlimited number of common and preference shares. The common shares will be voting and the preference shares will have the following attributes:

(a) voting;

(b) redeemable and retractable for amount equal to the consideration received on their issuance;

(c) entitling the holder to non-cumulative dividends in an amount equal to XXXXXXXXXX% per month of the redemption amount; and

(d) on dissolution, entitling the holder to receive the redemption amount.

Sib1 will incorporate TC1 and subscribe for 1 common share of TC1 on incorporation for $XXXXXXXXXX. Sib2 will incorporate TC2 and subscribe for 1 common share of TC2 on incorporation for $XXXXXXXXXX. Cousin1 will incorporate TC3 and subscribe for 1 common share of TC3 on incorporation for $XXXXXXXXXX. Cousin2 will incorporate TC4 and subscribe for 1 common share of TC4 on incorporation for $XXXXXXXXXX.

15. Sib1 will transfer her XXXXXXXXXX common shares and XXXXXXXXXX preference shares of DC to TC1 in exchange for a number of common shares of TC1 having an aggregate FMV equal to the aggregate FMV of the common and preference shares of DC transferred to TC1. A price adjustment clause will be included in the purchase and sale agreement. The directors of TC1 will resolve, pursuant to subsection XXXXXXXXXX of the BCA, to add to the stated capital of the common shares issued an amount equal to the aggregate ACB of the DC shares transferred, or $XXXXXXXXXX. For greater certainty, the ACB of the DC shares transferred will be equal to the amount "B" in the formula set out in paragraph 84.1(1)(a).

TC1 and Sib1 will jointly elect, in prescribed form and within the time limits referred to in subsection 85(6), to have the provisions of subsection 85(1) apply to the transfer of the DC shares as described in this paragraph to TC1. The agreed amounts specified in the election will be equal to the aggregate ACB of such common and preference shares of DC, which amounts will be less than the FMV of the respective shares at the time of transfer.

16. After the transfer of shares described in paragraph 15 above, each of Child1, Child2 and Child3 will transfer their XXXXXXXXXX common shares of DC to TC1 in exchange for a number of common shares of TC1 having an aggregate FMV equal to the aggregate FMV of the common shares of DC transferred to TC1. A price adjustment clause will be included in the purchase and sale agreements. The directors of TC1 will resolve, pursuant to subsection XXXXXXXXXX of the BCA, to add to the stated capital of the common shares issued an amount equal to the aggregate ACB of the DC shares transferred, or $XXXXXXXXXX. For greater certainty, the ACB of the DC shares transferred will be equal to the amount "B" in the formula set out in paragraph 84.1(1)(a).

TC1 and each of Child1, Child2 and Child3 will jointly elect, in prescribed form and within the time limits referred to in subsection 85(6), to have the provisions of subsection 85(1) apply to the transfer of the DC shares as described in this paragraph to TC1. The agreed amount specified in each of the elections will be equal to the aggregate ACB of such common shares of DC, which amounts will be less than the FMV of the respective shares at the time of transfer.

After the transfer of shares described in this paragraph, Child1, Child2 and Child3 will, in the aggregate, own less than XXXXXXXXXX% of the voting shares of TC1.

17. Sib2 will transfer her XXXXXXXXXX common shares and XXXXXXXXXX preference shares of DC to TC2 in exchange for a number of common shares of TC2 having an aggregate FMV equal to the aggregate FMV of the common and preference shares of DC transferred to TC2. A price adjustment clause will be included in the purchase and sale agreement. The directors of TC2 will resolve, pursuant to subsection XXXXXXXXXX of the BCA, to add to the stated capital of the common shares issued an amount equal to the aggregate ACB of the DC shares transferred, or $XXXXXXXXXX. For greater certainty, the ACB of the DC shares transferred will be equal to the amount "B" in the formula set out in paragraph 84.1(1)(a).

TC2 and Sib2 will jointly elect, in prescribed form and within the time limits referred to in subsection 85(6), to have the provisions of subsection 85(1) apply to the transfer of the DC shares as described in this paragraph to TC2. The agreed amount specified in the election will be equal to the aggregate ACB of such common and preference shares of DC, which amounts will be less than the FMV of the respective shares at the time of transfer

18. After the transfer of shares described in paragraph 17 above, each of Child4 and Child5 will transfer their XXXXXXXXXX common shares of DC to TC2 in exchange for a number of common shares of TC2 having an aggregate FMV equal to the aggregate FMV of the common shares of DC transferred to TC2. A price adjustment clause will be included in the purchase and sale agreements. The directors of TC2 will resolve, pursuant to subsection XXXXXXXXXX of the BCA, to add to the stated capital of the common shares issued an amount equal to the aggregate ACB of the DC shares transferred, or $XXXXXXXXXX. For greater certainty, the ACB of the DC shares transferred will be equal to the amount "B" in the formula set out in paragraph 84.1(1)(a).

TC2 and each of Child4 and Child5 will jointly elect, in prescribed form and within the time limits referred to in subsection 85(6), to have the provisions of subsection 85(1) apply to the transfer of the DC shares as described in this paragraph to TC2. The agreed amount specified in each of the elections will be equal to the aggregate ACB of such common shares of DC, which amounts will be less than the FMV of the respective shares at the time of transfer.

After the transfer of shares described in this paragraph, Child4 and Child5 will, in the aggregate, own less than XXXXXXXXXX% of the voting shares of TC2.

19. Cousin1 will transfer her XXXXXXXXXX common shares and XXXXXXXXXX preference shares of DC to TC3 in exchange for XXXXXXXXXX common shares of TC3 having an aggregate FMV equal to the aggregate FMV of the common and preference shares of DC transferred to TC3. A price adjustment clause will be included in the purchase and sale agreement. The directors of TC3 will resolve, pursuant to subsection XXXXXXXXXX of the BCA, to add to the stated capital of the common shares issued an amount equal to the aggregate ACB of the DC shares transferred, or $XXXXXXXXXX. For greater certainty, the ACB of the DC shares transferred will be equal to the amount "B" in the formula set out in paragraph 84.1(1)(a).

TC3 and Cousin1 will jointly elect, in prescribed form and within the time limits referred to in subsection 85(6), to have the provisions of subsection 85(1) apply to the transfer of the DC shares as described in this paragraph to TC3. The agreed amount specified in the election will be equal to the aggregate ACB of such common and preference shares of DC, which amounts will be less than the FMV of the respective shares at the time of transfer.

20. Cousin2 will transfer her XXXXXXXXXX common shares and XXXXXXXXXX preference shares of DC to TC4 in exchange for XXXXXXXXXX common shares of TC4 having an aggregate FMV equal to the aggregate FMV of the common and preference shares of DC transferred to TC4. A price adjustment clause will be included in the purchase and sale agreement. The directors of TC4 will resolve, pursuant to subsection XXXXXXXXXX of the BCA, to add to the stated capital of the common shares issued an amount equal to the aggregate ACB of the DC shares transferred, or $XXXXXXXXXX. For greater certainty, the ACB of the DC shares transferred will be equal to the amount "B" in the formula set out in paragraph 84.1(1)(a).

TC4 and Cousin2 will jointly elect, in prescribed form and within the time limits referred to in subsection 85(6), to have the provisions of subsection 85(1) apply to the transfer of the DC shares as described in this paragraph to TC4. The agreed amount specified in the election will be equal to the aggregate ACB of such common and preference shares of DC, which amounts will be less than the FMV of the respective shares at the time of transfer.

21. Immediately before the transfers of property described in paragraph 22 below, the property owned by DC will be classified into three types of property for the purpose of the definition of "distribution" in subsection 55(1), as follows:

(a) cash or near-cash property, comprising the current assets of DC (other than portfolio investments and similar instruments);

(b) business property, comprising of all of the assets of DC, other than cash or near-cash property, any income from which would, for the purpose of the Act, be income from a business (other than a specified investment business) carried on by DC; and

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

For greater certainty, any tax accounts, such as the balance of RDTOH, will not be considered property for purposes of the proposed transactions.

22. On XXXXXXXXXX, and, following the determination of the FMV of all of its cash or near-cash property, business property and investment property, DC will transfer to each of TC1, TC2, TC3 and TC4 a pro-rata share of all of its cash or near-cash property, business property and investment property, in a manner such that the FMV of the cash or near-cash property, business property and investment property so transferred to TC1, TC2, TC3 or TC4, as the case may be, will be equal to that proportion of the FMV of all the cash or near-cash property, business property and investment property of DC, immediately before the transfer, that:

(a) the aggregate FMV, immediately before the transfers described in this paragraph, of the DC shares owned by TC1, TC2, TC3 or TC4, as the case may be;

is of

(b) the FMV, immediately before the transfers described in this paragraph, of all the issued shares of the capital stock of DC.

For greater certainty, the transfers described in this paragraph will be made on a gross fair market value basis. Each of TC1, TC2, TC3 and TC4 will receive a pro-rata share of each type of property of DC, including the shares of Subco1 and Subco3, as described above. Similarly, each of TC1, TC2, TC3 and TC4 will assume a pro-rata share of each liability of DC.

23. As consideration for the property transferred by DC, as described in paragraph 22 above, each of TC1, TC2, TC3 and TC4 will:

(a) assume a pro-rata share of the liabilities of DC and the liabilities assumed by TC1, TC2, TC3 and TC4, as the case may be, will not exceed the aggregate of the agreed amounts, determined under paragraph 24 below, in respect of the eligible property transferred; and

(b) issue to DC XXXXXXXXXX preference shares having an aggregate redemption amount and aggregate FMV equal to the amount by which the aggregate FMV of the properties so transferred exceeds the pro-rata share of the liabilities assumed.

The amount determined under paragraph (b) above will be fixed by a resolution of the board of directors of each of TC1, TC2, TC3 and TC4 upon the issuance of the XXXXXXXXXX preference shares. The amount so fixed will be a specified amount for the purposes of subsection 191(4).

Each of TC1, TC2, TC3 and TC4 will add to the stated capital maintained for its preference shares an amount equal to the aggregate of the cost amounts of the properties transferred less the amount of the liabilities assumed by TC1, TC2, TC3 or TC4, as the case may be.

After the issuance of the preference shares described in the paragraph, DC will own more than 10% of the voting shares of each of TC1, TC2, TC3 and TC4, having a FMV that is more than 10% of the FMV of all the issued and outstanding shares of each respective TC.

24. DC and each of TC1, TC2, TC3 and TC4 will jointly elect, 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 of each eligible property transferred to TC1, TC2, TC3 and TC4, as the case may be and as described in paragraph 22 above. The agreed amount in respect of each eligible property so transferred will be an 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 FMV of the respective property, nor will it be less than the amount permitted under paragraph 85(1)(b). The amount of liabilities to be allocated to the property that is the subject of an election under subsection 85(1) will not exceed the total of the agreed amounts elected for that property. The amount of liabilities to be allocated to the property that is not the subject of an election under subsection 85(1) will not exceed the FMV of any such property.

25. On XXXXXXXXXX, and, following the transactions described in paragraphs 22 and 23 above, each of TC1, TC2, TC3 and TC4 will redeem all of their respective preference shares held by DC for an amount equal to the aggregate FMV, and redemption amount, of such shares. In consideration, TC1, TC2, TC3 and TC4 will each issue a non-interest-bearing demand promissory note to DC (the "TC1 Note", the "TC2 Note" the "TC3 Note" and the "TC4 Note", respectively) with a principal amount and FMV equal to the aggregate FMV of the shares so redeemed. DC will accept the TC1 Note, the TC2 Note, the TC3 Note and the TC4 Note as full payment of the redemption amount of the shares so redeemed.

26. At the end of day on which the preference shares are redeemed, as described in paragraph 25 above, each of TC1, TC2, TC3 and TC4 will cause their first taxation year to end. This will occur at least one day prior to the transactions described in paragraphs 27 and 28 below.

27. On or after XXXXXXXXXX, DC will purchase for cancellation all of its common shares, and redeem all of its preference shares, held by TC1 for an amount equal to the aggregate FMV of such shares. In consideration, DC will issue to TC1 a non-interest-bearing demand promissory note (the "DC1 Note") with a principal amount and FMV equal to the aggregate FMV of the shares so purchased and redeemed. TC1 will accept the DC1 Note as full payment of the aggregate FMV of the shares so purchased and redeemed.

28. On or after XXXXXXXXXX, and, following the purchase and redemption of shares described in paragraph 27 above, DC will purchase for cancellation all of its common shares, and redeem all of its preference shares, held by TC2 for an amount equal to the aggregate FMV of such shares. In consideration, DC will issue to TC2 a non-interest-bearing demand promissory note (the "DC2 Note") with a principal amount and FMV equal to the aggregate FMV of the shares so purchased and redeemed. TC2 will accept the DC2 Note as full payment of the aggregate FMV of the shares so purchased and redeemed.

29. DC and TC1 will set-off the principal amounts of the DC1 Note and the TC1 Note, and each note will then be cancelled. DC and TC2 will set-off the principal amounts of the DC2 Note and the TC2 Note, and each note will then be cancelled.

30. TC3 and TC4, as the remaining shareholders of DC, will, by special resolution, resolve to liquidate and dissolve DC pursuant to the provisions of the BCA. Under the terms of the wind-up, DC will assign and distribute the TC3 Note to TC3 and the TC4 Note to TC4. As a result of the assignment and distribution of the TC3 Note and the TC4 Note by DC, the obligation of TC3 and TC4 under their respective notes will be cancelled.

For the purposes of the Act, in particular subsection 84(2), the FMV of the TC3 Note and the TC4 Note received by TC3 and TC4, respectively, will be allocated amongst the classes of shares of DC held by TC3 and TC4 based on the relative aggregate FMV of the shares of each class of DC held by TC3 and TC4, as the case may be.

31. Following the completion of all of the proposed transactions described herein, all the properties of DC will have been distributed and all liabilities discharged and Articles of Dissolution will be filed and DC will be dissolved.

32. An agreement will be prepared whereby all the shareholders of DC will agree that all assets or liabilities, if any, not known at the date of the wind-up, will be subsequently shared among TC1, TC2, TC3 and TC4 based on their respective ownership percentage of DC immediately prior the dissolution of DC.

ADDITIONAL INFORMATION

33. No property has or will become property of DC, Subco1, Subco2 and Subco3 and no liabilities will be incurred by any of these corporations in contemplation of and before the transfers described in paragraph 22 above, except as described in this letter. None of DC, Subco1, Subco2, Subco3, TC1, TC2, TC3 or TC4 has any specific intention of disposing of any of the assets it owns to an unrelated person following the proposed transactions and as part of the series of transactions or events that includes the proposed transactions, other than in the ordinary course of business.

34. None of DC, TC1, TC2, TC3 or TC4 is, or 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 DC, TC1, TC2, TC3 or TC4 is, or will be, a specified financial institution prior to the completion of the proposed transactions.

35. There are not, and will not be at any time before 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 in the capital of DC, TC1, TC2, TC3 and TC4.

36. None of DC, TC1, TC2, TC3 or TC4 has, or will have, entered into a "dividend rental arrangement", as defined in subsection 248(1), in respect of any of the shares to be redeemed or purchased for cancellation as part of the proposed transactions.

37. None of the shares of the issued capital of DC, TC1, TC2, TC3 or TC4 has been, or will be, issued or acquired as part of a series of transaction of the type described in subsection 112(2.5).

38. It is intended that the shareholders of TC1 and TC2 will receive amounts from their respective corporations, either by way of dividends or reductions in PUC. These transactions will not be part of the series of transactions or events that includes the proposed transactions.

PURPOSE OF THE PROPOSED TRANSACTIONS

The purpose of the proposed transaction is to distribute a proportionate share of the assets of DC to new corporations in order to separate the interests of the current shareholders of DC. Due to a family conflict, the shareholders' respective visions of the future direction of DC differ and they do not wish to deal with each other. Thus, it is impossible for the major shareholders to carry on business together and they cannot work with one another. Accordingly, they wish to separate their respective interests in the operations of DC and proceed, independently of each other.

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 provisions of subsections 107(4), (4.1) and (5), subsection 107(2) will apply on the distribution by the Estate of the common shares of DC to the Children, as described in paragraph 13 above.

B. Subject to the application of subsection 69(11), the provisions of subsection 85(1) will apply to:

(a) the transfer by Sib1 to TC1, as described in paragraph 15 above, of the common and preference shares of DC;

(b) the transfer by each of Child1, Child2 and Child3 to TC1, as described in paragraph 16 above, of the common shares of DC;

(c) the transfer by Sib2 to TC2, as described in paragraph 17 above, of the common and preference shares of DC;

(d) the transfer by each of Child4 and Child5 to TC2, as described in paragraph 18 above, of the common shares of DC;

(e) the transfer by Cousin1 to TC3, as described in paragraph 19 above, of the common and preference shares of DC;

(f) the transfer by Cousin2 to TC4, as described in paragraph 20 above, of the common and preference shares of DC; and

(g) the transfers by DC to each of TC1, TC2, TC3 and TC4, as described in paragraph 22 above, of each eligible property;

such that the agreed amount in respect of each transfer will be deemed to be the transferor's POD and the transferee's cost thereof under paragraph 85(1)(a). For greater certainty, subsection 85(2.1) will not apply to reduce the PUC of the common shares of TC1, TC2, TC3 and TC4 issued as consideration for the DC shares so acquired.

C. As a result of:

(a) the redemption by each of TC1, TC2, TC3 and TC4 of their preference shares held by DC, as described in paragraph 25 above, by virtue of subsection 84(3), each TC will be deemed to have paid, and DC will be deemed to have received, a dividend on such shares equal to the amount, if any, by which the aggregate amount paid on such redemption exceeds the aggregate PUC in respect of such shares immediately before the redemption;

(b) the purchase for cancellation, and redemption, by DC of its common and preference shares held by TC1 and TC2, as described in paragraphs 27 and 28 above, by virtue of subsection 84(3), DC will be deemed to have paid, and each of TC1 and TC2 will be deemed to have received, a dividend on such shares equal to the amount, if any, by which the aggregate amount paid on such purchase for cancellation and redemption exceeds the aggregate PUC in respect of such shares immediately before the purchase or redemption; and

(c) the distributions by DC in the course of its winding-up, as described in paragraph 30 above, by virtue of paragraph 88(2)(b) and subsection 84(2), each of TC3 and TC4 will each be deemed to have received a dividend on the common and preference shares of DC, as the case may be, equal to the proportion of the amount by which the aggregate FMV of the property of DC distributed to each of TC3 and TC4 on the winding-up exceeds the amount by which the PUC of the common and preference shares, as the case may be, is reduced as a result of the distribution, that the number of shares of such class held by each of TC3 and TC4, as the case may be, if of the number of issued shares of such class outstanding immediately before the distribution;

and the taxable dividends described in paragraphs (a), (b), and (c) above:

(d) 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;

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

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

(g) will not be subject to tax under Part IV; and

(h) will not be subject to tax under Part IV.1 or VI.1.

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

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

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

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

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

E. The settlement of the various promissory notes, as described in paragraphs 29 and 30 above, will not give rise to a "forgiven amount" within the meaning of subsections 80(1) or 80.01(1). None of DC, TC1, TC2, TC3 or TC4 will realize any gain or incur any loss as a result of the repayment and cancellation of these notes.

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

G. Subsection 245(2) will not be applied to the proposed transactions, in and by themselves, to redetermine the tax consequences confirmed in the rulings given.

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 CCRA provided that the proposed transactions are completed by XXXXXXXXXX.

COMMENTS

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

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

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

(c) that a disposition by any of TC1, TC2, TC3 or TC4 of the property received on the distribution, as described in paragraph 22 above, would: (i) be in the ordinary course of business for the purposes of paragraph 55(3.1)(c), and (ii) not be part of the series of transactions that includes the proposed transactions described herein for purposes of paragraph 55(3.1)(c); those determinations can only be made after a review of all the circumstances of any such disposition.

Furthermore, none of the rulings given in this letter are intended to apply to the operation of a price adjustment clause, since its coming into effect will be due to circumstances that do not constitute proposed transactions that are seriously contemplated. The general position of the CCRA with respect to price adjustment clauses is stated in Interpretation Bulletin IT-169.

Yours truly,

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