2002 Ruling 2002-0158353 - Butterfly transaction-Papillon

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 transaction.

Position: Favourable rulings provided.

Reasons: Meets the requirements of the law.

XXXXXXXXXX 2002-015835

XXXXXXXXXX, 2002

Dear XXXXXXXXXX:

Re: Advance Income Tax Ruling
XXXXXXXXXX

This is in reply to your letter of XXXXXXXXXX in which you requested an advance income tax ruling on behalf of the above-noted taxpayers. We also acknowledge the information provided in your letters of XXXXXXXXXX, and during our various telephone conversations in connection with your ruling request (XXXXXXXXXX).

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(s) 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(s) or a related person,

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

(iv) is before the courts or, if a judgment has been issued, the time limit for appeal to a higher court has not expired.

However, we understand that the Directorate issued a favourable advance income tax ruling to the taxpayers on XXXXXXXXXX with respect to proposed transactions similar to those described herein. We also understand that the proposed transactions described in the advance income tax ruling dated XXXXXXXXXX were never carried out for business reasons.

LEGAL ENTITY DEFINITIONS

In this letter:

(a) "Aco" means XXXXXXXXXX, a corporation incorporated under the Canada Business Corporations Act on XXXXXXXXXX, all of the issued and outstanding shares of which are owned by XXXXXXXXXX and is more fully described at paragraph 6 hereof;

(b) "Bco" means XXXXXXXXXX, a corporation incorporated under the Canada Business Corporations Act on XXXXXXXXXX, all of the issued and outstanding shares of which are owned by XXXXXXXXXX, and is more particularly described at paragraph 5 hereof;

(c) "Cco" means XXXXXXXXXX, a corporation incorporated under the Canada Business Corporations Act on XXXXXXXXXX, all of the issued and outstanding shares of which are owned by XXXXXXXXXX, and is more particularly described at paragraph 5 hereof;

(d) "Dco" means XXXXXXXXXX, a corporation governed by the provisions of XXXXXXXXXX and resulting from the amalgamation of XXXXXXXXXX, of which XXXXXXXXXX common shares are owned by Holdco 1 (as defined below), and XXXXXXXXXX common shares are owned by Holdco 2 (as defined below); Dco's predecessor corporations were incorporated in XXXXXXXXXX and they and Dco are more fully described at paragraph 1 hereof;

(e) "Eco" means XXXXXXXXXX, a corporation incorporated under the Canada Business Corporations Act on XXXXXXXXXX, all of the issued and outstanding shares of which are owned by XXXXXXXXXX, and is more particularly described at paragraph 5 hereof;

(f) "Fco" means XXXXXXXXXX, a company incorporated under XXXXXXXXXX, all of the issued and outstanding shares of which are owned by XXXXXXXXXX;

(g) "Holdco 1" means XXXXXXXXXX, a corporation incorporated under the Canada Business Corporations Act on XXXXXXXXXX, all of the issued and outstanding shares of which are owned by XXXXXXXXXX, and is more particularly described at paragraph 3 hereof; and

(h) "Holdco 2" means XXXXXXXXXX, a corporation incorporated under the Canada Business Corporations Act on XXXXXXXXXX, all of the issued and outstanding shares of which are owned by Aco, Bco, Cco and Eco, and is more particularly described in paragraph 4 hereof.

DEFINITIONS

In this letter, unless otherwise expressly stated, the following terms have the meanings specified.

(a) "ACB" has the meaning assigned to the expression "Adjusted Cost Base" in section 54 of the Act;

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

(c) "Agreed Amount" has the meaning assigned by subsection 85(1);

(d) "Canadian-Controlled Private Corporation" has the meaning assigned by subsection 125(7);

(e) "Capital Dividend Account" has the meaning assigned by subsection 89(1);

(f) "Capital Property" has the meaning assigned in section 54;

(g) "CBCA" means the Canada Business Corporations Act;

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

(i) "Cost Amount" has the meaning assigned by subsection 248(1);

(j) "Distribution" has the meaning assigned by subsection 55(1);

(k) "Dividend Refund" has the meaning assigned by subsection 129(1);

(l) "Dividend Rental Arrangement" has the meaning assigned by subsection 248(1);

(m) "Eligible Property" has the meaning assigned by subsection 85(1.1);

(n) "FMV" means fair market value;

(o) "Guarantee Agreement" has the meaning assigned by subsection 112(2.2);

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

(q) "Private Corporation" has the meaning assigned by subsection 89(1);

(r) "PUC" has the meaning assigned to the expression "Paid-up Capital" in subsection 89(1);

(s) XXXXXXXXXX;

(t) "RDTOH" means "Refundable Dividend Tax On Hand" as the expression is defined in subsection 129(3);

(u) "Regulations" means the Income Tax Regulations;

(v) "Series of Transactions" has the meaning assigned by subsection 248(10);

(w) "Specified Investment Business" has the meaning assigned by subsection 125(7);

(x) "Taxable Canadian Corporation" has the meaning assigned by subsection 89(1); and

(y) "Taxable Dividend" has the meaning assigned by subsection 89(1);

Unless otherwise indicated in this letter, all dollar amounts referred to herein are in Canadian dollars.

FACTS

1. Dco is a Taxable Canadian Corporation and a Canadian-Controlled Private Corporation.

The authorized share capital of Dco consists of an unlimited number of common shares. As at the date hereof, the issued and outstanding shares of Dco consist of XXXXXXXXXX common shares (the "Dco Common Shares") without par value, and having a stated capital of $XXXXXXXXXX each. The number of Dco Common Shares issued to each shareholder and the PUC and ACB to each shareholder of such shares are as follows:

Holder

Number

PUC

ACB
Holdco 1

XXXXX

XXXXX

XXXXXX
Holdco 2

XXXXX

XXXXX

XXXXXX

XXXXX

XXXXX

XXXXXX

The FMV of the Dco Common Shares is in excess of Holdco 1 and Holdco 2's ACB. The Dco Common Shares represent capital property to their shareholders.

Dco was subject to an amalgamation after XXXXXXXXXX pursuant to the XXXXXXXXXX. Dco is the corporation resulting from the amalgamation on XXXXXXXXXX of XXXXXXXXXX, which was incorporated under the XXXXXXXXXX, and XXXXXXXXXX, which was incorporated under the XXXXXXXXXX. As at XXXXXXXXXX, Dco had a balance of RDTOH of $XXXXXXXXXX, a Capital Dividend Account in the amount of $XXXXXXXXXX and Pre-1972 CSOH of approximately $XXXXXXXXXX. It is not anticipated that the amounts of RDTOH, Capital Dividend Account or Pre-1972 CSOH will be substantially different at the time of the transfer of property described in paragraph 17 hereof.

2. The majority of Dco's assets consist of cash, marketable securities, accounts receivable, prepaid expenses, loans receivable from its shareholders and XXXXXXXXXX (Dco beneficially owns, inter alia, a XXXXXXXXXX% co-ownership interest in XXXXXXXXXX).

Fco holds registered title of Dco's XXXXXXXXXX. Fco acts as agent or mandatary of Dco and the other undivided co-owners with respect to such XXXXXXXXXX.

The rental income earned by Dco from its XXXXXXXXXX has been reported in its tax returns as income from a Specified Investment Business.

The liabilities of Dco consist of current and long-term liabilities representing the aggregate amount of approximately $XXXXXXXXXX.

Since XXXXXXXXXX, there has not been any material change in the composition of Dco's assets or liabilities. Furthermore, there will not be any material change in the composition of Dco's assets or liabilities between the date of this letter and the date the proposed transactions described in this letter are undertaken, save and except as a result of any transaction in the ordinary course of Dco's activities.

3. Holdco 1 is a Taxable Canadian Corporation and a Canadian-Controlled Private Corporation. The issued and outstanding shares of Holdco 1 consist of XXXXXXXXXX common shares all of which are owned by XXXXXXXXXX Holdco 1 beneficially owns a XXXXXXXXXX% co-ownership interest in XXXXXXXXXX.

4. Holdco 2 is a Taxable Canadian Corporation and a Canadian-Controlled Private Corporation. The issued and outstanding shares of Holdco 2 consist of XXXXXXXXXX common shares which are held equally by Aco, Bco, Cco and Eco. Holdco 2 beneficially owns a XXXXXXXXXX% co-ownership interest in XXXXXXXXXX.

5. Each of Bco, Cco and Eco is a Canadian-Controlled Private Corporation that was incorporated under the CBCA, all of the issued and outstanding shares of each are respectively held by XXXXXXXXXX.

6. Aco is a Taxable Canadian Corporation incorporated under the CBCA, all of the issued and outstanding shares of which are held by XXXXXXXXXX.

7. XXXXXXXXXX. All these XXXXXXXXXX, reside in Canada.

PROPOSED TRANSACTIONS

8. Holdco 1 will cause a new corporation to be incorporated under the CBCA ("Newco 1"). Newco 1 will be a Taxable Canadian Corporation and a Canadian-Controlled Private Corporation. The authorized capital of Newco 1 will include the following classes of shares:

(i) an unlimited number of common shares (the "Newco 1 Common Shares"). Each holder of Newco 1 Common Shares will be entitled to one (1) vote for each Newco 1 Common Share so held;

(ii) an unlimited number of voting, redeemable and retractable special shares which shall each be entitled to receive, as and when declared from time to time by the board of directors, non-cumulative dividends not exceeding an amount equal to XXXXXXXXXX% per annum calculated on the Newco 1 Special Share Redemption Amount (as hereinafter defined) (the "Newco 1 Special Shares"). Each Newco 1 Special Share shall be redeemable and retractable for an amount (the "Newco 1 Special Share Redemption Amount") equal to the FMV of the consideration received by Newco 1 upon the issuance of such share. Each Newco 1 Special Share will entitle its holder to receive on the dissolution or winding-up of Newco 1 a distribution of the net assets of Newco 1 in an amount equal to the Newco 1 Special Share Redemption Amount in priority to any distribution to be made to holders of the Newco 1 Common Shares. No dividends or other distributions will be paid on any shares ranking junior to the Newco 1 Special Shares if the effect of such dividend or other distribution would be to reduce the net realizable value of the assets of Newco 1 to an amount less than the aggregate of the Newco 1 Special Share Redemption Amounts.

For the purposes of subsection 191(4), the terms or conditions of the Newco 1 Special Shares will specify an amount in respect of each such share, to be designated by a resolution of the directors at the time of their issue, for which the share is to be redeemed, acquired or cancelled. The amount specified in respect of each such share, at the time of the issuance, will be expressed as a dollar amount, will not be determined by a formula or subject to change thereafter and will not exceed the FMV of the consideration for which the share will be issued.

No shares will be issued by Newco 1 upon incorporation.

9. Holdco 2 will cause a new corporation to be incorporated under the CBCA ("Newco 2"). Newco 2 will be a Taxable Canadian Corporation and a Canadian-Controlled Private Corporation. The authorized capital of Newco 2 will include the following classes of shares:

(i) an unlimited number of common shares (the "Newco 2 Common Shares"). Each holder of Newco 2 Common Shares will be entitled to one (1) vote for each Newco 2 Common Shares so held;

(ii) an unlimited number of voting, redeemable and retractable special shares which shall each be entitled to receive, as and when declared from time to time by the board of directors, non-cumulative dividends not exceeding an amount equal to XXXXXXXXXX% per annum calculated on the Newco 2 Special Share Redemption Amount (as hereinafter defined) (the "Newco 2 Special Shares"). The Newco 2 Special Share shall be redeemable and retractable for an amount (the "Newco 2 Special Share Redemption Amount") equal to the FMV of the consideration received by Newco 2 upon the issuance of such share. Each holder of a Newco 2 Special Share will entitle its holder to receive on the dissolution or winding-up of Newco 2 a distribution of the net assets of Newco 2 in an amount equal to the Newco 2 Special Share Redemption Amount in priority to any distribution to be made to holders of the Newco 2 Common Shares. No dividends or other distributions will be paid on any shares ranking junior to the Newco 2 Special Shares if the effect of such dividend or other distribution would be to reduce the net realizable value of the assets of Newco 2 to an amount less than the aggregate of Newco 2 Special Share Redemption Amounts.

For the purposes of subsection 191(4), the terms or conditions of the Newco 1 Special Shares will specify an amount in respect of each such share, to be designated by a resolution of the directors at the time of their issue, for which the share is to be redeemed, acquired or cancelled. The amount specified in respect of each such share, at the time of the issuance, will be expressed as a dollar amount, will not be determined by a formula or subject to change thereafter and will not exceed the FMV of the consideration for which the share will be issued.

No shares will be issued by Newco 2 upon incorporation.

10. As part of Newco 1's organization, Holdco 1 will transfer all of its Dco Common Shares to Newco 1. As the sole consideration, Newco 1 will issue XXXXXXXXXX Newco 1 Common Shares to Holdco 1.

As a result of this transfer, Newco 1 will be entitled to more than 10% of the voting rights under all circumstances in respect of the issued share capital of Dco and the Dco Common Shares will represent more than 10% of the FMV of all the issued share capital of Dco such that Dco will be connected with Newco 1 by virtue of paragraph 186(4)(b).

11. In respect of the transfer described in paragraph 10 above, Holdco 1 and Newco 1 will elect, jointly and in prescribed form and within the time limits referred to in subsection 85(6), to have the rules in subsection 85(1) apply to the transfer of the XXXXXXXXXX Dco Common Shares to Newco 1. The Agreed Amount specified in the election will be equal to the ACB to Holdco 1 of the transferred shares immediately before the transfer, which amount will not exceed the FMV of such shares.

Pursuant to the CBCA, the amount that will be added to the stated capital maintained in respect of the Newco 1 Common Shares as a result of the acquisition of the Dco Common Shares by Newco 1 will be equal to the aggregate stated capital, immediately prior thereto, of such XXXXXXXXXX Dco Common Shares so transferred by Holdco 1.

12. As part of Newco 2's organization, Holdco 2 will transfer all of its Dco Common Shares to Newco . As the sole consideration, Newco 2 will issue XXXXXXXXXX Newco 2 Common Shares to Holdco 2.

As a result of this transfer, Newco 2 will be entitled to more than 10% of the voting rights under all circumstances in respect of the issued share capital of Dco and the Dco Common Shares will represent more than 10% of the FMV of all the issued share capital of Dco such that Dco will be connected with Newco 2 by virtue of paragraph 186(4)(b).

13. In respect of the transfer described in paragraph 12 above, Holdco 2 and Newco 2 will elect, jointly and in prescribed form and within the time limits referred to in subsection 85(6), to have the rules in subsection 85(1) apply to the transfer of the XXXXXXXXXX Dco Common Shares to Newco 2. The Agreed Amount specified in the election will be equal to the ACB to Holdco 2 of the transferred shares immediately before the transfer, which amount will not exceed the FMV of such shares.

Pursuant to the CBCA, the amount that will be added to the stated capital maintained in respect of Newco 2 Common Shares as a result of the acquisition of the XXXXXXXXXX Dco Common Shares by Newco 2 will be equal to the aggregate stated capital, immediately prior thereto, of such XXXXXXXXXX Dco Common Shares so transferred by Holdco 2.

14. Immediately before the transfers described in paragraph 17 below the property of Dco will be classified into three types of property for the purposes of paragraph 55(3)(b):

(i) cash or near cash property, comprising all of the current assets of Dco, including any cash, short-term deposits and similar short-term investments, marketable securities (other than those held as portfolio investments), accounts receivable and prepaid expenses;

(ii) investment property, comprising all of the assets of Dco, other than any 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, Dco's XXXXXXXXXX will constitute investment property; and

(iii) business property, comprising all of the assets of Dco, other than any cash or near cash property, any income from which would be income from a business (other than a Specified Investment Business).

Dco will not have any business property at the time of the transfers described at paragraph 17 below.

15. In determining the net FMV of each type of property immediately before the transfers described in paragraph 17 below, the liabilities of Dco will be allocated to, and be deducted in the calculation of, the net FMV of each such type of property of Dco in the following manner:

(i) current liabilities of Dco (including the current portion of long-term debt) will be allocated to cash or near cash property (including any cash, accounts receivable and prepaid expenses, if any) of Dco in the proportion that the FMV of each such property is of the FMV of all cash or near cash property of Dco. The allocation of current liabilities as described herein will not exceed the aggregate FMV of all cash or near cash property of Dco;

(ii) liabilities of Dco, other than current liabilities, that relate to a particular property, will then be allocated to the particular property (and effectively to the type to which the particular property belongs) to the extent of its FMV. Liabilities that pertain to a type of property, but not to a particular property, will be allocated to that type of property, but not in excess of the net FMV of such type of property after the allocation of liabilities to a particular property, as described herein; and
(iii) if any liabilities (hereinafter referred to as "Excess Unallocated Liabilities") remain after the allocations described in steps (i) and (ii) are made, such Excess Unallocated Liabilities (including any excess current liabilities, if any), will then be allocated to the cash or near cash property and investment property of Dco based on the relative net FMV of each type of property prior to the allocation of such Excess Unallocated Liabilities.

16. For greater certainty, for the purposes of the classification of the types of property, the determination of the net FMV of each type of property and the Distribution:

(i) any tax accounts, such as balances of any capital losses, non-capital losses, investment tax credits of Dco, Pre-1972 CSOH, Capital Dividend Account or RDTOH of DCO, will not be considered to be a property or liability, as the case may be;

(ii) no amount will be considered to be a liability unless it represents a true legal liability which is capable of quantification; and

(iii) the amount of any deferred income taxes in the financial statements will not be considered a liability.

17. Dco will then transfer all of its property to Newco 1 and Newco 2 by transferring a portion of its cash or near cash property and investment property (the "Butterflied Assets"), such that the net FMV of each type of property so transferred to Newco 1 and Newco 2 (after allocating and assuming the liabilities of Dco, in the manner described in paragraph 15 above) will be equal to that proportion of the net FMV of all property of Dco of that type determined immediately before such transfer that:

(i) the aggregate FMV, immediately before the transfer, of all of the shares of the capital stock of Dco owned by Newco 1 or Newco 2, as the case may be;
is of

(ii) the aggregate FMV, immediately before the transfer, of all of the issued and outstanding shares of the capital stock of Dco.

As consideration for the Butterflied Assets so transferred, Newco 1 and Newco 2 will each assume a portion of the liabilities of Dco, and Newco 1 and Newco 2 will issue to Dco XXXXXXXXXX Newco 1 Special Shares and XXXXXXXXXX Newco 2 Special Shares, respectively, having a FMV and an aggregate redemption and retraction amount equal to the net FMV of the Butterflied Assets received by Newco 1 and Newco 2, respectively, which is the amount by which the FMV of the property transferred to Newco 1 and Newco 2 exceeds the liabilities assumed by Newco 1 and Newco 2, respectively.

For greater certainty, Dco will transfer to Newco 1 and Newco 2 a portion of its interest in XXXXXXXXXX, such that the net FMV of each portion so transferred will be equal to each transferee's respective share, as determined by the formula described in paragraph (i) and (ii) herein, of the net FMV of the interest owned by Dco immediately before such transfer.

The Newco 1 Special Shares and the Newco 2 Special Shares, as the case may be, issued to Dco will be entitled to more than 10% of the voting rights under all circumstances in respect of the issued share capital of Newco 1 or Newco 2, as the case may be, and will represent more than 10% of the FMV of all the issued share capital of Newco 1 or Newco 2, as the case may be, such that each of Newco 1 and Newco 2 will be connected with Dco by virtue of paragraph 186(4)(b).

18. In respect of the transfers of the Butterflied Assets described in paragraph 17 above, Dco and Newco 1 will respectively elect, jointly and in prescribed form and within the time limits referred to in subsection 85(6), to have the rules in subsection 85(1) apply to the transfer of each asset of Dco that is an Eligible Property to Newco 1 and Newco 2, respectively. The Agreed Amount specified in such elections in respect of each Eligible Property so transferred that has a FMV in excess of its Cost Amount to Dco will be an amount that is not less than:

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

(ii) the lesser of the amounts specified in subparagraph 85(1)(c.1)(i) or (ii) in the case of property described in paragraph 85(1)(c.1); and

(iii) the least of the amounts specified in subparagraphs 85(1)(d)(i) to 85(1)(d)(iii) in the case of eligible capital property, if any.

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 liabilities assumed as consideration for a property transferred pursuant to subsection 85(1) will not exceed the Agreed Amount in respect of that property. To the extent that any mortgage, liability secured by a transferred property exceeds the Agreed Amount in respect of that property, the excess mortgage liability will be assumed as consideration for the transfer of other assets. The liabilities allocated to a property other than a property transferred pursuant to subsection 85(1) will not exceed the FMV in respect of that property.

The subsection 85(1) election referred to herein will exclude any cash, accounts receivable and prepaid expenses.

19. Pursuant to the CBCA, the amount to be added, as a result of the acquisition of the Butterflied Assets by Newco 1, to the stated capital account maintained in respect of the Newco 1 Special Shares will not exceed the amount by which the aggregate of the Cost Amounts of the Butterflied Assets to Newco 1 exceed the amount of the liabilities assumed by Newco 1.

Pursuant to the CBCA, the amount to be added, as a result of the acquisition of the Butterflied Assets by Newco 2, to the stated capital account maintained in respect of the Newco 2 Special Shares will not exceed the amount by which the aggregate of the Cost Amounts of the Butterflied Assets to Newco 2 exceed the amount of the liabilities assumed by Newco 2.

20. Immediately after the transfer of property from Dco to Newco 1 as described in paragraph 17 above, and before the end of the day, Newco 1 will redeem its Newco 1 Special Shares held by Dco at its FMV, being an amount equal to the aggregate of the Newco 1 Special Share Redemption Amounts, and such redemption price will be paid in full by Newco 1 by the issuance of a non-interest bearing promissory note payable on demand (the "Newco 1 Note") having a principal amount and FMV equal to the aggregate of the Newco 1 Special Share Redemption Amounts. Dco will accept the Newco 1 Note as full payment of the aggregate Redemption Amounts of the Newco 1 Special Shares so redeemed.

At the end of the day on which the Newco 1 Special Shares are redeemed, Newco 1 will cause its first fiscal period to end. This transaction will occur one day prior to the transaction described in paragraph 21 below.

Immediately after the transfer of property from Dco to Newco 2 as described in paragraph 17 above, and before the end of the day, Newco 2 will redeem its Newco 2 Special Shares held by Dco at its FMV, being an amount equal to the aggregate of the Newco 2 Special Share Redemption Amounts, and such redemption price shall be paid in full by Newco 2 by the issuance of a non-interest bearing promissory note payable on demand (the "Newco 2 Note") having a principal amount and FMV equal to the aggregate of the Newco 2 Special Share Redemption Amounts. Dco will accept the Newco 2 Note as full payment of the aggregate Redemption Amounts of the Newco 2 Special Shares so redeemed.

At the end of the day on which the Newco 2 Special Shares are redeemed, Newco 2 will cause its first fiscal period to end. This transaction will occur one day prior to the transaction described in paragraph 21 below.

21. Following the transactions described in paragraph 20 above, Newco 1 and Newco 2 will, pursuant to the XXXXXXXXXX, resolve to wind up and dissolve Dco. No agreement or resolution relating to the winding-up of Dco or the distribution of its property will provide for the cancellation of any shares of Dco.

On the winding-up of Dco, Dco will distribute to Newco 1 and Newco 2, respectively, the Newco 1 Note and the Newco 2 Note. As a consequence of the distribution of the Newco 1 Note to Newco 1 and the Newco 2 Note to Newco 2, the said notes will be settled and extinguished.

Any Dividend Refund to which Dco becomes entitled as a result of the proposed transactions described herein will be distributed (under the terms of the winding-up) to each of Newco 1 and Newco 2 in the same proportions as described in paragraph 17 above. Following the distribution of such Dividend Refund, Articles of Dissolution will be filed with the appropriate Corporate Registry and upon receipt of the Certificate of Dissolution, Dco will be dissolved.

22. On or before the date of the distribution described in paragraph 21 above, Dco will elect pursuant to subsection 83(2), in prescribed manner and prescribed forms, that the full amount of any resulting dividend referred to in subparagraph 88(2)(b)(i) be deemed to be a capital dividend.

23. Pursuant to the CBCA, Newco 1 will be wound up into Holdco 1 and Newco 2 will be wound up into Holdco 2.

ADDITIONAL INFORMATION

24. The share provisions relating to the Newco 1 Special Shares and the Newco 2 Special Shares will provide that in the event that it is subsequently held or determined by a final judgment of any competent administrative tribunal or court or by a negotiated settlement with any revenue authority that the aggregate net FMV of any property that is relevant to the determination of the redemption price of such shares is different than the FMV assigned thereto, the redemption amounts of such shares shall be automatically adjusted retroactively, nunc pro tunc, to reflect the aggregate net FMV so held or determined.

25. Except as described in this letter, no liabilities have been or will be incurred by, and no assets have been or will be acquired by or disposed of by Dco in contemplation of or before the proposed transfers of property described in paragraph 17 above.

26. Except as described in this letter, no property transferred to any corporation in the course of the reorganization contemplated herein will, thereafter, be transferred directly or indirectly, as part of a Series of Transactions which includes the proposed transactions, to an unrelated person or partnership. Furthermore, the proposed transactions described herein will not result in the creation of a partnership for legal purposes with respect to Holdco 1 and Holdco 2's XXXXXXXXXX or any other Butterflied Assets.

27. Except as described in this letter, none of the parties is contemplating an acquisition of control of any of the corporations referred to above.

28. None of the shares of Dco or Newco 1 or Newco 2 has been, or will be, at any time during the implementation of the proposed transactions described herein:

(i) the subject of any undertaking that is referred to in subsection 112(2.2) as a Guarantee Agreement;

(ii) a share that is issued or acquired as part of a transaction or event or a Series of Transactions or event of the type described in subsection 112(2.5); or

(iii) the subject of a Dividend Rental Arrangement.

29. Neither Dco, Newco 1 nor Newco 2 is, or will be at the time of the proposed transactions described herein, a "specified financial institution" within the meaning of subsection 248(1).

30. The federal business number of the parties referred to herein and the location of the tax services office and taxation centre where their returns are filed are as follows:

XXXXXXXXXX.

PURPOSE OF THE PROPOSED TRANSACTIONS

31. The purpose of the proposed transactions is for the shareholders to hold their interest in the assets of DCO directly, thereby allowing them to independently organize their affairs for estate planning purposes.

RULINGS

Provided that the preceding statements constitute a complete and accurate disclosure of all relevant facts, proposed transactions and the purpose of the proposed transactions, and provided that the proposed transactions are completed in the manner described above, we confirm the following:

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

(a) the transfer of the Dco Common Shares held by each of Holdco 1 and Holdco 2 to Newco 1 an Newco 2, respectively, as described in paragraphs 10 to 13 above; and

(b) the transfer of the properties of Dco to Newco 1 and Newco 2, as described in paragraph 17 above,

such that the Agreed Amounts in respect of each transfer of Eligible Property will be deemed to be the transferor's proceeds of disposition and the transferee's cost thereof pursuant to paragraph 85(1)(a). For greater certainty, paragraph 85(1)(e.2) will not apply to the transfers referred to herein.

For the purpose of determining the Agreed Amount of the depreciable property of a prescribed class, the reference to "... the undepreciated capital cost to the taxpayer of all property of that class immediately before the disposition..." found in subparagraph 85(1)(e)(i) shall be interpreted to mean the portion of the undepreciated capital cost to the taxpayer of all property of that class that the capital cost to the taxpayer of the property so transferred immediately before the disposition is of the capital cost to the taxpayer of all property of that class immediately before the disposition.

B. The provisions of subsection 85(2.1) will not apply to reduce the PUC of the Newco 1 Special Shares and the Newco 2 Special Shares issued to Dco as described in paragraph 17 above.

C. As a result of the redemption by Newco 1 of the Newco 1 Special Shares and the redemption by Newco 2 of the Newco 2 Special Shares, as described in paragraph 20 above, and as a result of the distributions by Dco in the course of its winding-up as described in paragraph 21 above:

(a) (i) by virtue of paragraphs 84(3)(a) and 84(3)(b), Newco 1 will be deemed to have paid, and Dco will be deemed to have received, a Taxable Dividend equal to the amount by which the amount paid to redeem the Newco 1 Special Shares exceeds the PUC thereof, immediately before such redemption;

(ii) by virtue of paragraphs 84(3)(a) and 84(3)(b), Newco 2 will be deemed to have paid, and Dco will be deemed to have received, a Taxable Dividend equal to the amount by which the amount paid to redeem the Newco 2 Special Shares exceeds the PUC thereof, immediately before such redemption;

(iii) pursuant to paragraph 88(2)(b) and subsection 84(2), but subject to (iv), (v) and (vi) below, Dco will be deemed to have paid, and each of Newco 1 and Newco 2 will be deemed to have received, a dividend (the "Winding-Up Dividend") on the Dco Common Shares equal to the proportion of the amount by which the amount of the funds and property distributed by Dco to each of Newco 1 and Newco 2 in respect of the Dco Common Shares on the winding-up exceeds the amount by which the PUC of the Dco Common Shares is reduced as a result of the distribution, that the number of Dco Common Shares held by Newco 1 or Newco 2, as the case may be, is of the number of Dco Common Shares outstanding immediately before that time;

(iv) pursuant to subparagraph 88(2)(b)(i), such portion of the Winding-up Dividend referred to in (iii) as does not exceed Dco Capital Dividend Account determined immediately before the payment of the Winding-up Dividend, will be deemed, for the purposes of subsection 83(2) election referred to in paragraph 22 above, to be the full amount of a separate dividend;

(v) pursuant to subparagraph 88(2)(b)(ii), the portion of the Winding-up Dividend that is equal to the lesser of :

(A) Dco's Pre-1972 CSOH as determined immediately before the payment of the Winding-up Dividend and,

(B) the amount by which the Winding-up Dividend exceeds the portion thereof in respect of which Dco will elect under subsection 83(2) will be deemed not to be a dividend; and

(vi) pursuant to subparagraph 88(2)(b)(iii), the Winding-up Dividend, to the extent that it exceeds the total of the portion referred to in (iv) above that is deemed to be a separate dividend and the portion referred to in (v) above that is deemed not to be a dividend, will be deemed to be a separate dividend that is a Taxable Dividend.

(b) the dividends deemed to be received by Dco, Newco 1 and Newco 2 as a result of the redemptions and the winding-up referred to in Ruling C(a) above will be included in each corporation's income pursuant to paragraph 12(1)(j), and will be deductible by each corporation in computing its taxable income pursuant to subsection 112(1). For greater certainty, the provisions of subsections 112(2.1), 112(2.2), 112(2.3), and 112(2.4) will not apply to deny the application of the subsection 112(1) deduction in respect of such dividends;

(c) the amount of a deemed dividend referred to in Ruling C(a) above that will not be deemed by subparagraph 88(2)(b)(ii) not to be a dividend will be excluded from the proceeds of disposition of the shares by virtue of paragraph (j) of the definition of "proceeds of disposition" in section 54, and any loss arising from the disposition of those shares will be reduced by the amount of such dividends pursuant to subsection 112(3);

(d) (i) the dividends deemed to be received by Dco, Newco 1 and Newco 2 and referred to in Ruling C(a) above will not be subject to tax under Part IV.1 on the basis that such dividends will be excepted dividends by virtue of paragraph (c) of the definition of "excepted dividend" in section 187.1;

(ii) the dividends deemed to be received by Newco 1 and Newco 2 and referred to in Ruling C(a) above will not be subject to tax under Part VI.1 on the basis that each such dividend will be an "excluded dividend" by virtue of paragraph (a) of the definition of "excluded dividend" in subsection 191(1); and

(iii) the dividends deemed to be received by Dco and referred to in Ruling C(a) above will not be subject to tax under Part VI.1 on the basis that each such dividend will be deemed to be an "excluded dividend" by virtue of paragraph 191(4)(d).

(e) by virtue of paragraph 186(4)(b), Dco will be connected with each of Newco 1 and Newco 2, and Newco 1 and Newco 2 will each be connected with Dco. Consequently,

(i) provided that each of Newco 1 and Newco 2 is not entitled to a Dividend Refund in respect of its taxation year in which it is deemed to pay the dividend referred to in Ruling C(a) above, Dco will not be subject to Part IV tax under subsection 186(1) in respect of such dividend; and

(ii) each of Newco 1 and Newco 2 will, pursuant to paragraph 186(1)(b), be subject to Part IV tax in an amount equal to that portion of the Dividend Refund to which Dco will become entitled for its taxation year in which the dividends referred to in Ruling C(a)(vi) above, are paid, that the amount of each such dividend received by Newco 1 and Newco 2, as the case may be, is of the aggregate of all Taxable Dividends paid by Dco in its taxation year in which such dividends are paid.

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 in the ruling C and, for greater certainty, subsection 55(3.1) will not apply to deny the exemption under paragraph 55(3)(b).

E. The extinguishment of the Newco 1 Note and the Newco 2 Note as described in paragraph 21 above will not give rise to a "forgiven amount" within the meaning of subsections 80(1) and 80.01(1).

F. The provisions of subsection 88(1) will apply to the windings-up of Newco 1 and Newco 2 into Holdco 1 and Holdco 2, such that :

(i) each property of Newco 1 and Newco 2 distributed to Holdco 1 or Holdco 2, as the case may be, on the winding-up will be deemed by paragraph 88(1)(a) to have been disposed of by Newco 1 and Newco 2 for proceeds of disposition determined under that paragraph;

(ii) the shares in the capital stock of Newco 1 and Newco 2 held by Holdco 1 or Holdco 2, 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

(iii) each property of Newco 1 and Newco 2 distributed to Holdco 1 or Holdco 2, as the case may be, on the winding-up will be deemed, by subparagraph 88(1)(c)(ii) to have been acquired by Holdco 1 or Holdco 2 for an amount equal to the amount deemed by paragraph 88(1)(a) to be, as the case may be, Newco1's or Newco 2's proceeds of disposition of the property and no more.

G. Provided that the condition specified in paragraph 1100(2.2)(f) or (g) of the Regulations is satisfied, the relevant provisions of paragraph 1100(2.2)(h) to (k) of the Regulations shall apply in respect of the acquisition of depreciable property of a prescribed class to be transferred by Dco to Newco 1 or Newco 2, as the case may be, as described in paragraph 17, and to the consequential acquisition of such depreciable property by each of Holdco 1 and Holdco 2 as a result of the winding-up of Newco 1 and Newco 2, as described in paragraph 23 above.

H. Pursuant to subsection 1101(1ad) of the Regulations, each "rental property" (within the meaning given in subsection 1100(14) of the Regulations) which is acquired by Newco 1 or Newco 2, as the case may be, and which would otherwise be "rental property" of a separate class prescribed under subsection 1101(1ac) of the Regulations, will be deemed not to be property of a separate prescribed class of Newco 1 or Newco 2, as the case may be, provided that such property was a "rental property" included in a prescribed class of Dco other than a separate class prescribed under subsection 1101(1ac) of the Regulations.

I. Pursuant to subsection 1101(1ad) of the Regulations, each "rental property" (within the meaning given in subsection 1100(14) of the Regulations) which is acquired by Holdco 1 or Holdco 2, as the case may be, and which would otherwise be "rental property" of a separate class prescribed under subsection 1101(1ac) of the Regulations, will be deemed not to be property of a separate prescribed class of Holdco 1 or Holdco 2, as the case may be, provided that such property was a "rental property" included in a prescribed class of Newco 1 or Newco 2, as the case may be, other than a separate class prescribed under subsection 1101(1ac) of the Regulations.

J. The provisions of subsections 15(1), 56(2), 69(4) and 246(1) will not be applied as a result of the proposed transactions described herein, in and by themselves.

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

These rulings are given subject to the limitations and qualifications set forth in Information Circular 70-6R5 issued on May 17, 2002, and are binding on the CCRA 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 CCRA has agreed to or reviewed:

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

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

Price adjustment clause

You have informed us, as stated in paragraph 24 above, that there is a price adjustment clause to adjust the redemption amounts of the Newco 1 Special Shares and the Newco 2 Special Shares if it is determined that the FMV of the consideration for which such shares were issued is other than what it is determined to be at the time of their issue. Nothing in this letter should be construed as confirmation, express or implied, that, for the purpose of any of the rulings given above, any adjustment to the FMV of the properties transferred and the redemption amount of the shares issued as consideration, will be effective retroactively to the time of the transfer and issuance of shares. In addition, any such adjustment could affect the ruling given in Ruling D above. 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.

An invoice for our fees in connection with this ruling request will be forwarded to you under separate cover.

Yours truly,

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