2002 Ruling 2002-0161323 - 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 2002-016132

XXXXXXXXXX, 2002

Dear XXXXXXXXXX:

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 taxpayer. 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 request:

(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 income 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.

In addition, you have advised that the proposed transactions would not have any impact on the ability of the taxpayers identified in the ruling to satisfy any outstanding tax liabilities.

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, and unless otherwise stated, every reference herein to a section, subsection, paragraph, subparagraph or Part is a reference to the relevant provision of the Act;

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

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

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

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

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

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

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

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

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

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

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

(n) "prepaid expenses" means rights arising from 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) "Regulations" mean the Income Tax Regulations (Canada);

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

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

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

(w) "SFI" means "specified financial institution" as that expression is defined in subsection 248(1);

(x) "SIB" means "specified investment business" as that expression is defined in subsection 125(7) and subsection 248(1);

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

(z) "stated capital" has the meaning assigned by 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); and

(cc) "undepreciated capital cost" has the meaning assigned by subsection 13(21).

In addition, the following persons will be referred to as follows:

(a) "DC" means XXXXXXXXXX;

(b) "Sib1" means XXXXXXXXXX;

(c) "Sib2" means XXXXXXXXXX;

(d) "Subco1" means the taxable Canadian corporation to be incorporated by DC, as described in paragraph 9 below;

(e) "Subco2" means the taxable Canadian corporation to be incorporated by TC2, as described in paragraph 13 below;

(f) "TC1" means the taxable Canadian corporation to be incorporated by Sib1, as described in paragraph 11 below; and

(g) "TC2" means XXXXXXXXXX.

Our understanding of the facts, the proposed transactions and purpose of the proposed transactions is as set forth below:

FACTS

1. Sib1 and Sib2 are adult siblings who are residents of Canada for the purposes of the Act. The personal information for each of Sib1 and Sib2 is as follows:

Address			SIN		TSO		Taxation Centre

Sib1 XXXXXXXXXX

Sib2 XXXXXXXXXX

2. TC2 is a corporation incorporated under the provisions of the BCA. TC2 is a taxable Canadian corporation and a CCPC. TC2 carries on a SIB and its principal assets consist of shares of DC and a portfolio of marketable securities. The head office of TC2 is located at XXXXXXXXXX and it deals with the XXXXXXXXXX tax services office and files its tax returns with the XXXXXXXXXX taxation centre. TC2's business number is XXXXXXXXXX and its fiscal year-end is XXXXXXXXXX.

3. TC2's authorized share capital consists of an unlimited number of:

(a) voting Class "A" (common) shares convertible into Class "D" shares;

(b) voting Class "B" (common) shares;

(c) voting Class "C" non-participating shares;

(d) XXXXXXXXXX% per month non-cumulative, non-voting, non-participating Class "D" shares redeemable at the option of the corporation or the shareholder for the fair market value of the consideration received by the corporation at the time of issuing the share;

(e) XXXXXXXXXX% per month non-cumulative, non-voting, non-participating Class "E" shares redeemable at the option of the corporation or the shareholder for the fair market value of the consideration received by the corporation at the time of issuing the share;

(f) XXXXXXXXXX% per month non-cumulative, non-voting, non-participating Class "F" shares redeemable at the option of the corporation or the shareholder for the fair market value of the consideration received by the corporation at the time of issuing the share; and

(g) XXXXXXXXXX% per month non-cumulative, voting, non-participating Class "G" shares redeemable at the option of the corporation or the shareholder for the fair market value of the consideration received by the corporation at the time of issuing the share.

4. The issued and outstanding shares in the capital of TC2 are as follows:

(a) XXXXXXXXXX Class "A" common shares having an ACB, stated capital and PUC of $XXXXXXXXXX;

(b) XXXXXXXXXX Class "E" shares having an ACB, stated capital and PUC of $XXXXXXXXXX; and

(c) XXXXXXXXXX Class "F" shares having an ACB, stated capital and PUC of $XXXXXXXXXX.

Sib2 owns all of the issued and outstanding shares of TC2.

5. DC is a corporation incorporated under the provisions of the BCA. DC is a taxable Canadian corporation and a CCPC. The head office of DC is located at XXXXXXXXXX and it deals with the XXXXXXXXXX tax services office and files its tax returns with the XXXXXXXXXX taxation centre. DC's business number is XXXXXXXXXX and its fiscal year-end is XXXXXXXXXX.

DC carries on a SIB and its principal assets consist of marketable securities and a rental property situated in XXXXXXXXXX. As at XXXXXXXXXX, DC's marketable securities consisted of mutual funds, corporate bonds and short-term notes and shares of public corporations. The rental property consists of land, which is held as capital property, and a building, which is a depreciable property. DC's liabilities consist of trade payables.

As at XXXXXXXXXX, DC's RDTOH amounted to approximately $XXXXXXXXXX and CDA amounted to approximately $XXXXXXXXXX (and as of XXXXXXXXXX, DC's CDA has increased by approximately $XXXXXXXXXX. DC does not have any pre-1972 capital surplus on hand, as that expression is defined in subsection 88(2.1).

6. DC's authorized share capital consists of an unlimited number of:

(a) common shares;

(b) XXXXXXXXXX% per month non-cumulative, non-voting, non-participating Class "A" shares redeemable at the option of the corporation or the shareholder for the fair market value of the consideration received by the corporation at the time of issuing the share;

(c) XXXXXXXXXX% per month non-cumulative, non-voting, non-participating Class "B" shares redeemable at the option of the corporation or the shareholder for the fair market value of the consideration received by the corporation at the time of issuing the share;

(d) XXXXXXXXXX% per month non-cumulative, non-voting, non-participating Class "C" shares redeemable at the option of the corporation or the shareholder for the fair market value of the consideration received by the corporation at the time of issuing the share;

(e) XXXXXXXXXX% per month non-cumulative, non-voting, non-participating Class "D" shares redeemable at the option of the corporation or the shareholder for the fair market value of the consideration received by the corporation at the time of issuing the share;

(f) XXXXXXXXXX% per month non-cumulative, non-voting, non-participating Class "E" shares redeemable at the option of the corporation or the shareholder for the fair market value of the consideration received by the corporation at the time of issuing the share; and

(g) XXXXXXXXXX% per month non-cumulative, voting, non-participating Class "F" shares redeemable at the option of the corporation or the shareholder for the fair market value of the consideration received by the corporation at the time of issuing the share.

7. The issued and outstanding shares in the capital of DC are as follows:

(a) XXXXXXXXXX common shares having an ACB, stated capital and PUC of $XXXXXXXXXX; and

(b) XXXXXXXXXX Class "F" shares having an ACB, stated capital and PUC of $XXXXXXXXXX, each of which is redeemable and retractable for $XXXXXXXXXX per share.

Sib1 and TC2 each own 50% of the issued and outstanding shares of DC and each holds their respective shares as capital property.

PROPOSED TRANSACTIONS

8. DC will apply to the CCRA change its fiscal year-end from XXXXXXXXXX to XXXXXXXXXX.

9. DC will incorporate Subco1 under the provisions of the BCA. Subco1's authorized share capital will include at least one class of voting common shares and Class "A" shares which will be non-voting, non-participating preferred shares bearing a discretionary non-cumulative dividend of up to XXXXXXXXXX % per month and redeemable at the option of the corporation or shareholder for an amount equal to the fair market value of the amount received by the corporation as consideration for the share.

On incorporation, DC will subscribe for XXXXXXXXXX common shares of Subco1 for $XXXXXXXXXX per share.

10. Sib1 and Sib2 wish to maintain the rental property in one corporate vehicle subsequent to the proposed transactions. Accordingly, DC will transfer the rental property that it owns to Subco1 for a purchase price equal to the aggregate fair market value of the rental property. Subco1 will satisfy the purchase price by issuing to DC: (i) a non-interest-bearing demand promissory note equal to the total of the undepreciated capital cost of the building, less $XXXXXXXXXX, and the ACB of the land, less $XXXXXXXXXX, and (ii) XXXXXXXXXX Class "A" shares of Subco1 having a value equal to the excess of the fair market value of the rental property over the promissory note issued in (i) above.

The directors of Subco1 will, in accordance with the provisions of the BCA, limit the amount to be added to the stated capital of the Class "A" shares issued to an amount equal to the aggregate agreed amounts of the rental property transferred, less the face amount of the promissory note issued by Subco1.

DC and Subco1 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 the rental property as described in this paragraph. The agreed amount in respect of the rental property transferred will be as follows:

(a) in the case of capital property (other than depreciable property of a prescribed class) an amount equal to the lesser of the amounts described in subparagraphs 85(1)(c.1)(i) and (ii); and

(b) in the case of depreciable property of a prescribed class, an amount equal to the least of the amounts described in subparagraphs 85(1)(e)(i), (ii) and (iii).

In each case, the agreed amount will not exceed the fair market value of the respective property or 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 the property.

11. Sib1 will incorporate TC1 under the provisions of the BCA. TC1's authorized share capital will include at least one class of voting common shares and Class "A", Class "B" and Class "C" shares, each of which will be non-voting, non-participating preferred shares bearing a discretionary non-cumulative dividend of up to XXXXXXXXXX% per month and redeemable at the option of the corporation or shareholder for an amount equal to the fair market value of the amount received by the corporation as consideration for the share. TC1's first year-end will be XXXXXXXXXX.

On incorporation, Sib1 will subscribe for XXXXXXXXXX common shares of TC1 for $XXXXXXXXXX per share.

12. Sib1 will transfer to TC1:

(a) XXXXXXXXXX common shares of DC and TC1 will issue, as consideration, XXXXXXXXXX Class "A" shares of TC1 having a value equal to the fair market value of the XXXXXXXXXX common shares of DC so transferred; and

(b) XXXXXXXXXX Class "F" shares of DC and TC1 will issue, as consideration, XXXXXXXXXX Class "B" shares of TC1 having a value equal to the fair market value of the XXXXXXXXXX Class "F" shares of DC so transferred.

The directors of TC1, in accordance with the provisions of the BCA, will limit the amount to be added to the stated capital of the Class "A" shares and Class "B" shares so issued to the PUC of the DC shares so transferred, or $XXXXXXXXXX and $XXXXXXXXXX, respectively.

Sib1 and TC1 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 the DC shares described in this paragraph. The agreed amount in respect of each eligible property will be an amount equal to the lesser of the amounts described in subparagraphs 85(1)(c.1)(i) and (ii). The agreed amount will not exceed the fair market value of the respective property.

13. TC2 will incorporate Subco2 under the provisions of the BCA. Subco2's authorized share capital will include at least one class of voting common shares and Class "A", Class "B" and Class "C" shares, each of which will be non-voting, non-participating preferred shares bearing a discretionary non-cumulative dividend of up to XXXXXXXXXX% per month and redeemable at the option of the corporation or shareholder for an amount equal to the fair market value of the amount received by the corporation as consideration for the share. Subco2's first year-end will be XXXXXXXXXX.

On incorporation, TC2 will subscribe for XXXXXXXXXX common shares of Subco2 for $XXXXXXXXXX per share.

14. Following the transfers of property described in paragraphs 10 and 12 above, and immediately before the transfers of property described in paragraphs 15 and 16 below, DC's property will be classified into two types of property for the purposes of the definition of "distribution" in subsection 55(1) and paragraph 55(3)(b), as follows:

(a) cash or near cash property, comprising all of the current assets of DC, including any cash, term deposits, marketable securities, accounts receivable, prepaid expenses and loans without any specific terms of repayment (including the promissory note issued by Subco1, as described in paragraph 10 above); and

(b) investment property, comprising 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 SIB.

For greater certainty, DC does not expect to have any business property at the time of the proposed transactions and any tax accounts such as the balance of any RDTOH or CDA of DC will not be considered property for purposes of the proposed transactions described herein. In addition, DC will not exercise significant influence over any corporations other than Subco1 at the time of the proposed transactions.

15. On XXXXXXXXXX, DC will sell one-half of its cash and near cash property and one-half of its investment property to each of TC1 and Subco2 for a purchase price equal to the aggregate fair market value of the respective property so transferred. For greater certainty, the transfers described in this paragraph will be made on a gross market value basis and each of TC1 and Subco2 will receive 50% of all the issued and outstanding shares of Subco1 owned by DC immediately before the transfers.

16. The sale of assets described in paragraph 15 above will be divided into two lots. The first lot will consist of all the assets of DC with unrealized capital gains (the "Gain Properties"). The second lot will consist of all the assets of DC with unrealized capital losses (the "Loss Properties). As consideration for:

(a) the Loss Properties, each of TC1 and Subco2 will: (i) assume one-half of DC's payables, and (ii) issue a non-interest-bearing demand promissory note equal to the excess of the fair market value of the Loss Properties over the liabilities assumed in (a)(i); and

(b) the Gain Properties, each of TC1 and Subco2 will issue: (i) a non-interest-bearing demand promissory note equal to the aggregate ACB of the Gain Properties, less $XXXXXXXXXX , the losses accrued and realized on the disposition of the Loss Properties and 1/2 of any net capital losses carried forward from earlier fiscal years, and (ii) Class "C" shares having a value equal to the excess of the fair market value of the Gain Properties over the promissory note issued in (b)(i).

The two promissory notes issued by TC1 will be referred to as the "TC1 Consideration Notes" and the two promissory notes issued by Subco2 will be referred to as the "Subco2 Consideration Notes".

The directors of Subco2 will, in accordance with the provisions of the BCA, limit the amount to be added to the stated capital of the Class "C" shares issued to an amount equal to the aggregate agreed amounts of the Gain Properties transferred, less the face amount of the promissory note issued by Subco2, as described in paragraph (b)(i) above.

DC and each of TC1 and Subco2 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 described in paragraph (b) above. The agreed amount in respect of each eligible property will not be less than an amount equal to the lesser of the amounts described in subparagraphs 85(1)(c.1)(i) and (ii). The agreed amount will not exceed the fair market value 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 fair market value of such property.

17. On XXXXXXXXXX, immediately after the sale contemplated in paragraphs 15 and 16 above, TC1 will redeem the Class "C" shares owned by DC at their aggregate redemption amount and fair market value. TC1 will pay the redemption amount by issuing to DC a non-interest-bearing demand promissory note (the "TC1 Redemption Note") having a principal amount and fair market value equal to the redemption amount of the Class "C" shares so redeemed.

18. On XXXXXXXXXX, immediately after the sale contemplated in paragraphs 15 and 16 above, Subco2 will redeem the Class "C" shares owned by DC at their aggregate redemption amount and fair market value. Subco2 will pay the redemption amount by issuing to DC a non-interest-bearing demand promissory note (the "Subco2 Redemption Note") having a principal amount and fair market value equal to the redemption amount of the Class "C" shares so redeemed.

19. On XXXXXXXXXX, TC1 and TC2 will, by special resolution, resolve to liquidate and dissolve DC under the applicable provisions of the BCA. In connection with the winding-up of DC, DC will distribute the TC1 Consideration Notes and the TC1 Redemption Note to TC1 and the Subco2 Consideration Notes and the Subco2 Redemption Note to TC2. As a result of the assignment and distribution of the TC1 Consideration Notes and the TC1 Redemption Note to TC1, the obligations under each such promissory note will be cancelled. In due course, DC will file tax returns and articles of dissolution.

20. Prior to the distribution of the promissory notes, as described in paragraph 19 above, DC will elect, pursuant to subsection 83(2), in prescribed manner and prescribed form, that the full amount of any resulting dividend referred to in subparagraph 88(2)(b)(i) be deemed to be a capital dividend.

21. Subsequent to XXXXXXXXXX, TC2 will, by special resolution, resolve to liquidate and dissolve Subco2 under the applicable provisions of the BCA. In connection with the winding-up of Subco2, all of the property of Subco2 will be distributed to TC2 and TC2 will assume all of the liabilities of Subco2. In due course, Subco2 will file tax returns and articles of dissolution.

TC2 will elect, in prescribed form and within the time referred to in paragraph 80.01(4)(c), to have the rules in subsection 80.01(4) apply with respect to the settlement of the Subco2 Consideration Notes and the Subco2 Redemption Note as a result of the winding-up of Subco2, which were distributed to TC2 on the winding-up of DC as described in paragraph 19 above.

ADDITIONAL INFORMATION

22. No property has or will become property of, and no liabilities have been or will be incurred by, DC, TC1, TC2, Subco1 or Subco2 in contemplation of and before the proposed transactions, except as described herein.

23. None of the parties are contemplating a disposition of any of the shares of DC, TC1, TC2, Subco1 or Subco2 other than as described herein.

24. From time to time, DC buys and sells marketable securities, either on its own initiative or upon the advice of its stockbrokers or investment advisors. The marketable securities held by DC, as described in paragraph 5 above, are capital assets. In the course of carrying out the proposed transactions, TC1 and TC2 will receive the assets of DC, including the marketable securities. TC1 and TC2 will hold and sell the marketable securities so received from DC in the course of carrying on their normal investment activities in the same manner that DC would have done had the proposed transactions not been executed. Due to the current volatility in the stock markets, it is not, however, possible to maintain that no more than XXXXXXXXXX% of the marketable securities will be sold.

25. The building owned by DC, as described in paragraph 5 above, is currently leased to XXXXXXXXXX. Within the next year, and after the implementation of the proposed transactions, the term of the leases will expire. When this occurs, it is possible that the building will be sold and the proceeds invested in marketable securities, however, no concrete plans have been made in this regard. In your view, the possible sale of the building will not be part of the series of transactions of events that includes the proposed transactions.

26. None of DC, TC1, TC2 or Subco2 is or will be at the time that the proposed transactions are implemented, a corporation described in any of paragraphs (a) to (f) of the definition of "financial intermediary corporation" in subsection 191(1), a restricted financial institution or a SFI.

27. There are not, and will not be at any time prior to the completion of the proposed transactions described herein, any agreements or undertakings which constitute or include a guarantee agreement in respect of any of the shares in the capitals of DC, TC1, TC2 or Subco2.

28. None of DC, TC1, TC2 or Subco2 has entered, or will enter, into a "dividend rental arrangement", as defined in subsection 248(1), in respect of any of the shares to be redeemed, or any shares of a corporation to be wound-up, as part of the proposed transactions described herein.

29. No share of the issued capital of any of DC, TC1, TC2 or Subco2 has been, or will be, issued or acquired as part of a series of transactions of the type described in subsection 112(2.5).

30. No significant transactions were completed by the taxpayers prior to the time of submission of the ruling request nor will any be undertaken after the completion of the proposed transactions, which will be part of the series of transactions that includes the proposed transactions.

PURPOSE OF THE PROPOSED TRANSACTIONS

Sib1 and Sib2 have developed different investment philosophies and would like to divide DC's assets on a proportional basis.

RULINGS

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

A. The provisions of subsection 85(1) will apply to the transfer:

(a) by DC of the rental property to Subco1, as described in paragraph 10 above;

(b) by Sib1 of the common and Class "F" shares of DC to TC1, as described in paragraph 12 above; and

(c) by DC of each property that is an eligible property to each of TC1 and Subco2, as described in paragraphs 15 and 16 above;

such that the agreed amount 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 under paragraph 85(1)(a). For greater certainty, paragraph 85(1)(e.2) will not apply to any of the foregoing transfers and the transfer described in paragraph (c) above is subject to the application of subsection 69(11).

B. Subsection 40(3.4) will not apply to deny the capital losses realized by DC on the disposition to TC1 and Subco2 of each of the Loss Properties that are capital properties as described in paragraphs 15 and 16 above.

C. As a result of the redemption by each of TC1 and Subco2 of the Class "C" shares held by DC, as described in paragraphs 17 and 18 above, and as a result of the distributions by DC in the course of its winding-up, as described in paragraph 19 above:

(a) by virtue of subsection 84(3), each of TC1 and Subco2 will be deemed to have paid, and DC will be deemed to have received, a dividend on the Class "C" shares equal to the amount, if any, by which the aggregate amount paid upon such redemption exceeds the aggregate PUC in respect of the Class "C" shares immediately before such redemption;

(b) pursuant to paragraph 88(2)(b) and subsection 84(2), but subject to paragraphs (b)(i) and (ii) below, DC will be deemed to have paid, and each of TC1 and TC2 will be deemed to have received, a dividend (the "winding-up dividend") on the common shares and the Class "F" shares of DC, as the case may be, equal to the proportion of the amount by which the aggregate fair market value of the property of DC distributed to each of TC1 and TC2 on the winding-up exceeds the amount by which the PUC of the common shares and the Class "F" 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 TC1 and TC2, as the case may be, is of the number of issued shares of such class outstanding immediately before the distribution and:

(i) by virtue of subparagraph 88(2)(b)(i), such portion of the winding-up dividend referred to in paragraph (b) above as does not exceed DC's CDA determined immediately before the payment of the winding-up dividend will be deemed, for the purposes of the subsection 83(2) election referred to in paragraph 20 above, to be the full amount of a separate dividend; and

(ii) by virtue of subparagraph 88(2)(b)(iii), the winding-up dividend, to the extent that it exceeds the portion thereof referred to in paragraph (b)(ii) above that is deemed to be a separate dividend, will be deemed to be a separate taxable dividend; and

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

(i) 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;

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

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

(iv) will not be subject to tax under Part IV, except as provided in paragraph 186(1)(b), as DC will be connected with each of TC1 and Subco2 and each of TC1 and TC2 will be connected with DC, by virtue of subsection 186(4);

(v) will not be subject to tax under Part IV.1 by virtue of paragraph (c) of the definition of "excepted dividend" in subsection 187.1(1); and

(vi) will not be subject to tax under Part VI.1 by virtue of paragraph (a) of the definition of "excluded dividend" in subsection 191(1) because DC will have a substantial interest in TC1 and Subco2 and each of TC1 and TC2 will have a substantial interest in DC.

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 described 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 cancellation of the TC1 Consideration Notes and the TC1 Redemption Note, as described in paragraph 19 above, will not give rise to a "forgiven amount" within the meaning of subsections 80(1) and 80.01(1).

F. With respect to the winding-up of Subco2 into TC2, as described in paragraph 21 above:

(a) the provisions of subsection 88(1) will apply;

(b) each property of Subco2 distributed to TC2 on the winding-up will be deemed by paragraph 88(1)(a) to have been disposed of by Subco2 for proceeds of disposition determined under that paragraph;

(c) the shares in the capital stock of Subco2 held by TC2 immediately before the winding-up will be deemed by paragraph 88(1)(b) to have been disposed of by TC2 for proceeds of disposition determined under that paragraph;

(d) each property of Subco2 distributed to TC2 on the winding-up will be deemed by paragraph 88(1)(c) to have been acquired by TC2 for an amount equal to the amount deemed by paragraph 88(1)(a) to be Subco2's proceeds of disposition of the property; and

(e) provided that TC2 elects in prescribed form and within the time referred to in paragraph 80.01(4)(c) to have the provisions of subsection 80.01(4) apply in respect of the winding-up of Subco2, subsection 80.01(4) will apply to deem any commercial obligation owing by Subco2 to TC2 immediately prior to the winding-up to have been settled (in the case of any obligation owing by the subsidiary to the parent, immediately before the time that is immediately before the winding-up) by payment of an amount equal to the principal amount of the obligation.

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

H. As a result of the proposed transactions described herein, 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 out 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.

COMMENTS

Nothing in this letter should be construed as implying that the CCRA 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, and more particularly, we are not confirming that a sale of the building referred to in paragraph 25 above will not occur as part of the same series of transactions or events as the proposed transactions.

Yours truly,

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