2003 Ruling 2002-0162973 - 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: This is a 55(3)(b) split-up butterfly of the assets of Holdco among the three adult children of the deceased. The major assets of Holdco consist of real estate and mortgages to the children.

Position: The split-up butterfly qualifies under paragraph 55(3)(b).

Reasons:

XXXXXXXXXX 2002-016297

XXXXXXXXXX, 2003

Dear XXXXXXXXXX:

Re: XXXXXXXXXX
Advance Income Tax Ruling

We are writing in response to your letter of XXXXXXXXXX wherein you requested an advance income tax ruling on behalf of the above-referenced taxpayer. We also acknowledge receipt of your facsimiles as well as the information provided in various telephone conversations.

Throughout this letter, the corporate and individual taxpayers will be referred to as follows:

XXXXXXXXXX . Holdco
XXXXXXXXXX A
XXXXXXXXXX Estate
XXXXXXXXXX P
XXXXXXXXXX R
XXXXXXXXXX T

The Tax Services Office of Holdco, Estate, P and R is XXXXXXXXXX and their tax returns are filed at the XXXXXXXXXX Taxation Centre. The Tax Services Office of T is XXXXXXXXXX and her tax returns are filed at the XXXXXXXXXX Taxation Centre. Holdco is resident in Canada for the purposes of the Act.

To the best of your knowledge and that of any of the Taxpayers, none of the issues involved in this ruling request is:

(i) involved in an earlier return of any of the Taxpayers or a related person;

(ii) being considered by a tax services office or taxation centre in connection with a previously filed tax return of any of the Taxpayers or a related person;

(iii) under objection by any of the Taxpayers or a related person;

(iv) before the courts; or

(v) the subject of a ruling previously issued by the Income Tax Rulings Directorate.

The taxpayers have represented that the transactions described herein will not affect their ability to pay any of their outstanding tax liabilities.

DEFINITIONS

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

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

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

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

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

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

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

(g) "Class "A" Common Shares" means Class "A" voting common shares of Holdco;

(h) "Class "B" Common Shares" means Class "B" non-voting common shares of Holdco;

(i) "Class "C" Preferred Shares" means Class "C" non-cumulative non-voting redeemable preferred shares of Holdco with a par value of $XXXXXXXXXX each;

(j) "Class "D" Preferred Shares" means Class "D" non-cumulative non-voting redeemable preferred shares of Holdco with a par value of $XXXXXXXXXX each;

(k) "Class "E" Preferred Shares" means Class "E" non-cumulative non-voting redeemable preferred shares of Holdco with a par value of $XXXXXXXXXX each;

(l) "Class "F" Preferred Shares" means Class "F" non-cumulative non-voting redeemable preferred shares of Holdco with a par value of $XXXXXXXXXX each;

(m) "common share" has the meaning assigned by subsection 248(1);

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

(o) "disposition" has the meaning assigned by subsection 248(1);

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

(q) "dividend refund" has the meaning assigned by paragraph 129(1)(a);

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

(s) "Estate" means the Estate of A;

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

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

(v) "Executors" means the executors of the Will, being P, R and T;

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

(x) "Holdco" refers to XXXXXXXXXX, a company formed on the amalgamation of Numco and Old Holdco as described in Paragraph 12 below;

(y) "Investment Lot" means a vacant lot located on XXXXXXXXXX;

(z) "Numco" refers to XXXXXXXXXX, a company incorporated on XXXXXXXXXX;

(a.1) "Old Holdco" refers to XXXXXXXXXX, a company incorporated on XXXXXXXXXX;

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

(c.1) "Paragraph" refers to a numbered paragraph in this letter;

(d.1) "prescribed" has the meaning assigned by subsection 248(1);

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

(f.1) "proceeds of disposition" has the meaning assigned by section 54;

(g.1) "property" has the meaning assigned by subsection 248(1);

(h.1) "Property 1" means XXXXXXXXXX;

(i.1) "Property 2" means XXXXXXXXXX;

(j.1) "Property 3" means XXXXXXXXXX;

(k.1) "R's Mortgage" means the interest-free loan with an outstanding principal amount of approximately $XXXXXXXXXX received by R from Old Holdco to enable R to acquire her principal residence;

(l.1) "refundable dividend tax on hand" ("RDTOH") has the meaning assigned by subsection 129(3);

(m.1) "series of transactions or events" includes the transactions or events referred to in subsection 248(10);

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

(o.1) "T's Mortgage" means the interest-free loan with an outstanding principal amount of approximately $XXXXXXXXXX received by T from Old Holdco to enable T to acquire her principal residence;

(p.1) "tax consequences" has the meaning assigned by subsection 245(1);

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

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

(s.1) "taxation year" has the meaning assigned by subsection 249(1);

(t.1) "Taxpayers" means P, R, T, Holdco and the Estate;

(u.1) "Term Loan" means the loan advanced by the XXXXXXXXXX to Old Holdco on or about XXXXXXXXXX and now owed by Holdco with an outstanding principal amount of approximately $XXXXXXXXXX;

(v.1) "transaction" has the meaning contemplated by subsection 245(1); and

(w.1) "Will" means the Last Will and Testament of A, dated XXXXXXXXXX.

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

FACTS

1. A was a Canadian resident for purposes of the Act immediately before her death on XXXXXXXXXX.

2. A had a Will in respect of which probate was granted to the Executors on XXXXXXXXXX.

3. At the time of her death, A owned XXXXXXXXXX Class A voting common shares and XXXXXXXXXX Class B common shares of Old Holdco, a Canadian-controlled private corporation, while her adult children, P, R and T each owned XXXXXXXXXX Class B common shares and XXXXXXXXXX Class C common shares of Old Holdco.

4. P, R and T were at all relevant times, and continue to be, residents of Canada for purposes of the Act.

5. Under the terms of the Will, P was entitled to receive XXXXXXXXXX% of the Class A voting common shares, and R and T were each to receive XXXXXXXXXX% of the Class A voting commons shares of Old Holdco. The Class B common shares of Old Holdco were to be divided equally among P, R and T.

6. Under the terms of the Will, P, R and T were also equal beneficiaries of, among other things, the entire residuary estate.

7. Numco was formed on XXXXXXXXXX, and was a Canadian-controlled private corporation at all relevant times. The sole shareholders of Numco from the time of incorporation were P, R and T and their shareholdings, which had not changed since incorporation, were as follows:

P - XXXXXXXXXX Class A common shares and XXXXXXXXXX Class B common shares;
R - XXXXXXXXXX Class A common shares and XXXXXXXXXX Class B common shares; and
T - XXXXXXXXXX Class A common shares and XXXXXXXXXX Class B common shares.

The Class A common shares of Numco were voting but not participating shares, while the Class B common shares were non-voting but fully participating shares.

8. On XXXXXXXXXX, the Executors sold the XXXXXXXXXX Class A voting common shares and the XXXXXXXXXX Class B common shares of Old Holdco held by the Estate to Numco in consideration for XXXXXXXXXX Class C preferred shares and XXXXXXXXXX Class D preferred shares in the capital of Numco as well as an interest-free, demand promissory note having a principal amount of $XXXXXXXXXX ("Note 1"). An election under section 85 was filed in respect of this sale of shares.

9. On XXXXXXXXXX, $XXXXXXXXXX of the indebtedness under Note 1 was repaid to pay the tax liability of the deceased, and a new promissory note evidencing the remaining indebtedness in the amount of $XXXXXXXXXX ("Note 2") was executed by Numco in favour of the Estate.

10. On XXXXXXXXXX, the Executors distributed certain assets of the Estate, including Note 2 and the XXXXXXXXXX Class C preferred shares and XXXXXXXXXX Class D preferred shares of Numco, to P, R and T in partial satisfaction of their capital interests in the Estate, in the following proportions:

(a) P - one-third interest in Note 2, and XXXXXXXXXX Class C preferred shares and XXXXXXXXXX Class D preferred shares of Numco;

(b) R - one-third interest in Note 2, and XXXXXXXXXX Class C preferred shares and XXXXXXXXXX Class D preferred shares of Numco; and

(c) T - one-third interest in Note 2, and XXXXXXXXXX Class C preferred shares and XXXXXXXXXX Class D preferred shares of Numco.

11. P, R and T then each sold all of their respective XXXXXXXXXX Class B common shares and XXXXXXXXXX Class C common shares of Old Holdco to Numco in consideration for XXXXXXXXXX Class E preferred shares and XXXXXXXXXX Class F preferred shares of Numco, respectively. An election under section 85 was filed in respect of these share sales. As a result, Numco became the sole shareholder of Old Holdco.

The issued share capital of Old Holdco was then held as follows:

Class of Shares
Number of Shares by Shareholder

Numco
Class A voting common shares
XXXXXXXXXX
Class B commons shares
XXXXXXXXXX
Class C common shares
XXXXXXXXXX

The issued share capital of Numco was then held as follows:

Class of Shares
Number of Shares by Shareholder

P
R
T
Class A common shares
XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX
Class B common shares
XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX
Class C preferred shares
XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX
Class D preferred shares
XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX
Class E preferred shares
XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX
Class F preferred shares
XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX

In addition, P, R and T each held a one-third interest in the indebtedness of Numco represented by Note 2, each one-third interest amounting to $XXXXXXXXXX.

12. Pursuant to an Amalgamation Agreement, dated XXXXXXXXXX, Numco and Old Holdco were amalgamated to form Holdco, effective as of XXXXXXXXXX. Holdco chose XXXXXXXXXX to be its fiscal year end.

13. On XXXXXXXXXX, a designation pursuant to subsection 87(11) and paragraph 88(1)(d) was filed by Holdco to increase the cost amount of certain non-depreciable capital properties owned by Holdco.

14. At present, each of P, R, and T holds an interest-free, demand promissory note of Holdco having a principal amount of $XXXXXXXXXX, and owns shares of Holdco as follows:

Class of Shares
Number of Shares and PUC by Shareholder

P
R
T

No.

PUC

No.

PUC

No.

PUC
Class "A" Common Shares
XXXXXXX
XXXXXXX
XXXXXXX
XXXXXXX
XXXXXXX
XXXXXXX
Class "B" Common Shares
XXXXXXX
XXXXXXX
XXXXXXX
XXXXXXX
XXXXXXX
XXXXXXX
Class "C" Preferred Shares
XXXXXXX
XXXXXXX
XXXXXXX
XXXXXXX
XXXXXXX
XXXXXXX
Class "D" Preferred Shares
XXXXXXX
XXXXXXX
XXXXXXX
XXXXXXX
XXXXXXX
XXXXXXX
Class "E" Preferred Shares
XXXXXXX
XXXXXXX
XXXXXXX
XXXXXXX
XXXXXXX
XXXXXXX
Class "F" Preferred Shares
XXXXXXX
XXXXXXX
XXXXXXX
XXXXXXX
XXXXXXX
XXXXXXX

15. The net assets of Holdco, as at XXXXXXXXXX, were principally comprised of investment properties being R's Mortgage, T's Mortgage, Property 1, Property 2, Property 3 and a XXXXXXXXXX% interest in the Investment Lot.

16. Holdco has refundable dividend tax on hand as at XXXXXXXXXX in the amount of $XXXXXXXXXX.

PROPOSED TRANSACTIONS

Net Equity Butterfly Transaction - Division of Interests as at XXXXXXXXXX

17. R will incorporate a new company ("Rco") under the laws of XXXXXXXXXX having share capital that includes the following classes of shares:

(a) Class A common shares with a par value of $XXXXXXXXXX each - these shares will be voting but not participating shares;

(b) Class B common shares with a par value of $XXXXXXXXXX each - these shares will be non-voting but fully participating shares;

(c) Class C preferred shares with a par value of $XXXXXXXXXX each - these shares will be non-voting, redeemable and retractable shares, and will bear a fixed, non-cumulative dividend. These shares will be subject to a price adjustment clause and will be redeemable or retractable for an amount fixed by the directors of the company at the time that such shares are issued; and

(d) Class D preferred shares with a par value of $XXXXXXXXXX each - these shares will have similar terms and conditions as the Class C preferred shares described above.

Upon the incorporation of Rco, R will subscribe for and be issued XXXXXXXXXX Class A common shares of Rco at a price of $XXXXXXXXXX each.

18. T will incorporate a new company ("Tco") under the laws of XXXXXXXXXX having share capital that includes the following classes of shares:

(a) Class A common shares with a par value of $XXXXXXXXXX each - these shares will be voting but not participating shares;

(b) Class B common shares with a par value of $XXXXXXXXXX each - these shares will be non-voting but fully participating shares;

(c) Class C preferred shares with a par value of $XXXXXXXXXX each - these shares will be non-voting, redeemable and retractable shares, and will bear a fixed, non-cumulative dividend. These shares will be subject to a price adjustment clause and will be redeemable or retractable for an amount fixed by the directors of the company at the time that such shares are issued; and

(d) Class D preferred shares with a par value of $XXXXXXXXXX each - these shares will have similar terms and conditions as the Class C preferred shares described above.

Upon the incorporation of Tco, T will subscribe for and be issued XXXXXXXXXX Class A common shares of Tco at a price of $XXXXXXXXXX each.

19. Immediately before the proposed transfers of property described in Paragraphs 21 to 24 below, the assets of Holdco will be classified into three types of property for the purposes of a distribution pursuant to paragraph 55(3)(b), as follows:

(a) cash or near-cash property, comprising all of the current assets of Holdco, including cash and accounts receivable;

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

(c) investment property, comprising all of the assets of Holdco, 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 the purposes of this distribution, all of the assets of Holdco are either cash or near-cash property or investment property.

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

20. In determining the net FMV of each property or type of property owned by Holdco immediately before the transfers of property described in Paragraphs 25 to 27 below, the liabilities of Holdco will be allocated to, and deducted in the calculation of the net FMV of each property or type of property of Holdco.

For the purposes of this distribution, the liability represented by the Term Loan will be allocated to the investment property since this loan pertains to the acquisition by Numco of certain common and preferred shares of Old Holdco from the Estate.

21. R will transfer her XXXXXXXXXX Class "A" Common Shares, XXXXXXXXXX Class "B" Common Shares, XXXXXXXXXX Class "C" Preferred Shares, XXXXXXXXXX Class "D" Preferred Shares, XXXXXXXXXX Class "E" Preferred Shares and XXXXXXXXXX Class "F" Preferred Shares of Holdco (collectively, "R's Holdco Shares") to Rco in consideration for XXXXXXXXXX Class B common shares of Rco.

R and Rco will elect, jointly and in prescribed form and within the time referred to in subsection 85(6), to have the rules in subsection 85(1) apply to the transfer of R's Holdco Shares to Rco as described above. The agreed amount specified in the election will be equal to the cost amount of R's Holdco Shares to R at the time of the transfer. For greater certainty, the cost amount of the transferred shares will not exceed the FMV of the shares.

22. R will assign the indebtedness in the principal amount of $XXXXXXXXXX represented by the promissory note executed by Holdco in favour of R ("Holdco Note 1") to Rco in consideration for a similar promissory note executed by Rco in favour of R. Holdco Note 1 will be returned to Holdco for cancellation and Holdco will execute and deliver a replacement promissory note in favour of Rco ("Holdco Note 2") having the same terms as Holdco Note 1.

23. T will transfer her XXXXXXXXXX Class "A" Common Shares, XXXXXXXXXX Class "B" Common Shares, XXXXXXXXXX Class "C" Preferred Shares, XXXXXXXXXX Class "D" Preferred Shares, XXXXXXXXXX Class "E" Preferred Shares and XXXXXXXXXX Class "F" Preferred Shares of Holdco (collectively, "T's Holdco Shares") to Tco in consideration for XXXXXXXXXX Class B common shares of Tco.

T and Tco will elect, jointly and in prescribed form and within the time referred to in subsection 85(6), to have the rules in subsection 85(1) apply to the transfer of T's Holdco Shares to Tco as described above. The agreed amount specified in the election will be equal to the cost amount of T's Holdco Shares to T at the time of the transfer. For greater certainty, the cost amount of the transferred shares will not exceed the FMV of the shares.

24. T will assign the indebtedness in the principal amount of $XXXXXXXXXX represented by the promissory note executed by Holdco in favour of T ("Holdco Note 3") to Tco in consideration for a similar promissory note executed by Tco in favour of T. Holdco Note 3 will be returned to Holdco for cancellation and Holdco will execute and deliver a replacement promissory note in favour of Tco ("Holdco Note 4") having the same terms as Holdco Note 3.

25. Holdco will then transfer a portion of its cash or near-cash property, if any, and investment property to Rco and Tco such that the net FMV of each type of property so transferred to Rco and Tco (after allocating and deducting the liabilities of Holdco, in the manner described in Paragraph 20 above) approximates the proportion of the net FMV of all property of Holdco of that type determined immediately before such transfers that

(a) the aggregate FMV, immediately before the transfer, of all of the shares of the capital stock of Holdco owned by Rco or Tco, as the case may be, at that time

is of

(b) the aggregate FMV, immediately before the transfer, of all of the issued and outstanding shares of the capital stock of Holdco at that time.

For the purposes of this Paragraph, the expression "approximates the proportion" means the discrepancy from that proportion, if any, that would not exceed XXXXXXXXXX determined as a percentage of the net FMV of the property that Rco and Tco have respectively received compared to what it would have received had it received its appropriate pro-rata share of Holdco's property.

26. For greater certainty, Holdco will transfer R's Mortgage to Rco in consideration for XXXXXXXXXX Class "C" preferred shares of Rco having an aggregate redemption value equal to the outstanding principal amount of R's Mortgage. Holdco will also transfer Property 2 to Rco pursuant to section 85 in consideration for Rco assuming the Term Loan and issuing XXXXXXXXXX Class "D" preferred shares of Rco having an aggregate redemption value equal to the FMV of Property 2 less the outstanding principal amount of the Term Loan assumed by Rco.

Holdco and Rco will elect, jointly and in prescribed form and within the time referred to in subsection 85(6), to have the rules in subsection 85(1) apply to the transfer of Property 2 to Rco as described above. The agreed amount specified in the election will be equal to the cost amount of Property 2 to Holdco at the time of the transfer, which amount will not exceed the FMV thereof. Furthermore, the agreed amount will not be less than the principal amount of the Term Loan assumed by Rco.

27. For greater certainty, Holdco will transfer Property 1 to Tco pursuant to section 85 in consideration for XXXXXXXXXX Class "C" preferred shares of Tco having an aggregate redemption value equal to the FMV of Property 1.

Holdco and Tco will elect, jointly and in prescribed form and within the time referred to in subsection 85(6), to have the rules in subsection 85(1) apply to the transfer of Property 1 to Tco as described above. The agreed amount specified in the election will be equal to the cost amount of Property 1 to Holdco at the time of the transfer, which amount will not exceed the FMV thereof.

28. Immediately after the transfer of property from Holdco to Rco, described in Paragraph 26 above, Rco will redeem its Class "C" and Class "D" preferred shares held by Holdco by issuing an interest-free demand promissory note ("Rco Note") to Holdco having a principal amount and FMV equal to the aggregate redemption amount of such preferred shares. Rco will have its first year-end on the date of such redemption.

Immediately following the redemption of the Class "C" and Class "D" preferred shares, Holdco will purchase for cancellation R's Holdco Shares held by Rco by issuing an interest-free demand promissory note ("Holdco Note 5") to Rco having a principal amount and FMV equal to the FMV of R's Holdco Shares. Since the value of the Rco Note is approximately equal to the total value of Holdco Note 2 and Holdco Note 5, they will be set-off against the other and cancelled.

29. Immediately after the transfer of property from Holdco to Tco, described in Paragraph 27 above, Tco will redeem its Class "C" preferred shares held by Holdco by issuing an interest-free demand promissory note ("Tco Note") to Holdco having a principal amount and FMV equal to the aggregate redemption amount of such preferred shares. Tco will have its first year-end on the date of such redemption.

Immediately following the redemption of the Class "C" preferred shares, Holdco will purchase for cancellation T's Holdco Shares held by Tco by issuing an interest-free demand promissory note ("Holdco Note 6") to Tco having a principal amount and FMV equal to the FMV of T's Holdco Shares. Since the value of the Tco Note is approximately equal to the total value of Holdco Note 4 and Holdco Note 6, they will be set-off against the other and cancelled.

30. At the end of the foregoing transactions, P will be the sole shareholder of Holdco, the principal assets of which will comprise Property 3, a one-half interest in the Investment Lot, and T's Mortgage.

31. The remaining one-half interest in the Investment Lot is presently beneficially owned as to a one-third share each by P, R and T, while the Estate retains legal title. It is proposed that R and T will each transfer their respective interest in the Investment Lot by way of gift to P following which P will be the sole direct owner of the remaining one-half interest in the Investment Lot.

ADDITIONAL INFORMATION

32. Rco, Tco and Holdco are taxable Canadian corporations.

33. Rco, Tco and Holdco are not specified financial institutions.

34. The transactions described in Paragraphs 8 to 11 above were not undertaken in contemplation of the proposed transactions described in Paragraphs 17 to 31 above.

35. None of the shares of Holdco, Rco or Tco will be disposed of, except as described herein, as part of the series of transactions or events that includes the proposed transactions.

36. None of Holdco, Rco or Tco will dispose of more than 10% of their respective property which is owned immediately following the proposed transactions, as part of the series of transactions or events that includes the proposed transactions.

PURPOSE OF THE PROPOSED TRANSACTIONS

37. The purpose of the proposed transactions set out in Paragraphs 17 to 31 above is to give effect to the desire of P, R and T to divide and separate their respective interests in Holdco in an equitable manner.

RULINGS GIVEN

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

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

(a) the transfer to R's Holdco Shares to Rco and T's Holdco Shares to Tco, respectively, as described in Paragraphs 21 and 23 above; and

(b) the transfer of Holdco's assets to Rco and Tco, respectively, as described in Paragraphs 25 to 27 above;

such that the agreed amounts in respect of each such transfer will be deemed to be the transferor's proceeds of disposition of the property and the transferee's cost thereof, and the transferor's cost of the shares received as consideration for the disposition. For greater certainty, paragraph 85(1)(e.2) will not apply to the transfers referred to herein.

B. The application of subsection 84.1(1) to the transfers of shares described in Paragraphs 21 and 23 above will not result in a reduction in the PUC of the Rco and Tco shares issued on the transfers pursuant to paragraph 84.1(1)(a), or in a dividend being deemed to be paid by Rco or Tco to the respective transferor pursuant to paragraph 84.1(1)(b).

C. As a result of the redemption or purchase for cancellation, as the case may be, of shares in the transactions described in Paragraphs 28 and 29 above:

(a) by virtue of paragraphs 84(3)(a) and (b):

(i) Rco and Tco will each be deemed to have paid, and Holdco will be deemed to have received, a taxable dividend equal to the amount, if any, by which the amount paid to redeem the respective Rco and Tco preferred shares exceeds the PUC thereof, immediately before such redemption, and

(ii) Holdco will be deemed to have paid, and Rco and Tco will each be deemed to have received, a taxable dividend equal to the amount, if any, by which the amount paid to purchase for cancellation R's Holdco Shares and T's Holdco Shares held by Rco and Tco, respectively, exceeds the PUC thereof, immediately before such purchase for cancellation;

(b) the taxable dividends deemed to be received by Rco, Tco and Holdco, as the case may be, as a result of the redemptions and purchases for cancellation 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 for the taxation year in which such dividend is deemed to have been received pursuant to subsection 112(1), unless subsections 112(2.1), (2.2), (2.3) or (2.4) apply to deny the application of the subsection 112(1) deduction in respect of such dividends;

(c) the dividends deemed to be received by Rco, Tco and Holdco, as the case may be, referred to in Ruling C(a) above will be excluded from the proceeds of disposition of such shares by virtue of paragraph (j) of the definition of "proceeds of disposition" in section 54, and any loss arising from the disposition of such shares will be reduced by the amount of such dividends pursuant to subsection 112(3);

(d) the dividends deemed to be received by Rco, Tco and Holdco, as the case may be, referred to in Ruling C(a) will be taxable dividends;

(e) none of Rco, Tco and Holdco will be subject to Part IV.1 tax under section 187.2 in respect of the dividends referred to in Ruling C(a) above because such dividends will be excepted dividends pursuant to paragraph (b) of the definition of "excepted dividend" in section 187.1; and

(f) none of Rco, Tco and Holdco will be subject to Part VI.1 tax under section 191.1 in respect of the dividends referred to in Ruling C(a) above because such dividends will be excluded dividends pursuant to paragraph (a) of the definition of "excluded dividend" in subsection 191(1).

D. By virtue of subsection 186(2) and paragraph 186(4)(a), Holdco will be connected with Rco and Tco and Rco and Tco will be connected with Holdco. Consequently:

(a) provided that neither Rco nor Tco is entitled to a dividend refund in respect of its taxation year in which it is deemed to pay the dividends referred to in Ruling C(a)(i) above, Holdco will not be subject to Part IV tax under subsection 186(1) in respect of such dividends;

(b) pursuant to paragraph 186(1)(b), each of Rco and Tco will be subject to Part IV tax in an amount equal to that proportion of the dividend refund to which Holdco will become entitled as a result of the payment of the dividends referred to in Ruling C(a)(ii) above, that the amount of each such dividend received by Rco and Tco, as the case may be, is of the aggregate of all taxable dividends paid by Holdco in its taxation year in which such dividend is paid.

E. 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);

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

(d) 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 Ruling C(a) above, and for greater certainty, subsection 55(3.1) will not apply to deny the exemption under paragraph 55(3)(b).

F. The cancellation of the promissory notes described in Paragraphs 28 and 29 will not give rise to a "forgiven amount" within the meaning assigned by subsection 80(1).

G. Subsection 129(1.2) will not apply to deem the dividends referred to in Ruling C(a)(ii) above not to be taxable dividends.

H. Subsections 15(1) and 69(1) will not apply to the transfers described in Paragraphs 21, 23, 25, 26 and 27, in and by themselves.

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

The above rulings are given subject to the limitations and qualifications set out in Information Circular 70-6R5 dated May 17, 2002 and are binding on the Canada Customs and Revenue Agency provided that the proposed transactions are completed by XXXXXXXXXX.

The above rulings are based on the law as it presently reads 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

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

(a) the determination of the fair market value or ACB of any particular asset, the paid-up capital in respect of any shares referred to herein, or the non-capital losses or net capital losses of any corporation; or

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

2. Subsection 69(1) will apply to the transfer by R and T of their respective interest in the Investment Lot by way of gift to P, described in Paragraph 31 above.

3. You have informed us, as stated in Paragraphs 17(c) and 18(c) above, that there is a price adjustment clause to adjust the redemption amounts of the Rco Class C preferred shares and the Tco Class C preferred 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 E 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 Canada Customs and Revenue Agency 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

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