2003 Ruling 2002-0169573 - 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 2002-016957

XXXXXXXXXX, 2003

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 taxpayers. We acknowledge the 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 discussed in this ruling request is:

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

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

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

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

(e) before the courts.

DEFINITIONS

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

(p) "NISA" means "net income stabilization account" as that expression is defined in subsection 248(1);

(q) "NISA Fund No. 1" means the portion of a taxpayer's NISA other than its NISA Fund No. 2;

(r) "NISA Fund No. 2" has the meaning assigned by subsection 248(1);

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

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

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

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

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

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

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

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

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

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

(cc) "stated capital" has the meaning assigned by section 24 of the BCA;

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

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

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

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

(a) "DC" means XXXXXXXXXX whose business number is XXXXXXXXXX, whose address is XXXXXXXXXX, and which deals with the XXXXXXXXXX Tax Services Office and files its return with the XXXXXXXXXX Taxation Centre;

(b) "Holdco" means XXXXXXXXXX whose business number is XXXXXXXXXX, whose address is XXXXXXXXXX, and which deals with the XXXXXXXXXX Tax Services Office and files its return with the XXXXXXXXXX Taxation Centre;

(c) "Sib1" means XXXXXXXXXX;

(d) "Sib2" means XXXXXXXXXX;

(e) "Subco1" means a taxable Canadian corporation to be incorporated pursuant to the BCA, all of the issued and outstanding shares of which will be initially owned by DC, as described in paragraph 12 below;

(f) "Subco2" means a taxable Canadian corporation to be incorporated pursuant to the BCA, all of the issued and outstanding shares of which will be owned by TC, as described in paragraph 12 below; and

(g) "TC" means XXXXXXXXXX whose business number is XXXXXXXXXX, whose address is XXXXXXXXXX, and which deals with the XXXXXXXXXX Tax Services Office and files its return with the XXXXXXXXXX Taxation Centre.

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

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

FACTS

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

Address TSO/Taxation Centre SIN#

Sib1 XXXXXXXXXX

Sib2 XXXXXXXXXX

2. DC, TC and Holdco are taxable Canadian corporations and CCPCs governed by the provisions of the BCA. DC was incorporated prior to 1972. The taxation year for each of DC, TC and Holdco ends on XXXXXXXXXX of each year.

3. The authorized share capital of TC consists of:

Unlimited non-voting special shares
Unlimited common shares

TC has XXXXXXXXXX individual shareholders, all of whom are residents of Canada. Sib1 owns XXXXXXXXXX special shares redeemable at $XXXXXXXXXX and XXXXXXXXXX common shares. XXXXXXXXXX, children of Sib1, each own XXXXXXXXXX common shares, for a total of XXXXXXXXXX issued and outstanding common shares.

4. The authorized share capital of Holdco consists of:

Unlimited non-voting special shares
Unlimited common shares

Holdco has XXXXXXXXXX common shares issue and outstanding, with a stated capital of $XXXXXXXXXX. Sib2 owns all of the common shares of Holdco.

5. The authorized share capital of DC consists of:

XXXXXXXXXX Class A voting special shares redeemable at $XXXXXXXXXX
XXXXXXXXXX Class B special shares redeemable at $XXXXXXXXXX
XXXXXXXXXX common shares

TC owns XXXXXXXXXX common shares and XXXXXXXXXX Class A voting special shares (representing, in the aggregate, more than 50% of the voting shares of DC) and Holdco owns XXXXXXXXXX common shares and XXXXXXXXXX Class A voting special shares of DC.

6. The common shares and Class A voting special shares of DC represent capital property to each of DC's shareholders. The shares of TC and Holdco are capital property to Sib1 and Sib2 for the purposes of the Act. None of the shareholders of DC, TC and Holdco have acquired any shares of DC, TC or Holdco in contemplation of the proposed transactions described in this letter.

7. DC carries on a XXXXXXXXXX business ("Business X") and a XXXXXXXXXX business ("Business Y"). DC reports its income under the cash basis referred to in section 28.

8. XXXXXXXXXX (the "Marketing Board") governs the production and marketing of XXXXXXXXXX under authority granted in the Agricultural Products Marketing Act. The Marketing Board has allocated production and marketing rights (a "quota") to various persons, including DC. Under the Marketing Board regulations, only persons who own sufficient production facilities or have long-term leases in place for production facilities may hold quotas.

9. The assets of DC include cash, accounts receivable, prepaid expenses, XXXXXXXXXX inventory, a quota issued by the Marketing Board relating to Business Y, land, buildings, machinery and equipment, and loans and advances to an associated company of DC that carry no specific provision for interest or repayment and which are unsecured. As at XXXXXXXXXX there were no funds in NISA Fund No. 1 or NISA Fund No. 2. The liabilities of DC include a bank loan, accounts payable and accrued liabilities, and long-term debt relating to farm machinery and real estate. As at XXXXXXXXXX, DC had no advances payable to its shareholders and it is anticipated that there will be no advances payable to its shareholders at XXXXXXXXXX.

10. DC had $XXXXXXXXXX of RDTOH at XXXXXXXXXX. As at XXXXXXXXXX, DC had $XXXXXXXXXX of CDA, which was reduced to zero as a result of paying dividends prior to XXXXXXXXXX. DC does not have, and will not have before the proposed transactions described below are carried out, any unutilized losses or deductions for tax purposes except possibly a reserve under section 28 from the prior year.

11. The only significant transactions that were completed prior to the time of submission of the ruling request were the regular purchase and sale of farm related equipment at fair market value. In addition, DC purchased XXXXXXXXXX acres of farmland from an arm's length person for $XXXXXXXXXX on XXXXXXXXXX. The majority of the purchase price was funded by way of a bank mortgage placed on the real property utilized in Business Y. DC will not dispose of this farmland as part of the proposed transactions.

The transactions described in this paragraph are normal business transactions, were not made in contemplation of the proposed distribution and will not form part of the series of transactions or events that includes the proposed transactions described herein.

PROPOSED TRANSACTIONS

12. DC and TC will each incorporate a new corporation ("Subco1" and "Subco2") under the BCA. DC will be the sole shareholder of Subco1 and TC will be the sole shareholder of Subco2.

The authorized share capital of each of Subco1 and Subco2 will include voting common shares and at least one class of redeemable, retractable, non-cumulative, non-voting preferred shares (the "Subco1 Preferred Shares" and the "Subco2 Preferred Shares", respectively), the redemption amount of which will be equal to the fair market value of the property received as consideration therefor, net of any liabilities assumed. At the time of incorporation, one common share of Subco1 will be issued to DC and one common share of Subco2 will be issued to TC, each for nominal consideration.

13. The assets of DC (net of related liabilities) will be divided between those assets relating to Business X and those assets relating to Business Y. The net asset values of these two businesses are not equal. DC will transfer to Subco1 all of the assets relating to Business Y including current assets, equipment, land and buildings and the quota relating to Business Y. As consideration for the property so transferred, Subco1 will:

(a) assume certain current liabilities and long-term debt of DC (not to exceed DC's cost amount of the property transferred); and

(b) issue to DC, common shares having an aggregate fair market value equal to the amount by which the aggregate fair market value of the property transferred to Subco1 exceeds the amount of the liabilities assumed by Subco1 as described in paragraph (a) above.

Subco1 will add to the stated capital in respect of the common shares it issues an amount equal to the cost to Subco1 of the property transferred (as determined under section 85, where relevant), less any liabilities assumed by it.

14. In respect of the transfers described in paragraph 13 above, DC and Subco1 will jointly elect pursuant to subsection 85(1), in prescribed form and within the time limits referred to in subsection 85(6), in respect of the transfer of each asset that is an eligible property. The agreed amount in respect of each of the eligible properties so transferred will be equal to:

(a) in the case of capital property (other than depreciable property of a prescribed class) or NISA Fund No. 2, an amount equal to the lesser of the amounts described in subparagraphs 85(1)(c.1)(i) and (ii);

(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);

(c) in the case of eligible capital property, an amount equal to the least of the amounts described in subparagraphs 85(1)(d)(i), (ii) and (iii); and

(d) in the case of inventory, the amount described in paragraph 85(1)(c.2).

In each case, 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 the property. The subsection 85(1) election will exclude any cash, accounts receivable, NISA Fund No. 1 and prepaid expenses.

15. Immediately before the transfers of property described in paragraph 17 below, the property owned by DC will be determined on a consolidated look-through basis by including the appropriate pro-rata share of the assets of any corporation over which DC has the ability to exercise significant influence (DC and any such corporation (more particularly, Subco1) are hereinafter sometimes collectively called the "Group") and all such property will be classified into the following three types of property for the purposes of the definition of "distribution" in subsection 55(1) and paragraph 55(3)(b):

(a) cash or near cash property, comprising all of the current assets of the Group, including any cash, accounts receivable, materials and supplies, prepaid expenses, inventory and loans and advances to associated corporations;

(b) investment property, comprising all of the assets of the Group, 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; and

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

For greater certainty, the fair market value of the shares of a particular corporation over which DC has the ability to exercise significant influence and of any indebtedness receivable by DC from such a corporation will be allocated amongst the three types of property described above by multiplying the fair market value of the shares of the particular corporation or amount of indebtedness receivable from the particular corporation, as the case may be, by the proportion that the net fair market value of each type of property owned by the particular corporation (as determined in this paragraph and paragraph 16 below) is of the total net fair market value of all the property owned by the particular corporation.

For greater certainty, any tax accounts, such as the balance of any non-capital losses, RDTOH or CDA, will not be considered property for purposes of the proposed transactions described herein. In addition, the NISA will be considered business property for the purposes of determining the types of property. For the purpose of calculating the net fair market value of the types of property of DC, deferred taxes, if any, will be ignored. An estimate of income taxes payable on fiscal XXXXXXXXXX income and fiscal XXXXXXXXXX income, up to the date of the distribution, will be considered a current liability.

16. In determining, on a consolidated look-through basis, the net fair market value of DC's cash or near cash property, investment property and business property immediately before the transfers of property described in paragraph 17 below, the liabilities of DC and any corporation over which DC has the ability to exercise significant influence will be allocated to, and be deducted in the calculation of, the net fair market value of each such type of property of such corporation in the following manner:

(a) in determining, immediately before the transfers described in paragraph 17 below, the net fair market value of each type of property of a particular corporation over which DC has the ability to exercise significant influence, the liabilities of the particular corporation (other than any amount owing to DC) will be allocated to, and be deducted in the calculation of, the net fair market value of a type of property of the particular corporation in the following manner:

(i) current liabilities of the particular corporation will be allocated to the cash or near cash property of that corporation in the proportion that the fair market value of each such property is of the fair market value of all cash or near cash property owned by that corporation, and, to the extent that the total current liabilities so allocated exceed the total fair market value of all cash or near cash property of that particular corporation, that corporation will be considered to have a negative amount of cash or near cash property;

(ii) provided that the net fair market value of the cash or near cash property of the particular corporation is positive, the net fair market value of all accounts receivable, inventory and prepaid expenses of the particular corporation that are initially classified in accordance with paragraph 15(a) above as cash or near cash property that will relate to a business that will be carried on by the Group and that will be collected or consumed in the ordinary course of that business will then be reclassified as business property where the net fair market value is positive, and consequently, the resulting net fair market value of all cash or near cash property will be reduced by the total net fair market value (where it is positive) of such accounts receivable, inventory and prepaid expenses;

(iii) liabilities, other than current liabilities, of the particular corporation that relate to a particular property will then be allocated to the particular property (and effectively to the type of property to which the property belongs) to the extent of its fair market value and the liabilities pertaining to a type of property but not to a particular property will then be allocated to that type of property; to the extent that the allocation of liabilities to a type of property as described herein exceeds the total fair market value of that type of property of that corporation, that corporation will be considered to have a negative amount of that type of property; and

(iv) any other remaining liabilities of the particular corporation will then be allocated to the cash or near cash property, investment property and business property of that corporation based on the relative net fair market value of each type of property prior to the allocation of such liabilities but after the allocation of the liabilities described in paragraphs (a)(i) and (a)(iii) above, however, where a corporation is considered to have a negative amount of a type of property because of paragraph (a)(i) or (a)(iii) above, for the purposes of allocating those remaining liabilities, the net fair market value of that type of property will be deemed to be nil resulting in none of those remaining liabilities being allocated to that type of property; and

(b) in determining, on a consolidated look-through basis, the net fair market value of each type of property of DC immediately before the transfers of property described in paragraph 17 below, DC will include the appropriate pro-rata share of the net fair market value (or such negative amount due to paragraphs (a)(i) and (a)(iii) above) of each type of property of any corporation over which DC has the ability to exercise significant influence, and any liabilities of DC will then be allocated to, and be deducted in the calculation of, the net fair market value of each type of property of DC in the following manner:

(i) current liabilities of DC (including the current portion of any long-term debt and the loans to shareholders) will be allocated to cash or near cash property of DC in the proportion that the fair market value of each such property is of the fair market value of all cash or near cash property of DC, and, the allocation of current liabilities of DC as described herein will not exceed the aggregate fair market value of the cash or near cash property of DC;

(ii) accounts receivable, inventory and prepaid expenses that are initially classified in accordance with paragraph 15(a) above as cash or near cash property, that will relate to a business that will be carried on by the Group and that will be collected or consumed in the ordinary course of that business, will then be reclassified as business property, and consequently, the resulting net fair market value of all cash or near cash property will be reduced by the total net fair market value of such accounts receivable, inventory and prepaid expenses and the total net fair market value of such accounts receivable, inventory and prepaid expenses will be added to the fair market value of business property;

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

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

17. Immediately following the determination of the net fair market value of DC's types of property, as described in paragraphs 15 and 16 above, DC will transfer to Subco2:

(a) a portion of the common shares of Subco1; and

(b) if necessary, cash or near cash property which is additional to the cash or near cash property which is represented by the common shares of Subco1;

such that the net fair market value of each type of property so transferred to Subco2 (after allocating and deducting, in the manner described in paragraph 16 above, the liabilities of DC which are to be assumed by Subco2 as described herein) will approximate that proportion of the net fair market value of all property of DC of that type determined immediately before such transfer that:

(c) the aggregate fair market value, immediately before the transfer, of all of the shares of the capital stock of DC owned by TC at that time;

is of

(d) the aggregate fair market value, immediately before the transfer, of all of the issued and outstanding shares of the capital stock of DC at that time.

For the purpose of this paragraph, the expression "approximate that proportion" means that the discrepancy from that proportion, if any, would not exceed XXXXXXXXXX%, determined as a percentage of the net fair market value of each type of property which Subco2 will receive (or DC will retain) as compared to what Subco2 would have received (or DC would have retained) had it received (or retained) its pro rata share of the net fair market value of that type of property. However, the aggregate net fair market value of all property of DC transferred to Subco2 as described herein will be equal to the proportion determined by paragraphs (c) and (d) above of the aggregate net fair market value of all property of DC immediately before the transfer.

The purchase price for the property transferred to Subco2 will be equal to its aggregate fair market value and as consideration for the property so transferred, Subco2 will:

(e) assume a portion of the liabilities of DC (not to exceed DC's cost amount of the transferred property), such that the net fair market value of each type of property of DC transferred to Subco2 as described herein will be equal to its proportionate share, as determined by the formula described in paragraphs (c) and (d) above, of the total net fair market value of that type of property owned by DC immediately before such transfers; and

(f) issue to DC, Subco2 Preferred Shares having an aggregate fair market value and redemption amount equal to the amount by which the aggregate fair market value of the property transferred to Subco2 exceeds the amount of the liabilities assumed by Subco2 as described in paragraph (e) above.

Subco2 will add to the stated capital in respect of the Subco2 Preferred Shares it issues an amount equal to the cost to Subco2 (as determined under section 85, where relevant) of the property transferred to it, less any liabilities assumed by it.

18. In respect of the transfers described in paragraph 17 above, DC and Subco2 will jointly elect pursuant to subsection 85(1), in prescribed form and within the time limits referred to in subsection 85(6), in respect of the transfer of each asset that is an eligible property. The agreed amount in respect of each of the eligible properties so transferred will be equal to:

(a) in the case of capital property (other than depreciable property of a prescribed class) or NISA Fund No. 2, 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 inventory, the amount described in paragraph 85(1)(c.2).

In each case, 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 the property. The subsection 85(1) election will exclude any cash, accounts receivable, NISA Fund No. 1 and prepaid expenses.

19. Immediately after the transfer of the assets to Subco2 as described in paragraph 17 above, and before the end of that day, Subco2 will redeem the Subco2 Preferred Shares held by DC at their aggregate redemption amount and fair market value and will issue to DC in consideration therefor a non-interest-bearing demand promissory note (the "Subco2 Note") having a principal amount and fair market value equal to the redemption amount of the Subco2 Preferred Shares. DC will accept the Subco2 Note in full payment of the redemption price of the Subco2 Preferred Shares so redeemed.

20. Following the redemption of shares described in paragraph 19 above, TC 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 TC and TC will assume all of the liabilities of Subco2, including the amount owing to DC under the Subco2 Note.

21. Immediately following the distributions of property described in paragraph 20 above, DC will purchase for cancellation the common shares held by TC at their fair market value, and redeem the Class A voting special shares held by TC at their aggregate redemption amount and fair market value, and will issue to TC in consideration therefor a non-interest-bearing demand promissory note (the "DC Note") having a principal amount and fair market value equal to aggregate fair market value of the common and Class A voting special shares so purchased or redeemed. TC will accept the DC Note in full payment of the purchase price and redemption amount of the common and Class A voting special shares of DC so purchased or redeemed.

22. Following the purchase and redemption described in paragraph 21 above, DC and TC will set-off the principal amounts of the DC Note and the Subco2 Note, and each note will then be cancelled.

23. After the completion of the foregoing proposed transactions, TC and Holdco will carry on business independent of each other. In particular, TC will have exchanged its ownership in DC for a controlling interest in Subco1, which will operate Business Y. Holdco will have complete ownership of DC, which will continue to operate Business X, and which will also have a minority share ownership of Subco1.

ADDITIONAL INFORMATION

24. No property has or will become property of DC or Subco1 and no liabilities have been or will be incurred by DC or Subco1 in contemplation of and before the transfers of property described in paragraphs 17 and 20 above, except as described herein.

25. Except as outlined herein, and except in the normal course of carrying on business, none of DC, TC, Holdco, Subco1 or Subco2 has any specific intention of disposing of any assets owned by it to an unrelated person following the proposed transactions and as part of the series of transactions or events that includes the proposed transactions. In particular, TC does not have any specific intention of disposing of its shareholdings in Subco1 as part of the series of transactions or events that includes the proposed transactions.

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

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

28. None of the shares of DC or TC has been, or will be, issued or acquired as part of a series of transactions of the type described in subsection 112(2.5).

29. None of DC or TC has been, or will be, at any time before the completion of the proposed transactions described herein, a corporation described in any of paragraphs (a) to (f) of the definition of "financial intermediary corporation" in subsection 191(1), a specified financial institution or a restricted financial institution.

30. Each of DC, Subco2 and TC will have the financial capacity to honour, upon presentation for payment, the amount payable under the DC Note or the Subco2 Note, as the case may be.

31. TC and Holdco represent the majority of the accumulated net worth of Sib1 and Sib2. While indeterminate as to the amount and timing, both will look to their respective company to provide a portion of their retirement income needs. At the current time, neither Sib1 nor Sib2 contemplate disposing of the shares of DC, TC or Holdco to persons unrelated to Sib1 or Sib2 as part of their retirement plans. Sib1's current estate planning contemplates ultimately transferring his residual shareholdings to his children under subsection 73(4) or subsection 70(9).

PURPOSE OF THE PROPOSED TRANSACTIONS

Sib1 and Sib2 wish to commence succession planning in order to facilitate their retirement from active day-to-day involvement in the businesses of DC.

In recent years, Sib1 and his children have been actively involved in Business Y and Sib2 has been more actively involved in Business X.

As part of their estate and family succession planning, Sib1 and Sib2 and their respective families wish to farm and carry on business independent of each other, allow their families to participate in the future success of the farming operations, and segregate the operations of Business X and Business Y such that each Sib's offspring will benefit from their own efforts. It is acknowledged that due to the unequal shareholdings and the inability to sever the XXXXXXXXXX quota from the underlying real property of Business Y, Sib2 will continue to hold a minority interest in Business Y.

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

(a) the transfer of each eligible property by DC to Subco1, as described in paragraphs 13 and 14 above; and

(b) the transfer of each eligible property by DC to Subco2, as described in paragraphs 17 and 18 above;

such that the agreed amounts in respect of each such transfer 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 in this paragraph and for the purposes of determining the agreed amounts of the depreciable property of a prescribed class transferred, the reference to "the undepreciated capital cost to the taxpayer of all the property of that class immediately before the disposition" found in subparagraph 85(1)(e)(i) will be interpreted to mean that portion of the undepreciated capital cost to DC of all the property of that class that the fair market value of the assets of that class transferred is of the fair market value of all the assets of that class.

B. As a result of the redemption by Subco2 of the Subco2 Preferred Shares owned by DC, as described in paragraph 19 above, and on the purchase for cancellation and redemption by DC of the common shares and Class A voting special shares owned by TC, as described in paragraph 21 above:

(a) by virtue of subsection 84(3):

(i) Subco2 will be deemed to have paid, and DC will be deemed to have received, a taxable dividend equal to the amount by which the amount paid in respect of the redemption of the Subco2 Preferred Shares exceeds the PUC thereof; and

(ii) DC will be deemed to have paid, and TC will be deemed to have received, a taxable dividend equal to the aggregate amount by which the amount paid in respect of the purchase for cancellation of the common shares of DC, and the redemption amount for the Class A voting special shares of DC, as the case may be, exceeds the PUC thereof; and

(b) the taxable dividends deemed to have been received by each of DC and TC as described in paragraph (a) above will:

(i) be included in the recipient's income pursuant to section 82 and paragraph 12(1)(j);

(ii) be excluded from the proceeds of disposition of the shares so redeemed or purchased for cancellation, as the case may be, by virtue of paragraph (j) of the definition of "proceeds of disposition" in section 54;

(iii) pursuant to subsection 112(1), be deductible in computing the taxable income of the recipient for the year in which the dividend if deemed to have been received and such deduction will not be denied by any of the provisions of subsections 112(2.1), (2.2), (2.3) or (2.4);

(iv) pursuant to subsection 112(3), reduce any loss arising from the disposition of those shares;

(v) not be subject to tax under Part IV, except as provided in paragraph 186(1)(b), as Subco2 will be connected with DC and DC will be connected with TC, by virtue of paragraph 186(4)(a);

(vi) 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

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

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

D. The settlement of the DC Note and the Subco2 Note as described in paragraph 22 above will not give rise to a "forgiven amount" within the meaning of subsections 80(1) and 80.01(1).

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

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

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

COMMENTS

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

(a) to the determination of the ACB, the PUC or the fair market value of any shares or property referred to herein; and

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

Yours truly,

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