2003 Ruling 2003-0011783 - 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: A gross-asset butterfly reorganization

Position: Acceptable.

Reasons: Meets the requirements of the law.

XXXXXXXXXX 							2003-001178

XXXXXXXXXX, 2003

Dear XXXXXXXXXX:

Re:

(a) XXXXXXXXXX, having Tax Account No. XXXXXXXXXX, which files its tax returns through the XXXXXXXXXX Tax Services Office, XXXXXXXXXX, and its address being XXXXXXXXXX;

(b) XXXXXXXXXX having Tax Account No. XXXXXXXXXX, which files its tax returns through the XXXXXXXXXX Taxation Centre, XXXXXXXXXX, and its address being XXXXXXXXXX;

(c) XXXXXXXXXX having Social Insurance No. XXXXXXXXXX, who files his tax return through the XXXXXXXXXX Taxation Centre, XXXXXXXXXX, and his address being XXXXXXXXXX;

(d) XXXXXXXXXX having Social Insurance No. XXXXXXXXXX, who files her tax return through the XXXXXXXXXX Taxation Centre, XXXXXXXXXX, and her address being XXXXXXXXXX;

(e) XXXXXXXXXX having Social Insurance No. XXXXXXXXXX, who files his tax return through the XXXXXXXXXX Taxation Centre, XXXXXXXXXX, and his address being

XXXXXXXXXX.

This is in reply to your letters of XXXXXXXXXX, wherein you requested an advance income tax ruling on behalf of the above-noted taxpayers.

You are advised that, to the best of the knowledge of your clients, none of the issues described herein, as they apply specifically to such respective parties, is:

(a) in an earlier return;

(b) being considered by a tax services office or taxation centre in connection with any tax return previously filed;

(c) the subject of any notice of objection or is under appeal; or

(d) the subject of a previously issued ruling.

Dollar amounts referred to herein are Canadian dollars except as otherwise provided.

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;

(b) "Act" means the Income Tax Act, R.S.C. 1985, c.1 (5th Supp.), as amended, and all references to a statute are to the Act, unless otherwise indicated;

(c) "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 the property;

(d) "CCPC" means "Canadian-controlled private corporation" as defined by subsection 125(7);

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

(f) "CDA" means "capital dividend account" as defined by subsection 89(1);

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

(h) "DC" means XXXXXXXXXX, a corporation which is described in paragraph 5 of the Facts;

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

(j) "designated person" has the meaning assigned by subsection 74.5(5);

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

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

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

(n) "Effective Date" means a day in XXXXXXXXXX prior to XXXXXXXXXX, as agreed upon by the parties;

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

(p) "FMV" means fair market value;

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

(r) "Holdco" refers to either Holdco1, Holdco2 or Holdco3, and "Holdcos" refers to Holdco1, Holdco2 and Holdco3, collectively;

(s) "Holdco1" means the corporation to be incorporated by Sibling1, as described in paragraph 15 of the Proposed Transactions;

(t) "Holdco2" means the corporation to be incorporated by Sibling2, as described in paragraph 15 of the Proposed Transactions;

(u) "Holdco3" means the corporation to be incorporated by Sibling3, as described in paragraph 15 of the Proposed Transactions;

(v) "Holdco1 Note" has the meaning ascribed to it in paragraph 35 of the Proposed Transactions;

(w) "Holdco2 Note" has the meaning ascribed to it in paragraph 35 of the Proposed Transactions;

(aa) "Holdco3 Note" has the meaning ascribed to it in paragraph 35 of the Proposed Transactions;

(bb) "Loss Limited Partnership Units" has the meaning ascribed to it in paragraph 26 of the Proposed Transactions;

(cc) "non-depreciable capital property" means capital property that is not depreciable;

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

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

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

(gg) "related persons" has the meaning assigned by section 251 and where relevant the meaning assigned by paragraph 55(5)(e);

(hh) "Sibling" refers to either Sibling1, Sibling2 or Sibling3, and "Siblings" refers to Sibling1, Sibling2 and Sibling3, collectively;

(ii) "Sibling1" means XXXXXXXXXX;

(jj) "Sibling2" means XXXXXXXXXX;

(kk) "Sibling3" means XXXXXXXXXX;

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

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

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

(oo) "stated capital" has the meaning assigned by the Canada Business Corporations Act;

(pp) "Subsidiary" means the corporation to be incorporated by DC, as described in paragraph 20 of the Proposed Transactions;

(qq) "Trust" has the meaning ascribed to it in paragraph 1 of the Facts;

(rr) "New Trusts" means either New Trust1, New Trust2, or New Trust3;

(ss) "New Trust1" has the meaning ascribed by paragraph 21 of the Proposed Transactions;

(tt) "New Trust2" has the meaning ascribed by paragraph 22 of the Proposed Transactions;

(uu) "New Trust3" has the meaning ascribed by paragraph 23 of the Proposed Transactions;

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

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

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

FACTS

1. XXXXXXXXXX (the "Trust") was created by Indenture dated XXXXXXXXXX, between XXXXXXXXXX, as settlor, and XXXXXXXXXX , as trustees, all of whom were residents of Canada at the time. The Trust is an "inter vivos trust" (other than a trust described in subparagraph 104(4)(a)(iii)) as defined in subsection 108(1), and a "personal trust" as defined in subsection 248(1). The Trust is governed by the laws of the Province of XXXXXXXXXX. It has been a resident of Canada at all times since it was settled in XXXXXXXXXX.

2. XXXXXXXXXX, the settlor, was not a beneficiary of the Trust. XXXXXXXXXX died on XXXXXXXXXX. No property has ever been held by the Trust on the conditions set out in subsection 75(2).

3. XXXXXXXXXX is the son of XXXXXXXXXX. The Siblings are the only children of XXXXXXXXXX. The Siblings are all residents of Canada. The Siblings are all over the age of eighteen years.

4. The original trustees of the Trust at the time it was settled retired as trustees at various times between XXXXXXXXXX and XXXXXXXXXX and XXXXXXXXXX were appointed as substituted trustees in accordance with the terms of the Trust and its governing law. The XXXXXXXXXX are currently the trustees of the Trust. The Trust Indenture provides that the trustees shall act in accordance with the decisions of the majority of them.

5. DC is a taxable Canadian corporation and Canadian-controlled private corporation incorporated under The Corporations Act of the Province of XXXXXXXXXX, with a fiscal year end of XXXXXXXXXX. DC was formed on XXXXXXXXXX by the amalgamation of XXXXXXXXXX predecessor corporations, XXXXXXXXXX predecessor corporations were incorporated under The Corporations Act of the Province of XXXXXXXXXX.

6. The only issued shares of DC are XXXXXXXXXX Voting Common Shares and XXXXXXXXXX Non-voting Common Shares all of which shares are owned by the Trust. These shares are held by the Trust as capital property. The Voting Common Shares and Non-Voting Common Shares are identical in all respects except for their voting rights. The Trust received its XXXXXXXXXX Voting Common Shares in DC on the formation of DC by the amalgamation on XXXXXXXXXX in exchange for XXXXXXXXXX Voting Common Shares which the Trust owned XXXXXXXXXX. The Trust had acquired said Voting Common Shares in XXXXXXXXXX from the XXXXXXXXXX. The Trust received its XXXXXXXXXX Non-voting Common Shares in DC on the formation of DC by the amalgamation on XXXXXXXXXX in exchange for XXXXXXXXXX Non-voting Common Shares which the Trust owned XXXXXXXXXX. The Trust had acquired said Non-Voting Common Shares in XXXXXXXXXX from the XXXXXXXXXX. The ACB and stated capital of the issued shares of DC is $XXXXXXXXXX in aggregate for the XXXXXXXXXX Voting Common Shares and $XXXXXXXXXX in aggregate for the Non-Voting Common Shares. The FMV of the issued shares of DC is between $XXXXXXXXXX and $XXXXXXXXXX.

7. The terms of the Trust contain a definition of "Vesting Date", which has not yet occurred. Further, the Trust contains a provision which provides that XXXXXXXXXX. The capital beneficiaries of the Trust are the Siblings, their children, and any charity.

8. Pursuant to subsection 104(4), the Trust will be deemed to have disposed of its assets on XXXXXXXXXX.

9. DC has a diverse portfolio of investments. XXXXXXXXXX.

10. The principal liabilities of DC are loans from the Trust and from related persons. Other liabilities include income tax liabilities, and accounts payable which result from the ongoing operations of DC.

11. As at XXXXXXXXXX, the balance in DC's RDTOH account was $XXXXXXXXXX. As at XXXXXXXXXX, the balance in DC's RDTOH account is estimated to be approximately $XXXXXXXXXX. As at XXXXXXXXXX, the balance in the CDA was $XXXXXXXXXX. DC will earn investment income and may realize capital gains subsequent to these dates and prior to the date of dissolution as described below that will result in changes to the RDTOH and CDA not determinable at this time.

12. As described in paragraph 9 of the Facts, DC owns a diverse portfolio of investments. From time to time, DC buys and sells such types of investments which sometimes may be pursuant to advice from an investment advisor. On completion of the Proposed Transactions described below, the Holdcos will own the investments previously owned by DC. The Holdcos will hold and dispose of the investments received from DC in the normal course of their investment activities.

13. XXXXXXXXXX it is expected that DC will dispose of significant holdings in certain publicly traded entities on the open market for cash consideration. Such dispositions may occur prior to or subsequent to the Trust distribution as described in paragraph 1 of the Proposed Transactions. The cash consideration may be reinvested in whole or in part by DC in other securities in the normal course of its investment activities prior to the distribution by DC of its properties as described in paragraph 18 of the Proposed Transactions. XXXXXXXXXX of any such securities so acquired will be transferred by DC to each Holdco in the distribution by DC.

PROPOSED TRANSACTIONS

The transaction described in paragraph 14 will occur on a day prior to XXXXXXXXXX. The transactions described in paragraphs 15 through 25 will occur on one or more days prior to the Effective Date. The transactions described in paragraphs 31 through 36 will occur on the Effective Date in the order in which they are set out. The other transactions will occur on the days specified in their description.

Trust Distribution

14. The trustees of the Trust have given due consideration to the matter and intend to formally resolve to cause the Trust to distribute the shares of DC prior to XXXXXXXXXX, the deemed disposition date under subsection 104(4). Accordingly, prior to XXXXXXXXXX the trustees of the Trust will make a capital encroachment and distribute out of the Trust XXXXXXXXXX Voting Common Shares of DC and XXXXXXXXXX Non-voting Common Shares of DC to each Sibling in satisfaction of part of his or her capital interest in the Trust. The Trust will continue in existence and continue to hold its other assets, which are principally cash and a loan to DC.

Butterfly

15. Sibling1 will incorporate Holdco1; Sibling2 will incorporate Holdco2; and Sibling3 will incorporate Holdco3. These incorporations will occur on a day which does not precede Effective Date by more than XXXXXXXXXX. These Holdcos will be incorporated pursuant to the Canada Business Corporations Act and will be taxable Canadian corporations.

16. Each Holdco will have the following authorized capital:

- Common Shares entitled to such non-cumulative dividends as the directors shall declare, provided no dividends may be declared on the Common Shares if doing so would reduce the value of the net assets of the company to an amount which is less than the aggregate of the redemption amounts of the issued Special Shares and Preference Shares. The Common Shares will be entitled to receive, on a liquidation or a wind-up, the residual value of the company after the Special Shares and Preference Shares have received their redemption amounts. The Common Shares will carry one vote per share;

- Special Shares entitled to such non-cumulative dividends as the directors may declare, but not exceeding XXXXXXXXXX% of their aggregate subscription price. The Special Shares will be retractable (but not redeemable) for their subscription price. The Special Shares will be entitled to receive, on a liquidation or wind-up, the amount of their subscription price in priority to the liquidation entitlement of the Common Shares or Preference Shares. The Special Shares will carry one vote per share;

- Voting Preference Shares entitled to such non-cumulative dividends as the directors may declare, but not exceeding XXXXXXXXXX% of their aggregate redemption amount. The Voting Preference Shares will be retractable and redeemable for an aggregate redemption amount fixed at the first issuance of the Voting Preference Shares (subject to a price adjustment clause). Such redemption amount will be equal to the fair market value of the property received by the company in return for their issuance less any debt issued by the company or liabilities assumed by the company on their issuance. The Voting Preference Shares will be entitled to receive, on a liquidation or wind-up, their redemption amount in priority to the liquidation entitlement of the Common Shares. On a liquidation or wind-up, the Voting Preference Shares will rank equally with the Non-Voting Preference Shares to receive their respective redemption amounts. The Voting Preference Shares will carry one vote per share;

- Non-Voting Preference Shares entitled to such non-cumulative dividends as the directors may declare, but not exceeding XXXXXXXXXX% of their aggregate redemption amount. The Non-Voting Preference Shares will be retractable and redeemable for an aggregate redemption amount fixed at the first issuance of the Non-Voting Preference Shares (subject to a price adjustment clause). Such redemption amount will be equal to the fair market value of the property received by the company in return for their issuance less any debt issued by the company or liabilities assumed by the company on their issuance. The Non-Voting Preference Shares will be entitled to receive, on a liquidation or wind-up, their redemption amount in priority to the liquidation entitlement of the Common Shares. On a liquidation or wind-up, the Non-Voting Preference Shares will rank equally with the Voting Preference Shares to receive their respective redemption amounts. The Non-Voting Preference Shares will be non-voting;

- there will be unlimited number of shares authorized for each such class of shares.

17. Sibling1 will subscribe for one Common Share of Holdco1 for $XXXXXXXXXX and for XXXXXXXXXX Special Shares of Holdco1 for $XXXXXXXXXX.

18. Sibling2 will subscribe for one Common Share of Holdco2 for $XXXXXXXXXX and for XXXXXXXXXX Special Shares of Holdco2 for $XXXXXXXXXX.

19. Sibling3 will subscribe for one Common Share of Holdco3 for $XXXXXXXXXX and for XXXXXXXXXX Special Shares of Holdco3 for $XXXXXXXXXX.

20. Subsidiary will be incorporated by DC pursuant to the Canada Business Corporations Act. DC will subscribe for one Common Share of Subsidiary for $XXXXXXXXXX.

21. XXXXXXXXXX, who is a resident of Canada, will settle a new irrevocable trust ("New Trust1") with $XXXXXXXXXX. The trustees of New Trust1 will be Sibling1, Sibling2 and XXXXXXXXXX who resides in Canada. The income and capital beneficiaries will be Sibling1 and his issue. Under no circumstances will any property of the New Trust1 be able to revert to XXXXXXXXXX. The relevant terms of New Trust1 in summary form will be as follows:

(a) the trustees will have the absolute discretion to accumulate income or distribute all or any portion of the income to any of the income beneficiaries in such proportions as the trustees decide; provided that so long as Sibling1 is living, (x) no issue of Sibling1 who is under the age of 18 years may receive or otherwise obtain the use of any income of the New Trust1, and (y) no income or other amount may be paid or made payable by New Trust1 to any issue of Sibling1 who is under the age of 18 years such that New Trust1 would be entitled to a deduction in computing its income under subsections 104(6) or (12);

(b) the trustees will have the absolute discretion from time to time to encroach upon and pay any of the capital to any of the capital beneficiaries in such proportions as the trustees decide; provided that so long as Sibling1 is living, (x) no issue of Sibling1 who is under the age of 18 years may receive or otherwise obtain the use of any capital of the New Trust1, and (y) no capital may be paid or made payable by New Trust1 to any issue of Sibling1 who is under the age of 18 years such that New Trust1 would be entitled to a deduction in computing its income under subsections 104(6) or (12);

(c) on termination of New Trust1, if Sibling1 is then living, the trustees will have the absolute discretion to pay the capital to or for the benefit of any of the capital beneficiaries in such proportions as the trustees decide; provided that no issue of Sibling1 who is under the age of 18 years may receive or otherwise obtain the use of any of the capital;

(d) on termination of New Trust1, if Sibling1 is not then living, the trustees will be required to pay the capital to or for the benefit of the issue of Sibling1 in equal shares per stirpes;

(e) decisions of the trustees will be made by majority decision.

22. XXXXXXXXXX will settle a second new trust ("New Trust2") with $XXXXXXXXXX. The trustees will be Sibling2, Sibling3, and XXXXXXXXXX. The relevant terms of New Trust2 will be the same as the terms of New Trust1 except that Sibling2 and her issue will be the beneficiaries.

23. XXXXXXXXXX will settle a third new trust ("New Trust3") with $XXXXXXXXXX. The trustees will be Sibling3, Sibling1, and XXXXXXXXXX. The terms of New Trust3 will be the same as the terms of New Trust1 except that Sibling3 and his issue will be the beneficiaries.

New Trust1, New Trust2 and New Trust3 will contain limitations which expressly prohibit:

(a) the beneficiaries from receiving or otherwise obtaining the use of any income or capital of the trust while the beneficiary is a designated person in respect of Sibling1, Sibling2 or Sibling3, as the case may be;

(b) the making of any preferred beneficiary election pursuant to subsection 104(14) in respect of any beneficiary while such beneficiary is a designated person in respect of Sibling1, Sibling2 or Sibling3, as the case may be;

(c) the use of any property of the trust by a beneficiary while such beneficiary is a designated person for less than fair market value consideration.

24. Each of New Trust1, New Trust2 and New Trust3 will be irrevocable and no part of the income of capital of the trusts will revert to or for the benefit of the settlor. In addition, the settlor will be prohibited from being a beneficiary or trustee of the trusts.

25. XXXXXXXXXX DC will transfer to Subsidiary the limited partnership units and shares XXXXXXXXXX. As consideration for the limited partnership units and shares so transferred, Subsidiary will issue XXXXXXXXXX Common Shares to DC. Subsidiary will add to the stated capital account maintained for its Common Shares an amount equal to the amount of the aggregate costs of the limited partnership units and shares acquired by Subsidiary (determined pursuant to subsection 85(1) if relevant).

26. The limited partnership units and shares referred to in paragraph 25 of the Proposed Transactions are capital property. DC has unrealized capital losses in some of the units (the "Loss Limited Partnership Units") and has unrealized capital gains in some of the units. DC and Subsidiary will elect, jointly and in prescribed form and within the time limits referred to in subsection 85(6) to have the rules in subsection 85(1) apply to each transfer of Limited Partnership Units and shares referred to in paragraph 25 of the Proposed Transactions. The agreed amount in each election will be an amount equal to the lesser of the amounts described in subparagraphs 85(1)(c.1)(i) and (ii).

27. On the day before the Effective Date, Sibling1 will transfer all of his shares of DC to Holdco1 pursuant to section 85 in exchange for XXXXXXXXXX Voting Preference Shares having in aggregate a FMV equal to the FMV at that time of the said shares of DC and having a stated capital equal to the stated capital of the shares of DC transferred to Holdco1.

28. On the day before the Effective Date, Sibling2 will transfer all of her shares of DC to Holdco2 pursuant to section 85 in exchange for XXXXXXXXXX Voting Preference Shares having in aggregate a FMV equal to the FMV at that time of the said shares of DC and having a stated capital equal to the stated capital of the shares of DC transferred to Holdco2.

29. On the day before the Effective Date, Sibling3 will transfer all of his shares of DC to Holdco3 pursuant to section 85 in exchange for XXXXXXXXXX Voting Preference Shares having in aggregate a FMV equal to the FMV at that time of the said shares of DC and having a stated capital equal to the stated capital of the shares of DC transferred to Holdco3.

30. In regard to each of the transfers described in paragraphs 27, 28 and 29 above, each Sibling and his or her respective Holdco will file a joint election, in prescribed form, and within the time limits referred to in subsection 85(6) to have the rules in subsection 85(1) apply in respect of the transfers. The agreed amount in each election will be the ACB of the shares of DC transferred to the Holdco.

31. Immediately before the transfers of property described in paragraph 32 below, the property owned by DC will be determined on a consolidated basis, including the appropriate pro-rata share of the assets of any corporation over which DC has the ability to exercise significant influence, which assets will be classified into three types:

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

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

(c) business 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 a business (other than a specified investment business).

Any tax accounts such as any non-capital loss, net capital loss, the balance of any RDTOH or capital dividend account will not be considered property for this purpose.

32. On the Effective Date, DC will transfer to each Holdco one-third of each type of property as described above. For greater certainty, the transfers will be effected in a manner such that each Holdco will acquire one-third of each type of property on a gross fair market value basis. The shares of Subsidiary and any other corporation over which DC has significant influence will be transferred in equal numbers to each Holdco.

As consideration for the property so transferred, each Holdco will assume one-third of the liabilities of DC and each Holdco will issue one Non-Voting Preference Share to DC having a FMV and a redemption amount equal to the amount by which the FMV of the assets of DC transferred to the Holdco exceeds the amount of the liabilities respectively assumed by the Holdco.

Each Holdco will add to the stated capital account maintained for its Non-Voting Preference Shares an amount equal to the amount by which the aggregate costs of the properties acquired by the Subco (determined pursuant to subsection 85(1) if relevant) exceeds the amount of the liabilities assumed by the Subco.

33. Immediately following the transfers set out in paragraph 32 of the Proposed Transactions, the FMV of each type of property received by each of Holdco1, Holdco2 and Holdco3 will approximate the proportion determined by the formula:

A x B
C

where:

A is the FMV, immediately before the transfer, of all property of that type owned at that time by DC,

B is the FMV, immediately before the transfer, of all of the shares of the capital stock of DC owned by a Holdco, and

C is the FMV, immediately before the transfer, of all the issued shares of the capital stock of DC

For the purposes of this Paragraph, the expression "approximates the proportion" means the discrepancy from that proportion, if any, that would exceed one percent (1%) determined as a percentage of the FMV of the property that the Holdco has received compared to what it would have received had it received its appropriate pro-rata share of DC's property.

34. The property transferred by DC to the Holdcos as described in paragraph 32 of the Proposed Transactions may include non-depreciable capital property with unrealized capital gains (the "Gain Properties"), non-depreciable capital property with unrealized capital losses (the "Loss Properties"), depreciable property, and eligible capital property.

DC and each Holdco will elect, jointly and in prescribed form and within the time limits referred to in subsection 85(6), to have the rules in subsection 85(1) apply to each of the Gain Properties, the Loss Properties, the depreciable property, and the eligible capital property transferred to a Holdco as follows:

i. in the case of each Loss Property, the agreed amount will be an amount equal to the lesser of the amounts described in subparagraphs 85(1)(c.1)(i) and (ii)

ii. in the case of each Gain Property, the agreed amount will be an amount that is either equal to the ACB of the Gain Property or between the ACB and the FMV of the Gain Property. [The aggregate of all agreed amounts will exceed the aggregate of all the ACB's of the Gain Properties transferred to the Holdcos by an amount, if any, by which

(x) the aggregate of the capital losses on the Loss Properties being transferred to the Holdcos, the capital losses on the Loss Limited Partnership Units plus any other capital losses that are realized by DC after XXXXXXXXXX and before the Effective Date or which are available for carry forward into the XXXXXXXXXX taxation year,

exceeds

(y) the aggregate of any capital gains as may have been realized by DC after XXXXXXXXXX and before the Effective Date];

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

ii. in the case of eligible capital property, the agreed amount will be an amount equal to the least of the amounts specified in subparagraphs 85(1)(d)(i), (ii) and (iii) .

For the purposes of the joint election described herein, the reference to "the undepreciated capital cost to the taxpayer of all property of that class immediately before the disposition" found in subparagraph 85(1)(e)(i) shall be interpreted to mean that proportion of the undepreciated capital cost to the taxpayer of all the property of that class that the original cost of the assets that are transferred immediately before the disposition is of the original cost of all property of that class immediately before the disposition.

The agreed amount for any particular property included in the subsection 85(1) elections referred to in this paragraph will not be less than the amount of any liabilities treated as being assumed by a Holdco as consideration for the transfer of the particular property and will not exceed the FMV of the particular property. The amount of liabilities to be allocated to any property that is not the subject of an election under subsection 85(1) will not exceed the fair market value of such property.

35 On the Effective Date, each Holdco will redeem the one Non-Voting Preference Share in its capital stock owned by DC for an amount equal to its redemption amount, being its FMV (the "Redemption Price"). As payment of the Redemption Price, each Holdco will issue a non-interest-bearing promissory note payable on demand having a principal amount stated by formula to be equal to the Redemption Price. DC will accept the promissory note issued by Holdco1 (the "Holdco1 Note") as full payment for the Redemption Price of the Non-Voting Preference Share of Holdco1. DC will accept the promissory note issued by Holdco2 (the "Holdco2 Note") as full payment for the Redemption Price of the Non-Voting Preference Share of Holdco2. DC will accept the promissory note issued by Holdco3 (the "Holdco3 Note") as full payment for the Redemption Price of the Non-Voting Preference Share of Holdco3.

36 At the end of the Effective Date, each of Holdco1, Holdco2 and Holdco3 will cause its first taxation year to end.

37 On the day after the Effective Date, prior to the close of business, the shareholders of DC, will by special resolution, resolve to wind-up and dissolve DC under the applicable provisions of The Corporations Act of XXXXXXXXXX . In the course of the winding-up, DC will assign and distribute the Holdco1 Note to Holdco1, the Holdco2 Note to Holdco2, and the Holdco3 Note to Holdco3.

38 As a result of the assignment and distribution of the Holdco Notes, as described in the preceding paragraph, the obligations under the Holdco Notes will be cancelled.

39 DC will elect, pursuant to subsection 83(2), in prescribed manner and prescribed form, to treat a portion of the deemed dividend, referred to in subparagraph 88(2)(b)(i), on its class of Voting Common Shares to be a capital dividend.

40 Following receipt of the dividend refund to which DC will become entitled as a result of the proposed transactions described herein, DC will distribute one-third of such amount to each Holdco. An agreement will be prepared whereby the Holdcos will agree that all other property or liabilities of DC, if any, not known by this time, will be subsequently shared among the Holdcos equally.

41 Following the completion of the preceding transactions, all properties of DC will have been distributed and all liabilities either discharged or assumed by the Holdcos. Articles of Dissolution will then be filed and DC will be dissolved.

42 On the day after Effective Date, prior to the close of business, the Holdcos will enter into an agreement to share the overhead and rental costs of the office premises formerly leased by DC (which lease the Holdcos will now own in equal undivided interests) and to share the costs pertaining to the Class 8 and Class 10 assets at the office premises (which assets the Holdcos will now also own in equal undivided interests).

Post-Butterfly Transactions

43 At 11:59 p.m. on the day after Effective Date, Sibling1 will transfer his one Common Share of Holdco1 to Holdco1 in exchange for Voting Preference Shares having FMV in aggregate equal to the FMV of the one Common Share. Holdco1 will add $XXXXXXXXXX to the stated capital account of its Voting Preference Shares.

44 At 11:59 p.m. on the day after Effective Date, Sibling2 will transfer her one Common Share of Holdco2 to Holdco2 in exchange for Voting Preference Shares having FMV in aggregate equal to the FMV of the one Common Share. Holdco2 will add $XXXXXXXXXX to the stated capital account of its Voting Preference Shares.

45 At 11:59 p.m. on the day after Effective Date, Sibling3 will transfer his one Common Share of Holdco3 to Holdco3 in exchange for Voting Preference Shares having FMV in aggregate equal to the FMV of the one Common Share. Holdco3 will add $XXXXXXXXXX to the stated capital account of its Voting Preference Shares.

46 At 12:01 a.m. on the second day after Effective Date, New Trust1 will subscribe for XXXXXXXXXX Common Shares of Holdco1 for the subscription price of $XXXXXXXXXX and will pay the subscription price out of its settlement proceeds.

47 At 12:01 a.m. on the second day after Effective Date, New Trust2 will subscribe for XXXXXXXXXX Common Shares of Holdco2 for the subscription price of $XXXXXXXXXX and will pay the subscription price out of its settlement proceeds.

48 At 12:01 a.m. on the second day after Effective Date, New Trust3 will subscribe for XXXXXXXXXX Common Shares of Holdco3 for the subscription price of $XXXXXXXXXX and will pay the subscription price out of its settlement proceeds.

ADDITIONAL INFORMATION AND REPRESENTATIONS

49 No property has or will become property of DC or any corporation controlled by DC or by a predecessor corporation of any such corporation, and no liabilities have been or will be incurred by DC or any corporation controlled by DC or a predecessor corporation of any such corporation, in contemplation of and before the proposed transfer of property described in paragraph 32 of the Proposed Transactions, otherwise than as described herein.

50 None of the shares of DC or of any of the issued shares of the Holdcos is or will be subject to a guarantee agreement or a dividend rental arrangement and none of such shares has been or will be issued or acquired as part of the transaction or event or series of transactions or events of the type described in subsection 112(2.5).

51 None of DC or the Holdcos will be, at any time before the completion of the Proposed Transactions, a specified financial institution.

PURPOSE OF THE PROPOSED TRANSACTIONS

52 The general objectives of the proposed transactions are:

i. as to the Trust distribution, to distribute the shares of DC to the Siblings under subsection 107(2) prior to the 21-year rule in subsection 104(4) taking effect which would cause a deemed disposition of the shares at their FMV;

ii. as to the butterfly transaction, to enable each Sibling to have direct and separate control of his or her respective pro-rata share of the property of DC so that each may deal with such property independently from the others during their lives if they so decide; and in particular so that each Sibling may determine the independent investment policy of their Holdco; and

iii. as to the post-butterfly transactions, to permit each Sibling to implement estate planning objectives for their children and to segregate future appreciation in the value of the Holdcos in the New Trusts.

RULINGS

Provided that the above statements constitute a complete and accurate disclosure of all the relevant facts, proposed transactions and proposed transactions, we rule as follows:

A. Subsection 107(2) will apply to the distribution described in paragraph 14 of the Proposed Transactions above such that:

(a) pursuant to paragraph 107(2)(a), the Trust will be deemed to have disposed of the shares of DC for proceeds of disposition equal to the cost amount to the Trust of the shares immediately before the distribution;

(b) pursuant to paragraph 107(2)(b), each Sibling will be deemed to have acquired his or her portion of the shares of DC so distributed at a cost to him or her equal to the cost amount to the Trust of his or her portion of the shares immediately before the distribution;

(c) pursuant to paragraph 107(2)(c), each Sibling will be deemed to have disposed of part of his or her capital interest in the Trust for proceeds of disposition equal to the cost at which he or she is deemed by (b) above to have acquired his or her shares of DC; and

(d) pursuant to subsection 107(1.1), paragraph 107(1)(a) and the definition of cost amount in subsection 108(1) , the ACB of that part of the capital interest in the Trust of each Sibling immediately before the disposition of such part of his or her capital interest referred to in (c) above will be deemed to be equal to his or her respective portion of the cost amount to the Trust of the shares of DC distributed immediately before the distribution, and therefore no gain or loss will arise on the disposition of a part of a Sibling's capital interest in the Trust.

B. There will be no acquisition of control of DC for the purposes of section 111 by virtue of the transactions described in paragraph 14 and paragraphs 27 to 29 of the Proposed Transactions.

C. Subsection 85(1) will apply to the transfer of the limited partnership units by DC to Subsidiary as described in paragraphs 25 and 26 of the Proposed Transactions in respect of which an election under subsection 85(1) will be made. The agreed amount in respect of each transfer of units will be deemed to be DC's proceeds of disposition and Subsidiary's cost thereof pursuant to paragraph 85(1)(a). For greater certainty, paragraph 85(1)(e.2) will not apply to the transfers.

D. Subsection 85(1) will apply to the transfer of the shares of DC by each Sibling to his or her Holdco as described in paragraphs 27, 28 and 29 of the Proposed Transactions in respect of which an election under subsection 85(1) will be made. The agreed amount in respect of each transfer of such shares 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.

E. Subsection 85(1) will apply to the transfer of each eligible property by DC to a Holdco as described in paragraphs 32 and 34 of the Proposed Transactions, in respect of which an election under subsection 85(1) is made, such that the agreed amount in respect of each transfer of each eligible property will be deemed to be the proceeds of disposition to DC and the cost to each Holdco pursuant to paragraph 85(1)(a). For greater certainty, paragraph 85(1)(e.2) will not apply to the transfers.

F. Subparagraph 40(2)(g)(i) will not apply, but paragraph 40(3.4)(a) will deem DC's capital losses on the disposition to Subsidiary of the Loss Limited Partnership Units as described in paragraphs 25 and 26 of the Proposed Transactions to be nil at the time of such disposition. However, subparagraph 40(3.4)(b)(v) will deem such capital losses to occur immediately before the winding-up of DC begins as described in paragraph 37 of the Proposed Transactions.

G. Paragraph 40(2)(g) and subsection 40(3.4) will not apply to deny the capital losses realized by DC on the disposition to the Holdcos of each of the Loss Properties as described in paragraphs 32 and 34 of the Proposed Transactions.

H. On the redemption by a Holdco of the one Non-Voting Preference Share in its capital stock held by DC as described in paragraph 35 of the Proposed Transactions and as a result of the distributions by DC in the course of its winding-up as described in paragraph 37 of the Proposed Transactions:

(a) by virtue of paragraphs 84(3)(a) and 84(3)(b), each Holdco will be deemed to have paid, and DC will be deemed to have received a dividend at that time equal to the amount, if any, by which the amount paid to redeem the Non-Voting Preference Share exceeds the PUC of the share immediately before the redemption;

(b) (i) pursuant to paragraph 88(2)(b) and subsection 84(2), but subject to (b)(ii) and (iii) herein, DC will be deemed to have paid and each Holdco will be deemed to have received a dividend on the XXXXXXXXXX Voting Common Shares of DC held by the Holdco, equal to XXXXXXXXXX of the amount (the "winding-up dividend") by which the aggregate FMV of the property of DC distributed by DC on the winding-up in respect of such Voting Common Shares exceeds the amount by which the PUC of the Voting Common Shares is reduced;

(ii) pursuant to subparagraph 88(2)(b)(i), such portion of the winding-up dividend as does not exceed DC's CDA immediately before payment of the winding-up dividend and in respect of which DC has elected, as described in paragraph 39 of the Proposed Transactions, will be deemed to be the full amount of a separate dividend;

(iii) pursuant to subparagraph 88(2)(b)(iii), the winding-up dividend, to the extent it exceeds the portion referred to in (ii) herein that is deemed to be a separate dividend, will be deemed to be a separate taxable dividend;

(c) pursuant to paragraph 88(2)(b) and subsection 84(2), DC will be deemed to have paid and each Holdco will be deemed to have received a dividend on the XXXXXXXXXX Non-Voting Common Shares of DC held by the Holdco, equal to XXXXXXXXXX of the amount by which the aggregate FMV of the property of DC distributed by DC on the winding-up in respect of such Non-Voting Common Shares exceeds the amount by which the PUC of the Non-Voting Common Shares is reduced;

(d) to the extent that the deemed dividends described in (a), (b) and (c) above are taxable dividends, such dividends will, pursuant to subsection 112(1), be deductible in computing the taxable income of the recipient for the year in which the dividends are 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);

(e) the amount of the deemed dividends described in (a), (b) and (c) above will, by virtue of paragraph (j) of the definition of "proceeds of disposition" in section 54, be excluded from the Holdcos' proceeds of disposition of the Voting Common Shares and Non-Voting Common Shares on the winding-up of DC and from DC's proceeds of disposition of the Non-Voting Preference Shares of the Holdcos and any loss arising from such disposition of those shares will be reduced by the amount of such dividends pursuant to subsection 112(3);

(f) by virtue of subsection 186(2) and paragraph 186(4)(a), DC will be connected with each Holdco and each Holdco will be connected with DC; consequently:

(i) provided that each of Holdco1, Holdco2 and Holdco3 is not entitled to a dividend refund (within the meaning of subsection 129(1)) in respect of its taxation year in which it is deemed to pay the dividend referred to in (a) above, DC will not be subject to Part IV tax in respect of such dividend, and

(ii) Holdco1, Holdco2 and Holdco3 will, pursuant to paragraph 186(1)(b), be subject to Part IV tax in an amount equal to that proportion of the dividend refund to which DC will become entitled (within the meaning of subsection 129(1)) for its taxation year in which the dividends, referred to in (b)(iii) and (c) above, are paid, that the amount of such dividends received by each of Holdco1, Holdco2 and Holdco3 is of the aggregate of all taxable dividends paid by DC in its taxation year in which such dividends are paid; and

(g) the dividends referred to in (a), (b) and (c) will not be subject to tax under Part IV.1 and Part VI.1 by virtue of paragraph (b) of the definition of "excepted dividend" in section 187.1 and paragraph (a) of the definition of "excluded dividend" in subsection 191(1) because the recipient of the dividend will have a substantial interest, within the meaning assigned by paragraph 191(2)(a) and subsection 191(3), in the payer corporation at the time the dividend is paid.

I. The distribution of the Holdco Notes in the course of the winding-up of DC as described in paragraph 37 of the Proposed Transactions will not result in any gain to DC.

J. The cancellation of the obligations of the Holdco Notes referred to in paragraph 38 of the Proposed Transactions will not give rise to a "forgiven amount" within the meaning of subsection 80(1) or subsection 80.01(1), and none of the Holdcos will realize any gain upon such cancellation.

K. Provided that, as part of the series of transactions or events that includes the Proposed Transactions, there is not:

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

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

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

(d) an acquisition of property in the circumstances described in subparagraph 55(3.1)(b)(iii);

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

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

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

L. Provided that each Sibling holds the one Common Share of his or her Holdco as capital property, the provisions of subsection 86(1) will apply to the exchange of the one Common Share held by each Sibling in his or her Holdco in return for Voting Preference Shares as described in paragraphs 43, 44 and 45 of the Proposed Transactions such that the transferor's proceeds of disposition will be equal to the adjusted cost base of such shares immediately before such exchange pursuant to paragraph 86(1)(c), and for greater certainty, subsection 86(2) will not apply to the transfers.

M. The provisions of subsection 75(2) will not apply to any income, losses, taxable capital gains or allowable capital losses of New Trust1 as a result of the Proposed Transactions in and of themselves.

N. The provisions of subsection 75(2) will not apply to any income, losses, taxable capital gains or allowable capital losses of New Trust2 as a result of the Proposed Transactions in and of themselves.

O. The provisions of subsection 75(2) will not apply to any income, losses, taxable capital gains or allowable capital losses of New Trust3 as a result of the Proposed Transactions in and of themselves.

P. As a result of the Proposed Transactions, in and of themselves, the Minister will not make a designation pursuant to subsection 104(2).

Q. The proposed transactions will not, in and of themselves, cause the New Trusts to fail to meet the definition of "personal trust" as defined in subsection 248(1).

R. By virtue of subsection 74.4(4), subsection 74.4(2) will not apply to Sibling1 regarding the transactions described in paragraphs 17, 27 and 43 of the Proposed Transactions, provided that the conditions of subsection 74.4(4) are met.

S. By virtue of subsection 74.4(4), subsection 74.4(2) will not apply to Sibling2 regarding the transactions described in paragraphs 18, 28 and 44 of the Proposed Transactions, provided that the conditions of subsection 74.4(4) are met.

T. By virtue of subsection 74.4(4), subsection 74.4(2) will not apply to Sibling3 regarding the transactions described in paragraphs 19, 29 and 45 of the Proposed Transactions, provided that the conditions of subsection 74.4(4) are met.

U. The provisions of subsections 15(1), 56(2), 56(4), 69(1), 69(4), 105(1) and 246(1) will not apply to any of the transactions contained in the Proposed Transactions in and of themselves.

V. Subsection 245(2) will not be applied, as a result of the Proposed Transactions, in and by themselves, to redetermine the tax consequences confirmed in the rulings given above.

These rulings are given subject to the limitations and qualifications set forth in Information Circular 70-6R5 issued on May 29, 2001, and are binding on the Canada Customs and Revenue Agency provided that the proposed transactions are completed before XXXXXXXXXX.

These 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.

OPINION

Provided that the draft legislation contained in subsection 43(3) of the Draft Technical Income Tax Amendments released by the Department of Finance on December 20, 2002, is enacted substantially as proposed, we confirm that the tax consequences confirmed in ruling A will not be affected.

COMMENTS

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 FMV, ACB or PUC of any shares referred to herein;

(b) the determination of the balance of the capital dividend account or the refundable dividend tax on hand; or

(c) any tax consequences relating 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