2003 Ruling 2003-0015553 - XXXXXXXXXX - 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: Distribution of property pursuant to paragraph 55(3)(b).

Position: Favourable ruling provided.

Reasons: The law.

XXXXXXXXXX 2003-001555

XXXXXXXXXX, 2003

Dear XXXXXXXXXX:

Re: XXXXXXXXXX ("Holdco")
XXXXXXXXXX ("Opco")
Advance Income Tax Ruling Request

This is in reply to your letter of XXXXXXXXXX, and your other correspondence, wherein you requested an advance income tax ruling on behalf of the above-noted taxpayers. You have advised us that to the best of your knowledge and that of the taxpayers involved none of the issues involved in this ruling request are:

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

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

(iii) under objection by the taxpayers or a related person;

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

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

The taxpayers have also represented that the proposed transactions described herein will not result in any taxpayer described herein being unable to pay its existing outstanding tax liabilities.

DEFINITIONS

In this letter all monetary amounts are expressed in Canadian dollars and 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 from time to time and consolidated to the date of this letter and, unless otherwise expressly stated, every reference herein to a part, section or subsection, paragraph or subparagraph and clause or subclause is a reference to the relevant provision of the Act, and the Income Tax Regulations thereunder are referred to as the "Regulations";

(b) "active business" has the meaning assigned by subsection 248(1);

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

(d) "agreed amount" has the meaning assigned by subsection 85(1);

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

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

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

(h) "capital property" has the meaning assigned by subsection 248(1);

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

(j) "Child 1" means XXXXXXXXXX;

(k) "Child 2" means XXXXXXXXXX;

(l) "Child 3" means XXXXXXXXXX;

(m) "Child 4" means XXXXXXXXXX;

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

(o) "DC" means the corporation to be established as a result of the proposed amalgamation of Holdco and Opco as described in Paragraph 17;

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

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

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

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

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

(u) "fair market value" means the highest price available in an open and unrestricted market between informed, prudent parties acting at arm's length and under no compulsion to act;

(v) "FamilyCo 2" means XXXXXXXXXX and is more fully described in Paragraphs 9 and 10;

(w) "FamilyCo Trust 2" means XXXXXXXXXX and is more fully described in Paragraph 11;

(x) "XXXXXXXXXX" has the meaning assigned by subsection 248(1);

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

(z) "inventory" has the meaning assigned by subsection 248(1);

(aa) "non-capital loss" has the meaning assigned by subsection 248(1);

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

(cc) "Paragraph" refers to a numbered paragraph in this advance income tax ruling;

(dd) "predecessor corporation" has the meaning assigned by subsection 87(1);

(ee) "Proposed Transactions" means the transactions described in Paragraphs 13 to 26;

(ff) "refundable dividend tax on hand" has the meaning assigned by subsection 129(3);

(gg) "related persons" has the meaning assigned by section 251;

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

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

(jj) "specified investment business" has the meaning assigned by subsection 125(7) and subsection 248(1);

(kk) "stated capital" has the meaning assigned by the BCA;

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

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

FACTS

1. Opco was originally incorporated pursuant to the Companies Act of the Province of XXXXXXXXXX and was continued under the BCA on XXXXXXXXXX. Opco is a taxable Canadian corporation and a Canadian-controlled private corporation.

2. Opco carries on the business of farming exclusively in Canada and calculates its XXXXXXXXXX income using the XXXXXXXXXX as set out in XXXXXXXXXX . Opco's taxation year ends on XXXXXXXXXX. Opco's CCRA business number is XXXXXXXXXX and it deals with the XXXXXXXXXX TSO.

3. Opco's authorized share capital consists of XXXXXXXXXX common shares of no par value. Currently, there are only XXXXXXXXXX issued and outstanding common shares of Opco, which are legally and beneficially owned by Holdco.

4. Holdco was originally incorporated as XXXXXXXXXX pursuant to the Companies Act of the Province of XXXXXXXXXX and was continued under the BCA on XXXXXXXXXX. changed its name to Holdco on XXXXXXXXXX. Holdco is a taxable Canadian corporation and a Canadian-controlled private corporation.

5. Holdco does not carry on any active business. Holdco's property consists solely of the XXXXXXXXXX common shares of Opco; a small percentage ownership in the shares of XXXXXXXXXX ("PrivateCo"); an amount receivable of $XXXXXXXXXX from XXXXXXXXXX and current assets related to and derived from these holdings. Currently, the PrivateCo shares owned by Holdco have an estimated fair market value of $XXXXXXXXXX and an adjusted cost base of $XXXXXXXXXX. Holdco's CCRA business number is XXXXXXXXXX and it deals with the XXXXXXXXXX TSO.

6. Holdco's authorized share capital consists of the following classes of shares:

? XXXXXXXXXX voting XXXXXXXXXX percent preference shares redeemable at $XXXXXXXXXX per share
? XXXXXXXXXX non-voting XXXXXXXXXX percent preference shares redeemable at $XXXXXXXXXX per share
? XXXXXXXXXX common shares

Currently, Holdco has XXXXXXXXXX common shares issued and outstanding, which are held equally by each of Child 1, Child 2, Child 3 and Child 4.

7. Each of Child 1, Child 2, Child 3 and Child 4 (collectively the "Children") are the adult children of XXXXXXXXXX ("Parent 1") who is now deceased, and his spouse XXXXXXXXXX ("Parent 2"). Each of the Children is a resident of Canada for purposes of the Act. The common shares of Holdco owned by each of Child 1, Child 2, Child 3 and Child 4 represent capital property to each such Child and none of these shares were acquired by any of the Children in contemplation of the Proposed Transactions.

8. Holdco does not currently have any RDTOH balance. Opco currently has a RDTOH balance of $XXXXXXXXXX. Holdco also has a non-capital loss carryforward balance of $XXXXXXXXXX as at XXXXXXXXXX.

9. FamilyCo 2 was incorporated on XXXXXXXXXX pursuant to the BCA. FamilyCo 2 is a taxable Canadian corporation and a Canadian-controlled private corporation. FamilyCo 2's CCRA business number is XXXXXXXXXX and it deals with the XXXXXXXXXX TSO.

10. FamilyCo 2's authorized share capital consists of an unlimited number of the following classes of shares:

? Class A common shares (voting)
? Class B common shares (non-voting)
? Class C redeemable shares

In addition, FamilyCo 2 is authorized to issue XXXXXXXXXX Class D redeemable non-voting shares (the "FamilyCo 2 Class D Shares"). Currently, FamilyCo 2's issued and outstanding share capital consists solely of XXXXXXXXXX Class A common shares that are owned by FamilyCo Trust 2 and the XXXXXXXXXX FamilyCo 2 Class D Shares that are owned by Opco. The XXXXXXXXXX Class A common shares have an aggregate stated capital, paid-up capital and adjusted cost base of $XXXXXXXXXX. The XXXXXXXXXX FamilyCo 2 Class D Shares have an estimated fair market value of $XXXXXXXXXX and an aggregate stated capital, paid-up capital and adjusted cost base of $XXXXXXXXXX.

11. FamilyCo Trust 2 is a personal trust settled by Parent 1 on XXXXXXXXXX for the benefit of Child 2 and Child 2's immediate family. The trustees are Child 2, Child 2's spouse and XXXXXXXXXX, a person who is not related to the other two trustees and the income and capital beneficiaries are Child 2, Child 2's spouse and their XXXXXXXXXX children, XXXXXXXXXX and who are residents of Canada for the purposes of the Act.

12. Currently, the estimated net fair market value of all the property owned by Holdco and Opco is approximately $XXXXXXXXXX.

PROPOSED TRANSACTIONS

13. The Proposed Transactions will be completed in the following order unless otherwise indicated.

14. Parent 2 will settle four new family trusts (i.e. a separate trust for each of Parent 2's four Children and their respective family) by irrevocably transferring a gold coin owned by XXXXXXXXXX to each such trust. Each of the four new trusts will be a personal trust, as defined in subsection 248(1), the key elements of which are described below.

(a) The new trust settled for Child 1 ("Trust 1") will have the following key elements:

(i) The trustees will be Child 1, Child 1's spouse and XXXXXXXXXX, a person who is not related to the other two trustees.

(ii) The income and capital beneficiaries will be Child 1, Child 1's spouse and their XXXXXXXXXX adult children, XXXXXXXXXX who are residents of Canada for the purposes of the Act.

(b) The new trust settled for Child 2 ("Trust 2") will have the following key elements:

(i) The trustees will be Child 2, Child 2's spouse and XXXXXXXXXX.

(ii) The income and capital beneficiaries will be Child 2, Child 2's spouse and their XXXXXXXXXX children, XXXXXXXXXX.

(c) The new trust settled for Child 3 ("Trust 3") will have the following key elements:

(i) The trustees will be Child 3 and Child 3's spouse.

(ii) The income and capital beneficiaries will be Child 3, Child 3's spouse and their XXXXXXXXXX adult children, XXXXXXXXXX who are residents of Canada for the purposes of the Act.

(d) The new trust settled for Child 4 ("Trust 4") will have the following key elements:

(i) The trustees will be Child 4, Child 4's spouse and XXXXXXXXXX, a person who is not related to the other two trustees.

(ii) The income and capital beneficiaries will be Child 4, Child 4's spouse and their XXXXXXXXXX children, XXXXXXXXXX and who are residents of Canada for the purposes of the Act.

Each trust indenture documenting the terms of Trust 1, Trust 2, Trust 3 and Trust 4, as the case may be, will contain a clause which adopts the limitation described in paragraph 74.4(4)(b) such that none of the above mentioned trusts will be permitted to make a distribution of income or capital to any beneficiary while such person is a "designated person" as defined in subsection 74.5(5).

15. Child 1, Child 2, Child 3 and Child 4 each will separately incorporate a new corporation under the BCA (referred to as "Newco 1", "Newco 2", "Newco 3" and "Newco 4", respectively, and the "Newcos" collectively). The authorized share capital of each Newco essentially will be identical and will consist of an unlimited number of the following separate classes of shares:

? Class A voting participating shares ("Class A Shares")
? Class B non-voting participating shares ("Class B Shares")
? Class C voting preference shares ("Class C Shares")
? Class D non-voting preference shares ("Class D Shares")

The terms and conditions of the Class C Shares and Class D Shares will contain, inter alia, the following rights in respect thereof:

(a) redeemable and retractable for an amount (the "Redemption Amount") equal to the fair market value of the consideration for which such shares were issued;

(b) entitlement to non-cumulative annual dividends, when and if declared at the discretion of the Directors, at a rate of XXXXXXXXXX% per annum or such other rate as the Directors may from time to time determine (not to exceed %XXXXXXXXXX per annum) on the Redemption Amount thereof, provided that the result of the payment of any dividend on the Class C Shares or the Class D Shares does not impair the ability of the issuing corporation to redeem all of its then outstanding Class C Shares and Class D Shares at their Redemption Amount;

(c) whether or not such shares are voting in respect of the election of the Board of Directors or other matters, any preference, right, condition or limitation attaching to these shares can only be amended by a special resolution of the holders of each class of shares of the corporation each voting separately as a class;

(d) preference over all other shares on any distribution of the corporation's assets upon liquidation, dissolution or winding-up of the issuing corporation;

(e) no restriction as to the transferability of such shares, other than as required by the BCA, to qualify the issuing corporation as a private corporation; and

(f) a condition that dividends may be paid on the Class A Shares or the Class B Shares without annual dividends having been declared on the preference shares, provided that the result of the payment of any dividends on the Class A Shares or the Class B Shares does not impair the ability of the issuing corporation to redeem its then outstanding Class C Shares and Class D Shares at their Redemption Amount.

16. Trust 1, Trust 2, Trust 3 and Trust 4 will each separately pledge its gold coin to effect a borrowing by each such trust of $XXXXXXXXXX (on a non-interest bearing basis). Each such trust will use such funds to acquire XXXXXXXXXX fully paid Class A Shares from its corresponding Child's Newco for an aggregate subscription price of $XXXXXXXXXX such that immediately after the XXXXXXXXXX Class A Shares of each particular Newco are issued such shares will be owned as follows:

Trust
Shares of Newco

Trust 1
XXXXXX Class A Shares of Newco 1
Trust 2
XXXXXX Class A Shares of Newco 2
Trust 3
XXXXXX Class A Shares of Newco 3
Trust 4
XXXXXX Class A Shares of Newco 4

The adjusted cost base, stated capital and paid-up capital of each Newco's Class A Shares so issued and held by the respective holder will be $XXXXXXXXXX per share.

17. Under the applicable provisions of the BCA, Holdco will be amalgamated with Opco to form a new corporate entity "DC" such that:

(a) all of the property (except amounts receivable from any predecessor corporation or shares of the capital stock of any predecessor corporation) of Holdco and Opco immediately before the amalgamation will become property of DC by virtue of the amalgamation;

(b) all of the liabilities (except amounts payable to any predecessor corporation) of Holdco and Opco will become liabilities of DC by virtue of the amalgamation; and

(c) the outstanding shares of Opco owned by Holdco immediately prior to the amalgamation will be cancelled on the amalgamation, such that the XXXXXXXXXX common shares of Holdco that are owned by each of Child 1, Child 2, Child 3 and Child 4 immediately prior to the amalgamation will remain outstanding as common shares of DC (the "DC Common Shares").

Accordingly, the aggregate fair market value of the DC Common Shares issued and outstanding immediately after the amalgamation will be equal to the aggregate fair market value of all the shares of Holdco and Opco that were issued and outstanding immediately before the amalgamation. DC will be a taxable Canadian corporation.

18. Child 2 will acquire the XXXXXXXXXX FamilyCo 2 Class D Shares that are owned by DC, for a purchase price equal to their fair market value. As sole consideration for such purchase, Child 2 will issue a non-convertible promissory note (the "Class D Share Note") to DC having a principal amount and fair market value equal to the fair market value of the XXXXXXXXXX FamilyCo 2 Class D Shares so acquired by Child 2. The Class D Share Note issued by Child 2 will bear interest at the rate of XXXXXXXXXX% per annum and will be repayable on demand after the end of the XXXXXXXXXX-year period following the date of its issue.

19. The following transfers then will occur contemporaneously:

Each of the Children will transfer all their DC Common Shares (i.e. XXXXXXXXXX DC Common Shares each) to such Child's Newco for a purchase price equal to the aggregate fair market value of such shares. As sole consideration therefor, each Child's Newco will issue a number of its Class C Shares to such Child that will have an aggregate fair market value and aggregate Redemption Amount equal to the aggregate fair market value of the XXXXXXXXXX DC Common Shares so transferred to it. As a result, each Child will acquire control of such Child's Newco.

Each Child and such Child's Newco will jointly elect, under subsection 85(1) in prescribed form and manner and within the time specified in subsection 85(6), in respect of the transfer by such Child of the XXXXXXXXXX DC Common Shares to defer any capital gain that would otherwise result from the disposition of the DC Common Shares. The agreed amount for the purposes of each such election will be equal to the lesser of the amounts described in subparagraphs 85(1)(c.1) (i) and (ii).

The aggregate amount to be added to the stated capital account maintained for the Class C Shares that will be issued by each Newco as consideration for the XXXXXXXXXX DC Common Shares transferred to it by such Child under the BCA will equal the aggregate paid-up capital attributable to the XXXXXXXXXX DC Common Shares received by the particular Newco as described above. For greater certainty, such amount will not exceed the amount that is determined by the formula that is determined as B for the purposes of paragraph 84.1(1)(a).

Immediately after the above transfers, the Class C Shares issued by each Newco will be owned as follows:

Shareholder
Corporation

Child 1
Class C Shares of Newco 1
Child 2
Class C Shares of Newco 2
Child 3
Class C Shares of Newco 3
Child 4
Class C Shares of Newco 4

20. Immediately prior to the transfers of property set out in Paragraph 22 below, the property of DC will be classified into three types of property for purposes of the definition of "distribution" in subsection 55(1) as follows:

(a) cash or near cash property, comprising all of the current assets of DC, including any cash, accounts receivable, inventory and rights arising from prepaid expenses;

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

(c) investment property, comprising all of the assets of DC, other than cash or near cash property, any income from which would, for purposes of the Act, be income from property or a specified investment business, including, for greater certainty, the Class D Share Note issued by Child 2 as described in Paragraph 18.

In accordance with the policy described in Paragraph 21(b) below, the net fair market value of DC's inventory, accounts receivables and rights arising from prepaid expenses will be re-classified as business property to the extent that a particular Newco receiving such property will use such property in a business carried on by it which represents a continuation of the particular business carried on by DC immediately before the transfer of such property. In addition, for these purposes, any tax accounts of DC, including any non-capital loss balance, will not be considered as property.

21. In determining the net fair market value of each of the three types of property of DC immediately before the transfers of property described in Paragraph 22 below, the liabilities of DC will be allocated to, and will be deducted in the calculation of, the net fair market value of each such type of property of DC in the following manner:

(a) current liabilities of DC, comprising of accounts payable, accrued liabilities and income taxes payable of DC and its predecessors, will be allocated to the cash or near cash property (as described in Paragraph 20(a) above) 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 owned by DC;

(b) following the allocation of current liabilities to cash or near-cash property of DC as described in (a) above, and provided the amount of DC's cash or near cash property exceeds its current liabilities, the net fair market value of any accounts receivables, inventory and rights arising from prepaid expenses of DC will be reclassified as business property and excluded from the net fair market value of DC's cash or near-cash property, to the extent that such property will be collected, sold or used in the ordinary course of business to be carried on by a transferee corporation to which such property relates;

(c) liabilities, other than current liabilities, of DC 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 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

(d) if any liabilities remain after the allocations described in paragraphs (a) and (c) above are made ("excess unallocated liabilities"), such excess 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 excess unallocated liabilities.

For the purposes of this Paragraph, and for the purposes of the Proposed Transactions, no amount will be considered to be a liability of DC unless it represents a true legal liability which is capable of quantification. Consequently, for greater certainty, any estimated future income tax liability of DC will not be considered to be a liability for these purposes. For the purposes of determining the net fair market value of DC's XXXXXXXXXX inventory under (a) above, the long-term portion of any loan owing by DC and which relates solely to XXXXXXXXXX purchases will be allocated to such inventory.

As a result of the foregoing determinations, and in accordance with CCRA's administrative practice allowing for the re-classification of cash or near cash property, other than cash, as business property in certain circumstances as described in (b) above, it is expected that DC will only have business-type property and investment-type property immediately before the proposed distribution.

22. Following the determination of the net fair market value of DC's three types of property as described in Paragraphs 20 and 21 above, DC will transfer, at fair market value to each of Newco 1, Newco 2, Newco 3 and Newco 4, one quarter (25%) of the net fair market value of each type of property then owned by DC, such that immediately following such transfers, the net fair market value of each type of property so transferred to each such Newco, will for greater certainty, approximate that proportion of the net fair market value of all property of DC of that type determined immediately before such transfer that:

(a) the aggregate fair market value, immediately before the transfer, of all of the shares of DC owned by each of Newco 1, Newco 2, Newco 3 and Newco 4 at that time;

is of

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

For the purposes of this Paragraph and Paragraph 25 below, the expression "approximate that proportion" means that the discrepancy of that proportion, if any, will not exceed one percent (1%), determined as a percentage of the net fair market value of each type of property which each of Newco 1, Newco 2, Newco 3 and Newco 4 will receive as compared to what each such recipient corporation would have received had each such corporation received its appropriate pro-rata share (i.e. XXXXXXXXXX%) of the net fair market value of that type of property.

23. As consideration for the transfer of property described in Paragraph 22 above, each of Newco 1, Newco 2, Newco 3 and Newco 4, as the case may be, will: assume a portion of the liabilities of DC outstanding at that time; issue one or more non-interest bearing demand promissory notes (referred to as an "Asset Purchase Note" and described in more detail below); and issue a number of its Class D Shares to DC. The aggregate fair market value of all such consideration to be paid by each Newco to DC will be equal to the aggregate fair market value of the property transferred by DC to the particular Newco. The Class D Shares to be issued by each of Newco 1, Newco 2, Newco 3 and Newco 4, as the case may be, will have an aggregate fair market value and Redemption Amount equal to the aggregate fair market value of the property transferred by DC to the particular Newco less the amount of any non-share consideration paid by the particular Newco for such transferred property.

Specifically, except for the accounts receivable of DC, where a particular transferred property is an eligible property that has a fair market value exceeding its cost amount to DC immediately before the time such property is transferred to a particular Newco, the consideration to be paid by such Newco to DC will include a number of Class D Shares issued by the particular Newco (i.e. Newco 1, Newco 2, Newco 3 or Newco 4, as the case may be), having an aggregate fair market value and aggregate Redemption Amount equal to the aggregate fair market value of the particular eligible property so transferred to it less the aggregate fair market value of any non-share consideration paid by such Newco in respect thereof. DC and each of Newco 1, Newco 2, Newco 3 and Newco 4, as the case may be, will jointly elect in prescribed form and manner and within the time specified in subsection 85(6) under subsection 85(1) in respect of each such transfer. The agreed amount for the purposes of each such election will not be less than:

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

(b) in the case of inventory, an amount equal to the amount determined by paragraph 85(1)(c.2), on the basis that no amount is designated in respect of parameter D of the formula set out in subparagraph 85(1)(c.2)(i);

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

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

For greater certainty, the agreed amount will be not less than the fair market value, at the time of the disposition, of any non-share consideration received by DC for such property nor will such amount be greater than the fair market value of a particular eligible property.

For the purposes of the above elections, the reference in subparagraph 85(1)(e)(i) to "the undepreciated capital cost to the taxpayer of all property of that class immediately before the disposition" shall be interpreted to mean that proportion of the undepreciated capital cost to DC of all of the property of that class immediately before the disposition that the fair market value at that time of the particular asset that is transferred is of the fair market value at that time of all property of that class.

Where a particular transferred property is an eligible property (other than a depreciable property) that has an adjusted cost base which exceeds its fair market value (such as the PrivateCo shares owned by DC); or where a particular transferred property is not an eligible property (such as prepaid expenses); or where such property is included in DC's accounts receivable, each of Newco 1, Newco 2, Newco 3 and Newco 4, as the case may be, will issue as sole consideration therefor, an Asset Purchase Note with a principal amount and fair market value equal to the fair market value of the particular property so transferred. For greater certainty, the full amount of DC's accounts receivable will be transferred entirely to Newco 2 since DC and Newco 2 intend to file a joint election under subsection 22(1) in prescribed form and manner in respect of such transferred property.

The addition, under the BCA, to the stated capital account maintained for the Class D Shares that will be issued by each of Newco 1, Newco 2, Newco 3 and Newco 4, as the case may be, as consideration for the property transferred to the particular Newco by DC as described above, will not exceed the amount by which the aggregate of the agreed amounts in the particular Newco's subsection 85(1) election exceeds the aggregate of the fair market value of any non-share consideration paid by such Newco as consideration for such eligible property. For greater certainty, the stated capital account addition for such shares will not exceed the maximum amount that could be added to the paid-up capital of such shares, having regard to subsection 85(2.1).

24. Immediately following the transfers of property described in Paragraph 22 above, the following will take place.

(a) Each of the Newcos will redeem all its then issued and outstanding Class D Shares, which are owned by DC at their respective Redemption Amount. As consideration therefor, each of Newco 1, Newco 2, Newco 3 and Newco 4, as the case may be, will issue to DC a non-interest-bearing demand promissory note (each referred to as the "Newco Redemption Note") having a principal amount and fair market value equal to the aggregate fair market value of the particular Class D Shares so redeemed. DC will accept the Newco Redemption Note issued by each of the Newcos as full payment for the Redemption Amount of the respective Newco's Class D Shares so redeemed.

(b) DC will purchase for cancellation its XXXXXXXXXX issued and outstanding DC Common Shares which are owned in equal XXXXXXXXXX share lots by each of Newco 1, Newco 2, Newco 3 and Newco 4, for an amount equal to their fair market value. As consideration therefor, DC will issue to each Newco a non-interest-bearing demand promissory note (each referred to as the "DC Repurchase Note") having a principal amount and fair market value equal to the aggregate fair market value of the XXXXXXXXXX DC Common Shares so owned by such Newco that are purchased for cancellation. Each of Newco 1, Newco 2, Newco 3 and Newco 4, as the case may be, will accept its DC Repurchase Note as full payment for such purchase and the DC Common Shares will be cancelled.

(c) DC and each of Newco 1, Newco 2, Newco 3 and Newco 4, as the case may be, will set-off the principal amounts owing by it to DC on its Asset Purchase Note and its Newco Redemption Note against the principal amount owing by DC to it on the corresponding DC Repurchase Note and each such note will be cancelled together with the underlying liability.

25. Immediately following the completion of the Proposed Transactions described above, each of Newco 1, Newco 2, Newco 3 and Newco 4 as the case may be, will hold legal and beneficial ownership of the property transferred to each such Newco from DC, with the net fair market values determined in the manner described in Paragraph 21 above which will be equal to or will approximate that proportion of the aggregate net fair market value of each type of property of DC determined immediately before the transfer described in Paragraph 22 above that:

(a) the aggregate fair market value, immediately before the transfer of the property described in Paragraph 22 above, of the shares of DC owned by Newco 1, Newco 2, Newco 3 and Newco 4;

is of

(b) the aggregate fair market value, immediately before the transfers of property, of all of the issued and outstanding shares of DC at that time.

26. DC will be wound-up and dissolved. There will be no distribution of assets upon the winding-up of DC since at the time of the wind up DC will not own any property.

PURPOSE OF THE PROPOSED TRANSACTIONS

27. The purpose of the Proposed Transactions is to provide for the separation of the Children's respective interests (direct or indirect) in Holdco and Opco in order to allow for individual estate and succession plans to be formulated independently. Notwithstanding the current common intention of the four Children in respect of operating the active business of Opco, given the changing circumstances surrounding the business assets of Opco and the personal and family circumstances of each Child, the Proposed Transactions will also permit each Child's family unit to formulate and implement its own long-term strategic plans for the future development of Opco's current business in an independent manner.

ADDITIONAL INFORMATION

28. Except as described in this letter, no liabilities have been or will be incurred (other than in the ordinary course of business) by Holdco, Opco or DC, and no property has been or will be acquired or disposed of (other than in the ordinary course of business) by any such corporation, in contemplation of and before the Proposed Transactions.

29. Except as described in this letter, no shareholder of Holdco, Opco, DC, FamilyCo 2, Newco 1, Newco 2, Newco3 or Newco 4 has or is contemplating the sale of any shares of such corporation.

30. None of FamilyCo 2, Opco, DC, Newco 1, Newco 2, Newco 3 and Newco 4 is, or will be at any time during the Proposed Transactions, a specified financial institution or a corporation described in any of paragraphs (a) to (f) of the definition of financial intermediary corporation.

31. None of the shares of Holdco, Opco, DC, FamilyCo 1, Newco 1, Newco 2, Newco 3 or Newco 4, is, or will be, at any time during the Proposed Transactions:

(a) the subject of any undertaking that is a guarantee agreement;

(b) a share that is issued or acquired as part of a transaction, event of series of transactions or events of the type described in subsection 112(2.5); or

(c) the subject of a dividend rental arrangement.

32. Following completion of the Proposed Transactions, Newco 1, Newco 2, Newco 3 or Newco 4 may engage in one or more transactions amongst themselves, which may include the following transactions or events.

(a) Newco 2 and Newco 4 each will receive a portion of DC's XXXXXXXXXX inventory under the Proposed Transactions. Newco 2 and Newco 4 intend to manage the XXXXXXXXXX inventory under a joint venture XXXXXXXXXX operation since this is the most economically viable manner in which to manage this operation (i.e. versus each of Newco 2 and Newco 4 setting up separate XXXXXXXXXX operations). Under a standard industry form of agreement, revenues and costs relating to the XXXXXXXXXX operation will be shared in proportion to the assets contributed to the joint venture by the parties.

(b) Newco 2 will rent to the joint venture described in (a) above certain DC XXXXXXXXXX acquired by it on the distribution described herein as XXXXXXXXXX until XXXXXXXXXX for a rental amount. Thereafter, Newco 2 intends to arrange for the conduct of XXXXXXXXXX operations on its XXXXXXXXXX that may include operations for its own account, a third-party arrangement and/or a continuing arrangement with the joint venture described in (a) above.

(c) Newco 1 and Newco 3 plan to allow the joint venture described in (a) above to use certain property acquired by each such corporation on the distribution described herein in the XXXXXXXXXX operation and each will be paid a share of the revenues received from the sale of XXXXXXXXXX. The terms of any agreement will be structured as are typical for such arrangements in the XXXXXXXXXX industry between arm's-length third parties. Annual return to each of Newco 1 and Newco 3 is expected to be less than $XXXXXXXXXX in total and the right to XXXXXXXXXX will be subject to a right of termination XXXXXXXXXX.

(d) Each of Newco 1, Newco 2, Newco 3 and Newco 4 will receive DC lands in Proposed Transactions in areas subject to consideration for urban planning and development. In the future, each of the Newcos may jointly, or independently, conduct planning and other activities in response to urban development pressures/opportunities in respect of these XXXXXXXXXX.

(e) Newco 1, Newco 2 and Newco 4 have an informal understanding regarding the possibility of promoting an existing XXXXXXXXXX concept for certain continuous DC lands acquired by them. Each of Newco 1, Newco 2 and Newco 4 have agreed to continue the pursuit of the current vision of a XXXXXXXXXXX.

(f) Each of Newco 1, Newco 2, Newco 3 and Newco 4 may engage in one or more transactions amongst themselves which may include the purchase and sale of some of the property acquired by such Newco on the distribution described herein.

The creation of joint venture operations described in (a) above, will not, by itself result in the disposition of any property received by any of Newcos from the DC on the distribution described herein nor will any above described transactions or events described in (b), (c), (d), (e) and (f) above, result in the disposition of any property that would exceed the limitation described in paragraph 55(3.1)(c).

RULINGS GIVEN

Provided that the preceding statements constitute a complete and accurate disclosure of all of the relevant facts, proposed transactions and the purpose of the Proposed Transactions, and provided that the Proposed Transactions are completed in the manner described above, our rulings are as set forth below.

A. Provided the joint elections are filed pursuant to subsection 85(1), within the time set forth in subsection 85(6), subject to the application of subsection 69(11), the provisions of subsection 85(1), will apply to:

(a) the transfer of each eligible property by DC to Newco 1, Newco 2, Newco 3 and Newco 4, as the case may be, as described in Paragraph 22 above; and

(b) the transfer of the DC Common Shares by Child 1, Child 2, Child 3, and Child 4, as the case may be, to such Child's Newco as described in Paragraph 19 above,

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

B. With respect to the amalgamation of Holdco and Opco to form DC as described in Paragraph 17:

(a) it will be considered to be an amalgamation within the meaning of subsection 87(1);

(b) the provisions of subsection 87(2.1) will apply such that for the purpose of determining DC's non-capital loss for any taxation year, DC will be deemed to be the same corporation as, and the continuation of, each predecessor corporation; and

(c) provided the common shares of Holdco were capital property to the holders thereof immediately before the amalgamation, the provisions of subsection 87(4), other than paragraphs (c), (d) and (e) thereof, will apply.

C. As a result of the redemption by each of Newco 1, Newco 2, Newco 3 and Newco 4, as the case may be, of each such Newco's Class D Shares as described in Paragraph 24(a) and the purchase for cancellation by DC of its DC Common Shares held by each such Newco as described in Paragraph 24(b);

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

(i) each of Newco 1, Newco 2, Newco 3 and Newco 4, as the case may be, 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 by the particular Newco in respect of its redemption of Class D Shares owned by DC in exceeds the paid-up capital of such shares immediately before the redemption; and

(ii) DC will be deemed to have paid, and each of Newco 1, Newco 2, Newco 3 and Newco 4, as the case may be, will be deemed to have received, a taxable dividend equal to the amount by which the amount paid by DC in respect of the repurchase of the DC Common Shares owned by each particular Newco exceeds the paid-up capital attributable to such shares immediately before the purchase for cancellation;

(b) the taxable dividends deemed to have been received by DC as described in (a)(i) above, and the taxable dividend deemed to have been received by each Newco as described in (a)(ii) above:

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

(ii) will be excluded from the proceeds of disposition of such 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; and

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

(c) the taxable dividends deemed to have been received by DC as described in (a)(i) above, and the taxable dividend deemed to have been received by each Newco as described in (a)(ii) above, will not be subject to tax under Part IV, except as provided in paragraph 186(1)(b).

(d) the taxable dividends deemed to have been paid:

(i) by each of the Newcos as described in (a)(i) above; and

(ii) by DC to each of Newco 1, Newco 2, Newco 3 and Newco 4, as described in (a)(ii) above

will not be subject to tax under section 187.2 or section 191.1 by virtue of paragraph (b) and paragraph (c) of the definition of "excepted dividend" in section 187.1 and paragraph (a) of the definition of "excluded dividend" in subsection 191(1) because each dividend recipient will have a "substantial interest", within the meaning of assigned by subsection 191(2), in the dividend payer at the time of such dividend payment.

D. Provided that, as part of a series of transactions or events which include the Proposed Transactions described herein, there is not:

(a) an acquisition of property described in clause 55(3.1)(a)(iv)(C);

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

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

(d) an acquisition of shares described in subparagraph 55(3.1)(b)(iii);

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

(f) an acquisition of property 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 and, for greater certainty, subsection 55(3.1) will not apply to deny the exemption under paragraph 55(3)(b).

F. The set-off and cancellation of the principal amounts owing by each such Newco on its Asset Purchase Notes and Newco Redemption Note with the principal amount owing by DC to such Newco on the corresponding DC Repurchase Note as described in Paragraph 24(c) above will not result in a "forgiven amount" within the meaning of either subsection 80(1) or section 80.01. In addition, neither DC nor any of the Newcos will otherwise realize any gain or loss as a result of such set-off and cancellation.

G. The provisions of subsection 15(1), 56(2), 56(4) and 246(1) will not apply to the Proposed Transactions, in and by themselves.

H. Subsection 245(2) will not apply to the Proposed Transactions, in and by themselves, to re-determine the tax consequences confirmed in the rulings given.

The above rulings are given subject to the limitations and qualifications set out in IC 70-6R5 and are binding on the CCRA provided that the proposed transactions are completed by 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 into law, could have an effect on the rulings provided herein.

OTHER COMMENTS

Nothing in this letter should be construed as implying that the CCRA has confirmed, reviewed or has made any determination in respect of:

(a) the paid-up capital of any share or the adjusted cost base or fair market value of any property referred to herein;

(b) the amount of any non-capital loss or any other amount of any person referred to herein; or

(c) any other tax consequence relating to the facts, Proposed Transactions or any transaction or event taking place either prior to the Proposed Transactions or subsequent to the Proposed Transactions, whether described in this letter or not, including for greater certainty the transactions or events described in Paragraph 32, 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