2004 Ruling 2003-0043751R3 - sequential butterflies

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.

Principal Issues: Where TC receives butterflied property from DC on a spin-off butterfly, whether the sale by TC of some of the butterflied property back to DC after the spin-off butterfly (where such sale will not exceed the limitation as described in paragraph 55(3.1)(c) of the Income Tax Act (the "Act")) would affect the pro rata "distribution" rules as defined in subsection 55(1) of the Act.

Position: As the sale by TC of such property is to DC and not to the shareholder of DC, such sale will not affect the pro rate "distribution" rules in accordance with the Canada Revenue Agency's public position as set out at the 1996 Corporate Management Tax Conference.

Reasons:

See above.

XXXXXXXXXX 2003-004375

XXXXXXXXXX, 2004

Dear XXXXXXXXXX:

Re: XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX
Advance Income Tax Ruling Request

This is in reply to your letter of XXXXXXXXXX in which you requested an advance income tax ruling on behalf of the above-noted taxpayers. In your subsequent letter of XXXXXXXXXX, your facsimiles of XXXXXXXXXX and your email of XXXXXXXXXX, you and XXXXXXXXXX provided additional information concerning the facts and proposed transactions described in your original letter. We also acknowledge the information provided during our various telephone conversations (XXXXXXXXXX).

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

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

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

(iii) under objection by one of 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 expired; or

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

Definitions

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

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

(b) "adjusted cost base" ("ACB") has the meaning assigned by subsection 248(1);

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

(d) "arm's length" has the meaning assigned by subsection 251(1);

(e) "BCA" means the XXXXXXXXXX Business Corporations Act, XXXXXXXXXX;

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

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

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

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

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

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

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

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

(n) "fair market value" ("FMV") 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 and contracting for a taxable purchase and sale;

(o) "financial intermediary corporation" has the meaning assigned by subsection 191(1);

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

(q) "ITAR" refers to the Income Tax Application Rules;

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

(s) "pre-1972 capital surplus on hand" has the meaning assigned by subsection 88(2.1);

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

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

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

(w) "series of transactions or events" has the meaning assigned by subsection 248(10);

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

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

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

(aa) "subsidiary wholly-owned corporation" has the meaning assigned by subsection 248(1);

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

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

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

Facts

1. XXXXXXXXXX ("DC1") is a CCPC and a TCC. It was incorporated by Letters Patent dated XXXXXXXXXX and is governed by the BCA. DC1's fiscal and taxation years end on XXXXXXXXXX. DC1 deals with the XXXXXXXXXX Tax Services Office and files its corporate income tax returns at the XXXXXXXXXX Taxation Centre.

The authorized capital of DC1 consists of one class of an unlimited number of common shares ("DC1 Common Shares") and one class of an unlimited number of Class A preference shares ("DC1 Class A Preference Shares").

The DC1 Common Shares are voting and participating. The DC1 Class A Preference Shares are non-voting and are redeemable at $XXXXXXXXXX per share ("DC1 Class A Preference Share Redemption Amount"). Each of the DC1 Class A Preference Shares will be entitled to a preferential and non-cumulative annual dividend, at the discretion of the directors of DC1, but not to exceed XXXXXXXXXX% per annum of the DC1 Class A Preference Share Redemption Amount. The DC1 Class A Preference Shares will rank ahead of the DC1 Common Shares on liquidation or other distribution by DC1.

The issued and outstanding share capital of DC1 consists of:

(a) Common Shares

Shareholder
Name
Number
Outstanding
Stated
Capital
PUC
XXXXXXXX ("B1")
XXXXXXX
$XXXXXX
$XXXXXX
XXXXXXXX ("B2")
XXXXXXX
$XXXXXX
$XXXXXX
XXXXXXXX ("B3")
XXXXXXX
$XXXXXX
$XXXXXX
Total
XXXXXXX
$XXXXXX
$XXXXXX

(b) Class A Preference Shares

Shareholder
Name
Number
Outstanding
Stated
Capital
PUC
Redemption
Amounts
B1
XXXXXXX
$ XXXXX
$ XXXXX
$XXXXXXX
B2
XXXXXXX
$ XXXXX
$ XXXXX
$XXXXXXX
B3
XXXXXXX
$ XXXXX
$ XXXXX
$XXXXXXX
Total
XXXXXXX
$ XXXXX
$ XXXXX
$XXXXXXX

The DC1 shares held by B1, B2 and B3 were not acquired in contemplation of the proposed transactions described below.

B1, B2 and B3 hold their DC1 shares as capital property.

2. DC1 currently operates three divisions:

(a) XXXXXXXXXX;

(b) XXXXXXXXXX, and

(c) XXXXXXXXXX.

DC1 has been reporting its income on an accrued basis for financial statements and tax purposes.

3. The assets of DC1 include

(a) the properties of the Farm Division ("Farm Division Properties") which include:

(i) Net Income Stabilization Account fund No.1 and No.2 ("NISA Fund No.1 and No.2");

(ii) shares and patronage reserves in co-operative organizations to or from which the Farm Division sells or purchases goods used in its farming operation;

(iii) XXXXXXXXXX acres of farm land on which the Farm Division produces agricultural commodities. The Farm Division also leases XXXXXXXXXX acres of lands for its farming operation;

(iv) the farm equipment including the farm tractors, harvesting combines, attachments and all tillage equipment;

(v) the farm buildings and the XXXXXXXXXX which are used to shelter and house farm equipment and store XXXXXXXXXX;

(vi) office equipment, and

(b) the properties of the XXXXXXXXXX Division which include:

(i) land and building;

(ii) small utility tractors and wagons;

(iii) XXXXXXXXXX, and

(c) the properties of the XXXXXXXXXX Division which include:

(i) land and building;

(ii) vehicles, and

(d) three life insurance policies ("DC1 Insurance") which insure the lives of each of B1, B2 and B3. One of the purposes of the DC1 Insurance is to fund DC1's repurchase of any DC1 shares that are owned by B1, B2 or B3 upon his death. The cash surrender value of the DC1 Insurance can be converted into cash within 12 months, and

(e) Mortgage Receivable (as described in paragraph 4 below) which had a balance of $XXXXXXXXXX as at XXXXXXXXXX.

All property currently owned by DC1 was acquired by DC1 after 1971.

The liabilities of DC1 consist of

(f) current liabilities which include accounts payable, and

(g) long-term liabilities which include the two DC1 Promissory Notes that are payable to B1, B2 and B3 as described in paragraph 6 below, in the aggregate principal amount of $XXXXXXXXXX. The two DC1 Promissory Notes have no fixed repayment date. B1, B2 and B3's rights under the two DC1 Promissory Notes have been postponed to the benefits of the financial lenders of DC1.

DC1 does not have any non-capital losses. The balance in DC1's CDA and its RDTOH as at XXXXXXXXXX was $XXXXXXXXXX and $XXXXXXXXXX, respectively.

4. In XXXXXXXXXX, DC1 sold certain of its lands, (the "Lands") to an unrelated third party at FMV. As consideration for such sale, the third party granted a mortgage against the Lands to DC1 ("Mortgage Receivable"). DC1 claimed a capital gain reserve of $XXXXXXXXXX under subparagraph 40(1)(a)(iii) in respect of its sale of the Lands in the XXXXXXXXXX taxation year. The sale of the Lands was not part of the series of transactions that include the proposed transactions described below.

In XXXXXXXXXX, DC1 sold certain properties ("Properties") which consisted of XXXXXXXXXX houses, some farm equipment and XXXXXXXXXX common shares ("Marketable Securities") to unrelated parties. XXXXXXXXXX. The sale of the Properties was not part of the series of transactions that include the proposed transactions described below.

On XXXXXXXXXX, DC1 declared and paid a capital dividend on the DC1 Common Shares in the amount of $XXXXXXXXXX.

5. B1, B2 and B3 are brothers and they are all residents of Canada. B1, B2 and B3 are not related for purposes of section 55 by virtue of subparagraph 55(5)(e)(i) of the Act. Each of B1, B2 and B3 has not elected under ITAR 26(7) with respect to his capital property owned on December 31, 1971.

6. In XXXXXXXXXX, B1, B2 and B3 incorporated DC1. On incorporation of DC1, B1, B2 and B3 and an unrelated individual each subscribed for 1 DC1 common share for a nominal amount. Thereafter, B1, B2 and B3 acquired from the unrelated individual his DC1 common share for a dollar. Consequently, each of B1, B2 and B3 owned an additional 1/3 DC1 common share.

On or about XXXXXXXXXX, B1, B2 and B3 transferred to DC1

(a) XXXXXXXXXX farm properties, XXXXXXXXXX (the "XXXXXXXXXX Farm Properties") under subsection 85(1), and

(b) XXXXXXXXXX farm properties, XXXXXXXXXX (the "XXXXXXXXXX Farm Properties") at FMV.

As consideration for the transfers described

(c) in (a) above, inter alia, DC1 assumed the first and second mortgages that were registered against the XXXXXXXXXX Farm Properties and issued XXXXXXXXXX DC1 common shares to each of B1, B2 and B3, and

(d) in (b) above, DC1 assumed the first and second mortgages ("Mortgages") that were registered against the XXXXXXXXXX Farm Properties and issued two promissory notes ("DC1 Promissory Notes" and individually as a "DC1 Promissory Note") to B1, B2 and B3 having an aggregate principal amount equal to the difference between the aggregate FMV at that time of the XXXXXXXXXX Farm Properties so acquired by DC1 and the aggregate principal amount of the Mortgages so assumed by DC1.

Each of B1, B2 and B3 reported an income gain from the disposition of the XXXXXXXXXX Farm Properties in the XXXXXXXXXX taxation year. They also claimed a reserve under paragraph 20(1)(n) in respect of that income gain in the XXXXXXXXXX taxation year and also in each of the subsequent taxation years on the basis that their DC1 Promissory Notes were not due at the end of each of those taxation years.

On XXXXXXXXXX, B1, B2 and B3 transferred to DC1 XXXXXXXXXX ("XXXXXXXXXX Property") under subsection 85(1). As consideration for the transfer, DC1

(i) assumed an existing mortgage against the XXXXXXXXXX Property in the amount of $XXXXXXXXXX,

(ii) issued to each of B1, B2 and B3 one DC1 common share, and

(iii) granted an non-interest bearing promissory note, one to each of B1, B2 and B3, in the amount of $XXXXXXXXXX, $XXXXXXXXXX and $XXXXXXXXXX, respectively.

The sum of the aggregate FMV of (i), (ii) and (iii) described herein was equal to the FMV at that time of the XXXXXXXXXX Property that B1, B2 and B3 so transferred to DC1.

Consequently, each of B1, B2 and B3 owned XXXXXXXXXX DC1 common shares ("DC1 Old Common Shares").

7. In XXXXXXXXXX, each of B1, B2 and B3 transferred his XXXXXXXXXX DC1 Old Common Shares to DC1 under subsection 85(1). As consideration for the transfers, DC1 issued to each of B1, B2 and B3:

(a) XXXXXXXXXX DC1 Class A Preference Shares having an aggregate FMV and redemption amount of $XXXXXXXXXX, and

(b) XXXXXXXXXX DC1 Common Shares having an aggregate FMV, at the time of their issue, of $XXXXXXXXXX.

The sum of (a) and (b) described herein was equal to the aggregate FMV, at that time, of the XXXXXXXXXX DC1 Old Common Shares that each of B1, B2 and B3 so transferred to DC1, as the case may be.

The agreed amount in respect of the DC1 Old Common Shares that each of B1, B2 and B3 so transferred to DC1 was $XXXXXXXXXX in each case. Each of B1, B2 and B3 reported such agreed amount as proceeds from the disposition of his XXXXXXXXXX DC1 Old Common Shares described herein and each claimed a capital gains exemption related to such disposition in the XXXXXXXXXX taxation year.

For the purposes of the BCA,

(i) the addition to the stated capital of the DC1 Class A Preference Shares issued by DC1 to B1, B2 and B3 was $XXXXXXXXXX, and

(ii) the addition to the stated capital of the DC1 Common Shares issued by DC1 to B1, B2 and B3 was $XXXXXXXXXX.

The sum of (i) and (ii) described herein was equal to the aggregate PUC of the DC1 Old Common Shares that each of B1, B2 and B3 so transferred to DC1 described herein.

8. In XXXXXXXXXX, B1, B2 and B3 transferred certain equipment to DC1 under subsection 85(1). As consideration for the transfer, DC1 issued XXXXXXXXXX DC1 Class A Preference Shares to each of B1, B2 and B3 having an aggregate FMV and redemption amount equal to the aggregate FMV at that time of the equipment that B1, B2 and B3 so transferred to DC1. Consequently, each of B1, B2 and B3 owns XXXXXXXXXX DC1 Class A Preference Shares.

9. (a) You have advised that on XXXXXXXXXX, a new Canadian Agricultural Income Stabilization Program (CAISP) replaced the NISA program. However, farmers will have till June 30, 2004 to convert their NISA fund accounts into CAISP accounts in order to fully protect their 2004 crop production under the CAISP.

You have indicated that under the NISA program, the transfer of the NISA fund accounts between two corporations was strictly prohibited. Consequently, DC1 has requested that the NISA administration liquidate its NISA Fund No.1 and No.2 into cash ("Cash Amount") so that it can spin off the Farm Division Properties including the Cash Amount to Subco as described under the heading "DC1 Spin-Off" below.

Also, you have stated that, in order to protect TC1, TC2 and TC3's Farm Division operation under the CAISP in 2004, each of B1, B2 and B3 is committed to cause his respective TC (as described under the heading "DC2 Split-Up" below)

(i) open an CAISP account on or before June 30, 2004, and

(ii) deposit the particular TC's pro rata share of the Cash amount into its CAISP account.

The Cash Amount will be held in trust by the corporate solicitors of DC1, Subco, DC2, TC1, TC2 and TC3, as the case may be, so as to ensure that the Cash Amount will go, pro rata, into each TC's CAISP account.

Consequently, you have stated that the Cash Amount should be considered as business property for the purposes of determining the types of property described in paragraphs 17 and 30 below.

You have also indicated that DC1 will receive the Cash Amount prior to the commencement of the proposed transactions described under the heading "DC1 Spin-Off" below.

(b) You have advised that on XXXXXXXXXX, DC1 accepted an unsolicited offer ("Offer") from an unrelated purchaser ("Purchaser") to purchase XXXXXXXXXX acres of its farm land ("2004 Property") for $XXXXXXXXXX ("Sale"). The 2004 Property is included in the XXXXXXXXXX acres of farm land described in subparagraph 3(a)(iii) above. The Sale will close on XXXXXXXXXX.

As consideration for the 2004 Property, the Purchaser will pay DC1 cash of $XXXXXXXXXX and grant to DC1 a first mortgage ("First Mortgage") against the 2004 Property in the amount of $XXXXXXXXXX ("2004 Mortgage Receivable"). The 2004 Mortgage Receivable will not be convertible into other property.

You have indicated that part of the 2004 Property was acquired by DC1 in XXXXXXXXXX and the remaining was acquired in XXXXXXXXXX. The 2004 Property has been used by DC1 in its farming operation. DC1 will report a capital gain from the disposition of the 2004 Property in the 2004 taxation year. DC1's CDA and RDTOH will be increased as a consequence of the Sale.

You have also stated that the Sale will be completed prior to the commencement of the proposed transactions as described under the heading "DC1 Spin-Off" below.

Proposed Transactions

10. Pursuant to the provisions of the BCA, articles of amendment of DC1 will be filed to create one class of an unlimited number of Class B preference shares (the "DC1 Class B Preference Shares") and one class of an unlimited number of Class C preference shares (the "DC1 Class C Preference Shares") which will have the following attributes:

(a) the DC1 Class B Preference Shares will be non-voting and non-participating;

(b) the DC1 Class C Preference Shares will be voting and non-participating; and

(c) each DC1 Class B and Class C Preference Share:

(i) will be redeemable and retractable, subject to applicable law, at any time for an amount equal to the amount determined by dividing the aggregate FMV of the property received by the corporation on the issuance of the DC1 Class B or Class C Preference Shares, as the case may be, less the aggregate FMV of any non-share consideration issued or liabilities assumed by the corporation, by the number of the DC1 Class B or Class C Preference Shares issued, as the case may be (the "DC1 Class B Preference Share Redemption Amount" and the "DC1 Class C Preference Share Redemption Amount"), and

(ii) will be entitled to a preferential and non-cumulative annual dividend, at the discretion of the directors of the corporation, but not to exceed XXXXXXXXXX% per annum of the DC1 Class B Preference Share Redemption Amount or the DC1 Class C Preference Share Redemption Amount, as the case may be, and

(d) on dissolution or other distribution by the corporation,

(i) the DC1 Class A Preference Shares will rank ahead of the DC1 Common Shares and the DC1 Class B and Class C Preference Shares;

(ii) the DC1 Class B Preference Shares will rank ahead of the DC1 Common Shares and the DC1 Class C Preference Shares, and

(iii) the DC1 Class C Preference Shares will rank ahead of the DC1 Common Shares.

11. A new corporation ("DC2") will be incorporated pursuant to the provisions of the BCA. DC2 will be a TCC and a CCPC. The authorized capital of DC2 will consist of one class of an unlimited number of common shares (the "DC2 Common Shares"). No shares will be issued as part of the incorporation of DC2.

12. A second new corporation ("Subco") will be incorporated pursuant to the provisions of the BCA. Subco will be a TCC and a CCPC.

The authorized capital of Subco will consist of one class of an unlimited number of common shares (the "Subco Common Shares") and one class of an unlimited number of preferred shares (the "Subco Preferred Shares"), which will include the following attributes:

(a) the Subco Common Shares will be fully participating and entitle the holder to one vote per share;

(b) each of the Subco Preferred Shares:

(i) will be non-voting, non-participating;

(ii) will be redeemable and retractable, subject to applicable law, at any time for an amount equal to the amount determined by dividing the aggregate FMV of the property received by the corporation on the issuance of the Preferred Shares less the aggregate FMV of any non-share consideration issued or liabilities assumed by the corporation, by the number of the Preferred Shares issued (the "Subco Preferred Share Redemption Amount"), and

(iii) will be entitled to a preferential and non-cumulative dividend, at the discretion of the directors of the corporation, but not to exceed XXXXXXXXXX% per annum of the Subco Preferred Share Redemption Amount, and

(c) the Subco Preferred Shares will rank ahead of the Subco Common Shares on liquidation or other distribution by the corporation.

DC2 will subscribe for XXXXXXXXXX Subco Common Shares on incorporation of Subco for $XXXXXXXXXX . Consequently, Subco will be a subsidiary wholly-owned corporation of DC2.

13. Three new corporations ("TC1", "TC2" and "TC3") will be incorporated pursuant to the provisions of the BCA (TC1, TC2 and TC3 are collectively referred to hereafter as "TCs" and individually as "TC"). Each TC will be a TCC and a CCPC. No shares will be issued as part of the incorporation of the TCs.

The authorized capital of each TC will consist of one class of an unlimited number of common shares (the "TC1 Common Shares", the "TC2 Common Shares" and the "TC3 Common Shares"), one class of an unlimited number of Class A special shares (the "TC1 Class A Shares", the "TC2 Class A Shares" and the "TC3 Class A Shares") and one class of an unlimited number of Class B special shares (the "TC1 Class B Shares", the "TC2 Class B Shares" and the "TC3 Class B Shares"), which will include the following attributes:

(a) the TC Common Shares will be fully participating and will entitle the holder to one vote per share, and

(b) each TC Class A and Class B Share:

(i) will be non-voting and non-participating;

(iii) will be redeemable and retractable, subject to applicable law, at any time for an amount equal to the amount determined by dividing the aggregate FMV of the property received by the corporation on the issuance of the TC Class A or Class B Shares, as the case may be, less the aggregate FMV of any non-share consideration issued or liabilities assumed by the corporation, by the number of the TC Class A or Class B Shares issued, as the case may be (the "TC1 Class A Share Redemption Amount", the "TC1 Class B Share Redemption Amount", the "TC2 Class A Share Redemption Amount", the "TC2 Class B Share Redemption Amount", the "TC3 Class A Share Redemption Amount" and the "TC3 Class B Share Redemption Amount");

(iii) will be entitled to a preferential and non-cumulative annual dividend, at the discretion of the directors of the corporation, but not to exceed XXXXXXXXXX% per annum of the TC1 Class A Share Redemption Amount, the TC1 Class B Share Redemption Amount, the TC2 Class A Share Redemption Amount, the TC2 Class B Share Redemption Amount, the TC3 Class A Share Redemption Amount or the TC3 Class B Share Redemption Amount, as the case may be, and

(c) on dissolution, the TC Class A and Class B Shares will rank ahead of the TC Common Shares. However, the TC Class A and Class B Shares will rank pari passu on dissolution or other distribution by the corporation.

DC1 Spin-Off

14. Each of B1, B2 and B3 (collectively referred to hereafter as the "DC1 Shareholders" and individually as a "DC1 Shareholder") will transfer to DC1

(a) a particular number of his DC1 Common Shares (in exchange for a number of DC1 Class C Preference Shares as described in (f) herein), and

(b) a particular number of his DC1 Class A Preference Shares (in exchange for a number of DC1 Class B Preference Shares as described in (e) herein),

having an aggregate FMV equal to that proportion of the aggregate FMV of all of his DC1 shares that

(c) the aggregate FMV of the Farm Division Properties immediately before the transfer described in paragraph 20 below

is of

(d) the aggregate FMV of all of the business property of DC1 determined immediately before the transfer described in paragraph 20 below by applying the rules in paragraphs 18 and 19 below.

As sole consideration, DC1 will issue to each particular DC1 Shareholder

(e) a number of DC1 Class B Preference Shares having an aggregate FMV and redemption amount equal to the aggregate FMV and redemption amount at that time of the DC1 Class A Preference Shares that the particular DC1 Shareholder so transferred to DC1, and

(f) a number of DC1 Class C Preference Shares having an aggregate FMV and redemption amount equal to the aggregate FMV at that time of the DC1 Common Shares that the particular DC1 Shareholder so transferred to DC1.

For the purposes of the BCA,

(g) the addition to the stated capital of the DC1 Class B Preference Shares issued by DC1 to each of the DC1 Shareholders will be equal to the aggregate PUC of the DC1 Class A Preference Shares that each of the DC1 Shareholders so transferred to DC1, and

(h) the addition to the stated capital of the DC1 Class C Preference Shares issued by DC1 to each of the DC1 Shareholders will be equal to the aggregate PUC of the DC1 Common Shares that each of the DC1 Shareholders so transferred to DC1.

Each DC1 Shareholder will not file an election under subsection 85(1) with respect to the shares received by each on the share exchanges described herein.

Each DC1 Shareholder will hold his DC1 Class B and Class C Preference Shares as capital property.

15. Following the completion of the transfers described in paragraph 14 above, each particular DC1 Shareholder will transfer all of his DC1 Class B and Class C Preference Shares to DC2. As sole consideration, DC2 will issue to each particular DC1 Shareholder XXXXXXXXXX DC2 Common Shares having an aggregate FMV equal to the aggregate FMV at that time of the DC1 shares that the particular DC1 Shareholder so transferred to DC2.

Immediately after the share exchanges described in this paragraph, the aggregate FMV of the DC2 Common Shares owned by the particular DC1 shareholder will be equal to or approximate the amount determined by the formula, on the assumption that B1, B2 and B3 are participants, DC1 is the distributing corporation and DC2 is the acquirer,

				A x B    + D
			     		       C

as found in subparagraph (b)(iii) of the definition of "permitted exchange" in subsection 55(1). In addition, no person who is not a DC1 shareholder will own any shares of DC2.

Immediately after the share exchanges described in this paragraph, DC2 will control DC1. B1, B2 and B3 do not, and will not, deal at arm's length with each of DC1 and DC2 at all material times.

Each of B1, B2 and B3 will hold his DC2 Common Shares as capital property.

16. DC2 and each particular DC1 Shareholder will jointly elect in prescribed form and within the time limit referred to in subsection 85(6), but prior to the dissolution of DC2 as described below, to have the provisions of subsection 85(1) apply to each transfer described in paragraph 15 above. The agreed amount in respect of the DC1 Class B and Class C Preference Shares so transferred by the particular DC1 Shareholder to DC2 will be equal to the ACB, at the time of such transfer, to the particular DC1 Shareholder of each such share owned by the particular DC1 Shareholder and transferred to DC2. For greater certainty, the DC1 shares owned by the particular DC1 Shareholder will be property described in paragraph 85(1)(c.1) and the elected amount will be within the limits prescribed by that paragraph.

For the purposes of the BCA, the addition to the stated capital of the DC2 Common Shares issued by DC2 to each of the DC1 Shareholders described in paragraph 15 above will be equal to the aggregate of the greater of the PUC and the ACB to each of the DC1 Shareholders, as the case may be, immediately before the transfer, as modified by paragraph 84.1(2)(a.1), where applicable, of the DC1 Class B Preference Shares and the DC1 Class C Preference Shares that each of the DC1 Shareholders so transferred to DC2, as the case may be.

17. Immediately before the transfer of property described in paragraph 20 below, the property of DC1 will be classified into three types of property for the 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 DC1, including cash (other than the Cash Amount), deposits, accounts receivable, inventory, materials and supplies, and rights arising from the prepayment of certain expenses ("prepaid expenses"), the current portion of the Mortgage Receivable and the 2004 Mortgage Receivable, and the cash surrender value of the DC1 Insurance;

(b) business property, comprising all of the assets of DC1, 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 SIB); and

(c) investment property, comprising all of the assets of DC1, other than cash or near cash property, any income from which would, for the purposes of the Act, be income from property or a SIB.

For the purposes of determining the types of property described herein,

(d) the Cash Amount, the shares and the patronage reserves described in subparagraph 3(a)(ii) above will be considered as business property; and

(e) the Mortgage Receivable and the 2004 Mortgage Receivable will be considered as investment property.

18. In determining the net FMV of each type of property of DC1 immediately before the transfer described in paragraph 20 below, the liabilities of DC1 will be allocated to, and will be deducted in the calculation of, the net FMV of each such type of property of DC1 in the following manner:

(a) current liabilities of DC1 (including the current portion of the long-term debt) will be allocated to the cash or near cash property (including any cash other than the Cash Amount, accounts receivable, inventory, prepaid expenses, current portion of the Mortgage Receivable and the 2004 Mortgage Receivable, and the cash surrender value of the DC1 Insurance) of DC1 in the proportion that the FMV of each such property is of the FMV of all cash or near cash property owned by it. The amount of current liabilities allocated as described herein will not exceed the aggregate FMV of the cash or near cash property of DC1;

(b) any accounts receivable, inventory and prepaid expenses of DC1 that are initially classified in accordance with subparagraph 17(a) above as cash or near cash property, that relate to a business carried on by DC1 and that will be collected, sold or consumed by DC1, Subco or DC2 in the ordinary course of that business, will then be classified as business property and the net FMV thereof, determined after the allocation of current liabilities as described in (a) above, will be included in the net FMV of business property and will not be included in the net FMV of cash or near cash property;

(c) liabilities of DC1, other than current liabilities, that relate to a particular property will be allocated to the particular property (and effectively to the type to which the particular property belongs) to the extent of its FMV. The liabilities that pertain to a type of property, but not to a particular property, then will be allocated to that type of property, but not in excess of the net FMV of such type of property after the allocation of liabilities to a particular property as described herein;

(d) if any liabilities remain after the allocations described in steps (a) and (c) above are made ("Excess Unallocated Liabilities"), such Excess Unallocated Liabilities will then be allocated to the cash or near cash property, business property, and investment property, if any, of DC1, based on the relative net FMV of each type of property prior to the allocation of such Excess Unallocated Liabilities.

19. For greater certainty, in determining the net FMV of the property of DC1 as described in paragraphs 17 and 18 above, the following principles will apply:

(a) any tax accounts, such as the balance of any non-capital losses of DC1 or the balance of any RDTOH account or CDA of DC1, will not be considered property;

(b) no amount will be considered to be a liability unless it represents a true legal liability which is capable of quantification;

(c) deferred revenue which represents revenue received in the ordinary course of business, the recognition of which has been deferred due to the legal obligation of the recipient either to provide services or deliver goods to the customer from which such revenue was received, will be treated as a liability for purposes of the proposed transactions described herein, to the extent the amount of such deferred revenue gives rise to a legal obligation to pay such amount should the services not be provided or the goods not be delivered. The amount of any deferred revenue which does not represent such a legal obligation will not be considered a liability for the purposes of the proposed transactions described herein;

(d) the amount of any deferred income tax will not be considered a liability for the purposes of the proposed transactions described herein because such amount does not represent a legal obligation of DC1, and

(e) any long-term debts (other than the current portion) that have been incurred in support of the purchase of equipment, lands, buildings or other farming assets related to the XXXXXXXXXX, will be considered to relate to business property;

20. Immediately following the determination of its types of property as described in paragraph 17 above, DC1 will transfer to Subco a proportionate share of

(a) its cash or near cash property;

(b) its business property (such proportionate share solely consisting of the Farm Division Properties including the Cash Amount but excluding the 2004 Property); and

(c) its investment property, which includes the Mortgage Receivable and the 2004 Mortgage Receivable,

such that, immediately after the transfer, the net FMV of the cash or near cash property, the business property and the investment property (after allocating and deducting, in the manner described in paragraphs 18 and 19 above, the liabilities of DC1 which are to be assumed by Subco as described in (f) below) which is transferred to Subco as described herein, will approximate that proportion of the net FMV of all of that type of property of DC1, determined immediately before the transfer referred to herein that:

(d) the aggregate FMV of the DC1 shares owned by DC2, immediately before the transfer,

is of

(e) the aggregate FMV of all of the issued and outstanding shares of DC1 immediately before the transfer.

For the purpose of this paragraph and paragraph 26 below, the expression "approximate that proportion" means that the discrepancy from that proportion, if any, would not exceed XXXXXXXXXX%, determined as a percentage of the net FMV of each type of property which Subco has received (or DC1 has retained) as compared to what Subco would have received (or DC1 would have retained) had it received (or retained) its appropriate pro rata share of the net FMV of that type of property. However, the aggregate net FMV of all property of DC1 transferred to Subco as described herein will be equal to the proportion determined by (d) and (e) above of the aggregate net FMV of all property of DC1 immediately before the transfer.

For greater certainty, the portion of the net FMV of each type of DC1's property that is transferred to Subco as described herein will represent DC2's pro rata share of the net FMV of that type of property of DC1.

As consideration for the transfer of property described herein, Subco will:

(f) assume debt of DC1 that is allocable to the property of DC1 transferred to Subco as described in (a), (b) and (c) above, all determined in accordance with paragraph 18, but not exceeding the aggregate of the agreed amounts in the joint elections under subsection 85(1) described in paragraph 21 below. The amount of liabilities to be allocated to each such property that is not the subject of an election under subsection 85(1) will not exceed the FMV of any such property; and

(g) issue the Subco Preferred Shares having an aggregate FMV, redemption and retraction amount equal to the FMV of the property so transferred to Subco as described herein less the amount of the liabilities of DC1 assumed by Subco as described in (f) above.

For greater certainty, the amount of the liabilities of DC1 assumed by Subco described in (f) above,

(h) will include the two DC1 Promissory Notes, and

(i) will not exceed the aggregate cost amount of the property that was transferred by DC1 to Subco as described in this paragraph.

Concurrent with the transfer of property described herein, B1, B2, B3, DC1 and Subco will enter into an assignment agreement ("Assignment Agreement") which, inter alia, will expressly state that

(j) B1, B2 and B3, as creditors of DC1 with respect to the DC1 Promissory Notes, will discharge and release DC1 from all of its obligations under the two DC1 Promissory Notes, and

(k) Subco will become the new principal debtor under the two DC1 Promissory Notes.

Further, the solicitors of Subco and DC2 will hold the Cash Amount in trust so that it can be split up and transferred to TC1, TC2 and TC3 as described under the heading "DC2 Split-Up" below.

Subco will hold all capital property received from DC1 as described herein as capital property.

21. DC1 and Subco will jointly elect pursuant to subsection 85(1), in prescribed form and within the time referred to in subsection 85(6), but prior to the dissolution of Subco described in paragraph 23 below, with respect to the transfer to Subco of any eligible property of DC1 that has a FMV in excess of its cost amount. Specifically, the agreed amount in each joint election will be equal to the least of:

(a) the amounts specified in subparagraphs 85(1)(d)(i), (ii) or (iii) in the case of eligible capital property,

(b) the amounts specified in subparagraphs 85(1)(e)(i), (ii) or (iii) in the case of depreciable property of a prescribed class, and

(c) the amounts specified in subparagraphs 85(1)(c.1)(i) or (ii), in the case of property described in paragraph 85(1)(c.1).

In each case, the agreed amount will not exceed the FMV of the respective property, nor will it be less than the amount permitted under paragraph 85(1)(b).

The subsection 85(1) election referred to herein will exclude any cash, accounts receivable and prepaid expenses.

In respect of any trade accounts receivable transferred by DC1 to Subco, no election will be made under subsection 22(1) of the Act.

For the purposes of the BCA, the addition to the stated capital of the Subco Preferred Shares issued by Subco to DC1 as described in paragraph 20 above, will be equal to the amount by which the aggregate of the cost (determined pursuant to subsection 85(1), where relevant) of the property transferred to Subco described in paragraph 20 above exceeds the principal amount of the liabilities of DC1 assumed by Subco described in subparagraph 20(f) above.

22. Immediately after the transfer of the property by DC1 to Subco as described in paragraph 20 above, and before the end of the day on which that transfer takes place, Subco will redeem all of its outstanding Preferred Shares held by DC1 and will issue to DC1, as payment therefor, a demand non-interest bearing promissory note having a principal amount and FMV equal to the aggregate redemption amount and FMV of its Preferred Shares so redeemed (the "Subco Note"). DC1 will accept the Subco Note as full satisfaction for the redemption price of its Subco Preferred Shares so redeemed with the risk of the note being dishonoured.

23. Following the transactions described in paragraph 22 above, DC2, the sole shareholder of Subco, will, by special resolution, resolve to liquidate and dissolve Subco pursuant to the applicable provisions of the BCA.

On the wind-up of Subco, all property of Subco, including the Cash Amount, will be distributed to DC2 and all liabilities of Subco, including the two DC1 Promissory Notes and the Subco Note, will be assumed by DC2. DC2 will hold all property of Subco received on the wind-up of Subco as capital property.

24. Following the wind-up of Subco described in paragraph 23 above, DC1 will, at a particular time, redeem a particular number of the DC1 Class B Preference Shares held by DC2 which will result in a deemed dividend, pursuant to the provisions of subsection 84(3), equal to the balance in DC1's CDA immediately before that time.

DC1 will issue to DC2, as payment therefor, a demand non-interest bearing promissory note having a principal amount and FMV equal to the aggregate FMV and redemption amount of its Class B Preference Shares so redeemed (the "DC1 Note #1"). DC2 will accept the DC1 Note #1 as full satisfaction for the redemption price of its DC1 Class B Preference Shares so redeemed with the risk of the note being dishonoured.

DC1 will elect, in prescribed form and within the time referred to in subsection 83(2), to have the rules in subsection 83(2) apply to the full amount of that deemed dividend as described herein.

For greater certainty, DC1's CDA does not and will not, at any time, include any amount that is described in paragraphs 83(2.4)(a) to (e) of the Act.

25. On the day following the day on which the redemption of the particular number of the DC1 Class B Preference Shares described in paragraph 24 above occurs, DC1 will redeem all of the remaining DC1 Class B and Class C Preference Shares held by DC2 and will issue to DC2, as payment therefor, a demand non-interest bearing promissory note having a principal amount and FMV equal to the sum of the aggregate FMV and redemption amount of its Class B and Class C Preference Shares so redeemed (the "DC1 Note #2"). DC2 will accept the DC1 Note #2 as full satisfaction for the redemption price of its DC1 Class B and Class C Preference Shares so redeemed with the risk of the note being dishonoured.

The aggregate principal amount and FMV of the DC1 Note #1 and #2 will be equal to the principal amount and FMV of the Subco Note, which was assumed by DC2 on the wind-up of Subco as described in paragraph 23 above.

DC1 will pay the aggregate principal amount of the DC1 Note #1 and #2 by transferring to DC2 the Subco Note that will be accepted by DC2 in full payment of DC1's obligations. DC2 will pay the principal amount of the Subco Note by transferring to DC1 the DC1 Note #1 and #2 that will be accepted by DC1 in full payment of DC2's obligations. The DC1 Note #1 and #2 and the Subco Note will all be marked paid in full and cancelled.

26. Immediately following the transactions described in paragraph 20 above, the net FMV of each type of property retained by DC1, determined in the manner described in paragraphs 18 and 19 above, will approximate that proportion of the aggregate net FMV of that type of property of DC1, determined immediately before the transfer described in paragraph 20 above, that:

(a) the aggregate FMV, immediately before the transfer of property described in paragraph 20, of the DC1 shares owned by B1, B2 and B3

is of

(b) the aggregate FMV, immediately before the transfer of property, of all of the issued and outstanding shares of DC1.

27. In the event that some of the property received by DC2 on the wind-up of Subco as described in paragraph 23 above is property required by DC1 to carry on its XXXXXXXXXX Division business and XXXXXXXXXX Division business after the DC1 Spin-Off as described above, such property (other than money and indebtedness that is not convertible into other property) will be sold at FMV for cash consideration by DC2 to DC1. However, the disposition of such property will not exceed the limitation described in paragraph 55(3.1)(c) of the Act.

28. After the completion of the above-proposed transactions, DC1 and DC2 will carry on business independent of each other.

DC2 Split-Up

29. Each of B1, B2 and B3 will transfer his XXXXXXXXXX DC2 Common Shares to TC1, TC2 and TC3, respectively. As sole consideration for such transfer, each of TC1, TC2 and TC3 will issue XXXXXXXXXX of its Common Shares to B1, B2 and B3, respectively, having an aggregate FMV equal to the aggregate FMV at that time of the XXXXXXXXXX DC2 Common Shares that each of B1, B2 and B3 so transferred to TC1, TC2 and TC3, respectively.

B1 and TC1, B2 and TC2, B3 and TC3 will jointly elect in prescribed form and within the time period referred to in subsection 85(6) to have the provisions of subsection 85(1) apply to each transfer described herein. The agreed amount in respect of the DC2 Common Shares so transferred by each of B1, B2 and B3 to TC1, TC2 and TC3, respectively, will be equal to the aggregate ACB to B1, B2 and B3 of each such shares owned by B1, B2 and B3 and transferred to TC1, TC2 and TC3, respectively, at the time of such transfer. For greater certainty, the DC2 Common Shares owned by each of B1, B2 and B3 will be property described in paragraph 85(1)(c.1) and the elected amount will be within the limits prescribed by that paragraph.

For the purposes of the BCA, the addition to the stated capital of the XXXXXXXXXX TC1 Common Shares issued by TC1 to B1, the XXXXXXXXXX TC2 Common Shares issued by TC2 to B2 and the XXXXXXXXXX TC3 Common Shares issued by TC3 to B3 as described above will be equal to the aggregate PUC of the XXXXXXXXXX DC2 Common Shares so transferred by B1 to TC1, B2 to TC2 and B3 to TC3, as the case may be.

30. Immediately before the transfer of property described in paragraph 33 below, the property of DC2 will be classified into three types of property for the 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 DC2, including cash (other than the Cash Amount), deposits, accounts receivable, inventory, materials and supplies, rights arising from the prepayment of certain expenses ("prepaid expenses") and the current portion of the investment property as described in (e) herein;

(b) business property, comprising all of the assets of DC2, 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 SIB); and

(c) investment property, comprising all of the assets of DC2, other than cash or near cash property, any income from which would, for the purposes of the Act, be income from property or a SIB.

For the purposes of determining the types of property described herein,

(d) the Cash Amount, the shares and the patronage reserves as described in subparagraph 3(a)(ii) above will be considered as business property; and

(e) the portion of the Mortgage Receivable and the 2004 Mortgage Receivable received by Subco from DC1 as described in paragraph 20 above will be considered as investment property.

31. In determining the net FMV of each type of property of DC2 immediately before the transfer described in paragraph 33 below, the liabilities of DC2 will be allocated to, and will be deducted in the calculation of, the net FMV of each such type of property of DC2 in the following manner:

(a) current liabilities of DC1 (including the current portion of the long-term debt) will be allocated to the cash or near cash property (including any cash other than the Cash Amount, accounts receivable, inventory, prepaid expenses and the current portion of the investment property described in subparagraph 30(e) above) of DC2 in the proportion that the FMV of each such property is of the FMV of all cash or near cash property owned by it. The amount of current liabilities allocated as described herein will not exceed the aggregate FMV of the cash or near cash property of DC2;

(b) any accounts receivable, inventory and prepaid expenses of DC2 that are initially classified in accordance with subparagraph 30(a) above as cash or near cash property, that relate to a business carried on by DC2 and that will be collected, sold or consumed by DC2, TC1, TC2 or TC3 in the ordinary course of that business, will then be classified as business property and the net FMV thereof, determined after the allocation of current liabilities as described in (a) above, will be included in the net FMV of business property and will not be included in the net FMV of cash or near cash property;

(c) liabilities of DC2, other than current liabilities, that relate to a particular property will be allocated to the particular property (and effectively to the type to which the particular property belongs) to the extent of its FMV. The liabilities that pertain to a type of property, but not to a particular property, then will be allocated to that type of property, but not in excess of the net FMV of such type of property after the allocation of liabilities to a particular property as described herein;

(d) if any liabilities remain after the allocations described in steps (a) and (c) above are made ("Excess Unallocated Liabilities"), such Excess Unallocated Liabilities will then be allocated to the cash or near cash property, business property, and investment property, if any, of DC2, based on the relative net FMV of each type of property prior to the allocation of such Excess Unallocated Liabilities.

32. For greater certainty, in determining the net FMV of the property of DC2 as described in paragraphs 30 and 31, the following principles will apply:

(a) no amount will be considered to be a liability unless it represents a true legal liability which is capable of quantification;

(b) deferred revenue which represents revenue received in the ordinary course of business, the recognition of which has been deferred due to the legal obligation of the recipient either to provide services or deliver goods to the customer from which such revenue was received, will be treated as a liability for purposes of the proposed transactions described herein, to the extent the amount of such deferred revenue gives rise to a legal obligation to pay such amount should the services not be provided or the goods not be delivered. The amount of any deferred revenue which does not represent such a legal obligation will not be considered a liability for the purposes of the proposed transactions described herein;

(c) the amount of any deferred income tax will not be considered a liability for the purposes of the proposed transactions described herein because such amount does not represent a legal obligation of DC2, and

(d) any long-term debts (other than the current portion) that have been assumed by DC2 and that have been incurred in support of the purchase of equipment, land, buildings or other farming assets related to the Farm Division, will be considered to relate to business property.

33. Immediately following the determination of its types of property as described in paragraph 30 above, DC2 will transfer to each of TC1, TC2 and TC3 one-third of its:

(a) cash or near cash property;

(b) business property, and

(c) investment property;

such that, immediately after the transfer, the net FMV of each type of property of DC2 (after allocating and deducting, in the manner described in paragraphs 31 and 32 above, the liabilities of DC2 which are to be assumed by TC1, TC2 and TC3 as described in (f) below) which is transferred to each of TC1, TC2 and TC3 as described herein, will approximate that proportion of the net FMV of all of that type of property of DC2, determined immediately before the transfer referred to herein that:

(d) the aggregate FMV of the DC2 Common Shares owned by each of TC1, TC2 and TC3, as the case may be, immediately before the transfer,

is of

(e) the aggregate FMV of all of the issued and outstanding shares of DC2 immediately before the transfer.

For the purpose of this paragraph, the expression "approximate that proportion" means that the discrepancy from that proportion, if any, would not exceed XXXXXXXXXX%, determined as a percentage of the FMV of each type of property which each of TC1, TC2 and TC3 has received as compared to what each of them would have received had each of them received its appropriate pro rata share of the FMV of that type of property. However, the aggregate net FMV of all property of DC2 transferred to each of TC1, TC2 and TC3 as described herein will be equal to the proportion determined by (d) and (e) above of the aggregate net FMV of all property of DC2 immediately before the transfer.

As consideration for the transfer of property as described herein, each of TC1, TC2 and TC3 will:

(f) assume debt of DC2 that is allocable to the property of DC2 transferred to it as described above; and

(g) issue Class B Shares of its capital stock, having an aggregate FMV and redemption amount equal to the aggregate FMV of the property of DC2 transferred to it as described herein less the amount of the liabilities of DC2 assumed by it as described in (f) above.

For greater certainty, the amount of the liabilities of DC1 assumed by each of TC1, TC2 and TC3 described in (f) above, will not exceed the aggregate cost amount of the property that was transferred by DC1 to each of TC1, TC2 and TC3 as described herein, as the case may be.

34. DC2 and each of TC1, TC2 and TC3 will jointly elect pursuant to subsection 85(1) of the Act, in prescribed form and within the time referred to in subsection 85(6) of the Act, but prior to the dissolution of DC2 as described in paragraph 36 below, with respect to the transfer to each of such transferee of any eligible property of DC2 that has a FMV in excess of its cost amount. Specifically, the agreed amount in each joint election will be equal to the least of:

(a) the amounts specified in subparagraphs 85(1)(d)(i), (ii) or (iii) in the case of eligible capital property,

(b) the amounts specified in subparagraphs 85(1)(e)(i), (ii) or (iii) in the case of depreciable property of a prescribed class, and

(c) the amounts specified in subparagraphs 85(1)(c.1)(i) or (ii), in the case of property described in paragraph 85(1)(c.1).

In each case, the agreed amount will not exceed the FMV of the respective property, nor will it be less than the amount permitted under paragraph 85(1)(b).

The subsection 85(1) election referred to herein will exclude any cash, accounts receivable and prepaid expenses.

In respect of any accounts receivable transferred by DC2 to each of TC1, TC2 and TC3, no election will be made under subsection 22(1) of the Act.

For the purposes of the BCA, the addition to the stated capital of the TC1 Class B Shares issued by TC1 to DC2, the TC2 Class B Shares issued by TC2 to DC2 and the TC3 Class B Shares issued by TC3 to DC2 as described in paragraph 33 above, as the case may be, will be equal to the amount by which the aggregate of the cost (determined pursuant to subsection 85(1) of the Act, where relevant) of the property transferred by DC2 to each of TC1, TC2 and TC3 as described in paragraph 33 above exceeds the principal amount of the liabilities of DC2 assumed by each of TC1, TC2 and TC3 as described in subparagraph 33(f) above, as the case may be.

35. Immediately following the transfers of property as described in paragraph 33, each of TC1, TC2 and TC3 will redeem from DC2 all of its Class B Shares and will issue to DC2 in consideration therefor, a demand non-interest bearing promissory note having a principal amount and FMV equal to the aggregate redemption amount and FMV of its Class B Shares (the "Redemption Note", collectively the "Redemption Notes") so redeemed. DC2 will accept the Redemption Notes of each of TC1, TC2 and TC3 as full satisfaction for the redemption price of its Class B Shares of TC1, TC2 and TC3 so redeemed with the risk of the notes being dishonoured.

At the end of the day on which the Class B Shares of TC1, TC2 and TC3 are redeemed, each of TC1, TC2 and TC3 will cause its first taxation year to end.

36. On the day following the redemption of the Class B Shares of TC1, TC2 and TC3 as described in paragraph 35 above, the shareholders of DC2 will, by special resolution, resolve to wind up and dissolve DC2 under the applicable provisions of the BCA. No agreement or resolution relating to the winding up of DC2 or the distribution of its property will provide for the cancellation of any shares of DC2.

In connection with the winding-up of DC2, DC2 will distribute to each of TC1, TC2 and TC3 the particular Redemption Note owing by it to DC2. As a result of the assignment and distribution of the aforesaid notes, the obligations under each of the notes will be cancelled.

Prior to the distribution of such notes, DC2 will elect, pursuant to subsection 83(2) of the Act, in prescribed manner and prescribed form that the full amount of any resulting dividend referred to in subparagraph 88(2)(b)(i) of the Act be deemed to be a capital dividend.

The DC2's CDA will not, at any time, include any amount that is described in paragraphs 83(2.4)(a) to (e) of the Act.

Following receipt of the dividend refund to which DC2 will become entitled as a result of the proposed transactions described herein, DC2 will distribute such refund to the holders of the DC2 Common Shares in proportion to their shareholdings. The refund will not arise until after the end of the fiscal period in which the dividend was paid (or deemed paid).

All properties and liabilities of DC2 will have been distributed or discharged, as the case may be. Articles of Dissolution will then be executed and filed with the appropriate Corporate Registry. Upon receipt of the Certificate of Dissolution, DC2 will be dissolved.

Additional Information

37. None of the corporations referred to herein (including the corporations to be incorporated as described in the proposed transactions) is or will be, at any time during the series of transactions herein described, a specified financial institution or a restricted financial institution.

38. No property has been or will be acquired by DC1, Subco or DC2, and no liabilities have been or will be incurred by DC1, Subco or DC2, in contemplation of and before the transfers of property as described in paragraphs 20 and 33 above, except as described herein.

39. There will not be at any time prior to the completion of the proposed transactions, any agreements or undertakings which constitute or include a "guarantee agreement", as defined in subsection 112(2.2) of the Act, in respect of any of the issued shares referred to herein (including the shares to be issued as described in the proposed transactions).

40. Each of DC1, Subco, DC2, TC1, TC2 and TC3 will not have entered into a "dividend rental arrangement", as defined in subsection 248(1), in respect of any of the issued shares referred to herein (including the shares to be issued as described in the proposed transactions).

41. None of the issued shares referred to herein (including the shares to be issued as described in the proposed transactions) will be issued or acquired as part of a transaction or event or series of transactions or events of the type described in subsection 112(2.5) of the Act.

42. None of the corporations described above (including the corporations to be incorporated as described in the proposed transactions) is or will be, at any time before the completion of the proposed transactions described above, a corporation described in any of the paragraphs (a) to (f) of the definition "financial intermediary corporation" in subsection 191(1) of the Act.

43. Each of DC1, DC2, Subco, TC1, TC2 and TC3 will have the financial capacity to honour, upon presentation for payment, the amount payable under the promissory note issued by it as part of the proposed transactions.

Purpose of the Proposed Transactions

44. The purpose of the DC1 Spin-Off and the DC2 Split-Up described above is to allow B1, B2 and B3 to separate their interests in the Farm Division Properties so that they can pursue their separate estate planning goals.

45. The purpose of Subco is to allow DC1 to hold Subco shares as described under the heading "DC1 Spin-off" above, as DC2 will control DC1 after the share exchanges as described in paragraph 15 above and, consequently, DC1 would be prohibited from holding DC2 shares under the provisions of the BCA.

Rulings

Provided that the preceding statements constitute 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 follows:

A. The provisions of subsection 51(1) of the Act will apply to the share exchanges by each of B1, B2 and B3

(a) of his DC1 Common Shares for DC1 Class C Preference Shares, and

(b) his DC1 Class A Preference Shares for DC1 Class B Preference Shares

as described in paragraph 14 above, with the result that:

(c) each of B1, B2 and B3 will be deemed not to have disposed of his DC1 Common Shares and DC1 Class A Preference Shares, as the case may be, and

(d) the cost to each of B1, B2 and B3

(i) of the DC1 Class B Preference Shares received will be equal to the ACB, immediately before the share exchange, to each of B1, B2 and B3 of his DC1 Class A Preference Shares that he transferred to DC1, and

(ii) of the DC1 Class C Preference Shares received will be equal to the ACB, immediately before the share exchange, to each of B1, B2 and B3 of his DC1 Common Shares that he transferred to DC1.

For greater certainty, subsection 51(2) will not apply to the share exchanges referred to above.

B. The provisions of subsection 85(1) will apply to:

(a) the transfers by each of B1, B2 and B3 of his DC1 Class B and Class C Preference Shares to DC2 described in paragraph 15 above;

(b) the transfers by each of B1, B2 and B3 of his DC2 Common Shares to TC1, TC2 and TC3, respectively, described in paragraph 29 above;

(c) subject to the application of subsections 13(21.2) and 69(11) of the Act, the transfer of each eligible property by DC1 to Subco described in paragraph 20 above, and

(d) subject to the application of subsection 69(11), the transfer of each eligible property by DC2 to TC1, TC2 and TC3 described in paragraph 33 above,

such that the agreed amount in respect of each transfer of eligible property will be deemed to be the transferor's proceeds of disposition and the transferee's cost thereof pursuant to paragraph 85(1)(a). In respect of depreciable property, to the extent that the transferor's capital cost exceeds the transferor's proceeds of disposition of the property, the transferee's capital cost of each such property will be determined in accordance with subsection 85(5).

For the purpose of this ruling, 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 the portion of the undepreciated capital cost of all property of that class immediately before the transfer that the capital cost of the property of that class transferred is of the capital cost of all property of that class.

For greater certainty, paragraph 85(1)(e.2) will not apply to the transfers.

C. (a) Subsection 84(3) will apply on the redemption

(i) of the Subco Preferred Shares held by DC1 described in paragraph 22 above, to deem Subco to have paid and DC1 to have received;

(ii) of the DC1 Class B Preference Shares held by DC2 described in paragraph 24 above, to deem DC1 to have paid and DC2 to have received;

(iii) of the DC1 Class B and Class C Preference Shares held by DC2 described in paragraph 25 above, to deem DC1 to have paid and DC2 to have received, and

(iv) of the Class B Shares of TC1, TC2 and TC3 held by DC2 described in paragraph 35 above, to deem each of TC1, TC2 and TC3 to have paid and DC2 to have received, a dividend on such shares equal to the amount, if any, by which the aggregate amount paid upon such redemption exceeds the aggregate PUC in respect of such shares immediately before such redemption.

(b) As a result of the distributions by DC2 in the course of its winding-up described in paragraph 36 above,

(i) pursuant to paragraph 88(2)(b) and subsection 84(2), but subject to (ii) to (iv) herein, each of TC1, TC2 and TC3 will be deemed to have received a dividend (the "winding-up dividend") on its DC2 Common Shares, as the case may be, equal to one third of the amount by which the aggregate FMV of the property of DC2 distributed by DC2 to each of TC1, TC2 and TC3 on the winding-up exceeds the amount by which the PUC of the DC2 Common Shares, as the case may be, is reduced as a result of the distribution;

(ii) pursuant to subparagraph 88(2)(b)(i), such portion of the winding-up dividend referred to in (i) herein as does not exceed DC2's CDA determined immediately before the payment of the winding-up dividend shall be deemed, for the purposes of the subsection 83(2) election referred to in paragraph 36 above, to be the full amount of a separate dividend;

(iii) pursuant to subparagraph 88(2)(b)(ii), the portion of the winding-up dividend that is equal to the lesser of:

(I) DC2's pre-1972 capital surplus on hand as determined immediately before the payment of the winding-up dividend, and

(II) the amount by which the winding-up dividend exceeds the portion thereof in respect of which DC2 will elect under subsection 83(2)

shall be deemed not to be a dividend, and

(iv) pursuant to subparagraph 88(2)(b)(iii), the winding-up dividend, to the extent that it exceeds the portion thereof referred to in (ii) herein that is deemed to be a separate dividend and the portion referred to in (iii) herein that is deemed not to be a dividend, shall be deemed to be a separate dividend that is a taxable dividend.

(c) Provided that DC1 elects, in prescribed form and within the time referred to in subsection 83(2), to have the rules in subsection 83(2) apply to the full amount of the dividend referred to in (a)(ii) herein, that dividend will be a capital dividend to the extent of DC1's CDA immediately before the redemption of the DC1 Class B Preference Shares described in paragraph 24 above, and no part of that dividend will be included in computing the income of DC2.

(d) Any taxable dividend deemed to have been received by DC1, DC2 and each of TC1, TC2 and TC3 referred to in (a)(i), (iii) and (iv), and (b)(iv) herein:

(i) will be included in computing the income, pursuant to subsection 82(1) and paragraph 12(1)(j), of the person deemed to have received such dividend;

(ii) will be deductible by each recipient of such dividend in computing its respective taxable income pursuant to subsection 112(1) and, for greater certainty, the provisions of subsections 112(2.1), (2.2), (2.3) or (2.4) will not apply to deny the subsection 112(1) deduction in respect of such dividend;
(iii) will be excluded from the proceeds of disposition of the shares by virtue of paragraph (j) of the definition of "proceeds of disposition" in section 54 of the Act;

(iv) by virtue of subsection 112(3) of the Act, will reduce the loss, if any, in respect of the disposition of the shares on which the dividend is deemed to be received, and

(v) will not be subject to tax under Part IV.1 and Part VI.1 of the Act on the basis that such dividend will be an excepted dividend by virtue of paragraph (b) of the definition of "excepted dividend" in section 187.1 of the Act and an excluded dividend by virtue of paragraph (a) of the definition of "excluded dividend" in subsection 191(1) of the Act, as each of the recipients will have a substantial interest, within the meaning assigned by paragraph 191(2)(a) of the Act, in the payer corporation at the time such taxable dividend is paid.

(e) By virtue of subsection 186(2) and paragraph 186(4)(a) of the Act, DC1, DC2, Subco, TC1, TC2 and TC3 will be connected with each other. Consequently, pursuant to paragraph 186(1)(b) of the Act,

(i) DC2 shall be subject to Part IV tax in an amount equal to that proportion of the dividend refund to which DC1 will become entitled as a result of the payment of the dividend referred to in (a)(iii) herein, that the amount of such dividend received by DC2 is of the aggregate of all taxable dividends paid by DC1 in its taxation year in which such dividend is paid, and

(ii) each of TC1, TC2 and TC3 shall be subject to Part IV tax in an amount equal to that proportion of the dividend refund to which DC2 will become entitled as a result of the payment of the dividends referred to in (b)(iv) herein, that the amount of each such dividend received by TC1, TC2 and TC3, as the case may be, is of the aggregate of all taxable dividends paid by DC2 in its taxation year in which such dividend is paid.

D. Provided that as part of the series of transactions or events that includes the proposed transactions described herein, there is not:

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

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

(c) an acquisition of shares in the circumstances described in subparagraph 55(3.1)(b)(iii);

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

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

which has not been described herein, then by virtue of paragraph 55(3)(b), subsection 55(2) will not apply to the taxable dividends referred to in the rulings given in subparagraphs C(a)(i), (iii) and (iv), and (b)(iv) above and, for greater certainty, subsection 55(3.1) will not apply to deny the exemption under paragraph 55(3)(b) of the Act.

E. The repayments of the DC1 Note #1 and #2 held by DC2 described in paragraph 25 above and the Subco Note held by DC1 described in paragraph 25 above, and the extinguishment of the debt obligations as a result of the cancellation of the Redemption Notes described in paragraph 36 above, will not give rise to a "forgiven amount" within the meaning of subsection 80(1) or 80.01(1).

F. The provisions of subsection 88(1) will apply to the winding-up of Subco into DC2 as described in paragraph 23 above such that

(a) each property of Subco distributed to DC2 on the winding-up of Subco will be deemed by paragraph 88(1)(a) to have been disposed of by Subco for proceeds of disposition determined under that paragraph;

(b) the shares in the capital stock of Subco held by DC2 immediately before the winding-up will be deemed by paragraph 88(1)(b) to have been disposed of by DC2 for proceeds determined under that paragraph; and

(c) each property of Subco distributed to DC2 on the winding-up of Subco will be deemed by paragraph 88(1)(c) to have been acquired by DC2 for an amount equal to the amount deemed by paragraph 88(1)(a) to be Subco's proceeds of disposition of the property.

G. The provisions of subsections 15(1), 56(2) and 246(1) will not apply to any of the proposed transactions described in paragraphs 10 to 36 above, in and by themselves.

H. The provisions of subsection 245(2) will not be applied as a result of the proposed transactions described in paragraphs 10 to 36 above, 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 out in Information Circular 70-6R5 issued by Canada Revenue Agency ("CRA") on May 17, 2002 and are binding on the CRA provided that the proposed transactions are completed by XXXXXXXXXX.

The above rulings are based on the Act in its present form and do not take into account any proposed amendments to the Act which, if enacted, could have an effect on the rulings provided herein.

Comments

1. It is our view that

(a) each of B1, B2 and B3 will not be entitled to claim a paragraph 20(1)(n) reserve in respect of the two DC1 Promissory Notes, and

(b) DC1 will not be entitled to claim a subparagraph 40(1)(a)(iii) reserve in respect of the portion of

(i) the Mortgage Receivable, and

(ii) the 2004 Mortgage Receivable

that it transfers to Subco as described in paragraph 20 above.

2. Nothing in this ruling should be construed as implying that CRA has agreed to or reviewed:

(a) the determination of the FMV or the cost amount of any particular asset or the PUC or V-day value of any shares referred to herein;

(b) the computation of the CDA of DC1, DC2, TC1, TC2 or TC3, and

(c) any tax consequences relating to the facts and proposed transactions described herein other than those specifically described in the rulings given above. For greater certainty, our rulings should not be construed as providing comfort that any of the shares of DC1, DC2, Subco, TC1, TC2 or TC3 is or will be a "share of the capital stock of a family farm corporation" (as defined in subsection 110.6(1) of the Act).

Yours truly,

XXXXXXXXXX
Section Manager
for Division Director
Reorganizations and Resources Division
Income Tax Rulings Directorate
Policy and Planning Branch