2004 Ruling 2003-0052151R3 - Gross Asset 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.

Principal Issues: Standard Gross Asset Butterfly.

Position: Favourable Rulings Given.

Reasons: Meets the requirements of the law.

XXXXXXXXXX 2003-005215

XXXXXXXXXX, 2004

Dear XXXXXXXXXX:

Re: XXXXXXXXXX
Advance Income Tax Ruling Request

This is in reply to your letter dated XXXXXXXXXX, as amended by your subsequent letter dated XXXXXXXXXX and your other correspondence, wherein you requested an advance income tax ruling on behalf of the above-noted taxpayer. 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) XXXXXXXXXX;

(b) "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";

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

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

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

(f) "child" has the meaning assigned by subsection 252(1);

(g) "CRA" means the Canada Revenue Agency;

(h) "DC" means XXXXXXXXXX;

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

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

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

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

(m) "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, expressed in terms of cash;

(n) "Family Trust" means XXXXXXXXXX;

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

(p) XXXXXXXXXX;

(q) "mutual fund trust" has the meaning assigned by subsection 132(6);

(r) XXXXXXXXXX;

(s) XXXXXXXXXX;

(t) "Opco" means XXXXXXXXXX;

(u) XXXXXXXXXX;

(v) "P" means XXXXXXXXXX;

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

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

(y) "Parent" means the late XXXXXXXXXX;

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

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

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

(cc) "Proposed Transactions" means the transactions described in Paragraphs 23 to 36;

(dd) XXXXXXXXXX;

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

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

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

(hh) "Sibling 1" means XXXXXXXXXX;

(ii) "Sibling 2" means XXXXXXXXXX;

(jj) "Sibling 3" means XXXXXXXXXX;

(kk) "Sibling 4" means XXXXXXXXXX;

(ll) "stated capital" has the meaning assigned by XXXXXXXXXX;

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

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

(oo) "unit trust" has the meaning assigned by subsection 108(2).

FACTS

1. DC is a private corporation and a taxable Canadian corporation that was incorporated on XXXXXXXXXX. The principal business address of DC is XXXXXXXXXX. DC's fiscal period and taxation year ends on XXXXXXXXXX, and its CRA business number is XXXXXXXXXX. DC deals with the XXXXXXXXXX TSO and files its federal returns at the XXXXXXXXXX TC.

2. The authorized share capital of DC consists of an unlimited number of voting Class A common shares; an unlimited number of voting Class B common shares; and an unlimited number of non-voting Class A special shares.

The Class A common shares and Class B common shares are entitled to dividends (after the payment of dividends on the Class A special shares) and to the net assets of DC on dissolution (after satisfaction of the entitlement of the Class A special shares). The Class A special shares are redeemable and retractable for $XXXXXXXXXX per share and are entitled to non-cumulative dividends of XXXXXXXXXX% of the retraction and redemption amount per annum. The Class A special shares have a preferential right to the net assets of DC on dissolution to the extent of the retraction and redemption amount of such shares plus any unpaid dividends.

Currently, DC has not issued any Class A common shares but has XXXXXXXXXX Class B common shares and XXXXXXXXXX Class A special shares issued and outstanding, all of which are held by Family Trust as capital property. The respective aggregate adjusted cost base and paid-up capital of the XXXXXXXXXX Class A special shares and the Class B common shares of DC owned by Family Trust is nominal, however, the respective aggregate fair market value of each class of shares is substantial.

3. Parent was a Canadian citizen and resident of Canada until the time of his death on XXXXXXXXXX. Parent was also a citizen of the United States ("US"). Parent is the father of XXXXXXXXXX adult children, four of whom are Sibling 1, Sibling 2, Sibling 3 and Sibling 4, each of whom is an individual resident in Canada.

4. Family Trust is an inter vivos personal trust that was settled XXXXXXXXXX. The address of Family Trust is the same as DC's. Family Trust's taxation year end is XXXXXXXXXX and its CRA trust account number is XXXXXXXXXX. Family Trust deals with the XXXXXXXXXX TSO and it files its federal returns with the XXXXXXXXXX TC.

The trustees of the Family Trust are XXXXXXXXXX individuals each of whom is resident in Canada. The beneficiaries of Family Trust are Sibling 1, Sibling 2, Sibling 3 and Sibling 4. The trustees are not related to each other, the settlor of Family Trust, or any of the beneficiaries, nor is the settlor related to any of the beneficiaries.

The respective fixed interest of each beneficiary in the income and capital of Family Trust, stated as a percentage, and the age of each beneficiary are as follows:

XXXXXXXXXX.

5. The primary purpose for the creation of Family Trust was to ensure that Parent, being a US citizen, did not suffer adverse US income tax consequences related to certain transactions involving the various corporate entities in respect of which Parent had an ownership interest, as described below. Family Trust also served as an estate planning vehicle for Parent. One of the corporate entities that Parent had a significant interest in was Opco. Opco is a corporation that was incorporated under the laws of XXXXXXXXXX. Opco mainly carried on the business of XXXXXXXXXX.

6. The terms of the trust indenture for Family Trust require the trustees to distribute all of the "Net Annual Income" derived from Family Trust's property annually to each beneficiary in proportion to each beneficiary's respective fixed interest in the income of Family Trust. "Net Annual Income" is defined in the trust indenture to mean all of the income derived from such property minus certain expenses.

Under the terms of the trust indenture each beneficiary's fixed interest in the capital of Family Trust must be distributed to such beneficiary in XXXXXXXXXX once the particular beneficiary attains ages XXXXXXXXXX. Currently, as noted above, no beneficiary has attained age XXXXXXXXXX. The trustees of Family Trust have the power to encroach on the capital at any time under the terms of the trust indenture.

7. Immediately after Family Trust was settled in XXXXXXXXXX, it borrowed $XXXXXXXXXX from XXXXXXXXXX. In addition, Parent contributed cash of $XXXXXXXXXX to Family Trust. These funds were used by Family Trust to subscribe for XXXXXXXXXX newly issued Class B common shares of XXXXXXXXXX from treasury. The total cash subscription price for the XXXXXXXXXX Class B common shares of XXXXXXXXXX of $XXXXXXXXXX was the fair market value of such shares at that time. Prior to this share subscription, Parent had owned all the issued and outstanding shares of XXXXXXXXXX, being XXXXXXXXXX Class A common shares. XXXXXXXXXX was a private corporation and a taxable Canadian corporation incorporated under the XXXXXXXXXX at that time. XXXXXXXXXX had an ownership interest in the shares of Opco.

8. In XXXXXXXXXX, as part of an estate freeze, Family Trust transferred its XXXXXXXXXX Class B shares of XXXXXXXXXX to XXXXXXXXXX in exchange for XXXXXXXXXX Class B common shares of XXXXXXXXXX. At the same time, and for the same reason, Parent transferred his XXXXXXXXXX Class A common shares of XXXXXXXXXX to XXXXXXXXXX in exchange for XXXXXXXXXX Class A common shares and XXXXXXXXXX Class A special shares of XXXXXXXXXX. At that time, XXXXXXXXXX and was also a private corporation and a taxable Canadian corporation. The authorized capital of XXXXXXXXXX consisted of an unlimited number of voting, Class A common shares; an unlimited number of voting, Class B common shares; and an unlimited number of voting Class A special shares. The Class A special shares are redeemable at an amount equal to the aggregate fair market value of the property transferred to the company as consideration for the issue of such Class A special shares, divided by the number of Class A special shares. The shares are entitled to cumulative dividends at a rate equal to the lesser of XXXXXXXXXX% per annum and the safe harbour interest rate, as defined in the memorandum and articles of association. As a consequence of the above transaction, Parent owned all the issued and outstanding Class A common shares and Class A special shares of XXXXXXXXXX at that time such that Parent controlled XXXXXXXXXX.

9. On the incorporation of DC on XXXXXXXXXX, Family Trust subscribed for one common share of DC for cash of XXXXXXXXXX. On XXXXXXXXXX, Family Trust transferred its XXXXXXXXXX Class B shares of XXXXXXXXXX to DC in exchange for one common share of DC and a demand promissory note issued by DC in the amount of $XXXXXXXXXX. At this time, the aggregate adjusted cost base and the paid-up capital of the XXXXXXXXXX issued and outstanding common shares of DC owned by Family Trust was $XXXXXXXXXX.

10. XXXXXXXXXX DC XXXXXXXXXX transferring its shares of XXXXXXXXXX to XXXXXXXXXX in exchange for cash consideration of $XXXXXXXXXX and XXXXXXXXXX common shares of XXXXXXXXXX. Subsequent to this share exchange XXXXXXXXXX, DC then immediately transferred its XXXXXXXXXX common shares of XXXXXXXXXX to P for consideration consisting of XXXXXXXXXX Class B Partnership Units of P XXXXXXXXXX. The XXXXXXXXXX Class B Partnership Units of P represent an ownership interest of approximately XXXXXXXXXX% in P. Other former direct and indirect shareholders of Opco held the remaining Class B Units of P (approximately XXXXXXXXXX) which represented an ownership interest of approximately XXXXXXXXXX% in P.

11. P is a limited partnership that was created on XXXXXXXXXX.

XXXXXXXXXX, there are no plans for DC to dispose of or exchange the Class B Units of P at this time.

12. XXXXXXXXXX.

13. XXXXXXXXXX is the legal owner of all the Class A Units of P which represent an ownership interest of approximately XXXXXXXXXX% in P. XXXXXXXXXX.

14. XXXXXXXXXX.

15. On XXXXXXXXXX, DC reduced the stated capital of its common shares by $XXXXXXXXXX and paid cash of $XXXXXXXXXX to Family Trust as consideration for this stated capital reduction. This reduced the adjusted cost base and the paid-up capital of the XXXXXXXXXX common shares held by the Trust in DC to $XXXXXXXXXX in aggregate.

16. On XXXXXXXXXX, DC filed Articles of Amendment to create the Class A special shares, Class A common shares and Class B common shares. The issuance of the Class A special shares is not subject to a price adjustment clause.

17. On XXXXXXXXXX, in the course of a reorganization of DC's share capital, Family Trust exchanged its XXXXXXXXXX common shares of DC for XXXXXXXXXX Class A special shares and XXXXXXXXXX Class B common shares of DC on a tax-deferred basis pursuant to subsection 86(1). The XXXXXXXXXX Class A special shares of DC have an aggregate redemption amount of $XXXXXXXXXX. This reorganization and share exchange was completed so that excess funds could be moved from DC to Family Trust in such a manner that the receipt would be considered to represent capital to Family Trust. To date DC has moved $XXXXXXXXXX in cash from DC to Family Trust by redeeming XXXXXXXXXX Class A special shares of DC. Since the receipt of the cash on the redemption of these Class A special shares was considered to be capital to Family Trust, these funds were not required to be distributed to the beneficiaries. If the funds had instead been paid as cash dividends on the common shares of DC, the trustees would have been required to pay this income to the beneficiaries under the terms of Family Trust. XXXXXXXXXX.

18. Family Trust continues to own XXXXXXXXXX Class A Special shares following the above noted redemptions. All of the above noted share redemptions were completed for the purpose of moving the excess cash to Family Trust in the manner described above and in the course of year-end tax planning for DC. Specifically, a sufficient number of Class A special shares of DC were redeemed to result in a taxable dividend(s) paid by DC that was sufficient to recover the refundable dividend tax on hand account of DC for the particular taxation year and the amount of DC's capital dividend account of DC at the time of each redemption. It is your view that none of these redemptions will affect this ruling because they have not been undertaken in contemplation of the Proposed Transactions and such redemptions would have taken place in the same manner regardless of whether or not the Proposed Transactions are undertaken. As such none of these redemption have taken place as part of the same series of transactions or events that include the Proposed Transactions.

The trustees of the family Trust have invested the cash received from the various Class A special share redemptions for the benefit of the four beneficiaries in proportion to each beneficiary's fixed interest in Family Trust. The trustees have also encroached on capital from time to time for all of the beneficiaries with the exception of Sibling 4. However, Sibling 4's share of the redemption proceeds is invested in Family Trust for her benefit. The result is that each beneficiary will receive his/her pro-rata share of all cash received by Family Trust from DC. However, as noted above, the timing of the distributions to each beneficiary will depend on each beneficiary's age and/or financial requirements.

19. Currently, as noted above, DC owns XXXXXXXXXX Class B Units of P XXXXXXXXXX which represent XXXXXXXXXX a XXXXXXXXXX% ownership interest in P. DC's other assets include cash balance of approximately $XXXXXXXXXX (which includes a short term investment account referred to as the "XXXXXXXXXX"), before the payment of any tax instalments payable for the year ending XXXXXXXXXX and any taxes receivable. The XXXXXXXXXX Class B Units of P XXXXXXXXXX owned by DC are held by DC as capital property. At XXXXXXXXXX, the aggregate adjusted cost base of the XXXXXXXXXX Class B Units of P owned by DC was $XXXXXXXXXX . DC's adjusted cost base at the time the Proposed Transactions are carried out will have been reduced by DC's share of the distributions made by P in XXXXXXXXXX of $XXXXXXXXXX and will have been increased by DC's share of P's income for the year ended XXXXXXXXXX. The amount of the income adjustment is not currently known and will only be known when DC receives its T5013 slip for XXXXXXXXXX from P. XXXXXXXXXX.

20. DC's liabilities currently consist of income taxes payable.

21. DC's current CDA balance is approximately $XXXXXXXXXX. DC also had a nominal RDTOH balance at the beginning of its current taxation year. As described in Paragraphs 41 and 42 DC expects to have further RDTOH and CDA for its year ended XXXXXXXXXX. However these amounts are not determinable until P provides DC with its T5013 slip for its XXXXXXXXXX taxation year.

22. For greater certainty, it is your view that none of the transactions or events described in Paragraphs 7 to 17 inclusive (the "historical transactions") were undertaken in contemplation of the Proposed Transactions and that they would have taken place in the same manner regardless of whether or not the Proposed Transactions are undertaken. Accordingly, you represent that none of the historical transactions form part of the same series of transactions or events that will include the Proposed Transactions.

PROPOSED TRANSACTIONS

23. DC will split its existing XXXXXXXXXX Class B common shares owned by Family Trust into XXXXXXXXXX Class B common shares without any payment or any other change to the share capital of DC.

24. Family Trust will incorporate four new corporations, TC1, TC2, TC3 and TC4, respectively, (collectively referred to as the "TCs") under the XXXXXXXXXX. Each of the TCs will be a private corporation and a taxable Canadian corporation.

The authorized share capital of each TC will include, an unlimited number of voting common shares, an unlimited number of non-voting, redeemable, retractable Class A preferred shares and an unlimited number of non-voting, redeemable, retractable Class B preferred shares. The additional terms and conditions of the common and preferred shares of each TC will be as follows:

(a) the common shares will be entitled to dividends at the discretion of the board of directors of the corporation and will be fully participating;

(b) the Class A preferred shares will: entitle a holder to non-cumulative dividends of XXXXXXXXXX% per annum; be redeemable and retractable at $XXXXXXXXXX per share plus the amount of any declared but unpaid dividends to the date fixed for redemption or retraction, and entitle a holder to an amount, in priority to the common shares, on the liquidation, dissolution or winding-up of the corporation equal to $XXXXXXXXXX per share plus any declared but unpaid dividends on the date fixed for liquidation, dissolution or winding-up; and

(c) the holders of Class B preferred shares will: be entitled to non-cumulative dividends of XXXXXXXXXX% per annum; be redeemable and retractable at an amount determined by the formula (subject to adjustment should this value be established to be incorrect) equal to the aggregate fair market value of property transferred (net of any liabilities assumed) to the company as consideration for the issue of such Class B preferred shares, divided by the number of Class B preferred shares so issued, plus the amount of any declared but unpaid dividends on the date fixed for redemption or retraction; and entitle a holder to an amount, in priority to the common shares, on the liquidation, dissolution or winding-up of the corporation, determined by the formula (subject to adjustment should this value be established to be incorrect) equal to the aggregate fair market value of property transferred (net of any liabilities assumed) to the company as consideration for the issue of such Class B preferred shares, divided by the number of Class B preferred shares issued and outstanding at that time, plus any declared but unpaid dividends on the date fixed for liquidation, dissolution or winding-up.

In addition to the above terms and conditions, no dividends may be paid on any class of shares of the corporation if the net assets of the corporation after the payment of such dividends would be less than the aggregate redemption/retraction amount of the Class A preferred shares and the Class B preferred shares.

25. Family Trust will cause the board of directors for each TC to be the same as the board of directors of DC and Family Trust will subscribe for 1 common share in the capital of each TC for $XXXXXXXXXX.

26. For greater certainty, each of the share transfers described in this Paragraph, and Paragraphs 27, 28 and 29 below, will take place contemporaneously.

Family Trust will transfer XXXXXXXXXX Class B common shares of DC to TC1. As sole consideration, TC1 will issue XXXXXXXXXX common shares to Family Trust having a fair market value equal to the fair market value at that time of the XXXXXXXXXX Class B common shares of DC. Family Trust will also transfer XXXXXXXXXX Class A special shares of DC to TC1. As sole consideration, TC1 will issue XXXXXXXXXX Class A preferred shares having a fair market value equal to the fair market value at that time of the XXXXXXXXXX Class A special shares of DC.

TC1 and DC 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 such transfer. The agreed amount in respect of the shares so transferred to DC 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 common shares that will be issued by TC1 as consideration for the XXXXXXXXXX Class B common shares of DC transferred to it by DC will not exceed the aggregate paid-up capital attributable to the XXXXXXXXXX Class B common shares of DC received by TC1 as described above. Similarly, the aggregate amount to be added to the stated capital account maintained for the Class A preferred shares that will be issued by TC1 as consideration for the XXXXXXXXXX Class A special shares of DC transferred to it by DC will not exceed the aggregate paid-up capital attributable to the XXXXXXXXXX Class A special shares of DC received by TC1 as described above.

27. Family Trust will transfer XXXXXXXXXX Class B common shares of DC to TC2. As sole consideration, TC2 will issue XXXXXXXXXX common shares to Family Trust having a fair market value equal to the fair market value at that time of the XXXXXXXXXX Class B common shares of DC. Family Trust will also transfer XXXXXXXXXX Class A special shares of DC to TC2. As sole consideration, TC2 will issue XXXXXXXXXX Class A preferred shares having a fair market value equal to the fair market value at that time of the XXXXXXXXXX Class A special shares of DC.

TC2 and DC 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 such transfer. The agreed amount in respect of the shares so transferred to DC 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 common shares that will be issued by TC2 as consideration for the XXXXXXXXXX Class B common shares of DC transferred to it by DC will not exceed the aggregate paid-up capital attributable to the XXXXXXXXXX Class B common shares of DC received by TC2 as described above. Similarly, the aggregate amount to be added to the stated capital account maintained for the Class A preferred shares that will be issued by TC2 as consideration for the XXXXXXXXXX Class A special shares of DC transferred to it by DC will not exceed the aggregate paid-up capital attributable to the XXXXXXXXXX Class A special shares of DC received by TC2 as described above.

28. Family Trust will transfer XXXXXXXXXX Class B common shares of DC to TC3. As sole consideration, TC3 will issue XXXXXXXXXX common shares to Family Trust having a fair market value equal to the fair market value at that time of the XXXXXXXXXX Class B common shares of DC. Family Trust will also transfer XXXXXXXXXX Class A special shares of DC to TC3. As sole consideration, TC3 will issue XXXXXXXXXX Class A preferred shares having a fair market value equal to the fair market value at that time of the XXXXXXXXXX Class A special shares of DC.

TC3 and DC 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 such transfer. The agreed amount in respect of the shares so transferred to DC 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 common shares that will be issued by TC3 as consideration for the XXXXXXXXXX Class B common shares of DC transferred to it by DC will not exceed the aggregate paid-up capital attributable to the XXXXXXXXXX Class B common shares of DC received by TC3 as described above. Similarly, the aggregate amount to be added to the stated capital account maintained for the Class A preferred shares that will be issued by TC3 as consideration for the XXXXXXXXXX Class A special shares of DC transferred to it by DC will not exceed the aggregate paid-up capital attributable to the XXXXXXXXXX Class A special shares of DC received by TC3 as described above.

29. Family Trust will transfer XXXXXXXXXX Class B common shares of DC to TC4. As sole consideration, TC4 will issue XXXXXXXXXX common shares to Family Trust having a fair market value equal to the fair market value at that time of the XXXXXXXXXX Class B common shares of DC. Family Trust will also transfer XXXXXXXXXX Class A special shares of DC to TC4. As sole consideration, TC4 will issue XXXXXXXXXX Class A preferred shares having a fair market value equal to the fair market value at that time of the XXXXXXXXXX Class A special shares of DC.

TC4 and DC 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 such transfer. The agreed amount in respect of the shares so transferred to DC 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 common shares that will be issued by TC4 as consideration for the XXXXXXXXXX Class B common shares of DC transferred to it by DC will not exceed the aggregate paid-up capital attributable to the XXXXXXXXXX Class B common shares of DC received by TC4 as described above. Similarly, the aggregate amount to be added to the stated capital account maintained for the Class A preferred shares that will be issued by TC4 as consideration for the XXXXXXXXXX Class A special shares of DC transferred to it by DC will not exceed the aggregate paid-up capital attributable to the XXXXXXXXXX Class A special shares of DC received by TC4 as described above.

30. Immediately before the transfers of property described in Paragraph 31 below, the property of DC 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 DC, including any cash, the XXXXXXXXXX short term investment described in Paragraph 19 above, prepaid expenses, and any income taxes receivable;

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

(c) business property, comprising all of the assets of DC, other than property described in (a) and (b) above, any income from which would be income from a business (other than a specified investment business).

For greater certainty, any tax accounts, such as the balance of any refundable dividend tax on hand or capital dividend account of DC, will not be considered to be property of DC for the purposes of the allocation described above. In addition, the Class B Units of P XXXXXXXXXX will be classified as investment property such that immediately before the transfers described in Paragraph 31 below, DC will not own any property which will be considered to be business property.

31. Immediately following the classification of DC's property as described in Paragraph 30 above, and subject to the cash adjustments described below, DC will transfer to each TC, a pro-rata portion of each type of property owned by it at that time, as determined in accordance with Paragraph 30 above, on a gross fair market value basis based upon the following percentages:

TC1 - XXXXXXXXXX %
TC2 - XXXXXXXXXX %
TC3 - XXXXXXXXXX % and
TC4 - XXXXXXXXXX %.

While the Class B Units of P XXXXXXXXXX will be transferred on a proportionate basis to each TC, the Agreement for P does not permit the transfer of fractional Class B Units of P. XXXXXXXXXX . Accordingly, it is proposed that the amount of cash that each TC will receive on the distribution will be adjusted to compensate for the difference between the number of Class B Units of P XXXXXXXXXX that the particular TC was otherwise entitled to receive (including any fractional units) based on the percentage specified below and the actual number of such units that the particular TC received (such fractional units rounded to the nearest whole unit) such that:

(a) TC1 will receive, XXXXXXXXXX % of the total cash and near cash property less the amount of cash represented by XXXXXXXXXX multiplied by the fair market value of one Class B Unit of P, and XXXXXXXXXX Class B Units of P XXXXXXXXXX.

(b) TC2 will receive XXXXXXXXXX % of the total cash and near cash property plus the amount of cash represented by XXXXXXXXXX multiplied by the fair market value of one Class B Unit of P, and XXXXXXXXXX Class B Units of P XXXXXXXXXX.

(c) TC3 will receive XXXXXXXXXX % of the total cash and near cash property plus the amount of cash represented by XXXXXXXXXX multiplied by the fair market value of one Class B Unit of P, and XXXXXXXXXX Class B Units of P XXXXXXXXXX.

(d) TC4 will receive XXXXXXXXXX % of the total cash and near cash property less the amount of cash represented by XXXXXXXXXX multiplied by the fair market value of one Class B Unit of P, and XXXXXXXXXX Class B Units of P XXXXXXXXXX.

32. Immediately following the completion of the transfer of DC's property described in paragraph 31 above, each TC, as the case may be, will hold legal and beneficial ownership of the property transferred to each such TC from DC, with a fair market value which will be equal to or will approximate that proportion of the aggregate fair market value of each type of property of DC determined immediately before such transfer described in Paragraph 31 above that:

(a) the aggregate fair market value, immediately before the transfer of property described in Paragraph 31 above, of the shares of DC owned by TC1, TC2, TC3 and TC4, as the case may be;

is of

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

For the purposes of this Paragraph, the expression "approximates the proportion" means the discrepancy from that proportion, if any, that would not exceed XXXXXXXXXX determined as a percentage of the fair market value of the property that the TC has received compared to what it would have received had it received its appropriate pro-rata share of DC's property.

33. As consideration, for the property received by each TC from DC as described above, each TC will:

(a) assume a pro-rata portion of the liabilities of DC, based on the same percentages as set out in Paragraph 31 above; and

(b) issue Class B preferred shares to DC with an aggregate redemption value equal to the amount by which the aggregate fair market value of the property transferred exceeds the liabilities assumed.

Each of the TCs 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 property that is an eligible property received by the particular TC from DC. For greater certainty, the agreed amount in respect of each such transferred property will not:

(c) be less than the amount of any non-share consideration paid by the particular TC for such property;

(d) exceed the fair market value of all the consideration paid by the particular TC for such property; and

(e) be less than the lesser of the fair market value of the particular transferred property at the time of such transfer and its cost amount.

The amount to be added to the stated capital account maintained for the Class B preferred shares issued by each particular TC under the XXXXXXXXXX will be equal to the aggregate fair market value of the transferred property received by the particular TC less the amount of any liabilities of DC that will be assumed by the particular TC in respect of such transfer.

34. Each TC will redeem all of its outstanding Class B preferred shares held by DC for an amount equal to the aggregate redemption amount of such shares.

As consideration, each of TC1, TC2, TC3, and TC4, as the case may be, will issue a non-interest-bearing demand promissory note to DC (respectively referred to as the TC1 Note, TC2 Note, TC3 Note, and TC4 Note) having a principal amount and fair market value equal to the aggregate redemption amount of the corresponding number of Class B preferred shares so redeemed by the particular TC. The principal amount of each note will be stated by formula such that it will be subject to adjustment should the fair market value be established to be incorrect.

35. Each TC will have its first taxation year end immediately following the date on which the Proposed Transactions described in Paragraph 34 occur, but for greater certainty, prior to the Proposed Transactions described in Paragraph 36.

36. The shareholders of DC will, by special resolution, resolve to wind-up and dissolve DC under the applicable provisions of the XXXXXXXXXX. No agreement or resolution relating to the winding up of DC or the distribution of its property will provide for the cancellation of any shares of DC. In connection with the winding-up of DC, DC will assign and distribute the TC 1 Note to TC1; the TC2 Note to TC2; the TC3 Note to TC3; and the TC4 Note to TC4. As a result of each such assignment and distribution of the aforesaid notes, the obligations under each of the notes will be cancelled. However, based on the information contained in the T5013 slip provided by P as described in Paragraph 21, immediately prior to the assignment and distribution of such notes, DC will elect, pursuant to 83(2), in prescribed manner and prescribed form that the full amount of any resulting dividend referred to in subparagraph 88(2)(b)(i) be deemed to be a capital dividend. Following receipt of any tax refunds in which DC will become entitled as a result of the Proposed Transactions described herein, DC will distribute such dividend refund to the holders of the Class B common shares in proportion to their shareholdings. The dividend refund will not arise until after the fiscal period in which the dividend is paid (or is deemed to be paid). All properties and liabilities of DC 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 Articles of Dissolution, DC will be dissolved.

ADDITIONAL INFORMATION

37. Unless otherwise specified, the Proposed Transactions described herein will occur in the order in which they are set out above and such Proposed Transactions will commence on the date agreed to by the parties.

38. No property has or will become property of DC or any corporation controlled by DC or by a predecessor corporation of any such corporation, and no liabilities have been or will be incurred by DC or any corporation controlled by DC or a predecessor corporation of any such corporation, in contemplation of and before the proposed transfer of property described in Paragraph 31, otherwise than as described herein.

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

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

41. XXXXXXXXXX. It is desirable for DC to transfer its Class B Units to each of the TCs (as described in Paragraph 31) prior to XXXXXXXXXX to avoid an income allocation by P to DC that would be in respect of P's taxation year ending XXXXXXXXXX. Such income from P would be required to be included in DC's taxation year ending XXXXXXXXXX, because this is the taxation year of DC which includes the end of P's taxation year in which the allocation was made. As the Proposed Transactions are expected to be carried out before the start of DC's XXXXXXXXXX taxation year, any income taxes incurred by DC in its XXXXXXXXXX taxation year that would otherwise be eligible for a dividend refund could not be refunded since all of DC's assets would have been distributed in its XXXXXXXXXX taxation year. Accordingly, it is planned for the distribution of DC's assets to occur before XXXXXXXXXX.

42. The XXXXXXXXXX distribution that DC has received from P in XXXXXXXXXX could result in DC being deemed to have a capital gain. This capital gain would arise pursuant to subsection 100(2) if the amounts required to be deducted under subsection 53(2) in the computation of the adjusted cost base of DC's Class B Units of P exceed DC's cost of such Class B Units and the amounts DC is required to add to the cost of its Class B Units pursuant to subsection 53(1). To the extent that a capital gain arises, then DC will have a positive balance in its capital dividend account.

PURPOSE OF THE PROPOSED TRANSACTIONS

43. As noted in Paragraph 6 above, once a beneficiary of Family Trust attains the age of XXXXXXXXXX, XXXXXXXXXX of such beneficiary's capital interest in Family Trust must be distributed to him/her, as the case may be. One property that would be required to be distributed to each such beneficiary would be the shares of DC. If such a distribution were to take place, this would result in the shares of DC being, for some period of time, held by one or more of the beneficiaries as well as Family Trust until such time that all of the DC shares have ultimately been distributed. The trustees believe that it is in the best interest of each beneficiary to receive his/her respective interest in the underlying assets of DC in their own particular holding company as opposed to each beneficiary owning a minority interest in DC. Accordingly, it is preferred that each beneficiary receive shares of their respective TC when each beneficiary attains the ages of XXXXXXXXXX as opposed to shares of DC.

44. A separation of the assets of DC into the four separate TCs would also facilitate the trustees management of each beneficiary's underlying interest in the assets of DC without affecting the interest of another beneficiary. Currently, the trustees of Family Trust must cause the assets of DC to be managed to satisfy the collective needs of the beneficiaries of Family Trust and it is possible that the needs of a particular beneficiary may conflict with the needs of another beneficiary over the period of time Family Trust owns shares of DC. The separation of DC into four separate corporations would allow the trustees to cause the assets of a particular TC to be managed to satisfy the needs of the particular beneficiary without affecting the needs of another beneficiary. XXXXXXXXXX.

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), the provisions of subsection 85(1), other than paragraph 85(1)(e.2), will apply to the respective transfers of the Class B common shares and Class A special shares of DC by Family Trust to each of TC1, TC2, TC3 and TC4, as the case may be, as described in Paragraphs 26 to 29 above, such that the agreed amount in respect of each such transfer will 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, none of these transfers will, in and of themselves, cause us to consider that the transferred shares received by a transferee, or the shares issued by each transferee to the transferor as consideration therefor, are not capital property of the particular holder of such shares.

B. Provided the joint elections are files pursuant to subsection 85(1), within the time set forth in subsection 85(6), the provisions of subsection 85(1), other than paragraph 85(1)(e.2), will apply to the transfer of each eligible property by DC to TC1, TC2, TC3 and TC4, as the case may be, as described in Paragraph 31 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, subsection 85(2.1) will apply to reduce the paid-up capital of the shares issued by each of TC1, TC2, TC3 and TC4, as the case may be, to DC, as described in Paragraph 33 above, to an amount equal to the aggregate of the cost amounts (as determined pursuant to subsection 85(1)) of such Transferred Property received by such TC less the amount of any liabilities assumed by such TC on such transfer.

C. As a result of the redemption by each of TC1, TC2, TC3 and TC4 of its Class B preferred shares held by DC, as the case may be, as described in Paragraph 34 above, and as a result of the distributions by DC in the course of its winding-up, as described in Paragraph 36 above:

(a) by virtue of paragraphs 84(3)(a) and 84(3)(b), each such TC will be deemed to have paid, and DC will be deemed to have received, a taxable dividend equal to the amount by which the aggregate the amount paid in respect of the redemption by such TC of its Class B preferred shares exceeds the aggregate paid-up capital of such shares; and

(b)(i) pursuant to paragraph 88(2)(b) and subsection 84(2), but subject to (ii) to (iv) herein, each of TC1, TC2, TC3 and TC4 will be deemed to have received a dividend (the "winding-up dividend") on its Class A special shares and Class B common shares of DC, as the case may be, equal to the proportion of the amount by which the aggregate fair market value of the property of DC distributed by DC on the winding-up exceeds the amount by which the paid-up capital on the Class A special shares and the Class B common shares of DC, as the case may be, is reduced on the distribution that the number of shares of such class held by the particular TC, as the case may be, is of the number of issued shares of such class outstanding immediately before 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 DC's capital dividend account determined immediately before the payment of the winding-up dividend shall be deemed, for the purposes of 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:

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

(B) the amount by which the winding-up dividend exceeds the portion thereof in respect of which DC 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 as deemed not to be a dividend, shall be deemed to be a separate dividend that is a taxable dividend.

D. Each of the taxable dividends referred to in Ruling C(a) and C(b)(iv) above:

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

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

(c) will, by virtue of paragraph (j) of the definition of "proceeds of disposition" in section 54, be excluded in determining the proceeds of disposition of the particular shares on the redemption or winding-up, as the case may be, to the particular person receiving such deemed dividend.

(d) will not, by virtue of subsection 186(2) and paragraph 186(4)(a), be subject to tax under Part IV, except as provided in paragraph 186(1)(b), because DC will be connected to each TC and each TC will be connected to DC by virtue of paragraph 186(4)(a); and

(e) will not, by virtue of paragraph (b) of the definition of "excepted dividend" in section 187.1 and paragraph (a) of the definition of "excluded dividend" in subsection 191(1), be subject to tax under subsections 191.1 and 187.2 because each dividend recipient will have a "substantial interest", within the meaning assigned by paragraph 191(2)(a) and section 191(3), in the dividend payer at the time of such dividend payment.

E. The extinguishment of the debt obligations as a result of the cancellation of the TC1 Note, TC2 Note, TC3 Note and TC4 Note, as described in Paragraph 36 above, will not give rise to a "forgiven amount" within the meaning of subsection 80(1) or 80.01(1). None of the TCs will realize any gain or loss as a result of the cancellation of these notes as described in Paragraph 36 above.

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

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

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

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

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

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

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

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

G. The provisions of subsections 15(1), 15(2), 56(2), 69(1), 69(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 above.

The above rulings are given subject to the limitations and qualifications set out in IC 70-6R5 and are binding on the CRA 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 CRA 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; or

(b) 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, other than those specifically described in the rulings given above.

Yours truly,

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