2004 Ruling 2003-0053881R3 - Butterfly Ruling - XXXXXXXXXX .

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: Butterfly Ruling.

Position: Favorable Rulings Issued.

Reasons: The law.

XXXXXXXXXX 2003-005388

XXXXXXXXXX, 2004

Re: XXXXXXXXXX Advance Income Tax Ruling Request

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

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

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

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

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

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

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

DEFINITIONS

In this letter all monetary amounts are expressed in Canadian dollars and the following terms have the meanings specified:

(a) "Act" means the Income Tax Act (Canada), R.S.C. 1985 (5th Supp.) c.1, as amended from time to time and consolidated to the date of this letter and, unless otherwise expressly stated, every reference herein to a part, section or subsection, paragraph or subparagraph and clause or subclause is a reference to the relevant provision of the Act, and the Income Tax Regulations thereunder are referred to as the "Regulations";

(b) "adjusted cost base" (also referred to as "ACB") has the meaning assigned by section 54;

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

(d) "DC" means XXXXXXXXXX - CRA Business Number: XXXXXXXXXX;

(e) "BCA" means the XXXXXXXXXX;

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

(g) "capital gain" has the meaning assigned by paragraph 39(1)(a);

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

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

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

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

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

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

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

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

(p) "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;

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

(r) "paid-up capital" (also referred to as "PUC") has the meaning assigned by subsection 89(1);

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

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

(u) "Proposed Transactions" means the transactions described in Paragraphs 11 to 19;

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

(w) "related persons" has the meaning assigned by subsection 251(2);

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

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

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

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

(bb) "stated capital" and "stated capital account" each has the respective meaning assigned thereto by the BCA;

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

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

(ee) "TC 1" means XXXXXXXXXX - CRA Business Number: XXXXXXXXXX;

(ff) "TC 2" means XXXXXXXXXX - CRA Business Number: XXXXXXXXXX; and

(gg) "Xco" means XXXXXXXXXX.

FACTS

1. XXXXXXXXXX ("Parent") is the father of two adult children, XXXXXXXXXX ("Sibling 1") and XXXXXXXXXX ("Sibling 2"). Each of Parent, Sibling 1 and Sibling 2 are resident in Canada for purposes of the Act.

2. Each of DC, TC 1 and TC 2 is a Canadian-controlled private corporation and a taxable Canadian corporation incorporated under the BCA prior to XXXXXXXXXX. TC 1 and TC 2 were each incorporated on XXXXXXXXXX . Since their respective dates of incorporation, each of DC, TC 1 and TC 2 has operated as a holding company. Each of DC, TC 1 and TC 2 has a taxation year that ends on XXXXXXXXXX and each such corporation files its respective federal corporate tax returns at the XXXXXXXXXX TC.

3. The authorized share capital of DC is as follows:

(a) XXXXXXXXXX Class A non-voting common shares without par value issued in two separate series, of which the first series, consisting of XXXXXXXXXX shares, is designated as "Class A - Series 1" and the second series, consisting of XXXXXXXXXX shares, is designated as "Class A - Series 2". Each of the Class A - Series 1 and Class A-Series 2 shares are redeemable and retractable at $XXXXXXXXXX per share (respectively, the "Class A - Series 1 Redemption Amount" and "Class A - Series 2 Redemption Amount", as the case may be) plus the amount of any non-cumulative dividends (payable at the rate of XXXXXXXXXX% per annum on such redemption amount at the discretion of the directors) declared but unpaid thereon. The Class A - Series 1 Redemption Amount and Class A - Series 2 Redemption Amount, along with any declared but unpaid dividends will be paid in priority to the entitlement of any other shares on liquidation.

(b) XXXXXXXXXX Class B voting common shares without par value (ranking equally with the Class C and Class D common shares in respect of dividend and liquidation entitlements);

(c) XXXXXXXXXX Class C non-voting common shares without par value; (ranking equally with the Class B and Class D shares in respect of dividend and liquidation entitlements); and

(d) XXXXXXXXXX Class D voting common shares without par value (ranking equally with the Class B and Class C shares in respect of dividend and liquidation entitlements).

The aggregate stated capital, paid-up capital and aggregate adjusted cost base to each shareholder of each class of issued and outstanding shares of DC are as follows:

Shareholder

Class

# of Shares

Stated Capital/PUC

ACB

Parent
Class A - Series 1
XXXXXXXX
XXXXXXXX
XXXXXXXXX

Class B
XXXXXXXX
XXXXXXXXX
XXXXXXXXX

Class C
XXXXXXXX
XXXXXXXXX
XXXXXXXXX

TC 1
Class A - Series 2
XXXXXXXX
XXXXXXXXX
XXXXXXXXX

Class B
XXXXXXXX
XXXXXXXXX
XXXXXXXXX

Class C
XXXXXXXX
XXXXXXXXX
XXXXXXXXX

TC 2
Class A - Series 2
XXXXXXXX
XXXXXXXXX
XXXXXXXXX

Class B
XXXXXXXX
XXXXXXXXX
XXXXXXXXX

Class C
XXXXXXXX
XXXXXXXXX
XXXXXXXXX

Each of TC 1 and TC 2 acquired its XXXXXXXXXX Class B shares and XXXXXXXXXX Class C shares of DC on XXXXXXXXXX for cash consideration of $XXXXXXXXXX per share, respectively. Also on that same day, each of TC 1 and TC 2 acquired its XXXXXXXXXX Class A, Series 2 shares of DC as a result of an exchange of shares of a predecessor corporation of Xco to DC by each of TC 1 and TC 2 in respect of which joint elections were filed pursuant to section 85. Parent acquired his XXXXXXXXXX Class B Shares and XXXXXXXXXX Class C Shares of DC on XXXXXXXXXX for cash consideration of $XXXXXXXXXX per share. Parent acquired his XXXXXXXXXX Class A - Series 1 of DC on XXXXXXXXXX as consideration for his transfer of shares of a predecessor corporation of Xco to DC in respect of which a joint election was filed pursuant to section 85. Each of the shareholders of DC holds all of its shares of DC as capital property.

4. The authorized share capital of TC 1 is as follows:

Authorized:

(a) XXXXXXXXXX Class A voting common shares without par value;

(b) XXXXXXXXXX Class B non-voting common shares without par value; and

(c) XXXXXXXXXX Class A non-voting preferred shares ("Class A Preferred") with a par value of $XXXXXXXXXX each and a redemption amount of $XXXXXXXXXX per share (dividends are payable on the redemption amount at the discretion of the directors).

The aggregate stated capital, paid-up capital and aggregate adjusted cost base to each shareholder, of each class of issued and outstanding shares of TC 1 are as follows:

Shareholder

Class

# of Shares

Stated Capital/PUC/ACB

Sibling 1
Class A
XXXXXXXXXX
XXXXXXXXXX

Class B
XXXXXXXXXX
XXXXXXXXXX

Class A Preferred
XXXXXXXXXX
XXXXXXXXXX

Sibling 1 Trust
Class B
XXXXXXXXXX
XXXXXXXXXX

5. Sibling 1 Trust is an inter vivos personal trust that was settled on XXXXXXXXXX. The trustees of Sibling 1 Trust are XXXXXXXXXX Canadian resident individuals (XXXXXXXXXX), who are not related to each other or to the beneficiaries. The beneficiaries of Sibling 1 Trust are Sibling 1, Sibling 1's spouse (after the death of Sibling 1) and any issue of Sibling 1 (after the death of Sibling 1 and his spouse). Currently, each of the beneficiaries is a Canadian resident. Sibling 1 Trust subscribed for XXXXXXXXXX Class B common shares of TC 1 at a subscription price (paid in cash) of $XXXXXXXXXX per share on XXXXXXXXXX.

6. The authorized share capital of TC 2 is as follows:

Authorized:

(a) XXXXXXXXXX Class A voting common shares without par value;

(b) XXXXXXXXXX Class B non-voting common shares without par value; and

(c) XXXXXXXXXX Class A non-voting preferred shares ("Class A Preferred") with a par value of $XXXXXXXXXX each and a redemption amount of $XXXXXXXXXX per share (dividends are payable on the redemption amount at the discretion of the directors).

The aggregate stated capital, paid-up capital and redemption amount (where applicable) and aggregate adjusted cost base to each shareholder, of each class of issued and outstanding shares of TC 2 are as follows:

Shareholder
Class
# of Shares
Stated Capital/PUC/ACB

Sibling 2
Class A
XXXXXXXXXX
XXXXXXXXXX

Class B
XXXXXXXXXX
XXXXXXXXXX

Class A Preferred
XXXXXXXXXX
XXXXXXXXXX

Sibling 2 Trust
Class B
XXXXXXXXXX
XXXXXXXXXX

7. Sibling 2 Trust is an inter vivos personal trust that was settled on XXXXXXXXXX. The trustees of Sibling 2 Trust are XXXXXXXXXX Canadian resident individuals (XXXXXXXXXX), who are not related to each other or to the beneficiaries. The beneficiaries of Sibling 2 Trust are Sibling 2 and any issue of Sibling 2 (after the death of Sibling 2). Sibling 2 Trust subscribed for XXXXXXXXXX Class B common shares of TC 2 at a subscription price (paid in cash) of $XXXXXXXXXX per share on XXXXXXXXXX.

8. Currently, DC's only significant asset is the XXXXXXXXXX common shares of Xco, which represent a XXXXXXXXXX% voting interest in Xco. DC's other assets consist of a small cash balance and a demand loan receivable from Parent, which at the time the Proposed Transactions are executed, will not exceed $XXXXXXXXXX and $XXXXXXXXXX, respectively. The aggregate ACB of the Xco common shares owned by DC is $XXXXXXXXXX. The current aggregate fair market value of the common shares of Xco owned by DC is approximately $XXXXXXXXXX. The common shares of Xco are held by DC as capital property. DC's only significant liability is a loan payable to Xco in the amount of $XXXXXXXXXX. This loan is unsecured and has no fixed terms of repayment. As a result, the fair market value of DC is derived almost entirely from its ownership of the common shares of Xco.

9. Xco is taxable Canadian corporation and a private corporation that was incorporated under the BCA. Xco's core business, carried on directly and/or through various operating subsidiaries, is primarily related to XXXXXXXXXX In addition, Xco also carries on, through an operating subsidiary, a XXXXXXXXXX business in Canada. Xco also owns numerous real estate properties throughout Canada and the United States.

10. Parent controls DC, Sibling 1 controls TC 1 and Sibling 2 controls TC 2.

PROPOSED TRANSACTIONS

11. The articles of incorporation of each of TC 1 and TC 2 will be amended such that the share capital of each corporation will include an unlimited number of a new class of non-voting, non-participating special shares, referred to respectively as the "TC 1 Special Shares" and "TC 2 Special Shares" and collectively as the "TC Special Shares". The terms of the TC Special Shares will provide that such shares will be redeemable and retractable for an amount (respectively the "TC 1 Redemption Amount" and "TC 2 Redemption Amount", as the case may be) equal to the aggregate fair market value of the property transferred to TC 1 and TC 2, as the case may be, as described in Paragraph 13 below, less the amount of the Assumed Liabilities assumed by such corporation on such transfer, as described in Paragraph 14 below, divided by the total number of TC Special Shares so issued by the particular corporation as consideration for such transfer of property. The TC 1 Redemption Amount and TC 2 Redemption Amount will each be subject to a purchase price adjustment should it be established that such redemption amount is incorrect.

12. Immediately prior to the transfers of property described in Paragraph 13 below, the property of DC will be classified into three types of property (on a gross fair market value basis), for the purposes of the definition of "distribution" in subsection 55(1), as follows:

(a) cash or near-cash property, comprising of all the current assets of DC, including any cash and the demand loan receivable from Parent;

(b) investment property, comprising of 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 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, for the purposes of the Act, be income from a business (other than a specified investment business).

For the purposes of the Proposed Transactions, any tax accounts or other tax related amounts, such as loss carry-forwards, capital dividend account and refundable dividend tax on hand, will not be considered as property of DC.

Excluding the common shares of Xco held by DC, DC will not own any other property immediately before the proposed distribution that would be classified as investment property or business property. DC has "significance influence" over Xco (within the meaning of that term as assigned by section 3050 of the CICA Handbook). Consequently, DC would be required to use the consolidated look-through method for determining the appropriate proportion of each of the three types of property that the common shares Xco would represent. However, since TC 1 and TC 2 will each receive its pro-rata share of the common shares of Xco held by DC (and DC will retain its pro-rata share of such common shares of Xco), the determination using the consolidated look-through method will not actually be undertaken for the purposes of the Proposed Transactions. As a result, for the purposes of this distribution, DC will only have cash and near-cash property and property represented by the Xco common shares immediately before the proposed distribution.

13. Immediately following the classification of DC's three types of property as described in Paragraph 12 above, DC will transfer contemporaneously, to each of TC 1 and TC 2, a pro-rata portion of the gross fair market value of each type of property then owned by DC, as determined in accordance with Paragraph 12 above, such that immediately following such transfers, the fair market value of each type of property so transferred to each of TC 1 and TC 2, as the case may be, will be equal to or will approximate that proportion of the fair market value of that particular type of property of DC immediately before such transfers of property described herein that:

(a) the aggregate fair market value, immediately before the transfer, of all of the DC shares owned by TC 1 and TC 2 at that time, as the case may be,

is of

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

For the purposes of this Paragraph and Paragraph 14 below, the expression "approximate that proportion" means that the discrepancy of that proportion, if any, will not exceed XXXXXXXXXX percent (XXXXXXXXXX%), determined as a percentage of the fair market value of each type of property which each of TC 1 and TC 2 will receive as compared to what each such recipient corporation would have received had each such corporation received its appropriate pro-rata share of the fair market value of that type of property.

14. As consideration for the property received by each of TC 1 and TC 2 from DC as described above, each of TC 1 and TC 2, as the case may be, will:

(a) assume an identical pro-rata portion of any liabilities owing by DC at the time of the transfers, namely its pro-rata portion of the loan payable to Xco (respectively, the "TC 1 Assumed Liability" and "TC 2 Assumed Liability"); and

(b) issue to DC, a number of its TC Special Shares that have an aggregate fair market value (and respective TC 1 Redemption Amount and TC 2 Redemption Amount) equal to the aggregate fair market value of the all the property transferred by DC to such corporation less the amount of the TC 1 Assumed Liability or TC 2 Assumed Liability, as the case may be.

Each of TC 1 and DC and TC 2 and DC, as the case may be, 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 the transfer of the common shares of Xco (such property being eligible property) received by TC 1 and TC 2, as the case may be, from DC. The agreed amount for the purposes of each such election will be equal to the adjusted cost base to DC immediately before the transfer of the number of common shares of Xco so transferred to TC 1 and TC 2, as the case may be. For greater certainty, such agreed amount will not be less than the lesser of the two amounts specified in subparagraph 85(1)(c.i) nor will such amount exceed the amount permitted under paragraph 85(1)(c), nor will it be less than the amount permitted under paragraph 85(1)(b).

15. The amount to be added to the respective stated capital account maintained for the TC 1 Special Shares issued by TC 1 and for the TC 2 Special Shares issued by TC 2, as the case may be, as consideration for the common shares of Xco transferred by DC as described in Paragraph 14 above, will equal the amount by which the paid-up capital attributable to the number of common shares of Xco transferred to TC 1 and TC 2, as the case may be, exceeds the amount of the liabilities of DC assumed by such corporation as described in Paragraph 14(a) above. For greater certainty, the respective stated capital addition for such shares will not exceed the maximum amount that could be added to the paid-up capital of such shares, having regard to subsection 85(2.1).

16. DC will redeem all of its Class A - Series 2 shares held by TC 1 and all of its Class A - Series 2 shares held by TC 2, as the case may be, for their respective aggregate Class A - Series 2 Redemption Amount; and purchase for cancellation all of its Class B common shares and Class C common shares held by each of TC 1 and TC 2 for their respective aggregate fair market value.

As consideration for each such redemption/purchase, DC will issue to each of TC 1 and TC 2, as the case may be, a non-interest bearing demand promissory note (the "DC 1 Note" and "DC 2 Note" respectively and collectively, "the DC Notes"), each having a principal amount and fair market value equal to the aggregate purchase price of the respective Class B common shares, Class C common shares and Class A - Series 2 Redemption Amount of the Class A - Series 2 shares held by each of TC 1 and TC 2 immediately before such purchase or redemption. TC 1 will accept the DC 1 Note in full payment of such redemption/purchase of the shares of DC held by it. Similarly, TC 2 will accept the DC 2 Note in full payment of such redemption/purchase of the shares of DC held by it.

17. TC 1 will redeem its TC 1 Special Shares held by DC for their TC 1 Redemption Amount and TC 2 will redeem its TC 2 Special Shares held by DC for their TC 2 Redemption Amount, and for greater certainty each such redemption amount will equal the fair market value of such TC Special Shares. As consideration, each of TC 1 and TC 2, as the case may be, will issue a non-interest bearing demand promissory note (the "TC 1 Note" and the "TC 2 Note" respectively), in favour of DC, having a principal amount equal to the aggregate redemption amount of its TC Special Shares that it issued to DC as described in Paragraph 14 above. DC will accept the TC 1 Note in full payment of the redemption price of the TC 1 Special Shares and DC will accept the TC 2 Note in full payment of the redemption price of the TC 2 Special Shares.

18. DC, has the financial capacity to honour, upon presentation for payment, the principal amount payable under its DC 1 Note and DC 2 Note; and each of TC 1 and TC 2, as the case may be, has the financial capacity to honour, upon presentation for payment, the amount payable under its TC 1 Note and TC 2 Note, as the case may be.

19. By agreement, DC and TC 1 will set-off the principal amount owing by TC 1 to DC on the TC 1 Note with the corresponding principal amount owing by DC to TC 1 on the DC 1 Note, and DC and TC 2 will set-off the principal amount owing by TC 2 to DC on the TC 2 Note with the corresponding principal amount owing by DC to TC 2 on the DC 2 Note such that each such note will be cancelled.

PURPOSE OF THE PROPOSED TRANSACTIONS

20. The purpose of the Proposed Transactions is to allow TC 1 and TC 2 to acquire direct and beneficial ownership of their respective current indirect interests in Xco presently owned through DC, thereby allowing each of Sibling 1, Sibling 2, and Parent to implement their own investment strategies and estate planning with respect to such interests.

ADDITIONAL INFORMATION

21. 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.

22. None of DC, TC 1 and TC 2 or Xco is or will be at the time of the Proposed Transactions, a specified financial institution.

23. None of the shares of DC, TC1 or TC 2 referred to in this ruling request have been, or will be, at any time during the implementation of the Proposed Transactions described herein:

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

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

(c) the subject of a dividend rental arrangement.

24. 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 13, otherwise than as described herein.

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 that the each respective transferor and transferee jointly file an election pursuant to subsection 85(1) in the prescribed form and manner and within the time specified 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 common shares of Xco held by DC to each of TC 1 and TC 2, as the case may be, as described in Paragraph 13, such that the agreed amount in respect of each such transfer of Xco common shares will be deemed to be DC's proceeds of disposition and TC 1's and TC 2's cost of such property, as the case may be, pursuant to section 85.

For greater certainty, in respect of the each of the transfers described above, subsection 85(2.1) will not apply to reduce the paid-up capital of the TC Special Shares issued by TC 1 and TC 2, as the case may be, to DC on such transfer.

B. The provisions of subsection 84(3) will apply to:

(a) the respective redemption by DC of its Class A - Series 2 shares owned by each of TC 1 and TC 2, as described in Paragraph 16 such that DC will be deemed to have paid and each of TC 1 and TC 2, as the case may be, will be deemed to have received a dividend at that time on such shares equal to the amount, if any, by which the amount paid on each such redemption exceeds the paid-up capital attributable to such shares immediately before each such redemption;

(b) the purchase for cancellation by DC of its Class B common shares and Class C common shares owned by each of TC 1 and TC 2, as described in Paragraph 16 such that DC will be deemed to have paid and each of TC 1 and TC 2, as the case may be, will be deemed to have received a dividend at that time on such shares equal to the amount, if any, by which the amount paid on the redemption exceeds the paid-up capital attributable to such shares immediately before each such purchase;

(c) the redemption by TC 1 of its TC 1 Special Shares owned by DC, as described in Paragraph 17 such that TC 1 will be deemed to have paid and DC will be deemed to have received a dividend at that time on such shares equal to the amount, if any, by which the amount paid on the redemption exceeds the paid-up capital of such shares immediately before the redemption; and

(d) the redemption by TC 2 of its TC 2 Special Shares owned by DC, as described in Paragraph 17 such that TC 2 will be deemed to have paid and DC will be deemed to have received a dividend at that time on such shares equal to the amount, if any, by which the amount paid on the redemption exceeds the paid-up capital of such shares immediately before the redemption.

C. To the extent that each deemed dividend referred to in Ruling B above is a taxable dividend, such dividend shall be:

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

(b) deductible by the particular recipient in calculating its taxable income pursuant to subsection 112(1) and, for greater certainty, such deduction will not be prohibited by any of subsections 112(2.2), (2.3), and (2.4);

(b) excluded from the particular recipient's determination of proceeds of disposition of such shares being redeemed or purchased for cancellation pursuant to paragraph 54(j);

(c) not be subject to tax under subsection 186(1), except to the extent that the payer corporation is entitled to a dividend refund for its taxation year in which it paid such dividend; and

(d) not be subject to tax under Part IV.1 and Part VI.1 because each dividend will be an "excepted dividend" (within the meaning of section 187.1) and an "excluded dividend" (within the meaning of subsection 191(1)).

D. The set-off of the respective notes issued by each of TC 1 and TC 2 to DC with the corresponding note issued by DC as described in Paragraph 19 will not give rise to a "forgiven amount" and the provisions of subsections 80(2) nor will subsection 80.01(2) apply to each such set-off.

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

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

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

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

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

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

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

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

F. Subsection 245(2) will not apply to any of the Proposed Transactions, in and by themselves, to redetermine the tax consequences confirmed in the rulings given.

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

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

(c) any other tax consequence relating to the facts, Proposed Transactions or any transaction or event taking place either prior to the Proposed Transactions or subsequent to the Proposed Transactions, whether described in this letter or not, 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