2003 Ruling 2003-0183713 - Spin-Off Butterfly

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CRA.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ARC.

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CCRA.

Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ADRC.

Principal Issues: This is a 55(3)(b) spin-off butterfly of the assets of Investco, controlled by a Trust, among 9 Holdcos, also controlled by the Trust, in preparation for the distribution of the Trust assets now held by the 9 Holdcos among the 9 individual beneficiaries of the Trust. The assets of Investco consist primarily of cash and near-cash property and marketable securities.

Position: The spin-off butterfly qualifies under paragraph 55(3)(b).

Reasons:

XXXXXXXXXX 2003-018371

XXXXXXXXXX, 2003

Dear XXXXXXXXXX:

Re: XXXXXXXXXX
XXXXXXXXXX
Advance Income Tax Ruling

We are writing in response to your letter of XXXXXXXXXX wherein you requested an advance income tax ruling on behalf of the above-referenced taxpayer. We also acknowledge receipt of your facsimiles and emails as well as the information provided in various telephone conversations.

Throughout this letter, the corporate and individual taxpayers will be referred to as follows:

XXXXXXXXXX Investco
XXXXXXXXXX R
XXXXXXXXXX Estate
XXXXXXXXXX Trust
XXXXXXXXXX Foundation

The Tax Services Office of Investco is XXXXXXXXXX and its tax returns are filed at the XXXXXXXXXX Taxation Centre. Prior to his death, the Tax Services Office of R was XXXXXXXXXX and his tax returns were filed at the XXXXXXXXXX Taxation Centre. Investco is resident in Canada for the purposes of the Act.

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 any 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 any of the taxpayers or a related person;

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

(iv) before the courts; or

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

The taxpayers have represented that the transactions described herein will not affect their ability to pay any of their outstanding tax liabilities.

DEFINITIONS

In this letter, unless otherwise expressly stated, 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 to the date hereof, and unless otherwise stated, every reference herein to a Part, section, subsection, paragraph or subparagraph is a reference to the relevant provision of the Act;

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

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

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

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

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

(g) "CBCA" means the Canada Business Corporations Act and, where applicable, its predecessor statutes;

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

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

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

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

(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) "Estate" means the Estate of R, Identification Number to be determined;

(o) "FMV" means fair market value;

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

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

(r) "Paragraph" refers to a numbered paragraph in this letter;

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

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

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

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

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

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

(y) "Trust" means the XXXXXXXXXX; and

(z) "Will" means the Last Will and Testament of R, as amended by the 10 Codicils.

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

FACTS

1. Investco is a Canadian-controlled private corporation and a taxable Canadian corporation incorporated on XXXXXXXXXX under the CBCA. Since its incorporation, Investco's only undertaking has been the investment of its funds. Its activities are those of a specified investment business. Investco's taxation year ends on XXXXXXXXXX.

2. The authorized share capital of Investco consists of:

(a) an unlimited number of non-voting Class AX preferred shares with a non-cumulative dividend not exceeding XXXXXXXXXX% per annum, redeemable and retractable for an amount equal to the consideration for which such shares were issued (i.e., $XXXXXXXXXX per share);

(b) an unlimited number of non-voting Class BY preferred shares with a non-cumulative dividend not exceeding XXXXXXXXXX% per annum, redeemable and retractable for an amount equal to the consideration for which such shares were issued (i.e., $XXXXXXXXXX per share);

(c) an unlimited number of voting Class V preferred shares (one vote per share) with no dividend entitlement, retractable for an amount equal to the consideration for which such shares were issued (i.e., $XXXXXXXXXX per share);

(d) an unlimited number of voting Class A common shares (one vote per share); and

(e) an unlimited number of non-voting Class B common shares, convertible into Class BY preferred shares at the option of the shareholder on a one-for-one basis.

3. The issued and outstanding share capital of Investco at the time of R's death consisted of:

(a) XXXXXXXXXX Class AX preferred shares;

(b) XXXXXXXXXX Class BY preferred shares;

(c) XXXXXXXXXX Class V preferred shares; and

(d) XXXXXXXXXX Class A common shares.

4. The issued and outstanding shares of Investco were then owned as follows:

Preferred

Common

Class AX

Class BY

Class V

Class A
Trust

XXXXXXXXXX

XXXXXXXXXX

XXXXXXXXXX

XXXXXXXXXX
Estate

XXXXXXXXXX

XXXXXXXXXX

XXXXXXXXXX

XXXXXXXXXX

The Estate then controlled Investco through the ownership of the voting Class V preferred shares of Investco.

The PUC and ACB of each of the issued and outstanding shares of Investco to the Trust and the Estate is as follows:

Preferred

Common

Class AX

Class BY

Class V

Class A
PUC

XXXXXXXXXX

XXXXXXXXXX

XXXXXXXXXX

XXXXXXXXXX
ACB

XXXXXXXXXX

XXXXXXXXXX

XXXXXXXXXX

XXXXXXXXXX

5. R died on XXXXXXXXXX. Prior to his death, R was an individual resident in Canada within the meaning of the Act.

6. At the time of his death, R owned the following shares of Investco:

Preferred

Class AX

Class BY

Class V

XXXXXXXXXX

XXXXXXXXXX

XXXXXXXXXX

7. The FMV, PUC and ACB of each share of Investco owned by R at the time of his death was as follows:

Preferred

Class AX

Class BY

Class V

FMV

XXXXXXXXXX

XXXXXXXXXX

XXXXXXXXXX

PUC

XXXXXXXXXX

XXXXXXXXXX

XXXXXXXXXX

ACB

XXXXXXXXXX

XXXXXXXXXX

XXXXXXXXXX

8. In his Will, R bequeathed all of his property to the trustees of his Estate. The executors and trustees of the Estate are XXXXXXXXXX. These individuals are not related to each other.

The Will sets out the manner in which his Estate is to be distributed to his heirs upon his death. R provided for a number of specific bequests to be made to various beneficiaries that include registered charities, family members and other individuals. Once the specific bequests are satisfied, the remainder of the Estate is to be divided amongst the XXXXXXXXXX grandsons of R.

9. Pursuant to subsection 70(5), R was deemed to have disposed of all the capital property, including the shares of Investco, owned by him immediately before his death. For each property, he was deemed to have received proceeds of disposition equal to the FMV of the property immediately before his death. The proceeds of disposition deemed to be received by R as a result of the deemed disposal of his property became the ACB of the property to the Estate.

10. In order to settle the Estate in accordance with the Will, the trustees transferred XXXXXXXXXX Class BY preferred shares of Investco to various charities listed in the Will of R, such shares having an aggregate fair market value equal to $XXXXXXXXXX. Immediately following the said transfer, Investco purchased for cancellation all the Class BY preferred shares owned by those registered charities for an amount equal to their aggregate redemption value. The remaining preferred shares of Investco owned by the Estate were redeemed as follows: the remaining XXXXXXXXXX Class BY preferred shares and all XXXXXXXXXX Class AX preferred shares were redeemed on XXXXXXXXXX, and all XXXXXXXXXX Class V preferred shares were redeemed on XXXXXXXXXX.

11. The Estate was not deemed to have received a deemed dividend nor to have realized a capital gain or loss on the redemption of all XXXXXXXXXX Class AX preferred shares and all XXXXXXXXXX Class V preferred shares of Investco because the aggregate redemption proceeds were equal to the aggregate PUC and ACB of the respective shares. Investco was deemed to have paid, and the owners of the Class BY preferred shares were deemed to have received, a deemed dividend on the redemption or purchase for cancellation of all of the XXXXXXXXXX Class BY preferred shares of Investco equal to $XXXXXXXXXX. The amount of the deemed dividend was calculated as the difference between the aggregate proceeds of redemption or purchase for cancellation of all the Class BY preferred shares of Investco of $XXXXXXXXXX less the aggregate PUC of those shares of $XXXXXXXXXX.

12. At the time the proposed transactions described in Paragraphs 25 to 37 below are undertaken, all of the shares of Investco that were owned by the Estate will have been redeemed or purchased for cancellation in the course of settling the Estate, as described in Paragraph 10 above. Immediately before the redemption of the Class V preferred shares of Investco, Investco was controlled by the executors of the Estate. Immediately after the redemption of the Class V preferred shares of Investco, Investco was controlled by the trustees of the Trust, who are described in Paragraph 15 below. Since none of the exceptions in subsection 256(7) apply, the redemption of the Class V preferred shares of Investco resulted in an acquisition of control of Investco by the trustees of the Trust that owns all the Class A common shares of Investco. Pursuant to paragraph 249(4)(a), the taxation year of Investco is deemed to have ended immediately before the acquisition of control. Investco's income tax return for the deemed year-end will be prepared and filed within the prescribed time set out in paragraph 150(1)(a), and a new fiscal period will be established and a new taxation year will commence for Investco in accordance with sections 249 and 249.1.

13. The redemptions and purchase for cancellation described in Paragraph 10 above occurred after the submission of the original ruling request but before the commencement of the proposed transactions described below. These redemptions and purchase for cancellation will not affect this ruling request because none of the Investco shares owned by the Estate were acquired by Investco in contemplation of the proposed transactions because they would have been acquired in the same manner regardless of whether or not the proposed transactions are undertaken.

Although there is some connection between the redemption of R's preferred shares of Investco by the executors of his Estate and the distribution of the Trust by the trustees by means of the proposed transactions, the redemption and the proposed transactions are separate and independent transactions. It was the responsibility of the executors to settle the Estate. There were large bequests in R's Will that were required to be made in cash, some even within XXXXXXXXXX months of his death, that is, before XXXXXXXXXX. The executors redeemed the Estate's preferred shares before proceeding with the proposed transactions so as to be able to pay these bequests and settle the Estate before turning to the distribution of the Trust. Although it was envisaged that the redemption would be followed by the proposed transactions, the proposed transactions were not taken into account when deciding to redeem the preferred shares.

Since R's death, the executors-trustees have caused Investco to sell XXXXXXXXXX Class A shares of XXXXXXXXXX (i.e., XXXXXXXXXX of the total Class A and Class B XXXXXXXXXX shares held by Investco) and realized significant capital gains. The executors-trustees did not make the redemption before rather than after the proposed transactions in order to avoid the sale of XXXXXXXXXX shares, of which there is a disproportionately large holding in the portfolio of Investco. In fact, they have sold more XXXXXXXXXX shares that have given rise to more capital gains and tax than would have been the case if they had sold only the number of shares that might have been distributed on a proportionate basis to a tenth splinter company.

There are three alternative means by which the Trust may be distributed. The Trustees could distribute the Trust by winding up Investco and distributing the underlying assets. This would be the least tax-effective means of making the distribution.

There are also two other methods of distributing the Trust, each of which would be equally tax-effective. The trustees could either carry out the proposed transactions, or distribute XXXXXXXXXX Class A common shares of Investco and a proportionate number of the XXXXXXXXXX Class AX preferred shares of Investco to each of the XXXXXXXXXX residuary beneficiaries of the Trust. By either of these methods of distribution, no tax would be paid by the XXXXXXXXXX Canadian resident beneficiaries and the same amount of tax would be paid by the XXXXXXXXXX non-resident beneficiaries. The executors-trustees were not obliged to adopt the butterfly method of distribution just because of the redemption. Their only reason for preferring the proposed transactions to a distribution of shares of Investco is that they consider that it would be more suitable for the beneficiaries.

The executors-trustees only became aware of the possibility of distributing the Trust by means of the proposed transactions shortly before R's death. It had previously been thought that the Trust would be distributed either by winding-up Investco or in the form of shares of Investco. This is why there are XXXXXXXXXX Class A common shares of Investco. In fact, there had previously been XXXXXXXXXX common shares of each of two predecessor corporations which were later amalgamated to form Investco. From the very beginning, it was thought that each of the beneficiaries would be given an equal number of shares of Investco or of its predecessors, so that the number of shares was always made equally divisible by XXXXXXXXXX.

The XXXXXXXXXX beneficiaries of the Trust fall into two generations. R's daughter and nephews and nieces are a generation senior to his grandchildren. The former have children and grandchildren of their own whereas the latter have only young children. It is therefore thought that all the beneficiaries will have different needs in respect of income and growth of capital and different investment strategies and estate planning objectives. The proposed transactions would therefore be the more suitable means of distributing the Trust from the beneficiaries' point of view.

14. The Trust was settled on XXXXXXXXXX (a nephew of R). The agreement that established the Trust is governed by the laws of the Province of XXXXXXXXXX. The Trust is a personal trust, the current beneficiaries of which are:

XXXXXXXXXX.

15. The current trustees of the Trust are a corporate trustee, XXXXXXXXXX, together with the individual trustees of the Estate named in Paragraph 8 above. Where there are differences of opinion among the trustees of the Trust, the opinion of the majority of the trustees will prevail provided that the corporate trustee is part of the majority.

16. Under the terms of the agreement that established the Trust, the trustees are directed, after the payment in full of the share of the Foundation (which has occurred) and after the death of R, to divide the trust fund into XXXXXXXXXX equal shares.

17. The assets of the Trust comprise cash, pooled funds and shares of Investco.

18. The shares of Investco are capital property to the Trust.

19. The principal assets of Investco comprise cash, short-term deposits, interest receivable, income taxes recoverable, and marketable securities. The marketable securities consist of publicly traded Canadian and foreign stocks and bonds. The marketable securities represent portfolio investments of Investco since Investco does not have significant influence, within the meaning of section 3050 of the CICA Handbook, over any corporation in which it holds marketable securities. The cash at any point in time essentially represents the proceeds of dividends and interest received or proceeds from the sale of securities, which are continually being reinvested in new securities. The income of Investco is reported as income from property and capital gains.

20. The marketable securities described in Paragraph 19 above are capital property to Investco.

21. The liabilities of Investco comprise accounts payable and accrued liabilities.

22. The estimated aggregate fair market value of the assets of Investco as at XXXXXXXXXX (before deducting liabilities) was approximately $XXXXXXXXXX and the aggregate adjusted cost base of such assets was approximately $XXXXXXXXXX.

23. The aggregate capital losses accrued on certain securities (collectively, the "loss properties" or individually a "loss property") held at XXXXXXXXXX was approximately $XXXXXXXXXX.

24. As at XXXXXXXXXX, Investco had an RDTOH balance of $XXXXXXXXXX (the dividend refund claimed for Investco's taxation year ended XXXXXXXXXX was $XXXXXXXXXX) and a CDA balance of $XXXXXXXXXX. It is anticipated that Investco will have earned investment income and realized capital gains in the period from XXXXXXXXXX to the date of the dissolution of Investco, as described below, that will result in additions to the RDTOH and CDA. The amounts are not determinable at this time.

PROPOSED TRANSACTIONS

25. The Trust will incorporate XXXXXXXXXX companies under the CBCA (referred to hereinafter as a "Holdco" and collectively as the "Holdcos"). Each Holdco will be a taxable Canadian corporation and a private corporation.

26. Each Holdco will have authorized share capital as follows:

(a) Class A preference shares: non-voting; non-participating; non-cumulative dividends at variable rates from XXXXXXXXXX% to XXXXXXXXXX% per annum; ranked XXXXXXXXXX upon dissolution, liquidation or wind-up; redeemable, retractable and may be purchased for cancellation for their redemption amount;

(b) Class B preference shares: voting; non-participating; non-cumulative dividends at variable rates from XXXXXXXXXX% to XXXXXXXXXX% per annum; ranked XXXXXXXXXX upon dissolution, liquidation or wind-up; redeemable, retractable and may be purchased for cancellation for their redemption amount;

(c) Class C preference shares: non-voting; non-participating; non-cumulative dividends at variable rates from XXXXXXXXXX% to XXXXXXXXXX% per annum; ranked XXXXXXXXXX upon dissolution, liquidation or wind-up; redeemable, retractable and may be purchased for cancellation for their redemption amount;

(d) Class D preference shares: non-voting; non-participating; cumulative monthly dividends at a rate equal to XXXXXXXXXX% of the prime rate; ranked XXXXXXXXXX upon dissolution, liquidation or wind-up; redeemable, retractable and may be purchased for cancellation for their redemption amount;

(e) Class E preference shares: issuable in series with terms and conditions (including dividend entitlement at variable rates from XXXXXXXXXX% to XXXXXXXXXX% per annum) to be determined by the directors upon filing of articles of amendment; ranked XXXXXXXXXX upon dissolution, liquidation or wind-up;

(f) Class F preference shares: non-voting; non-participating; non-cumulative dividends at variable rates from XXXXXXXXXX% to XXXXXXXXXX% per annum; ranked XXXXXXXXXX upon dissolution, liquidation or wind-up; redeemable, retractable and may be purchased for cancellation for their redemption amount;

(g) Class G preference shares: non-voting; non-participating; non-cumulative dividends at variable rates from XXXXXXXXXX % to XXXXXXXXXX % per annum; ranked XXXXXXXXXX upon dissolution, liquidation or wind-up; redeemable, retractable and may be purchased for cancellation for their redemption amount;

(h) Class H preference shares: non-voting; non-participating; non-cumulative dividends at variable rates from XXXXXXXXXX% to XXXXXXXXXX% per annum; ranked XXXXXXXXXX upon dissolution, liquidation or wind-up; redeemable, retractable and may be purchased for cancellation for their redemption amount;

(i) Class I preference shares: non-voting; non-participating; non-cumulative dividends (in the form of capital dividends) equal to the increase in the capital dividend account from life insurance proceeds upon death of a holder of Class I Preference shares; ranked XXXXXXXXXX upon dissolution, liquidation or wind-up; redeemable upon death of a holder, retractable and may be purchased for cancellation for their redemption amount (generally at $XXXXXXXXXX per share);

(j) Class J preference shares: non-voting; non-participating; non-cumulative dividends in amounts determined by the directors; ranked XXXXXXXXXX upon dissolution, liquidation or wind-up; redeemable, retractable and may be purchased for cancellation for their redemption amount (generally at $XXXXXXXXXX per share);

(k) Class K preference shares: non-voting; non-participating; non-cumulative dividends at variable rates from XXXXXXXXXX% to a maximum of CCRA's prescribed rate per annum; ranked XXXXXXXXXX upon dissolution, liquidation or wind-up; redeemable, retractable and may be purchased for cancellation for their redemption amount;

(l) Class L preference shares: non-voting; non-participating; non-cumulative dividends at a rate equal to XXXXXXXXXX% of CCRA's prescribed rate per annum; ranked XXXXXXXXXX upon dissolution, liquidation or wind-up; redeemable, retractable and may be purchased for cancellation for their redemption amount;

(m) Class M preference shares: non-voting; non-participating; non-cumulative dividends at variable rates from XXXXXXXXXX% to XXXXXXXXXX% per annum; ranked XXXXXXXXXX upon dissolution, liquidation or wind-up; redeemable, retractable and may be purchased for cancellation for their redemption amount (generally at $XXXXXXXXXX per share);

(n) Class V preference shares: voting; non-participating; non-cumulative dividends at variable rates from XXXXXXXXXX% to XXXXXXXXXX% per annum; ranked XXXXXXXXXX upon dissolution, liquidation or wind-up; redeemable upon death or insolvency of a holder, retractable and may be purchased for cancellation for their redemption amount;

(o) Class A common shares: voting; participating; non-cumulative dividends in amounts determined by the directors; right to remaining property upon dissolution, liquidation or wind-up pari passu with Class B, Class C and Class D Common shares;

(p) Class B common shares: non-voting; participating; non-cumulative dividends in amounts determined by the directors; right to remaining property upon dissolution, liquidation or wind-up pari passu with Class A, Class C and Class D Common shares;

(q) Class C common shares: voting; participating; non-cumulative dividends in amounts determined by the directors; no entitlement to capital dividends; right to remaining property upon dissolution, liquidation or wind-up pari passu with Class A, Class B and Class D Common shares; and

(r) Class D common shares: voting; participating; non-cumulative dividends in amounts determined by the directors; right to remaining property upon dissolution, liquidation or wind-up pari passu with Class A, Class B and Class C Common shares.

The common shares of each Holdco will be common shares within the meaning assigned in subsection 248(1).

27. The Trust will simultaneously transfer to each Holdco XXXXXXXXXX Class A common shares of Investco in exchange for XXXXXXXXXX Class A common shares of each Holdco with a PUC of $XXXXXXXXXX per share or $XXXXXXXXXX per Holdco or $XXXXXXXXXX for all XXXXXXXXXX Holdcos and an ACB of $XXXXXXXXXX per share or $XXXXXXXXXX per Holdco or $XXXXXXXXXX for all XXXXXXXXXX Holdcos.

In addition, the Trust will simultaneously transfer to each Holdco XXXXXXXXXX Class AX preferred shares of Investco in exchange for XXXXXXXXXX Class A preference shares of each Holdco with a PUC of $XXXXXXXXXX per share or $XXXXXXXXXX per Holdco or $XXXXXXXXXX for all XXXXXXXXXX Holdcos and an ACB of $XXXXXXXXXX per share or $XXXXXXXXXX per Holdco or $XXXXXXXXXX for all XXXXXXXXXX Holdcos.

The Trust and each Holdco will elect, jointly and in prescribed form and within the time referred to in subsection 85(6), to have the rules in subsection 85(1) apply to the transfers described above. The agreed amount specified in each election will be equal to the ACB to the Trust of the Class AX preferred shares and Class A common shares of Investco at the time of the transfer which, in the case of the Class A common shares, is less than the FMV of the shares so transferred. For greater certainty, the ACB of the transferred shares will not exceed the FMV of the shares.

No share of the capital stock of any Holdco will be owned immediately after the exchange by any person or partnership other than the Trust.

28. Investco will pass a resolution reducing the aggregate PUC of its Class A common shares by a total amount of $XXXXXXXXXX by transferring such amount from the stated capital to contributed surplus in the accounts of the company. The PUC of the Investco Class A common shares after such reduction will be $XXXXXXXXXX per share, $XXXXXXXXXX per Holdco, or $XXXXXXXXXX for all XXXXXXXXXX Holdcos. No amounts will be paid out by Investco on the PUC reduction.

29. Immediately before the transfers of property described in Paragraph 30 below, the property owned by Investco will be classified into three types of property for the purposes of a distribution pursuant to paragraph 55(3)(b), as follows:

(a) cash or near-cash property, comprising all of the current assets of Investco, including any cash, short-term deposits, interest receivable, income taxes recoverable, and marketable securities which are not held as portfolio investments;

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

(c) business property, comprising all of the assets of Investco, other than cash or near-cash property, any income from which would, for purposes of the Act, be income from an active business carried on by Investco (other than a specified investment business).

For the purposes of this distribution, the marketable securities held as portfolio investments will be considered investment property. Furthermore, Investco will not have any business property at the time of the transfers described in Paragraph 30 below.

For greater certainty, any tax accounts, such as the balance of any RDTOH or CDA of Investco, will not be considered property for purposes of the proposed transactions described herein.

30. Investco will transfer to each Holdco, at FMV, XXXXXXXXXX of its:

(a) cash or near-cash property; and

(b) investment property.

The transfers will be effected in such a manner that each Holdco will acquire an equal proportion of each type of property.

Immediately following the transfers set out in this Paragraph, the FMV of each type of property received by each Holdco will be equal to the amount determined by the formula

A x B/C

where

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

B is the FMV, immediately before the transfer, of all of the shares of the capital stock of Investco owned by the respective transferee corporation, and

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

The transfer will be effected in exchange for XXXXXXXXXX Class B preference shares of each Holdco having a PUC equal to the ACB of the assets transferred and a redemption price equal to the FMV of the assets transferred. Upon the issuance of the XXXXXXXXXX Class B preference shares, the directors of each Holdco will resolve that the dividend rate on the shares for that calendar year will be less than the prime rate of the XXXXXXXXXX at that time.

31. Investco and each Holdco will elect, jointly and in prescribed form and within the time referred to in subsection 85(6), to have the rules in subsection 85(1) apply to the transfers described in Paragraph 30 above. The agreed amount specified in each election will be equal to the ACB to Investco of the transferred properties at the time of the transfer. For greater certainty, the ACB of the transferred properties will not exceed their FMV.

32. Each Holdco will redeem all of its Class B preference shares owned by Investco and will issue to Investco, as payment therefor, a non-interest-bearing demand promissory note (referred to hereinafter as a "Holdco Note" and collectively as the "Holdco Notes") having a principal amount and FMV equal to the aggregate redemption amount of the Holdco Class B preference shares so redeemed by it. Investco will accept the Holdco Notes in full satisfaction of the redemption amounts.

33. Immediately after the redemption of their respective Class B preference shares, described in Paragraph 32 above, each Holdco will cause its first fiscal period to end.

34. Subsequent to the first year-end of each Holdco, described in Paragraph 33 above, the Holdcos, as shareholders of Investco, will, by special resolution, resolve to wind-up and dissolve Investco pursuant to the relevant provisions of the CBCA. In connection with the winding-up, Investco will distribute to each Holdco the Holdco Note issued by that particular Holdco upon the redemption of its Class B preference shares described in Paragraph 32 above and each Holdco will assume XXXXXXXXXX of the liabilities of Investco. No agreement or resolution relating to the winding-up of Investco or the distribution of its property will provide for the cancellation of any shares of Investco.

Prior to the distribution of the Holdco Notes, Investco will elect, pursuant to subsection 83(2), in prescribed manner and prescribed form, that the full amount of the dividend referred to in subparagraph 88(2)(b)(i), not exceeding the balance of Investco's CDA at that time, be deemed to be a capital dividend. Each Holdco will receive its proportionate share of the capital dividend.

35. As a result of the assignment and distribution of the Holdco Notes, described in Paragraph 34 above, the obligations under the Holdco Notes will be cancelled.

36. Following the receipt of the dividend refund to which Investco will become entitled as a result of the proposed transactions described above, Investco will distribute such amount pro rata among the shareholders of the Class AX preferred shares and Class A common shares based on their entitlement (i.e. XXXXXXXXXX of such dividend refund to each Holdco). The refund will not arise until after the end of the fiscal year in which the dividend was paid, or was deemed paid. After distribution of the dividend refund, all property of Investco will have been distributed and all liabilities of Investco will have been discharged.

37. Upon completion of the proposed transactions described above, and subsequent to an assessment by the CCRA for the taxation year in which such transactions are completed and tax refunds, if any, are received and cashed, Articles of Dissolution will be executed and will be filed pursuant to the CBCA. All the outstanding shares of Investco will be cancelled and Investco will surrender its charter and be dissolved.

ADDITIONAL INFORMATION

38. No property has become or will become property of, and no liabilities have been or will be incurred by, Investco in contemplation of and before the proposed transactions.

39. Neither Investco nor any of the XXXXXXXXXX Holdcos referred to herein is, or will be at any time during the implementation of the proposed transactions, a specified financial institution.

40. None of the shares of Investco or of any of the XXXXXXXXXX Holdcos are or will be, at any time during the implementation of the proposed transactions described above:

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

(b) the subject of a dividend rental arrangement; or

(c) a share that is 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).

41. The proposed transactions are scheduled to take place after the year-end of Investco, described in Paragraph 12 above, and over the year-end of each Holdco, described in Paragraph 33 above.

PURPOSE OF THE PROPOSED TRANSACTIONS

42. The purpose of the proposed transactions is to divide the assets of Investco among XXXXXXXXXX corporate entities with a view to ultimately distributing the Holdco shares to the beneficiaries of the Trust so that each beneficiary may independently determine the investment objectives of a corporation controlled by them.

RULINGS GIVEN

Provided that the preceding statements constitute a complete and accurate disclosure of all of the relevant facts, proposed transactions and 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 redemption of the Class V preferred shares of Investco, as described in Paragraphs 10 and 12 above, has resulted in an acquisition of control of Investco by the Trust. Pursuant to paragraph 249(4)(a), the taxation year of Investco is deemed to have ended immediately before the acquisition of control.

B. Subject to the application of subsection 69(11), the provisions of subsection 85(1) will apply to:

(a) the transfer of the shares of Investco held by the Trust to the XXXXXXXXXX Holdcos, as described in Paragraph 27 above; and

(b) the transfer of Investco's property to the XXXXXXXXXX Holdcos, as described in Paragraph 30 above;

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

C. The application of section 84.1 to the transfer of shares described in Paragraph 27 above will not result in a reduction of the PUC of the common shares issued by each Holdco on the transfers pursuant to paragraph 84.1(1)(a).

D. The aggregate reduction of the PUC of the Class A common shares, as described in Paragraph 28 above, will not give rise to a deemed dividend pursuant to subsection 84(4), nor will it result in a reduction of the ACB of these shares to the respective Holdcos under subparagraph 53(2)(a)(ii).

E. As a result of the redemption by the Holdcos of their respective Class B preference shares, described in Paragraph 32 above, and the distribution by Investco in the course of its winding-up of the Holdco Notes to the respective Holdcos, described in Paragraph 34 above:

(a) by virtue of paragraphs 84(3)(a) and (b), each Holdco will be deemed to have paid, and Investco will be deemed to have received, a taxable dividend equal to the amount by which the amount paid to redeem the Class B preference shares of such Holdco exceeds the PUC thereof, immediately before such redemption;

(b) (i) by virtue of subsection 84(2) and paragraph 88(2)(b), but subject to (ii) and (iii) below, Investco will be deemed to have paid, and each Holdco will be deemed to have received, a taxable dividend (the "winding-up dividend") equal to XXXXXXXXXX of the amount by which the aggregate FMV of the Holdco Notes distributed by Investco to the Holdcos on the winding-up, net of any liabilities assumed by the Holdcos, as described in Paragraph 34 above, exceeds the aggregate amount by which the PUC of the Class A common shares and the Class AX preferred 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 above as does not exceed Investco's CDA determined immediately before the payment of the winding-up dividend will be deemed, for the purposes of the subsection 83(2) election referred to in Paragraph 34 above, to be the full amount of a separate dividend; and

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

(c) the taxable dividends deemed to be received by Investco and each Holdco, as the case may be, as a result of the redemptions and distributions on winding-up referred to in Rulings E(a) and (b) above will be included in each corporation's income pursuant to paragraph 12(1)(j), and will be deductible by each corporation in computing its taxable income for the taxation year in which such dividend is deemed to have been received pursuant to subsection 112(1), respectively. For greater certainty, subsections 112(2.1), (2.2), (2.3) or (2.4) will not apply to deny the application of the subsection 112(1) deduction in respect of such dividends;

(d) the dividends deemed to be received by Investco and each Holdco, as the case may be, referred to in Rulings E(a) and (b) above will be excluded from the proceeds of disposition of such shares by virtue of paragraph (j) of the definition of "proceeds of disposition" in section 54, and any loss arising from the disposition of such shares will be reduced by the amount of such dividends pursuant to subsection 112(3);

(e) by virtue of paragraph 186(4)(a) and subsection 186(2), Investco will be connected with each Holdco, and by virtue of paragraph 186(4)(b), each Holdco will be connected with Investco. Consequently:

(i) provided that none of the Holdcos is entitled to a dividend refund in respect of its taxation year in which it is deemed to pay the dividends referred to in Rulings E(a) above, Investco will not be subject to Part IV tax under subsection 186(1) in respect of such dividends; and

(ii) pursuant to paragraph 186(1)(b), each Holdco will be subject to Part IV tax in an amount equal to that proportion of the dividend refund to which Investco will become entitled as a result of the payment of the dividends referred to in ruling E(b) above, that the amount of each such dividend received by each Holdco, as the case may be, is of the aggregate of all taxable dividends paid by Investco in its taxation year in which such dividend is paid;

(f) neither Investco nor any of the Holdcos will be subject to Part IV.1 tax under section 187.2 in respect of the dividends referred to in Rulings E(a) and (b) above; and

(g) neither Investco nor any of the Holdcos will be subject to Part VI.1 tax under section 191.1 in respect of the dividends referred to in Rulings E(a) and (b) above.

F. Provided that as part of the series of transactions or events that includes the proposed transactions, 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); or

(d) an acquisition of property in the circumstances described in paragraphs 55(3.1)(c) or 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 Rulings E(a) and (b) above, and for greater certainty, subsection 55(3.1) will not apply to deny the exemption under paragraph 55(3)(b).

G. The cancellation of the Holdco Notes described in Paragraph 35 above will not give rise to a "forgiven amount" within the meaning assigned by subsection 80(1).

H. Subsections 15(1), 56(2) and 246(1) will not apply to the proposed transactions described in Paragraphs 25 to 37 above, in and by themselves.

I. Subsection 245(2) will not apply to 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 Information Circular 70-6R5 dated May 17, 2002 and are binding on the Canada Customs and Revenue Agency provided that the proposed transactions are completed by XXXXXXXXXX.

The above rulings are based on the law as it presently reads and do not take into account any proposed amendments to the Act which, if enacted, could have an effect on the rulings provided herein.

COMMENTS

1. Nothing in this ruling should be construed as implying that the Canada Customs and Revenue Agency has agreed to or reviewed:

(a) the determination of the fair market value or ACB of any particular asset or the paid-up capital of any shares referred to herein; or

(b) any tax consequences relating to the facts and proposed transactions described herein other than those specifically described in the rulings given above.

Yours truly,

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

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