2005 Ruling 2004-0088551R3 - Post-Mortem Estate Plan

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: (1) Whether bump available to increase adjusted cost base of subsidiary's capital property distributed on amalgamation (2) Timing of Acquisition of Control for Bump Purposes (3) Grandfathering of exemption from stop-loss rule in 112(3.2)

Position: (1) XXXXXXXXXX . (2) Acquisition of Control occurs immediately after death of Deceased (3) Grandfathering rule applies.

Reasons: (1) Shares of parent may constitute substituted property under ss. 88(1)(c.3)(i) and (ii) and some of those shares are to be acquired by trust for benefit of Deceased's grandchildren who are not specified persons. (2) Acquisition of control block of shares of subsidiary by the person who subsequently transfers those shares to the parent is within 248(8)(a). (3) Technical requirements met.

XXXXXXXXXX 2004-008855

XXXXXXXXXX , 2005

Dear Sir:

Re: XXXXXXXXXX (the "Taxpayers") Advance Income Tax Ruling Request

We are writing in response to your letters of XXXXXXXXXX in which you requested an advance income tax ruling on behalf of the Taxpayers. Reference is made to our various telephone conversations (XXXXXXXXXX) as well as e-mail correspondence and letter correspondence dated XXXXXXXXXX.

You have advised that to the best of your knowledge and that of the Taxpayers and their legal representatives, none of the issues involved in this request:

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

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

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

(iv) is or was previously before the courts; or

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

Unless otherwise indicated, all statutory references and references to dollar amounts are to the Income Tax Act (Canada) R.S.C. 1985, c.1 (5th Supp.) (the "Act") and Canadian dollars, respectively.

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

DEFINITIONS

(a) "ACO" means XXXXXXXXXX, a corporation incorporated under and governed by the BCA;

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

(c) "Amalco" means a corporation to be formed on the amalgamation of Subco and Newco under the BCA;

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

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

(f) "BCO" means XXXXXXXXXX, a corporation incorporated under and governed by the BCA;

(g) "Beneficiaries" has the meaning assigned by Paragraph 9;

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

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

(j) "CCO" means XXXXXXXXXX, a corporation formed under and governed by the BCA;

(k) "Comfort Letter" means the letter of the Tax Legislation Division of the Department of Finance to the Income Tax Rulings Directorate dated XXXXXXXXXX referred to in Paragraph 38;

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

(m) "Date of Death" means XXXXXXXXXX;

(n) "Deceased" means XXXXXXXXXX;

(o) "Estate" means the estate of the Deceased;

(p) "Executors" means the executors of the Estate; namely, XXXXXXXXXX;

(q) "ineligible property" has the meaning assigned by paragraph 88(1)(c);

(r) "Newco" means a corporation to be incorporated under the provisions of the BCA;

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

(t) "Paragraph" means a numbered paragraph in this letter;

(u) "proceeds of disposition" has the meaning assigned by subsection 248(1);

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

(w) "series of transactions or events" includes the related transactions or events described in subsection 248(10);

(x) "specified person" has the meaning assigned by paragraph 88(1)(c.2);

(y) "stated capital" has the meaning of the term as assigned by the BCA;

(z) "Subco" means XXXXXXXXXX, a corporation incorporated under and governed by the BCA;

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

(bb) "substituted property" includes the meanings assigned by subsection 248(5) and paragraph 88(1)(c.3);

(cc) "Trust 1" means the XXXXXXXXXX;

(dd) "Trust 2" has the meaning assigned by Paragraph 20; and

(ee) "Voting Shares" means the XXXXXXXXXX Class A voting shares in the capital of Subco, which are entitled to XXXXXXXXXX votes per share and results in the holder of the Voting Shares controlling Subco.

FACTS

1. The Deceased was a resident of Canada who died on XXXXXXXXXX.

2. The mailing address of the Estate is XXXXXXXXXX. The Estate has not yet obtained a business number and the Tax Centre to which the Estate's tax returns are filed and the Tax Services Office that will administer the Estate's tax affairs have not yet been determined.

3. The Deceased owned all of the issued and outstanding shares in the capital of Subco at the time of Deceased's death, which the Deceased held as capital property.

4. Subco is a Canadian-controlled private corporation. Subco's mailing address is XXXXXXXXXX. Its business number is XXXXXXXXXX. Subco files its tax returns with the XXXXXXXXXX Tax Centre and its tax affairs are administered by the XXXXXXXXXX Tax Services Office.

5. The issued share capital of Subco consists of XXXXXXXXXX common shares, XXXXXXXXXX Class A Preferred Shares (the "Voting Shares"), XXXXXXXXXX Class C Preferred Shares and XXXXXXXXXX Class D Preferred Shares.

6. The Deceased acquired the common shares of Subco in exchange for common shares of BCO in a transaction in respect of which an election was filed pursuant to section 85. The Deceased acquired the Class A Preferred Shares of Subco on XXXXXXXXXX by subscribing for them by paying $XXXXXXXXXX to Subco. The Class C Preferred Shares and Class D Preferred Shares of Subco were acquired by the Deceased in exchange for marketable securities, common shares of ACO, Class A Preferred Shares and Class B preferred shares of BCO transferred by the Deceased to Subco at various times, each exchange of which was governed by the rules in section 85. As outlined in the table below, the adjusted cost bases of the Deceased's common shares and Class D Preferred Shares received from Subco exceeded their paid-up capital by $XXXXXXXXXX as section 84.1 applied to the Deceased's transfer of the common shares and Class B preferred shares of BCO to Subco. There is also another $XXXXXXXXXX difference between the ACB and paid-up capital of the Class D Preferred Shares of Subco held by the Estate that were received in exchange for shares of another private company in a transaction that was subject to the provisions of section 84.1.

7. The paid-up capital, adjusted cost base to the Deceased immediately prior to the Deceased's death and the preliminary estimate of the fair market value of the shares of Subco at the Date of Death are as follows:

Common
Class A
Class C
Class D
Total - All Classes
Paid-up capital
XXXXXX
XXXX
XXXXXX
XXXXXX
XXXXXX
Adjusted cost base
XXXXXX
XXXX
XXXXXX
XXXXXX
XXXXXX
Fair market value
XXXXXX
XXXX
XXXXXX
XXXXXX
XXXXXX

8. Based on the foregoing, the Estate will report a capital gain of approximately $XXXXXXXXXX in the Deceased's terminal income tax return in connection with the deemed disposition by the Deceased of the Deceased's shares of Subco pursuant to subsection 70(5). No amount will be claimed as a deduction pursuant to section 110.6 in computing the Deceased's taxable income that may be reasonably considered to relate to the deemed disposition of the Deceased's shares of Subco pursuant to subsection 70(5). The fair market value of the shares of Subco noted above represent the adjusted cost bases to the Estate of such shares.

9. Pursuant to the Deceased's will dated XXXXXXXXXX, the residue of the Estate except the Voting Shares, is bequeathed equally among the Deceased's issue. One of the children of the Deceased is resident XXXXXXXXXX, and the receipt by that beneficiary of shares of Subco creates adverse XXXXXXXXXX tax results XXXXXXXXXX. Accordingly, and as permitted under the terms of the Deceased's will, a trust (that is a resident of Canada for the purposes of the Act) for that child will receive cash and assets other than shares of Subco from the Estate equivalent in value to XXXXXXXXXX of the residue of the Estate. Under the Deceased's will, XXXXXXXXXX is to be paid to the child resident XXXXXXXXXX from that trust as soon as possible, and the Estate has already paid $XXXXXXXXXX (XXXXXXXXXX) of that amount. In addition to other Estate assets, the Deceased's will permits XXXXXXXXXX of the shares of Subco (other than Voting Shares) to pass to each of XXXXXXXXXX children who are residents of Canada, XXXXXXXXXX to pass to XXXXXXXXXX. Such beneficiaries (including the beneficiary resident XXXXXXXXXX) are hereinafter referred to collectively as "the Beneficiaries".

10. The Deceased's will provides that the Voting Shares may be transferred to a new trust and contemplates the steps proposed in this letter. The relevant portion of the Deceased's will states:

'XXXXXXXXXX' (XXXXXXXXXX).

11. The principal assets of Subco which were owned by Subco at the Date of Death and (subject to the redemption of the preferred shares of CCO outlined in Paragraph 19 and disposals in the normal course of investing) will be owned continuously by Subco until the time of the Proposed Transactions described below are:

(a) XXXXXXXXXX Class A voting preferred shares of CCO which have an aggregate redemption amount and fair market value of $XXXXXXXXXX and an adjusted cost base and paid-up capital of $XXXXXXXXXX;

(b) marketable securities having an aggregate fair market value of $XXXXXXXXXX at death and aggregate adjusted cost bases of $XXXXXXXXXX;

(c) cash of about $XXXXXXXXX , which was about $XXXXXXXXXX less than Subco's debt to the Deceased at the Date of Death, which Subco has since used to partially retire the debt to the Estate;

(d) XXXXXXXXXX% of the shares of ACO - common shares with an estimated fair market value of $XXXXXXXXXX at death, an adjusted cost base to Subco of $XXXXXXXXXX and paid-up capital of $XXXXXXXXXX; and

(e) XXXXXXXXXX Class A Preferred Shares and XXXXXXXXXX Class B preferred shares of BCO which have an aggregate redemption amount, fair market value and adjusted cost base ($XXXXXXXXXX per share) of $XXXXXXXXXX , but an aggregate paid-up capital of $XXXXXXXXXX.

12. The debt owing by Subco to the Deceased and subsequently to the Estate arose from promissory notes issued to the Deceased by Subco on the transfer of assets by the Deceased to Subco, monies received as dividends by the Deceased and loaned back to Subco and other cash that was loaned by the Deceased to Subco.

13. In addition to Subco, the only other shareholder of CCO is Trust 1 which owns XXXXXXXXXX common shares of CCO. Subco controls CCO through the ownership of the Class A voting preferred shares of CCO.

14. CCO owned at the Date of Death and (subject to disposals in the normal course of investing) will continue to own at the time of the Proposed Transactions described below XXXXXXXXXX common shares of BCO and XXXXXXXXXX common shares of XXXXXXXXXX.

15. BCO is a holding company that owns XXXXXXXXXX % of the shares of XXXXXXXXXX which carries on XXXXXXXXXX.

16. As a consequence of the death of the Deceased, CCO received life insurance proceeds of approximately $XXXXXXXXXX. The capital dividend account of Subco, CCO and ACO as of XXXXXXXXXX (other than in respect of the life insurance proceeds) consists of XXXXXXXXXX, respectively.

17. The common shares of Subco are "grandfathered" for the purposes of subsection 112(3.2). In particular, on XXXXXXXXXX the common shares of Subco were owned by the Deceased and on that date Subco was a beneficiary of XXXXXXXXXX life insurance policies that insured the life of the Deceased. All of these policies were subsequently sold to CCO in XXXXXXXXXX. It was reasonable to conclude on XXXXXXXXXX that a main purpose of each of the life insurance policies was to fund, directly or indirectly, in whole or in part, a redemption, acquisition or cancellation of the common shares of Subco by Subco.

18. An advance income tax ruling XXXXXXXXXX was obtained from Revenue Canada, Taxation in respect of an "estate freeze" involving Subco.

TRANSACTIONS IMPLEMENTED BEFORE DECEMBER 31, 2004

19. For XXXXXXXXXX tax purposes, CCO is now both a XXXXXXXXXX . As a result, the Beneficiary resident XXXXXXXXXX is subject to XXXXXXXXXX tax on the income of CCO including that Beneficiary's share of the insurance proceeds. To further minimize the adverse XXXXXXXXXX tax results to this Beneficiary and obtain a XXXXXXXXXX for Canadian withholding tax, the transactions described below occurred before December 31, 2004:

(a) In accordance with the provisions of the Deceased's will contained in the excerpt that is reproduced at Paragraph 10, the Executors created a trust ("Trust 2") as provided for in the will of the Deceased and distributed the Voting Shares to the Trust 2.

(b) XXXXXXXXXX corporations were incorporated. Trust 2 acquired, using monies borrowed from the Estate, one voting preferred share of each corporation which entitles the holder to XXXXXXXXXX votes of each corporation and ensures Trust 2 controls each new corporation. In XXXXXXXXXX cases, one adult Beneficiary resident in Canada acquired the one common share issued in his or her respective corporation, while the common shares of the XXXXXXXXXX corporation were acquired by trusts for XXXXXXXXXX the grandchildren of the Deceased who are beneficiaries under the Deceased's will.

(c) CCO paid the monthly non-cumulative dividend of $XXXXXXXXXX on its Class A preferred shares, representing XXXXXXXXXX% of the redemption amount of those shares held by Subco. CCO filed an election under subsection 83(2) in respect of the $XXXXXXXXXX to treat it as a distribution from its capital dividend account.

(d) CCO redeemed XXXXXXXXXX Class A voting preferred shares held by Subco for their redemption price of $XXXXXXXXXX ($XXXXXXXXXX per share). CCO filed an election under subsection 83(2) in respect of the resulting deemed dividend of $XXXXXXXXXX to treat it as a distribution out of the capital dividend account.

(e) CCO paid a taxable dividend of $XXXXXXXXXX to its sole common shareholder, Trust 1. This $XXXXXXXXXX amount represented XXXXXXXXXX % of the estimated income of CCO to XXXXXXXXXX reportable proportionately (XXXXXXXXXX %) for XXXXXXXXXX tax purposes by the XXXXXXXXXX beneficiary. As noted, that amount included a significant portion of the monies received by CCO on the insurance policies referred to in Paragraph 16.

(f) Trust 1 distributed XXXXXXXXXX % of the dividend received from CCO to the Beneficiary resident XXXXXXXXXX and XXXXXXXXXX% to XXXXXXXXXX new corporations incorporated in Paragraph 19(b) that qualify as beneficiaries of Trust 1. Trust 1 will designate in accordance with subsection 104(19) that the amount so distributed be deemed to be a taxable dividend received by the recipients.

20. Trust 2 was created with the XXXXXXXXXX surviving children of the Deceased acting as trustees. XXXXXXXXXX of such individuals are resident in Canada and one is a resident of XXXXXXXXXX. Trust 2 is a non-discretionary trust and the beneficiaries are the Beneficiaries. In particular, the entitlement to the income and capital of Trust 2 will be XXXXXXXXXX to each of XXXXXXXXXX children who are residents of Canada, XXXXXXXXXX to the child resident XXXXXXXXXX and XXXXXXXXXX to the grandchildren of the Deceased who are beneficiaries under the Deceased's will. Trust 2 is a resident of Canada for the purposes of the Act.

PROPOSED TRANSACTIONS

21. CCO will redeem for cash such number of Class A voting preferred shares as have an aggregate redemption price equal to the balance owing by Subco to the Estate after applying the remaining proceeds from the redemption of shares and the payment of the dividend of $XXXXXXXXXX described in Paragraph 19. The cash for such redemption will come from a taxable dividend of $XXXXXXXXXX paid by BCO to CCO on XXXXXXXXXX. CCO will file an election under subsection 83(2) in respect of the entire amount of the dividend deemed by subsection 84(3) to arise on this redemption to treat it as a distribution from its capital dividend account. Subco will use these funds and the proceeds received by Subco on the redemption of shares in Paragraph 19(d), the dividend of $XXXXXXXXXX received in Paragraph 19(c), and, if necessary, transfer other cash balances or marketable securities held by Subco to pay off the remainder of its debt to the Estate, which will result in the cancellation of all of the promissory notes described in Paragraph 12.

22. The Estate will collect its debt receivable from Subco described in Paragraph 12 in cash or, if necessary, in cash and other assets transferred by Subco in the manner described in Paragraph 21. The Estate will allocate those assets and any other assets of the Estate (other than shares of Subco) to the trust maintained for the non-resident Beneficiary described in Paragraph 9, toward the satisfaction of the Estate's obligations to distribute assets having a value equal to XXXXXXXXXX of the residue of the Estate to such trust. If any additional amounts are required to fulfill the Estate's obligations to the trust for the non-resident Beneficiary, the Estate will borrow money from one or more of the corporations described in Paragraph 19(b) (other than the corporation whose common shares are held by the trusts maintained for the benefit of the grandchildren of the Deceased who are beneficiaries under the Deceased's will) and transfer the proceeds of that borrowing to the trust maintained for the benefit of the non-resident Beneficiary described in Paragraph 9. The Estate may sell certain of its securities to repay the borrowing. The transactions in Paragraphs 19 and 21 will eliminate both Subco's cash balances and its liability to the Estate.

23. The trust for the benefit of the child resident XXXXXXXXXX described in Paragraph 9 will use a portion of its cash receipt from the Estate to pay the balance of the XXXXXXXXXX due to that child as referred to in Paragraph 9.

24. The Estate will incorporate Newco. Following incorporation, one common share will be issued to the Estate for $XXXXXXXXXX.

25. The Estate will transfer all of its shares of Subco to Newco in exchange for shares of Newco on the following basis:

(a) the Estate will transfer the XXXXXXXXXX Class C Preferred Shares of Subco in exchange for XXXXXXXXXX Class C Preferred Shares of Newco having rights, privileges, conditions and obligations similar to those attached to the Class C Preferred Shares of Subco, it being acknowledged that the dividend rate will be XXXXXXXXXX% payable monthly rather than XXXXXXXXXX% per annum and the Class C Preferred Shares of Newco will rank after the Class B Preferred Shares of Newco;

(b) the Estate will transfer the XXXXXXXXXX Class D Preferred Shares of Subco in exchange for XXXXXXXXXX Class D Preferred Shares of Newco having rights, privileges, conditions and obligations similar to those attached to the Class D Preferred Shares of Subco, it being acknowledged that the dividend rate will be XXXXXXXXXX% payable monthly rather than XXXXXXXXXX% per annum and the Class D Preferred Shares of Newco will rank after the Class C Preferred Shares of Newco; and

(c) the Estate will transfer the common shares of Subco in exchange for common shares of Newco and Class B Preferred Shares of Newco with a redemption amount equal to the aggregate of the estimated capital dividend account and XXXXXXXXXX times the estimated refundable dividend tax on hand of Amalco at the end of the first taxation year of Amalco.

26. The terms and conditions of the Class B Preferred Shares of Newco will specify an amount in respect of each such share issued to the Estate on the exchange described in Paragraph 25(c). The amount specified in respect of each Class B Preferred Share issued to the Estate will be its redemption price of $XXXXXXXXXX and this amount will not exceed the fair market value of the consideration for which the share was issued.

27. The transactions referred to in Paragraph 25 will occur simultaneously. At the same time, Trust 2 will transfer the Voting Shares to Newco in exchange for shares of Newco with rights, privileges, conditions and obligations identical to those of the Voting Shares including the stated capital except that the shares of Newco will rank after the Class B Preferred Shares of Newco.

28. In connection with the transfers of the shares of Subco noted in Paragraphs 25 (and 27), the Estate and Newco (and Trust 2 and Newco) will file joint elections in prescribed form and within the time limits described in subsection 85(6) to have the rules in subsection 85(1) apply in respect of the transfers. With respect to such elections, the amount agreed on by the parties pursuant to paragraph 85(1)(a) for each transfer of property will be equal to the lesser of the amounts described in subparagraphs 85(1)(c.1)(i) and (ii). In respect of each exchange, the shares of Newco received by the Estate will have the same fair market value as the shares of Subco transferred by the Estate. Subco will be a subsidiary wholly-owned corporation of Newco.

29. In connection with issuing the Class C Preferred Shares and Class D Preferred Shares of Newco, Newco will add to the stated capital account maintained for the Class C Preferred Shares of Newco an amount equal to the fair market value of the Class C Preferred Shares of Subco received as consideration for the issuance of the Class C Preferred Shares of Newco, determined at the time of the issuance. Newco will add to the stated capital account maintained in respect of the Class D Preferred Shares of Newco the amount determined pursuant to "B" of paragraph 84.1(1)(a) in respect of the Class D Preferred Shares of Subco immediately before the exchange of shares described in Paragraph 25(b).

30. In connection with issuing the common shares and Class B Preferred Shares of Newco, Newco will add to the stated capital account maintained in respect of the Class B Preferred Shares of Newco $XXXXXXXXXX plus an amount equal to the amount, if any, by which the fair market value of the Class D Preferred Shares of Subco, determined at the time of the issuance of the Class B Preferred Shares of Newco, exceeds the amount added to the stated capital account maintained in respect of the Class D Preferred Shares of Newco in Paragraph 29. Newco will add to the stated capital account maintained in respect of the common shares of Newco an amount equal to the lesser of (i) the fair market value of the common shares of Newco issued to the Estate as a consequence of the exchange described in Paragraph 25(c), determined at the time of their issue and (ii) the amount by which the amount determined pursuant to "B" of paragraph 84.1(1)(a) in respect of the common shares of Subco immediately before the exchange described in Paragraph 25(c) exceeds the amount added to the stated capital account maintained in respect of the Class B Preferred Shares of Newco.

31. Immediately after the amounts described in Paragraphs 29 and 30 have been added to the stated capital accounts maintained in respect of the Class B Preferred Shares, Class C Preferred Shares, Class D Preferred Shares and common shares of Newco, the Estate and the Trust 2 will pass a resolution to authorize Newco to reduce the stated capital balance maintained in respect of the Class B Preferred Shares to $XXXXXXXXXX and to add the amount so reduced to the stated capital account maintained in respect of the Class D Preferred Shares of Newco.

32. Newco and Subco will amalgamate to form Amalco. As a consequence, all of the assets and liabilities of Subco and Newco will become assets and liabilities of Amalco and all the shares of Subco will be cancelled. Immediately before the amalgamation, Subco will have no existing cash balances such that the only cash amounts that will belong to Amalco upon the amalgamation will be cash balances of Newco immediately before the amalgamation. In this regard, Subco may lend or transfer any remaining cash balances to ACO, BCO, CCO or another entity under the control of Subco prior to the amalgamation. No shares of Amalco will be issued such that the issued and outstanding shares of Newco will become the shares of Amalco. In connection with the amalgamation, in the return of income for its first taxation year, Amalco will designate an amount under the provisions of subsection 87(11) and paragraph 88(1)(d) to increase in the following order, within the limits described in paragraph 88(1)(d), the adjusted cost base of the marketable securities, the adjusted cost base of the remaining Class A voting preferred shares of CCO and the adjusted cost base of the shares of ACO that Subco owned continuously since the Date of Death and owned immediately prior to the amalgamation.

33. CCO will increase the stated capital of its remaining Class A voting preferred shares held by Amalco by an amount sufficient to increase the adjusted cost base of those shares to Amalco, after the bump referred to in Paragraph 32, to equal the redemption price of those shares. This increase in stated capital should be between $XXXXXXXXXX to XXXXXXXXXX, but in no event will this increase exceed the balance of CCO's capital dividend account after the redemptions and the dividend of $XXXXXXXXXX outlined in Paragraphs 19 and 21. CCO will file an election under subsection 83(2) in respect of the entire amount of the dividend deemed paid to Amalco under subsection 84(1) on this increase in paid-up capital of the Class A voting preferred shares of CCO.

34. After the redemptions of Class A voting preferred shares of CCO in Paragraphs 19 and 21, the increase in the stated capital of that class in Paragraph 33 and the payment of the dividend by CCO in Paragraph 19(c), CCO will have a remaining capital dividend account balance. CCO will redeem for cash, at their redemption price, such number of Class A voting preferred shares as will result in a deemed dividend payment to Amalco by CCO equal to that remaining capital dividend account balance. The cash for such redemption will come from the $XXXXXXXXXX taxable dividend paid by BCO to CCO described in Paragraph 21. ACO will pay a capital dividend on its common shares to Amalco to transfer its capital dividend account balance, if any, and a taxable dividend to recover any refundable dividend tax on hand (i.e., "XXXXXXXXXX times" its estimated refundable dividend tax on hand). ACO has realized capital losses since XXXXXXXXXX that have reduced the capital dividend account balance reported in Paragraph 16.

CCO will file an election under subsection 83(2) in respect of the entire amount of the dividend deemed by subsection 84(3) to arise on this redemption to treat that as a distribution from its capital dividend account. Should ACO have a capital dividend account balance at closing, it will also file a subsection 83(2) election.

34.1 CCO will redeem for cash at their redemption price such number of Class A voting preferred shares as will have an aggregate redemption price equal to the difference between the amount of the $XXXXXXXXXX taxable dividend described in Paragraph 21 and the aggregate redemption price paid on the redemptions of the Class A voting preferred shares in Paragraphs 21 and 34. The redemption proceeds will be approximately $XXXXXXXXXX leaving approximately $XXXXXXXXXX of Class A voting preferred shares of CCO outstanding. Such redemption will give rise to a taxable dividend.

35. Amalco will redeem all of the Class B Preferred Shares of Amalco that are held by the Estate for their redemption value of approximately $XXXXXXXXXX in two separate transactions:

(a) First, Amalco will redeem such number of Class B Preferred Shares held by the Estate as results in a deemed dividend payment equal to the capital dividend balance in Amalco.

(b) Then, Amalco will redeem the remaining Class B Preferred Shares held by the Estate. This will result in a deemed taxable dividend payment to the Estate that will recover the refundable dividend tax on hand in Amalco.

Amalco will redeem the Class B Preferred Shares held by the Estate using its available cash on hand. With respect to the first redemption, Amalco will file an election under subsection 83(2) in respect of the entire amount of the dividend that is deemed by subsection 84(3) to have been paid by Amalco to the Estate.

36. It is anticipated that the amount of the capital loss incurred by the Estate on the disposition of the Class B Preferred Shares of Amalco on the redemptions in Paragraph 35 will be approximately $XXXXXXXXXX. The Executors, in the course of the administration of the Estate in the first year after the death of the Deceased, will make an election in prescribed manner and within the prescribed time pursuant to paragraph 164(6)(c) to deem the full amount of such loss to be a capital loss of the Deceased from a disposition of the Class B Preferred Shares of Amalco in the taxation year in which the Deceased died and not a capital loss of the Estate from a disposition of such shares.

37. The Estate will distribute the remaining shares of Amalco to the other Beneficiaries (excluding the child resident XXXXXXXXXX) in accordance with each Beneficiary's respective share under the will of the Deceased.

38. The Income Tax Rulings Directorate received a letter from the Tax Legislation Division of the Department of Finance dated XXXXXXXXXX (the "Comfort Letter") in which the Tax Legislation Division of the Department of Finance agreed that "...the acquisition of the shares of Amalco by the trusts established for the grandchildren of X should not result in the denial of the bump in the cost of the non-depreciable capital property to be acquired by Amalco." This statement was made in response to a concern raised by the Income Tax Rulings Directorate in a letter to the Department the Finance dated XXXXXXXXXX with respect to the application of subparagraph 88(1)(c)(vi) in the context of the proposed transactions. Such concern was raised due to the acquisition of shares of Amalco described in Paragraph 37 by the trusts maintained for the benefit of the grandchildren of the Deceased (the Deceased being referred to as "X" in the letter of XXXXXXXXXX and the Comfort Letter).

39. The Comfort Letter further states that the Tax Legislation Division of the Department of Finance is "... prepared to recommend to the Minister of Finance that the Act be amended so that, in the circumstances described above, the grandchildren of X will be considered to be specified persons. We are prepared to recommend that the amendment apply to windings-up that begin after XXXXXXXXXX."

PURPOSE OF THE PROPOSED TRANSACTIONS

40. The principal purposes of the proposed transactions are to:

(a) obtain an increase in the adjusted cost base of the property referred to in Paragraph 32 in accordance with subsection 87(11) and paragraphs 88(1)(c) and (d) and to increase the cost base of the Class A Preference Shares of CCO by virtue of the transaction described in Paragraph 33;

(b) permit the Estate to recover the capital dividend account generated from the life insurance proceeds on a tax-free basis;

(c) use subsection 164(6) in order to offset a portion of the capital gain realized by the Deceased in the year of death against any capital losses realized by the Estate in its first taxation year as a result of deemed dividends; and

(d) permit the Estate to recover the remainder of the capital gain taxed on the Deceased's final return as a "return of capital".

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, we rule as follows:

A. Paragraph 84.1(1)(a) will not apply to reduce the paid-up capital of the common shares and Class B Preferred Shares of Newco issued to the Estate on the exchange described in Paragraph 25(c).

B. Subsection 84(1) will not apply to deem the Estate to have received a dividend from Newco (nor will subsection 84(1) apply to deem Newco to have paid a dividend to the Estate) on the Class D Preferred Shares of Newco as a result of the increase to the paid-up capital of the Class D Preferred Shares of Newco described in Paragraph 31.

C. As a result of the application of paragraphs 88(1)(d.2) and (d.3), for the purposes of paragraphs 88(1)(c) and (d), Newco will be deemed to have last acquired control of Subco at the time immediately before the death of the Deceased from an arm's length person.

D. On the vertical amalgamation of Subco and Newco to form Amalco as described in Paragraph 32, provided that no property acquired by Amalco on such amalgamation or "any property acquired by any person in substitution therefor" (within the meaning of that phrase for the purposes of clause 88(1)(c)(vi)(B)) is acquired by any person described in any of subclauses 88(1)(c)(vi)(B)(I), (II), or (III) (on the assumption that the "subsidiary" referred to in those subclauses is Subco and the "parent" is Newco) as part of the series of transactions or events that includes the proposed transactions described herein, the cost to Amalco of each property owned by Subco at the time Newco acquired control of Subco and that became property of Amalco pursuant to the amalgamation (the "Bumped Assets") will be deemed by paragraph 88(1)(c) to be the cost amount of such property plus, provided that such property is capital property, but not depreciable property, the amount designated by Amalco under paragraph 88(1)(d) in respect of the property as described in Paragraph 32. For greater certainty, the distribution of cash to the trust for the benefit of the XXXXXXXXXX resident child will not, in and of itself, cause the Bumped Assets to be ineligible property.

Without considering the acquisition of the shares of Amalco described in Paragraph 37 by the trusts maintained for the benefit of the grandchildren of the Deceased, who are not "specified persons" under subparagraph 88(1)(c.2)(i) for the purposes of determining whether the Bumped Assets are ineligible property, the transactions described herein (including, for greater certainty, the distribution of cash to the trust for the benefit of the Beneficiary who is a resident of XXXXXXXXXX), will not, in and of themselves, cause the Bumped Assets to be ineligible property.

E. To the extent that capital losses are realized by the Estate on the disposition of the Class B Preferred Shares of Amalco on the redemptions referred to in Paragraph 35 within the first taxation year of the Estate, such capital losses will be deemed, except for the purposes of subsection 112(3) and paragraph 164(6)(c), to be capital losses of the Deceased from the disposition of the shares of Amalco in the Deceased's last taxation year and not capital losses of the Estate from the disposition of such property provided that the legal representative of the Estate elects in prescribed manner and within the prescribed time pursuant to paragraph 164(6)(c).

F. Subsection 83(2.1) will not apply to the capital dividends received by Subco and by Amalco as a result of the redemptions of the Class A voting preferred shares of CCO referred to in Paragraphs 21 and 34, and as a result of the increase in paid-up capital of the remaining Class A voting preferred shares of CCO referred to in Paragraph 33, or to the capital dividend received by the Estate as a result of the redemption of Class B Preferred Shares of Amalco referred to in Paragraph 35(a).

G. Part VI.1 tax will not apply in respect of the dividend received by Amalco on shares of ACO as a result of the transactions described in Paragraph 34, the taxable dividends received by Amalco on the Class A voting preferred shares of CCO as a result of the transaction described in Paragraph 34.1, and, provided that the amount paid on the redemption of each Class B Preferred Share of Amalco referred to in Paragraph 35(b) does not exceed the amount specified in respect of each such share as described in Paragraph 26, Part VI.1 tax will not apply in respect of the dividend deemed to have been received by the Estate on the redemption of the remaining Class B Preferred Shares of Amalco referred to in Paragraph 35(b).

H. Subsection 129(1.2) will not apply in respect of the dividends received or deemed to have been received by Amalco on shares of CCO or ACO as a result of the transactions described in Paragraphs 34 and in respect of the dividend deemed to have been received by the Estate on the redemption of the remaining Class B Preferred Shares of Amalco referred to in Paragraph 35(b).

I. Subparagraph 212(1)(c)(ii) will not apply to the payment of the remaining balance of the XXXXXXXXXX amount referred to in Paragraphs 9 and 23 to the child who is a resident of XXXXXXXXXX.

J. The adjusted cost base of the Class A voting preferred shares of CCO will be increased by the amount described in Paragraph 33 by virtue of paragraph 53(1)(b).

K. Subsection 245(2) will not be applied, as a result of the proposed transactions, in and of themselves, to re-determine the tax consequences described in the rulings given.

These rulings are given subject to the limitations and qualifications set forth in Information Circular 70-6R5 issued on May 17, 2002, and are binding on the Canada Revenue Agency provided that the proposed transactions described in Paragraph 35 and paragraphs preceding that paragraph are completed before XXXXXXXXXX and that the proposed transaction described in Paragraph 37 is completed on or before XXXXXXXXXX.

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

OPINION

Provided that section 13 of the Budget Implementation Act, 2004 No. 2 contained in Bill C-33 is enacted in substantially the same form as passed by the House of Commons on February 25, 2005, subsection 40(3.6) will not apply to deem the capital losses arising on the disposition of the Amalco shares by the Estate described in Paragraph 35 to be nil.

COMMENTS

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

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

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

Yours truly,

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