2004 Ruling 2004-0093101R3 - Butterfly - Family Farm Corporation

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: Single-wing Split-up Butterfly

Position: Favourable Rulings Given

Reasons: The law

XXXXXXXXXX 2004-009310

XXXXXXXXXX, 2004

Dear XXXXXXXXXX:

Re: XXXXXXXXXX
Advance Income Tax Ruling Request

This is in reply to your letter of XXXXXXXXXX, 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 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, unless otherwise specified, all monetary amounts are expressed in Canadian dollars and the following terms have the meanings specified below:

(a) "Act" means the Income Tax Act, R.S.C. 1986 (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, and the Income Tax Regulations thereunder are referred to as the "Regulations";

(b) XXXXXXXXXX;

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

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

(e) "Butterfly Shares" means the new class of preferred shares of Transferee as described in Paragraph 14;

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

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

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

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

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

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

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

(m) "Distributorco" means XXXXXXXXXX. (CRA business number XXXXXXXXXX);

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

(o) "Effective Date" means a day in which the Proposed Transactions described in Paragraphs 12 to 15 are carried out;

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

(q) "fair market value" ("FMV") means the highest price available in an open and unrestricted market between informed prudent parties acting at arm's length and under no compulsion to act and contracting for a taxable purchase and sale;

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

(s) "net capital loss" and "non-capital loss" have the respective meanings assigned by subsection 111(8);

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

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

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

(w) "Proposed Transactions" means the transactions described in Paragraphs 6 to 18;

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

(y) "related persons" has the meaning assigned by section 251 and where relevant the meaning assigned by paragraph 55(5)(e);

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

(aa) "Shareholder 1" refers to XXXXXXXXXX (social insurance number XXXXXXXXXX);

(bb) "Shareholder 2" refers to XXXXXXXXXX (social insurance number XXXXXXXXXX);

(cc) "Shareholder 3" refers to XXXXXXXXXX (social insurance number XXXXXXXXXX);

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

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

(ff) "stated capital" has the meaning assigned in XXXXXXXXXX;

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

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

(ii) "Transferee" refers to the new corporation to be incorporated as described in Paragraph 7.

FACTS

1. Distributorco is a taxable Canadian corporation and CCPC that was incorporated on XXXXXXXXXX under the laws of XXXXXXXXXX. Distributorco carries on the business of farming by way of crop sharing. Distributorco files its income tax returns with the XXXXXXXXXX TC and deals with the XXXXXXXXXX TSO. The taxation year of Distributorco ends on XXXXXXXXXX.

2. The assets of Distributorco consist primarily of three separate plots of farmland described as: XXXXXXXXXX buildings and equipment, inventory, marketable securities, certain sundry receivables and cash. The principal liabilities owing by Distributorco are an unsecured loan owing to Shareholder 1 and a small amount of current liabilities. Distributorco does not have significant influence over any corporation.

3. The issued and outstanding shares of Distributorco consist of XXXXXXXXXX voting Class A common shares ("Class A Common Shares"), XXXXXXXXXX voting Class B common shares ("Class B Common Shares"), XXXXXXXXXX non-voting Class C common shares ("Class C Common Shares") and XXXXXXXXXX non-voting Class D common shares ("Class D Common Shares"). The PUC and ACB to the particular holder of such shares are as follows.

Shareholder
Class of Shares
ACB
PUC

Shareholder 1
XXXXXXX Class B Common Shares
$XXXXXXXXXX
$XXXXXXXXXX

Shareholder 2
XXXXXXX Class A Common Shares
XXXXXXX Class B Common Shares
XXXXXXX Class C Common Shares
$XXXXXXXXXX

$XXXXXXXXXX

$XXXXXXXXXX
$XXXXXXXXXX

$XXXXXXXXXX

$XXXXXXXXXX

Shareholder 3
XXXXXXX Class A Common Shares
XXXXXXX Class D Common Shares
$XXXXXXXXXX

$XXXXXXXXXX
$XXXXXXXXXX

$XXXXXXXXXX

The issued and outstanding shares of Distributorco described 2 above are held by each such holder as capital property. Shareholder 1 is the mother of Shareholder 2 and Shareholder 3. The XXXXXXXXXX Class A Common Shares owned by Shareholder 2 and Shareholder 3, as the case may be, were acquired by each such shareholder from XXXXXXXXXX, who died in XXXXXXXXXX, was the father of Shareholder 2 and Shareholder 3 and the spouse of Shareholder 1. The XXXXXXXXXX Class B Common Shares owned by Shareholder 2 were acquired from Shareholder 1 in XXXXXXXXXX. None of these aforementioned share acquisitions took place in contemplation of the Proposed Transactions.

4. It is believed that Distributorco currently has a nil CDA balance. However, to the extent that Distributorco does have a positive CDA balance immediately prior to the Proposed Transactions, Distributorco will declare and pay a separate dividend to each of its shareholders of an aggregate amount that will not be greater than such CDA balance. Distributorco shall elect under subsection 83(2), in prescribed manner and prescribed form, such that each dividend shall be deemed to be a capital dividend.

5. Distributorco also has a small balance of $XXXXXXXXXX in its RDTOH account and does not have any non-capital losses or net capital losses that have not been deducted for income tax purposes.

6. Each of Shareholder 1, Shareholder 2 and Shareholder 3 are resident in Canada for purposes of the Act.

PROPOSED TRANSACTIONS

7. Shareholder 3 will incorporate Transferee, a new corporation under the XXXXXXXXXX. Transferee will be a private corporation and a taxable Canadian corporation. The incorporation of Transferee will occur on one or more days prior to the Effective Date. Transferee will be authorized to carry on the same business activities that are currently being carried on by Distributorco.

8. The authorized share capital of Transferee will consist of numerous classes of voting and non-voting common shares and numerous classes of voting and non-voting preferred shares. Each class of preferred shares of Transferee will have the following general attributes:

(a) such shares will be redeemable, subject to applicable law, at any time at the option of the issuer for an aggregate amount ("Redemption Amount") equal to the FMV of the property received as consideration for the issuance of such share by the issuer at the time of issuance;

(b) such shares will be retractable, subject to applicable law, at any time at the option of the holder at a retraction amount equal to the Redemption Amount;

(c) the holders of such shares will be entitled to a non-cumulative cash dividend as and when declared by the Board of Directors from time to time, which dividend need not also be declared on any other class of shares of the issuer if the resulting realizable value of the net assets of the issuer after payment of the dividends would be less than the aggregate of the Redemption Amounts of all of the preferred shares then outstanding; and

(d) the holders of such shares will be entitled, upon the liquidation, dissolution or winding-up of the issuer, to a payment in priority to all other classes of shares of the issuer of an amount equal to the Redemption Amount to the extent of the amount or value of property available under applicable law for payment to shareholders upon dissolution, but will be entitled to no more than the amount of that payment.

In respect of the class of the non-voting preferred shares of Transferee to be issued to Distributorco as described in Paragraph 14 (the "Butterfly Shares"), for the purpose of subsection 191(4), the terms and conditions of the Butterfly Shares will specify an amount in respect of each such share, including an amount for which such share is to be redeemed, acquired or cancelled. The amount to be specified in respect of each such share, at the time of its issuance by a resolution to be made by the board of directors, will be expressed as a dollar amount, will not be determined by a formula and will be equal to the FMV of the property received as consideration for the issuance of such share.

9. On incorporation of Transferee as described in Paragraph 7 above, Shareholder 3 shall subscribe for XXXXXXXXXX voting common shares of Transferee (the "Transferee Common Shares") for the sum of XXXXXXXXXX dollars. These will be the only issued and outstanding shares of Transferee immediately prior to the Proposed Transactions that follow.

10. Immediately before the transfers of property described in Paragraph 13 below, the assets of Distributorco will be classified into the three types of property for the purposes of the definition of distribution pursuant in subsection 55(1), as follows:

(a) cash or near-cash property, comprised of all of the current assets of Distributorco, including cash, short-term investments, marketable securities, GST receivable, accounts receivable, inventory and deferred grain cheques;

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

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

For greater certainty, any tax accounts, such as Distributorco's RDTOH account balance, will not be considered property for this purpose, and Distributorco's farmland, buildings and equipment will be classified as business property.

11. In determining the net FMV of each of the three types of property of Distributorco immediately before the transfers of property described in Paragraph 13 below, the liabilities of Distributorco will be allocated to, and deducted in the calculation of the net FMV of each type of property of Distributorco in the following manner:

(a) current liabilities of Distributorco (which will include the amount owing to Shareholder 1) will be allocated to each cash or near-cash property in the proportion that the fair market value of each such property is of the fair market value of all cash or near-cash property.

(b) following the allocation of current liabilities to cash or near-cash property of Distributorco as described in (a) above, and provided the amount of Distributorco's cash or near cash property exceeds its current liabilities, the net fair market value of any GST receivable, accounts receivable, inventory and deferred grain cheques of Distributorco will be reclassified as business property and excluded from the net fair market value of Distributorco's cash or near-cash property, to the extent that such property will be sold or used in the ordinary course of business to be carried on by Transferee or Distributorco;

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

(d) if any liabilities remain after the allocations described in paragraphs (a) and (c) above are made ("excess unallocated liabilities"), such excess unallocated liabilities will then be allocated to the cash or near cash property, investment property and business property, if any, of Distributorco, based on the relative net fair market value of each type of property prior to the allocation of such excess unallocated liabilities.

For the purposes of this Paragraph, and for the purposes of the Proposed Transactions, no amount will be considered to be a liability of Distributorco unless it represents a true legal liability that is capable of quantification.

12. On the Effective Date, Shareholder 3 will transfer her XXXXXXXXXX Class A Common Shares and XXXXXXXXXX Class D Common Shares of Distributorco to Transferee, for a purchase price equal to the aggregate FMV of such shares. As sole consideration therefor, Transferee will issuing a sufficient number of a class of non-voting preferred shares of Transferee (the "Transferee Preferred Shares") to Shareholder 3, each having a Redemption Amount of $XXXXXXXXXX per share, and having an aggregate FMV and aggregate Redemption Amount equal to the aggregate FMV of the XXXXXXXXXX Class A Common Shares and XXXXXXXXXX Class D Common Shares of Distributorco so transferred.

The aggregate amount added to the stated capital account of Transferee in respect of the Transferee Preferred Shares issued to Shareholder 3 as described above will equal the aggregate PUC attributable to the XXXXXXXXXX Class A Common Shares and XXXXXXXXXX Class D Common Shares of Distributorco so transferred.

Shareholder 3 and Transferee will jointly elect under subsection 85(1), in prescribed form and within the time limits prescribed by subsection 85(6), in respect of the XXXXXXXXXX Class A Common Shares and XXXXXXXXXX Class D Common Shares of Distributorco so transferred. The agreed amount specified in respect of each such transfer will be equal to the adjusted cost base to Shareholder 3 of the particular class of shares so transferred. For greater certainty, the adjusted cost base of the XXXXXXXXXX Class A Common Shares and XXXXXXXXXX Class D Common Shares of Distributorco, as the case may be, will not be greater than the FMV of such class of shares at the time of such transfer.

13. Immediately following the transfer of shares described in Paragraph 12 above, Distributorco will transfer a pro-rata portion (expected to be XXXXXXXXXX%) of each type of property owned by it at that time, as determined in accordance with Paragraphs 10 and 11 above, such that immediately following such transfers, the net FMV of each type of property so transferred to Transferee, will for greater certainty, approximate that proportion of the net FMV of all property of Distributorco of that type determined immediately before such transfer that

(a) the aggregate fair market value, immediately before the transfer, of all of the shares of Distributorco owned by Transferee at that time;

is of

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

For the purposes of this Paragraph the expression "approximate that proportion" means that the discrepancy of that proportion, if any, will not exceed one percent (1%), determined as a percentage of the net fair market value of each type of property which Transferee will receive as compared to what Transferee would have received had Transferee received its appropriate pro-rata share (i.e. XXXXXXXXXX%) of the net fair market value of that type of property.

In respect to the transfer of the type of property classified as business property, Transferee is expected to receive all of the farmland described as XXXXXXXXXX, a portion of the farmland described as XXXXXXXXXX and a portion of the inventory that will, after the allocation of liabilities described in Paragraph 11(b), be reclassified as business property. For greater certainty Transferee will not receive any portion of the buildings or equipment owned by Distributorco.

14. As consideration for the transfer of property described in Paragraph 13 above, Transferee will assume a pro rata portion of liabilities owing by Distributorco and will issue to Distributorco a number of a separate class of non-voting preferred shares of Transferee (the "Butterfly Shares"), having an aggregate Redemption Amount and aggregate FMV equal to the amount by which the aggregate FMV of such transferred property received by Transferee exceeds the amount of the liabilities assumed by Transferee.

In respect of the transfers of property described in the Paragraph 13 above, Distributorco and Transferee will jointly elect pursuant to subsection 85(1), in prescribed form and within the time limits prescribed by subsection 85(6), with respect to the transfer of each property that is an eligible property (other than inventory, GST receivable and marketable securities) and the agreed amount for the purposes of each election will be equal to the ACB of the particular property. For greater certainty, the agreed amount for the purposes of each such election will not be less than the FMV of the particular property or the amount of any non-share consideration received by Distributorco as consideration for such property.

Transferee will add an amount to the stated capital account for its Butterfly Shares equal to the amount by which the aggregate cost to Transferee, as determined pursuant to subsection 85(1) where applicable, of the property acquired by Transferee from Distributorco less the principal amount of any liabilities assumed by Transferee on such transfer.

15. Immediately after the transfers of property to Transferee as described in Paragraph 13, and before the end of the Effective Date, Transferee will redeem its Butterfly Shares held by Distributorco for the aggregate Redemption Amount and will issue to Distributorco a non-interest-bearing demand promissory note (the "Transferee Note") having a principal amount and fair market value equal to such aggregate Redemption Amount. Distributorco will accept the Transferee Note issued by Transferee as full payment for the Redemption Amount of the Butterfly Shares.

16. At the end of the day immediately following the redemption of the Butterfly Shares described in Paragraph 15 above, Transferee will cause its first taxation year to end.

17. One day following the redemption of Butterfly Shares described in Paragraph 15, Distributorco will purchase for cancellation its XXXXXXXXXX Class A Common Shares and XXXXXXXXXX Class D Common Shares of Distributorco held by Transferee for their FMV. Distributorco will pay the aggregate purchase price for each such class of shares by issuing to Transferee a non-interest bearing demand promissory note ("the Distributorco Note") having a principal amount and FMV equal to the aggregate FMV of the XXXXXXXXXX Class A Common Shares and XXXXXXXXXX Class D Common Shares of Distributorco so purchased for cancellation. Transferee will accept the Distributorco Note as full payment of the purchase price of such shares.

18. The principal amount owing by Transferee to Distributorco under the Transferee Note will be set-off against the principal amount owing by Distributorco to Transferee under the Distributorco Note such that each such note will be cancelled in full satisfaction of the obligations under each such note.

Post Butterfly Transactions

19. On the day immediately following the completion of the Proposed Transactions, Transferee will sell its portion of the interest in the farmland described as XXXXXXXXXX to Distributorco for consideration equal to the FMV of such farmland. As consideration for such property, Distributorco will issue an note that will be due and payable upon the passing of Shareholder 1 and which will bear interest at the prescribed rate that is in effect on the date that particular transfer of the farmland takes place. The purpose of this transfer is to provide Distributorco with sole ownership of farmland described as XXXXXXXXXX, which, as a result of the Proposed Transactions described above, would otherwise own approximately XXXXXXXXXX% thereof immediately after the distribution.

ADDITIONAL INFORMATION

20. The Proposed Transactions described above will occur in the order presented unless otherwise indicated, with the exception of filing the applicable election forms, as described in Paragraphs 12 and 14, which will be filed within the applicable due date following the completion of the Proposed Transactions.

21. No property has or will become property of Distributorco and no liabilities have been or will be incurred by Distributorco in contemplation of and before the Proposed Transactions, except in the ordinary course of business, or as otherwise described above and except as described in Paragraph 19, neither Distributorco nor Transferee has any specific intentions of disposing of any property owned by it to an unrelated person following the completion of the Proposed Transactions or as part of the series of transactions or events that includes the Proposed Transactions.

22. Except as described in this letter, none of Shareholder 1, Shareholder 2, Shareholder 3 will dispose of any shares of Distributorco or Transferee as part of the series of transactions or events that includes the Proposed Transactions.

23. Neither Distributorco nor Transferee is, or will be, a specified financial institution or a corporation described in any of paragraphs (a) to (f) of the definition of "financial intermediary corporation" in subsection 191(1) at any time during the series of transaction or events that includes the Proposed Transactions described herein.

24. None of the shares of Distributorco or Transferee referred to herein (including the shares to be issued as described in the proposed transactions) is or will be at any time during the series of transaction or events that includes the Proposed Transactions described herein:

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

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

(c) the subject of a dividend rental arrangement referred to in subsection 112(2.3).

25. Each of Distributorco and Transferee will have the financial capacity to honour, upon presentation for payment, the amount payable under the promissory note issued by it as part of the Proposed Transactions.

PURPOSE OF THE PROPOSED TRANSACTIONS

26. Shareholder 3 wishes to carry on separate businesses independent of Shareholder 1 and Shareholder 2. This will allow Shareholder 3 to have direct and separate control over her pro-rata share of Distributorco's property so that she may deal with the properties independently, taking into account her own business philosophy. After the Proposed transaction are completed, the separate existence of Distributorco and Transferee will also facilitate independent estate planning.

RULINGS

Provided that the preceding statements constitute a complete and accurate disclosure of all of the relevant facts, proposed transactions and the purpose of the Proposed Transactions, and provided that the Proposed Transactions are completed in the manner described above, our rulings are as set forth below.

A. Provided the joint elections are filed pursuant to subsection 85(1), within the time set forth in subsection 85(6), subject to the application of subsection 69(11), the provisions of subsection 85(1), will apply to:

(a) the transfer of each eligible property by Distributorco to Transferee, as described in Paragraph 13 above; and

(b) the transfer of the XXXXXXXXXX Class A Common Shares and XXXXXXXXXX Class D Common Shares of Distributorco by Shareholder 3 to Transferee as described in Paragraph 12 above,

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

B. As a result of the redemption by Transferee of the Butterfly Shares as described in Paragraph 15 and the purchase for cancellation by Distributorco of its XXXXXXXXXX Class A Common Shares and XXXXXXXXXX Class D Common Shares held by Transferee as described in Paragraph 17;

(a) by virtue of subsection 84(3):

(i) Transferee will be deemed to have paid, and Distributorco will be deemed to have received, a taxable dividend equal to the amount by which the amount paid by Transferee in respect of its redemption of Butterfly Shares owned by Distributorco exceeds the paid-up capital of such shares immediately before the redemption; and

(ii) Distributorco will be deemed to have paid, and Transferee will be deemed to have received, a taxable dividend equal to the amount by which the amount paid by Distributorco in respect of the repurchase of the common shares of Distributorco owned by Transferee exceeds the paid-up capital attributable to such shares immediately before the purchase for cancellation;

(b) the taxable dividends deemed to have been received by Distributorco as described in (a)(i) above, and the taxable dividend deemed to have been received by Transferee as described in (a)(ii) above:

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

(ii) will be excluded from the proceeds of disposition of such shares so redeemed or purchased for cancellation, as the case may be, by virtue of paragraph (j) of the definition of "proceeds of disposition" in section 54; and

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

(c) the taxable dividends deemed to have been received by Distributorco as described in (a)(i) above, and the taxable dividend deemed to have been received by Transferee as described in (a)(ii) above, will not be subject to tax under Part IV, except as provided in paragraph 186(1)(b).

(d) the taxable dividends deemed to have been paid:

(i) by Transferee as described in (a)(i) above; and

(ii) by Distributorco as described in (a)(ii) above

will not be subject to tax under section 187.2 or section 191.1.

C. Provided that, as part of a series of transactions or events, which include the Proposed Transactions described herein, there is not:

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

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

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

(d) an acquisition of shares described in subparagraph 55(3.1)(b)(iii),

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

D. Subparagraph 256(7)(a)(i) will apply with respect to the acquisition of the XXXXXXXXXX Class A Common Shares and XXXXXXXXXX Class D Common Shares of Distributorco by Transferee as described in Paragraph 12 and subparagraph 256(7)(a)(ii) will apply with respect to the purchase for cancellation of the XXXXXXXXXX Class A Common Shares and XXXXXXXXXX Class D Common Shares of Distributorco held by Transferee as described in Paragraph.

E. The set-off and cancellation of the principal amounts owing by each such Transferee on the Transferee Note with the principal amount owing by Distributorco to Transferee on the Distributorco Note as described in Paragraph 18 above will not result in a "forgiven amount" within the meaning of either subsection 80(1) or section 80.01. In addition, neither Distributorco nor Transferee will otherwise realize any gain or loss as a result of such set-off and cancellation.

F. The provisions of subsection 15(1), 56(2), 69(1), 69(4) and 246(1) will not apply to the Proposed Transactions, in and by themselves.

G. Subsection 245(2) will not apply to the Proposed Transactions, in and by themselves, to re-determine the tax consequences confirmed in the rulings given.

The above Rulings are subject to the limitations and qualifications set out in Information Circular 70-6R5 dated May 17, 2002 and are binding on CRA 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 and the Regulations which, if enacted into law, could have an effect on the rulings provided herein.

OTHER COMMENTS

Nothing in this letter should be construed as implying that the CRA has confirmed, reviewed or has made any determination in respect of:

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

(b) any other tax consequence relating to the facts, Proposed Transactions or any transaction or event taking place either prior to the Proposed Transactions or subsequent to the Proposed Transactions, whether described in this letter or not, other than those specifically described in the rulings given above.

Yours truly,

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