2004 Ruling 2004-0094581R3 - Gross Asset Butterfly

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

Principal Issues: Standard Gross Asset Butterfly

Position: Favourable Rulings Given

Reasons: The law

XXXXXXXXXX 2004-009458

XXXXXXXXXX, 2004

Dear XXXXXXXXXX:

Re: XXXXXXXXXX
Advance Income Tax Ruling Request

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

(i) in an earlier return of any of the taxpayers 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 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, 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 the following terms have the meanings specified:

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

(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 transferee of the property have agreed upon in their election under subsection 85(1) in respect of the property;

(d) "BN" means the Business Number assigned to a corporation by CRA;

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

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

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

(h) "CBCA" means the Canada Business Corporations Act, R.S.C., 1985, c. C-44 and where applicable, its predecessor statutes;

(i) "CRA" means Canada Revenue Agency;

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

(k) "DC" means XXXXXXXXXX;

(l) "depreciable property" has the meaning assigned by subsection 13(21);

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

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

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

(p) "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, expressed in terms of cash;

(q) "Holdco1" means XXXXXXXXXX;

(r) "Holdco2" means XXXXXXXXXX;

(s) "Holdco3" means XXXXXXXXXX;

(t) "Holdco1-Shareholder1" means XXXXXXXXXX;

(u) "Holdco1-Shareholder2" means XXXXXXXXXX;

(v) "Holdco1-Shareholder3" means XXXXXXXXXX;

(w) "Holdco1-Shareholder4" means XXXXXXXXXX;

(x) "Holdco2-Shareholder1" means XXXXXXXXXX;

(y) "Holdco2-Shareholder2" means XXXXXXXXXX;

(z) "Holdco2-Shareholder3" means XXXXXXXXXX;

(aa) "Holdco2-Shareholder4" means XXXXXXXXXX;

(bb) "Holdco3-Shareholder1" means XXXXXXXXXX;

(cc) "Holdco3-Shareholder2" means XXXXXXXXXX;

(dd) "non-depreciable capital property" means capital property that is not depreciable;

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

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

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

(hh) "Proposed Transactions" means the transactions described in Paragraphs 19 to 31;

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

(jj) "registered charity" has the meaning assigned by subsection 248(1);

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

(ll) "SIN" means Social Insurance Number;

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

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

(oo) "taxable Canadian corporation" ("TCC") has the meaning assigned by subsection 89(1); and

(pp) "UCC" means undepreciated capital cost.

FACTS

1. DC is a TCC and a CCPC, incorporated on XXXXXXXXXX under the CBCA. Since its incorporation, DC's only undertaking is the investment of its funds and its activities are those of a SIB. The taxation year of DC ends on XXXXXXXXXX and its Head Office is located at XXXXXXXXXX . DC files its federal income tax returns with the XXXXXXXXXX TC and is serviced by the XXXXXXXXXX TSO.

2. The authorized share capital of DC consists of:

XXXXXXXXXX common shares;

XXXXXXXXXX% Class "A" voting, non-cumulative preferred shares ("Class A preferred shares"), redeemable at the option of the company at the capital amount paid up thereon, all of which had been previously issued and subsequently redeemed in prior years;

An unlimited number of XXXXXXXXXX% Class "B" non-cumulative preferred shares ("Class B preferred shares"), redeemable at the option of the company at the capital amount paid up thereon; and

An unlimited number of XXXXXXXXXX% Class "C" non-cumulative preferred shares ("Class C preferred shares"), redeemable at the option of the company at the capital amount paid up thereon.

3. The issued and outstanding share capital of DC consists of XXXXXXXXXX common shares and XXXXXXXXXX Class C preferred shares that are owned in equal proportions by each of Holdco1, Holdco2 and Holdco3. The PUC of each issued and outstanding Class C preferred share is $XXXXXXXXXX and the PUC of each issued and outstanding common share is approximately $XXXXXXXXXX. The aggregate ACB of the common shares of DC held by each of Holdco1, Holdco2 and Holdco3 is $XXXXXXXXXX, $XXXXXXXXXX and $XXXXXXXXXX, respectively, while the aggregate ACB of the Class C preferred shares held by each of Holdco1, Holdco2 and Holdco3 is $XXXXXXXXXX.

4. As at XXXXXXXXXX, DC had a RDTOH balance of $XXXXXXXXXX. The estimated CDA balance of DC, after payment of a capital dividend paid on XXXXXXXXXX of $XXXXXXXXXX, is $XXXXXXXXXX . It is anticipated that DC will earn investment income and realize capital gains prior to the date of the dissolution of DC, as described below, that will result in additions to its RDTOH and CDA.

5. Holdco1 is a TCC and a CCPC, incorporated on XXXXXXXXXX under the CBCA. Since its incorporation, Holdco1's only undertaking is the investment of its funds such that its activities are those of a SIB. The taxation year of Holdco1 ends on XXXXXXXXXX and its Head Office is located at XXXXXXXXXX. Holdco1 files its federal income tax returns with the XXXXXXXXXX TC and is serviced by the XXXXXXXXXX TSO.

6. The authorized share capital of Holdco1 consists of an unlimited number of voting Class A, B, C, D, and E common shares; and an unlimited number of preferred shares, XXXXXXXXXX%, voting, non-cumulative, redeemable at the option of Holdco1 at the capital amount paid up thereon.

7. The issued and outstanding share capital of Holdco1 consists of XXXXXXXXXX Class A common shares that are owned by Holdco1-Shareholder1; 1 Class B common share that is owned by Holdco1-Shareholder2; 1 Class C common share that is owned by Holdco1-Shareholder3; and 1 Class D common share that is owned by Holdco1-Shareholder3.

8. Holdco1 is controlled by Holdco1-Shareholder1 who is a resident of Canada for purposes of the Act. In addition, Holdco1 has the following tax accounts; RDTOH balance as at XXXXXXXXXX in the amount of $XXXXXXXXXX (adjusted for a dividend refund of $XXXXXXXXXX for the taxation year ended XXXXXXXXXX) and an estimated CDA balance as at XXXXXXXXXX of nil, following payment of a capital dividend on XXXXXXXXXX of $XXXXXXXXXX.

9. Holdco2 is a TCC and a CCPC, incorporated on XXXXXXXXXX under the CBCA. Since its incorporation, Holdco2's only undertaking is the investment of its funds such that its activities are those of a SIB. The taxation year of Holdco2 ends on XXXXXXXXXX and its Head Office is located at XXXXXXXXXX. Holdco2 files its federal income tax returns with the XXXXXXXXXX TC and is serviced by the XXXXXXXXXX TSO.

10. The authorized share capital of Holdco2 consists of an unlimited number of voting Class A, B, C, D, and E common shares; and an unlimited number of preferred shares, XXXXXXXXXX%, voting, non-cumulative, redeemable at the option of the company at the capital amount paid up thereon. The issued and outstanding share capital of Holdco2 consists of XXXXXXXXXX Class A common shares that are owned by Holdco2-Shareholder1; 1 Class B common share that is owned by Holdco2-Shareholder2; 1 Class C common share that is owned by Holdco2-Shareholder3; and 1 Class D common share that is owned by Holdco2-Shareholder4.

11. Holdco2 is controlled by Holdco2-Shareholder1 who is a resident of Canada for purposes of the Act. In addition, Holdco2 has the following tax accounts; RDTOH balance as at XXXXXXXXXX in the amount of $XXXXXXXXXX (adjusted for a dividend refund of $XXXXXXXXXX for the taxation year ended XXXXXXXXXX) and an estimated CDA balance as at XXXXXXXXXX of nil, following payment of a capital dividend on XXXXXXXXXX of $XXXXXXXXXX.

12. Holdco3 is a TCC and a CCPC, incorporated on XXXXXXXXXX under the CBCA. Since its incorporation, Holdco3's only undertaking is the investment of its funds such that its activities are those of a SIB. The taxation year of Holdco3 ends on XXXXXXXXXX and its Head Office is located at XXXXXXXXXX . Holdco3 files its federal income tax returns with the XXXXXXXXXX TC and is serviced by the XXXXXXXXXX TSO.

13. The authorized share capital of Holdco3 consists of an unlimited number of voting Class A, B, C, D, E, F, G, H and I common shares; and an unlimited number of preferred shares, XXXXXXXXXX%, voting, non-cumulative, redeemable at the option of the company at the capital amount paid up thereon. The issued and outstanding share capital of Holdco3 consists of XXXXXXXXXX preferred shares; XXXXXXXXXX Class A common shares; XXXXXXXXXX Class B common shares; XXXXXXXXXX Class D common shares; XXXXXXXXXX Class E common shares; and XXXXXXXXXX Class F common shares. With the exception of the XXXXXXXXXX Class D common shares of Holdco3 that are owned by Holdco3-Shareholder2 all the issued and outstanding shares of Holdco3 are owned by Holdco3-Shareholder1.

14. Holdco3 is controlled by Holdco3-Shareholder1 who is a resident of Canada for purposes of the Act. In addition, Holdco3 has the following tax accounts; RDTOH balance as at XXXXXXXXXX of $XXXXXXXXXX (adjusted for a dividend refund of $XXXXXXXXXX for the taxation year ended XXXXXXXXXX) and an estimated CDA balance as at XXXXXXXXXX of $XXXXXXXXXX, following payment of a capital dividend on XXXXXXXXXX of $XXXXXXXXXX.

15. Holdco1-Shareholder1 is the parent of Holdco1-Shareholder2, Holdco1-Shareholder3 and Holdco1-Shareholder4. Holdco2-Shareholder1 is the parent of Holdco2-Shareholder2 Holdco2-Shareholder3 and Holdco2-Shareholder4. Holdco3-Shareholder1 is the parent of Holdco3-Shareholder2. Holdco1-Shareholder1, Holdco2-Shareholder1 and Holdco3-Shareholder1 are also siblings.

16. The principal assets of DC consist of cash, accounts receivable, income taxes recoverable, marketable investments, a rental property, office furniture and fixtures and computer equipment used in DC's business. 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 marketable investments consist of publicly traded Canadian and foreign stocks, bonds, mutual funds and an interest in a limited partnership. The marketable investments represent portfolio investments of DC since DC does not have significant influence, within the meaning of section 3050 of the CICA Handbook, over any entity immediately before the commencement of the Proposed Transactions. The marketable investments are capital property to DC. The income of DC is reported as income from property and capital gains.

17. The liabilities of DC comprise accounts payable and accrued liabilities and presently there are no long-term liabilities. The estimated aggregate fair market value of the assets of DC as at XXXXXXXXXX (before deducting liabilities) was approximately $XXXXXXXXXX and the aggregate adjusted cost base (or UCC where appropriate) of such assets was approximately $XXXXXXXXXX.

18. On XXXXXXXXXX, DC had aggregate accrued but unrealized capital losses of approximately $XXXXXXXXXX on certain marketable investments (collectively, the "Loss Properties" or individually a "Loss Property") held by it at that time. At this time, it is not known whether the Loss Properties will be on hand, or whether such properties will still be Loss Properties at the time the Proposed Transactions are undertaken.

PROPOSED TRANSACTIONS

19. Holdco3 will incorporate a new corporation under the CBCA, referred to hereinafter as "Subco1". No shares of Subco1 will be issued at that time. Subco1's authorized share capital will consist of an unlimited number of non-voting XXXXXXXXXX% Class A preferred shares, non-cumulative, without nominal or par value, redeemable at the option of the company at the capital amount paid up thereon; an unlimited number of voting Class Z preferred shares (one vote per share), non-cumulative, redeemable and retractable at a price equal to the fair market value of the consideration for which they are issued; and an unlimited number of voting common shares (one vote per share).

20. Holdco3 will contemporaneously transfer to Subco1: its XXXXXXXXXX common shares of DC in exchange for XXXXXXXXXX newly issued common shares of Subco1 having an aggregate fair market value equal to that of the XXXXXXXXXX common shares of DC so transferred; and its XXXXXXXXXX Class C preferred shares of DC in exchange for XXXXXXXXXX newly issued Class A preferred shares of Subco1 having an aggregate fair market value equal to that of the XXXXXXXXXX Class C preferred shares of DC so transferred.

An aggregate of $XXXXXXXXXX will be credited to the stated capital account for the common shares of Subco1 and an aggregate of $XXXXXXXXXX will be credited to the stated capital account for the Class A preferred shares of Subco1 in respect of such share transfers described above.

Holdco3 and Subco1 will jointly elect, pursuant to subsection 85(1), in prescribed form and within the time limit specified in subsection 85(6), in respect of the above share transfers. The aggregate agreed amount for each such transfer will be equal to the aggregate ACB to Holdco3 of the common shares ($XXXXXXXXXX) and Class C preferred shares ($XXXXXXXXXX) of DC, respectively. For greater certainty, each agreed amount will not exceed the aggregate FMV of the particular class of shares so transferred.

Holdco3 will be the sole shareholder of Subco 1 after the above described share transfers.

21. The authorized share capital of Holdco1 and Holdco2 will be amended to include an unlimited number of voting Class Z preferred shares (one vote per share). The Class Z preferred shares will be non-cumulative, redeemable and retractable at a price equal to the fair market value of the consideration for which they are issued.

22. In order to facilitate the pro rata distribution of each type of property owned by DC, the rental property (i.e., land and building) will first be transferred to a newly incorporated subsidiary of DC. More specifically, DC will incorporate a new corporation under the CBCA referred to hereinafter as "Subco2" and then DC will transfer its rental property to Subco2 in exchange for XXXXXXXXXX common shares of Subco2 having an aggregate fair market value equal to the aggregate fair market value of the rental property so transferred.

DC and Subco2 will jointly elect, pursuant to subsection 85(1), in prescribed form and within the time limit specified in subsection 85(6), but prior to the dissolution of DC as described in Paragraph 28 below, in respect of the transfers of the land and building. The agreed amount for each transfer will be the respective cost amount to DC of, and will not exceed the respective FMV of, the land and building, as the case may be.

The amount to be credited to the stated capital account for the XXXXXXXXXX common shares of Subco2 that are issued in respect of the transfer of property described above will be equal to the aggregate of the agreed amounts.

DC will not have significant influence over any corporation other than Subco2 at the time immediately before the transfers of property described in Paragraph 24 below take place.

23. Immediately before the transfers of property described in Paragraph 24 below, all the property owned by DC will be determined and classified into three types of property for the purposes of the definition of "distribution" in subsection 55(1), as follows:

(a) cash or near-cash property, consisting of cash, accounts receivable, income taxes recoverable and marketable investments, if any, which are not held as portfolio investments;

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

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

For the purposes of this distribution, the marketable investments held as portfolio investments by DC, which include units in a limited partnership and the XXXXXXXXXX Subco2 common shares held by DC will be considered investment property. Furthermore, DC will not have any business property at the time of the transfers described in Paragraph 24. For greater certainty, any tax accounts, such as the balance of any RDTOH or CDA of DC will not be considered property for the purposes of this distribution.

24. DC will transfer to each of Holdco1, Holdco2 and Subco1 (collectively referred to as the "Transferee Corporations" or individually referred to as a "Transferee Corporation"), one-third of its cash or near-cash property and investment property. These transfers will be effected in a manner such that each Transferee Corporation will acquire an equal portion (i.e. one-third) of each type of property on a gross FMV basis. XXXXXXXXXX common shares of Subco2 will be transferred to each Transferee Corporation.

Immediately following the transfers set out in this Paragraph, the FMV of each type of property received by each Transferee Corporation will approximate the proportion 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 DC,

"B" is the FMV, immediately before the transfer, of all of the shares of the capital stock of DC 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 DC.

For the purpose of this paragraph, the expression "approximate the proportion" means the discrepancy from that proportion, if any, that would not exceed one percent (1%) determined as a percentage of the FMV of the property that the Transferee Corporation has received compared to what it would have received had it received its appropriate pro-rata share of DC's property.

25. As consideration for the property transferred to the Transferee Corporations as described in Paragraph 24, each Transferee Corporation will issue a number of Class Z preferred shares of its capital stock to DC having an aggregate FMV and redemption amount ("Redemption Amount") equal to the aggregate FMV of the particular property of DC so transferred to the particular Transferee Corporation. More specifically, each of Holdco1, Holdco2 and Subco1, as the case may be, will issue XXXXXXXXXX Class Z preferred shares of its capital stock to DC in respect of such transfer.

DC and each Transferee Corporation will elect jointly, and file in the prescribed form pursuant to subsection 85(1) and within the time limit set out in subsection 85(6), but prior to the dissolution of DC as described in Paragraph 28 below, to have the rules in subsection 85(1) apply to each transfer of property that is an eligible property as follow:

(i) in the case of each capital property (other than a depreciable property of a prescribed class) and including each Loss Property, the agreed amount will be an amount equal to the lesser of the amounts described in subparagraphs 85(1)(c.1)(i) and (ii); and

(ii) in the case of depreciable property of a prescribed class, the agreed amount will be an amount equal to the least of the amounts described in subparagraphs 85(1)(e)(i), (ii) and (iii).

For the purposes of each joint election described in this Paragraph, the reference to "the undepreciated capital cost to the taxpayer of all property of that class immediately before the disposition" found in subparagraph 85(1)(e)(i) shall be interpreted to mean that proportion of the undepreciated capital cost to the taxpayer of all the property of that class that the original cost of the assets that are transferred immediately before the disposition is of the original cost of all property of that class immediately before the disposition.

Each Transferee Corporation will add to its stated capital maintained for its Class Z preferred shares an amount equal to the aggregate cost of the particular properties acquired by such Transferee Corporation from DC.

26. Each Transferee Corporation will redeem all of its XXXXXXXXXX Class Z preferred shares that are owned by DC for an amount equal to the aggregate FMV and Redemption Amount of such shares. As payment of such Redemption Amount, each Transferee Corporation will issue to DC a demand non-interest-bearing promissory note ( collectively referred to as the "Holdco Notes", and individually as "Holdco1 Note, Holdco2 Note and Subco1 Note, as the case may be") having a principal amount and fair market value equal to the Redemption Amount and fair market value of the particular Transferee Corporation's Class Z preferred shares so redeemed. DC will accept the Holdco1 Note issued by Holdco1 as full payment of the Redemption Amount of the Class Z preferred shares of Holdco1. DC will accept Holdco2 Note issued by Holdco2 as full payment of the Redemption Amount of the Class Z preferred shares of Holdco2 and DC will accept the Subco1 Note issued by Subco1 as full payment of the Redemption Amount of the Class Z preferred shares of Subco1.

27. On XXXXXXXXXX, and after the redemption by each Transferee Corporation of its XXXXXXXXXX Class Z preferred shares held by DC as described in Paragraph 26 above, Subco1 will cause its first taxation year to end.

28. Subsequent to the taxation year-end of each Transferee Corporation (i.e., XXXXXXXXXX as mentioned above in Paragraphs 5, 9 and 27 above), the Transferee Corporations, as sole shareholders of DC, after agreeing to assume their pro-rata share of DC's liabilities, will by special resolution, resolve to wind-up and dissolve DC pursuant to the relevant provisions of the CBCA.

In connection with the winding-up of DC, DC will distribute pro-rata to Holdco1, Holdco2 and Subco1, as the case may be, all its property, including for greater certainty, any dividend refund received by DC. In the course of winding-up, DC will assign and distribute the Holdco1 Note to Holdco1, the Holdco2 Note to Holdco2 and the Subco1 Note to Subco1. No agreement or resolution relating to the winding-up of DC or the distribution of its property will provide for the cancellation of any shares of DC.

Prior to the distribution of the Holdco Notes, DC will elect, pursuant to subsection 83(2), an amount not exceeding the balance in DC's CDA account at that time, in prescribed manner and prescribed form, to treat the portion of the winding-up dividend referred to in subparagraph 88(2)(b)(i) as a separate capital dividend. Each Transferee Corporation will receive a proportionate capital dividend from DC.

29. As a result of the assignment and distribution of the Holdco Notes described in Paragraph 28 above, such Transferee Corporation's obligation under its Holdco Note will be cancelled.

30. Following the receipt of the dividend refund to which DC will become entitled as a result of the Proposed Transactions, DC will distribute such amount pro-rata among the holders of its Class C preferred and common shares based on their entitlement (i.e., one-third of such dividend refund to each Transferee Corporation). The dividend refund will not arise until after the end of the fiscal year in which the dividend was paid (or deemed paid). After the distribution of the dividend refund, all property of DC will have been distributed and all liabilities of DC will have been discharged or assumed by the Transferee Corporations on a pro-rata basis.

31. Upon completion of the above Proposed Transactions and subsequent to a CRA assessment 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 and DC will surrender its charter and be dissolved.

ADDITIONAL INFORMATION

32. Other than as described herein, no property has or will be acquired or disposed of by DC, and no liabilities have been or will be incurred by DC, or a corporation controlled by it, in contemplation of and before the Proposed Transactions, except in the ordinary course of the business of DC.

33. The shareholders and directors of DC have decided to make a donation in the range of $XXXXXXXXXX to a registered charity in the XXXXXXXXXX area. It has not been decided whether this donation will be made by DC before the Proposed Transactions or proportionately by each of Holdco1, Holdco2 and either Holdco3 or Subco1 (the "proportionate donations") after the completion of the Proposed Transactions. This donation (or proportionate donations by each of Holdco1, Holdco2 and either Holdco3 or Subco1) will be made irrespective of whether or not the Proposed Transactions are completed. You also maintain that the Proposed Transactions will be undertaken regardless of whether the proposed donation (or proportionate donations) is, or will be, made.

39. None of DC or Holdco1, Holdco2, Holdco3, Subco1 and Subco2 is, or will be at any time, an SFI.

40. None of the shares of DC, Holdco1, Holdco2, Holdco3, Subco1 and Subco2 are or will be, at any time throughout the series of transactions that includes the Proposed Transactions described herein:

(a) the subject of a guarantee agreement;

(b) the subject of a dividend rental arrangement;

(c) a share that is issued or acquired as part of a transaction or event or series of transactions or events of the types described in subsection 112(2.5).

41. It is anticipated that a some point after the completion of the Proposed Transactions, Holdco3 and Subco1 may be amalgamated pursuant to a vertical short-form amalgamation in respect of which subsections 87(1) and 87(11) would apply.

PURPOSE OF THE PROPOSED TRANSACTIONS

42. The purpose of the Proposed Transactions is to divide the assets of DC into three corporate entities to allow each shareholder to arrange their affairs according to their own requirements and to make dealing with the underlying securities and property more efficient. The purpose for Holdco3 incorporating Subco1 as described in Paragraph 19 above, is to avoid a Part IV tax circularity issue since Holdco3's taxation year-end is different from that of the other two Transferee Corporations.

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

(i) the transfer of DC shares owned by Holdco3 to Subco1 as described in Paragraph 20;

(ii) the transfer of the land and building owned by DC to Subco2 as described in Paragraph 22; and

(iii) the transfer of each eligible property owned by DC to each Transferee Corporation as described in Paragraphs 24 and 25,

such that the agreed amount in respect of each such transfer will be deemed to be the transferor's proceeds of disposition of the particular property and the transferee's cost thereof, and the transferor's cost of the shares received as consideration for such disposition. 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 each Transferee Corporation of its respective Class Z preferred shares described in Paragraph 26, and the distribution by DC in the course of its winding-up of the Holdco Notes to the respective Transferee Corporations as described in Paragraph 28 above:

(a) by virtue of paragraphs 84(3)(a) and (b), each Transferee Corporation will be deemed to have paid, and DC will be deemed to have received, a taxable dividend equal to the amount by which the amount paid to redeem the Class Z preferred shares of such Transferee Corporation 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) described below, DC will be deemed to have paid, and each Transferee Corporation will be deemed to have received, a taxable dividend (the "winding-up dividend") equal to the amount by which the aggregate FMV of the particular properties distributed by DC to the particular Transferee Corporation on the winding-up (i.e., the Holdco Note and one third of the income taxes recoverable to DC), net of any liabilities assumed by the particular Transferee Corporation, exceeds the aggregate amount by which the PUC of the DC common shares and Class C preferred shares, as the case may be, that are held by the particular Transferee Corporation, 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 in (i) above not exceeding DC's CDA determined immediately before the payment of the winding-up dividend shall be deemed, for the purposes of the subsection 83(2) election referred to in Paragraph 28 above, to be a 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 the portion thereof referred to in (ii) above that is deemed to be a separate dividend, shall be deemed to be a separate dividend that is a taxable dividend;

(c) the taxable dividends deemed to be received by DC and each Transferee Corporation, as the case may be, as a result of the redemptions and distributions on the winding-up referred to in Rulings B(a) and (b) above will be included in each corporation's income pursuant to paragraph 12(1)(j), and will be deductible by DC and each Transferee Corporation, as the case may be, in computing such corporation's taxable income for the year in which such dividend is deemed to have been received, by virtue of subsection 112(1) and, for greater certainty, the deduction will not be denied by any of subsections 112(2.1), (2.2), (2.3) or (2.4);

(d) the dividends deemed to be received by DC and each Transferee Corporation, as the case may be, referred to in Rulings B(a) and (b) above will be excluded from the proceeds of disposition of such shares by virtue of paragraph (j) of that 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), DC will be connected with each Transferee Corporation and by virtue of paragraph 186(4)(b) each Transferee Corporation will be connected with DC such that:

(i) provided that the particular Transferee Corporation is not entitled to a dividend refund in respect of its taxation year in which it is deemed to pay its taxable dividend referred to in Ruling B(a) above, DC will not be subject to tax under Part IV under subsection 186(1) in respect of such dividend; and

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

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

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

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

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

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

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

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

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

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

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

D. The settlement of the Holdco Notes as described in Paragraph 29 above will not give rise to a "forgiven amount" within the meaning of subsections 80(1) or 80.01(1).

E. Subsections 15(1), 56(2), 69(4) and 246(1) will not apply to the Proposed Transactions in and by themselves.

F. 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 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

Unless otherwise confirmed in the above rulings, nothing in this letter should be construed as implying that the CRA has confirmed, reviewed or has made any determination in respect of:

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

(b) any income tax consequences relating to the possible amalgamation of Holdco3 and Subco1; and

(c) any other tax consequence relating to the facts, Proposed Transactions or any transaction or event taking place either prior to the Proposed Transactions or subsequent to the Proposed Transactions, whether described in this letter or not, other than those specifically described in the rulings given above, including whether any of the Proposed Transactions would also be included in a series of transactions or events that include other transactions or events that are not described in this letter.

Yours truly,

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