2004 Ruling 2004-0101231R3 - Paragraph 55(3)(a) "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: Split-up of a family owned corporation to multiple related holding corporations. Will subsection 55(4) apply to cause the exception from the application of subsection 55(2) provided by paragraph 55(3)(a) to not apply?

Position: In this case subsection 55(4) would not apply.

Reasons: Based on the specific facts as supported by the taxpayer's representations, which of course are subject ultimately to verification by audit.

XXXXXXXXXX 2004-010123

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 or expressions have the meaning 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" has the meaning assigned by section 54;

(c) "agreed amount" means the amount agreed on in respect of a property in an election filed pursuant to subsection 85(1);

(d) "Assets" means the total assets of Holdings, including any tax refund received by Holdings for its taxation year that includes the Proposed Transactions, less $XXXXXXXXXX;

(e) "BN" refers to the Business Number assigned to a corporation, trust or estate by CRA;

(f) "capital dividend" means a dividend to which subsection 83(2) applies;

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

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

(i) "Class A Shares" means the Class A Shares in the capital of Holdings;

(j) "Class X Preferred Shares" means, either collectively or individually (as the context requires), the Class X Preferred Shares to be issued by each of Newco A, Newco B, Newco C, Newco D and Newco E as described in Paragraphs 11 and 14;

(k) "Class Y Preferred Shares" means, either collectively or individually (as the context requires), the Class Y Preferred Shares to be issued by each of Newco A, Newco B, Newco C, Newco D and Newco E as described in Paragraphs 11 and 18;

(l) "Common Shares" means the common shares in the capital of Holdings;

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

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

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

(p) "eligible capital property" has the meaning assigned by subsection 14(5);

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

(r) "Estate" means the estate of XXXXXXXXXX, a deceased individual (XXXXXXXXXX);

(s) "fair market value" means the highest price available in an open and unrestricted market, between informed, prudent parties, acting at arm's length and with no compulsion to act, expressed in terms of cash;

(t) "forgiven amount" has the meaning assigned by subsection 80(1);

(u) "Holdings" means XXXXXXXXXX;

(v) "inventory" has the meaning assigned by subsection 248(1);

(w) "Newco A" means a corporation to be incorporated under the XXXXXXXXXX as described in Paragraph 11;

(x) "Newco B" means a corporation to be incorporated under the XXXXXXXXXX as described in Paragraph 11;

(y) "Newco C" means a corporation to be incorporated under the XXXXXXXXXX as described in Paragraph 11;

(z) "Newco D" means a corporation to be incorporated under the XXXXXXXXXX as described in Paragraph 11;

(aa) "Newco E" means a corporation to be incorporated under the XXXXXXXXXX as described in Paragraph 11;

(bb) XXXXXXXXXX;

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

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

(ee) "Parent" means XXXXXXXXXX;

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

(gg) "proceeds of disposition" has the meaning assigned by section 54;

(hh) "Proposed Transactions" means the transactions described in Paragraphs 9 to 23;

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

(jj) "related persons" has the meaning assigned in subsection 251(2);

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

(ll) "Special Shares" means the Special Shares in the capital of Holdings;

(mm) "Special Voting Shares" means the Special Voting Shares in the capital of Holdings, to be created as described in Paragraph 9;

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

(oo) "Sibling1" means XXXXXXXXXX;

(pp) "Sibling2" means XXXXXXXXXX;

(qq) "Sibling3" means XXXXXXXXXX;

(rr) "SIN" means Social Insurance Number;

(ss) "stated capital" means the amount of capital determined in respect of a class or series of shares in accordance with the XXXXXXXXXX;

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

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

(vv) "taxation year" has the meaning assigned by subsection 249(1).

FACTS:

1. Holdings is a corporation formed on the amalgamation of two predecessor corporations, XXXXXXXXXX Holdings files its income tax returns at the XXXXXXXXXX TC and deals with the XXXXXXXXXX TSO.

2. Holdings is a taxable Canadian corporation and a private corporation. Holdings' taxation year ends on XXXXXXXXXX . Holdings carries on an investment business and its assets consist primarily of cash, marketable securities, land and a building.

3. Sibling1, Sibling2 and Sibling3 are Parent's adult children. XXXXXXXXXX, who is deceased, was also Parent's child.

4. The only beneficiaries of Estate who are or may be entitled to share in its income or capital are XXXXXXXXXX ("Grandchild1") and XXXXXXXXXX ("Grandchild2"), both of whom are XXXXXXXXXX children and Parent's grandchildren.

5. There are three classes of issued and outstanding shares in the capital of Holdings which are Common Shares, Class A Shares and Special Shares. Their terms and conditions are as follows:

The holders of the Common Shares and Class A Shares issued by Holdings are each entitled to one (1) vote per share at any meeting of shareholders of Holdings. The Special Shares are non-voting; however, approval of the holders of the Special Shares is required in order to (i) redeem or purchase for cancellation any shares ranking junior to the Special Shares (which, with respect to the issued and outstanding shares, are the Common Shares), (ii) create any shares ranking as to capital in priority to or on a parity with the Special Shares, and (iii) delete, vary, modify, amend or amplify the rights, conditions and restrictions attaching to the Special Shares.

Approval of the holders of the Class A Shares is required in order to (i) redeem or purchase for cancellation any shares ranking junior to the Class A Shares (which, with respect to the issued and outstanding shares, are the Special Shares and the Common Shares), (ii) create any shares ranking as to capital in priority to or on a parity with the Class A Shares, and (iii) delete, vary, modify, amend or amplify the rights, conditions and restrictions attaching to the Class A Shares. The Class A Shares are redeemable at the option of Holdings for a redemption price of $XXXXXXXXXX per share, plus all declared and unpaid non-cumulative dividends thereon. The Special Shares are redeemable at the option of Holdings or the holder for a redemption price of $XXXXXXXXXX per share, plus all declared and unpaid non-cumulative dividends thereon.

6. The current shareholders of Holdings and the relevant tax attributes of each class of shares held by such shareholders are as follows:

Name of Shareholders

Class of Shares
Number of Shares
Aggregate
ACB
Aggregate
PUC
Sibling1
Common Shares
XXXXX
XXXXXXX
XXXXXXX
Sibling2
Common Shares
XXXXX
XXXXXXX
XXXXXXX
Sibling3
Common Shares
XXXXX
XXXXXXX
XXXXXXX
Parent
Class A Shares
XXXXX
XXXXXXX
XXXXXXX
Parent
Special Shares
XXXXX
XXXXXXX
XXXXXXX
Estate
Common Shares
XXXXX
XXXXXXX
XXXXXXX

7. Parent, who is XXXXXXXXXX years old but in good health for a person of that age, currently controls Holdings for the purposes of the Act by virtue of her Class A Shares. Parent is involved with all major and strategic issues relating to Holdings and all such issues are discussed with her and approved by her as necessary. In addition, Parent attends all shareholder meetings, approves company business as required, receives regular investment summaries regarding Holdings' portfolio and meets with Sibling1 every XXXXXXXXXX weeks to review the overall performance of Holdings' business operations. While Parent is not involved in the day-to-day management of Holdings, Parent still exercises control over Holdings by delegating many responsibilities to carefully selected agents, including an investment advisor who manages Holdings' investment portfolio and Sibling1. Sibling1 is compensated by Holdings for any such management services provided by him to Holdings.

8. All of the shareholders of Holdings hold their shares as capital property and each of the shareholders is a person who is resident in Canada for the purposes of the Act.

PROPOSED TRANSACTIONS:

9. The Articles of Amalgamation of Holdings will be amended to create a new class of XXXXXXXXXX Special Voting Shares. The holders of the Special Voting Shares will be entitled to one (1) vote per share. However, the holders of the Special Voting Shares will not be entitled to any dividends and will only be entitled to receive $XXXXXXXXXX per share on a liquidation, dissolution of winding-up of Holdings. The holders of the Special Voting Shares shall not be entitled to any other particular rights, other than those mandated by the XXXXXXXXXX.

10. Parent will subscribe for XXXXXXXXXX Special Voting Shares of Holdings for an aggregate subscription price of $XXXXXXXXXX to be paid in cash.

11. Parent will incorporate Newco A, Newco B, Newco C, Newco D and Newco E under the XXXXXXXXXX (each a "Newco" and collectively referred to as the "Newcos"). The authorized share capital of each of the Newcos will consist of XXXXXXXXXX Multiple Voting Shares, an unlimited number of common shares, an unlimited number of Class X Preferred Shares and an unlimited number of Class Y Preferred Shares. The holders of the Multiple Voting Shares will be entitled to XXXXXXXXXX votes per share, will not be entitled to any dividends and will only be entitled to receive $XXXXXXXXXX per share on a liquidation, dissolution of winding-up of such Newco in priority to all other shares. The holders of the Multiple Voting Shares shall not be entitled to any other particular rights, other than those mandated by the XXXXXXXXXX .

12. On the incorporation of Newco A, Newco B, Newco C, Newco D and Newco E, Parent will subscribe for XXXXXXXXXX Multiple Voting Shares of each corporation for XXXXXXXXXX per share to be paid in cash.

13. Following the incorporation of the Newcos, Parent will transfer a number of her Class A Shares and Special Shares of Holdings to each of the Newcos as follows:

(a) XXXXXXXXXX Class A Shares and XXXXXXXXXX Special Shares to Newco A in exchange for XXXXXXXXXX Class X Preferred Shares of Newco A having an aggregate fair market value equal to the aggregate fair market value of the XXXXXXXXXX Class A Shares and XXXXXXXXXX Special Shares transferred by Parent;

(b) XXXXXXXXXX Class A Shares and XXXXXXXXXX Special Shares to Newco B in exchange for XXXXXXXXXX Class X Preferred Shares of Newco B having an aggregate fair market value equal to the aggregate fair market value of the XXXXXXXXXX Class A Shares and XXXXXXXXXX Special Shares transferred by Parent;

(c) XXXXXXXXXX Class A Shares and XXXXXXXXXX Special Shares to Newco C in exchange for XXXXXXXXXX Class X Preferred Shares of Newco C having an aggregate fair market value equal to the aggregate fair market value of the XXXXXXXXXX Class A Shares and XXXXXXXXXX Special Shares transferred by Parent;

(d) XXXXXXXXXX Class A Shares and XXXXXXXXXX Special Shares to Newco D in exchange for XXXXXXXXXX Class X Preferred Shares of Newco D having an aggregate fair market value equal to the aggregate fair market value of the XXXXXXXXXX Class A Shares and XXXXXXXXXX Special Shares transferred by Parent; and

(e) XXXXXXXXXX Class A Shares and XXXXXXXXXX Special Shares to Newco E in exchange for XXXXXXXXXX Class X Preferred Shares of Newco E having an aggregate fair market value equal to the aggregate fair market value of the XXXXXXXXXX Class A Shares and XXXXXXXXXX Special Shares transferred by Parent.

In respect of each transfer of Class A Shares and Special Shares of Holdings as described above, Parent and each of Newco A, Newco B, Newco C, Newco D and Newco E, as the case may be, will make a joint election under subsection 85(1) in prescribed form and manner and within the time limit referred to in subsection 85(6). The agreed amount for the purpose of each such election will be equal to the lesser of the two amounts described in paragraph 85(1)(c.1).

14. The terms of the Class X Preferred Shares to be issued by each of Newco A, Newco B, Newco C, Newco D and Newco E, as the case may be, to Parent as described in Paragraph 13 above, will provide that such Class X Preferred Shares will:

(a) entitle a holder to one (1) vote per share;

(b) be redeemable and retractable at an aggregate amount equal to the aggregate fair market value of the number of Class A Shares and Special Shares of Holdings so transferred to the particular Newco by Parent, as described in Paragraph 13 above, together with all accrued and unpaid dividends, subject to a purchase price adjustment as described below (herein referred to as the "Class X Redemption Amount");

(c) have an aggregate stated capital equal to the greater of the aggregate paid-up capital and aggregate adjusted cost base (determined in accordance with the rules in paragraphs 84.1(2)(a) and (a.1)) of the number of Class A Shares and Special Shares of Holdings so transferred to the particular Newco by Parent;

(d) entitle a holder to non-cumulative dividends at a rate reasonably determined to be a market dividend rate at the time the shares are issued; and

(e) subject to the rights of any shares ranking in priority to or on parity with the Class X Preferred Shares, entitle a holder to receive the Class X Redemption Amount on the wind-up, liquidation or dissolution of the particular Newco in priority to any return to any holders of the Class Y Preferred Shares and the common shares.

For greater certainty, the aggregate Class X Redemption Amount of the number of Class X Preferred Shares to be issued by each of Newco A, Newco B, Newco C, Newco D and Newco E, as the case may be, will be equal to the aggregate fair market value of that number of Class A Shares and Special Shares of Holdings so transferred by Parent to that particular Newco as described in Paragraph 13 above. Further, each such Class X Redemption Amount will be subject to purchase price adjustment (retroactive to the date of issuance) if it is subsequently and finally determined that the fair market value of the Class A Shares and Special Shares of Holdings so transferred to the particular Newco at the date of such transfer, is more or less than the Class X Redemption Amount as originally determined. This purchase price adjustment will be consistent with the CRA's administrative policy as outlined in Interpretation Bulletin IT-169.

15. Following the share transfers described in Paragraph 13, each of Sibling1, Sibling2, Sibling3 and Estate will each transfer Common Shares as follows:

(a) Sibling1 will transfer his XXXXXXXXXX Common Shares to Newco A in exchange for XXXXXXXXXX common shares of Newco A having an aggregate fair market value equal to the aggregate fair market value of the XXXXXXXXXX Common Shares transferred by Sibling1;

(b) Sibling2 will transfer his XXXXXXXXXX Common Shares to Newco B in exchange for XXXXXXXXXX common shares of Newco B having an aggregate fair market value equal to the aggregate fair market value of the XXXXXXXXXX Common Shares transferred by Sibling2;

(c) Sibling3 will transfer her XXXXXXXXXX Common Shares to Newco C in exchange for XXXXXXXXXX common shares Newco C having an aggregate fair market value equal to the aggregate fair market value of the XXXXXXXXXX Common Shares transferred by Sibling3;

(d) Estate will transfer XXXXXXXXXX Common Shares to Newco D in exchange for XXXXXXXXXX common shares Newco D having an aggregate fair market value equal to the aggregate fair market value of the XXXXXXXXXX Common Shares transferred by Estate; and

(e) Estate will transfer XXXXXXXXXX Common Shares to Newco E in exchange for XXXXXXXXXX common shares Newco E having an aggregate fair market value equal to the aggregate fair market value of the XXXXXXXXXX Common Shares transferred by Estate.

In respect of each transfer of Common Shares described above, each of Sibling1, Sibling2, Sibling3 and Estate, as the case may be, will make a joint election with their respective Newco under subsection 85(1) in prescribed form and manner and within the time limit referred to in subsection 85(6). The agreed amount for the purpose of each such election will be equal to the lesser of the two amounts specified in paragraph 85(1)(c.1).

16. The terms of the XXXXXXXXXX common shares to be issued by each particular Newco as consideration for the Common Shares of Holdings received by such Newco, as described in Paragraph 15, will provide that such shares will:

(a) entitle a holder to one (1) vote per share;

(b) have an aggregate stated capital equal to the greater of the aggregate paid-up capital and aggregate adjusted cost base (determined in accordance with the rules in paragraphs 84.1(2)(a) and (a.1)) attributable to such Common Shares of Holdings so transferred to the particular Newco;

(c) entitle a holder to dividends as and when declared by the directors in their discretion; and

(d) subject to the rights of holders of shares ranking prior to or on parity with the common shares, entitle a holder to the remaining property of such Newco on the wind-up, liquidation or dissolution of Newco.

17. Following the share transfers described in Paragraph 13 and 15 above, Holdings will transfer a pro-rata portion of its Assets to each of the Newcos as follows:

(a) XXXXXXXXXX% of the Assets will be transferred to Newco A in exchange for XXXXXXXXXX Class Y Preferred Shares having an aggregate fair market value equal to the aggregate fair market value of its pro-rata portion of the Assets transferred by Holdings to it less the fair market value of any liabilities, if any, assumed by Newco A;

(b) XXXXXXXXXX% of the Assets will be transferred to Newco B in exchange for XXXXXXXXXX Class Y Preferred Shares having an aggregate fair market value equal to the aggregate fair market value of its pro-rata portion of the Assets transferred by Holdings to it less the fair market value of any liabilities, if any, assumed by Newco B;

(c) XXXXXXXXXX% of the Assets will be transferred to Newco C in exchange for XXXXXXXXXX Class Y Preferred having an aggregate fair market value equal to the aggregate fair market value of its pro-rata portion of the Assets transferred by Holdings to it less the fair market value of any liabilities, if any, assumed by Newco C;

(d) XXXXXXXXXX% of the Assets will be transferred to Newco D in exchange for XXXXXXXXXX Class Y Preferred having an aggregate fair market value equal to the aggregate fair market value of its pro-rata portion of the Assets transferred by Holdings to it less the fair market value of any liabilities, if any, assumed by Newco D; and

(e) XXXXXXXXXX% of the Assets will be transferred to Newco E in exchange for XXXXXXXXXX Class Y Preferred Shares having an aggregate fair market value equal to the aggregate fair market value of its pro-rata portion of the Assets transferred by Holdings to it less the fair market value of any liabilities, if any, assumed by Newco E.

In respect of each transfer of eligible property described above, Holdings and each particular Newco, will make a joint election under subsection 85(1) in prescribed form and manner and within the time limit referred to in subsection 85(6). The agreed amount in respect of each transfer of property that is an eligible property for the purpose of each such election will equal:

(f) the least of the amounts specified in subparagraphs 85(1)(d)(i), (ii) and (iii), in the case of eligible capital property;

(g) the least of the amounts specified in subparagraphs 85(1)(e)(i), (ii) and (iii), in the case of depreciable property of a prescribed class; and

(h) the lesser of the amounts specified in subparagraphs 85(1)(c.1)(i) and (ii), in the case of inventory and capital property (other than depreciable property of a prescribed class).

For greater certainty, for the purposes of each election described above, the agreed amount will not exceed the amount of any non-share consideration paid by such Newco in respect of the particular transferred property. Where the particular transferred property is not an eligible property, the transfer price will equal the fair market value of such property.

18. The terms of the Class Y Preferred Shares to be issued by each of Newco A, Newco B, Newco C, Newco D and Newco E, as the case may be, issued as consideration for its pro-rata share of Holdings' Assets, as described in Paragraph 17, will provide that such shares will:

(a) be non-voting;

(b) be redeemable and retractable at an amount equal to the aggregate fair market value of the pro-rata share of Holdings' Assets transferred to the particular Newco less the amount of any liabilities assumed by the particular Newco on such transfer, together with all accrued and unpaid dividends and subject to a purchase price adjustment as described below (the "Class Y Redemption Amount");

(c) have an aggregate stated capital equal to the aggregate of the elected amounts (where an election was made under subsection 85(1)) or the transfer price (where no election was made under subsection 85(1)) in respect of such transferred Assets received by such Newco, as described in Paragraph 17 above, less the amount of any non-share consideration paid by such Newco for its portion of the Assets transferred by Holdings;

(d) entitle a holder to non-cumulative dividends at a rate reasonably determined to be a market dividend rate at the time the shares are issued; and

(e) subject to the rights of any shares ranking in priority to or on parity with the Class Y Preferred Shares, entitle a holder to the Class Y Redemption Amount on the wind-up, liquidation or dissolution of the Newco in priority to any return to the holders of the common shares.

For greater certainty, the Class Y Redemption Amount of the Class Y Preferred Shares will be subject to purchase price adjustment (retroactive to the date of issuance), if it is subsequently and finally determined that the fair market value of each Newco's pro-rata share of the Assets it received from Holdings at the date of transfer (less the amount of liabilities so assumed, if any), is more or less than the Class Y Redemption Amount as originally determined. This price adjustment clause will be consistent with the CRA's administrative policy outlined in Interpretation Bulletin IT-169.

19. Immediately following the pro-rata transfers of Holdings' Assets to each of Newco A, Newco B, Newco C, Newco D and Newco E, as the case may be, as described in Paragraph 17, each such Newco will redeem its Class Y Preferred Shares that were issued to Holdings as described above, in exchange for a demand, non-interest bearing promissory note (each referred to as a "Redemption Note") having a fair market value and a principal amount equal to the Class Y Redemption Amount of the particular Class Y Preferred Shares issued by such Newco. Holdings will accept the Redemption Note of each of Newco A, Newco B, Newco C, Newco D and Newco E, as the case may be, as full payment of the Class Y Redemption Amount with the risk of such note being dishonoured. At the end of the day on which each Newco redeems its Class Y Preferred Shares, each of Newco A, Newco B, Newco C, Newco D and Newco E, as the case may be, will cause its first taxation year to end.

20. The day following the redemptions of the Class Y Preferred Shares by each Newco as described in Paragraph 19, the shareholders of Holdings will resolve to reduce the aggregate stated capital of the Common Shares, Special Shares and Class A Shares to $XXXXXXXXXX in each case. No distribution will be made to the shareholders of Holdings in respect of these stated capital reductions.

21. Holdings will then purchase for cancellation all of its Common Shares, Special Shares and Class A Shares owned by each of Newco A, Newco B, Newco C, Newco D and Newco E, as the case may be, in exchange for a demand, non-interest bearing promissory note (each such note referred to as a "Purchase for Cancellation Note") having a fair market value and a principal amount equal to the aggregate fair market value of such redeemed shares held by the particular Newco. Each of Newco A, Newco B, Newco C, Newco D and Newco E, as the case may be, will accept the Purchase for Cancellation Note issued by Holdings to it as full payment for such purchase for cancellation with the risk of such note being dishonoured.

If it is determined that Holdings has a positive balance in its capital dividend account at that time, Holdings will make any necessary election(s) under subsection 83(2) to treat all or some of the deemed dividends arising on the purchases for cancellation as capital dividends and if the aggregate amount of such capital dividends exceeds the balance in Holdings' capital dividend account at that time, Holdings will also make any necessary election under subsection 184(3) to treat any such excess amount as separate taxable dividends such that each of the Newcos will receive a pro rata portion of Holdings' capital dividend account.

22. Since the principal amount and fair market value of the Redemption Note issued by each particular Newco as described in Paragraph 19 will be equal to the principal amount and fair market value of the corresponding Purchase for Cancellation Note issued by Holdings as described in Paragraph 21, the Redemption Note issued by a particular Newco will legally set-off against the corresponding Purchase for Cancellation Note issued by Holdings such that the respective obligations under such notes will be marked paid in full and cancelled.

23. Holdings will be wound-up and dissolved after it completes and files it income tax return for its taxation year that includes the Proposed Transactions.

SUBSEQUENT TRANSACTIONS:

24. Parent's last will and testament will provide for the following direct bequests on her death:

(a) XXXXXXXXXX Class X Preferred Shares of Newco A will be bequeathed to Sibling1;

(b) XXXXXXXXXX Class X Preferred Shares in Newco B will be bequeathed to Sibling2;

(c) XXXXXXXXXX Class X Preferred Shares in Newco C will be bequeathed to Sibling3;

(d) XXXXXXXXXX Class X Preferred Shares in Newco D will be bequeathed to Estate; and

(e) XXXXXXXXXX Class X Preferred Shares in Newco E will be bequeathed to Estate.

25. Parent has no intention to transfer any of her Class X Preferred Shares other than by way of her will as described in Paragraph 24. However, in the event that Parent's death is imminent, Parent may choose to gift her Class X Preferred Shares to Sibling1, Sibling2, Sibling3, and/or to Estate, as the case may be.

OTHER INFORMATION:

26. Other than as described herein, there are no significant transactions that have been completed prior to the date of this letter nor are there any other transactions that are currently being contemplated that would form part of the series of transactions or events that includes the Proposed Transactions.

27. Neither Holdings nor any corporation to which Holdings is related is a specified financial institution.

28. None of the shares in the capital of Holdings or of any of the Newcos, has been, or will be, at any time during the implementation of the Proposed Transactions:

(a) the subject of any undertaking that is referred to in subsection 112(2.2) as a "guarantee agreement";

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

(c) the subject of a "dividend rental arrangement" as defined in subsection 248(1).

PURPOSE OF THE PROPOSED TRANSACTIONS:

29. The purpose of the Proposed Transactions is to divide the Assets of Holdings proportionally among each of the Newcos so that ultimately each of Sibling1, Sibling2, Sibling3 and Estate will be able to independently determine its own investment objectives relating to its share of the Assets.

The purpose for having Parent subscribe for XXXXXXXXXX Special Voting Shares of Holdings as described in Paragraph 10 is to ensure that some nominal voting shares of Holdings remain outstanding immediately after Holdings purchases for cancellation of all its Common Shares, Special Shares and Class A Shares owned by each Newco, as described in Paragraph 21, since this will facilitate a more orderly winding-up of Holdings.

The purpose of reducing the aggregate stated capital of the Common Shares, Special Shares and Class A Shares, as described in Paragraph 20, is to ensure that the amount of deemed dividends arising as a result of the Proposed Transaction described in Paragraph 21 will result in Holdings' realizing a full refund of refundable dividend tax on hand as well as being able to pay out capital dividends to the full extent of its capital dividend account.

The purpose for Parent acquiring a controlling block of shares of each Newco, as described in Paragraphs 12 and 14, is to protect her economic interest in the underlying property owned by Holdings, which is to be transferred, on a pro-rata basis, to the Newcos, during her lifetime. Accordingly, you maintain that none of the purposes for Parent acquiring control of Newco A, Newco B, Newco C, Newco D and Newco E, as the case may be, is to cause Sibling1, Sibling2, Sibling3 and Estate to be related to each such Newco so that subsection 55(2) would not apply to any of the deemed dividends resulting from the Proposed Transactions since Parent intends to exercise the same degree of control over each Newco that she currently exercises over Holdings as described in Paragraph 7.

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) each transfer of Class A Shares and Special Shares of Holdings owned by Parent to each Newco as described in Paragraphs 13;

(ii) each transfer of Common Shares of Holdings owned by Sibling1, Sibling2, Sibling3 and Estate, as the case may be, to such Newco as described in Paragraph 15; and

(iii) each transfer of eligible property owned by Holdings to each Newco as described in Paragraph 17

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

C. As a result of the redemption by each Newco of its Class Y Preferred Shares held by Holdings as described in Paragraph 19, and the purchase for cancellation by Holdings of the Common Shares, Special Shares and Class A Shares held by each Newco as described in Paragraph 21:

(a) by virtue of paragraphs 84(3)(a) and 84(3)(b), each Newco will be deemed to have paid, and Holdings will be deemed to have received, a dividend equal to the amount by which the amount paid on the redemption of Class Y Preferred Shares issued by a particular Newco exceeds the paid-up capital of such shares immediately before such redemption;

(b) by virtue of paragraphs 84(3)(a) and 84(3)(b), Holdings will be deemed to have paid, and a particular Newco will be deemed to have received, a dividend equal to the amount by which the amount paid on each repurchase of the Common Shares, Special Shares and Class A Shares held by a particular Newco exceeds the paid-up capital of such shares immediately before each such repurchase;

(c) except to the extent that an amount of any dividend described in (b) above is a capital dividend, the amount of each dividend described in (a) and (b) above, will be a taxable dividend that will be included in computing the particular dividend recipient's income pursuant to subsection 82(1) and paragraph 12(1)(j) and will be deductible in computing such dividend payer's taxable income pursuant to subsection 112(1). For greater certainty, the provisions of subsection 112(2.1), 112(2.2), 112(2.3) and 112(2.4) will not apply to deny the subsection 112(1) deduction in respect of any such taxable dividend;

(d) the amount of any such dividend described in (a) and (b) above will be excluded from the proceeds of disposition of the particular shares by virtue of paragraph (j) of the definition of proceeds of disposition and by virtue of subsection 112(3), will reduce the loss, if any, in respect of such disposition of shares on which the particular dividend is deemed to be received;

(e) by virtue of paragraph 186(4)(a) and subsection 186(2), Holdings will be connected with each of the Newcos and each Newco will be connected with Holdings such that:

(i) provided that each of the Newcos 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 (c) above, Holdings 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 of the Newcos will be subject to Part IV tax in an amount equal to that proportion of the dividend refund to which Holdings will become entitled as a result of the payment of the taxable dividends referred to in (c) above, that the amount of each such dividend received by each of Newco A, Newco B, Newco C, Newco D and Newco E, as the case may be, is of the aggregate of all such taxable dividends paid by Holdings in its taxation year in which such dividend is paid;

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

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

G. By virtue of paragraph 55(3)(a), the provisions of subsection 55(2) will not apply to any of the taxable dividends referred to in Ruling C, provided that there is no disposition or increase in interest described in any of subparagraphs 55(3)(a)(i) to (v) as part of a series of transactions described herein. For greater certainty, the Proposed Transactions described herein, in and by themselves, will not be considered to result in a disposition or increase in interest described in subparagraphs 55(3)(a)(i) to (v) with respect to the dividends deemed to be received by Holdings or any of the Newcos.

H. The mutual set-off and cancellation of the corresponding Redemption Notes and Purchase for Cancellation Notes as described in Paragraph 22 will not give rise to a forgiven amount.

I. The provisions of subsections 15(1), 56(2), 69(4) and 246(1) will not apply to any of the Proposed Transactions described herein, in and by themselves.

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

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 transfer of Parent's shares of any of the Newcos as described in Paragraphs 24 or 25; 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