2005 Ruling 2005-0114861R3 - Butterfly - XXXXXXXXXX

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 Butterfly

Position: Favourable rulings given.

Reasons: Comply with applicable provisions.

XXXXXXXXXX 								2005-011486

XXXXXXXXXX, 2005

Dear XXXXXXXXXX:

Re: XXXXXXXXXX. - Paragraph 55(3)(b)
Advance Income Tax Ruling Request

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

(i) in an earlier return of the taxpayer or any related person;

(ii) being considered by a tax services office (TSO) or taxation centre (TC) in connection with a previously filed tax return by the taxpayer or any related person;

(iii) under objection by the taxpayers or any 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 taxpayer has also represented that the proposed transactions described herein will not result in the taxpayer or any related person described herein being unable to pay its existing outstanding tax liabilities.

DEFINITIONS

In this letter, all monetary amounts are expressed in Canadian dollars unless otherwise indicated, and 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" ("ACB") has the meaning assigned by section 54;

(c) "BCA" means the Business Corporations Act, XXXXXXXXXX

(d) "BN" means the business number issued to a particular entity by CRA;

(e) "Butterfly Business Assets" has the meaning assigned by Paragraph 7;

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

(g) "capital" has the meaning assigned by XXXXXXXXXX the BCA for a class of shares, or series of a class of shares, as the case may be;

(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) "DC" refers to XXXXXXXXXX

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

(m) "Designated Proportion" means the proportion that the fair market value of the Class A Shares of DC owned by Newco, immediately before the transfers of property described in Paragraph 14, is of the fair market value of all of the issued and outstanding shares of DC immediately before the transfers of property described in Paragraph 14;

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

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

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

(q) "fair market value" ("FMV") means the highest price, expressed in terms of money or money's worth, obtainable in an open and unrestricted market between knowledgeable, informed and prudent parties acting at arm's length, neither party being under any compulsion to transact;

(r) XXXXXXXXXX

(s) "forgiven amount" has the meaning assigned by subsections 80(1) and 80.01(1);

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

(u) "Holdco" means XXXXXXXXXX

(v) "Newco" means XXXXXXXXXX

(w) "New Trust" means the Sibling1 Trust described in Paragraph 9;

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

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

(z) "personal trust" has the meaning assigned by subsection 248(1);

(aa) "Proposed Transactions" means the transactions described in Paragraphs 9 to 17;

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

(cc) "related persons" has the meaning assigned by section 251;

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

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

(ff) "Sibling1" means XXXXXXXXXX, an individual who resides at XXXXXXXXXX and files his tax return at the XXXXXXXXXX TC;

(gg) "Sibling1 Family Trust" means the XXXXXXXXXX

(hh) "Sibling1-Spouse" means XXXXXXXXXX, an individual who resides at XXXXXXXXXX and files her tax return at the XXXXXXXXXX TC;

(ii) "Sibling2" refers to XXXXXXXXXX, an individual who resides at XXXXXXXXXX and files his tax return at the XXXXXXXXXX TC;

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

(kk) "specified investment business" ("SIB") has the meaning assigned by subsections 125(7);

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

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

Our understanding of the Facts, Proposed Transactions and the purpose of the Proposed Transactions is as follows:

FACTS

1. DC was incorporated under the laws of XXXXXXXXXX and is a taxable Canadian corporation and a CCPC. DC operates an XXXXXXXXXX business in Canada consisting of XXXXXXXXXX DC has a taxation year-end of XXXXXXXXXX and currently has no RDTOH.

2. DC's authorized share capital consists of: XXXXXXXXXX non-voting, fully participating class A shares ("Class A Shares") without par value, having an aggregate capital and paid-up capital of $XXXXXXXXXX; XXXXXXXXXX voting, non participating class B shares ("Class B Shares") without par value having an aggregate capital and paid-up capital of $XXXXXXXXXX, and XXXXXXXXXX non-voting, redeemable and retractable class C shares ("Class C Shares") with a par value of $XXXXXXXXXX each and having an aggregate capital and paid-up capital of $XXXXXXXXXX. The Class C Shares have a redemption/retraction amount of $XXXXXXXXXX per share.

3. DC's issued shares are held as follows:

Shareholder Class A Shares Class B Shares Class C Shares

Sibling1 XXXXXXXXXX XXXXXXXXXX XXXXXXXXXX
Sibling1-Spouse XXXXXXXXXX
Sibling1 Family TrustXXXXXXXXXX
Sibling2 XXXXXXXXXX

Sibling1 and Sibling2 are brothers who are resident in Canada. Sibling1-Spouse is the spouse of Sibling1 and is resident in Canada. Sibling1 Family Trust is a personal trust that is resident in Canada, the beneficiaries of which are Sibling1-Spouse and the children and grandchildren of Sibling1 and Sibling1-Spouse, whenever born or adopted. Currently, Sibling1 and Sibling1-Spouse have XXXXXXXXXX adult children and one grandchild. An individual who is a Canadian resident and who is not related to Sibling1 and Sibling1-Spouse, is the sole trustee of Sibling1 Family Trust.

4. The shares of the capital stock of DC that are owned by each of Sibling1, Sibling2, Sibling1-Spouse and Sibling1 Family Trust as described in Paragraph 3 are capital property to each holder. As described in more detail in Paragraphs 5 and 6, none of the issued and outstanding shares of the capital stock of DC were acquired by any person in contemplation of the Proposed Transactions.

5. On XXXXXXXXXX, Sibling1 acquired XXXXXXXXXX Class B Shares that were owned by Sibling2 for their aggregate fair market value of $XXXXXXXXXX pursuant to an option and escrow agreement (the "Option") granted by Sibling2 to Sibling1 on XXXXXXXXXX. The acquisition of Sibling2's XXXXXXXXXX Class B Shares by Sibling1 resulted in Sibling1 acquiring de jure control of DC at that time.

Sibling2 granted the Option to Sibling1 as a result of Sibling2's decision to retire from active involvement in DC's affairs. XXXXXXXXXX

Accordingly, in order to facilitate Sibling2's desire to retire and ultimately be able to sell his XXXXXXXXXX Class B Shares to Sibling1, the Option was granted XXXXXXXXXX At the time Sibling2 granted the Option to Sibling1 in XXXXXXXXXX, no distribution of DC's assets was being contemplated by any of DC's shareholders or their advisors.

XXXXXXXXXX

Sibling1's decision to exercise the Option was independent from the decision to proceed with the distribution of DC's assets and is not connected in anyway other than a coincidental fashion. Moreover, the sale of Sibling2's Class B Shares to Sibling1 did not advance any tax avoidance objective or otherwise facilitate the proposed distribution described in Paragraph 14 because even if Sibling1 had not acquired Sibling2's Class B Shares under the Option, a similar distribution by DC that would meet the requirements of paragraph 55(3)(b) could have taken place. Accordingly, the proposed distribution by DC would have taken place, regardless of whether Sibling1 acquired Sibling2's Class B Shares of DC. You also maintain that the acquisition of Sibling2's Class B Shares would have taken place even if such a distribution could not have been carried out.

6. In connection with Sibling2's decision to retire from DC in XXXXXXXXXX, as described in Paragraph 5, DC, Sibling2 and Sibling1 also entered into an agreement on XXXXXXXXXX (the "Class C Redemption Agreement"). Under the terms of the Class C Redemption Agreement, DC agreed to redeem XXXXXXXXXX Class C Shares owned by Sibling2 each year, commencing with DC's XXXXXXXXXX taxation year, and redeem a further number of Class C Shares owned by Sibling2 each year (based on a formula relating to a specified amount of DC's excess net cash flow for such year), until all Sibling2's Class C Shares are so redeemed. As noted in Paragraph 5, in XXXXXXXXXX when Sibling2 decided to retire and the decision to enter into the Class C Redemption Agreement was made there was no distribution of DC's assets being contemplated.

Sibling2 had acquired the XXXXXXXXXX Class C Shares of DC in XXXXXXXXXX as part of an estate freeze whereby Sibling2 exchanged his participating shares of DC at that time for XXXXXXXXXX Class C Shares in order to crystallize the $XXXXXXXXXX capital gains exemption. Sibling1 also acquired XXXXXXXXXX Class C Shares of DC in XXXXXXXXXX for the same reason and manner as Sibling2. The ongoing and periodic redemption of Sibling2's Class C Shares under the Class C Redemption Agreement is being done to ensure that Sibling2 has an annual source of funds available for his retirement, while ensuring that DC has adequate funds for its business operations. DC has granted a mortgage to Sibling2 over its real property to secure its obligations under the Class C Share Redemption Agreement.

Over the past XXXXXXXXXX years, Sibling2 has transferred (electing under section 85 to defer any gain) the number of Class C Shares that are to be redeemed under the Class C Redemption Agreement to Holdco, before such Class C Shares are actually redeemed. Holdco is a TCC that is wholly-owned by Sibling2. The redemption of the Class C Shares acquired by Holdco has resulted in the application of subsection 55(2) to dividends that Holdco has been deemed to receive on the redemption. To date XXXXXXXXXX Class C Shares owned by Sibling2 have been transferred to Holdco and redeemed by DC pursuant to the Class C Redemption Agreement as follows:

		DC's Taxation Year       # of Class C Shares Redeemed
		XXXXXXXXXX 				XXXXXXXXXX
		XXXXXXXXXX 				XXXXXXXXXX
		XXXXXXXXXX 				XXXXXXXXXX
		XXXXXXXXXX 				XXXXXXXXXX
		XXXXXXXXXX 				XXXXXXXXXX
		XXXXXXXXXX 				XXXXXXXXXX
		XXXXXXXXXX 				XXXXXXXXXX
		XXXXXXXXXX 				XXXXXXXXXX
		XXXXXXXXXX 				XXXXXXXXXX
		Subtotal   				XXXXXXXXXX
		XXXXXXXXXX 				XXXXXXXXXX
		Total      				XXXXXXXXXX 

None of the above-described redemptions of Class C Shares have taken place in contemplation of, or in connection with, the Proposed Transactions. It is also anticipated that, regardless of whether or not the Proposed Transactions proceed, DC's existing obligation under the Class C Redemption Agreement to redeem the remaining Class C Shares held by Sibling2, will take place over the next few years in the same manner as described above.

7. The assets used in DC's business operations include XXXXXXXXXX as well as cash, accounts receivable, prepaid expenses, inventory and other property and equipment related to DC's business operations and XXXXXXXXXX

It is proposed that the XXXXXXXXXX (i.e. land and buildings), XXXXXXXXXX, equipment and receivables associated with DC's XXXXXXXXXX operations (the "Butterfly Business Assets") will be transferred to a new corporation as described in the Proposed Transactions. DC does not have "significant influence" over any other entity within the meaning described in section 3050 of the CICA Handbook.

8. The current estimated fair market value of all the issued and outstanding shares of DC is approximately $XXXXXXXXXX. Specifically, the fair market value of the Class A Shares is approximately $XXXXXXXXXX; the fair market value of the Class B Shares is approximately $XXXXXXXXXX; and the fair market value of the Class C Shares is approximately $XXXXXXXXXX.

PROPOSED TRANSACTIONS

9. The New Trust will be settled with XXXXXXXXXX. Sibling1 will be the sole trustee of the New Trust and the beneficiaries of the New Trust will be identical to those of Sibling1 Family Trust. The settlor of the New Trust will be an as-yet unidentified individual who will be a Canadian resident and a person, other than the trustee of the Sibling1 Family Trust, who is not a beneficiary of the New Trust. The settlor of the New Trust will not be compensated, in any manner, for his or her gift of the trust property.

10. Sibling1 will incorporate Newco under the provisions of the BCA. Newco will be a CCPC and a taxable Canadian corporation. The authorized share capital of Newco will consist of: XXXXXXXXXX fully participating class A shares ("Newco Class A Shares") having a par value of $XXXXXXXXXX per share; XXXXXXXXXX voting, non-participating class B shares ("Newco Class B Shares") with a par value of $XXXXXXXXXX per share; XXXXXXXXXX non-voting, redeemable and retractable class C preferred shares ("Newco Class C Shares") with a par value of $XXXXXXXXXX per share; XXXXXXXXXX non-voting, redeemable and retractable class D preferred shares ("Newco Class D Shares") with a par value of $XXXXXXXXXX per share; and XXXXXXXXXX non-voting, redeemable and retractable class E preferred shares ("Newco Class E Shares") with a par value of $XXXXXXXXXX per share. The Newco Class C Shares, Newco Class D Shares and Newco Class E Shares will each have a redemption/retraction amount equal to the fair market value of the consideration for which such shares were issued and such amount will be subject to a price adjustment clause.

On the incorporation of Newco, Sibling1 will subscribe for XXXXXXXXXX Newco Class B Shares for $XXXXXXXXXX each and the New Trust will subscribe for XXXXXXXXXX Newco Class A Shares for $XXXXXXXXXX each. For the purposes of the BCA, the respective additions to the capital of the XXXXXXXXXX Newco Class A Shares issued to New Trust and the XXXXXXXXXX Newco Class B Shares issued to Sibling1 will be $XXXXXXXXXX per share.

11. On a contemporaneous basis, Sibling1 will transfer his XXXXXXXXXX Class A Common Shares to Newco in exchange for XXXXXXXXXX Newco Class C Shares and Sibling1 Family Trust will transfer its XXXXXXXXXX Class A Common Shares to Newco in exchange for XXXXXXXXXX Newco Class D Shares. The Newco Class C Shares will have an aggregate redemption amount and fair market value equal to the fair market value of the XXXXXXXXXX Class A Common Shares transferred to Newco by Sibling1. Similarly, the Newco Class D Shares will have an aggregate redemption amount and fair market value equal to the fair market value of the XXXXXXXXXX Class A Common Shares transferred to Newco by Sibling1 Family Trust.

Sibling1 and Newco and Sibling1 Family Trust and Newco, as the case may be, will jointly elect, in prescribed form and within the time limits referred to in subsection 85(6), to have the rules in subsection 85(1) apply to the transfer of such particular transferor's Class A Common Shares to Newco. The amount agreed upon in each election will be equal to or greater than the lesser of the amounts described in subparagraphs 85(1)(c.1)(i) and (ii) and will be less than the fair market value of such transferred shares.

For the purposes of the Act: the increase to the PUC of the XXXXXXXXXX Newco Class C Shares issued as consideration for the XXXXXXXXXX Class A Shares transferred to Newco by Sibling1 will not exceed the amount of PUC attributable to the Class A Shares for which the XXXXXXXXXX Newco Class C Shares were issued; and the increase to the PUC of the XXXXXXXXXX Newco Class D Shares issued as consideration for the XXXXXXXXXX Class A Shares transferred to Newco by Sibling1 Family Trust will not exceed the amount of PUC attributable to the Class A Shares for which the XXXXXXXXXX Newco Class D Shares were issued.

12. Immediately before the transfer of property described in Paragraph 14, the property owned by DC will be classified into the following three types of property for the purposes of the definition of "distribution" in subsection 55(1), as follows:

(a) cash or near-cash property, comprising all of the current assets of DC, including cash, accounts receivable, trade receivables, inventory and prepaid expenses;

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

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

For greater certainty, for purposes of this distribution:

(d) any tax accounts such as the balance of any non-capital losses of DC or the balance of any RDTOH or CDA of DC, if any, will not be considered property;

(e) no amount will be considered to be a liability unless it represents a true legal liability which is capable of quantification; and

(f) the amount of any deferred income tax will not be considered a liability for the purposes of the proposed transactions described herein because such amount does not represent a legal obligation of DC.

Since DC has no property, the income from which would be considered income from property, nor does DC carry on any specified investment business, DC is not expected to have any investment property for the purposes of this distribution.

13. In determining the net FMV of each of the three types of property of DC immediately before the transfers of property described in Paragraph 14, the liabilities of DC will be allocated to, and will be deducted in the calculation of the net FMV of each type of property of DC in the following manner:

(a) current liabilities of DC (including the current portion of any long-term debt and the full amount of any loan owing by DC to its shareholders) will be allocated to each cash or near-cash property in the proportion that the FMV of each such property is of the FMV of all cash or near-cash property owned by DC. The amount of current liabilities so allocated will not exceed the aggregate FMV of all cash or near-cash property of DC. To the extent that the total amount of current liabilities to be allocated to DC's cash or near cash property does exceed the total FMV of all DC's cash or near cash property, DC will be considered to have a negative amount of cash or near cash property;

(b) following the allocation of current liabilities to cash or near-cash property of DC as described in (a), provided that the net FMV of the cash or near cash property of DC is positive, any remaining net FMV of any accounts receivable, trade receivables, inventories and prepaid expenses of DC will be reclassified as business property of DC and excluded from the net FMV of DC's cash or near-cash property, to the extent that such property will be collected, sold, used or consumed in the ordinary course of business to be carried on by DC or by Newco;

(c) liabilities, other than current liabilities, of DC that relate to a particular property will be allocated to that particular property (and effectively to the type of property to which the particular property belongs) to the extent of its FMV. Any excess of such liabilities over the FMV of a particular property and liabilities that pertain to a particular type of property, but not to a particular property, will then be allocated to that particular type of property, but not in excess of the net FMV of such type of property. To the extent that the total amount of liabilities are to be allocated to a particular type of property as described herein actually exceeds the total FMV of that type of property, DC will be considered to have a negative amount of that type of property; and

(d) if any liabilities remain after the allocations described in (a) and (c) 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 DC, based on the relative net FMV of each type of property prior to the allocation of such excess unallocated liabilities. However, where DC is considered to have a negative amount of a type of property because of (a) or (c), for the purposes of allocating those remaining liabilities, the net FMV of that type of property will be deemed to be nil resulting in none of those remaining liabilities being allocated to that type of property.

Based on the types of property classifications described in Paragraph 12, and after the allocation of liabilities described in this Paragraph, it is anticipated that DC will only have business property at the time of the transfers of property described in Paragraph 14.

14. DC will transfer some of its cash and any accounts receivable, trade receivables, inventories and prepaid expenses related to DC XXXXXXXXXX business and the Butterfly Business Assets to Newco (collectively, all such property transferred to Newco are referred to as the "Transferred Assets").

As consideration for the Transferred Assets, Newco will:

(a) assume an amount of DC's current liabilities ("Assumed Liabilities") equal to the fair market value of such accounts receivable, trade receivables, inventories and prepaid expenses so transferred to Newco;

(b) assume an amount of DC's other liabilities ("Assumed Debt") as partial consideration for the Butterfly Business Assets; and

(c) issue XXXXXXXXXX Newco Class E Shares to DC having an aggregate redemption amount and aggregate fair market value equal to the amount by which the aggregate fair market value of all the Butterfly Business Assets (on a gross basis) exceeds the amount of the Assumed Debt,

such that, immediately following all such property transfers and liability assumptions, the net fair market value of each type of DC's property so transferred to Newco will, for greater certainty, 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 Newco, 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 that proportion" means that the discrepancy from that proportion, if any, would not exceed 1%, determined as a percentage of the net fair market value of each type of property which Newco has received (or DC has retained) as compared to what Newco would have received (or DC would have retained) had it received (or retained) its appropriate pro-rata share of the net fair market value of that type of property.

15. Newco will jointly elect with DC, in prescribed form and within the time limits referred to in subsection 85(6), to have the rules in subsection 85(1) apply to each transfer of eligible property that is included in the Transferred Assets and in respect of which Class E Shares of Newco have been issued as full or partial consideration therefore as described in Paragraph 14. The amount agreed upon in each election will be as follows:

(a) in the case of capital property (other than depreciable property of a prescribed class) and inventory, an amount equal to the lesser of the amounts described in subparagraphs 85(1)(c.1)(i) and (ii);

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

(c) in the case of eligible capital property, an amount equal to the least of the amounts described in subparagraphs 85(1)(d)(i), (ii) and (iii).

In addition, in each case, the amount agreed upon in each election will not exceed the fair market value of the respective property, nor will it be less than the amount permitted under paragraph 85(1)(b). The amount of any liabilities assumed by Newco and to be allocated to a particular property that is the subject of an election under subsection 85(1) as described herein will not exceed the agreed amount elected for that particular property. The amount of any liabilities assumed by Newco and to be allocated to a particular property that is not the subject on an election under subsection 85(1) as described herein will not exceed the fair market value of such particular property.

For the purposes of the joint elections described in this Paragraph, the reference in subparagraph 85(1)(e)(i) to the "undepreciated capital cost to the taxpayer of all property of that class immediately before the disposition" shall be interpreted to mean that proportion of the undepreciated capital cost to DC of all of the property of that class immediately before the disposition that the fair market value at that time of the asset that is transferred is of the fair market value at that time of all property of that class.

For the purposes of the Act, the increase in the PUC of the Newco Class E Shares to be issued to DC as consideration for the Transferred Assets for which an election under section 85(1) is made, will be an amount equal to the aggregate of the agreed amounts, less the amount of any liabilities assumed by Newco in respect of such transfer, and in any other case, the fair market value of such property so transferred less amount of any liabilities assumed by Newco in respect of such transfer.

16. Immediately following the transfers of the Transferred Assets described in Paragraph 14, on a contemporaneous basis:

(a) DC will purchase for cancellation its Class A Shares owned by Newco for their fair market value. In satisfaction of the purchase price for such shares DC will issue to Newco a promissory note, payable to Newco on demand without interest or fixed terms of repayment, having a principal amount and fair market value equal to the aggregate fair market value of the Class A Shares so purchased for cancellation (the "DC Purchase Note"). Newco will accept the DC Purchase Note in full payment of the purchase price of the Class A Shares.

(b) Newco will redeem all its Class E Shares owned by DC at their aggregate redemption amount. In satisfaction of the redemption price for such shares Newco will issue a promissory note, payable to DC on demand without interest or fixed terms of repayment, having a principal amount and fair market value equal to the aggregate redemption amount of the Class E Shares so redeemed (the "Newco Redemption Note"). DC will accept the Newco Redemption Note in full payment of the redemption price of the Class E Shares.

17. Immediately following the transactions described in Paragraph 16, the principal amount owing by DC to Newco under the DC Purchase Note and the principal amount owing by Newco to DC under the Newco Redemption Note will be set off in full against each other and each such note will be marked paid in full and cancelled.

ADDITIONAL INFORMATION

18. The Proposed Transactions will occur in the order presented unless otherwise indicated, with the exception of filing the applicable election forms described in Paragraphs 11 and 15, which will be filed before the applicable due date following completion of the Proposed Transactions.

19. As described in Paragraph 6, DC will continue to redeem its Class C Shares held by Sibling2 and/or Holdco in accordance with its subsisting legal obligations under the Class C Redemption Agreement.

20. No property has, or will, become property of DC in contemplation of and before the distribution described in Paragraph 14, except as otherwise described herein, or in the ordinary course of business, and no liabilities have been, or will be, incurred or discharged by DC in contemplation of and before the distribution described in Paragraph 14, except as otherwise described herein, or in the ordinary course of business.

21. Except as described in the Proposed Transactions, no shareholder of DC or Newco is contemplating any sale or transfer of any shares of DC or Newco.

22. Neither Newco nor DC is, or will be, a specified financial institution and neither Newco nor DC is, or will be, a corporation described in any of paragraphs (a) to (f) of the definition of "financial intermediary corporation" in subsection 191(1) at any time prior to the completion of the Proposed Transactions.

23. None of the shares of DC or Newco will be at any time during the implementation of the Proposed Transactions:

(a) the subject of 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.

PURPOSES OF THE PROPOSED TRANSACTIONS

24. The proposal to transfer the XXXXXXXXXX and other related assets to Newco is rooted in Sibling1's concerns about the XXXXXXXXXX and Sibling1's feelings about the likely ambitions of Sibling1's two adult children. The continued successful operation of the XXXXXXXXXX requires constant effort and although Sibling1 has no intention of retiring in the foreseeable future, Sibling1 can see that, some day, the XXXXXXXXXX may require the involvement of additional outside management and that there may be a need to give such management minority equity positions as part of their compensation package. Finally, Sibling1 has reached the conclusion that it is possible that neither of Sibling1's two children will want to actively participate in DC's business. In his mind, these observations and feelings make the creation of a separate, stand-alone company to hold the XXXXXXXXXX a desirable goal.

25. The purpose for creating the New Trust as described in Paragraph 9 is that the existing Sibling1 Family Trust was settled in XXXXXXXXXX and under the "21-year rule", Sibling1 Family Trust will have deemed disposition of its property in XXXXXXXXXX. The New Trust, in contrast, will not have a deemed disposition of its property under the "21-year rule" until XXXXXXXXXX.

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), provided the appropriate joint elections are filed in the prescribed form and manner within the time limits specified in subsection 85(6) and provided that the particular property so transferred is an eligible property in respect of which Class E Shares of Newco have been issued as full or partial consideration therefore, the provisions of subsection 85(1) will apply to:

(a) the transfer of the XXXXXXXXXX Class A shares of DC owned by Sibling1 to Newco as described in Paragraph 11;

(b) the transfer of the XXXXXXXXXX Class A Shares of DC owned by the Sibling1 Family Trust to Newco as described in Paragraph 11; and

(c) the transfers of the Transferred Assets to Newco as described in Paragraph 14;

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 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. Subsection 84(3) will apply:

(a) on the purchase for cancellation of the Class A Shares owned by Newco as described in Paragraph 16(a), to deem DC to have paid and Newco to have received; and

(b) on the redemption by Newco of its Class E Shares owned by DC as described in Paragraph 16(b), to deem Newco to have paid and DC to have received;

a dividend on such class of shares equal to the amount, if any, by which the amount paid upon each such redemption or purchase for cancellation, as the case may be, exceeds the PUC in respect of such shares immediately before such redemption or purchase for cancellation, as the case may be, and any such dividend, to the extent that it is a taxable dividend:

(c) will be included, pursuant to subsection 82(1) and paragraph 12(1)(j), in computing the income of the corporation deemed to have received such dividend;

(d) will be deductible pursuant to subsection 112(1) by the corporation deemed to have received such dividend;

(e) will not be a dividend to which any of the provisions of subsections 112(2.1), (2.2), (2.3) or (2.4) apply;

(f) will be excluded, pursuant to paragraph (j) of the definition of "proceeds of disposition" in section 54, in determining the proceeds of disposition to the recipient corporation of the shares so redeemed;

(g) by virtue of subsection 112(3), will reduce the loss, if any, in respect of the disposition of the shares on which the particular dividend is deemed to be received; and

(h) will not be subject to tax under Part IV.1 and Part VI.1.

C. Provided the particular corporation that is deemed to have paid a dividend in Ruling B is not entitled to a dividend refund in respect of its taxation year in which it is deemed to pay that dividend, the corporation that is deemed to have received such dividend will not be subject to Part IV tax under subsection 186(1).

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

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

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

(c) an acquisition of shares of DC in the circumstances described in subparagraph 55(3.1)(b)(iii); or

(d) an acquisition of property in the circumstances described in subparagraph 55(3.1)(c) or 55(3.1)(d);

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

E. The set off and cancellation of the Redemption Note and the Repurchase Note as described in Paragraph 17 will not, in and of itself, result in a forgiven amount, nor will such set off and cancellation result in DC or Newco realizing any gain or loss.

F. With the exception of the transactions described in Paragraphs 9 and 10 relating solely to the New Trust, the provisions of subsections 15(1), 56(2) and 246(1) will not apply to the Proposed Transactions described herein, in and by themselves.

G. Subsection 245(2) will not apply to the Proposed Transactions, in and by themselves, to redetermine the 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

This letter should not be in anyway construed as providing any comfort or assurance that subsection 245(2) would not apply to the creation of the New Trust described in Paragraph 9 and the issuance of shares of XXXXXXXXXX Newco Class A Shares to the New Trust as described in Paragraph 10.

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 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