2005 Ruling 2005-0144831R3 - Split-up 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: Whether the proposed butterfly meets the requirements of paragraph 55(3)(b)?

Position: Yes.

Reasons: It meets the requirements of the law.

XXXXXXXXXX 								2005-014483

XXXXXXXXXX, 2005

Dear XXXXXXXXXX:

Re:

(a) XXXXXXXXXX having social insurance number XXXXXXXXXX who files his income tax returns through the XXXXXXXXXX Taxation Centre and his address being XXXXXXXXXX;

(b) XXXXXXXXXX. having Tax Account No. XXXXXXXXXX which files its tax returns through the XXXXXXXXXX Taxation Centre and its address being XXXXXXXXXX

(c) XXXXXXXXXX, having Tax Account No. XXXXXXXXXX which files its tax returns through the XXXXXXXXXX Taxation Centre and its address being XXXXXXXXXX

(d) XXXXXXXXXX, having Tax Account No. XXXXXXXXXX which files its tax returns through the XXXXXXXXXX Taxation Centre and its address being XXXXXXXXXX

(e) XXXXXXXXXX, having Tax Account No. XXXXXXXXXX which files its tax returns through the XXXXXXXXXX Taxation Centre and its address being XXXXXXXXXX

This is in reply to your letter of XXXXXXXXXX which was amended and restated by your letters of XXXXXXXXXX, wherein you requested an advance income tax ruling on behalf of the above-noted taxpayers.

To the best of the knowledge of the taxpayers, none of the issues described herein is:

(a) in an earlier return;

(b) being considered by a tax services office or taxation centre in connection with any tax return previously filed;

(c) the subject of any notice of objection or is under appeal; or

(d) the subject of a previously issued ruling.

Dollar amounts referred to herein are Canadian dollars except as otherwise provided.

DEFINITIONS

In this letter, the following terms have the meanings specified:

(a) "ACB" means "adjusted cost base" as that expression is defined in section 54 of the Act;

(b) "Act" means the Income Tax Act, R.S.C. 1985, c.1 (5th Supp.), as amended, and all references to a statute are to the Act, unless otherwise indicated;

(c) "agreed amount" in respect of a property means the amount that the transferor and the transferee of the property have agreed upon in their election under subsection 85(1) of the Act in respect of the property;

(d) "CCPC" means "Canadian-controlled private corporation" as defined by subsection 125(7) of the Act;

(e) "CDA" means "capital dividend account" as defined by subsection 89(1) of the Act;

(f) "capital property" has the meaning assigned by section 54 of the Act;

(g) "cost amount" has the meaning assigned by subsection 248(1) of the Act;

(h) "DC" means XXXXXXXXXX., a corporation which is described in paragraph 5 of the Facts;

(i) "depreciable property" has the meaning assigned by subsection 13(21) of the Act;

(j) "dividend refund" has the meaning assigned by paragraph 129(1)(a) of the Act;

(k) "dividend rental arrangement" has the meaning assigned by subsection 248(1) of the Act;

(l) "Effective Date" means a day prior to XXXXXXXXXX, as agreed upon by the parties;

(m) "eligible property" has the meaning assigned by subsection 85(1.1) of the Act;

(n) "FMV" means fair market value;

(o) "guarantee agreement" has the meaning assigned by subsection 112(2.2) of the Act;

(p) "Holdco" refers to either Holdco 1, Holdco 2 or Holdco 3, and "Holdcos" refers to Holdco 1, Holdco 2 and Holdco 3, collectively;

(q) "Holdco 1", "Holdco 2" and "Holdco 3" means the corporations to be incorporated by XXXXXXXXXX, as described in paragraph 9 of the Proposed Transactions;

(r) "Holdco Note" refers to either Holdco 1 Note, Holdco 2 Note or Holdco 3 Note, and "Holdco Notes" refers to Holdco 1 Note, Holdco 2 Note and Holdco 3 Note, collectively;

(r.1) "Holdco 1 Note" has the meaning ascribed to it in paragraph 22 of the Proposed Transactions;

(s) "Holdco 2 Note" has the meaning ascribed to it in paragraph 22 of the Proposed Transactions;

(t) "Holdco 3 Note" has the meaning ascribed to it in paragraph 22 of the Proposed Transactions;

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

(v) "PUC" means "paid-up capital" as that expression is defined in subsection 89(1) of the Act;

(w) "RDTOH" means "refundable dividend tax on hand" as that expression is defined in subsection 129(3) of the Act;

(x) "related persons" has the meaning assigned by section 251 of the Act;

(y) "significant influence" has the meaning assigned by Section 3050 of the CICA Handbook;

(z) "specified financial institution" has the meaning assigned by subsection 248(1) of the Act;

(aa) "stated capital" has the meaning assigned by the Canada Business Corporations Act;

(bb) "Trust" refers to either Trust #1, Trust #2 or Trust #3;

(cc) "Trust #1" has the meaning ascribed to it in paragraph 2 of the Facts;

(dd) "Trust #2" has the meaning ascribed to it in paragraph 3 of the Facts;

(ee) "Trust #3" has the meaning ascribed to it in paragraph 4 of the Facts;

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

(gg) "taxable dividend" has the meaning assigned by subsection 89(1) of the Act.

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

FACTS

1. XXXXXXXXXX ("Father") is the father of XXXXXXXXXX ("Sib1"), XXXXXXXXXX ("Sib 3") and XXXXXXXXXX ("Sib 2"). Father is XXXXXXXXXX years of age. All of these individuals are residents of Canada.

2. The XXXXXXXXXX ("Trust #1") was created by trust agreement dated XXXXXXXXXX, between Father as settlor, and Father, Sib 1 and XXXXXXXXXX, as trustees. The present beneficiaries of Trust #1 are Sib 1, his spouse, and the issue of Sib 1.

3. The XXXXXXXXXX ("Trust #2") was created by agreement dated XXXXXXXXXX, between Father as settlor, and Father, Sib 2 and XXXXXXXXXX, as trustees. The present beneficiaries of Trust #2 are Sib 2, her spouse, and the issue of Sib 2.

4. The XXXXXXXXXX ("Trust #3") was created by agreement dated XXXXXXXXXX, between Father as settlor, and Father, Sib 3 and XXXXXXXXXX, as trustees. The present beneficiaries of Trust #3 are Sib 3, his spouse, and the issue of Sib 3.

5. DC is a CCPC incorporated under the Canada Business Corporations Act (the "CBCA"), with a fiscal year-end of XXXXXXXXXX.

6. Father has controlled DC since the time of the incorporation in XXXXXXXXXX

The issued shares of DC are held as follows:

Father:

XXXXXXXXXX Class A Shares. The Class A Shares are redeemable and retractable for $XXXXXXXXXX per share. The Class A Shares are non-voting and are entitled to non-cumulative dividends. On the wind-up of DC, a holder of Class A Shares is entitled to receive $XXXXXXXXXX per share in priority to the entitlement of the Class B Shares and Class C Shares.

XXXXXXXXXX Class B Shares. The Class B Shares are redeemable for $XXXXXXXXXX per share. The Class B Shares are voting and are not entitled to dividends. On the wind-up of DC, the Class B Shares are entitled to receive $XXXXXXXXXX per share in priority to the entitlement of the Class C Shares.

Each of Trust #1, Trust #2 and Trust #3:

XXXXXXXXXX Class C Shares. These are common shares. The Class C Shares are non-voting. The Class C Shares are entitled to non-cumulative dividends provided that no dividends may be declared on the Class C Shares if doing so would result in DC having insufficient assets to redeem the Class A Shares and Class B Shares. On the wind-up of DC, the Class C Shares are entitled to receive the residual assets of DC after the Class A Shares and Class B Shares have received their redemption amounts.

These shares have been held by the respective shareholders since XXXXXXXXXX, and are capital property to each of the shareholders.

7. DC's assets are comprised of publicly traded stocks, bonds and other debt obligations, treasury bills, cash, some shares in private corporations, and some office equipment. DC's liabilities consist of a small amount of payables. As at XXXXXXXXXX, the balance in DC's ROTOH account was $XXXXXXXXXX, and the balance in DC's CDA was $XXXXXXXXXX. DC will earn investment income and may realize capital gains subsequent to this date and prior to the date of dissolution that will result in changes to the RDTOH and CDA not determinable at this time.

8. As described in paragraph 7 of the Facts, DC owns a diverse portfolio of investments. From time to time, DC buys and sells investments. On completion of the Proposed Transactions described below, the Holdcos will own the investments previously owned by DC. The Holdcos will hold and dispose of the investments received from DC in the normal course of their investment activities.

PROPOSED TRANSACTIONS

9. Father will incorporate Holdco 1, Holdco 2 and Holdco 3 pursuant to the CBCA. These incorporations will occur on XXXXXXXXXX. The Holdcos will be taxable Canadian corporations.

Each Holdco will have the following authorized capital:

(a) Class A Shares which will have identical attributes to those of the Class A Shares in DC (as described in paragraph 6);

(b) Class B Shares which will have identical attributes to those of the Class B Shares in DC (as described in paragraph 6);

(c) Non-Voting Preference Shares that are not entitled to dividends. The Non-Voting Preference Shares will be retractable and redeemable for an aggregate redemption amount fixed at the first issuance of the Non-Voting Preference Shares. Such redemption amount will be equal to the fair market value of the property received by the company in return for their issuance less any debt issued by the company or liabilities assumed by the company on their issuance. The Non-Voting Preference Shares will be entitled to receive, on wind-up, their redemption amount in priority to the liquidation entitlement of the Class B and Class C Shares. On wind-up, the Non-Voting Preference Shares will rank equally with the Class A Shares to receive their respective redemption amounts. The Non-Voting Preference Shares will be non-voting;

(d) Class C Shares which will be common shares and will have identical attributes to those of the Class C Shares in DC (as described in paragraph 6).

10 Three days before the Effective Date, DC will pay a dividend on its Class A Shares in an amount equal to the amount in its capital dividend account. DC will elect pursuant to subsection 83(2) of the Act, in prescribed manner and in prescribed form, to treat the dividend as a capital dividend.

11 Two days before the Effective date, Father will transfer XXXXXXXXXX of his Class B Shares of DC to each of Holdco 1, Holdco 2, and Holdco 3, in exchange for an equal number of Class B Shares of the respective Holdco.

12. On the day before the Effective Date, Father will transfer one-third of his Class A Shares of DC to each of Holdco 1, Holdco 2, and Holdco 3, in exchange for an equal number of Class A Shares of the respective Holdco.

13. In regard to each of the transfers described in paragraphs 11 and 12, Father and each Holdco will file a joint election, in prescribed form, and within the time limits referred to in subsection 85(6) to have the rules in subsection 85(1) of the Act apply in respect of the transfers. The agreed amount in respect of the shares transferred will be equal to the lesser of the amounts described in subparagraph 85(1)(c.1)(i) and (ii). The aggregate addition to the stated capital of the Class A Shares and the Class B Shares of each Holdco will be equal to the aggregate PUC of the shares transferred.

14. On the day before the Effective Date, Trust #1 will transfer its XXXXXXXXXX Class C Shares of DC to Holdco 1 in exchange for XXXXXXXXXX Class C Shares of Holdco 1.

15. On the day before the Effective Date, Trust #2 will transfer its XXXXXXXXXX Class C Shares of DC to Holdco 2 in exchange for XXXXXXXXXX Class C Shares of Holdco 2.

16. On the day before the Effective Date, Trust #3 will transfer its XXXXXXXXXX Class C Shares of DC to Holdco 3 in exchange for XXXXXXXXXX Class C Shares of Holdco 3.

17. In regard to each of the transfers described in paragraphs 14, 15 and 16, each Trust and its respective Holdco will file a joint election in the prescribed form, and within the time limits referred to in subsection 85(6) to have the rules in subsection 85(1) of the Act apply in respect of the transfers. The agreed amount in each election will be equal to the lesser of the amounts described in subparagraphs 85(1)(c.1) and (ii). The aggregate addition to the stated capital of the Class C Shares of the Holdcos will be equal to the aggregate PUC of the shares transferred.

18. Immediately before the transfers of property described in paragraph 19 below, the property owned by DC will be determined on a consolidated basis, including the appropriate pro-rata share of the assets of any corporation over which DC has the ability to exercise significant influence, which assets will be classified into three types:

(a) cash or near-cash property, comprising all of the current assets of DC, including any cash, deposits, and accounts receivable;

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

Any tax accounts such as RDTOH and capital dividend account will not be considered property for this purpose.

For greater certainty, the fair market value of the shares of a particular corporation over which DC has the ability to exercise significant influence, and of any indebtedness receivable by DC from such a corporation, will be allocated among the three types of property of DC by multiplying the fair market value of the shares and indebtedness of the particular corporation by the proportion that the fair market value of each type of property owned by the particular corporation (as determined in this paragraph) is of the total fair market value of all the property owned by the particular corporation.

19. On the Effective Date, DC will transfer to each Holdco one-third of each type of property as described in paragraph 18 on a gross market value basis.

As consideration for the property so transferred, each Holdco will assume one-third of the liabilities of DC and each Holdco will issue one Non-Voting Preference Share to DC having a FMV and a redemption amount equal to the amount by which the FMV of the assets of DC transferred to the Holdco exceeds the amount of the liabilities respectively assumed by the Holdco.

Each Holdco will add to the stated capital account maintained for its Non-Voting Preference Shares an amount equal to the amount by which the aggregate costs of the properties acquired by the Holdco (determined pursuant to subsection 85(1) of the Act if relevant) exceeds the amount of the liabilities assumed by the Holdco.

20. Immediately following the transfers set out in paragraph 19 of the Proposed Transactions, the FMV of each type of property received by each of Holdco1, Holdco2 and Holdco3, 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 a Holdco, and

C is the FMV, immediately before the transfer, all of the issued shares of the capital stock of DC

For the purposes 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 fair market value of the property that each of Holdco 1, Holdco 2 or Holdco 3, as the case may be, has received compared to what it would have received had it received its appropriate pro-rata share of DC's property.

21. DC and each Holdco will elect, jointly and in prescribed form and within the time limits referred to in subsection 85(6) of the Act to have the rules in subsection 85(1) of the Act apply to each eligible property transferred by DC to a Holdco as described in paragraph 19 that has a FMV in excess of its cost amount. The agreed amount for the purposes of each such election will not be less than:

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

(b) in the case of a 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) of the Act.

For the purposes of the joint election described herein, 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) of the Act will 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.

The agreed amount for any particular property included in the subsection 85(1) elections referred to in this paragraph will not be less than the amount of any liabilities treated as being assumed by a Holdco as consideration for the transfer of the particular property and will not exceed the FMV of the particular property.

The amount of liabilities to be allocated to any property that is not the subject of an election under subsection 85(1) will not exceed the fair market value of such property.

22. On the Effective Date, after the transfer of the property described in paragraph 19, each Holdco will redeem the one Non-Voting Preference Share in its capital stock owned by DC for an amount equal to its redemption amount, being its FMV (the "Redemption Price"). As payment of the Redemption Price, each Holdco will issue a non-interest-bearing promissory note payable on demand having a principal amount to be equal to the Redemption Price. DC will accept the promissory note issued by Holdco 1 (the "Holdco 1 Note") as full payment for the Redemption Price of the Non-Voting Preference Share of Holdco 1. DC will accept the promissory note issued by Holdco 2 (the "Holdco 2 Note") as full payment for the Redemption Price of the Non-Voting Preference Share of Holdco 2. DC will accept the promissory note issued by Holdco 3 (the "Holdco 3 Note") as full payment for the Redemption Price of the Non-Voting Preference Share of Holdco 3.

23. At the end of the Effective Date, each of Holdco 1, Holdco 2 and Holdco 3 will cause its first taxation year to end.

24. On the day after the Effective Date, DC will redeem all its Class A Shares owned by Holdco 1 for a price equal to the aggregate of their redemption amounts, DC will redeem all its Class B Shares owned by Holdco 1 for a price equal to the aggregate of their redemption amounts, and DC will purchase back for cancellation the Class C Shares for a price stated to be equal to the FMV of the Class C Shares. The total of the price for the redemption of the Class A Shares, the price for the redemption of the Class B Shares and the price for the repurchase of the Class C Shares (the "R amount") will be paid by in full by DC issuing a non-interest-bearing demand promissory note with a principal amount equal to the R amount of the Class A Shares, the Class B Shares and the Class C Shares of Holdco 1 (the "DC Note 1").

25. On the day after the Effective Date, DC will redeem all its Class A Shares owned by Holdco 2 for a price equal to the aggregate of their redemption amounts, DC will redeem all its Class B Shares owned by Holdco 2 for a price equal to the aggregate of their redemption amounts, and DC will purchase back for cancellation the Class C Shares for a price stated to be equal to the FMV of the Class C Shares. The total of the price for the redemption of the Class A Shares, the price for the redemption of the Class B Shares and the price for the repurchase of the Class C Shares (the "R amount") will be paid by in full by DC issuing a non-interest-bearing demand promissory note with a principal amount equal to the R amount of the Class A Shares, the Class B Shares and the Class C Shares of Holdco 2 (the "DC Note 2").

26. On the day after the Effective Date, DC will redeem all its Class A Shares owned by Holdco 3 for a price equal to the aggregate of their redemption amounts, DC will redeem all its Class B Shares owned by Holdco 3 for a price equal to the aggregate of their redemption amounts, and DC will purchase back for cancellation the Class C Shares for a price stated to be equal to the FMV of the Class C Shares. The total of the price for the redemption of the Class A Shares, the price for the redemption of the Class B Shares and the price for the repurchase of the Class C Shares (the "R amount") will be paid by in full by DC issuing a non-interest-bearing demand promissory note with a principal amount equal to the R amount of the Class A Shares, the Class B Shares and the Class C Shares of Holdco 3 (the "DC Note 3")

27. Pursuant to agreements entered into between DC and each of Holdco 1, Holdco 2 and Holdco 3: the principal amount owing by DC to Holdco 1 under the DC Note 1 and the principal amount owing by Holdco 1 to DC under the Holdco 1 Note will be set-off in full against each other and each such note will be marked paid in full and cancelled; the principal amount owing by DC to Holdco 2 under the DC Note 2 and the principal amount owing by Holdco 2 to DC under the Holdco 2 Note will be set-off in full against each other and each such note will be marked paid in full and cancelled; the principal amount owing by DC to Holdco 3 under the DC Note 3 and the principal amount owing by Holdco 3 to DC under the Holdco 3 Note will be set-off in full against each other and each such note will be marked paid in full and cancelled.

28. Following receipt of the dividend refund to which DC will become entitled as a result of the proposed transactions described herein, DC will distribute one-third of such amount to each Holdco.

29. Following the completion of the preceding transactions, Father will continue to own the remaining XXXXXXXXXX Class B Shares in the capital stock of DC.

30. On the day after the Effective Date, prior to the close of business, the Holdcos will enter into an agreement to equally share the overhead costs of the office premises formerly used by DC and to share the costs pertaining to the Class 8, Class 10 and Class 45 assets at the office premises (which assets the Holdcos will now also own in equal undivided interests).

ADDITIONAL INFORMATION

31. No property has or will become property of DC or any corporation controlled by DC or by a predecessor corporation of any such corporation, and no liabilities have been or will be incurred by DC or any corporation controlled by DC or a predecessor corporation of any such corporation, in contemplation of and before the proposed transfer of property described in paragraph 19 of the Proposed Transactions, otherwise than as described herein.

32. None of the shares of DC or of any of the issued shares of the Holdcos is or will be subject to a guarantee agreement or a dividend rental arrangement and none of such shares has been or will be issued or acquired as part of the transaction or event or series of transactions or events of the type described in subsection 112(2.5) of the Act.

33. None of DC or any of the Holdcos will be, at any time before the completion of the Proposed Transactions, a specified financial institution.

PURPOSE OF THE PROPOSED TRANSACTIONS

The general objectives of the proposed transactions are:

34. Father manages the investment portfolio of DC. His children are not involved. Father intends to retain control of each Holdco and manage each Holdco's investment portfolio while he is living.

35. Father in his last will and testament intends to bequeath his Class A Shares in Holdco 1 to Sib 1 (or to a trust for his benefit and his children), and his Class B Shares to Sib 1; his Class A Shares in Holdco 2 to Sib 2 (or to a trust for her benefit and her children), and his Class B Shares to Sib 2; and his Class A Shares in Holdco 3 to Sib 3 (or to a trust for his benefit or his children), and his Class B Shares to Sib 3.

36. The Proposed Transactions will ultimately enable each child of Father to have direct and separate control of his or her respective pro-rata share of the property of DC so that each may deal with such property independently from the others during their lives if they so decide; and in particular so that each child may determine the independent investment policy of their Holdco.

RULINGS

Provided that the preceding statements constitute a complete and accurate disclosure of all the relevant facts, the proposed transactions, the purposes of the proposed transactions and the additional information, we rule as follows:

A. There will be no acquisition of control of DC for the purposes of section 111 of the Act by virtue of the transactions described in paragraph 11 of the Proposed Transactions.

B. Subsection 85(1) of the Act will apply to the transfer of the Class B and Class A Shares of DC by Father to each Holdco as described in paragraphs 11 and 12 of the Proposed Transactions in respect of which an election under subsection 85(1) is made. The agreed amount in respect of each transfer of such shares will be deemed to be Father's proceeds of disposition and the Holdco's cost thereof pursuant to paragraph 85(1)(a). For greater certainty, paragraph 85(1)(e.2) will not apply to the transfers.

C. Subsection 85(1) of the Act will apply to the transfer of the Class C Shares of DC by each Trust to each Holdco as described in paragraphs 14, 15 and 16 of the Proposed Transactions in respect of which an election under subsection 85(1) is made. The agreed amount in respect of each transfer of such shares will 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.

D. Subsection 85(1) of the Act will apply to the transfer of each eligible property by DC to a Holdco as described in paragraph 19 of the Proposed Transactions, in respect of which an election under subsection 85(1) is made, such that the agreed amount in respect of each transfer of each eligible property will be deemed to be the proceeds of disposition to DC and the cost to each Holdco pursuant to paragraph 85(1)(a). For greater certainty, paragraph 85(1)(e.2) will not apply to the transfers.

E. On the redemption by a Holdco of the one Non-Voting Preference Share in its capital stock held by DC as described in paragraph 22 of the Proposed Transactions and as a result of the redemptions and repurchase by DC of the Class A Shares, the Class B Shares and the Class C Shares in its capital stock held by the Holdcos as described in paragraphs 24, 25 and 26 of the Proposed Transactions:

(a) by virtue of paragraphs 84(3)(a) and 84(3)(b) of the Act, each Holdco will be deemed to have paid, and DC will be deemed to have received a dividend at that time equal to the amount, if any, by which the amount paid to redeem the Non-Voting Preference Share exceeds the PUC of the share immediately before the redemption;

(b) by virtue of paragraphs 84(3)(a) and 84(3)(b) of the Act, DC will be deemed to have paid and each Holdco will be deemed to have received a dividend on the Class A Shares, the Class B Shares and the Class C Shares of DC held by the Holdco, equal to the amount by which the amount paid on the repurchase of the Class C Shares or on the redemption of the Class A Shares and the Class B Shares exceeds the PUC thereof;

(c) to the extent that the deemed dividends described in (a) and (b) above, are taxable dividends, such dividends will, pursuant to subsection 112(1) of the Act, be deductible in computing the taxable income of the recipient for the year in which the dividends are deemed to have been received and such deduction will not be denied by any of the provisions of subsections 112(2.1), (2.2), (2.3) or (2.4) of the Act;

(d) the amount of the deemed dividends described in (a) and (b) above will, by virtue of paragraph (j) of the definition "proceeds of disposition" in section 54 of the Act, be excluded from the Holdcos' proceeds of disposition of the Class A Shares, Class B Shares and Class C Shares of DC and from DC's proceeds of disposition of the Non-Voting Preference Shares of the Holdcos;

(e) by virtue of subsection 186(2) and paragraph 186(4)(a) of the Act, DC will be connected with each Holdco and each Holdco will be connected with DC;

Consequently,

(i) provided that each of Holdco 1, Holdco 2 and Holdco 3 is not entitled to a dividend refund (within the meaning of subsection 129(1) of the Act) in respect of its taxation year in which it is deemed to pay the dividend referred to in (a) above, DC will not be subject to Part IV tax in respect of such dividend, and

(ii) Holdco 1, Holdco 2 and Holdco 3 will, pursuant to paragraph 186(1)(b) of the Act, be subject to Part IV tax in an amount equal to that proportion of the dividend refund to which DC will become entitled (within the meaning of subsection 129(1)) for its taxation year in which the dividends are paid, that the amount of such dividends received by each of Holdco 1, Holdco 2 and Holdco 3 is of the aggregate of all taxable dividends paid by DC in its taxation year in which such dividends are paid;

(f) the dividends referred to in (a) and (b) will not be subject to tax under Part IV.1 and Part VI.1 of the Act.

F. The provisions of subsection 112(3) will apply to reduce any loss which would otherwise be determined for the holder as a result of the redemption or cancellation of shares referred to in Ruling E above.

G. The cancellation of the obligations of the notes as described in paragraph 27 of the Proposed Transactions will not give rise to a "forgiven amount" within the meaning of subsection 80(1) or subsection 80.01(1) of the Act, and none of DC or the Holdcos will realize any gain upon such cancellation.

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

(i) an acquisition of property in the circumstances discussed in subparagraph 55(3.1)(a) of the Act;

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

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

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

(v) an acquisition of property in the circumstances described in paragraph 55(3.1)(c) of the Act; or

(vi) an acquisition of property in the circumstances described in paragraph 55(3.1)(d) of the Act, 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 E above and, for greater certainty, subsection 55(3.1) will not apply to deny the exemption under paragraph 55(3)(b).

I. The provisions of subsections 15(1), 56(2), and 69(1) of the Act will not apply to any of the transactions contained in the Proposed Transactions in and of themselves.

J. Subsection 245(2) of the Act will not apply to the Proposed Transactions, in and by themselves, to redetermine the tax consequences confirmed in the rulings given.

These rulings are given subject to the limitations and qualifications set forth in Information Circular 70-6R5 issued on May 17, 2002, and are binding on the Canada Revenue Agency provided that the proposed transactions are completed before XXXXXXXXXX.

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

COMMENTS

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

(a) the determination of the ACB, PUC or FMV of any shares referred to herein; or

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

Yours truly,

XXXXXXXXXX
Manager
Corporate Reorganizations Section
Reorganizations and Resources Division
Income Tax Rulings Directorate