2005 Ruling 2005-0149021R3 - XXXXXXXXXX - Internal Reorganization

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: Internal reorganization - does subsection 55(4) apply?

Position: No based on facts.

Reasons: Based on the facts it is reasonable to conclude that the main purpose test in subsection 55(4) is not met.

XXXXXXXXXX 									2005-014902

XXXXXXXXXX, 2005

Dear XXXXXXXXXX:

Re: XXXXXXXXXX - 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 taxpayers. You have advised us that to the best of your knowledge and that of the taxpayers involved none of the issues involved in this ruling request are:

(i) in an earlier return of the 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 of the taxpayers or a related person 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" ("ACB") has the meaning assigned by subsection 248(1);

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

(d) "BCA" means the Business Corporations Act (XXXXXXXXXX), as amended;

(e) "BN" means the business number issued to the particular corporate entity by CRA;

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

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

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

(i) "CRA" means Canada Revenue Agency;

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

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

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

(m) "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;

(n) "financial intermediary corporation" has the meaning assigned by subsection 191(1);

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

(p) "Investco" means XXXXXXXXXX, a corporation incorporated and subsisting under the BCA (BN# XXXXXXXXXX);

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

(r) "Parent" means XXXXXXXXXX

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

(t) "pre-1972 capital surplus on hand" has the meaning assigned by subsection 88(2.1);

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

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

(w) "Proposed Transactions" means the transactions described in Paragraphs 7 to 20;

(x) "public corporation" has the meaning assigned by subsection 89(1);

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

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

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

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

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

(dd) "Sibling A" means XXXXXXXXXX

(ee) "Sibling A Family Trust" means a discretionary personal trust to be settled by Parent under which Sibling A and/or Sibling A's family members, each of whom will be a related person in regard to Parent, will be beneficiaries and one or more entities, each being a registered charity, may be beneficiaries;

(ff) "Sibling B" means XXXXXXXXXX

(gg) "Sibling B Family Trust" means a discretionary personal trust to be settled by Parent under which Sibling B and/or Sibling B's family members, each of whom will be a related person in regard to Parent, will be beneficiaries and one or more entities, each being a registered charity, may be beneficiaries;

(hh) "Sibling C" means XXXXXXXXXX

(ii) "Sibling C Family Trust" means a discretionary personal trust to be settled by Parent under which Sibling C and/or certain other individuals, each of whom will be a related person in regard to Parent, will be beneficiaries and one or more entities, each being a registered charity, may be beneficiaries;

(jj) "SIN" means social insurance number;

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

(ll) "specified investment business" ("SIB") has the meaning assigned by subsection 248(1);

(mm) "stated capital" has the meaning assigned by the BCA;

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

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

(pp) "Trust Company" means XXXXXXXXXX.

FACTS

1. Parent is an individual resident in Canada for the purposes of the Act and the adult child of XXXXXXXXXX who is now deceased (the "Deceased"). Each of Sibling A, Sibling B and Sibling C is an adult child of Parent and a grandchild of the Deceased. Sibling A, Sibling B and Sibling C are resident in Canada for the purposes of the Act. XXXXXXXXXX

2. Investco is a taxable Canadian corporation and a private corporation. The XXXXXXXXXX TSO administers Investco's tax affairs and its corporate tax returns are filed at the XXXXXXXXXX TC. Investco's current mailing address is: XXXXXXXXXX

3. The issued and outstanding share capital of Investco consists of:

(a) XXXXXXXXXX Class A Preference Shares ("Investco Class A Shares") XXXXXXXXXX. Parent owns all of the Investco Class A Shares. XXXXXXXXXX.

(b) XXXXXXXXXX Class B Preference Shares ("Investco Class B Shares") XXXXXXXXXX. Parent owns all of the Investco Class B Shares.

(c) XXXXXXXXXX Class C Preference Shares ("Investco Class C Shares") XXXXXXXXXX. Each of Sibling A and Sibling B owns XXXXXXXXXX Investco Class C Shares. XXXXXXXXXX.

(d) XXXXXXXXXX Class D Preference Shares ("Investco Class D Shares"). XXXXXXXXXX. Parent owns all of the Investco Class D Shares.

(e) XXXXXXXXXX Class E Preference Shares ("Investco Class E Shares") XXXXXXXXXX. Parent owns all of the Investco Class E Shares. XXXXXXXXXX.

(f) XXXXXXXXXX common shares ("Investco Common Shares"), XXXXXXXXXX. All of the Investco Common Shares are owned by a personal trust (the "XXXXXXXXXX Trust") established for the benefit of Parent's children and grandchildren as described in Paragraph 4.

No person, as part of a series of transactions that includes any of the Proposed Transactions, has acquired any of the shares of Investco.

4. The XXXXXXXXXX Trust was settled by the Deceased. The trustees of the XXXXXXXXXX Trust are Parent, Sibling A, Sibling B, Sibling C and Trust Company. Under the terms of the XXXXXXXXXX Trust, Sibling A, Sibling B, Sibling C and their respective issue are discretionary income beneficiaries. On the termination date, which occurs on the death of the last to die of the grandchildren of the Deceased alive on the date the XXXXXXXXXX Trust was settled, the capital of the trust is to be distributed to Parent's issue unless no such issue are alive, in which case the capital of the trust is to be distributed among the grandchildren and more remote issue of the Deceased. The XXXXXXXXXX Trust is resident in Canada for the purposes of the Act.

5. The property of Investco consists principally of a portfolio of shares of various public corporations including XXXXXXXXXX Class A Shares of XXXXXXXXXX. ("Opco"), liquid investments, and land and buildings situate in XXXXXXXXXX. Opco is a public corporation. The Class A Shares of Opco were acquired by Investco in XXXXXXXXXX as part of a series of transactions that were the subject of advance income tax ruling XXXXXXXXXX, dated XXXXXXXXXX, 2000, and supplementary ruling XXXXXXXXXX, dated XXXXXXXXXX, 2000.

6. XXXXXXXXXX

PROPOSED TRANSACTIONS

7. Parent will incorporate three new corporations under the BCA such that each of Parent's three adult children will have a separate holding corporation for the benefit of such particular child and Parent. Specifically, Parent and Sibling A's holding corporation will be referred to as "Sibling A Holdco"; Parent and Sibling B's holding corporation will be referred to as "Sibling B Holdco"; and Parent and Sibling C's holding corporation will be referred to as "Sibling C Holdco". Collectively, the three holding corporations will be referred to as the "Sibling Holdcos". No shares will be issued on the incorporation of the Sibling Holdcos. The authorized share capital of each of the Sibling Holdcos will include:

(a) a class of voting common shares ("Common Shares"), entitled to one vote each, and fully participating with the Class D Shares (described below) with respect to dividends (paid in equal amounts per share), after the payment of preferential dividends on the Class B Shares (described below) and Class D Shares, and entitling the holders to receive the remaining property of the corporation upon winding-up;

(b) a class of voting Class B preference shares ("Class B Shares") entitled to one vote each, with a redemption amount of $XXXXXXXXXX each and having a $XXXXXXXXXX non-cumulative annual dividend entitlement;

(c) a class of non-voting Class D preference shares ("Class D Shares") with a redemption amount of $XXXXXXXXXX each and having a $XXXXXXXXXX non-cumulative annual dividend entitlement plus, after a dividend of $XXXXXXXXXX per share is paid on all the Common Shares, the Class D Shares are fully participating with the Common Shares in all further dividends in equal amounts per share and otherwise non-participating; and

(d) a class of non-voting redeemable and retractable preference shares ("Preferred Shares") having an aggregate redemption amount ("Redemption Amount") and aggregate fair market value equal to the consideration for which such shares are issued.

For greater certainty, the authorized classes of shares of the Sibling Holdcos described in (a), (b) and (c) will have substantively the same rights and restrictions as the Investco shares described in Paragraph 3 having the same class name.

8. Parent will settle three new personal trusts by contributing a silver coin to each such trust. Each of Parent's three adult children will have a separate trust created for the benefit of that particular child, and/or that child's family members, if any, and possibly one or more entities, each being a registered charity. In respect of Sibling A, the new family trust to be created will be referred to as the "Sibling A Family Trust". Similarly, in respect of Sibling B, the new family trust to be created will be referred to as the "Sibling B Family Trust" and in respect of Sibling C, the new family trust to be created will be referred to as the "Sibling C Family Trust". Collectively, the three new personal trusts will be referred to as the "Sibling Family Trusts". The beneficiaries of each of the Sibling Family Trusts will be persons who are related to Parent and possibly one or more entities, each being a registered charity. Each of the Sibling Family Trusts will be resident in Canada for the purposes of the Act.

9. Investco will redeem all of its Investco Class A Shares, Investco Class C Shares and Investco Class E Shares and will deliver to the holders thereof an amount of cash equal to the respective redemption amount and fair market value of such class of shares so redeemed. As a result, the only issued and outstanding shares of Investco after such redemptions will be the Investco Class B Shares and the Investco Class D Shares held by Parent, and the Investco Common Shares held by the XXXXXXXXXX Trust.

10. Investco will declare and pay cash dividends on its Investco Class B Shares, Investco Class D Shares and Investco Common Shares in an aggregate amount equal to the amount of Investco's capital dividend account immediately before that time. An election will be made pursuant to subsection 83(2) for each such dividend to be deemed to be a capital dividend. Investco will also declare cash dividends on its Investco Class B Shares, Investco Class D Shares and Investco Common Shares in an aggregate amount equal to the amount necessary to generate a dividend refund equal to the amount of Investco's RDTOH.

11. On a contemporaneous basis, the XXXXXXXXXX Trust will sell its XXXXXXXXXX Common Shares of Investco as follows:

(a) XXXXXXXXXX Investco Common Shares to Sibling A;
(b) XXXXXXXXXX Investco Common Shares to Sibling A Family Trust;
(c) XXXXXXXXXX Investco Common Shares to Sibling B;
(d) XXXXXXXXXX Investco Common Shares to Sibling B Family Trust; and
(e) XXXXXXXXXX Investco Common Shares to Sibling C Family Trust.

For greater certainty, in respect of the Investco Common Shares to be acquired by Sibling A and/or the Sibling A Family Trust, the total number of Investco Common Shares acquired by such persons will not exceed XXXXXXXXXX. Similarly, in respect of the Investco Common Shares to be acquired by Sibling B and/or the Sibling B Family Trust, the total number of Investco Common Shares acquired by such persons will not exceed XXXXXXXXXX. Each of the foregoing share sales/purchases will be for a purchase price equal to the FMV of such number of Investco Common Shares acquired by the respective purchaser and the respective purchaser will pay each such purchase price in cash. The number of Investco Common Shares to be received directly by a particular Sibling or by such Sibling's Family Trust will be determined based on the personal and family circumstances of the particular Sibling, including the number of children the particular Sibling has.

12. Contemporaneously with the share transfers described in Paragraphs 13 and 14, Parent will transfer XXXXXXXXXX Investco Class B Shares and XXXXXXXXXX Investco Class D Shares to Sibling A Holdco. Sibling A Holdco will issue: XXXXXXXXXX Class B Shares to Parent as consideration for the XXXXXXXXXX Investco Class B Shares transferred to Sibling A Holdco by Parent; and XXXXXXXXXX Class D Shares as consideration for the XXXXXXXXXX Investco Class D Shares transferred to Sibling A Holdco by Parent.

Parent and Sibling A Holdco will jointly elect in prescribed form, within the time limit referred to in subsection 85(6), to have the provisions of subsection 85(1) apply to such transfer. The agreed amount in respect of each Investco Class B Share and each Investco Class D Share, as the case may be, transferred by Parent to Sibling A Holdco will be an amount equal to Parent's adjusted cost base of such share immediately before such transfer. For greater certainty, the agreed amount for each transfer will not exceed the lesser of the two amounts described in paragraph 85(1)(c.1).

For purposes of the BCA: the amount to be added to the stated capital account maintained for the Class B Shares of Sibling A Holdco will not exceed the greater of the adjusted cost base (as determined under subsection 84.1(2) for the purposes of subsection 84.1(1)) and the paid-up capital attributable to the Investco Class B Shares in consideration for which the Class B Shares of Sibling A Holdco were issued; and the amount to be added to the stated capital account maintained for the Class D Shares of Sibling A Holdco will not exceed the greater of the adjusted cost base (as determined under subsection 84.1(2) for the purposes of subsection 84.1(1)) and the paid-up capital attributable to the Investco Class D Shares in consideration for which the Class D Shares of Sibling A Holdco were issued.

13. Contemporaneously with the share transfers described in Paragraphs 12 and 14, Parent will transfer XXXXXXXXXX Investco Class B Shares and XXXXXXXXXX Investco Class D Shares to Sibling B Holdco. Sibling B Holdco will issue: XXXXXXXXXX Class B Shares to Parent as consideration for the XXXXXXXXXX Investco Class B Shares transferred to Sibling B Holdco by Parent; and XXXXXXXXXX Class D Shares as consideration for the XXXXXXXXXX Investco Class D Shares transferred to Sibling B Holdco by Parent.

Parent and Sibling B Holdco will jointly elect in prescribed form, within the time limit referred to in subsection 85(6), to have the provisions of subsection 85(1) apply to such transfer. The agreed amount in respect of each Investco Class B Share and each Investco Class D Share, as the case may be, transferred by Parent to Sibling B Holdco will be an amount equal to Parent's adjusted cost base of such share immediately before such transfer. For greater certainty, the agreed amount for each transfer will not exceed the lesser of the two amounts described in paragraph 85(1)(c.1).

For purposes of the BCA: the amount to be added to the stated capital account maintained for the Class B Shares of Sibling B Holdco will not exceed the greater of the adjusted cost base (as determined under subsection 84.1(2) for the purposes of subsection 84.1(1)) and the paid-up capital attributable to the Investco Class B Shares in consideration for which the Class B Shares of Sibling B Holdco were issued; and the amount to be added to the stated capital account maintained for the Class D Shares of Sibling B Holdco will not exceed the greater of the adjusted cost base (as determined under subsection 84.1(2) for the purposes of subsection 84.1(1)) and the paid-up capital attributable to the Investco Class D Shares in consideration for which the Class D Shares of Sibling B Holdco were issued.

14. Contemporaneously with the share transfers described in Paragraphs 12 and 13, Parent will transfer XXXXXXXXXX Investco Class B Shares and XXXXXXXXXX Investco Class D Shares to Sibling C Holdco. Sibling C Holdco will issue: XXXXXXXXXX Class B Shares to Parent as consideration for the XXXXXXXXXX Investco Class B Shares transferred to Sibling C Holdco by Parent; and XXXXXXXXXX Class D Shares as consideration for the XXXXXXXXXX Investco Class D Shares transferred to Sibling C Holdco by Parent.

Parent and Sibling C Holdco will jointly elect in prescribed form, within the time limit referred to in subsection 85(6), to have the provisions of subsection 85(1) apply to such transfer. The agreed amount in respect of each Investco Class B Share and each Investco Class D Share, as the case may be, transferred by Parent to Sibling C Holdco will be an amount equal to Parent's adjusted cost base of such share immediately before such transfer. For greater certainty, the agreed amount for each transfer will not exceed the lesser of the two amounts described in paragraph 85(1)(c.1).

For purposes of the BCA: the amount to be added to the stated capital account maintained for the Class B Shares of Sibling C Holdco will not exceed the greater of the adjusted cost base (as determined under subsection 84.1(2) for the purposes of subsection 84.1(1)) and the paid-up capital attributable to the Investco Class B Shares in consideration for which the Class B Shares of Sibling C Holdco were issued; and the amount to be added to the stated capital account maintained for the Class D Shares of Sibling C Holdco will not exceed the greater of the adjusted cost base (as determined under subsection 84.1(2) for the purposes of subsection 84.1(1)) and the paid-up capital attributable to the Investco Class D Shares in consideration for which the Class D Shares of Sibling C Holdco were issued.

15. Contemporaneously with the share transfers described in Paragraphs 16 and 17, Sibling A and/or Sibling A Family Trust will contemporaneously transfer a number of Investco Common Shares to Sibling A Holdco such that immediately thereafter Sibling A Holdco will own XXXXXXXXXX Investco Common Shares. As consideration therefor, Sibling A Holdco will issue an identical number of its Common Shares to the particular transferor as the number of Investco Common Shares that were transferred to it by that particular transferor.

Each of Sibling A and/or Sibling A Family Trust, as the case may be, and Sibling A Holdco will jointly elect in prescribed form, within the time limit referred to in subsection 85(6), to have the provisions of subsection 85(1) apply to each such transfer. The agreed amount in respect of each Investco Common Share transferred by the particular transferor to Sibling A Holdco will be an amount equal to that particular transferor's adjusted cost base of such Investco Common Share immediately before such transfer. For greater certainty, the agreed amount for each transfer will not exceed the lesser of the two amounts described in paragraph 85(1)(c.1).

For purposes of the BCA, the amount to be added to the stated capital account maintained for the Common Shares of Sibling A Holdco will not exceed the greater of the adjusted cost base (as determined under subsection 84.1(2) for the purposes of subsection 84.1(1)) and the paid-up capital attributable to the Investco Common Shares in consideration for which the Common Shares of Sibling A Holdco were issued.

For greater certainty, Parent will continue to have de jure control of Sibling A Holdco.

16. Contemporaneously with the share transfers described in Paragraphs 15 and 17, Sibling B and/or Sibling B Family Trust will contemporaneously transfer a number of Investco Common Shares to Sibling B Holdco such that immediately thereafter Sibling B Holdco will own XXXXXXXXXX Investco Common Shares. As consideration therefor, Sibling B Holdco will issue an identical number of its Common Shares to the particular transferor as the number of Investco Common Shares that were transferred to it by that particular transferor.

Each of Sibling B and/or Sibling B Family Trust, as the case may be, and Sibling B Holdco shall jointly elect in prescribed form, within the time limit referred to in subsection 85(6), to have the provisions of subsection 85(1) apply to each such transfer. The agreed amount in respect of each Investco Common Share transferred by the particular transferor to Sibling B Holdco will be an amount equal to that particular transferor's adjusted cost base of such Investco Common Share immediately before such transfer. For greater certainty, the agreed amount for each transfer will not exceed the lesser of the two amounts described in paragraph 85(1)(c.1).

For purposes of the BCA, the amount to be added to the stated capital account maintained for the Common Shares of Sibling B Holdco will not exceed the greater of the adjusted cost base (as determined under subsection 84.1(2) for the purposes of subsection 84.1(1)) and the paid-up capital attributable to the Investco Common Shares in consideration for which the Common Shares of Sibling B Holdco were issued.

For greater certainty, Parent will continue to have de jure control of Sibling B Holdco.

17. Contemporaneously with the share transfers described in Paragraphs 15 and 16, Sibling C Family Trust will transfer XXXXXXXXXX Investco Common Shares to Sibling C Holdco. As consideration therefor, Sibling C Holdco will issue XXXXXXXXXX of its Common Shares to Sibling C Family Trust.

Sibling C Family Trust and Sibling C Holdco will jointly elect in prescribed form, within the time limit referred to in subsection 85(6), to have the provisions of subsection 85(1) apply to such transfer. The agreed amount in respect of each Investco Common Share transferred by Sibling C Family Trust to Sibling C Holdco will be an amount equal to Sibling C Family Trust's adjusted cost base of such Investco Common Share immediately before such transfer. For greater certainty, the agreed amount for each transfer will not exceed the lesser of the two amounts described in paragraph 85(1)(c.1).

For purposes of the BCA, the amount to be added to the stated capital account maintained for the Common Shares of Sibling C Holdco will not exceed the greater of the adjusted cost base (as determined under subsection 84.1(2) for the purposes of subsection 84.1(1)) and the paid-up capital attributable to the Investco Common Shares in consideration for which the Common Shares of Sibling C Holdco were issued.

For greater certainty, Parent will continue to have de jure control of Sibling C Holdco.

18. Investco will, on a contemporaneous basis, transfer XXXXXXXXXX% of its gross assets to each of the Sibling Holdcos. For the purpose of these transfers of Investco's assets, the amount of Investco's dividend refund that it expects to receive as a result of the taxable dividends described in Paragraph 10 will be treated as an asset of Investco. It is also contemplated that the real property held by Investco will be transferred in its entirety to Sibling C Holdco. As consideration therefor: each of the Sibling Holdcos will assume XXXXXXXXXX% of any liabilities of Investco (contingent or otherwise) that are owing by Investco at that time and capable of quantification (the "Investco Assumed Liabilities"); and issue a number of its Preferred Shares to Investco having an aggregate Redemption Amount equal to the FMV of the particular assets transferred to the particular Sibling Holdco, less the amount of the Investco Assumed Liabilities assumed by that particular Sibling Holdco. It is anticipated that the amount of the Investco Assumed Liabilities will be insignificant.

In connection with these transfers of Investco's assets, Investco and the relevant Sibling Holdco, will jointly elect in prescribed form and within the time limit referred to in subsection 85(6), to have the provisions of subsection 85(1) apply to each such transfer of property that is an eligible property. The agreed amount specified in each election will be within the limits described in subsection 85(1) and for greater certainty, no gains will be realized by Investco in respect of any such transfers although it is possible that a capital loss may arise in respect of the transfer of certain capital property due to the limit in subparagraph 85(1)(c.1)(i).

For purposes of the BCA, the amount to be added to the stated capital account maintained for the Preferred Shares issued by the particular Sibling Holdco will be the aggregate of (i) the agreed amounts in respect of such assets transferred to the particular Sibling Holdco where a subsection 85(1) election was made and (ii) the FMV of such assets transferred to the particular Sibling Holdco in respect of which no subsection 85(1) election was made, less the amount of the Investco Assumed Liabilities assumed by such particular Sibling Holdco.

19. On a contemporaneous basis, each of the Sibling Holdcos will redeem its Preferred Shares, that were issued by it to Investco as described in Paragraph 18, as follows:

(a) In respect of Sibling A Holdco's redemption of its Preferred Shares held by Investco, Sibling A Holdco will issue to Investco, as payment therefor, a demand non-interest-bearing promissory note ("Sibling A Holdco Note") having a principal amount and FMV equal to the aggregate Redemption Amount and FMV of such Preferred Shares so redeemed. Investco will accept the Sibling A Holdco Note as absolute payment for the aggregate Redemption Amount of such Preferred Shares. The taxation year of Sibling A Holdco will end immediately after such redemption and at the end of such taxation year Sibling A Holdco is expected to have a nil balance of RDTOH.

(b) In respect of Sibling B Holdco's redemption of its Preferred Shares held by Investco, Sibling B Holdco will issue to Investco, as payment therefor, a demand non-interest-bearing promissory note ("Sibling B Holdco Note") having a principal amount and FMV equal to the aggregate Redemption Amount and FMV of such Preferred Shares so redeemed. Investco will accept the Sibling B Holdco Note as absolute payment for the aggregate Redemption Amount of such Preferred Shares. The taxation year of Sibling B Holdco will end immediately after such redemption and at the end of such taxation year Sibling B Holdco is expected to have a nil balance of RDTOH.

(c) In respect of Sibling C Holdco's redemption of its Preferred Shares held by Investco, Sibling C Holdco will issue to Investco, as payment therefor, a demand non-interest-bearing promissory note ("Sibling C Holdco Note") having a principal amount and FMV equal to the aggregate Redemption Amount and FMV of such Preferred Shares so redeemed. Investco will accept the Sibling C Holdco Note as absolute payment for the aggregate Redemption Amount of such Preferred Shares. The taxation year of Sibling C Holdco will end immediately after such redemption and at the end of such taxation year Sibling C Holdco is expected to have a nil balance of RDTOH.

20. Immediately following the end of the taxation year of each of the Sibling Holdcos, Investco will purchase for cancellation its Investco Common Shares, and redeem its Investco Class B Shares and Investco Class D Shares that are held by each of the Sibling Holdcos as follows:

(a) In respect of Investco's purchase for cancellation of the Investco Common Shares and redemption of its Investco Class B Shares and Investco Class D Shares held by Sibling A Holdco, Investco will assign and distribute the Sibling A Holdco Note to Sibling A Holdco which will be accepted by Sibling A Holdco as full payment of Investco's obligation and the Sibling A Holdco Note will be cancelled.

(b) In respect of Investco's purchase for cancellation of the Investco Common Shares and redemption of its Investco Class B Shares and Investco Class D Shares held by Sibling B Holdco, Investco will assign and distribute the Sibling B Holdco Note to Sibling B Holdco which will be accepted by Sibling B Holdco as full payment of Investco's obligation and the Sibling B Holdco Note will be cancelled.

(c) In respect of Investco's purchase for cancellation of the Investco Common Shares and redemption of its Investco Class B Shares and Investco Class D Shares held by Sibling C Holdco, Investco will assign and distribute the Sibling C Holdco Note to Sibling C Holdco which will be accepted by Sibling C Holdco as full payment of Investco's obligation and the Sibling C Holdco Note will be cancelled.

PURPOSE OF THE PROPOSED TRANSACTIONS

21. The purpose of the Proposed Transactions is to divide an equal portion of the assets of Investco among the three Siblings and their respective families via the Sibling Holdcos so that future investment decisions may be made in respect of the assets of each such corporation independently from the investment decisions made by the other corporations. The purpose of Investco continuing to hold an equal share of assets and for Parent to control each of the Sibling Holdcos is to ensure that Parent will continue to receive dividend income in an amount sufficient to provide XXXXXXXXXX with the means to meet XXXXXXXXXX financial needs until XXXXXXXXXX death.

ADDITIONAL INFORMATION

22. The Proposed Transactions will occur in the order presented unless otherwise indicated, with the exception of the filing the applicable election forms, as described in Paragraphs 12 to 18, which will be filed within the applicable due date following the completion of the Proposed Transactions.

23. There have been no significant transactions, other than those described herein, that have been completed prior to the date of this letter nor are there any other significant transactions, proposed or contemplated, other than those described herein, that will take place as part of the series of transactions or events that includes the Proposed Transactions. Specifically, there is no intention by any person to dispose of the shares of any of the corporations referred to herein to a person or partnership that was not a related person to Investco or any of the Sibling Holdcos, as the case may be, immediately prior to such disposition.

24. None of the corporations referred to herein (including the corporations to be incorporated as described in the Proposed Transactions) is or will be, at any time during the series of transactions herein described, a specified financial institution or a restricted financial institution.

25. There will not be at any time prior to the completion of the Proposed Transactions, any agreements or undertakings which constitute or include a guarantee agreement in respect of any of the issued shares referred to herein (including the shares to be issued as described in the Proposed Transactions).

26. None of the corporations referred to herein (including the corporations to be incorporated as described in the Proposed Transactions) will have entered into a dividend rental arrangement in respect of any of the issued shares referred to herein (including the shares to be issued as described in the Proposed Transactions).

27. None of the issued shares referred to herein (including the shares to be issued as described in the Proposed Transactions) will be issued or acquired as part of a transaction or event or series of transactions or events of the type described in subsection 112(2.5).

28. None of the corporations referred to herein (including the corporations to be incorporated as described in the Proposed Transactions) is or will be, at any time before the completion of the Proposed Transactions, a corporation described in any of paragraphs (a) to (f) of the definition "financial intermediary corporation" in subsection 191(1).

RULINGS

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

A. Provided that the requisite joint elections are made in the prescribed form and within the time period, and provided that the particular property so transferred is an eligible property, subject to the application of subsection 26(5) of the Income Tax Application Rules, the provisions of subsection 85(1) will apply to:

(a) the transfer of XXXXXXXXXX Investco Class B Shares and XXXXXXXXXX Investco Class D Shares to Sibling A Holdco by Parent as described in Paragraph 12;

(b) the transfer of XXXXXXXXXX Investco Class B Shares and XXXXXXXXXX Investco Class D Shares to Sibling B Holdco by Parent as described in Paragraph 13;

(c) the transfer of XXXXXXXXXX Investco Class B Shares and XXXXXXXXXX Investco Class D Shares to Sibling C Holdco by Parent as described in Paragraph 14;

(d) the respective transfers of a number of Investco Common Shares to Sibling A Holdco by Sibling A and/or Sibling A Family Trust as described in Paragraph 15;

(e) the respective transfers of a number of Investco Common Shares to Sibling B Holdco by Sibling B and/or Sibling B Family Trust as described in Paragraph 16;

(f) the transfer of XXXXXXXXXX Investco Common Shares to Sibling C Holdco by Sibling C Family Trust as described in Paragraph 17; and

(g) the respective transfers by Investco of assets to each of the Sibling Holdcos as described in Paragraph 18;

such that the agreed amount in respect of each such transfer of eligible property will be deemed to be the transferor's proceeds of disposition of the particular property 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. By virtue of subsection 40(3.3) and paragraph 40(3.4)(a), to the extent that Investco realizes any capital loss on the respective transfers of assets to each of the Sibling Holdcos as described in Paragraph 18, such loss will be deemed to be nil and the amount of such loss as otherwise determined under the Act (without reference to paragraph 40(2)(g) and subsection 40(3.4)), will, for the purposes of paragraph 40(3.4)(b), be deemed to be a loss of Investco from the disposition of such assets at the time that is immediately before the first time, after the disposition, that any of the events described in paragraph 40(3.4)(b) occurs.

C. Subsection 84(3) will apply:

(a) on the respective redemptions by Sibling A Holdco, Sibling B Holdco and Sibling C Holdco, of the Preferred Shares of the Sibling Holdcos owned by Investco, as described in Paragraph 19, to deem each of the Sibling Holdcos to have paid and Investco to have received;

(b) on the respective purchases for cancellation of the Investco Common Shares and redemptions of the Investco Class B Shares and Investco Class D Shares owned by Sibling A Holdco, Sibling B Holdco and Sibling C Holdco, as the case may be, as described in Paragraph 20, to deem Investco to have paid and each of the Sibling Holdcos 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.

D. Provided the particular corporation that is deemed to have paid a dividend in Ruling C 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 tax under Part IV.

E. By virtue of paragraph 55(3)(a), the provisions of subsection 55(2) will not apply to the taxable dividends referred to in Ruling C provided there is not a disposition of property or an increase in interest described in any of subparagraphs 55(3)(a)(i) to (v) which is part of the series of transactions or events that includes the Proposed Transactions. For greater certainty, the Proposed Transactions, in and by themselves, will not be considered to result in any disposition or increase in interest described in subparagraph 55(3)(a)(i) to (v).

F. The cancellation of the Sibling A Holdco Note, Sibling B Holdco Note and Sibling C Holdco Note, as described in Paragraph 20, will not give rise to a "forgiven amount" within the meaning of subsection 80(1) or 80.01(1).

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

H. 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

To the extent there is a capital loss realized by any corporation on the redemption or purchase for cancellation of the shares described in Paragraphs 19 and 20, each such loss will be deemed to be nil pursuant to subsection 40(3.6) and for greater certainty, subsections 40(3.3) and 40(3.4), and paragraph 40(3.6)(b), will not apply with respect to such corporation's loss.

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