2006 Ruling 2005-0162951R3 - Single-wing butterfly

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

Principal Issues: Standard Single-wing butterfly.

Position: Favourable rulings issued.

Reasons: No new issues.

XXXXXXXXXX 2005-016295

XXXXXXXXXX, 2006

Dear XXXXXXXXXX:

Subject: XXXXXXXXXX - Advance Income Tax Ruling Request

This is in reply to your letters 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 this date of this letter, and unless otherwise expressly stated, every reference herein to a part, section or subsection, paragraph or subparagraph, clause or subclause is a reference to the relevant provision of the Act, and the Income Tax Act Regulations thereunder are referred to as the "Regulations";

(b) "adjusted cost base" ("ACB") has the meaning assigned by section 54;

(c) "agreed amount" means the amount agreed on by the transferor and transferee in respect of the transfer of an eligible property in a joint election filed pursuant to subsection 85(1);

(d) "arm's length" has the meaning assigned by subsection 251(1);

(e) "BCA" means the Companies Act of XXXXXXXXXX;

(f) "BN" means the tax identification number assigned by the CRA to the particular entity;

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

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

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

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

(k) "DC" means XXXXXXXXXX;

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

(m) "distribution" has the meaning assigned by subsection 55(1);

(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 available in an open and unrestricted market, between informed prudent parties, acting at arm's length and with no compulsion to act, expressed in terms of cash;

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

(s) "Holdco1" means XXXXXXXXXX;

(t) "Holdco2" means XXXXXXXXXX;

(u) "Holdco3" means XXXXXXXXXX;

(v) "Holdco4" means XXXXXXXXXX;

(w) "Individual1" means XXXXXXXXXX an individual resident in Canada for the purposes of the Act;

(x) "Individual1 Family Trust" means XXXXXXXXXX;

(y) "Individual2" means XXXXXXXXXX an individual resident in Canada for the purposes of the Act;

(z) "Individual2 Family Trust" means XXXXXXXXXX;

(aa) "Individual3" means XXXXXXXXXX an individual resident in Canada for the purposes of the Act;

(bb) "Individual3 Family Trust" means XXXXXXXXXX;

(cc) "Individual4" means XXXXXXXXXX an individual resident in Canada for the purposes of the Act;

(dd) "Individual4 Family Trust" means XXXXXXXXXX;

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

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

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

(hh) "Proposed Transactions" means the transactions described in Paragraphs 15 to 24;

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

(jj) "related person" has the meaning assigned by section 251;

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

(ll) "SIN" means Social Insurance Number;

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

(nn) "stated capital" refers to stated capital determined by reference to the applicable corporate law in the Province of XXXXXXXXXX;

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

(pp) "taxable dividend" has the meaning assigned by subsection 89(1).

FACTS

1. DC was incorporated on XXXXXXXXXX under the BCA. DC is a CCPC and a taxable Canadian corporation. The registered office of DC is XXXXXXXXXX. DC carries on the business of XXXXXXXXXX in both local and foreign markets. DC also operates a XXXXXXXXXX. DC's taxation year and fiscal period ends on XXXXXXXXXX. DC deals with the XXXXXXXXXX TSO and files its federal returns at the XXXXXXXXXX TC.

2. The authorized capital of DC consists of XXXXXXXXXX common shares ("Common Shares") with a par value of $XXXXXXXXXX per share and XXXXXXXXXX preferred shares ("Preferred Shares") with a par value of $XXXXXXXXXX per share. The Preferred Shares are non-voting, carry a non-cumulative weekly dividend entitlement at an annualized rate of XXXXXXXXXX% of the interest rates prescribed pursuant to paragraph 4301(c) of the Regulations, and are redeemable at $XXXXXXXXXX per share.

3. The issued and outstanding shares of DC are owned as follows:

Shareholder		Common Shares	Preferred Shares	% of Class

Individual1		XXXXXXXX 		XXXXXXXX 		XXXXXXXX
Holdco1		XXXXXXXX 		XXXXXXXX 		XXXXXXXX
Individual2		XXXXXXXX 		XXXXXXXX 		XXXXXXXX
Holdco2		XXXXXXXX 		XXXXXXXX 		XXXXXXXX
Individual3		XXXXXXXX 		XXXXXXXX 		XXXXXXXX
Holdco3		XXXXXXXX 		XXXXXXXX 		XXXXXXXX
Individual4		XXXXXXXX 		XXXXXXXX 		XXXXXXXX
Holdco4		XXXXXXXX 		XXXXXXXX 		XXXXXXXX 

Each of the shareholders of DC holds its shares of DC as capital property. The PUC of the Common Shares is $XXXXXXXXXX per share. The PUC of the Preferred Shares is $XXXXXXXXXX per share

The XXXXXXXXXX Preferred Shares owned by Individual1 have an aggregate ACB of $XXXXXXXXXX. The XXXXXXXXXX Common Shares owned by Holdco1 have an aggregate ACB of $XXXXXXXXXX and a FMV greater than both the ACB and PUC.

The XXXXXXXXXX Preferred Shares owned by Individual2 have an aggregate ACB of $XXXXXXXXXX. The XXXXXXXXXX Common Shares owned by Holdco2 have an aggregate ACB of $XXXXXXXXXX and a FMV greater than both ACB and PUC.

The XXXXXXXXXX Preferred Shares owned by Individual3 have an aggregate ACB of $XXXXXXXXXX. The XXXXXXXXXX Common Shares owned by Holdco3 have an aggregate ACB of $XXXXXXXXXX and a FMV greater than both ACB and PUC.

The XXXXXXXXXX Preferred Shares owned by Individual4 have an aggregate ACB of $XXXXXXXXXX. The XXXXXXXXXX Common Shares held by Holdco4 have an ACB of $XXXXXXXXXX and a FMV greater than both ACB and PUC.

4. Holdco1 is a taxable Canadian corporation that was formed under the BCA. Individual1 owns all the issued and outstanding voting preferred shares of Holdco1. Individual1 Family Trust owns all of the issued and outstanding common shares of Holdco1. Individual1 controls Holdco1.

5. Individual1 Family Trust is an irrevocable inter vivos discretionary trust settled by Individual4 under the laws of XXXXXXXXXX. Individual1 and Individual1's spouse are the only trustees. The beneficiaries of the Individual1 Family Trust are Individual1, Individual1's spouse, Individual1's children and any trusts or estates established for such individuals, any "Permitted Corporation" (as defined in the trust indenture), and XXXXXXXXXX.

6. Holdco2 is a taxable Canadian corporation that was formed under the BCA. Individual2 owns all of the issued and outstanding voting preferred shares of Holdco2. Individual2 Family Trust holds all of the issued and outstanding common shares of Holdco2. Individual2 controls Holdco2.

7. Individual2 Family Trust is an irrevocable inter vivos discretionary trust settled by Individual2's mother (XXXXXXXXXX), under the laws of XXXXXXXXXX. Individual2, Individual2's spouse and another arm's length individual (XXXXXXXXXX) are the trustees. The beneficiaries of the Individual2 Family Trust are Individual2, Individual2's spouse, Individual2's children and any trusts or estates established for such individuals, any "Permitted Corporation" (as defined in the trust indenture), and XXXXXXXXXX.

8. Holdco3 is a taxable Canadian corporation that was formed under the BCA. Individual3 owns all of the issued and outstanding voting preferred shares of Holdco3. Individual3 Family Trust holds all of the issued and outstanding common shares of Holdco3. Individual3 controls Holdco3.

9. Individual3 Family Trust is an irrevocable inter vivos discretionary trust settled by Individual3's mother (XXXXXXXXXX), under the laws of XXXXXXXXXX. Individual1, Individual3 and Individual3's spouse are the trustees. The beneficiaries of the Individual3 Family Trust are Individual3, Individual3's spouse, Individual3's children and any trusts or estates established for such individuals, any "Permitted Corporation" (as defined in the trust indenture), Holdco3 and XXXXXXXXXX.

10. Holdco4 is a taxable Canadian corporation that was formed under the BCA. Individual4 owns all the issued and outstanding voting preferred shares of Holdco4. Individual4 Family Trust holds all of the issued and outstanding common shares of Holdco4. Individual4 controls Holdco4.

11. Individual4 Family Trust is an irrevocable inter vivos discretionary trust settled by Individual1 under the laws of XXXXXXXXXX. Individual1, Individual4 and Individual4's spouse are the trustees. The beneficiaries of the Individual4 Family Trust are Individual4, Individual4's spouse, Individual4's children and any trusts or estates established for such individuals, any "Permitted Corporation" (as defined in the trust indenture).

12. Individual2 and Individual3 are first cousins, and first cousins of Individual1 and Individual4. Individual1 and Individual4 are brothers. No person or related group of persons controls DC. The desire of the shareholders of DC to implement the Proposed Transactions is derived from the four individual shareholder's inability to govern DC effectively.

13. The assets of DC consist primarily of property related to the XXXXXXXXXX business carried on by DC including, XXXXXXXXXX and related equipment, inventory and accounts receivable. The liabilities of DC consist primarily of bank indebtedness, accounts payable, accrued liabilities and long-term debt.

14. At the time the Proposed Transactions are implemented, DC is not expected to have any balance of CDA, RDTOH or non-capital losses.

PROPOSED TRANSACTIONS

15. Individual2 will incorporate a new taxable Canadian corporation ("TC") under the provisions of the BCA. The authorized share capital of TC will consist of the following classes of shares:

(a) XXXXXXXXXX common shares with each issued common share entitling the holder to one vote per share;

(b) XXXXXXXXXX non-voting Class A preferred shares ("Class A Shares") without par or nominal value; entitling a holder to fixed non-cumulative dividends as and when declared by the board of directors in an amount determined by the board of directors in their absolute discretion; redeemable and retractable for an amount equal to the FMV of the consideration for which such shares are issued plus all declared and unpaid dividends, and on dissolution entitling the holder to receive the redemption amount per Class A Share plus all declared and unpaid dividends; and

(c) XXXXXXXXXX voting Class B preferred shares ("Class B Shares") without par or nominal value; entitling a holder to fixed non-cumulative dividends as and when declared by the board of directors in an amount determined by the board of directors in their absolute discretion. For the purposes of subsection 191(4), the terms and conditions of the Class B Shares will specify an amount (the "Redemption Amount") in respect of each share for which the share is to be redeemed, acquired or cancelled. The Redemption Amount in respect of each share, at the time of issuance thereof, will be expressed as a fixed dollar amount that will not be determined by formula or subject to change thereafter and will not exceed the fair market value of the consideration for which such share is issued. None of the Class B Shares of TC will be issued for consideration that includes a taxable preferred share.

One common share of TC will be issued to Individual2 for nominal consideration on incorporation.

16. The following share transfers will take place on a contemporaneous basis:

(a) Individual2 will transfer his XXXXXXXXXX Preferred Shares of DC to TC and, as consideration therefor, TC will issue XXXXXXXXXX Class A Shares of TC having an aggregate FMV and redemption amount equal to the aggregate FMV, at that time, of the XXXXXXXXXX Preferred Shares of DC transferred to TC by Individual2. The aggregate addition to the stated capital of the Class A Shares of TC so issued will equal the aggregate paid-up capital attributable to the XXXXXXXXXX Preferred Shares of DC transferred to TC by Individual2, and which for greater certainty, will not exceed the maximum amount that could be added to the PUC of such shares, having regard to section 84.1; and

(b) Holdco2 will transfer its XXXXXXXXXX Common Shares of DC to TC and, as consideration therefor, TC will issue XXXXXXXXXX common shares of TC having an aggregate FMV equal to the aggregate FMV of the XXXXXXXXXX Common Shares of DC transferred to TC by Holdco2. The aggregate addition to the stated capital of the common shares of TC so issued will equal the aggregate paid-up capital attributable to the XXXXXXXXXX Common Shares of DC transferred to TC by Holdco2, and which, for greater certainty, will not exceed the maximum amount that could be added to the PUC of such shares, having regard to subsection 85(2.1).

17. In regard to each of the share transfers described in Paragraph 16, TC and each of Individual2 and Holdco2, as the case may be, will file a joint election, in prescribed form, and within the time limits referred to in subsection 85(6) to have the provisions of subsection 85(1) apply in respect of each of the share transfers. The agreed amount in each election will be equal to the respective transferor's ACB of the particular class of shares of DC transferred to TC and for greater certainty, such agreed amount will not be less than the lesser of the two amounts described in paragraph 85(1)(c.1).

18. Immediately before the transfer of property described in Paragraph 20, 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, inventory, prepaid expenses and the demand notes owing to DC as described in Paragraph 25;

(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 any goodwill.

For greater certainty, for purposes of this distribution:

(d) tax accounts of DC, such as the balance of non-capital losses, RDTOH or CDA, 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.

19. In determining the net FMV of each of the three types of property of DC immediately before the transfers of property described in Paragraph 20, 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 severance obligations, debts owing to DC's shareholders and the current portion of any bank indebtedness) 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, 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 TC;

(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 that 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 excess unallocated liabilities being allocated to that type of property.

Based on the types of property classifications described in Paragraph 18, and after the allocation of liabilities described in this Paragraph, it is anticipated that DC will only have cash and near cash property and business property at the time of the transfers of property described in Paragraph 20.

20. DC will transfer a pro rata portion of each of its three types of property (to the extent it has property of that type as determined in accordance with Paragraphs 18 and 20) to TC and, as consideration therefor TC will:

(a) assume an appropriate amount of liabilities of DC; and

(b) issue to DC XXXXXXXXXX Class B Shares having an aggregate Redemption Amount and aggregate FMV equal to the aggregate FMV of the property received by such TC less the amount of the liabilities of DC assumed by TC as described in (a);

such that immediately following such property transfers and liability assumptions, the net FMV of each of the three types of property of DC transferred to TC will, for greater certainty, approximate that proportion of the net FMV of all property of that type owned by DC determined immediately before such transfer that:

(c) The aggregate FMV, immediately before the transfer, of all of the shares of DC owned by TC at that time;

is of

(d) The aggregate FMV, immediately before the transfer, of all of the issued and outstanding shares of DC at that time.

For the purposes of this Paragraph, the expression "approximate that proportion" means that the discrepancy of that proportion, if any, will not exceed one percent (1%), determined as a percentage of the net FMV of each type of property which TC will receive as compared to what TC would have received had TC received its appropriate pro rata share of the FMV of the business property.

For greater certainty, the XXXXXXXXXX Class B Shares of TC that are issued to DC as described above will represent more than 10% of the issued share capital of TC having full voting rights in all circumstances and such shares will also represent more than 10% of the FMV of all the issued shares of TC.

21. In respect of the transfers of property by DC to TC as described in Paragraph 20, DC and TC will jointly elect, in prescribed form and within the time referred to in subsection 85(6), to have the provisions of subsection 85(1) apply to each eligible property that is transferred by DC to TC as described in Paragraph 20. The agreed amount in respect of each eligible property so transferred will be as follows:

(a) in the case of capital property (other than depreciable property of a prescribed class) and inventory, an amount not less than 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 not less than 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 not less than the least of the amounts described in subparagraphs 85(1)(d)(i), (ii) and (iii).

In each case, the agreed amount will not exceed the FMV of the respective property, nor will it be less than the amount permitted under paragraph 85(1)(b). The amount of DC's liabilities to be assumed by TC and to be allocated to property that will be the subject of an election under subsection 85(1) will not exceed the total of the agreed amounts elected for all such properties. The amount of DC's liabilities to be assumed by TC and allocated to property that will not be the subject of an election under subsection 85(1) will not exceed the FMV of such particular property.

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

For the purposes of the Act, the increase to the PUC of the XXXXXXXXXX Class B Shares issued to DC by TC as consideration for the property transferred to it as described in Paragraph 20, will not exceed the amount by which the aggregate of the agreed amounts exceeds the aggregate amount of the liabilities of DC assumed by TC for such property. For greater certainty, the increase to the PUC of the XXXXXXXXXX Class B Shares so issued by TC will not exceed the maximum amount that could be added to the PUC of such shares, having regard to subsection 85(2.1).

22. TC will redeem its XXXXXXXXXX Class B Shares held by DC for an amount equal to the aggregate Redemption Amount and FMV of such shares. As consideration therefor, TC will issue a non-interest bearing demand promissory note to DC (the "TC Note") having a principal amount and FMV equal to the aggregate Redemption Amount and FMV of the Class B Shares so redeemed by TC. DC will accept the TC Note as full payment of the Redemption Amount of the Class B Shares so redeemed along with any risk of such TC Note being dishonoured.

23. DC will then redeem its XXXXXXXXXX Preferred Shares held by TC and purchase for cancellation its XXXXXXXXXX Common Shares held by TC on a contemporaneous basis. As consideration for the redemption of DC's XXXXXXXXXX Preferred Shares held by TC, DC will issue a non-interest bearing demand promissory note to TC (the "DC Note1") having a principal amount and FMV equal to the aggregate redemption amount and FMV of the XXXXXXXXXX Preferred Shares held by TC. As consideration for the purchase for cancellation of DC's Common Shares held by TC, DC will issue a non-interest bearing demand promissory note to TC (the "DC Note2") having a principal amount and FMV equal to the aggregate FMV XXXXXXXXXX Common Shares held by TC and purchased for cancellation.

24. The principal amount owing by TC to DC under the TC Note will be set-off against the principal amounts owing by DC to TC under the DC Note1 and DC Note2 such that each such note will be cancelled in full satisfaction of the obligations under each such note.

ADDITIONAL INFORMATION

25. XXXXXXXXXX.

26. In connection with the implementation of the Proposed Transactions certain existing indebtedness owing by DC (i.e. a line of credit owing to XXXXXXXXXX) will be restructured after the Proposed Transactions in order to ensure that DC does not violate the existing terms of such indebtedness as a result of the implementation of the Proposed Transactions. Such restructuring is required as a result of the proposed assumption by TC of a pro rata portion of such indebtedness and will include TC providing sufficient security to XXXXXXXXXX. For greater certainty, such debt restructuring will not result in the increase in the principal amount owing by DC to XXXXXXXXXX under the existing indebtedness prior to the proposed distribution such that it will not impact the determination of the three types of property owned by DC (on a net asset basis) as described in Paragraphs 18 and 19.

27. DC leases vehicles on behalf of each of Individual1, Individual2, Individual3 and Individual4. For greater certainty, TC will assume the obligation under the vehicle lease in respect of Individual2 on the proposed distribution described in Paragraph 20.

28. Following the implementation of the Proposed Transactions, DC and TC may conduct business with each other. Such transactions, if they occur, will be on commercial terms that would be agreed to between arm's length parties.

29. The Proposed Transactions will occur in the order presented unless otherwise indicated, with the exception of the filing of the applicable election forms described in Paragraphs 17 and 21, which will be filed before the applicable due date.

30. No property has or will become property of DC in contemplation of, and before the proposed distribution described in Paragraph 20, except as described herein, and no liabilities have been, or will be incurred or discharged by DC in contemplation of and before the distribution described in Paragraph 20, except as described herein. Except as otherwise described herein, no shares of DC or of any other corporation referred to herein has been acquired or will be acquired or disposed of as part of a series of transactions or events that includes the Proposed Transactions.

31. None of the shares of DC, TC or of any other corporation described herein (including any shares to be issued as described in the Proposed Transactions) is or will be, at any time during a series of transactions or events that includes the Proposed Transactions:

(i) the subject of any undertaking that is a guarantee agreement;

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

(iii) the subject of a dividend rental arrangement.

32. Neither DC, TC nor any other corporation referred herein is, or will be, a specified financial institution or a corporation described in any of paragraphs (a) to (f) of the definition of "financial intermediary corporation" in subsection 191(1) at any time during a series of transactions or events the includes the Proposed Transactions.

PURPOSE OF PROPOSED TRANSACTIONS

33. The purpose of the Proposed Transactions is to permit Individual2 to separate his direct and indirect interests in DC in order to allow Individual1 (and the entities related to him) to own and operate their various business interests independently from the other shareholders of DC.

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 each particular property so transferred is an eligible property in respect of which shares have been issued as full or partial consideration therefore, the provisions of subsection 85(1) will apply to:

(a) the transfer of the Preferred Shares of DC by Individual2 to TC as described in Paragraph 16;

(b) the transfers of the Common Shares of DC by Holdco2 to TC as described in Paragraph 16; and

(c) the transfers of DC's property to TC as described in Paragraph 20;

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 above.

B. Provided the issued and outstanding shares of DC described in Paragraph 3 constitute capital property to the particular holder immediately prior to the commencement of the Proposed Transactions, the issuance of shares by TC to such particular holder as consideration for such holder's shares of DC as described in Paragraph 16, will not, in and by themselves, cause such holder's shares of TC to not be capital property to that holder.

C. Subsection 84(3) will apply on the redemption or purchase for cancellation, as the case may be, to:

(a) the Class B Shares of TC held by DC as described in Paragraph 22, to deem TC to have paid and DC to have received;

(b) the Preferred Shares of DC held by TC as described in Paragraph 23, to deem DC to have paid and TC to have received; and

(c) the Common Shares of DC held by TC as described in Paragraph 23, to deem DC to have paid and TC to have received;

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

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

(f) will be deductible by each recipient of such dividend in computing its respective taxable income pursuant to subsection 112(1) and, for greater certainty, the provisions of subsections 112 (2.1), (2.2), (2.3) or (2.4) will not apply to deny the subsection 112(1) deduction in respect of such dividend;

(g) will be excluded from the proceeds of disposition of the shares by virtue of paragraph (j) of the definition of "proceeds of disposition" in section 54;

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

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

D. Provided that 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 Part IV tax under subsection 186(1).

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

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

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

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

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

(e) 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 C and, for greater certainty, subsection 55(3.1) will not apply to deny the exemption under paragraph 55(3)(b).

F. The set-off of the DC Note1 and DC Note2 held by TC and the TC Note held by DC described in Paragraph 24 will not give rise to a forgiven amount and neither DC nor TC will realize any gain or incur any loss as a result of such set-off.

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

H. Subsection 245(2) will not apply to the Proposed Transactions, in and by themselves, to re-determine 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.

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; or

(b) any other tax consequence relating to the facts, Proposed Transactions, Additional Information 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,

XXXXXXXXXX
Manager
Corporate Reorganizations Section II
Reorganizations and Resources Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch