2006 Ruling 2006-0188101R3 - Multiple-wing 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: No Significant Issues.

XXXXXXXXXX 2006-018810

XXXXXXXXXX, 2006

Dear XXXXXXXXXX:

Subject: XXXXXXXXXX - Advance Income Tax Ruling Request

This is in reply to your letter of XXXXXXXXXX, and your other correspondence, wherein you requested an advance income tax ruling on behalf of the taxpayers described in this ruling request. 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 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 taxpayers 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 taxpayers have also represented that the proposed transactions described herein will not result in the taxpayers or any related person described herein being unable to pay its existing outstanding tax liabilities.

DEFINITIONS

In this letter, all monetary amounts are expressed in Canadian dollars unless otherwise indicated, and the following terms or expressions have the meaning specified:

(a) "Act" means the Income Tax Act, R.S.C. 1985 (5th Supp.) c.1, as amended from time to time and consolidated to the date of this letter, and unless otherwise expressly stated, every reference herein to a part, section or subsection, paragraph or subparagraph, 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 an eligible property in an election filed pursuant to subsection 85(1);

(d) "BCA" means the Canada Business Corporations Act;

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

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

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

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

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

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

(k) "DC" means XXXXXXXXXX;

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

(m) "dividend refund" has the meaning assigned by paragraph 129(1)(a);

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

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

(p) "excepted dividend" has the meaning assigned by section 187.1;

(q) "excluded dividend" has the meaning assigned by subsection 191(1);

(r) "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;

(s) "Five Holdcos" has the meaning described in Paragraph 4;

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

(u) "F1-Individual1" means XXXXXXXXXX an individual who is a non-resident of Canada for the purposes of the Act;

(v) "F1-Individual2" means XXXXXXXXXX an individual resident in Canada for the purposes of the Act;

(w) "F1-TC2" means XXXXXXXXXX;

(x) "F1-TC1" means XXXXXXXXXX;

(y) "F1-Trust1" means the XXXXXXXXXX;

(z) "F1-Trust2" means the XXXXXXXXXX;

(aa) "F2-Individual1" means XXXXXXXXXX an individual resident in Canada for the purposes of the Act;

(bb) "F2-Individual2" means XXXXXXXXXX an individual resident in Canada for the purposes of the Act;

(cc) "F2-TC1" means XXXXXXXXXX;

(dd) "F2-TC2" means XXXXXXXXXX;

(ee) "F2-TC3" means XXXXXXXXXX;

(ff) "F3-Individual1" means XXXXXXXXXX an individual resident in Canada for the purposes of the Act;

(gg) "F3-Individual2" means XXXXXXXXXX an individual resident in Canada for the purposes of the Act;

(hh) "F3-Individual3" means XXXXXXXXXX an individual resident in Canada for the purposes of the Act;

(ii) "F3-Individual4" means XXXXXXXXXX an individual who is a non-resident of Canada for the purposes of the Act;

(jj) "F3-TC1" means XXXXXXXXXX;

(kk) "F3-TC2" means XXXXXXXXXX;

(ll) "F3-TC3" means XXXXXXXXXX;

(mm) "F4-Individual1" means XXXXXXXXXX an individual resident in Canada for the purposes of the Act;

(nn) "F4-TC1" means XXXXXXXXXX;

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

(pp) "Newco" means the new corporation described in Paragraph 17;

(qq) "Original Request" has the meaning described in Paragraph 12;

(rr) "Predecessor F2-TC3" means XXXXXXXXXX;

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

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

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

(vv) "Proposed Transactions" means the proposed transactions described in Paragraphs 16 to 22;

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

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

(yy) "SIN" means social insurance number;

(zz) "short-term preferred share" has the meaning assigned by subsection 248(1);

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

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

(ccc) "stated capital" means stated capital as that expression is used in the BCA;

(ddd) "subsidiary wholly-owned corporation" has the meaning assigned by subsection 248(1);

(eee) "substantial interest" has the meaning assigned by subsection 191(2);

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

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

(hhh) "taxable preferred share" has the meaning assigned by subsection 248(1); and

(iii) "testamentary trust" has the meaning assigned by subsection 108(1).

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

FACTS

1. DC was incorporated on XXXXXXXXXX under the Canada Corporations Act and continued on XXXXXXXXXX under the BCA. DC is a CCPC and its fiscal period and taxation year end on XXXXXXXXXX . DC deals with the XXXXXXXXXX TSO and files its federal returns at the XXXXXXXXXX TC.

2. DC had been the main holding company for four brothers (XXXXXXXXXX and herein referred to as the "founding brothers") who are now all deceased. Initially, each of the founding brothers, along with each brother's respective children, held a 25% interest in DC. DC in turn, had held interests in various corporations, including XXXXXXXXXX, all of which no longer exist. Currently, the surviving family members of each of the founding brothers still, directly or indirectly, hold a 25% interest in DC. For the purposes of this letter, the members of the family of the late XXXXXXXXXX will be referred to as Family1; the members of the family of the late XXXXXXXXXX will be referred to as Family2; the members of the family of the late XXXXXXXXXX will be referred to as Family3; and the members of the family of the late XXXXXXXXXX will be referred to as Family4.

3. DC's authorized capital consists of an unlimited number of Class A and Class B common shares, each without nominal or par value, and an unlimited number of Class C, Class D, Class E, Class F, Class G, and Class H preferred shares. DC's issued and outstanding shares consist of:

XXXXXXXXXX Class A common shares ("Class A Shares");
XXXXXXXXXX Class B common shares ("Class B Shares");
XXXXXXXXXX Class D preferred shares ("Class D Shares");
XXXXXXXXXX Class G preferred shares ("Class G Shares"); and
XXXXXXXXXX Class H preferred shares ("Class H Shares").

Each of the issued and outstanding Class D Shares, Class G Shares and Class H Shares of DC is a short-term preferred share and a taxable preferred share.

4. DC's issued and outstanding shares are held as follows:

		Class A	Class B	Class D	Class H	Class G

Family1

F1-TC1	XXXXXXX 	XXXXXXX 	XXXXXXX 	XXXXXXX 	XXXXXXX
F1-TC2			XXXXXXX 	XXXXXXX 	XXXXXXX 	XXXXXXX 

Family2

F2-TC1			XXXXXXX 	XXXXXXX 			XXXXXXX
F2-TC2							XXXXXXX
F2-TC3							XXXXXXX 

Family3

F3-TC1			XXXXXXX 	XXXXXXX 			XXXXXXX
F3-TC2							XXXXXXX
F3-TC3							XXXXXXX
F3-								XXXXXXX
Individual1

Family4

F4-TC1	XXXXXXX 	XXXXXXX 	XXXXXXX 			XXXXXXX
F4-								XXXXXXX
Individual1

The Class A Shares and Class B Shares have full voting rights (one vote per share) under all circumstances. The PUC of each Class A Share is $XXXXXXXXXX and the PUC of each Class B Share is $XXXXXXXXXX. The terms of the Class A and Class B Shares are identical except that dividends out of CSOH may be paid to the holders of Class B Shares to the exclusion of the holders of Class A Shares. Due to the fact that certain historical and pertinent corporate records of DC dating back to XXXXXXXXXX are no longer available, the accurate determination of DC's CSOH, if any, may be impossible to compute. The FMV of a Class A Share is identical to the FMV of a Class B Share.

The Class D Shares do not generally have voting rights and are subject to XXXXXXXXXX% annual cumulative dividends. However, since the declarations of dividends on the Class D Shares are in arrears (by approximately $XXXXXXXXXX), and have been for some time, the holders of such shares are entitled to one vote per share until such time that such dividend arrears are paid in full. The Class D Shares were issued for cash consideration of $XXXXXXXXXX . By separate directors' resolutions, the PUC of the Class D Shares was reduced on three separate occasions, with a corresponding payment to the holders of such shares equal to the amount of each such PUC reduction. The first two PUC reductions of $XXXXXXXXXX and $XXXXXXXXXX, respectively, took place during DC's taxation year ending in XXXXXXXXXX . The third PUC reduction of $XXXXXXXXXX took place during DC's taxation year ending in XXXXXXXXXX. The present aggregate PUC of the Class D Shares is $XXXXXXXXXX or $XXXXXXXXXX/share. Each Class D Share has an ACB to each holder of $XXXXXXXXXX.

The Class G Shares are non-voting, redeemable and retractable at $XXXXXXXXXX per share and have an aggregate PUC of $XXXXXXXXXX. The Class G Shares were issued on XXXXXXXXXX as consideration for the transfer, by each of F1-TC1, F1-TC2, F2-TC1, F3-TC1 and F4-TC1 (collectively referred to as the "Five Holdcos"), of the shares of XXXXXXXXXX. ("Sisterco") to DC. Sisterco was a TCC, all the shares of which were owned by the Five Holdcos immediately before such transfer. Sisterco was then wound-up into DC pursuant to subsection 88(1) shortly after it became a subsidiary wholly-owned corporation of DC. The purpose of these transactions was to transfer Sisterco's non-capital and net capital losses to DC since Sisterco was inactive and virtually without assets at that time. At the time these transactions were undertaken no distribution of DC's assets was being contemplated and such transactions are not connected to, nor have they been completed in contemplation of, the Proposed Transactions.

The Class H Shares are non-voting, redeemable and retractable at $XXXXXXXXXX per share and have an aggregate PUC of $XXXXXXXXXX.

Each of Family1, Family2, Family3 and Family4 directly or indirectly owns 25% of the shares of DC having full voting rights in all circumstances and 25% of the shares of DC representing 25% of the total equity or fair market value of DC. The shares of DC are held by each of the holders as capital property and none of the shares of DC has been issued or acquired by any person in contemplation of the proposed distribution by DC.

5. F1-Trust1 and F1-Trust2 are Canadian resident testamentary trusts formed on XXXXXXXXXX as a consequence of the death of the late XXXXXXXXXX and under the terms of XXXXXXXXXX's will (the "Will"). F1-Trust1 owns a majority of the voting shares of F1-TC1 and all of the participating shares of F1-TC1. F1-Trust2 owns a majority of the voting shares of F1-TC2 and a portion of the participating shares of F1-TC2. The trustees of the F1-Trust1 and the F1-Trust2 are F1-Individual1 and F1-Individual2 (who are siblings) and an attorney (the "Attorney") who is not related to the other two trustees and who is resident in Canada for the purposes of the Act. Under the terms of the Will, the Attorney must be part of a voting majority of trustees of each of the trusts in order to arrive at a decision on any given issue.

6. F1-Individual2 is the income beneficiary of F1-Trust2. In addition, XXXXXXXXXX, who are the sons of F1-Individual2 and nephews of F1-Individual1, are capital beneficiaries of the F1-Trust2. XXXXXXXXXX are Canadian residents. Under the terms of the Will, the trustees of the F1-Trust2 are now required to distribute a substantial portion of F1-Trust2's assets to its capital beneficiaries. However, as a result of XXXXXXXXXX described in Paragraph 7, the distribution of the assets held in the F1-Trust2 may be delayed XXXXXXXXXX. None of the decisions concerning the distribution of the assets by the F1-Trust2 is connected to the Proposed Transactions.

7. It is possible that the Attorney may decide to resign as trustee of the F1-Trust2 and the F1-Trust1. XXXXXXXXXX However, if all the parties agree that the Attorney can continue to act as trustee of each of the F1-Trust2 and the F1-Trust1, the Attorney may not resign and continue to act as trustee for each of the two trusts. In any event, should the Attorney actually decide to resign as trustee of F1-Trust2 and/or trustee of F1-Trust1, as the case may be, such action is not in any way connected to the proposed butterfly distribution by DC. The proposed butterfly distribution by DC will be undertaken whether or not the Attorney decides to resign as trustee of the F1-Trust1 and/or the F1-Trust2.

8. F2-TC1 is a TCC that was incorporated as part of an estate freeze on XXXXXXXXXX. All the shares of F2-TC1 are held in equal proportions by F2-TC2 and F2-TC3. F2-Individual1 controls F2-TC2 and F2-Individual2 controls F2-TC3. F2-Individual1 and F2-Individual2 are siblings. F2-TC3 is a TCC that was created as a result of an amalgamation between Predecessor F2-TC3 and a newly incorporated subsidiary corporation of Predecessor F2-TC3 on XXXXXXXXXX. This amalgamation took place as part of an estate freeze involving Predecessor F2-TC3, F2-Individual2 and her two adult children that commenced on or about XXXXXXXXXX . None of the completed transactions described in this Paragraph has been undertaken in contemplation of the Proposed Transactions and such transactions would have been undertaken whether or not any butterfly distribution of DC's assets takes place.

9. F3-TC1 is a TCC that was incorporated as part of an estate freeze on XXXXXXXXXX. XXXXXXXXXX of the issued and outstanding voting shares of F3-TC1 are held by each of F3-TC2 and F3-TC3, and XXXXXXXXXX of those issued and outstanding voting shares of F3-TC1 are held by each of F3-Individual1 and F3-Individual4. F3-TC2 is a TCC that is controlled by F3-Individual2 and F3-TC3 is a TCC that is controlled by F3-Individual3. F3-Individual2 and F3-Individual3 are siblings. F3-Individual1 and F3-Individual4 are siblings and are nieces of F3-Individual2 and F3-Individual3.

10. As part of the process of winding-up the estate of the late XXXXXXXXXX (who was a sister of F3-Individual3 and F3-Individual2 and the parent of F3-Individual1 and F3-Individual4), XXXXXXXXXX Class H Shares of DC (having an aggregate redemption value of $XXXXXXXXXX) previously held by a TCC that was controlled by her prior to her death, were transferred by her estate in XXXXXXXXXX to a new TCC (XXXXXXXXXX) which was organized and controlled by her estate. In XXXXXXXXXX. was wound-up and liquidated as part of the process of winding-up her estate, and the XXXXXXXXXX Class H Shares of DC were distributed to F3-Individual1, who was a beneficiary of her estate. In addition, as part of the process of winding-up XXXXXXXXXX and her estate, the shares of F3-TC1 were ultimately distributed to F3-Individual1 and F3-Individual4 in equal proportions. The timing of these transactions was substantially driven by the intention by the executors of her estate to file a subsection 164(6) election and otherwise avoid adverse US tax consequences which would apply to F3-Individual4 who was beneficially interested in almost XXXXXXXXXX% of that estate's assets. None of these completed transactions was undertaken in contemplation of the Proposed Transactions and such transactions would have been undertaken whether or not any butterfly distribution of DC's assets takes place.

11. F4-TC1 is a TCC that was incorporated as part of an estate freeze on XXXXXXXXXX. F4-TC1 is controlled by F4-Individual1.

12. On XXXXXXXXXX, the taxpayers had made a request for advance ruling in respect of a proposed butterfly distribution of DC's assets (the "Original Request"). However, the proposed transactions described in the Original Request were abandoned in late XXXXXXXXXX as a result of some technical issues that could not be resolved at that time. Immediately prior to the time of the Original Request, DC's significant assets were comprised mainly of two parcels of real property (each of which was acquired before XXXXXXXXXX by one of the two predecessors which were related to DC and subsequently transferred to DC), marketable investments, and amounts receivable from its corporate shareholders. Subsequent to the decision to abandon the proposed transactions described in the Original Request, DC sold its real property (on an arm's-length basis) for approximately $XXXXXXXXXX in cash. The sale of one parcel of real property in XXXXXXXXXX (which generated proceeds of disposition of $XXXXXXXXXX) was made pursuant to an option that was granted many years ago to the lessee of the particular property while the second property was sold in XXXXXXXXXX after having been on the market for some time prior. Both sales took place at a time when there was not any plan to proceed with a butterfly distribution of DC's assets. As such, the sale of DC's real property has taken place (and would have taken place) whether or not any proposed butterfly distribution of DC's assets actually takes place.

13. DC has five outstanding loans receivable owing by the Five Holdcos. These five loans are currently repayable on demand without interest in the aggregate approximate amount of $XXXXXXXXXX, and are in the approximate proportion to the respective holdings of Class A Shares and Class B Shares in DC. The last advances made by DC to the Five Holdcos took place on XXXXXXXXXX (in the aggregate amount of $XXXXXXXXXX). None of these advances was made in contemplation of any proposed butterfly distribution by DC, but rather were made as redundant funds became available in order to satisfy the personal needs or comply with the particular investment policies of the ultimate beneficial owners of each of the Five Holdcos.

14. After the decision was made to abandon the proposed transactions described in the Original Request and prior to the subsequent decision to proceed with the proposed butterfly distribution of DC's assets as described in this letter, the directors of DC declared a series of cash dividends on XXXXXXXXXX aggregating $XXXXXXXXXX and on XXXXXXXXXX aggregating $XXXXXXXXXX. These dividends essentially distributed redundant liquid assets to the shareholders of DC, which were derived substantially from the sale of the real estate assets described in Paragraph 12. In addition, some or all of the corporate shareholders of DC paid substantial dividends to their own shareholders from their respective share of these dividend proceeds. The decision to pay these dividends arose as redundant funds became available in order to satisfy the personal needs of the ultimate beneficial owners of DC's shares.

At the time each of these dividends was paid, it was understood that there would be no advance ruling involving any butterfly distribution by DC and consequently, no wind-up or liquidation of DC, such that DC would continue to operate as a holding corporation for its shareholders indefinitely. The Proposed Transactions were only structured when it became apparent, after numerous communications with the Income Tax Rulings Directorate (Palamar/Cooke) and some five months or so after the last dividend was paid by DC, that obtaining an advance income tax ruling under paragraph 55(3)(b) may have been possible. For greater certainty, at the time each of the above described dividends was paid, no butterfly distribution of DC's assets was being contemplated. Moreover, the Proposed Transactions would have been undertaken whether or not the dividends were paid.

15. Presently, substantially all of DC's assets are comprised of cash, marketable securities and the five loans receivable owing by the Five Holdcos as described in Paragraph 13. The amount of DC's tax losses, RDTOH and CDA, if any, will be determined, to the extent that such a determination is possible, immediately before the proposed distribution by DC as described in Paragraph 21 is carried out.

PROPOSED TRANSACTIONS

16. The shareholders of DC will, at a special shareholders' meeting, clarify by unanimous resolution, their understanding that the payments to the shareholders in respect of the PUC reductions on the Class D Shares had the effect of reducing the redemption amount and retraction amount of such Class D Shares, notwithstanding that the existing terms and conditions of the Class D Shares, as described in DC's Articles, are silent on this question. The purpose of this unanimous shareholder's resolution is to ensure that a holder of Class D Shares will not be able to receive, in the aggregate, amounts from DC in excess of what such holder may have paid for such shares when such shares were issued, taking into consideration the payments on the PUC reductions described in Paragraph 4. It was always intended by the shareholders that any amounts received by them as PUC reductions on the Class D Shares would reduce the liquidation entitlement of these shares. The unanimous shareholders' resolution merely corrects the oversight of failing to include such a provision in the terms and conditions of the Class D Shares when they were created.

17. F3-Individual1 will incorporate Newco under the provisions of the BCA. Newco will be a TCC. The authorized share capital of Newco will include common shares and a class of preferred shares having terms and conditions similar to the terms and conditions of the Class H Shares. One or more common shares of Newco will be issued to F3-Individual1 on incorporation for nominal consideration.

18. On a contemporaneous basis with the share transfer described in Paragraph 19, F4-Individual1 will transfer all his Class H Shares to F4-TC1 and as consideration therefor, F4-TC1 will issue a number of its preferred shares (having terms and conditions similar to the Class H Shares) having an aggregate fair market value and redemption amount equal to the aggregate fair market value of the Class H Shares so transferred.

F4-Individual1 and F4-TC1 will jointly elect, in prescribed form and within the time limits referred to in subsection 85(6), to have the rules in subsection 85(1) apply to the transfer of the Class H Shares to F4-TC1. The agreed amount in such election will be equal to the lesser of the amounts described in subparagraphs 85(1)(c.1)(i) and (ii).

For the purposes of the Act, the increase to the PUC of the preferred shares of F4-TC1 issued as consideration for the Class H Shares transferred to F4-TC1 by F4-Individual1 will not exceed the amount of PUC attributable to the Class H Shares for which the preferred shares of F4-TC1 were issued. For greater certainty, the increase to the PUC of the preferred shares of F4-TC1 so issued will not exceed the maximum amount that could be added to the PUC of such shares, having regard to subsection 85(2.1).

19. On a contemporaneous basis with the share transfer described in Paragraph 18, F3-Individual1 will transfer all her Class H Shares of DC to Newco and as consideration therefor, Newco will issue a number of its preferred shares having an aggregate fair market value and redemption amount equal to the aggregate fair market value of the Class H Shares so transferred.

F3-Individual1 and Newco will jointly elect, in prescribed form and within the time limits referred to in subsection 85(6), to have the rules in subsection 85(1) apply to the transfer of the Class H Shares to Newco. The agreed amount in such election will be equal to the lesser of the amounts described in subparagraphs 85(1)(c.1)(i) and (ii).

For the purposes of the Act, the increase to the PUC of the preferred shares of Newco issued as consideration for the Class H Shares transferred to Newco by F3-Individual1 will not exceed the amount of PUC attributable to the Class H Shares for which the preferred shares of Newco were issued. For greater certainty, the increase to the PUC of the preferred shares of Newco so issued will not exceed the maximum amount that could be added to the PUC of such shares, having regard to subsection 85(2.1).

20. Immediately before the transfer of property described in Paragraph 21, the property owned by DC will be classified into the following three types of property for the purposes of this distribution by DC as follows:

(a) cash or near-cash property, comprising all of the current assets of DC, including cash, DC's loans receivable owing by the Five Holdcos, income taxes receivable and prepaid expenses, if any;

(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).

For greater certainty, for purposes of this distribution:

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

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

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

Based on the types of property classifications described in this Paragraph, it is anticipated that DC will only have cash or near cash property at the time of the proposed distribution described in Paragraph 21.

21. The directors and shareholders of DC will resolve to wind-up DC. During the course of the dissolution, DC will distribute, on a pro rata basis, all of DC's property (on a gross asset basis) to each of its shareholders. At the time of this distribution, each of the shareholders of DC will be a TCC and, for the purpose of this Paragraph and Paragraph 22, each will be referred to as a transferee corporation. In addition, as part of their portion of DC's pro rata distribution, each of the Five Holdcos will receive its respective loan receivable on the distribution and as a consequence of such transfer each such loan receivable will be cancelled and considered to be paid in full. As part of the wind-up of DC, the holders of DC's Class A Shares and Class B Shares will each agree to assume, their appropriate portion of DC's liabilities.

Immediately following the distribution of DC's property described in this Paragraph, the FMV of each type of property so transferred to DC's shareholders, will approximate that proportion of the FMV of all property of DC of that type determined immediately before such transfer that

(a) the aggregate FMV, immediately before the transfer, of all of the shares of DC owned by a particular transferee corporation of DC at that time;

is of

(b) 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 fair market value of each type of property which each such transferee corporation will receive as compared to what each such transferee corporation would have received had such transferee corporation received its appropriate pro rata share of the fair market value of that type of property.

22. Immediately prior to the distribution of DC's properties described in Paragraph 21, DC will elect, pursuant to subsection 83(2), in prescribed manner and prescribed form, to treat the portion of the winding-up dividend referred to in subparagraph 88(2)(b)(i) on the Class H Shares as a separate capital dividend. Each of the transferee corporations owning Class H Shares will receive a proportionate capital dividend from DC.

Should the CDA of DC exceed the portion of the winding-up dividend in respect of the Class H Shares that is deemed to be a capital dividend as described above, DC will also elect, pursuant to subsection 83(2), in prescribed manner and prescribed form, to treat the portion of the winding-up dividend referred to in subparagraph 88(2)(b)(i) on the Class A Shares and Class B Shares, as the case may be, as a separate capital dividend to the extent that such portion does not exceed DC's CDA after deducting the portion deemed to be capital dividends paid on the Class H Shares described above.

In due course, DC will file tax returns, necessary election forms and, after the receipt of any dividend refund or other tax related refunds, file a petition for dissolution. Upon receipt of the certificate of dissolution, DC will be formally dissolved.

Post Distribution Transactions:

23. The Five Holdcos and Newco may declare and pay cash dividends to their respective shareholders to the extent that their respective directors see fit, from the proceeds derived from the distribution of DC's assets described in Paragraph 21. Moreover, the corporate shareholders of the Five Holdcos may also declare and pay taxable cash dividends to their individual shareholders out of the proceeds that each such corporation received that ultimately originated from the distribution of DC's assets.

ADDITIONAL INFORMATION

24. The Proposed Transactions will occur in the order presented unless otherwise indicated, with the exception of the filing any applicable election forms in respect of the Proposed Transactions described in Paragraphs 18, 19 and 22, which will be filed on or before the applicable due date.

25. Neither DC 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.

26. Except as otherwise described herein, no property has or will become property of DC in contemplation of the Proposed Transactions.

27. Except as otherwise described herein, no shares of DC or of any other corporation referred to herein will be acquired or disposed of as part of a series of transactions or events that includes the Proposed Transactions.

28. Except as otherwise described herein, none of the corporations referred to herein will dispose of more than 10% of the fair market value of property (other than money or indebtedness that is not convertible into other property) received by it from DC, as part of the series of transactions or events that includes the Proposed Transactions, otherwise than as a result of a disposition in the ordinary course of such corporation's business.

29. None of the shares of DC 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.

30. In respect of the control of F2-TC2 by-F2 Individual1 as described in Paragraph 8, you indicate that it has been recently discovered that F2-Individual1's spouse actually controls F2-TC2 due to an unintended and erroneous issuance of voting shares to F2-Individual1's spouse in XXXXXXXXXX. In order to correct this error, F2-Individual1's spouse will exchange, pursuant to section 86, all his voting shares of F2-TC2 for a class of shares of F2 TC2 that will be non-voting and having the appropriate fair market value and paid-up capital. The forgoing error rectification, by way of a share exchange, is not connected to the Proposed Transactions as the error arose at a time when no butterfly distribution was being contemplated and such rectification would be implemented whether or not the proposed distribution by DC takes place.

31. In respect of the various classes of issued and outstanding participating shares of F1-TC2 as described in Paragraph 5, you indicate that it has been recently discovered that the attributes of such classes of participating shares, erroneously, did not conform in varying aspects to the intentions of the parties when such shares were issued in XXXXXXXXXX. For example, some classes of shares should have had a retractable feature included in their share terms, some were not subject to a price adjustment clause and some had a redemption amount that should have been reduced where stated capital reductions were made. In order to correct these errors, Articles of Amendment will be filed, which, in each case, will correct the unintended errors in order to reflect the true and clear intention of the parties in XXXXXXXXXX. The forgoing error corrections are not connected to the Proposed Transactions as the errors arose at a time when no butterfly distribution was being contemplated and such corrections would be implemented whether or not the proposed distribution by DC takes place.

32. You also have indicated that the following transactions have been undertaken by one or more transferee corporations:

(a) FC-TC2 redeemed $XXXXXXXXXX worth of Class D preferred shares in XXXXXXXXXX and reduced its PUC by $XXXXXXXXXX in order to satisfy the personal needs of its shareholders;

(b) F4-TC1 redeemed a number of its various classes of shares in XXXXXXXXXX and in XXXXXXXXXX in order to satisfy the personal needs of its shareholders;

(c) F3-TC1 paid a substantial dividend of $XXXXXXXXXX to its corporate shareholders in XXXXXXXXXX for the purpose of enabling such corporate shareholders to repay certain loans owing by them; and

(d) Each of F2-TC2, F2-TC3, F3-TC2 and F3-TC3 has recently paid dividends to their individual shareholders in order to satisfy the personal needs of such shareholders.

You maintain that none of the above described transactions or events has taken place in contemplation of the Proposed Transactions or as part of a series of transactions or events that includes the Proposed Transactions.

PURPOSE OF THE PROPOSED TRANSACTIONS

33. The purpose of the Proposed Transactions is to distribute DC's residual and redundant assets to its shareholders so that each family can then pursue its own particular interest with respect to their share of DC's assets.

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 transferred property 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 Class H Shares owned by F4-Individual1 to F4-TC1 as described in Paragraph 18; and

(b) the transfer of the Class H Shares owned by F3-Individual1 to Newco as described in Paragraph 19;

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 amount thereof pursuant to paragraph 85(1)(a) and such that paragraph 85(1)(e.2) will not apply to the transfers referred to above.

B. As a result of the distributions by DC in the course of its winding-up as described in Paragraph 21:

(a) by virtue of paragraph 88(2)(b) and subsection 84(2), but subject to (i) to (iii) below, DC will be deemed to have paid, and each of the transferee corporations (as defined in Paragraph 21) will be deemed to have received, a dividend (each referred to as a "winding-up dividend" and collectively as the "winding-up dividends") on each particular class of shares of DC held by such transferee corporation, equal to the proportion of the amount by which the aggregate FMV of the property of DC distributed to each transferee corporation on the winding-up and allocated to a particular class of shares of DC exceeds the amount by which the PUC of such class of shares of DC, as the case may be, is reduced as a result of the distribution, that the number of shares of such class of shares of DC held by such transferee corporation, as the case may be, is of the number of all shares of that particular class of DC outstanding immediately before that time, and

(i) pursuant to subparagraph 88(2)(b)(i), such portion of each winding-up dividend referred to in (a) on the Class H Shares and the Class B Shares, as the case may be, as does not, in aggregate, exceed DC's CDA (allocated as described in Paragraph 22) immediately before the payment of such winding-up dividend will be deemed, for purposes of the subsection 83(2) election referred to in Paragraph 22, to be the full amount of a separate dividend;

(ii) pursuant to subparagraph 88(2)(b)(ii), such portion of each winding-up dividend referred to in (a) that is equal to the lesser of:

(a) DC's CSOH, as determined immediately before the payment of the winding-up dividends; and

(b) the amount by which the winding-up dividend exceeds the portion of thereof in respect of which DC will elect under subsection 83(2);

will be deemed not to be a dividend; and

(iii) pursuant to subparagraph 88(2)(b)(iii), each winding-up dividend, to the extent that it exceeds the portion thereof referred to in (i) that is deemed to be a separate dividend and the portion thereof referred to in (ii) that is deemed not to be a dividend, will be deemed to be a separate dividend that is a taxable dividend; and

(b) the taxable dividends described in (a)(iii):

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

(ii) will be deductible by the recipient pursuant to subsection 112(1) in computing its taxable income in the year in which such a dividend is deemed to have been received, and, for greater certainty, will not be prohibited by subsections 112(2.1), (2.2), (2.3) or (2.4);

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

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

(vi) will not be subject to tax under Part IV.1.

C. To the extent that a taxable dividend described in Ruling B is received by F1-TC1, F1-TC2, F2-TC1, F3-TC1 and F4-TC1, such dividend will not be subject to tax under Part IV, except to the extent that DC is entitled to a dividend refund for its taxation year in which it paid such dividend;

and

to the extent that a taxable dividend described in Ruling B is received by F2-TC2, F2-TC3, F3-TC2, F3-TC3 and Newco, such dividend will be subject to tax under Part IV.

D. To the extent that a taxable dividend described in Ruling B is received by F1-TC1, F1-TC2, F2-TC1, F2-TC2, F2-TC3 and F4-TC1, such dividend will not be subject to tax under Part VI.1;

and

to the extent that a taxable dividend described in Ruling B is received by F3-TC1, F3-TC2, F3-TC3 and Newco, such dividend will be subject to tax under Part VI.1, subject to DC having sufficient "dividend allowance" as defined in subsection 191(2) for the taxation year in which such dividends are deemed to be paid.

E. Provided that as part of a series of transactions or events that includes the Proposed Transactions, 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 a share 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 in Paragraphs 1 to 23; then by virtue of paragraph 55(3)(b), subsection 55(2) will not apply to the taxable dividends referred to in Ruling B and, for greater certainty, subsection 55(3.1) will not apply to deny the exemption under paragraph 55(3)(b).

F. The transfer and cancellation of the respective loans owing by each of the Five Holdcos to DC, as described in Paragraph 21, will not give rise to a forgiven amount, and none of DC, or the Five Holdcos will realize any gain or incur any loss as a result of the transfer and cancellation of such loans.

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

H. The provisions of subsection 245(2) will not be applied as a result of the Proposed Transactions, in and by themselves, to re-determine the tax consequences confirmed in the rulings given above.

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) the balance of CDA, CSOH or RDTOH of any corporation;

(c) without affecting any of the rulings given herein, the application of subsection 55(2) to any of the dividends described in Paragraph 23 or Paragraph 32;

(d) any other tax consequence relating to the facts, Proposed Transactions or any transactions or events taking place either prior to the Proposed Transactions or subsequent to the Proposed Transactions (including those described in Paragraph 32), 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