2006 Ruling 2006-0197501R3 - Multiple-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 multiple-wing butterfly. No new issues.

XXXXXXXXXX 2006-019750

Dear XXXXXXXXXX:

XXXXXXXXXX, 2006

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 subsection 248(1);

(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) "BCA1" means the Canada Business Corporations Act;

(e) "BCA2" means XXXXXXXXXX;

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

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

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

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

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

(k) "DC1" means XXXXXXXXXX;

(l) "DC1Sub1" means XXXXXXXXXX;

(m) "DC1Sub2" means XXXXXXXXXX;

(n) "DC1Sub3" means XXXXXXXXXX;

(o) "DC2" means XXXXXXXXXX;

(p) "DC2Sub" means XXXXXXXXXX;

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

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

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

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

(u) "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;

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

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

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

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

(z) "Proposed Transactions" means the proposed transactions described in Paragraphs 10 to 22;

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

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

(cc) "Sibling1" means XXXXXXXXXX an individual resident in Canada for the purposes of the Act;

(dd) "Sibling1Co" means XXXXXXXXXX;

(ee) "Sibling2" means XXXXXXXXXX an individual resident in Canada for the purposes of the Act;

(ff) "Sibling2Co" means XXXXXXXXXX;

(gg) "Sibling3" means XXXXXXXXXX an individual resident in Canada for the purposes of the Act;

(hh) "Sibling3Co" means XXXXXXXXXX;

(ii) "significant influence" has the meaning described in section 3050 of the CICA Handbook;

(jj) "SIN" means social insurance number;

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

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

(mm) "stated capital" means stated capital as that expression is used in the BCA1 or BCA2, as the case may be;

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

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

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

FACTS

1. DC1 was incorporated on XXXXXXXXXX under the BCA1. DC1 is a taxable Canadian corporation and a private corporation. DC1, thorough several wholly-owned corporations and through numerous partly-owned corporations (the "operating subsidiaries"), carries on the business of XXXXXXXXXX. DC1 also owns all the issued and outstanding shares of DC1Sub1, which operates a XXXXXXXXXX, and all the issued and outstanding shares of DC1Sub2 and DC1Sub3, each of which previously operated a XXXXXXXXXX business but are now dormant. DC1 also owns various real estate and other miscellaneous assets related to the business carried on by it and one or more of its subsidiaries. DC1 deals with the XXXXXXXXXX TSO and its corporate tax returns are filed with the XXXXXXXXXX TC.

Each of DC1's wholly-owned and partly-owned subsidiaries (referred to collectively as the "DC1 Group") is a taxable Canadian corporation and a private corporation. DC1 is considered to have significant influence over each corporation included in the DC1 Group.

2. XXXXXXXXXX

Neither DC1 nor any of the Siblings is related to any of the other third-party shareholders and DC1 and each of the Siblings is considered to deal at arm's-length with such other third-party shareholders. None of the corporations included in the DC1 Group has any balance of CDA or RDTOH. The shares of DC1 and of each corporation included in the DC1 Group are held by each of the Siblings, or DC1, as the case may be, as capital property.

3. The only issued and outstanding shares of DC1 are XXXXXXXXXX Class A common shares ("DC1 Common Shares"), which are held in equal proportions (i.e. XXXXXXXXXX shares each) by Sibling1, Sibling2 and Sibling3. The aggregate ACB and PUC of each shareholder's XXXXXXXXXX DC1 Common Shares is $XXXXXXXXXX and the aggregate fair market value of each shareholder's shares is $XXXXXXXXXX.

4. As indicated in Paragraph 1, DC1 owns real estate that is used in its various businesses. Included in DC1's real estate are two parcels of vacant land. One parcel of vacant land is used as a parking lot for the XXXXXXXXXX owned by DC1Sub1 and XXXXXXXXXX at that same location. The other parcel of vacant land owned by DC1 has been held by DC1 for the purpose of constructing a facility that would include XXXXXXXXXX. All the real estate owned by DC1 is considered to be capital property and business property (within the meaning described in Paragraph 15) for the purposes of the proposed distribution described herein.

5. DC2 was incorporated on XXXXXXXXXX under the BCA1. DC2 is a taxable Canadian corporation and a private corporation. DC2 owns a XXXXXXXXXX and XXXXXXXXXX% of the shares of another taxable Canadian corporation ("DC2Sub"), which also operates a XXXXXXXXXX. DC2 is considered to have significant influence over DC2Sub. Neither DC2 nor any of the Siblings is related to the other XXXXXXXXXX% shareholder of DC2Sub and DC2 and each of the Siblings is considered to deal at arm's-length with the other XXXXXXXXXX% shareholder of DC2Sub. Neither DC2 nor DC2Sub has any balance of CDA or RDTOH. DC2 deals with the XXXXXXXXXX TSO and its corporate tax returns are filed with the XXXXXXXXXX TC.

6. The only issued and outstanding shares of DC2 are XXXXXXXXXX common shares ("DC2 Common Shares"), which are held in equal proportions (i.e. XXXXXXXXXX shares each) by Sibling1, Sibling2 and Sibling3. The DC2 Common Shares are held by each of the Siblings as capital property. The aggregate ACB and PUC attributable to each shareholder's XXXXXXXXXX DC2 Common Shares is $XXXXXXXXXX and the aggregate fair market value of each shareholder's shares is $XXXXXXXXXX.

7. Each of the Siblings has always acted jointly and in concert with the other Siblings in respect of all important business and financial decisions regarding DC1 and DC2.

8. On XXXXXXXXXX, Sibling1, Sibling2 and Sibling3 each incorporated a new corporation under the BCA2. Specifically, Sibling1's corporation is referred to as Sibling1Co; Sibling2's corporation is referred to as Sibling2Co; and Sibling3's corporation is referred to as Sibling3Co (collectively, the corporations are referred to as the "SiblingCos" and "SiblingCo" means any one of the SiblingCos). Each of the SiblingCos is a taxable Canadian corporation and a private corporation. Each of the SiblingCos owns shares in other corporations that also carry on the business of XXXXXXXXXX. None of the SiblingCos has a balance of CDA or RDTOH.

9. The authorized share capital of each of the SiblingCos consists of the following classes of shares:

(a) an unlimited number of voting Class "A" common shares ("Class A Shares") with discretionary dividends and ranking pari passu with the Class "B" shares as to dividends and upon liquidation,

(b) an unlimited number of non-voting Class "B" common shares with discretionary dividends and ranking pari passu with the Class A Shares as to dividends and upon liquidation,

(c) an unlimited number of voting Class "C" preferred shares, with no rights to dividends and automatically redeemable on death for their stated capital,

(d) an unlimited number of non-voting Class "D" preferred shares, with no rights to dividends except for a dividend from the Capital Dividend Account created on the death of the shareholder,

(e) an unlimited number of retractable, non-voting Class "E" preferred shares ("Class E Shares"), with a XXXXXXXXXX% per month discretionary dividend on the redemption value of the shares,

(f) an unlimited number of retractable, non-voting Class "F" preferred shares, with a XXXXXXXXXX% per month discretionary dividend on the redemption value of the shares,

(g) an unlimited number of retractable, non-voting Class "G" preferred shares, with a discretionary annual dividend equal to the amount of the Corporation's Banker's Preferential Rate plus XXXXXXXXXX% on the redemption value of the shares,

(h) an unlimited number of retractable, non-voting Class "H" preferred shares, with a discretionary annual dividend of XXXXXXXXXX% of the stated capital of the shares, and

(i) an unlimited number of redeemable, non-voting Class "I" preferred shares, with a non -cumulative, XXXXXXXXXX% annual dividend payable on stated capital.

On incorporation, Sibling1 subscribed for XXXXXXXXXX Class A Shares of Sibling1Co for $XXXXXXXXXX; Sibling2 subscribed for XXXXXXXXXX Class A Shares of Sibling2Co for $XXXXXXXXXX; and Sibling3 subscribed for XXXXXXXXXX Class A Shares of Sibling3Co for $XXXXXXXXXX. The shares of each of the SiblingCos are held as capital property by each shareholder. No other shares of the SiblingCos have been issued.

PROPOSED TRANSACTIONS

10. DC1 will amalgamate with DC2 to form DC Amalco such that:

(a) all of the property (except amounts receivable from any predecessor corporation or shares of the capital stock of any predecessor corporation) of DC1 and DC2 immediately before the amalgamation will become property of DC Amalco by virtue of the amalgamation;

(b) all of the liabilities (except amounts payable to any predecessor corporation) of DC1 and DC2 will become liabilities of DC Amalco by virtue of the amalgamation; and

(c) all of the shareholders (except any predecessor corporation), who owned shares of the capital stock of any predecessor corporation immediately before the merger, will receive shares of the capital stock of DC Amalco because of the merger.

Specifically, upon the amalgamation, DC Amalco will issue XXXXXXXXXX common shares ("DC Amalco Common Shares") to each of Sibling1, Sibling2 and Sibling3 as sole consideration for the DC1 Common Shares and DC2 Common Shares that were owned by each of Sibling1, Sibling2 and Sibling3 immediately before the amalgamation.

11. The directors of each of DC1Sub2 and DC1Sub3 (formerly owned by DC1 as described in Paragraph 1), as the case may be, will resolve to dissolve and wind-up such corporation and all the assets of each such corporation will be distributed to DC Amalco pursuant to the provisions of subsection 88(1). The inter-company loans owing to DC Amalco by DC1Sub2 and by DC1Sub3 will be settled as a consequence of the winding-up of such corporation without any payment.

DC Amalco will elect, in prescribed form and within the time referred to in paragraph 80.01(4)(c), to have the rules in subsection 80.01(4) apply with respect to the settlement of the inter-company loans owing by DC1Sub2 and by DC1Sub3 on the winding-up of each such corporation.

In due course, each of DC1Sub2 and DC1Sub3 will file tax returns, and, after the receipt of any dividend refund or other tax related refunds, if any, file a petition for dissolution. Upon receipt of the certificate of dissolution, each such corporation will be formally dissolved.

12. DC Amalco will incorporate three new corporations under the BCA2, specifically referred to as "Subco1", "Subco2" and "Subco3" (collectively referred to as the "Subcos" and "Subco" means any one of the Subcos). The authorized share capital of each of Subco1, Subco2 and Subco3 will consist of the following classes of shares:

(a) an unlimited number of voting fully participating Class "A" shares ("Class A Shares") ranking pari passu with Class "B" shares,

(b) an unlimited number of non-voting fully participating Class "B" shares ranking pari passu with Class "A" shares,

(c) an unlimited number of voting redeemable Class "C" preferred shares with a non-cumulative dividend,

(d) an unlimited number of voting redeemable and retractable Class "D" preferred shares with a non-cumulative dividend,

(e) an unlimited number of non-voting redeemable and retractable preferred Class "E" shares ("Class E Shares") with a non-cumulative dividend.

13. Immediately before the transfers of property described in this Paragraph, the property of DC Amalco will be classified into three types of property (in the same manner as described in Paragraphs 15 and 16), immediately following which DC Amalco will transfer, on a contemporaneous basis, a pro rata portion (i.e. 1/3rd) of each type of property owned by DC Amalco to each of Subco1, Subco2 and Subco3 as follows:

(a) Where the fair market value of DC Amalco's property is equal to or less than its capital cost (or where such property is not an eligible property), DC Amalco will first transfer this property to each of the Subcos on a pro rata basis and, as consideration therefor, each of Subco1, Subco2 and Subco3, as the case may be, will assume an appropriate amount of DC Amalco's liabilities equal to the aggregate amount of the fair market value of such transferred property less $XXXXXXXXXX and issue XXXXXXXXXX of its Class A Shares to DC Amalco having an aggregate fair market value of $XXXXXXXXXX. For greater certainty, the transfers of property described in this subparagraph will not include any of the real estate owned by DC Amalco. Immediately after these property transfers, DC Amalco will own all the issued and outstanding voting shares of each of the Subcos (and thus be considered to control each of the Subcos) XXXXXXXXXX at the time DC Amalco transfers its real estate property to each of the Subcos as described in (b) below.

(b) Where the fair market value of DC Amalco's property exceeds its capital cost and is an eligible property which, for greater certainty, will include the real estate owned by DC Amalco, DC Amalco will transfer such property on a pro rata basis to each of the Subcos and, as consideration therefor, each of Subco1, Subco2 and Subco3, as the case may be, will assume an appropriate amount of DC Amalco's liabilities and issue a number of its Class E Shares to DC Amalco having an aggregate redemption amount and fair market value equal to the aggregate fair market value of the property transferred to it by DC Amalco less the amount of any liabilities of DC Amalco assumed by the particular Subco for such property.

Immediately following the transfers of property described in the Paragraph, the net fair market value of each type of property so transferred by DC Amalco to each of the Subcos will be equal to or will approximate that proportion of the net fair market value of that particular type of property of DC Amalco immediately before such transfers of property described herein that:

(c) the aggregate fair market value, immediately before the transfer, of all of the DC Amalco shares owned by each of Sibling1Co, Sibling2Co and Sibling3Co at that time, as the case may be, is of

(d) the aggregate fair market value, immediately before the transfer, of all the issued and outstanding shares of DC Amalco at that time.

For the purposes of this paragraph, the expression "approximates that proportion" means the discrepancy from that proportion, if any, that would not exceed one percent (1%) determined as a percentage of the FMV of the property that each Subco has received compared to what each SiblingCo would have received had it received its appropriate pro rata share of DC Amalco's property.

For greater certainty, in respect of the transfers of property described in (a) above, no subsection 85(1) elections will be made and the amount of DC Amalco's liabilities to be assumed by a particular Subco will not exceed the FMV of such particular property.

In respect of the transfers of property described in (b) above, DC Amalco and each of Subco1, Subco2 and Subco3, as the case may be, 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 the transfer of each eligible property by DC Amalco to such Subco. The agreed amount in respect of each eligible property so transferred will be as follows:

(i) 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);

(ii) 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

(iii) 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 Amalco's liabilities to be assumed by a particular Subco 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.

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) will be read to mean that proportion of the undepreciated capital cost to DC Amalco of all the property of that class that the capital cost of the asset immediately before the disposition is of the aggregate 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 Class A Shares issued to DC Amalco by a particular Subco as consideration for the property transferred to it as described in (a) above, will not exceed the aggregate fair market value of the transferred property less the aggregate amount of liabilities of DC Amalco assumed by the particular Subco for such property.

For the purposes of the Act, the increase to the PUC of the Class E Shares issued to DC Amalco by a particular Subco as consideration for the property transferred to it as described in (b) above, will not exceed the amount by which the aggregate of the agreed amounts less the aggregate amount of liabilities of DC Amalco assumed by such Subco for such property. For greater certainty, the increase to the PUC of the Class E Shares so issued by each Subco will not exceed the maximum amount that could be added to the PUC of such shares, having regard to subsection 85(2.1).

14. On a contemporaneous basis, Sibling1 will transfer his XXXXXXXXXX DC Amalco Common Shares to Sibling1Co; Sibling2 will transfer his XXXXXXXXXX DC Amalco Common Shares to Sibling2Co; and Sibling3 will transfer his DC Amalco Common Shares to Sibling3Co. As consideration therefor, Sibling1Co will issue XXXXXXXXXX of its Class A Shares to Sibling1 having an aggregate fair market value equal to the aggregate fair market value of the XXXXXXXXXX DC Amalco Common Shares transferred to SiblingCo1. Similarly, Sibling2Co will issue XXXXXXXXXX of its Class A Shares to Sibling2 and Sibling3Co will issue XXXXXXXXXX of its Class A Shares to Sibling3, in each case having an aggregate fair market value equal to the aggregate fair market value of the XXXXXXXXXX DC Amalco Common Shares transferred to the particular SiblingCo.

In respect of the transfers of the DC Amalco Common Shares to each of Sibling1Co, Sibling2Co and Sibling3Co as described in this Paragraph, each of Sibling1, Sibling2 and Sibling3, as the case may be, and his respective SiblingCo 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 the transfer of such shares to such SiblingCo. The aggregate of the agreed amounts in respect of the transfer of such DC Amalco Common Shares by a particular Sibling will be equal to that particular Sibling's aggregate adjusted cost base of such shares immediately before the transfer.

For the purposes of the Act, the increase to the PUC of the XXXXXXXXXX Class A Shares issued by each SiblingCo as consideration for the XXXXXXXXXX DC Amalco Common Shares transferred to it by such Sibling will not exceed the amount of PUC attributable to the XXXXXXXXXX DC Amalco Common Shares for which the XXXXXXXXXX Class A Shares of such SiblingCo were issued. For greater certainty, the increase to the PUC of the XXXXXXXXXX Class A Shares issued by each SiblingCo will not exceed the maximum amount that could be added to the PUC of such shares, having regard to section 84.1.

15. Immediately before the transfer of property described in Paragraph 17, the property of DC Amalco will be determined on a consolidated basis by including the appropriate pro rata share of the property of any corporation over which DC Amalco has the ability to exercise significant influence (DC Amalco and any corporation over which DC Amalco, Subco1, Subco2 or Subco3 has significant influence, will hereinafter sometimes collectively be referred to as the "DC Amalco Group"), and such property will be classified into the following three types of property for the purposes of the definition of "distribution" in subsection 55(1):

(a) cash or near cash property, comprising all of the current assets of the DC Amalco Group including any cash, accounts receivable, inventories, prepaid expenses, loans receivables from shareholders and officers, deposits with utilities, and loans to related corporations;

(b) investment property, comprising all of the assets of the DC Amalco Group, 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.

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

For the purposes of this Paragraph, a corporation will be considered to have significant influence over a corporation if it has significant influence over that corporation or over any other corporation that has significant influence over that corporation. In addition, for the purposes of determining the net FMV of the three types of property of DC Amalco as described in this Paragraph and Paragraph 16:

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

16. For the purpose of determining, on a consolidated basis, the net FMV of DC Amalco's three types of property immediately before the transfer of property described in Paragraph 17:

(a) in determining the net FMV of each type of property held by any corporation included in the DC Amalco Group, other than DC Amalco, the liabilities of each such corporation (other than any amount owing to DC Amalco), will be allocated to, and be deducted in the calculation of, the net FMV of a type of property owned by such corporation as follows:

(i) current liabilities of the particular corporation will be allocated to the cash or near cash property of that corporation in the proportion that the FMV of each such property is of the FMV of all cash or near cash property owned by that corporation to the extent that such allocation does not exceed the total FMV of such type of property. To the extent that the total of the current liabilities so allocated exceeds the total FMV of all cash or near cash property of that particular corporation, that corporation will be considered to have a negative amount of cash or near cash property;

(ii) provided that the net FMV of the cash or near cash property of the particular corporation is positive, the net FMV of all accounts receivable, inventories, prepaid expenses and deposits with utilities of that corporation that: are initially classified as cash or near cash property, that relate to a business that is carried on by that corporation, and that will be collected or consumed in the ordinary course of carrying on that business by the particular corporation, will be reclassified as business property. Consequently, the resulting net FMV of all cash or near cash property of that corporation will be reduced by the total net FMV (where such amount is positive) of such accounts receivable, inventory and prepaid expenses;

(iii) liabilities, other than current liabilities, of the particular corporation that relate to a particular property will then be allocated to the particular property (and effectively to the type of property to which the 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 the same type of property but not to a particular property will then be allocated to that particular type of property to the extent that such allocation does not exceed the total FMV of that type of property. To the extent that the liabilities pertaining to a particular type of property exceed the total FMV of that type of property of that corporation, that corporation will be considered to have a negative amount of that type of property; and

(iv) any other remaining liabilities of the particular corporation will then be allocated to the cash or near cash property, investment property and business property of that corporation based on the relative net FMV of each type of property prior to the allocation of such liabilities but after the allocation of the liabilities described in subparagraphs (a)(i) and (iii). However, where a corporation is considered to have a negative amount of a type of property because of subparagraphs (a)(i) or (iii), for the purposes of allocating those remaining liabilities, the net FMV of that type of property will be deemed to be nil resulting in none of those remaining liabilities being allocated to that type of property; and

(b) in determining the net FMV of each type of property of DC Amalco, immediately before the transfers of property, DC Amalco will include the appropriate pro rata share of the net FMV of each type of property of all corporations included in the DC Amalco Group (other than DC Amalco), (or such negative amount), as determined in accordance with subparagraph (a) above, and any liabilities of DC Amalco will then be allocated to, and be deducted in the calculation of, the net FMV of each type of property of DC Amalco in the following manner:

(i) current liabilities of DC Amalco will be allocated to cash or near cash property of DC Amalco in the proportion that the FMV of each such property is of the FMV of all cash or near cash property of DC Amalco. The amount of current liabilities so allocated as described herein will not exceed the aggregate FMV of all cash or near cash property of the cash or near cash property of DC Amalco;

(ii) following the allocation of current liabilities to cash or near-cash property of DC Amalco as described in (i), any remaining net FMV of accounts receivable, inventories, prepaid expenses and deposits with utilities of DC Amalco will be reclassified as business property and excluded from the net FMV of DC Amalco's cash or near cash property, to the extent that such property will relate to a business that will be carried on by DC Amalco or a transferee corporation and will be collected, sold, used or consumed in the ordinary course of that business;

(iii) liabilities of DC Amalco, other than current liabilities, that relate to a particular property will then be allocated to the particular property (and effectively to the type 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 type of property, but not to a particular property, will then be allocated to that type of property, but not in excess of the net FMV of such type of property after the allocation of liabilities to a particular property, as described herein; and

(iv) if any liabilities remain after the allocations described in (i) and (iii) are made ("excess DC Amalco unallocated liabilities"), such excess DC Amalco unallocated liabilities will then be allocated to the cash or near cash property, investment property and business property, if any, of DC Amalco based on the relative net FMV of each type of property prior to the allocation of such excess DC Amalco unallocated liabilities.

17. Immediately following the determination of the net FMV of DC Amalco's three types of property as described in Paragraphs15 and 16, DC Amalco will, on a contemporaneous basis, transfer a pro rata share (i.e. 1/3rd) of each of its three types of property to each of the SiblingCos. For greater certainty, DC Amalco will transfer: all its Class A Shares and Class E Shares of Subco1 to Sibling1Co; all its Class A Shares and Class E Shares of Subco2 to Sibling2Co; and all its Class A Shares and Class E Shares of Subco3 to Sibling3Co.

Immediately following the transfers of property by DC Amalco, the net FMV of each type of property so transferred to each of Sibling1Co, Sibling2Co and Sibling3Co, as the case may be, will be equal to or will approximate that proportion of the net fair market value of that particular type of property of DC Amalco immediately before such transfers of property described herein that:

(a) the aggregate fair market value, immediately before the transfer, of all of the DC Amalco shares owned by each of Sibling1Co, Sibling2Co and Sibling3Co at that time, as the case may be, is of

(b) the aggregate fair market value, immediately before the transfer, of all the issued and outstanding shares of DC Amalco at that time.

For the purposes of this paragraph, the expression "approximates that proportion" means the discrepancy from that proportion, if any, that would not exceed one percent (1%) determined as a percentage of the FMV of the property that each SiblingCo has received compared to what it would have received had it received its appropriate pro rata share of DC Amalco's property.

18. As consideration for the transfer of property to each of the SiblingCos by DC Amalco as described in Paragraph 17, each of Sibling1Co, Sibling2Co and Sibling3Co, as the case may be, will issue to DC Amalco XXXXXXXXXX of its Class E Shares having an aggregate fair market value and redemption amount equal to the aggregate fair market value of the all the property transferred by DC Amalco to the particular SiblingCo.

In respect of the transfers of property by DC Amalco to the SiblingCos, DC Amalco and each of Sibling1Co, Sibling2Co and Sibling3Co, as the case may be, 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 the transfer of each eligible property that is transferred by DC Amalco to such SiblingCo. The agreed amount for the purposes of each such election will not be less than the lesser of the two amounts described in paragraph 85(1)(c.1) and will not exceed the fair market value of each such property.

For the purposes of the Act, the increase to the PUC of the Class E Shares issued to DC Amalco by a particular SiblingCo as consideration for the property transferred to such SiblingCo as described in Paragraph 17, will not exceed the aggregate of the agreed amounts for such property and, 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).

19. Each of Sibling1Co, Sibling2Co and Sibling3Co, as the case may be, will redeem its Class E Shares that were issued to DC Amalco as described in Paragraph 18 for an amount equal to the aggregate redemption amount and fair market value of such shares. As consideration for such redemption, Sibling1Co, Sibling2Co, and Sibling3Co, as the case may be, will issue a non-interest bearing demand promissory note to DC Amalco having a principal amount and fair market value equal to the aggregate fair market value of its Class E Shares that are being redeemed. The non-interest bearing demand promissory note issued to DC Amalco by SiblingCo1 will be referred to as the "Sibling1Co Note"; the non-interest bearing demand promissory note issued to DC Amalco by SiblingCo2 will be referred to as the "Sibling2Co Note"; and the non-interest bearing demand promissory note issued to DC Amalco by SiblingCo3 will be referred to as the "Sibling3Co Note" (collectively, such notes will be referred to as the "SiblingCo Notes").

20. The directors of DC Amalco will resolve to liquidate DC Amalco pursuant to the provisions of the BCA1. In connection with the wind-up of DC Amalco, DC Amalco will assign and distribute: the Sibling1Co Note to SiblingCo1; the Sibling2Co Note to Sibling2Co; and the SiblingCo3 Note to Sibling3Co. Immediately prior to the assignment and distribution of the SiblingCo Notes, if DC Amalco has a positive CDA balance, it 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 its shares as a separate capital dividend such that each of the SiblingCos will receive a proportionate capital dividend from DC.

In due course, DC Amalco 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 Amalco will be formally dissolved.

21. As a result of the assignment and distribution by DC Amalco of the Sibling1Co Note to SiblingCo1, the Sibling2Co Note to SiblingCo2 and the Sibling3Co Note to Sibling3 as described in Paragraph 20, the obligation of each SiblingCo under its respective note will be cancelled.

22. The directors of each particular Subco will resolve to liquidate such Subco and as a result of each such wind-up, all the assets of Subco1 will be distributed to Sibling1Co, all the assets of Subco2 will be distributed to Sibling2Co and all the assets of Subco2 will be distributed to Sibling2Co.

In due course, each of the Subcos 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, each of the Subcos will be formally dissolved.

ADDITIONAL INFORMATION

23. 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 11, 13, 14, 17 and 20, which will be filed on or before the applicable due date.

24. Each purchase and sale agreement in respect of the transfers of property described in the Proposed Transactions will contain a price adjustment clause which will allow the parties thereto to alter the sale price as well as the retraction and redemption value of any share consideration paid thereon in the event that the taxation authorities do not concur with the fair market value assigned to the property sold by the parties.

25. 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 a series of transactions or events that includes the Proposed Transactions, a specified financial institution, a restricted financial institution or a corporation described in any of paragraphs (a) to (f) of the definition financial intermediary corporation.

26. No property has been or will be acquired by DC Amalco, or any of its predecessor corporations, and no liabilities have been or will be incurred by DC Amalco or any of its predecessor corporations, in contemplation of and before the transfers of property described in Paragraph 17, except as otherwise described herein.

27. None of the shares of any 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.

28. None of Sibling1, Sibling2, or Sibling3, directly or indirectly, intends to dispose of any shares of DC Amalco, the SiblingCos, or the shares of any other corporation included in the DC Amalco Group except as otherwise described herein.

PURPOSE OF THE PROPOSED TRANSACTIONS

29. The purpose of the Proposed Transactions is to distribute the assets of DC1 and DC2 (ultimately, DC Amalco) to its shareholders so that each Sibling can then pursue his own particular interest and business strategy with respect to his share of DC Amalco'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), and provided the appropriate joint elections are filed in the prescribed form and manner within the time specified in subsection 85(6), the provisions of subsection 85(1) will apply to the transfer:

(a) of the DC Amalco Common Shares owned by Sibling1, Sibling2 and Sibling3, as the case may be, to his respective SiblingCo as described in Paragraph 14;

(b) of any eligible property owned by DC Amalco to each of the Subcos as described in Paragraph 13; and

(c) of any eligible property owned by DC Amalco to each of the SiblingCos as described in Paragraph 17,

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 above.

B. Provided that DC Amalco elects in prescribed form and within the time referred to in paragraph 80.01(4)(c) to have the provisions of subsection 80.01(4) apply in respect of the winding-up of DC1Sub2 and DC1Sub3, as the case may be, as described in Paragraph 11, subsection 80.01(4) will apply to deem any commercial debt obligation owing by each of DC1Sub2 and DC1Sub3 to DC Amalco immediately before the winding-up to have been settled by payment of an amount that would be DC Amalco's cost amount of such commercial debt obligation immediately before the winding-up. For greater certainty, DC Amalco's cost amount of any such commercial debt obligation for this purpose of this Ruling will be determined under subparagraph 80.01(4)(c)(i) and (ii).

C. The provisions of subsection 88(1) will apply to the winding-up of: Subco1 into SiblingCo1; Subco2 into SiblingCo2; and Subco3 into SiblingCo3, as described in Paragraph 22.

D. As a result of the respective redemptions by each of the SiblingCos of such corporation's Class E Shares held by DC Amalco as described in Paragraph 19; and the distributions by DC Amalco in the course of its winding-up as described in Paragraph 20:

(a) by virtue of paragraphs 84(3)(a) and 84(3)(b), each of the SiblingCos will be deemed to have paid, and DC Amalco will be deemed to have received, a taxable dividend on the Class E Shares of the particular SiblingCo so redeemed equal to the amount, if any, by which the aggregate amount paid on such redemption exceeds the aggregate PUC in respect of such SiblingCo's Class E Shares immediately before such redemption;

(b) by virtue of paragraph 88(2)(b) and subsection 84(2), but subject to (i) and (ii) below, DC Amalco will be deemed to have paid, and each of the SiblingCos will be deemed to have received, a dividend (the "winding-up dividend") on each class of shares of DC Amalco held by such SiblingCo equal to the proportion of the amount by which the aggregate FMV of the property of DC Amalco distributed to each of the SiblingCos on the winding-up and allocated to a particular class of shares as described in Paragraph 21 exceeds the amount by which the PUC of such class of shares of DC Amalco is reduced on the distribution, that the number of shares of that class of DC Amalco held by such SiblingCo is of the number of all such shares of that class of DC Amalco outstanding immediately before that time; and

(i) pursuant to subparagraph 88(2)(b)(i), such portion of the winding-up dividend as does not exceed DC Amalco's CDA determined immediately before the payment of the winding-up dividend will be deemed, for purposes of the subsection 83(2) election referred to in Paragraph 21, to be the full amount of a separate dividend; and

(ii) pursuant to subparagraph 88(2)(b)(iii), the winding-up dividend, to the extent that it exceeds the portion thereof referred to in (i) that is deemed to be a separate dividend, will be deemed to be a separate dividend that is a taxable dividend;

(c) the taxable dividends described in (a) and (b) above:

(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 POD 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;

(v) will not be subject to tax under Part IV except to the extent that such payer corporation is entitled to a dividend refund for its taxation year in which it paid such dividend; and

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

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

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

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

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

(d) an acquisition of property in the circumstances described in subparagraph 55(3.1)(c) or (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 D and, for greater certainty, subsection 55(3.1) will not apply to deny the exemption under paragraph 55(3)(b).

F. The cancellation of the Sibling1Co Note issued by Sibling1Co, the Sibling2Co Note issued by Sibling2Co, and the Sibling3Co Note issued by Sibling3Co on the wind-up of DC Amalco as described in Paragraph 21 will not result in a forgiven amount.

G. The provisions of subsections 15(1), 56(2), 56(4), 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 or RDTOH of any corporation;

(c) 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,

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