2006 Ruling 2006-0209121R3 - Internal Reorganization - 55(3)(a)

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: Split-up of a family owned corporation controlled by Parent under paragraph 55(3)(a).

Position: Favourable rulings issued.

Reasons: The law.

XXXXXXXXXX 									2006-020912

XXXXXXXXXX, 2006

Dear XXXXXXXXXX:

Subject: XXXXXXXXXX
Advance Income Tax Ruling Request

This is in reply to your letters of XXXXXXXXXX, as modified by your other correspondence, wherein you requested an advance income tax ruling on behalf of the 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 any of the taxpayers or a related person;

(ii) being considered by a tax services office ("TSO") or taxation centre ("TC") in connection with a previously filed tax return of any of the taxpayers or a related person;

(iii) under objection by any of the taxpayers or a related person;

(iv) before the courts or, if a judgment has been issued, the time limit for appeal to a higher court has expired; or

(v) the subject of a ruling previously issued by the Income Tax Rulings Directorate.

The taxpayers have also represented that the proposed transactions described herein will not result in any taxpayer 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 and clause or subclause is a reference to the relevant provision of the Act, and the Income Tax Regulations thereunder are referred to as the "Regulations";

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

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

(d) "Assets" means the total assets of Investco, including any tax refund to be received by Investco for its taxation year that includes the Proposed Transactions;

(e) "BCA" means the XXXXXXXXXX Business Corporations Act;

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

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

(h) "capital dividend" means a dividend to which subsection 83(2) applies;

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

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

(k) "Child1" means XXXXXXXXXX;

(l) "Child2" means XXXXXXXXXX;

(m) "Child3" means XXXXXXXXXX;

(n) "Child4" means XXXXXXXXXX;

(o) "Child5" means XXXXXXXXXX;

(p) "Children" means Child1, Child2, Child3, Child4, and Child5 collectively, and "Child" means any of the Children in the singular;

(q) "cost amount" has the meaning assigned by subsection 248(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) "Effective Date" means a day shortly after the issuance of this Ruling, as agreed upon by the parties;

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

(v) "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;

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

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

(y) "Holdcos" means Holdco1, Holdco2, Holdco3, Holdco4, and Holdco5 collectively, and "Holdco" means any of the Holdcos in the singular;

(z) "Investco" means XXXXXXXXXX;

(aa) "XXXXXXXXXX Trust" means XXXXXXXXXX;

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

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

(dd) "Parent" means XXXXXXXXXX;

(ee) "Proposed Transactions" means the transactions described in Paragraphs 14 to 27;

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

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

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

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

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

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

(ll) "Trusts" means Trust1, Trust2, Trust3, Trust4 and Trust5 collectively, and "Trust" means any of the Trusts in the singular;

(mm) "Trust1" means XXXXXXXXXX;

(nn) "Trust2" means XXXXXXXXXX;

(oo) "Trust3" means XXXXXXXXXX;

(pp) "Trust4" means XXXXXXXXXX;

(qq) "Trust5" means XXXXXXXXXX;

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

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

(tt) "taxation year" has the meaning assigned by subsection 249(1).

FACTS

1. Trust1 was created by a trust agreement dated XXXXXXXXXX, between Parent as settlor, and Child1 as trustee. Child1 died on XXXXXXXXXX. The current trustees of Trust1 are Parent, Child2 and Child3. The only beneficiaries of Trust1 are the issue of Child1.

2. Trust2 was created by a trust agreement dated XXXXXXXXXX, between Parent as settlor, and Child2 and her spouse, as trustees. The only beneficiaries of Trust2 are Child2, her spouse, and the issue of Child2.

3. Trust3 was created by a trust agreement dated XXXXXXXXXX, between Parent as settlor, and Child3 and her spouse, as trustees. The only beneficiaries of Trust3 are Child3, her spouse, and the issue of Child3.

4. Trust4 was created by a trust agreement dated XXXXXXXXXX, between Parent as settlor, and Child4, as trustee. The only beneficiaries of Trust4 are Child4 and the issue of Child4.

5. Trust5 was created by a trust agreement dated XXXXXXXXXX, between Parent as settlor, and Child5 and his spouse, as trustees. The only beneficiaries of Trust5 are Child5, his spouse, and the issue of Child5.

6. The XXXXXXXXXX Trust was created by a trust agreement dated XXXXXXXXXX. The settlor of the XXXXXXXXXX Trust was XXXXXXXXXX, who was the spouse of Parent until his death in XXXXXXXXXX. The current trustees of the XXXXXXXXXX Trust are Parent and her solicitor. The only beneficiaries of the XXXXXXXXXX Trust are the surviving Children of Parent and her grandchildren. By order of the Superior Court of XXXXXXXXXX, dated the XXXXXXXXXXX, the XXXXXXXXXX Trust was amended to change the "date of distribution" to be the age when the particular beneficiary attains XXXXXXXXXX years of age, rather than XXXXXXXXXX years of age.

7. Parent is the mother of Child1, Child2, Child3, Child4 and Child5. Parent, and each of the surviving Children, is resident in Canada for the purposes of the Act. Parent is related to each beneficiary of the Trusts and to each beneficiary of the XXXXXXXXXX Trust.

8. Investco is a CCPC that was incorporated on XXXXXXXXXX under the BCA. Investco has a taxation year-end of XXXXXXXXXX. Investco deals with the XXXXXXXXXX TSO and files its federal returns at the XXXXXXXXXX TC. Investco has the several classes of issued and outstanding shares described as follows:

(a) XXXXXXXXXX non-voting class A preferred shares ("Class A Shares") that are redeemable and retractable for $XXXXXXXXXX per share. The holders of the Class A Shares are not entitled to dividends. On the wind-up of Investco, the holders of Class A Shares are entitled to receive $XXXXXXXXXX per share in priority to the other classes of shares;

(b) XXXXXXXXXX voting class D preferred shares ("Class D Shares") that are redeemable for $XXXXXXXXXX per share. Each Class D Share entitles a holder to XXXXXXXXXX votes. The holders of the Class D Shares are not entitled to dividends. On the wind-up of Investco, the holders of Class D Shares are entitled to receive $XXXXXXXXXX per share in priority to the other classes of shares other than the Class A Shares;

(c) XXXXXXXXXX voting class E preferred shares ("Class E Shares") that are redeemable and retractable for $XXXXXXXXXX per share. Each Class E Share entitles a holder to one (1) vote. The holders of Class E Shares are entitled to discretionary non-cumulative dividends (up to XXXXXXXXXX% annually on the redemption amount). On the wind-up of Investco, the holders of Class E Shares are entitled to receive $XXXXXXXXXX per share in priority to the other classes of shares other than the Class A Shares and Class D Shares;

(d) XXXXXXXXXX non-voting class G preferred shares ("Class G Shares") that are retractable for $XXXXXXXXXX per share. The holders of Class G Shares are not entitled to dividends. On the wind-up of Investco, the holders of Class G Shares are entitled to receive $XXXXXXXXXX per share in priority to the other classes of shares other than the Class A Shares, Class D Shares and Class E Shares;

(e) XXXXXXXXXX voting common shares ("Common Shares"). Each Common Share entitles a holder to one (1) vote. The holders of Common Shares are entitled to dividends as and when declared. On the wind-up of Investco, the holders of Common Shares are entitled to receive the residual assets of Investco, after all classes of preferred shares have received their redemption amounts.

9. The issued and outstanding shares of Investco are held as follows:

Shareholder		Class A 	Class D 	Class E 	Class G 	Common
			Shares 	Shares 	Shares 	Shares 	Shares

Parent		XXXXXXX 	XXXXXXX 	XXXXXXX 

XXXXXX
Trust									XXXXXXX
Trust1										XXXXXXX
Trust2										XXXXXXX
Trust3										XXXXXXX
Trust4										XXXXXXX
Trust5										XXXXXXX 

Parent is XXXXXXXXXX years old but in good health for a person of her age. Parent currently controls Investco and has controlled Investco since the death of her spouse in XXXXXXXXXX. All issued shares are capital property to each of the shareholders.

10. In addition to the issued and outstanding classes of shares of Investco described in Paragraph 8, Investco has authorized a class of voting class C preferred shares ("Class C Shares"). Each Class C Share entitles a holder to one (1) vote. The holders of Class C Shares are not entitled to dividends. The Class C Shares have a redemption amount of $XXXXXXXXXX per share and are redeemable and retractable at the option of either the holder or Investco. In the event of the liquidation, dissolution or winding-up of Investco, the holders of Class C Shares are entitled to receive an amount equal to the redemption amount. No Class C Shares have been issued.

11. Investco's assets are comprised of approximately XXXXXXXXXX% of the issued and outstanding shares of one publicly traded Canadian corporation, XXXXXXXXXX ("Aco"), a nominal amount of cash and XXXXXXXXXX% of the issued and outstanding common shares in a private corporation, XXXXXXXXXX ("Bco"), which also owns approximately XXXXXXXXXX% of the issued and outstanding shares of Aco. Other corporations, some of which may be controlled by individuals who are nephews and nieces of Parent, hold the remaining shares of Bco. Investco's liabilities (if any) consist of a small amount of payables. Investco has a balance of RDTOH and will continue to earn investment income until the Effective Date.

12. Investco's only source of income is from the dividends it receives on its share investments at the end of each XXXXXXXXXX. The funds from such dividends are used regularly and almost exclusively by Investco to redeem the Class E Shares held by Parent and to pay dividends on its Common Shares. The Class E Shares have been redeemed regularly over a number of years.

13. Investco has requested and received permission from the XXXXXXXXXX TSO to change its taxation year to a day that will end preceding the Effective Date. On completion of the Proposed Transactions the Holdcos will own and hold, in equal proportions (i.e. 1/5th each), the Assets previously owned by Investco.

PROPOSED TRANSACTIONS

14. Parent will subscribe for, and acquire, one (1) Class C Preferred Share of Investco for a subscription price of $XXXXXXXXXX to be paid to Investco.

15. Parent will incorporate five new corporations, (referred to as Holdco1, Holdco2, Holdco3, Holdco4 and Holdco5, as the case may be), under the BCA. Each of the Holdcos will be a taxable Canadian corporation and no shares of any of the Holdcos will be issued on incorporation.

Each of the Holdcos will have the following authorized share capital:

(a) a number of common shares having identical attributes to those of the Common Shares of Investco described in Paragraph 8.

(b) a number of Class A Preferred Shares having identical attributes to those of the Class A Shares of Investco described in Paragraph 8;

(c) a number of Class D Preferred Shares having identical attributes to those of the Class D Shares of Investco described in Paragraph 8;

(d) a number of Class E Preferred Shares having identical attributes to those of the Class E Shares of Investco described in Paragraph 8;

(e) a number of Class G Preferred Shares having identical attributes to those of the Class G Shares of Investco described in Paragraph 8; and

(f) a number of non-voting preference shares ("Non-Voting Preference Shares"). The holders of the Non-Voting Preference Shares are not entitled to dividends and such shares are retractable and redeemable for an aggregate redemption amount ("Redemption Amount") fixed at the first issuance of such shares. The Redemption Amount of a Non-Voting Preference Share will be equal to the aggregate fair market value of the property received by the company in return for the issuance of such shares less any non-share consideration paid by the company for such property on their issuance, divided by the number of shares so issued. The holders of Non-Voting Preference Shares will be entitled to receive, on wind-up, their Redemption Amount in priority to the liquidation entitlement of the Class A, D, G Preferred Shares and common shares but ranking equally with the holders of the Class E Preferred Shares;

16. If before the end of Investco's current taxation year, Investco has a balance of cash on hand equal to, or in excess of $XXXXXXXXXX (being the amount equal to the FMV and redemption amount of a Class E Share), Investco will redeem a number of its Class E Shares held by Parent for cash consideration and also possibly pay a cash dividend on its Common Shares held by the Trusts such that Investco's cash on hand immediately thereafter, will be less than $XXXXXXXXXX. Investco will be deemed to have paid, and Parent will be deemed to have received, a dividend on the redemption of the Class E Shares held by Parent under subsection 84(3). Sometime after the transactions described in this Paragraph are completed and before the Effective Date, Investco will cause its current taxation year that commenced on XXXXXXXXXX to end.

17. On the Effective Date, and on a contemporaneous basis with the share transfers described in Paragraphs 18 and 19, Parent will transfer:

(a) one-fifth (i.e. XXXXXXXXXX) of her Class A Shares of Investco to each of the Holdcos and as consideration therefor, each Holdco will issue an equal number of its Class A Preferred Shares to Parent having an aggregate FMV equal to the aggregate FMV of the Class A Shares of Investco transferred to that Holdco by Parent;

(b) one-fifth (i.e. XXXXXXXXXX) of her Class D Shares of Investco to each of the Holdcos and as consideration therefor, each Holdco will issue an equal number of its Class D Preferred Shares to Parent having an aggregate FMV equal to the aggregate FMV of the Class D Shares of Investco transferred to that Holdco by Parent;

(c) one-fifth of her remaining Class E Shares of Investco to each of the Holdcos and as consideration therefor, each Holdco will issue an equal number of its Class E Preferred Shares to Parent having an aggregate FMV equal to the aggregate FMV of the Class E Shares of Investco transferred to that Holdco by Parent.

For the purposes of the BCA, the increase to the stated capital of the Class A Preferred Shares of each Holdco that are issued to Parent as consideration for the Class A Shares of Investco that such Holdco will receive from Parent, as described above, will not exceed the amount determined as B for the purposes of paragraph 84.1(1)(a).

For the purposes of the BCA, the increase to the stated capital of the Class D Preferred Shares of each Holdco that are issued to Parent as consideration for the Class D Shares of Investco that such Holdco will receive from Parent, as described above, will not exceed the amount determined as B for the purposes of paragraph 84.1(1)(a).

For the purposes of the BCA, the increase to the stated capital of the Class E Preferred Shares of each Holdco that are issued to Parent as consideration for the Class E Shares of Investco that such Holdco will receive from Parent, as described above, will not exceed the amount determined as B for the purposes of paragraph 84.1(1)(a).

18. On a contemporaneous basis with the share transfers described in Paragraphs 17 and 19, the XXXXXXXXXX Trust will transfer one-fifth of its Class G Shares of Investco to each of the Holdcos and as consideration therefor, each Holdco will issue an equal number of its Class G Preferred Shares to the XXXXXXXXXX Trust having an aggregate FMV equal to the aggregate FMV of the Class G Shares of Investco transferred to that Holdco by the XXXXXXXXXX XXXXXXXXXX Trust.

For the purposes of the BCA, the increase to the stated capital of the Class G Preferred Shares of each Holdco that are issued to the XXXXXXXXXX Trust as consideration for the Class G Shares of Investco that such Holdco will receive from the XXXXXXXXXX Trust, as described above, will not exceed the amount determined as B for the purposes of paragraph 84.1(1)(a).

19. On a contemporaneous basis with the share transfers described in Paragraphs 17 and 18:

(a) Trust1 will transfer its XXXXXXXXXX Common Shares of Investco to Holdco1 and as consideration therefor, Holdco1 will issue XXXXXXXXXX of its common shares to Trust1 having an aggregate FMV equal to the aggregate FMV of the XXXXXXXXXX Common Shares of Investco transferred to Holdco1 by Trust1;

(b) Trust2 will transfer its XXXXXXXXXX Common Shares of Investco to Holdco2 and as consideration therefor, Holdco2 will issue XXXXXXXXXX of its common shares to Trust2 having an aggregate FMV equal to the aggregate FMV of the XXXXXXXXXX Common Shares of Investco transferred to Holdco2 by Trust 2;

(c) Trust3 will transfer its XXXXXXXXXX Common Shares of Investco to Holdco3 and as consideration therefor, Holdco3 will issue XXXXXXXXXX of its common shares to Trust3 having an aggregate FMV equal to the aggregate FMV of the XXXXXXXXXX Common Shares of Investco transferred to Holdco3 by Trust 3;

(d) Trust4 will transfer its XXXXXXXXXX Common Shares of Investco to Holdco4 and as consideration therefor, Holdco4 will issue XXXXXXXXXX of its common shares to Trust4 having an aggregate FMV equal to the aggregate FMV of the XXXXXXXXXX Common Shares of Investco transferred to Holdco4 by Trust 4; and

(e) Trust5 will transfer its XXXXXXXXXX Common Shares of Investco to Holdco5 and as consideration therefor, Holdco5 will issue XXXXXXXXXX of its common shares to Trust5 having an aggregate FMV equal to the aggregate FMV of the XXXXXXXXXX Common Shares of Investco transferred to Holdco5 by Trust 5.

For the purposes of the BCA, the increase to the stated capital of the common shares that are issued by a particular Holdco to a particular Trust as consideration for the XXXXXXXXXX Common Shares of Investco that such Holdco will receive from such Trust, as described above, will not exceed the amount determined as B for the purposes of paragraph 84.1(1)(a).

20. In respect of each of the share transfers described in Paragraphs 17, 18 and 19, each respective transferor and transferee will file a joint election in the prescribed form, and within the time limits referred to in subsection 85(6) to have the provisions of subsection 85(1) apply in respect of each of the share transfers. The agreed amount in each joint election will be equal to the lesser of the amounts described in subparagraphs 85(1)(c.1)(i) and (ii) nor will any such agreed amount be less than the amount described in paragraph 85(1)(b).

21. On the Effective Date and immediately following the share transfers described in Paragraphs 17, 18 and 19, Investco will transfer, on a pro rata basis (i.e. one-fifth) of the FMV of its Assets to each of the Holdcos.

As consideration therefor, each Holdco will assume one-fifth of the liabilities owing by Investco and each Holdco will issue one Non-Voting Preference Share to Investco having a FMV and a Redemption Amount equal to the amount by which the aggregate FMV of the Assets of Investco that are transferred to that particular Holdco exceeds the aggregate amount of liabilities of Investco that are assumed by that particular Holdco in respect of such transfer.

In respect of the above-described transfers, Investco and each of the respective Holdcos will jointly elect, in prescribed form and within the time referred to in subsection 85(6), to have the provisions of subsection 85(1) apply to each eligible property that is transferred by Investco to such Holdco. The agreed amount in respect of each eligible property so transferred will be as follows:

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

(b) in the case of depreciable property of a prescribed class, an amount not less than the least of the amounts described in subparagraphs 85(1)(e)(i), (ii) and (iii); and

(c) in the case of eligible capital property, an amount not less than the least of the amounts described in subparagraphs 85(1)(d)(i), (ii) and (iii).

In each case, the agreed amount will not exceed the FMV of the respective property, nor will it be less than the amount permitted under paragraph 85(1)(b). Where the particular transferred property is not an eligible property, the transfer price will equal the fair market value of such property. The amount of Investco's liabilities to be assumed by a particular Holdco and to be allocated to property that will be the subject of an election under subsection 85(1) will not exceed the total of the agreed amounts elected for all such properties. The amount of Investco's liabilities to be assumed by a particular Holdco and allocated to property that will not be the subject of an election under subsection 85(1) will not exceed the FMV of such particular property.

For the purposes of the BCA, each of the Holdcos will add to the stated capital account maintained for its Non-Voting Preference Share an amount equal to the amount by which the aggregate cost of the properties acquired by it from Investco (determined pursuant to subsection 85(1) where relevant) exceeds the aggregate amount of the liabilities, if any, assumed by that particular Holdco as consideration therefor. For greater certainty, the increase to the PUC of the Non-Voting Preference Share so issued by each Holdco will not exceed the maximum amount that could be added to the PUC of such share, having regard to subsection 85(2.1).

22. On the Effective Date, and after the transfer of Investco's Assets described in Paragraph 21, each Holdco will redeem its one Non-Voting Preference Share that it issued to Investco for an amount equal to its Redemption Amount and FMV. As payment of the Redemption Amount, each Holdco will issue a non-interest-bearing promissory note payable on demand having a principal amount and FMV equal to the Redemption Amount. In particular, the promissory note issued by Holdco1 will be referred to as the "Holdco1 Note"; the promissory note issued by Holdco2 will be referred to as the "Holdco2 Note"; the promissory note issued by Holdco3 will be referred to as the "Holdco3 Note"; the promissory note issued by Holdco4 will be referred to as the "Holdco4 Note"; and the promissory note issued by Holdco5 will be referred to as the "Holdco5 Note" (collectively, such notes will be referred to as the "Holdco Notes"). Investco will accept each of the Holdco Notes as full payment for the Redemption Amount of each such Holdco's Non-Voting Preference Share.

23. Following the share redemptions described in Paragraph 22, each of the Holdcos will cause its first taxation year to end.

24. On the day after the Effective Date, Investco will on a contemporaneous basis:

(a) redeem all of its Class A Shares, Class D Shares, Class E Shares and Class G Shares held by each of the Holdcos for an amount equal to the aggregate respective redemption amounts and FMV of such class of shares held by the particular Holdco; and

(b) purchase for cancellation all of its Common Shares held by each of the Holdcos for an amount equal to the aggregate FMV of such shares held by the particular Holdco.

As consideration for such redemption or purchase for cancellation, as the case may be, Investco will issue to each Holdco, a non-interest-bearing promissory note payable on demand and having a principal amount equal to the aggregate of: the respective redemption amounts of the Class A Shares, Class D Shares, Class E Shares and Class G Shares and the FMV of the Common Shares of Investco held by such Holdco at that time. In particular, the promissory note issued by Investco to Holdco1 will be referred to as the "Investco Note1"; the promissory note issued by Investco to Holdco2 will be referred to as the "Investco Note2"; the promissory note issued by Investco to Holdco3 will be referred to as the "Investco Note3"; the promissory note issued by Investco to Holdco4 will be referred to as the "Investco Note4"; and the promissory note issued by Investco to Holdco5 will be referred to as the "Investco Note5" (collectively, such notes will be referred to as the "Investco Notes"). Each of the Holdcos will accept its respective Investco Note as full payment for the aggregate of redemption amounts and purchase for cancellation amount of the shares of Investco that were held by such Holdco.

25. Pursuant to agreements entered into between Investco and each of the Holdcos:

(a) the principal amount owing by Investco to Holdco1 under the Investco Note1 and the principal amount owing by Holdco1 to Investco under the Holdco1 Note will be set-off in full against each other and each such note will be marked paid in full and cancelled;

(b) the principal amount owing by Investco to Holdco2 under the Investco Note2 and the principal amount owing by Holdco2 to Investco under the Holdco2 Note will be set-off in full against each other and each such note will be marked paid in full and cancelled;

(c) the principal amount owing by Investco to Holdco3 under the Investco Note3 and the principal amount owing by Holdco3 to Investco under the Holdco3 Note will be set-off in full against each other and each such note will be marked paid in full and cancelled;

(d) the principal amount owing by Investco to Holdco4 under the Investco Note4 and the principal amount owing by Holdco4 to Investco under the Holdco4 Note will be set-off in full against each other and each such note will be marked paid in full and cancelled; and

(e) the principal amount owing by Investco to Holdco5 under the Investco Note5 and the principal amount owing by Holdco5 to Investco under the Holdco5 Note will be set-off in full against each other and each such note will be marked paid in full and cancelled.

26. Investco will file its federal income tax return for its taxation year that includes the Proposed Transactions without delay. Following receipt of the dividend refund (if any) to which Investco will become entitled as a result of the Proposed Transactions described herein, Investco will immediately distribute one-fifth of such amount to each Holdco.

27. Within a reasonable time following the distribution, by Investco, of the amount to each Holdco described in Paragraph 26, Articles of Dissolution will be filed in the appropriate corporate registry and upon receipt of the Certificate of Dissolution, Investco will be dissolved.

ADDITIONAL INFORMATION

28. 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 17, 18, 19 and 21, which will be filed on or before the applicable due date and for greater certainty, in respect of the Proposed Transaction described in Paragraph 21, before Investco ceases to exist.

29. Other than as described herein, no significant transactions have been completed prior to the date of this letter nor are there any other transactions currently being contemplated that would form part of the series of transactions or events that includes the Proposed Transactions.

30. Neither Investco nor any corporation to which Investco is related is a specified financial institution or a restricted financial institution.

31. None of the shares in the capital of Investco or of any of the Holdcos, has been, or will be, at any time during the implementation of the Proposed Transactions:

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

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

(c) the subject of a dividend rental arrangement.

PURPOSE OF THE PROPOSED TRANSACTIONS

32. Parent currently controls Investco and manages the investments of Investco. Parent intends to continue to control and manage these investments (that are acquired by the Holdcos) by controlling each of the Holdcos during her lifetime for the purpose of protecting her economic interest in the underlying property currently owned by Investco (which is to be transferred, on a pro rata basis, to the Holdcos) and to continue to provide Parent with a continuing source of income during her lifetime.

33. The Proposed Transactions will facilitate future estate planning and ultimately enable each of the Children to have more control of his/her respective pro rata share of the Assets of Investco received by such Holdco so that each may deal with such property independently from the others during their lifetime if they so decide; and in particular, so that each Child may determine an independent investment policy for his/her Holdco.

34. The purpose for having Parent subscribe for one (1) Class C Preferred Share of Investco as described in Paragraph 14 is to ensure that a nominal voting share of Investco remains outstanding immediately after Investco redeems, or purchases for cancellation, all of its shares that are owned by the Holdcos since this will facilitate a more orderly winding-up of Investco.

35. The purpose for Investco's year end change described in Paragraph 16 is to ensure that the dividend refund that Investco will be entitled to receive as a result of the dividends that Investco paid, or is deemed to have paid, on its shares that were held by Parent or the Trusts, as the case may be, as described in Paragraph 16, will not cause any Part IV tax liabilities to the Holdcos under paragraph 186(1)(b) with respect to the dividends that the Holdcos are deemed to have received and Investco is deemed to have paid, on the redemption or purchase for cancellation of the Class A Shares, Class D Shares, Class E Shares, Class G Shares and Common Shares that were held by the Holdcos described in Paragraph 24.

RULINGS:

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

A. Subject to the application of subsection 69(11), provided the appropriate joint elections are filed in the prescribed form and manner within the time limits specified in subsection 85(6) and provided that each particular property so transferred is an eligible property in respect of which shares have been issued as full or partial consideration therefor, the provisions of subsection 85(1) will apply to:

(i) the transfer of the Class A Shares, the Class D Shares and the Class E Shares of Investco owned by Parent to each of the Holdcos as described in Paragraph 17;

(ii) the transfer of the Class G Shares of Investco owned by the XXXXXXXXXX Trust to each of the Holdcos as described in Paragraph 18;

(iii) the transfer of the Common Shares of Investco owned by the Trusts to their respective Holdcos as described in Paragraph 19, and

(iv) the transfer of property owned by Investco to each of the Holdcos as described in Paragraph 21;

such that the agreed amount in respect of each transfer of property described above will be deemed to be the transferor's proceeds of disposition of the particular property and the transferee's cost thereof. For greater certainty, paragraph 85(1)(e.2) will not apply in respect of any of the transfers of property referred to above.

B. There will be no acquisition of control of Investco for the purposes of section 111 by virtue of the share transfers described in Paragraph 17.

C. As a result of the redemption by each Holdco of its Non-Voting Preference Share held by Investco as described in Paragraph 22, and the redemption or purchase for cancellation, as the case may be, by Investco of the Class A Shares, Class D Shares, Class E Shares, Class G Shares and Common Shares held by each Holdco as described in Paragraph 24:

(a) by virtue of paragraphs 84(3)(a) and 84(3)(b), each Holdco will be deemed to have paid, and Investco will be deemed to have received, a dividend equal to the amount by which the amount paid by a particular Holdco on the redemption of its Non-Voting Preference Share held by Investco exceeds the paid-up capital of such share immediately before such redemption;

(b) by virtue of paragraphs 84(3)(a) and 84(3)(b), Investco will be deemed to have paid, and a particular Holdco will be deemed to have received, a dividend equal to the amount by which the amount paid by Investco on each redemption of the Class A Shares, Class D Shares, Class E Shares, Class G Shares and on each purchase for cancellation of the Common Shares held by a particular Holdco exceeds the paid-up capital of such class of shares immediately before each such redemption or purchase for cancellation, as the case may be;

(c) the amount of each dividend described in (a) and (b) above, will be a taxable dividend that will be included in computing the particular dividend recipient's income pursuant to subsection 82(1) and paragraph 12(1)(j) and will be deductible in computing such dividend recipient's taxable income pursuant to subsection 112(1). For greater certainty, the provisions of subsection 112(2.1), 112(2.2), 112(2.3) and 112(2.4) will not apply to deny the subsection 112(1) deduction in respect of any such taxable dividend;

(d) the amount of any such dividend described in (a) and (b) above will be excluded from the proceeds of disposition of the particular shares by virtue of paragraph (j) of the definition of "proceeds of disposition" in section 54 and by virtue of subsection 112(3), will reduce the loss, if any, in respect of such disposition of shares on which the particular dividend is deemed to be received;

(e) by virtue of paragraph 186(4)(a) and subsection 186(2), Investco will be connected with each of the Holdcos and each of the Holdcos will be connected with Investco such that:

(i) provided that each of the Holdcos is not entitled to a dividend refund in respect of its taxation year in which it is deemed to pay its taxable dividend referred to in (a) above, Investco will not be subject to Part IV tax under subsection 186(1) in respect of such dividend; and

(ii) pursuant to paragraph 186(1)(b), each of the Holdcos will be subject to Part IV tax in an amount equal to that proportion of the dividend refund to which Investco will become entitled as a result of the payment of the taxable dividends referred to in (b) above, that the amount of each such dividend received by each of Holdco1, Holdco2, Holdco3, Holdco4 and Holdco5, as the case may be, is of the aggregate of all such taxable dividends paid by Investco in its taxation year in which such dividend is paid;

(f) neither Investco nor any of the Holdcos will be subject to Part IV.1 tax under section 187.2 in respect of the dividends referred to in (a) and (b) above; and

(g) neither Investco nor any of the Holdcos will be subject to Part VI.1 tax under section 191.1 in respect of the dividends referred to in (a) and (b) above.

D. By virtue of paragraph 55(3)(a), the provisions of subsection 55(2) will not apply to any of the taxable dividends referred to in Ruling C, provided that there is no disposition or increase in interest described in any of subparagraphs 55(3)(a)(i) to (v) as part of a series of transactions described herein. For greater certainty, the Proposed Transactions described herein, in and by themselves, will not be considered to result in a disposition or increase in interest described in subparagraphs 55(3)(a)(i) to (v) with respect to the dividends deemed to be received by Investco or any of the Holdcos described in Ruling C.

E. The mutual set-off and cancellation of the corresponding Investco Notes and the Holdco Notes as described in Paragraph 25 will not give rise to a forgiven amount.

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

G. Subsection 245(2) will not apply to the Proposed Transactions, in and by themselves, to re-determine the income tax consequences confirmed herein.

The above rulings are subject to the limitations and qualifications set out in Information Circular 70-6R5 dated May 17, 2002 and are binding on CRA provided that the Proposed Transactions, except for the Proposed Transactions described in Paragraphs 26 and 27, are completed by XXXXXXXXXX. The above rulings are based on the law as it presently reads and do not take into account any proposed amendments to the Act and the Regulations which, if enacted into law, could have an effect on the rulings provided herein.

OTHER COMMENTS

Unless otherwise confirmed in the above rulings, nothing in this letter should be construed as implying that the CRA has confirmed, reviewed or has made any determination in respect of:

(a) the paid-up capital of any share or the adjusted cost base or fair market value of any property referred to herein;

(b) any other tax consequence relating to the facts, Proposed Transactions or any transaction or event taking place either prior to the Proposed Transactions or subsequent to the Proposed Transactions, whether described in this letter or not, other than those specifically described in the rulings given above, including whether any of the Proposed Transactions would also be included in a series of transactions or events that include other transactions or events that are not described in this letter.

Yours truly,

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