2008 Ruling 2007-0221361R3 - Alter Ego Trust Planning

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: 1. Is capital loss realized when alter ego trust makes gift of shares of capital property to qualified donee pursuant to provision in trust's indenture that gives its trustees discretion to do so? 2. Whether the gifts of property by the alter ego trust to the qualified donees will be included in the trust's total charitable gifts? 3. Does acquisition of control of corporations wholly-owned by alter ego trust arise on death of settlor of the alter ego trust? 4. Does GAAR apply to post-mortem planning where capital gains of alter ego trust realized under s. 104(4) are effectively sheltered from tax (despite limitations on the trust's total gifts for the year (75% of income)) through creation of (i) dividend income to increase total gifts threshold of alter ego trust that will be sheltered by charitable donation and dividend tax credits and (ii) capital losses that will be used to offset the gains arising under s. 104(4)?

Position: 1. Subsection 40(3.4) does not suspend losses. 2. Yes. 3. No 4. No.

Reasons: 1. Alter ego trust will wind-up, at which point any suspended capital losses will be realized under s. 40(3.4)(b)(i) as it will not be possible for alter ego trust to be affiliated with any person or partnership upon winding-up. 2. Trustees have absolute discretion as to whether to make the gift and possibility exists that gift could be made to an entity that is not a qualified donee. 3. Clause. 256(7)(a)(i)(C) applies. 4. Previous favourable ruling given in this context.

XXXXXXXXXX 									2007-022136

XXXXXXXXXX , 2008

Dear Sir:

Re: XXXXXXXXXX
(collectively the "Taxpayers")
Advance Income Tax Ruling Request

We are writing in response to your letter of XXXXXXXXXX in which you requested an advance income tax ruling on behalf of the Taxpayers. We also acknowledge the information provided in subsequent correspondence and various telephone conversations. You have advised us that to the best of your knowledge and that of the Taxpayers, none of the issues involved in this ruling request are:

(i) in an earlier return of the Taxpayers or persons who are related to the Taxpayers;
(ii) being considered by a tax services office or taxation centre in connection with a tax return filed previously by any of the Taxpayers or persons who are related to any of the Taxpayers;
(iii) under objection by any of the Taxpayers or any person who is related to the any of the Taxpayers;
(iv) before the courts; or
(v) the subject of a ruling previously issued by the Income Tax Rulings Directorate.

Unless otherwise noted, all statutory references herein are to the Income Tax Act, R.S.C. 1985, c. 1 (5th Supp.), as amended (hereinafter referred to as the "Act").

DEFINITIONS

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

(a) "Aco" means XXXXXXXXXX .;

(b) "Aco Share Exchange Agreement" means the Agreement whereby the New AE Trust will exchange the Subject Aco Shares for the New Aco Shares;

(c) "Aco Subject Common Shares" means the Subject Aco Shares that are Common shares of Aco;

(d) "Aco Subject Preferred Shares" means the Subject Aco Shares that are Class A Preferred shares of Aco;

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

(f) "AE Trust" means the XXXXXXXXXX

(g) "alter ego trust" has the meaning assigned by subsection 248(1);

(h) "allowable capital loss" has the meaning assigned by paragraph 38(b);

(i) "BCA" means the Business Corporations Act XXXXXXXXXX

(j) "Bco" means XXXXXXXXXX .;

(k) "Bco Share Exchange Agreement" means the Agreement whereby the New AE Trust will exchange the Subject Bco Shares for the New Bco Shares;

(l) "Bco Subject B Common Shares" means the Subject Bco Shares that are Class B Common shares of Bco;

(m) "Bco Subject C Common Shares" means the Subject Bco Shares that are Class C Common shares of Bco;

(n) "Bco Subject A Preferred Shares" means the Subject Bco Shares that are Class A Preferred shares of Bco;

(o) "Bco Subject B Preferred Shares" means the Subject Bco Shares that are Subject B Preferred shares of Bco;

(p) "Cco" means XXXXXXXXXX .;

(q) "Cco Share Exchange Agreement" means the Agreement whereby the New AE Trust will exchange the Subject Cco Shares for the New Cco Shares;

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

(s) "Designated Charities" under the terms of the AE Trust, shall mean the Foundation and such other registered Canadian charities as the trustee may add to the class of Designated Charities;

(t) "Designated Entities" under the terms of the New AE Trust, shall mean the Foundation and societies incorporated under the XXXXXXXXXX , that are not registered charities under the Act;

(u) "Distributed Property" has the meaning assigned by Paragraph 14;

(v) "eligible dividend" has the meaning assigned by subsection 89(1);

(w) "excessive eligible dividend designation" has the meaning assigned by subsection 89(1);

(x) "Existing Aco Shares" means the following shares of Aco that are currently held by the AE Trust:

(i) XXXXXXXXXX Common shares; and
(ii)XXXXXXXXXX Class A Preferred shares;

(y) "Existing Bco Shares" means the following shares of Bco that are currently held by the AE Trust:

(i) XXXXXXXXXX Class B Common shares;
(ii) XXXXXXXXXX Class C Common shares;
(iii) XXXXXXXXXX Class A Preferred shares; and
(iv) XXXXXXXXXX Class B Preferred shares;

(z) "Existing Cco Shares" means the XXXXXXXXXX Common shares of Cco that are currently held by the AE Trust;

(aa) "fair market value" means the highest price available in an open and unrestricted market between informed and prudent parties dealing at arm's length;

(bb) "Final Distribution Date" under the terms of the AE Trust and the New AE Trust, shall mean the final day of the third taxation year of the AE Trust or the New AE Trust to end after the death of Individual A, or such earlier date as the trustee may select;

(cc) First Portion" under the terms of the AE Trust and the New AE Trust, means the sum of $XXXXXXXXXX or such other amount as the trustee may determine at any time prior to the Material Date;

(dd) "First Trust" means the XXXXXXXXXX ;

(ee) "Foundation" means the XXXXXXXXXX ;

(ff) "Individual A" means XXXXXXXXXX ;

(gg) "Individual B" means XXXXXXXXXX ;

(hh) "Individual C" means XXXXXXXXXX ;

(ii) "majority-interest beneficiary" has the meaning assigned by subsection 251.1(3);

(jj) "majority-interest group of beneficiaries" has the meaning assigned by subsection 251.1(3);

(kk) "Material Date" under the terms of the AE Trust and the New AE Trust, means the day that is one day after the date of death of Individual A;

(ll) "net capital loss" has the meaning assigned by subsection 111(8);

(mm) "New Aco Shares" means XXXXXXXXXX Class B Preferred shares of Aco that will be created and then issued to the New AE Trust pursuant to the Aco Share Exchange Agreement;

(nn) "New AE Trust" means the XXXXXXXXXX

(oo) "New Bco Shares" means XXXXXXXXXX Class C Preferred shares of Bco that will be created and then issued to the New AE Trust pursuant to the Bco Share Exchange Agreement;

(pp) "New Cco Shares" means XXXXXXXXXX Class A Preferred shares of Cco that will be created and then issued to the AE Trust pursuant to the Cco Share Exchange Agreement;

(qq) "non-qualifying securities" has the meaning assigned by subsection 118.1(18);

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

(ss) "Paragraph" means a numbered paragraph in this letter;

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

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

(vv) "private foundation" has the meaning assigned by subsection 149.1(1);

(ww) "Proposed Transactions" means the transactions described in Paragraphs 14 to 34;

(xx) "qualified donee" has the meaning assigned by subsection 149.1(1);

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

(zz) XXXXXXXXXX ;

(aaa) "Second Portion" under the terms of the AE Trust and the New AE Trust, means the sum of $XXXXXXXXXX or such other amount as the trustee may determine at any time prior to the Material Date;

(bbb) "Second Trust" means the XXXXXXXXXX ;

(ccc) "Share Exchange Agreements" means, collectively:

(i) the Aco Share Exchange Agreement;
(ii) the Bco Share Exchange Agreement; and
(iii) the Cco Share Exchange Agreement;

(ddd) "Shareholders Loan Accounts" means all indebtedness owing at a particular time by each of Aco, Bco and Cco to the AE Trust or the New AE Trust, as the case may be;

(eee) "Subject Aco Shares" means all of the shares of Aco that will be owned by the New AE Trust at the time of the transaction described in Paragraph 22, except for:

(i) XXXXXXXXXX Common share; and
(ii) XXXXXXXXXX Class A Preferred share;

(fff) "Subject Bco Shares" means all of the shares of Bco that will be owned by the New AE Trust at the time of the transaction described in Paragraph 26, except for:

(i) XXXXXXXXXX Class B Common share;
(ii) XXXXXXXXXX Class C Common share;
(iii) XXXXXXXXXX Class A Preferred share; and
(iv) XXXXXXXXXX Class B Preferred share.

(ggg) "Subject Cco Shares" means all of the shares of Cco that will be owned by the New AE Trust at the time of the transaction described in Paragraph 30, except for XXXXXXXXXX Common share;

(hhh) "taxation year" has the meaning assigned by subsection 249(1);

(iii) "Terminal Year" means the taxation year of the New AE Trust in which the death of Individual A occurs;

(jjj) "Third Portion" under the terms of the AE Trust and the New AE Trust, means the sum of $XXXXXXXXXX or such other amount as the trustee may determine at any time prior to the Material Date;

(kkk) "Third Trust" means the XXXXXXXXXX ;

(lll) "total charitable gifts" has the meaning assigned by subsection 118.1(1);

(mmm) "total gifts" has the meaning assigned by subsection 118.1(1); and

(nnn) "Trustco" means XXXXXXXXXX ., a corporation resident in Canada for the purposes of the Act.

FACTS

1. Individual A was born on XXXXXXXXXX and is a resident of Canada for the purposes of the Act. Individual A's principal residence is located at XXXXXXXXXX . Individual A files his tax returns with the XXXXXXXXXX Tax Centre and his tax affairs are administered by the XXXXXXXXXX Tax Services Office.

2. Aco is a corporation governed by the BCA. Aco has a registered office at XXXXXXXXXX . Aco files its Canadian income tax returns with the XXXXXXXXXX Tax Centre and its Canadian income tax affairs are administered by the XXXXXXXXXX Tax Services Office.

3. Bco is a corporation governed by the BCA. Bco has a registered office at XXXXXXXXXX . Bco files its Canadian income tax returns with the XXXXXXXXXX Tax Centre and its Canadian income tax affairs are administered by the XXXXXXXXXX Tax Services Office.

4. Cco is a corporation governed by the BCA. Cco has a registered office at XXXXXXXXXX . Cco files its Canadian income tax returns with the XXXXXXXXXX Tax Centre and its Canadian income tax affairs are administered by the XXXXXXXXXX Tax Services Office.

5. The Foundation is a trust created on XXXXXXXXXX by Individual A, as settlor, and Individual A, Individual B and Individual C, as trustees. The Foundation is a registered charity and is designated as a private foundation. The address of the Foundation is XXXXXXXXXX . The Foundation files its annual information return with the Charities Directorate and its tax affairs are administered by the XXXXXXXXXX Tax Services Office.

6. The First Trust was established on XXXXXXXXXX by Individual A, as settlor, and Individual B and Individual C, as trustees. It was settled with a gift of XXXXXXXXXX that it received from Individual A. The sole purpose of the First Trust was to receive a distribution from the AE Trust after the death of Individual A. After the completion of the Proposed Transactions, the sole purpose of the First Trust will be to receive a distribution from the New AE Trust after the death of Individual A. The primary beneficiaries of the First Trust are the XXXXXXXXXX of Individual A, being XXXXXXXXXX . The First Trust has not yet been assigned a business number. It has an address at XXXXXXXXXX . Its tax returns will be filed at the XXXXXXXXXX Centre and its tax affairs will be administered by the XXXXXXXXXX Tax Services Office.

7. The Second Trust was established on XXXXXXXXXX by Individual A, as settlor, and Individual B and Individual C, as trustees. It was settled with a gift of XXXXXXXXXX that it received from Individual A. The sole purpose of the Second Trust was to receive a distribution from the AE Trust after the death of Individual A. After the completion of the Proposed Transactions, the sole purpose of the Second Trust will be to receive a distribution from the New AE Trust after the death of Individual A.The primary beneficiaries of the Second Trust are XXXXXXXXXX of Individual A, being XXXXXXXXXX . The Second Trust has not yet been assigned a business number. It has an address at XXXXXXXXXX . Its tax returns will be filed at the XXXXXXXXXX Centre and its tax affairs will be administered by the XXXXXXXXXX Tax Services Office.

8. The Third Trust was established on XXXXXXXXXX by Individual A, as settlor, and Individual B and Individual C, as trustees. It was settled with a gift of XXXXXXXXXX that it received from Individual A. The sole purpose of the Third Trust was to receive a distribution from the AE Trust after the death of Individual C. After the completion of the Proposed Transactions, the sole purpose of the Third Trust will be to receive a distribution from the New AE Trust after the death of Individual A. The beneficiaries of the Third Trust are XXXXXXXXXX and the Foundation. The Third Trust has not yet been assigned a business number. It has an address at XXXXXXXXXX . Its tax returns will be filed at the XXXXXXXXXX Centre and its tax affairs will be administered by the XXXXXXXXXX Tax Services Office.

9. The AE Trust was established on XXXXXXXXXX by Individual A, as settlor, and Trustco, as trustee. It was settled with a gift of XXXXXXXXXX that it received from Individual A. The address of the AE Trust is XXXXXXXXXX . Its tax returns will be filed with the XXXXXXXXXX Centre and its tax affairs will be administered the XXXXXXXXXX Tax Services Office. The AE Trust is a personal trust and an alter ego trust for the purposes of the Act.

10. Trustco is a corporation governed by the BCA. Trustco is a resident of Canada for the purposes of the Act. Trustco has an office at XXXXXXXXXX . To date, the sole purpose of Trustco has been to serve as trustee of the AE Trust; it will serve as the trustee of the New AE Trust upon the completion of the transaction described in Paragraph 16. Individual A is the sole shareholder of Trustco. Trustco earns no income. Trustco files its tax returns with the XXXXXXXXXX Tax Centre and its tax affairs are administered by the XXXXXXXXXX Tax Services Office.

11. The terms of the AE Trust provide as follows:

(a) prior to the Material Date, the income of the AE Trust will be paid to Individual A;
(b) prior to the Material Date, the trustee shall have the discretion to encroach on capital for the benefit of Individual A;
(c) prior to the Material Date, no person other than Individual A shall have any use or derive any benefit from the trust property;
(d) after the Material Date, but prior to the Final Distribution Date, the trustee shall distribute the First Portion to the First Trust, the Second Portion to the Second Trust, and the Third Portion to the Third Trust.
(e) after the Material Date, but prior to the Final Distribution Date, the trustee shall have the power to make a gift of the whole or any part or parts of the trust property and/or the net income derived therefrom to one or more of the Designated Charities, except to the extent it is necessary to retain such property or income to fund the distributions described in (d) above; and
(f) upon the Final Distribution Date, any property which has not been gifted to the Designated Charities and which is not required to fund the distributions described in (d) above, shall be distributed among such registered charities (other than the Designated Charities) as the trustee shall select.

12. In XXXXXXXXXX , Individual A contributed the Existing Aco Shares, the Existing Bco Shares, the Existing Cco Shares and the Shareholder Loan Accounts to the AE Trust. The fair market value of the Existing Aco Shares, the Existing Bco Shares, and the Existing Cco Shares is estimated to be between $XXXXXXXXXX to $XXXXXXXXXX , with most of that value represented by the Existing Bco Shares. The paid-up capital of the Existing Aco Shares, the Existing Bco Shares and the Existing Cco Shares is nominal and the fair market value of the Existing Aco Shares, the Existing Bco Shares and the Existing Cco Shares exceeds their adjusted cost base. The Shareholder Loan Accounts currently consist of amounts owing by Bco and Cco to the AE Trust. The aggregate amount owed to the AE Trust in respect of the Shareholders Loan Accounts is approximately $XXXXXXXXXX .

13. The AE Trust also holds the following property:

(a) a debt of XXXXXXXXXX . (a wholly-owned subsidiary of Bco) in the amount of $XXXXXXXXXX ;
(b) a debt owing by XXXXXXXXXX . (a wholly-owned subsidiary of Aco) in the amount of $XXXXXXXXXX ;
(c) bank and investment accounts holding assets with a total fair market value of approximately $XXXXXXXXXX (consisting mainly of cash and fixed-income investments); and
(d) personal-use real estate having a fair market value of approximately $XXXXXXXXXX .

PROPOSED TRANSACTIONS

14. Trustco will encroach on the capital of the AE Trust for the benefit of Individual A such that the capital of the AE Trust will be distributed in full to Individual A, including, for greater certainty, the Existing Aco Shares, the Existing Bco Shares, the Existing Cco Shares, the Shareholder Loan Accounts and the property described in Paragraph 13 (the "Distributed Property"). The AE Trust will not make any election pursuant to subsection 107(2.001) in respect of any trust property distributed to Individual A. Any income derived by the AE Trust from the trust property to the time of the distribution that has not been added to the capital of the AE Trust will be paid to Individual A.

15. The AE Trust will be wound-up.

16. Individual A will settle the New AE Trust with a gift of XXXXXXXXXX . The address of the New AE Trust will be XXXXXXXXXX . Its tax returns will be filed with the XXXXXXXXXX Centre and its tax affairs will be administered the XXXXXXXXXX Tax Services Offices. Trustco will be the trustee of the New AE Trust. The New AE Trust will be a personal trust and a resident of Canada for the purposes of the Act.

17. The terms of the New AE Trust will provide that:

(a) prior to the Material Date, the income of the New AE Trust will be paid to Individual A;
(b) prior to the Material Date, the trustee shall have the discretion to encroach on capital for the benefit of Individual A;
(c) prior to the Material Date, no person other than Individual A shall have any use or derive any benefit from the trust property;
(d) after the Material Date, but prior to the Final Distribution Date, the trustee shall distribute the First Portion to the First Trust, the Second Portion to the Second Trust and the Third Portion to the Third Trust:
(e) after the Material Date, but prior to the Final Distribution Date, the trustee shall have the power to make a gift of the whole or any part or parts of the trust property and/or the net income derived therefrom to one or more of the Designated Entities except to the extent it is necessary to retain such property or income to fund the distributions described in (d) above; and
(f) upon the Final Distribution Date, any trust property that has not been gifted to the Designated Entities and that is not required to fund the distributions described in (d) above, shall be distributed among such registered charities (other than the Foundation) and societies incorporated under the XXXXXXXXXX as the trustee shall select.

18. Individual A will contribute the Distributed Property to the capital of the New AE Trust for no consideration. Individual A will not elect in Individual A's return of income under Part I for the taxation year in which the contribution is made that the provisions of subsection 73(1) not apply to such contribution.

19. On the death of Individual A, the shares of Trustco will be transmitted to the executors of Individual A's Will.

19.1 After the Material Date, the Proposed Transactions described in Paragraphs 20 to 34 will be completed in the order presented below.

20. The share capital of Aco will be altered to create the New Aco Shares. The rights and restrictions attached to the New Aco Shares will provide that:

(a) the New Aco Shares will be redeemable and retractable preferred shares without par value;
(b) the aggregate redemption price of the New Aco Shares shall be equal to the fair market value of any consideration received by Aco in consideration for the issuance of such shares; and
(c) upon the issuance of the New Aco Shares, the directors of Aco shall add such amount as they shall determine to the stated capital account, provided that such amount shall not exceed the value of the consideration received for the issuance of such shares.

21. The XXXXXXXXXX Common shares of Aco held by the New AE Trust will be sub-divided into XXXXXXXXXX Common shares.

22. The New AE Trust and Aco will enter into the Aco Share Exchange Agreement whereby the New AE Trust will exchange the Subject Aco Shares for the New Aco Shares and $XXXXXXXXXX in cash.

23. On the issuance of the New Aco Shares, the directors of Aco shall add to the stated capital account of Aco maintained in respect of the New Aco Shares, an amount that is equal to the fair market value of the Subject Aco Shares less $XXXXXXXXXX .

24. The share capital of Bco will be altered to create the New Bco Shares. The rights and restrictions attached to the New Bco Shares will provide that:

(a) the New Bco Shares will be redeemable and retractable preferred shares without par value;
(b) the aggregate redemption price of the New Bco Shares shall be equal to the fair market value of any consideration received by Bco in consideration for the issuance of such shares; and
(c) upon the issuance of the New Bco Shares, the directors of Bco shall add such amount as they shall determine to the stated capital account, provided that such amount shall not exceed the value of the consideration received for the issuance of such shares.

25. The XXXXXXXXXX Class C Common shares of Bco held by the New AE Trust will be sub-divided into XXXXXXXXXX Class C Common shares.

26. The New AE Trust and Bco will enter into the Bco Share Exchange Agreement whereby the New AE Trust will exchange the Subject Bco Shares for the New Bco Shares and $XXXXXXXXXX in cash.

27. On the issuance of the New Bco Shares, the directors of Bco shall add to the stated capital account of Bco maintained in respect of the New Bco Shares, an amount that is equal to the fair market value of the Subject Bco Shares less $XXXXXXXXXX .

28. The share capital of Cco will be altered to create the New Cco Shares. The rights and restrictions attached to the New Cco Shares will provide that:

(a) the New Cco Shares will be redeemable and retractable preferred shares without par value;
(b) the aggregate redemption price of the New Cco Shares shall be equal to the fair market value of any consideration received by Cco in consideration for the issuance of such shares; and
(c) upon the issuance of the New Cco Shares, the directors of Cco shall add such amount as they shall determine to the stated capital account, provided that such amount shall not exceed the value of the consideration received for the issuance of such shares.

29. The XXXXXXXXXX Common shares of Cco held by the New AE Trust will be sub-divided into XXXXXXXXXX Common shares.

30. The New AE Trust and Cco will enter into the Cco Share Exchange Agreement whereby the New AE Trust will exchange the Subject Cco Shares for the New Cco Shares and $XXXXXXXXXX in cash.

31. On the issuance of the New Cco Shares, the directors of Cco shall add to the stated capital account of Cco maintained in respect of the New Cco Shares, an amount that is equal to the fair market value of the Subject Cco Shares less $XXXXXXXXXX .

32. The Shareholders Loan Accounts will be repaid with cash to the extent required to permit the New AE Trust to distribute the First Portion to the First Trust, the Second Portion to the Second Trust and the Third Portion to the Third Trust. In the event that the amount owing in respect of the Shareholders Loan Accounts is not sufficient to permit the New AE Trust to make such distributions with cash, then Bco will redeem a sufficient number of New Bco Shares held by the New AE Trust to permit the New AE Trust to make such distributions.

33. Trustco, in its capacity as trustee of the New AE Trust, will exercise its discretionary power to make gifts of the remaining property of the New AE Trust, including, for greater certainty, any rights of the New AE Trust to receive refunds of tax, among Designated Entities under the terms of the New AE Trust described in Paragraphs 17(e) and registered charities and societies described in Paragraph 17(f).

34. The New AE Trust will be wound-up upon making the gift(s) described in Paragraph 33.

OTHER INFORMATION

35. Individual A will hold the Distributed Property as capital property from the time Individual A acquires the Distributed Property as described in Paragraph 14 to the time Individual A disposes of the Distributed Property as described in Paragraph 18. The New AE Trust will hold the Existing Aco Shares, the Existing Bco Shares and the Existing Cco Shares as capital property.

36. No unanimous shareholders agreements or similar arrangements will be in force among the shareholders of Trustco, Aco, Bco or Cco, that (i) restrict, in whole or in part, the powers of the directors of Trustco, Aco, Bco or Cco to manage the business and affairs of each respective corporation or (ii) affect the power of any shareholder of Trustco, Aco, Bco or Cco to control the election of the board of directors of the respective corporations.

37. Cash consideration will be allocated to each Subject Aco Share, Subject Bco Share and Subject Cco Share exchanged under the Share Exchange Agreements.

38. The First Trust, Second Trust and Third Trust will cease to be beneficiaries of the New AE Trust upon receipt of the First Portion, Second Portion and Third Portion, respectively. These distributions will occur before the gift of property described in Paragraph 33.

39. Individual A has XXXXXXXXXX sons who are not beneficiaries of the First Trust, the Second Trust or the Third Trust. Neither person will be a beneficiary of the New AE Trust.

40. There will be no advantage in respect of the gifts of property described in Paragraph 33 within the meaning of subsection 187(23) of Bill C-10, An Act to amend the Income Tax Act, including amendments in relation to foreign investment entities and non-resident trusts, and to provide for the bijural expression of the provisions of that Act, as passed at 2nd Reading in the Senate on December 4, 2007.

PURPOSES OF THE PROPOSED TRANSACTIONS

41. Individual A established the AE Trust as the vehicle by which to make post-mortem distributions of Individual A's assets, as opposed to Individual A's Will, in order to protect Individual A's privacy, to avoid potential claims against such assets pursuant to the XXXXXXXXXX , and to avoid the imposition of probate filing fees with respect to those assets.

42. Originally, it was contemplated that the Proposed Transactions described in Paragraphs 20 to 34 would be carried out by the AE Trust for the purposes described in Paragraphs 43 to 51. However, the terms of the AE Trust, in our view, would not permit the AE Trust to include any amount in its total charitable gifts in respect of any gift or donation of property made by the AE Trust under the authority of the discretionary power to make gifts of trust property as described in Paragraph 11(e). Consequently, the Proposed Transactions described in Paragraphs 14 to 18 will be undertaken so that any gift or donation of property to a qualified donee that is described in Paragraph 33 can be included in the total charitable gifts of the New AE Trust. The establishment of New AE Trust will also allow the objectives associated with the post-mortem distributions of Individual A's assets described in Paragraph 41 to be achieved.

43. Upon the death of Individual A, the New AE Trust will be deemed to dispose of the Existing Aco Shares, the Existing Bco Shares and the Existing Cco Shares for proceeds of disposition equal to their respect fair market values pursuant to subsection 104(4). As a consequence, it is expected that the New AE Trust will realize significant capital gains, the taxable portion of which will be included in the income of the New AE Trust for the Terminal Year. It is Individual A's desire to provide Trustco, the trustee of the New AE Trust, with the discretionary power, but not the legal obligation, to donate a large portion of Individual A's wealth, which will be held by the New AE Trust, to the Foundation so that the capital gains arising on the disposition of the Existing Aco Shares, the Existing Bco Shares and the Existing Cco Shares may be fully sheltered from tax by claiming a charitable donation tax credit in respect of any donation. However, it would not be possible to fully shelter such gains from tax since the New AE Trust's total gifts for the Terminal Year will, in general terms, be limited to 75% of the AE Trust's income for the Terminal Year. Due to this limitation, the New AE Trust would not be able to fully shelter the capital gains realized by the New AE Trust pursuant to subsection 104(4) by simply donating the Existing Aco Shares, the Existing Bco Shares and the Existing Cco Shares to the Foundation after Individual A's death.

44. In contrast, had Individual A not established the New AE Trust and allowed such property to pass to Individual A's estate, Individual A would be able to direct in Individual A's Will that the donation be made to a qualified donee. This would allow for a charitable donation tax credit to be claimed in computing Individual A's taxes payable for the year of Individual A's death. Since the amount of total gifts for the taxation year of an individual in the year the individual dies is not limited to XXXXXXXXXX % of the individual's income for the year, Individual A's estate could have donated property to a qualified donee to fully offset any capital gains tax liability otherwise payable in respect of the year of Individual A's death.

45. The Proposed Transactions are intended to provide the trustees of New AE Trust with the discretion to make a charitable donation to registered charities that would indirectly offset the entire amount of capital gains realized by the New AE Trust as a consequence of Individual A's death, thereby replicating the tax result that Individual A could have achieved by allowing Individual A's holdings to devolve to Individual A's estate. This would be accomplished by causing the deemed payment of dividends by Aco, Bco and Cco to the New AE Trust on the exchange of the Subject Aco Shares, Subject Bco Shares and Subject Cco Shares under the Share Exchange Agreements. The amount of these dividends would be included, along with "gross-up" amounts determined in respect of the dividends pursuant to subsection 82(1), in computing the total gifts of the New AE Trust for the taxation year in which the New AE Trust receives the dividends. The inclusion of the dividends and the gross-up amounts in the total gifts of the New AE Trust for that taxation year would increase the amount of charitable donations that the New AE Trust can claim in that year as a deduction against its taxes otherwise payable. The exchanges of the shares of Aco, Bco and Cco would also give rise to denied capital losses that would be added to the adjusted cost base of the shares of Aco, Bco and Cco held by the New AE Trust immediately after the respective exchanges, thereby creating a latent capital loss in the shares of these three corporations.

46. The purposes of any gift to the Foundation would be to provide the Foundation with economic resources that would be applied in furtherance of the Foundation's charitable purposes, allow the New AE Trust to claim a charitable donation tax credit and allow the New AE Trust to realize capital losses on the disposition of the shares of Aco, Bco and Cco held by the New AE Trust so that those losses may be used to offset the capital gains (whether as a deduction of an allowable capital loss in computing the New AE Trust's income in the Terminal Year or as a carryback of a net capital loss as a deduction in computing the New AE Trust's taxable income in the Terminal Year) realized by the New AE Trust in respect of the Existing Aco Shares, Existing Bco Shares and Existing Cco Shares pursuant to subsection 104(4).

47. The share capital of Aco, Bco and Cco will be altered as described in Paragraphs 20, 24 and 28, respectively, to create the New Aco Shares, New Bco Shares and New Cco Shares in order to ensure that the corporations can issue shares to the New AE Trust that will have a fair market value equal to the fair market value of the Subject Aco Shares, Subject Bco Shares and Subject Cco Shares (less the value of the cash consideration paid to the New AE Trust for the Subject Aco Shares, Subject Bco Shares and Subject Cco Shares) that are to be exchanged under the Share Exchange Agreements.

48. The Share Exchange Agreements will provide that the Subject Aco Shares, the Subject Bco Shares and the Subject Cco Shares will be exchanged, which means that the New AE Trust will continue to hold one share of each class of Existing Aco Shares, Existing Bco Shares and Existing Cco Shares. The purpose for retaining one share of each such class is to prevent section 86 from applying to the exchanges contemplated under the Share Exchange Agreements, which would preclude the New AE Trust from being deemed to have received dividends from Aco, Bco and Cco by reducing the paid-up capital of the New Aco Shares, New Bco Shares and New Cco Shares in accordance with subsection 86(2.1). In addition, the Share Exchange Agreements will provide that cash consideration will be received by the New AE Trust in exchange for shares of each class of Subject Aco Shares, Subject Bco Shares and Subject Cco Shares in order to prevent section 51 from applying to the exchanges, which would otherwise preclude the New AE Trust from being deemed to have received dividends from Aco, Bco and Cco by virtue of the reduction to the paid-up capital of the New Aco Shares, New Bco Shares and New Cco Shares that would be made under subsection 51(3).

49. Since the New AE Trust must retain one share of each class of Existing Aco Shares, Existing Bco Shares and Existing Cco Shares to prevent the application of section 86 to the transactions contemplated under the Share Exchange Agreements, the purpose for subdividing the Existing Aco Shares, the Existing Bco Shares and the Existing Cco Shares as described in Paragraphs 21, 25 and 29, respectively, is to allow the New AE Trust to exchange shares that represent substantially all of the value of each corporation and substantially all of the adjusted cost base of the shares of each corporation. This will allow the New AE Trust to generate the required amount of dividend income and the amount of denied capital losses which will be added to the adjusted cost base of the shares of Aco, Bco and Cco and will create latent capital losses in those shares that, when realized, will offset the capital gains realized by the New AE Trust pursuant to subsection 104(4) on Individual A's death.

50. The purpose for adding the amounts described in Paragraphs 23, 27 and 31 to the stated capital accounts maintained in respect of the New Aco Shares, the New Bco Shares and the New Cco Shares, respectively, is to maximize the amount of the dividends that Aco, Bco and Cco will be deemed to pay to the New AE Trust pursuant to subsections 84(3) and 84(5) on completing the exchanges contemplated by the Share Exchange Agreements.

51. Individual A settled the First Trust, the Second Trust and the Third Trust, as opposed to settling one trust for the benefit of Individual A's XXXXXXXXXX , to prevent the beneficiaries of one of the trusts from holding any legal entitlement that would allow the beneficiary to determine what a beneficiary of one the other trusts could receive from the AE Trust and, upon completion of the Proposed Transactions, the New AE Trust.

RULINGS GIVEN

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 further that the Proposed Transactions are completed in the manner described above, we rule as follows:

A. Provided that the AE Trust is a personal trust and that the trustee of the AE Trust does not make an election under subsection 107(2.001) in respect of the distribution of any capital property by the AE Trust described in Paragraph 14, subsection 107(2) will apply to the distribution of each capital property by the AE Trust to Individual A in satisfaction of Individual A's capital interest in AE Trust.

B. Subsection 73(1) will apply to the contribution of the each capital property by Individual A to the New AE Trust described in Paragraph 18 such that Individual A will be deemed to have disposed of each capital property for proceeds of disposition equal to its adjusted cost base, determined as of the time immediately before the contribution of the property.

C. For the purposes of the provisions of the Act enumerated in subsection 256(7), the transmission of shares of Trustco from Individual A to the executors of his estate upon the death of Individual A will not, in and of itself, result in an acquisition of control of Trustco and will not, in and of itself, result in an acquisition of control of Aco, Bco or Cco.

D. Pursuant to paragraph 84(3)(b), the New AE Trust will be deemed to have received:

(i) on the exchange of the Subject Aco Shares described in Paragraph 22 (the "Aco Exchange"):

(a) a dividend equal to the amount by which the amount paid by Aco on the Aco Exchange for the Aco Subject Common Shares exceeds the paid-up capital of the Aco Subject Common Shares immediately before the Aco Exchange; and
(b) a dividend equal to the amount by which the amount paid by Aco on the Aco Exchange for the Aco Subject Preferred Shares exceeds the paid-up capital of the Subject Aco Preferred Shares immediately before the Aco Exchange;

(ii) on the exchange of the Subject Bco Shares described in Paragraph 26 (the "Bco Exchange"):

(a) a dividend equal to the amount by which the amount paid by Bco on the Bco Exchange for the Bco Subject B Common Shares exceeds the paid-up capital of the Bco Subject B Common Shares immediately before the Bco Exchange;
(b) a dividend equal to the amount by which the amount paid by Bco on the Bco Exchange for the Bco Subject C Common Shares exceeds the paid-up capital of the Bco Subject C Common Shares immediately before the Bco Exchange;
(c) a dividend equal to the amount by which the amount paid by Bco on the Bco Exchange for the Bco Subject A Preferred Shares exceeds the paid-up capital of the Bco Subject A Preferred Shares immediately before the Bco Exchange; and
(d) a dividend equal to the amount by which the amount paid by Bco on the Bco Exchange for the Bco Subject B Preferred Shares exceeds the paid-up capital of the Bco Subject B Preferred Shares immediately before the Bco Exchange; and

(iii) on the exchange of Subject Cco Shares described in Paragraph 30 (the "Cco Exchange"), a dividend equal to the amount by which the amount paid by Cco on the exchange of the Subject Cco Shares exceeds the paid-up capital of the Subject Cco Shares immediately before the Cco Exchange.

E. For the purposes of paragraph 84(3)(a), in determining the amounts paid by Aco, Bco and Cco on the exchanges of the Subject Aco Shares, the Subject Bco Shares and the Subject Cco Shares, respectively, each New Aco Share, New Bco Share and New Cco Share will, pursuant to paragraph 84(5)(d), be valued at an amount equal to the amount by which the paid-up capital in respect of the class of shares to which it belongs has increased by virtue of the issue of the share.

F. As a consequence of the Share Exchange Agreements and the additions to the stated capital accounts described in Paragraphs 23, 27 and 31:

(i) the paid-up capital of the New Aco Shares will, by virtue of their issue, increase by the fair market value of the Subject Aco Shares, determined as of the time of the Aco Exchange, less $XXXXXXXXXX ;
(ii) the paid-up capital of the New Bco Shares will, by virtue of their issue, increase by the fair market value of the Subject Bco Shares, determined as of the time of the Bco Exchange, less $XXXXXXXXXX ; and
(iii) the paid-up capital of the New Cco Shares will, by virtue of their issue, increase by the fair market value of the Subject Cco Shares, determined as of the time of the Cco Exchange, less $XXXXXXXXXX .

G. Provided that the fair market value of the consideration given by Aco, Bco and Cco to the New AE Trust for each Subject Aco Share, Subject Bco Share and Subject Cco Share is, at the time of its disposition on the Aco Exchange, Bco Exchange or Cco Exchange, equal to the fair market value of that Subject Aco Share, Subject Bco Share or Subject Cco Share, as the case may be, the New AE Trust would, but for subsection 40(3.6) of the Act, realize:

(i) on the disposition of the Subject Aco Shares on the Aco Exchange, a capital loss equal to the amount by which the total of the adjusted cost base of the Subject Aco Shares and the amount of any costs incurred by the New AE Trust for the purpose of disposing of the Subject Aco Shares exceeds the paid-up capital of the Subject Aco Shares;

(ii) on the disposition of the Subject Bco Shares on the Bco Exchange, a capital loss equal to the amount by which the total of the adjusted cost base of the Subject Bco Shares and the amount of any costs incurred by the New AE Trust for the purpose of disposing of the Subject Bco Shares exceeds the paid-up capital of the Subject Bco Shares; and

(iii) on the disposition of the Subject Cco Shares on the Cco Exchange, a capital loss equal to the amount by which the total of the adjusted cost base of the Subject Cco Shares and the amount of any costs incurred by the New AE Trust for the purpose of disposing of the Subject Cco Shares exceeds the paid-up capital of the Subject Cco Shares.

H. Pursuant to paragraphs 40(3.6)(a) and (b) and paragraph 53(1)(f.2), capital losses from the dispositions of the Subject Aco Shares, the Subject Bco Shares and the Subject Cco Shares under the Share Exchange Agreements will be deemed to be nil, and, in computing the adjusted cost base of:

(i) each New Aco Share and Existing Aco Share held by the New AE Trust immediately after the Aco Exchange, there shall be added the proportion of the amount of the capital loss of the New AE Trust from the disposition of Subject Aco Shares on the Aco Exchange, determined without reference to subsection 40(3.6), that

(a) the fair market value, determined immediately after the Aco Exchange, of the particular New Aco Share or Existing Aco Share, as the case may be,
is of
(b) the fair market value, determined immediately after the Aco Exchange, of the New Aco Shares and the Existing Aco Shares owned by the New AE Trust;

(ii) each New Bco Share and Existing Bco Share held by the New AE Trust immediately after the Bco Exchange, there shall be added the proportion of the amount of the capital loss of the New AE Trust from the disposition of Subject Bco Shares on the Bco Exchange, determined without reference to subsection 40(3.6), that

(a) the fair market value, determined immediately after the Bco Exchange, of the particular New Bco Share or Existing Bco Share, as the case may be,
is of
(b) the fair market value, determined immediately after the Bco Exchange, of the New Bco Shares and the Existing Bco Shares owned by the New AE Trust; and

(iii) each New Cco Share and the Existing Cco Share held by the New AE Trust immediately after the Cco Exchange, there shall be added the proportion of the amount of the capital loss of the New AE Trust from the disposition of Subject Cco Shares on the Cco Exchange, determined without reference to subsection 40(3.6), that

(a) the fair market value, determined immediately after the Bco Exchange, of the particular New Cco Share or Existing Cco Share, as the case may be,
is of
(b) the fair market value, determined immediately after the Cco Exchange, of the New Cco Shares and the Existing Cco Share owned by the New AE Trust.

I. Provided that the New AE Trust winds-up on or before the Final Distribution Date, the New AE Trust will realize at a time that is no later than the end of the third taxation year of the New AE Trust immediately following the taxation year of the New AE Trust in which Individual A dies:

(i) from the disposition of each New Aco Share, a capital loss equal to the amount, if any, by which the adjusted cost base of the New Aco Share and the amount of any costs incurred by the New AE Trust for the purpose of disposing of the New Aco Share exceeds its fair market value, determined at the time of the disposition of the New Aco Share;

(ii) from a disposition of each New Bco Share, a capital loss equal to the amount, if any, by which the adjusted cost base of the New Bco Share and the amount of any costs incurred by the New AE Trust for the purpose of disposing of the New Bco Share exceeds the fair market value of the New Bco Share, determined at the time of the disposition of the New Bco Share; and

(iii) from a disposition of each New Cco Share, a capital loss equal to the amount, if any, by which the adjusted cost base of the New Cco Share and the amount of any costs incurred by the New AE Trust for the purpose of disposing of the New Cco Share exceeds the fair market value of the New Cco Share, determined at the tune of the disposition of the New Cco Share.

J. Where Trustco, in its capacity as trustee of the New AE Trust, exercises its discretion to make a gift of property described in Paragraph 17(e) to a Designated Entity that is a qualified donee or to distribute property to a registered charity as described in Paragraph 17(f), and the New AE Trust does not make a designation in respect of the gift or distribution pursuant to subsection 118.1(6), and subject to paragraph 2 of the COMMENTS below, the New AE Trust may include in the New AE Trust's total charitable gifts, for the taxation year in which the gift or distribution is made, an amount equal to the fair market value of property gifted or distributed by the New AE Trust, determined at the time the gift or distribution is made.

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

These rulings are given subject to the limitations and qualifications set forth in Information Circular 70-6R5 issued on May 17, 2002, and are binding on the CRA provided that the undertakings described in paragraph 3 of the COMMENTS below are fulfilled.

As the Proposed Transactions may not be carried out for several years, we wish to emphasize the limitations on the validity of the above rulings that are explained in paragraph 14 of Information Circular 70-6R5. In particular, the above rulings are based on the law in its present form and do not take into account any statutory amendments (whether currently proposed or not) that are enacted after the date of this letter, or any court decisions rendered after the date of this letter.

COMMENTS

1. Nothing in this letter should be construed as implying that the CRA has agreed to or reviewed:

(a) the determination of the adjusted cost base, paid-up capital or fair market value of any shares or other property referred to herein;
(b) whether the designation of any dividends described in Ruling D as eligible dividends will result in an excessive eligible dividend designation; and
(c) any tax consequences relating to the facts and Proposed Transactions described herein other than those described in the rulings given above.

2. Although Ruling J provides that the New AE Trust may include the fair market value of the property that will be gifted or distributed by the New AE Trust as described in Paragraph 33, in its total charitable gifts for the taxation year of the New AE Trust in which such gifts or distributions are made, we are not providing any comment as to whether the gifts of the Shareholders Loan Accounts, the Existing Aco Shares, the Existing Bco Shares, the Existing Cco Share, the New Aco Shares, the New Bco Shares and the New Cco Shares would constitute a gift of non-qualifying securities by the New AE Trust. The determination of whether the New AE Trust will deal at arm's length with Aco, Bco and Cco, and, with respect to the Shareholder Loan Accounts, any debtor corporation, at any particular time is ultimately a question of fact that can only be determined upon reviewing the facts and circumstances in existence at that time. If it is determined that the New AE Trust does not deal at arm's length with any such corporation immediately after the time that it makes a gift or distribution of a share or obligation of the corporation as described in Paragraph 33, the New AE Trust will be deemed by subsection 118.1(13) not to have made any charitable gift, which could preclude the New AE Trust from including the fair market value of the property in the New AE Trust's total charitable gifts for the taxation year of the New AE Trust in which it is deemed to receive dividends from Aco, Bco and Cco, as described in Ruling D.

3. Although the terms of the New AE Trust provides that all of the property of the Trust must be distributed prior to the end of the third taxation year of the Trust that ends after the death of Individual A, it is anticipated that the Proposed Transactions will be completed in the Terminal Year, in which case the amount of any capital losses realized by the New AE Trust would be offset against the capital gains that will be realized by the New AE Trust in the Terminal Year in respect of the disposition of the Existing Aco Shares, the Existing Bco Shares and the Existing Cco Shares pursuant to subsection 104(4). However, if Individual A dies late in the Terminal Year, there may not be sufficient time to complete the transactions contemplated by the Share Exchange Agreements and to make the gift described in Paragraph 33 by the end of the Terminal Year. Such transactions would occur in the following taxation year of the New AE Trust. Under these circumstances, the gains realized by the New AE Trust in respect of the disposition of the Existing Aco Shares, the Existing Bco Shares and the Existing Cco Shares pursuant to subsection 104(4) would likely give rise to a substantial amount of tax that will become payable by the New AE Trust 90 days after the end of the Terminal Year. It is anticipated that the amount of such gains will be offset in full by deducting the net capital losses of the New AE Trust for the taxation year of the New AE Trust for the following taxation year. Nonetheless, for some period of time, taxes will be owed by the New AE Trust under such circumstances and, if left unpaid interest would accrue and become owing by the New AE Trust in respect of such taxes.

In the event that the transactions contemplated by the Share Exchange Agreements and those described in Paragraph 33 do not occur in the Terminal Year, a number of undertakings have been proposed by the Taxpayers, which must be fulfilled in order for the rulings contained herein to be binding on the CRA. In the event that any of the undertakings set out below are not honoured, the above rulings are void and will not be binding on the CRA. The undertakings are as follows:

(a)the return of income for the New AE Trust for the Terminal Year will be filed within 90 days after the end of the Terminal Year;

(b) a written acknowledgment of the taxes payable by the New AE Trust for the Terminal Year will be submitted in conjunction with the filing of its return of income for the Terminal Year, which will also indicate that such liability will be reduced upon deducting the New AE Trust's net capital losses that will arise in a subsequent taxation year of the New AE Trust;

(c) the New AE Trust will, if required by the CRA, provide security to defer collection of the taxes payable by the New AE Trust for the Terminal Year, which may entail providing a letter of credit, a pledge of corporate shares or a cash payment to the CRA;

(d) arrangements will be made with the CRA for the payment of any interest that may accrue on the amount of any taxes payable by the New AE Trust for the Terminal Year;

(e) an objection to the assessment of income of the New AE Trust for the Terminal Year will not be made solely for the purpose of prohibiting the Minister from carrying out any act of collecting the taxes payable by the New AE Trust for the Terminal Year, including the actions described in paragraphs (a) to (g) of subsection 225.1(1);

(f) the trustee(s) of the New AE Trust will take all reasonable steps to ensure that the Proposed Transactions are completed in the taxation year of the New AE Trust immediately following the Terminal Year and that the return of income for such taxation year will be filed and the request to deduct the net capital losses of the New AE Trust for such taxation year in computing the taxable income of the New AE Trust for the Terminal Year will be made prior to the end of such taxation year;

(g) in the event that the Proposed Transactions are not completed prior to the end of the taxation year of the New AE Trust immediately following the Terminal Year, the trustee(s) of the New AE Trust will take all reasonable steps to ensure that the Proposed Transactions and related tax filings occur forthwith; and

(h) the trustee(s) or other legal representatives of the New AE Trust will make an application for a certificate pursuant to subsection 159(2) prior to distributing the property of the New AE Trust to the First Trust, the Second Trust, the Third Trust and the Foundation as contemplated in the Proposed Transactions.

Yours truly,

for Division Director
Reorganizations and Resources Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch