2007 Ruling 2007-0231521R3 - Eligible Dividend Designations

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. Whether designation of safe income crystallization dividend as eligible dividend results in Part III.1 tax liability. 2. Whether it is acceptable for dividend to be designated as eligible dividend if payment of the dividend attracts dividend refund.

Position: 1. No. 2. Yes

Reasons: 1. While the series of transactions was intended to generate an increase in the safe income dividend recipient's GRIP, as evidenced by the elections of the dividend payers to not be CCPCs under s. 89(11), the safe income dividend can be linked to income of a public corporation that was subject to Part I tax liability at comprehensive corporate tax rates. Therefore, the increase to the safe income dividend recipient's GRIP is not artificial under paragraph (c) of the definition of "excessive eligible dividend designation". However, in other types of situations, such an increase may be artificial, especially where the underlying earnings upon which the safe income dividend is measured were not subject to comprehensive Part I tax. 2. There is no ordering or tracing of the dividend payment to the type of income earned by the CCPC. If a CCPC has a combination of aggregate investment income and GRIP, the rules provide that this result will occur.

XXXXXXXXXX 								2007-023152

XXXXXXXXXX, 2007

Dear Sirs:

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

We are writing in response to your letters 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) "ACB" means "adjusted cost base", which has the meaning assigned by section 54;

(b) "Aco" means XXXXXXXXXX;

(c) "AcquisitionCo" means XXXXXXXXXX;

(d) "aggregate investment income" has the meaning assigned by subsection 129(4);

(e) "agreed amount" has the meaning assigned by subsection 85(1);

(f) "Bco" means XXXXXXXXXX;

(g) "Bco Note" refers to the loan made by Aco to Bco described in Paragraph 25;

(h) "Cco" means XXXXXXXXXX;

(i) "Cco Note" refers to the loan made by Aco to Cco described in Paragraph 25;

(j) "CCPC" means "Canadian-controlled private corporation", which has the meaning assigned by subsection 125(7);

(k) "CDA" means "capital dividend account", which has the meaning assigned by subsection 89(1);

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

(m) "Dco" means XXXXXXXXXX;

(n) "Dco Note" refers to the loan made by Aco to Dco described in Paragraph 25;

(o) "disposition" has the meaning assigned by subsection 248(1);

(p) "dividend refund" has the meaning assigned by subsection 129(1);

(q) "EEDD" means "excessive eligible dividend designation", which has the meaning assigned by subsection 89(1);

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

(s) "Estate" refers to the Estate of XXXXXXXXXX;

(t) "FMV" means fair market value;

(u) "full rate taxable income" has the meaning assigned by subsection 123.4(1);

(v) "GRIP" means "general rate income pool", which has the meaning assigned by subsection 89(1);

(w) "Holdco 1" means XXXXXXXXXX;

(x) "Holdco 2" means XXXXXXXXXX;

(y) "Implementing Legislation" means the Budget Implementation Act, 2006, No. 2, S.C. 2007, c. 2;

(z) "lock-up agreement" refers to the lock-up agreement between Offeror and the Estate, Wco, and Aco dated as of XXXXXXXXXX;

(aa) "LRIP" means "low rate income pool", which has the meaning assigned by subsection 89(1);

(bb) "Mco" means XXXXXXXXXX;

(cc) "non-CCPC" means a corporation that is not a CCPC;

(dd) XXXXXXXXXX;

(ee) "Offer" refers to the offer made by AcquisitionCo dated XXXXXXXXXX to purchase any and all of the issued and outstanding XXXXXXXXXX shares and XXXXXXXXXX shares of Target;

(ff) "Offeror" means XXXXXXXXXX;

(gg) "Offeror Holdco 1" means XXXXXXXXXX;

(hh) "Offeror Holdco 2" means XXXXXXXXXX;

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

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

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

(ll) "PUC" means "paid-up capital", which has the meaning assigned by subsection 89(1);

(mm) "RDTOH" means "refundable dividend tax on hand", which has the meaning assigned by subsection 129(3);

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

(oo) "safe-income determination time" has the meaning assigned by subsection 55(1);

(pp) "safe income on hand" in respect of a particular share of a corporation at a particular time means the portion of the unrealized gain inherent in such share of the corporation at that time that cannot reasonably be considered to be attributable to anything other than income earned or realized (as determined pursuant to subsection 55(5)), to the extent that it is on hand, by any corporation after 1971 and before the safe-income determination time for the transaction, event or series of transactions or events in which a corporation resident in Canada has received a taxable dividend in respect of which it is entitled to a deduction under subsection 112(1) or (2) or 138(6);

(qq) "series of transactions or events" includes the meaning assigned by subsection 248(10);

(rr) "Sibling 1" means XXXXXXXXXX;

(ss) "Sibling 2" means XXXXXXXXXX;

(tt) "Sibling 3" means XXXXXXXXXX;

(uu) "stated capital" has the meaning assigned by section XXXXXXXXXX;

(vv) "Subject Transactions" means the transactions and events described in Paragraphs 36 to 39;

(ww) "Target" means XXXXXXXXXX;

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

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

(zz) "Wco" means XXXXXXXXXX.

FACTS

1. Aco was incorporated on XXXXXXXXXX and is governed under the XXXXXXXXXX. It is a CCPC and a taxable Canadian corporation. The principal business address of Aco is XXXXXXXXXX. Its taxation year, ends on XXXXXXXXXX and its business number is XXXXXXXXXX. Aco files its Canadian federal income tax returns with the XXXXXXXXXX Taxation Centre. Its tax affairs are administered by the XXXXXXXXXX Tax Services Office.

2. The authorized share capital of Aco consists of an unlimited number of common shares, of which XXXXXXXXXX are issued and outstanding. Aco's common shares are held as follows:

		SHAREHOLDER			COMMON SHARES HELD
			Bco				XXXXXXXXXX
			Cco				XXXXXXXXXX
			Dco				XXXXXXXXXX 

3. Bco was incorporated on XXXXXXXXXX and is governed under the XXXXXXXXXX. It is a CCPC and a taxable Canadian corporation. The principal business address of Bco is XXXXXXXXXX. Its taxation year ends on XXXXXXXXXX and its business number is XXXXXXXXXX . Bco files its Canadian federal income tax returns with the XXXXXXXXXX Taxation Centre. Its tax affairs are administered by the XXXXXXXXXX Tax Services Office.

4. The authorized share capital of Bco consists of an unlimited number of XXXXXXXXXX%, non-cumulative, redeemable, preference shares and an unlimited number of common shares. There are XXXXXXXXXX issued and outstanding common shares of Bco, all of which are held by Sibling 1. Sibling 1 is a resident of Canada for income tax purposes and XXXXXXXXXX social insurance number is XXXXXXXXXX.

5. Cco was incorporated on XXXXXXXXXX and is governed under the XXXXXXXXXX. It is a CCPC and a taxable Canadian corporation. The principal business address of Cco is XXXXXXXXXX. Its taxation year ends on XXXXXXXXXX and its business number is XXXXXXXXXX. Cco files its Canadian federal income tax returns with the XXXXXXXXXX Taxation Centre. Its tax affairs are administered by the XXXXXXXXXX Tax Services Office.

6. The authorized share capital of Cco consists of an unlimited number of common shares. There are XXXXXXXXXX issued and outstanding common shares of Cco, all of which are held by Sibling 2. Sibling 2 is a resident of Canada for income tax purposes and XXXXXXXXXX social insurance number is XXXXXXXXXX.

7. Dco was incorporated on XXXXXXXXXX and is governed under the XXXXXXXXXX. It is a CCPC and a taxable Canadian corporation. The principal business address of Dco is XXXXXXXXXX . Its taxation year ends on XXXXXXXXXX and its business number is XXXXXXXXXX. Dco files its Canadian federal income tax returns with the XXXXXXXXXX Taxation Centre. Its tax affairs are administered by the XXXXXXXXXX Tax Services Office.

8. The authorized share capital of Dco consists of an unlimited number of XXXXXXXXXX % non-cumulative, redeemable preference shares and an unlimited number of common shares. There are XXXXXXXXXX issued and outstanding common shares of Dco, all of which are held by Sibling 3. Sibling 3 is a resident of Canada for income tax purposes and XXXXXXXXXX social insurance number is XXXXXXXXXX.

9. From XXXXXXXXXX to XXXXXXXXXX, Target was governed under the XXXXXXXXXX. Throughout that period, Target was a public corporation and a taxable Canadian corporation.

10. As of XXXXXXXXXX , Aco held XXXXXXXXXX shares of Target and XXXXXXXXXX shares of Target. The safe income on hand in respect of the XXXXXXXXXX shares of Target held by Aco was $XXXXXXXXXX and the safe income on hand in respect of the XXXXXXXXXX shares of Target held by Aco was $XXXXXXXXXX.

11. Target had a LRIP balance of nil as at XXXXXXXXXX and throughout its XXXXXXXXXX taxation year ending XXXXXXXXXX. No amount was included in computing the safe income on hand in respect of the XXXXXXXXXX shares or the XXXXXXXXXX shares of Target held by Aco that would represent income or earnings that would be included in Target's LRIP if that income or earnings had been paid as taxable dividends to Target prior to XXXXXXXXXX.

12. Offeror was incorporated on XXXXXXXXXX and is governed under the XXXXXXXXXX. It was a non-CCPC as of XXXXXXXXXX. Offeror is a taxable Canadian corporation. The principal business address of Offeror is XXXXXXXXXX. Its taxation year ends on XXXXXXXXXX and its business number is XXXXXXXXXX. Offeror files its Canadian federal income tax returns with the XXXXXXXXXX Taxation Centre. Its tax affairs are administered by the XXXXXXXXXX Tax Services Office.

13. AcquisitionCo was incorporated on XXXXXXXXXX and was governed under the XXXXXXXXXX. As of the date of its incorporation, AcquisitionCo was a taxable Canadian corporation and a non-CCPC. The principal business address of AcquisitionCo was XXXXXXXXXX. Its taxation year end was XXXXXXXXXX and its business number was XXXXXXXXXX. AcquisitionCo's tax affairs are administered by the XXXXXXXXXX Tax Services Office and its Canadian federal income tax returns are filed with the XXXXXXXXXX Taxation Centre.

14. AcquisitionCo was a wholly-owned subsidiary of Offeror Holdco 2, which, in turn, was a wholly-owned subsidiary of Offeror Holdco 1. The shareholders of Offeror Holdco 1, which were also the shareholders of Offeror, entered into an arrangement with Offeror whereby the shareholders of Offeror Holdco 1 would transfer their shares of Offeror Holdco 1 to Offeror, but only after the completion of certain transactions that would result in Offeror becoming a CCPC. This arrangement was made at a time when Offeror was a non-CCPC by virtue of it being controlled by a public corporation.

15. On XXXXXXXXXX, Aco, Wco and Estate entered into a lock-up agreement with Offeror whereby Aco, Wco and the Estate agreed, subject to certain conditions, to tender their XXXXXXXXXX share and XXXXXXXXXX share interests in Target to AcquisitionCo for cash consideration pursuant to the Offer. On or before XXXXXXXXXX, Offeror assigned its rights under the lock-up agreement to AcquisitionCo. On XXXXXXXXXX, AcquisitionCo made the Offer to acquire the shares of Target from its shareholders for cash consideration. The Offer provided that, as an alternative to selling shares of Target directly to AcquisitionCo, a shareholder of Target that fulfilled certain criteria could transfer their shares of Target to a newly-incorporated corporation wholly-owned by that shareholder so that AcquisitionCo would acquire the shares of that corporation from the shareholder for cash consideration equivalent to that which would have been received by the shareholder for the shares of Target so transferred.

16. Holdco 1 was incorporated under the XXXXXXXXXX on XXXXXXXXXX. Holdco 1 is a CCPC and a taxable Canadian corporation. The principal business address of Holdco 1 was XXXXXXXXXX. Its business number was XXXXXXXXXX. Its tax affairs were administered by the XXXXXXXXXX Tax Services Office and it filed its Canadian federal income tax returns with the XXXXXXXXXX Taxation Centre.

17. The authorized share capital of Holdco 1 consisted of an unlimited number of common shares. Prior to the transaction described in Paragraph 20, there were XXXXXXXXXX issued and outstanding common shares, all of which were held by Aco.

18. Holdco 2 was incorporated under the XXXXXXXXXX on XXXXXXXXXX. At the date of incorporation, Holdco 2 was a CCPC and a taxable Canadian corporation. The principal business address of Holdco 2 was XXXXXXXXXX. Its business number was XXXXXXXXXX. Its tax affairs were administered by the XXXXXXXXXX Tax Services Office and its Canadian federal income tax returns were filed with the XXXXXXXXXX Taxation Centre.

19. The authorized share capital of Holdco 2 consisted of an unlimited number of common shares. Prior to the transaction described in Paragraph 21, there were XXXXXXXXXX issued and outstanding common shares, all of which were held by Aco.

20. On XXXXXXXXXX, Aco transferred its XXXXXXXXXX shares of Target to Holdco 1 in exchange for XXXXXXXXXX common shares of Holdco 1. Aco and Holdco 1 jointly elected in prescribed form and within the time limits referred to in subsection 85(6), to have the rules in subsection 85(1) apply such that Aco was deemed to have disposed of the XXXXXXXXXX shares of Target for proceeds of disposition equal to their adjusted cost base to Aco at the time of the transfer.

21. On XXXXXXXXXX, Aco transferred its XXXXXXXXXX shares of Target to Holdco 2 in exchange for XXXXXXXXXX common shares of Holdco 2. Aco and Holdco 2 jointly elected in prescribed form and within the time limits referred to in subsection 85(6), to have the rules in subsection 85(1) apply such that Aco was deemed to have disposed of the XXXXXXXXXX shares of Target for proceeds of disposition equal to their adjusted cost base to Aco at the time of the transfer.

22. On XXXXXXXXXX , Holdco 1 increased the stated capital account maintained in respect of its common shares through multiple resolutions of the directors of the corporation. The aggregate increase in stated capital amounted to $XXXXXXXXXX. This amount exceeded the $XXXXXXXXXX of safe income on hand in respect of the XXXXXXXXXX shares of Target. As a result, Aco was deemed to have received and Holdco 1 was deemed to have paid a dividend in the aggregate amount of $XXXXXXXXXX pursuant to subsection 84(1), while the balance of the increase to stated capital, which would otherwise have been included in the amount of the dividend determined under subsection 84(1), was recharacterized as proceeds of disposition pursuant to subsection 55(2).

23. On XXXXXXXXXX, Holdco 2 increased the stated capital account maintained in respect of its common shares through multiple resolutions of the directors of the corporation. The aggregate increase in stated capital amounted to $XXXXXXXXXX. This amount exceeded the $XXXXXXXXXX of safe income on hand in respect of the XXXXXXXXXX shares of Target. As a result, Aco was deemed to have received and Holdco 2 was deemed to have paid a dividend in the aggregate amount of $XXXXXXXXXX pursuant to subsection 84(1), while the balance of the increase to stated capital, which would otherwise have been included in the amount of the dividend determined under subsection 84(1), was recharacterized as proceeds of disposition pursuant to subsection 55(2).

24. On XXXXXXXXXX, AcquisitionCo acquired the shares of Holdco 1 and Holdco 2 from Aco pursuant to the terms of the Offer, thereby acquiring control of Holdco 1 and Holdco 2, which resulted in the taxation years of Holdco 1 and Holdco 2 being deemed to have ended at the end of XXXXXXXXXX pursuant to subsection 249(4). On the disposition of the shares of Holdco 1 and Holdco 2, Aco received total cash proceeds of disposition of $XXXXXXXXXX and realized a total capital gain of $XXXXXXXXXX.

25. On XXXXXXXXXX, Aco loaned $XXXXXXXXXX to Bco (the "Bco Note"), $XXXXXXXXXX to Cco (the "Cco Note"), and $XXXXXXXXXX to Dco (the "Dco Note"). Each loan was non-interest bearing and repayable on demand. Each of Bco, Cco, and Dco invested the funds in various investment vehicles and marketable securities.

26. On XXXXXXXXXX, Aco paid a dividend of $XXXXXXXXXX to its shareholders and elected pursuant to subsection 83(2) that the full amount of the dividend be a capital dividend. The election was made in prescribed manner and prescribed form. Bco and Dco each received $XXXXXXXXXX of this dividend while Cco received $XXXXXXXXXX . Payment of this dividend was effected by way of set-off against portions of the principal amounts owing in respect of the Bco Note (i.e., $XXXXXXXXXX reduction to the principal amount), the Cco Note (i.e., $XXXXXXXXXX reduction to the principal amount), and the Dco Note (i.e., $XXXXXXXXXX reduction to the principal amount).

27. On XXXXXXXXXX, Aco paid a dividend of $XXXXXXXXXX to its shareholders. Bco and Dco each received $XXXXXXXXXX in respect of this dividend while Cco received $XXXXXXXXXX. The dividend was paid by way of set-off against the remaining principal amounts owing on the Bco Note, the Cco Note and the Dco Note and through the issuances of new demand promissory notes to Bco, Cco and Dco. The dividend was a taxable dividend. Aco expects to receive a dividend refund of approximately $XXXXXXXXXX as a result of paying this dividend. Each of Bco and Dco should be liable to Part IV tax of approximately $XXXXXXXXXX in respect of the portion of the dividend so received, while Cco should be liable for Part IV tax of approximately $XXXXXXXXXX in respect of this dividend.

28. On XXXXXXXXXX , Bco paid a dividend of $XXXXXXXXXX to its shareholder, Sibling 1. Bco elected pursuant to subsection 83(2) that the full amount of the dividend be a capital dividend. The election was made in prescribed manner and prescribed form, at or before the relevant time required for making such election under subsection 83(2).

29. On XXXXXXXXXX, Cco paid a dividend of $XXXXXXXXXX to its shareholder, Sibling 2. Cco elected pursuant to subsection 83(2) that the full amount of the dividend be a capital dividend. The election was made in prescribed manner and prescribed form, at or before the relevant time required for making such election under subsection 83(2).

30. On XXXXXXXXXX, Dco paid a dividend of $XXXXXXXXXX to its shareholder, Sibling 3. Dco elected pursuant to subsection 83(2) that the full amount of the dividend be a capital dividend. The election was made in prescribed manner and prescribed form, at or before the relevant time required for making such election under subsection 83(2).

31. On XXXXXXXXXX, Bco paid a dividend of $XXXXXXXXXX to its shareholder, Sibling 1. This dividend was a taxable dividend. Bco expects to receive a dividend refund of $XXXXXXXXXX as a consequence of paying this dividend.

32. On XXXXXXXXXX , Cco paid a dividend of $XXXXXXXXXX to its shareholder, Sibling 2. This dividend was a taxable dividend. Cco expects to receive a dividend refund of $XXXXXXXXXX as a consequence of paying this taxable dividend.

33. On XXXXXXXXXX , Dco paid a dividend of $XXXXXXXXXX to its shareholder, Sibling 3. This dividend was a taxable dividend. Dco expects to receive a dividend refund of $XXXXXXXXXX as a consequence of paying this taxable dividend.

34. Both Holdco 1 and Holdco 2 filed their Canadian federal income tax returns for the taxation years that ended XXXXXXXXXX. The returns were filed on or before XXXXXXXXXX. In their respective income tax returns, Holdco 1 and Holdco 2 each provided a written statement that it was electing to have subsection 89(11) apply such that it would not to be a CCPC for the purposes described in paragraph (d) of the definition of CCPC in subsection 125(7). Holdco 1 and Holdco 2 made the aforementioned statement in their respective tax returns for the taxation year ending on XXXXXXXXXX because the prescribed form for the election to have subsection 89(11) apply was not available at the time the returns were filed. As the prescribed form for making the election is now available, Holdco 1 and Holdco 2 will each complete the prescribed form and file it in due course. Had Holdco 1 and Holdco 2 not elected to have subsection 89(11) apply, each corporation would have been considered to have been a CCPC for the purposes described in paragraph (d) of the definition of CCPC in subsection 125(7) at the time the increases to the stated capital accounts described in Paragraphs 22 and 23 occurred.

35. Holdco 1's and Holdco 2's LRIP balances were nil at the time each corporation increased the stated capital of its shares as described in Paragraphs 22 and 23.

SUBJECT TRANSACTIONS

36. In accordance with subsection 47(3) of the Implementing Legislation and subsection 89(14), Holdco 1 notified Aco in writing on or before XXXXXXXXXX that $XXXXXXXXXX of the dividend paid as described in Paragraph 22 is an eligible dividend.

37. In accordance with subsection 47(3) of the Implementing Legislation and subsection 89(14), Holdco 2 notified Aco in writing on or before XXXXXXXXXX that $XXXXXXXXXX of the dividend paid as described in Paragraph 23 is an eligible dividend.

38. In accordance with subsection 47(3) of the Implementing Legislation and subsection 89(14), Aco notified its shareholders in writing on or before XXXXXXXXXX that $XXXXXXXXXX of the $XXXXXXXXXX dividend paid as described in Paragraph 27 is an eligible dividend.

39. In accordance with subsection 47(3) of the Implementing Legislation and subsection 89(14), Bco, Cco and Dco each notified its shareholder in writing on or before XXXXXXXXXX that the dividend paid by the corporation as described in Paragraphs 31, 32, and 33, respectively, is an eligible dividend.

PURPOSE OF SUBJECT TRANSACTIONS

40. The purpose of the Subject Transactions is to allow the taxable dividends described in Paragraphs 31, 32 and 33 to be eligible for the enhanced dividend gross-up and dividend tax credit as described in subparagraph 82(1)(b)(ii) and paragraph 121(b), respectively.

ADDITIONAL INFORMATION

41. Bco, Cco and Dco expect to receive dividend refunds as a consequence of paying the dividends described in Paragraphs 31, 32 and 33.

42. On XXXXXXXXXX, the CRA stated that the designation of an eligible dividend paid in the XXXXXXXXXX calendar year would be considered to meet the requirements of subsection 89(14) if the shareholders receiving the dividend were notified of such designation on the pertinent T5 information slip issued to those shareholders for XXXXXXXXXX. The CRA also stated that for XXXXXXXXXX it would allow a taxable dividend to be reported as two separate dividends in order to allow one of the separate dividends to be designated as an eligible dividend. The notifications with respect to the dividends referred to in Paragraphs 36, 37 and 38 were made in accordance with these statements.

43. The dividends paid by Holdco 1 and Holdco 2 to Aco, as described in Paragraphs 22 and 23, were reported as taxable dividends that were not eligible dividends on the T5 information slips issued by Holdco 1 and Holdco 2 to Aco for XXXXXXXXXX. Amended T5 information slips were prepared indicating that the dividends received by Aco from Holdco 1 and Holdco 2 of $XXXXXXXXXX and $XXXXXXXXXX respectively, are eligible dividends.

44. Aco did not indicate that the $XXXXXXXXXX dividend it paid as described in Paragraph 27 was designated as an eligible dividend in the T5 information slips it issued for XXXXXXXXXX. Aco prepared and issued amended T5 information slips indicating that $XXXXXXXXXX of the taxable dividends paid by it in XXXXXXXXXX were eligible dividends, which included $XXXXXXXXXX of the $XXXXXXXXXX dividend Aco paid as described in Paragraph 27.

45. The amount determined under paragraph (a) of the definition of EEDD for Aco's XXXXXXXXXX taxation year will be nil after taking into consideration the designation of eligible dividends by Holdco 1 and Holdco 2 described in Paragraphs 36 and 37 and the designation of the eligible dividend by Aco described in Paragraph 38.

46. The amounts determined under paragraph (a) of the definition of EEDD for the respective taxation years of Bco, Cco and Dco that ended on XXXXXXXXXX will be nil after taking into consideration the designation of the eligible dividend by Aco described in Paragraph 38 and the designations of eligible dividends by Bco, Cco and Dco described in Paragraph 39.

47. At all relevant times, Target held XXXXXXXXXX% of the shares of Mco, a CCPC. In XXXXXXXXXX, Mco paid a $XXXXXXXXXX dividend to Target. The dividend was a taxable dividend but only $XXXXXXXXXX of the amount of the dividend was designated to be an eligible dividend. There were no arrangements made by Target or Mco prior to XXXXXXXXXX to postpone the payment of this dividend. No portion of the safe income on hand of Mco was included in computing the safe income on hand of the common shares and Class B shares of Target held by Aco or the shares of Holdco 1 and Holdco 2 held by Aco.

48. Had Holdco 1 and Holdco 2 not elected to not be non-CCPCs pursuant to subsection 89(11) as described in Paragraph 34, neither Holdco 1 or Holdco 2 would have had an amount included in their respective LRIP balances pursuant to subsection 89(8) if the arrangement among the shareholders of Offeror and Offeror Holdco 1 referred to in Paragraph 14 would have caused Holdco 1 and Holdco 2 to cease to be a CCPC and become non-CCPCs.

49. Subsection 66(1) of Bill C-33, 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, which was passed by the House of Commons on June 15, 2007, would, if enacted, not apply in respect of the dividends that Aco is deemed to receive from Holdco 1 and Holdco 2 as described in Paragraphs 22 and 23, respectively, as those dividends were deemed to have been received by Aco on or before XXXXXXXXXX.

RULINGS GIVEN

Provided that the preceding statements constitute a complete and accurate disclosure of all of the relevant facts and additional information, the Subject Transactions and the purpose of the Subject Transactions, and provided that the Subject Transactions were completed in the manner described above, our rulings are as set forth below.

A. Each amount designated as an eligible dividend by:

(a) Holdco 1, as described in Paragraph 36 in respect of the dividend it paid to Aco as described in Paragraph 22;

(b) Holdco 2, as described in Paragraph 37 in respect of the taxable dividend it paid to Aco as described in Paragraph 23;

(c) Aco, as described in Paragraph 38 in respect of the taxable dividend it paid to Bco, Cco and Dco as described in Paragraph 27;

(d) Bco, as described in Paragraph 39 in respect of the taxable dividend it paid to Sibling 1 as described in Paragraph 31;

(e) Cco, as described in Paragraph 39 in respect of the taxable dividend it paid to Sibling 2 as described in Paragraph 32; and

(f) Dco, as described in Paragraph 39 in respect of the taxable dividend it paid to Sibling 3 as described in Paragraph 33,

will not constitute an EEDD within the meaning of paragraph (c) of the definition of EEDD in subsection 89(1).

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

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 Subject Transactions were completed on or before XXXXXXXXXX.

The above rulings are based on the Act in its present form and do not take into account any proposed amendments to the Act, which if enacted, could have an effect on the rulings provided herein.

COMMENTS

In addition, 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) the safe income on hand of a share of a corporation referred to herein; and

(c) any tax consequences relating to the facts and Subject Transactions described herein other than those described in the rulings given above.

Furthermore, it is our view that if the safe income on hand of the XXXXXXXXXX shares and XXXXXXXXXX shares of Target, the safe income on hand of the common shares of Holdco 1 or the safe income on hand of Holdco 2 is determined to be less than the amounts indicated in Paragraphs 10 and 22 and 23, subsection 55(2) may apply to the extent of such variance. As a result, the taxable dividends that Aco is deemed to have received from Holdco 1 and Holdco 2 pursuant to subsection 84(1) would be less than the amount designated as an eligible dividend in respect of the dividend paid by Aco to Bco, Cco and Dco as described in Paragraph 27. In our view, this may cause Aco to have made an EEDD in accordance with paragraph (a) of the definition of EEDD, thereby making Aco liable for taxes in respect of that dividend pursuant to Part III.1.

Yours truly,

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