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: Whether the proposed butterfly reorganization meets the requirements of paragraph 55(3)(b).
Position: Yes.
Reasons: Meets the requirements of the law.
XXXXXXXXXX 2007-024088
XXXXXXXXXX , 2008
Dear Sir:
Re: Advance Income Tax Ruling
XXXXXXXXXX
This is in reply to your letters of XXXXXXXXXX in which you requested an advance income tax ruling on behalf of the taxpayers referred to above. We also acknowledge our subsequent telephone conversations and correspondence concerning your request. The documents submitted with your request are part of this document only to the extent described herein.
We understand that to the best of your knowledge and that of the taxpayers on whose behalf this ruling is being requested, none of the issues involved in this ruling request
(i) is in an earlier return of any of such taxpayers or a related person,
(ii) is being considered by a tax services office or taxation centre in connection with a previously filed tax return of any such taxpayers or a related person,
(iii) is under objection by any of such taxpayers or a related person,
(iv) is, in relation to any of such taxpayers or a related person, before the courts or is the subject of a judgment the time limit for appeal from which has not expired, or
(v) is the subject of a ruling previously considered by the Directorate in relation to any of such taxpayers or a related person.
PART I - DEFINITIONS
In this letter, unless otherwise indicated or the context otherwise requires, the following terms have the meanings specified below:
(a) "Act" means the Income Tax Act, R.S.C. 1985, c.1 (5th Supp.), as amended from time to time and consolidated to the date of this letter
(the "Act"), and unless otherwise indicated, legislative references such as those made to a part, division, section, subsection, paragraph, subparagraph, clause or subclause are to provisions of the Act;
(b) "adjusted cost base" (also referred to as "ACB") has the meaning assigned by section 54;
(c) "agreed amount" means the amount that a transferor and transferee have agreed upon in their election under subsection 85(1) in respect of a transfer of "eligible property";
(d) "BCA" means the Business Corporations Act, R.S.O. 1990, c.B.16, as amended;
(e) "capital dividend account" (also referred to as "CDA") has the meaning assigned by subsection 89(1);
(f) "capital property" has the meaning assigned by section 54;
(g) "commercial obligation" has the meaning assigned by subsection 80(1) and 80.01(1);
(h) "cost amount" has the meaning assigned by subsection 248(1);
(i) "DC1" has the meaning assigned by Paragraph 3 below;
(j) "DC2" has the meaning assigned by Paragraph 8 below;
(k) "DC3" has the meaning assigned by Paragraph 13 below;
(l) "DC4" has the meaning assigned by Paragraph 19 below;
(m) "DC5" has the meaning assigned by Paragraph 25 below;
(n) "DCAmalco Note" means the promissory note or both promissory notes issued by DCAmalco to Sibling2Subco pursuant to the transaction described in Paragraph 45 below;
(o) "DCAmalco" means the corporation formed on the amalgamation of the Predecessor Corporations pursuant to the proposed transaction described in Paragraph 31 below;
(p) "distribution" has the meaning assigned by subsection 55(1);
(q) "dividend refund" has the meaning assigned by subsection 129(1);
(r) "eligible property" has the meaning assigned by subsection 85(1.1);
(s) "excepted dividend" has the meaning assigned by section 187.1;
(t) "excluded dividend" has the meaning assigned by subsection 191(1);
(u) "guarantee agreement" has the meaning assigned by subsection 112(2.2);
(v) "ITAR" means the Income Tax Application Rules, R.S.C. 1985, c.2(5th Supp.), as amended;
(w) "Mr. X" has the meaning assigned by Paragraph 1 below;
(x) "Mrs. X" has the meaning assigned by Paragraph 1 below;
(y) "paid-up capital" (also referred to as "PUC") has the meaning assigned by subsection 89(1);
(z) "Paragraph" refers to a particular numbered paragraph in this letter except where it is not capitalized, in which case it refers to a provision of the Act unless otherwise indicated or the context otherwise requires;
(aa) "personal trust" has the meaning assigned by subsection 248(1);
(bb) "pre-1972 capital surplus on hand" (also referred to as "CSOH") has the meaning assigned by subsection 88(2.1);
(cc) "Predecessor Corporations" means DC1, DC2, DC3, DC4 and DC5 collectively, and "Predecessor Corporation" means any one of such corporations;
(cc.1) "Prepaid Expenses" means rights arising from the prepayment of expenses;
(dd) "private corporation" has the meaning assigned by subsection 89(1);
(ee) "Proposed Transactions" means the proposed transactions described in Part III of this letter;
(ff) "public corporation" has the meaning assigned by subsection 89(1);
(gg) "refundable dividend tax on hand" (also referred to as "RDTOH") has the meaning assigned by subsection 129(3);
(hh) "Regulations" means the regulations under the Act;
(ii) "related persons" has the meaning assigned by subsection 251(2);
(jj) "restricted financial institution" has the meaning assigned by subsection 248(1);
(kk) "series of transactions or events" includes the related transactions or events referred to in subsection 248(10);
(ll) "Sibling1" has the meaning assigned by Paragraph 1 below;
(mm) "Sibling2" has the meaning assigned by Paragraph 1 below;
(nn) "Sibling1Co" means the corporation incorporated by Sibling1 pursuant to the proposed transaction described in Paragraph 32 below;
(oo) "Sibling2Co" means the corporation incorporated by Sibling2 pursuant to the proposed transaction described in Paragraph 33 below;
(pp) "SiblingCos" means Sibling1Co and Sibling2Co, collectively, and "SiblingCo" means either one of such corporations;
(qq) "Sibling2Subco" means the corporation incorporated by Sibling2Co pursuant to the proposed transaction described in Paragraph 34 below;
(rr) "Sibling2Subco Note" has the meaning assigned by Paragraph 43 below;
(ss) "significant influence" has the meaning assigned by section 3050 of the Canadian Institute of Chartered Accountants Handbook;
(tt) "specified financial institution" has the meaning assigned by subsection 248(1);
(uu) "specified investment business" has the meaning assigned by subsection 125(7);
(vv) "specified person" has the meaning assigned by paragraph (h) of the definition "taxable preferred share" in subsection 248(1);
(ww) "Spousal Trust" has the meaning assigned by Paragraph 1 below;
(xx) "stated capital" and "stated capital account" have the meanings assigned thereto by the BCA;
(yy) "Subparagraph" refers to a particular numbered subparagraph in this letter except where it is not capitalized, in which case it refers to a provision of the Act unless otherwise indicated or the context otherwise requires;
(zz) "substantial interest" has the meaning assigned by subsection 191(2);
(aaa) "taxable Canadian corporation" has the meaning assigned by subsection 89(1);
(bbb) "taxable dividend" has the meaning assigned by subsection 89(1);
(ccc) "thin-voting special shares" means shares which entitle the holder thereof to one vote per share at all meetings of shareholders but not to receive dividends, and which are redeemable and retractable for, and on liquidation or winding-up entitle the holder to receive, an amount that is equal to the redemption amount per share; and
(ddd) "unrelated person" has the meaning assigned by paragraph 55(3.01)(a).
PART II - FACTS
1. XXXXXXXXXX ("Mrs. X") is the surviving spouse of the late XXXXXXXXXX ("Mr. X") and the life tenant of a trust created pursuant to his Last Will and Testament which is a trust described in paragraph 70(6)(b) (the "Spousal Trust"). The Spousal Trust is resident in Canada and has five trustees: Mrs. X; Mr. and Mrs. X's two children, XXXXXXXXXX ("Sibling1") and XXXXXXXXXX ("Sibling2"); Sibling1's husband, XXXXXXXXXX ; and the solicitor of Mr. X's estate, XXXXXXXXXX , who is not related to any of the other trustees or the other taxpayers referred to herein. The trustees of the Spousal Trust have unfettered discretion to encroach on the capital thereof for the benefit of Mrs. X at any time during her lifetime. Any property of the Spousal Trust remaining at Mrs. X's death will vest in possession equally in Sibling1 and Sibling2 if they survive Mrs. X.
2. Each of Mrs. X, Sibling1 and Sibling2 is resident in Canada for the purposes of the Act, and is over 18 years of age.
3. XXXXXXXXXX ("DC1") is a taxable Canadian corporation and a private corporation which is governed by the BCA. DC1 was incorporated on XXXXXXXXXX .
4. DC1's issued and outstanding share capital consists of XXXXXXXXXX common shares, XXXXXXXXXX Class A shares and XXXXXXXXXX thin-voting special shares, all of which are owned by
Mrs. X. The paid-up capital of the common shares is $XXXXXXXXXX in the aggregate. The paid-up capital of the Class A shares is $XXXXXXXXXX in the aggregate. The Class A shares are non-voting, non-participating (except for an XXXXXXXXXX % non-cumulative dividend) and redeemable and retractable at the amount paid-up thereon, which is $XXXXXXXXXX in the aggregate.
5. All of DC1's issued shares are owned by and are capital property of Mrs. X. The fair market value of such shares exceeds the adjusted cost base thereof to Mrs. X. All XXXXXXXXXX common shares were issued to Mrs. X prior to 1972 at a price of $XXXXXXXXXX in the aggregate which was paid in cash. All XXXXXXXXXX Class A shares were issued to
Mrs. X in XXXXXXXXXX as consideration for the transfer to DC1 of shares of another company, which transfer was the subject of a joint election under subsection 85(1). Mrs. X acquired her XXXXXXXXXX thin-voting special shares in XXXXXXXXXX at an aggregate subscription price of $XXXXXXXXXX which was paid in cash.
6. The principal assets of DC1 consist of:
(a) cash and near-cash property consisting principally of cash and short-term deposits, accounts receivable and Prepaid Expenses; and
(b) XXXXXXXXXX rental buildings (including the subjacent land) known municipally as XXXXXXXXXX which contain a combination of XXXXXXXXXX .
DC1 does not have the ability to exercise significant influence over any corporation or other entity in which it invests.
7. The properties described in Subparagraph 6(b) above are capital property of DC1. For purposes of the Act, DC1 reports its income from such properties as income from a specified investment business.
8. XXXXXXXXXX ("DC2") is a taxable Canadian corporation and a private corporation which is governed by the BCA. DC2 was incorporated on XXXXXXXXXX .
9. DC2's issued and outstanding share capital consists of XXXXXXXXXX common shares which are owned by Sibling1 and Sibling2 in equal proportions and XXXXXXXXXX thin-voting special shares which are owned by Mrs. X. The paid-up capital of the common shares is $XXXXXXXXXX in the aggregate. The common shares were issued to Mr. X prior to 1972 in consideration for the payment by him of a cash subscription price of $XXXXXXXXXX per share, and such shares were owned by him thereafter continuously until his death on XXXXXXXXXX . In accordance with Mr. X's Last Will and Testament, the common shares were distributed to Sibling1 and Sibling2 in equal proportions. Mrs. X acquired her XXXXXXXXXX thin-voting special shares in XXXXXXXXXX at an aggregate subscription price of $XXXXXXXXXX which was paid in cash.
10. The DC2 shares owned by Sibling1, Sibling2 or Mrs. X, as the case may be, are capital property of the particular owner and their fair market value equals or exceeds their adjusted cost base to the particular owner thereof.
11. The principal assets of DC2 consist of:
(a) cash and near-cash property consisting principally of cash and short-term deposits, accounts receivable and Prepaid Expenses; and
(b) XXXXXXXXXX of rental buildings (including the subjacent land), each of which contains a combination of XXXXXXXXXX
12. The rental properties described in Subparagraph 11(b) above are capital property of DC2. For purposes of the Act, DC2 reports its income from such properties as income from a specified investment business. DC2 does not have the ability to exercise significant influence over any corporation or other entity in which it invests.
13. XXXXXXXXXX . ("DC3") is a taxable Canadian corporation and a private corporation which is governed by the BCA. DC3 was incorporated on XXXXXXXXXX .
14. DC3's issued and outstanding share capital consists of XXXXXXXXXX common shares which are owned by Sibling1 and Sibling2 in equal proportions and XXXXXXXXXX thin-voting special shares which are owned by Mrs. X. The paid-up capital of such common shares is $XXXXXXXXXX in the aggregate. The paid-up capital of such special shares is $XXXXXXXXXX in the aggregate.
15. The DC3 common shares owned by Sibling1 and Sibling2 were issued to Mr. X in XXXXXXXXXX in consideration partly for the payment of cash and partly for the transfer of securities of another corporation, called XXXXXXXXXX . Mr. X owned such DC3 shares continuously until his death, after which they were distributed by his estate trustees equally to Sibling1 and Sibling2 in accordance with the terms of his Last Will and Testament. Mrs. X had owned some DC3 common shares but those were purchased for cancellation in XXXXXXXXXX . Mrs. X acquired her XXXXXXXXXX thin-voting DC3 special shares in XXXXXXXXXX at an aggregate subscription price of $XXXXXXXXXX which was paid in cash.
16. The shares of DC3 owned by each of Sibling1 and Sibling2 are capital property of the particular owner. The fair market value of such shares equals or exceeds the adjusted cost base thereof to the particular owner.
17. The principal assets of DC3 consist of:
(a) cash and near-cash property consisting principally of cash and short-term deposits, accounts receivables and Prepaid Expenses; and
(b) a rental building (including the subjacent land) known XXXXXXXXXX .
18. The rental property described in Subparagraph 17(b) above is capital property of DC3. For purposes of the Act, DC3 reports its income from such property as income from a specified investment business. DC3 does not have the ability to exercise significant influence over any corporation or other entity in which it invests.
19. XXXXXXXXXX . ("DC4") is a taxable Canadian corporation and a private corporation which is governed by the BCA. DC4 was incorporated on XXXXXXXXXX .
20. DC4's issued and outstanding share capital consists of XXXXXXXXXX common shares, the paid-up capital of which is $XXXXXXXXXX in the aggregate, and XXXXXXXXXX thin-voting special shares, the paid-up capital of which is $XXXXXXXXXX in the aggregate. One common share is owned by the trustees of the Spousal Trust and the other common share is owned by Sibling1 and Sibling2 in equal proportions. All the thin-voting special shares are owned by Mrs. X. Mrs. X acquired her XXXXXXXXXX thin-voting special shares in XXXXXXXXXX at an aggregate subscription price of $XXXXXXXXXX which was paid in cash. Mrs. X had also owned a common share of DC4 but she exchanged it for "fixed-value" DC4 preference shares in XXXXXXXXXX which were redeemed between XXXXXXXXXX and XXXXXXXXXX .
21. The common shares of the capital stock of DC4 owned by the Spousal Trust and Sibling1 and Sibling2 and the common share of its capital stock that had been owned by Mrs. X prior to the share exchanges described above were issued in XXXXXXXXXX to three inter vivos trusts in exchange for their transferring to DC4 their common shares of another corporation called XXXXXXXXXX . That share exchange was made in accordance with advance income tax ruling #3-2426 dated XXXXXXXXXX , 1989, as amended, and was the subject of an election under subsection 85(1). Such trusts were wound up in XXXXXXXXXX at which time their DC4 shares were distributed to Mrs. X, Sibling1 and Sibling2 and the Spousal Trust in satisfaction of her or his or its interest in the particular trust.
22. Each outstanding DC4 share or fraction thereof, as the case may be, is capital property of its current owner. The fair market value of each such share or fraction thereof, as the case may be, equals or exceeds the adjusted cost base to the particular owner thereof. Each current owner of each such share or fraction thereof, as the case may be, is deemed to have owned his, her or its DC4 share or fraction thereof, as the case may be, on XXXXXXXXXX for purposes of the ITAR.
23. The principal assets of DC4 consist of:
(a) cash and near-cash property consisting principally of cash and short-term deposits, accounts receivable, Prepaid Expenses and advances to related companies; and
(b) XXXXXXXXXX adjacent rental buildings known XXXXXXXXXX .
24. The rental properties described in Subparagraph 23(b) above are capital property of DC4. For purposes of the Act, DC4 reports its income from such properties as income from a specified investment business. DC4 does not have the ability to exercise significant influence over any corporation or other entity in which it invests.
25. XXXXXXXXXX ("DC5") is a taxable Canadian corporation and a private corporation which is governed by the BCA. It was incorporated on XXXXXXXXXX .
26. DC5's issued and outstanding share capital consists of XXXXXXXXXX common shares, which are owned by the trustees of the Spousal Trust, and XXXXXXXXXX thin-voting special shares, which are owned by Mrs. X. The Spousal Trust acquired its XXXXXXXXXX common shares of DC5 in XXXXXXXXXX in exchange for transferring an equal number of common shares of another corporation called XXXXXXXXXX . Mrs. X acquired her XXXXXXXXXX thin-voting special shares of DC5 in XXXXXXXXXX at a subscription price of $XXXXXXXXXX in the aggregate which was paid in cash.
27. Each outstanding DC5 share is capital property of its owner the fair market of which equals or exceeds the adjusted cost base thereof to the particular owner. The paid-up capital of the issued common shares is $XXXXXXXXXX and the paid-up capital of the special shares is $XXXXXXXXXX .
28. The principal asset of DC5 consists of an undivided XXXXXXXXXX % co-ownership interest in a XXXXXXXXXX rental building known XXXXXXXXXX . DC5 also has some cash and near-cash property consisting principally of cash and short-term deposits, accounts receivable and Prepaid Expenses. DC5 does not have the ability to exercise significant influence over any corporation or other entity.
29. Set forth below are the following: the date on which the taxation year of each of the taxpayers referred to herein ends and the amounts of the capital dividend account and refundable dividend tax on hand of each such corporate taxpayer at the end of its XXXXXXXXXX taxation year:
RDTOH and CDA Balances - XXXXXXXXXX
Taxpayer Taxation RDTOH CDA
Year End
DC1 XXXXXXXXXX XXXXXXXXXX XXXXXXXXXX
DC2 XXXXXXXXXX XXXXXXXXXX XXXXXXXXXX
DC3 XXXXXXXXXX XXXXXXXXXX XXXXXXXXXX
DC4 XXXXXXXXXX XXXXXXXXXX XXXXXXXXXX
DC5 XXXXXXXXXX XXXXXXXXXX XXXXXXXXXX
PART III - PROPOSED TRANSACTIONS
Spousal Trust Distribution
30. The trustees of the Spousal Trust will distribute the DC4 and DC5 common shares owned by the Spousal Trust to Mrs. X in partial satisfaction of her capital interest in the Spousal Trust.
31. The Predecessor Corporations will amalgamate in accordance with the provisions of the BCA to continue as one corporation ("DCAmalco") which will be a taxable Canadian corporation and a private corporation. On the amalgamation,
(a) all property and liabilities of the Predecessor Corporations immediately before the amalgamation (except amounts receivable from or payable to each other) will become property and liabilities of DCAmalco;
(b) all authorized but unissued shares of the capital stock of the Predecessor Corporations will be cancelled and all issued and outstanding shares of their capital stock will be exchanged for shares of the capital stock of DCAmalco as described in Subparagraphs (c) and (d) of this Paragraph;
(c) each of Sibling2, Sibling1 and Mrs. X will receive common shares of the capital stock of DCAmalco (and no other consideration) in exchange for the common shares of each Predecessor Corporation owned by him or her immediately before the amalgamation;
(d) Mrs. X, in exchange for her Class A shares of DC1, will receive non-voting preference shares of the capital stock of DCAmalco that, immediately after the amalgamation, will be redeemable and retractable in the aggregate at an amount equal to the aggregate fair market value of such DC1 shares immediately before the amalgamation (and Mrs. X will receive no other consideration for such DC1 shares); and
(e) Mrs. X will receive thin-voting special shares of DCAmalco in exchange for her thin-voting special shares of each Predecessor Corporation, and the number of votes attached to such DCAmalco special shares so issued to Mrs. X will be more than 50% of the number of votes that may be cast at meetings of DCAmalco's shareholders (and Mrs. X will receive no other consideration for such shares of the Predecessor Corporations).
The aggregate fair market value, immediately after the amalgamation, of the shares of the capital stock of DCAmalco so received by each of Sibling2, Sibling1 or Mrs. X will be equal to the aggregate fair market value of the shares of the Predecessor Corporations owned by him or her immediately before the amalgamation. DCAmalco will add to the stated capital account maintained for a particular class of shares of its capital stock issued on the amalgamation an amount equal to the paid-up capital of the shares of the Predecessor Corporations exchanged for DCAmalco shares of such class on the amalgamation.
Incorporation of Sibling1Co
32. Sibling1 will incorporate a new corporation under the BCA which will be a taxable Canadian corporation and a private corporation ("Sibling1Co"). The authorized share capital of Sibling1Co will include an unlimited number of shares of each of the following three classes:
(a) one class of voting common shares, which will be issued to Sibling1 in exchange for the transfer to Sibling1Co of her DCAmalco shares, as described in Subparagraph 35(b) below;
(b) one class of non-voting, non-participating (except for XXXXXXXXXX % non-cumulative dividends), redeemable and retractable preference shares, which will be issued to Mrs. X in exchange for the transfer to Sibling1Co of one-half of her DCAmalco common shares and preference shares as described in Subparagraph 35(c) below; and
(c) one class of thin-voting special shares which will be issued to Mrs. X in exchange for the transfer to Sibling1Co of one-half of her DCAmalco thin-voting special shares as described in Subparagraph 35(c) below.
One or more common shares of Sibling1Co will be issued to Sibling1 in the course and for the purpose of organizing the corporation. Such share or shares will be issued at a nominal amount and may be purchased for cancellation at that same amount prior to the share transfers described in Paragraph 35 below.
Incorporation of Sibling2Co
33. Sibling2 will incorporate a new corporation under the BCA which will be a taxable Canadian corporation and a private corporation ("Sibling2Co"). The authorized share capital of Sibling2Co will include an unlimited number of shares of each of the following classes:
(a) one class of voting common shares, which will be issued to Sibling2 in exchange for the transfer to Sibling2Co of his DCAmalco shares, as described in Subparagraph 35(a) below;
(b) one class of non-voting, non-participating (except for XXXXXXXXXX % non-cumulative dividends), redeemable and retractable preference shares, which will be issued to Mrs. X in exchange for the transfer to Sibling2Co of one-half of her DCAmalco common shares and preference shares as described in Subparagraph 35(d) below; and
(c) one class of thin-voting special shares which will be issued to Mrs. X in exchange for the transfer to Sibling2Co of one-half of her DCAmalco thin-voting special shares on the transfer described in Subparagraph 35(d) below.
One or more common shares of Sibling2Co will be issued to Sibling2 in the course and for the purpose of organizing the corporation. Such share or shares will be issued at a nominal amount and may be purchased for cancellation at that same amount prior to the share transfers described in Paragraph 35 below.
Incorporation of Sibling2Subco
34. Sibling2Co will incorporate a new corporation under the BCA which will be a taxable Canadian corporation and a private corporation ("Sibling2Subco"). The authorized share capital of Sibling2Subco will include an unlimited number of shares of each of the following classes:
(a) one class of voting common shares one or more of which will be issued to Sibling2Co in the course of organizing Sibling2Subco as consideration for its payment to Sibling2Subco of a nominal cash subscription price for such share(s); and
(b) one class of non-voting, non-participating (except for XXXXXXXXXX % non-cumulative dividends), redeemable and retractable preference shares which will be issued to DCAmalco as partial consideration for the transfer of its property described in Subparagraph 41(b) below.
Transfers of DCAmalco Shares to SiblingCos
35. All issued and outstanding shares of the capital stock of DCAmalco will be transferred to the SiblingCos as follows:
(a) Sibling2 will transfer all shares of the capital stock of DCAmalco owned by him to Sibling2Co in exchange for common shares of the capital stock of Sibling2Co the fair market value of which, immediately after the exchange, will be equal in the aggregate to the fair market value of all DCAmalco shares owned by him immediately before the exchange;
(b) Sibling1 will transfer all shares of the capital stock of DCAmalco owned by her to Sibling1Co in exchange for common shares of the capital stock of Sibling1Co the fair market value of which, immediately after the exchange, will be equal in the aggregate to the fair market value of all DCAmalco shares owned by her immediately before the exchange;
(c) Mrs. X will transfer to Sibling1Co one-half of the shares of each class of shares of the capital stock of DCAmalco owned by her immediately before the transfer. In exchange for both the DCAmalco common shares and preference shares so transferred by her, Mrs. X will be issued non-voting preference shares of Sibling1Co that, immediately after the exchange, will have a fair market value and will be redeemable and retractable in the aggregate at an amount equal to the aggregate fair market value of such DCAmalco shares immediately before the exchange. In exchange for the DCAmalco thin-voting special shares so transferred by her, Mrs. X will be issued thin-voting special shares of Sibling1Co that, immediately after the exchange, will have a fair market value and will be redeemable and retractable in the aggregate at an amount equal to the aggregate fair market value of such DCAmalco shares immediately before the exchange; and
(d) Mrs. X will transfer to Sibling2Co one-half of the shares of each class of shares of the capital stock of DCAmalco owned by her immediately before the transfer. In exchange for both the DCAmalco common shares and preference shares so transferred by her, Mrs. X will be issued non-voting preference shares of Sibling2Co that, immediately after the exchange, will have a fair market value and will be redeemable and retractable in the aggregate at an amount equal to the aggregate fair market value of such DCAmalco shares immediately before the exchange. In exchange for the DCAmalco thin-voting special shares so transferred by her, Mrs. X will be issued thin-voting special shares of Sibling2Co that, immediately after the exchange, will have a fair market value and will be redeemable and retractable in the aggregate at an amount equal to the aggregate fair market value of such DCAmalco shares immediately before the exchange.
In accordance with clause 24(3)(a) of the BCA, the amount that will be added by each SiblingCo to the stated capital account maintained for any particular class of shares of its capital stock issued to a particular transferor of DCAmalco shares, as described above, will not exceed the greater of
(i) the paid-up capital of the particular DCAmalco shares transferred by the particular transferor as consideration for the issuance of such shares of such SiblingCo; and
(ii) subject to paragraphs 84.1(2)(a) and (a.1), the adjusted cost base of such DCAmalco shares to such transferor.
For greater certainty, it is noted that paragraphs 84.1(2)(a) and (a.1) and paragraph 84.1(1)(a) will operate to exclude any amount of non-arm's-length basis derived from a valuation day increment or previous capital gains exemption claim under section 110.6 from the adjusted cost base of the DC Amalco shares for the purpose of applying section 84.1 to the transfers of the DC Amalco shares to the Siblingcos.
Upon completion of the share transfers described in this Paragraph, the SiblingCos will be controlled, and DCAmalco will continue to be controlled, by Mrs. X.
36. Each of Sibling2, Sibling1, and Mrs. X will jointly elect with the particular SiblingCo to which he or she transfers shares of DCAmalco, as described in the preceding Paragraph, in prescribed form and within the time referred to in subsection 85(6), to have the rules in subsection 85(1) apply to such transfer. The agreed amount in respect of the shares of DCAmalco that are the subject of each such election will be equal to the adjusted cost base thereof to the transferor thereof immediately before the transfer, which will be less than the fair market value thereof at that time.
Classification of Types of DCAmalco Property
37. Immediately before the transfers of property described in Paragraph 40 below, DCAmalco's property will be classified into three different types for purposes of paragraph 55(3)(b), as follows:
(a) cash or near-cash property, consisting of all current assets of DCAmalco, including any cash, short term deposits, marketable securities, accounts receivable and Prepaid Expenses and advances and loans receivable from shareholders, officers and related corporations;
(b) investment property, consisting of all the assets of DCAmalco, other than cash or near-cash property, any income from which for purposes of the Act would be income from property or a specified investment business; and
(c) business property, consisting of all assets of DCAmalco, other than cash or near-cash property, any income from which for purposes of the Act would be income from a business other than a specified investment business.
For greater certainty, DCAmalco will not have the ability to exercise significant influence over any corporation or other entity in which it shall have an investment. Any tax accounts of DCAmalco, such as any non-capital loss or net capital loss, the amount of any refundable dividend tax on hand or pre-1972 capital surplus on hand or the balance of any capital dividend account, will not be considered property for purposes of the classification described herein.
38. In determining the net fair market value of each type of property of DCAmalco immediately before the transfers of property described in Paragraph 40 below, the liabilities of DCAmalco will be allocated to, and will be deducted in the calculation of the net fair market value of each type of property of DCAmalco in the following manner:
(a) Current liabilities of DCAmalco will be allocated to the cash or near-cash property of DCAmalco in the proportion that the net fair market value of each such property is of the fair market value of all such property of DCAmalco. To the extent that the aggregate amount of current liabilities so allocated to the cash or near-cash property of DCAmalco exceeds the aggregate fair market value of all such property DCAmalco will be considered to have a negative amount of cash or near-cash property;
(b) Liabilities of DCAmalco, other than current liabilities, that relate to a particular property will be allocated to the particular property (and effectively to the type of property to which the particular property relates) to the extent of its fair market value. Any excess of any such liabilities over the fair market value of the particular property to which they relate and any liabilities that relate to the same type of property but not to any particular property will be allocated to the type of property. To the extent that the total amount of liabilities so allocated to any particular type of property in the manner described herein exceeds the fair market value of such type of property, DCAmalco will be considered to have a negative amount of that type of property; and
(c) Any remaining liabilities of DCAmalco after completing the allocations described in Subparagraphs (a) and (b) above ("excess unallocated liabilities"), will be allocated to the different types of property of DCAmalco (determined in accordance with Paragraph 37 above) based on the relative net fair market value of each type of property determined prior to the allocation of the excess unallocated liabilities.
For these purposes any deferred income tax credit balance that may exist for accounting purposes will not be considered a liability, and any amounts owing to related persons will be considered current liabilities.
39. For the purposes of the classifications and determinations contemplated by Paragraphs 37 and 38 above, it is anticipated that DCAmalco will not have any business property, and that it will have only two types of property: cash or near cash property and investment property.
DCAmalco Distribution
40. DCAmalco will transfer one-half of its cash or near-cash property and investment property to Sibling2Subco so that, immediately after the transfer, the net fair market value of each type of property of DCAmalco (calculated in the manner described in Paragraphs 37 and 38 above) transferred to Sibling2Subco will approximate 50% of the net fair market value of that type of property of DCAmalco determined immediately before the transfer referred to in this Paragraph.
The transfer of cash and near-cash property of DCAmalco to Sibling2Subco will occur no later than XXXXXXXXXX days after DCAmalco's other property is transferred to Sibling2Subco, but will nonetheless be part of the distribution of DCAmalco's property for purposes of section 55. For the purposes of this Paragraph the expression "approximate 50%" means that any discrepancy between the net fair market value of a particular type of property of DCAmalco received by Sibling2Subco and the net fair market value of that type of property that Sibling2Subco would have received had it received Sibling2Co's 50% share thereof will not exceed one percent (1%).
41. As consideration for the transfers of property described in Paragraph 40 above, Sibling2Subco
(a) will assume liabilities of DCAmalco allocable to the types of property transferred to Sibling2Subco (determined in the manner described in Paragraph 38 above) so that
(i) the aggregate amount of the liabilities allocated to those properties transferred to Sibling2Subco that are the subject of a joint election pursuant to subsection 85(1), as described in Paragraph 42 below, shall not exceed the aggregate of the amounts agreed upon by DCAmalco and Sibling2Subco in respect of those properties in such election, and
(ii) the amount of the liabilities allocated to each property of DCAmalco transferred to Sibling2Subco that is not the subject of a joint election pursuant to subsection 85(1) shall not exceed the fair market value of such property; and
(b) will issue to DCAmalco preference shares of its capital stock that are non-voting and non-participating (except for a preferential non-cumulative dividend if, as and when declared by the board, and at a rate expressed as a percentage of their redemption price but not to exceed XXXXXXXXXX % per annum) and redeemable and retractable in the aggregate at an amount equal to the amount by which the aggregate fair market value of all property transferred by DCAmalco to Sibling2Subco exceeds the aggregate fair market value of the non-share consideration for such property.
In accordance with clause 24(3)(a) of the BCA, the amount that will be added to the stated capital account maintained by Sibling2Subco in respect of its preference shares upon the share issuance hereinbefore described in this Paragraph will not exceed the aggregate cost (determined under subsection 85(1), where relevant) of the property transferred by DCAmalco to Sibling2Subco pursuant to the transfers described in Paragraph 40 above less the amount of the non-share consideration for such property, as described in Subparagraph (a) above.
42. DCAmalco and Sibling2Subco will jointly elect, in prescribed form and within the time referred to in subsection 85(6), to have the rules in subsection 85(1) apply to the transfer of each eligible property of DCAmalco transferred to Sibling2Subco the fair market value of which exceeds or may exceed the cost amount thereof to DCAmalco. The amount agreed upon in such election in respect of any particular eligible property
(a) will not be greater than the fair market value of such property at the time of the transfer,
(b) will not be less than the amount of any liabilities assumed by Sibling2Subco as consideration for the transfer of such property, and
(c) will not be less than such of the following amounts as are applicable:
(i) in the case of any capital property (other than depreciable property of a prescribed class) or inventory, the lesser of the amounts described in subparagraphs 85(1)(c.1)(i) and (ii);
(ii) in the case of any depreciable property of a prescribed class, the least of the amounts described in subparagraphs 85(1)(e)(i), (ii) and (iii); and
(iii) in the case of any eligible capital property, the least of the amounts described in subparagraphs 85(1)(d)(i), (ii) and (iii).
Redemption of DCAmalco's Sibling2Subco Preference Shares
43. Sibling2Subco will redeem all preference shares of its capital stock held by DCAmalco at the redemption price of such shares, which Sibling2Subco will pay by issuing to DCAmalco a non-interest-bearing demand promissory note having a principal amount and fair market value equal to the aggregate redemption price of such shares (the "Sibling2Subco Note"). DCAmalco will accept the Sibling2Subco Note in full payment of the redemption price of such preference shares.
Winding-up of Sibling2Subco
44. A special resolution of Sibling2Subco will be passed to wind up Sibling2Subco pursuant to the provisions of the BCA. In the course of its winding-up, Sibling2Subco will distribute all of its assets, rights and properties to Sibling2Co, and all liabilities and obligations of Sibling2Subco, including the Sibling2Subco Note, will be assumed by Sibling2Co.
Purchase for Cancellation of Sibling2Co's DCAmalco Shares
45. DCAmalco will purchase for cancellation all the shares of its capital stock held by Sibling2Co at the fair market value thereof and will satisfy the purchase price by issuing a non-interest-bearing demand promissory note to Sibling2Co the principal amount and fair market value of which will be equal to the fair market value of the DCAmalco shares so purchased from Sibling2Co for cancellation.
If DCAmalco shall have a balance in its capital dividend account immediately before the purchase of Sibling2Co's DCAmalco shares, as contemplated by this Paragraph, the purchase will occur in separate transactions, as follows:
(a) First, DCAmalco will purchase for cancellation such number and type of shares of its capital stock held by Sibling2Co as will result in DCAmalco being deemed to have paid and Sibling2Co being deemed to have received, pursuant to subsection 84(3), one or more dividends equal in the aggregate to one-half of the amount of DCAmalco's capital dividend account balance immediately before that time. DCAmalco will elect, in prescribed manner and prescribed form at or before the earlier of the time and the day referred to in subsection 83(2), to have the provisions of subsection 83(2) apply to the full amount of each such deemed dividend.
(b) Second, DCAmalco will purchase all remaining shares of its capital stock held by Sibling2Co.
If DCAmalco shall have a balance in its capital dividend account, as aforesaid, rather than issuing a single promissory note to Sibling2Co, it will issue two promissory notes to Sibling2Co: one in payment of the purchase price of the shares of its capital stock purchased for cancellation in the first transaction; and the other in payment of the purchase price of the shares of its capital stock purchased for cancellation in the second transaction. Each such promissory note will be payable on demand without interest and will have a principal amount and fair market value equal to the fair market value of the DCAmalco shares the purchase price of which is to be paid by the issuance of that note. If two promissory notes are issued by DCAmalco to Sibling2Co in payment of the purchase price of its DCAmalco shares, then references to the DCAmalco Note in the remainder of this letter shall be read as referring to both such promissory notes.
Offset of Promissory Notes
46. The principal amount owing by Sibling2Co to DCAmalco under the Sibling2Subco Note will be set off against the principal amount owing by DCAmalco to Sibling2Co under the DCAmalco Note so that the holder of each such note will agree to the cancellation of the note in full satisfaction of that party's obligations under the other such note.
47. Immediately following the Proposed Transactions described above, the net fair market value of each type of property retained by DCAmalco, determined in the manner described in Paragraphs 37 and 38 above, will approximate one-half the net fair market value of that type of property of DCAmalco, determined immediately before the transfers of property described in Paragraph 40 above.
48. The Proposed Transactions will occur in the order presented unless otherwise indicated, with the exception of the filing of any applicable election forms in respect of the Proposed Transactions, as described in Paragraphs 36, 42 and 45, which will be filed on or before the applicable due date.
49. No property has become or will become property of any Predecessor Corporation or DCAmalco in contemplation of the Proposed Transactions and before the transfers described in Paragraph 40 otherwise than as described herein. DCAmalco will not dispose of any assets owned by it immediately before the distribution described in Paragraph 40 and not disposed of by it on the distribution to an unrelated person as part of a series of transactions that includes the Proposed Transactions otherwise than as described herein or as a result of a disposition in the ordinary course of business. No property of DCAmalco acquired by Sibling2Co pursuant to the Proposed Transactions will be transferred to any other person as part of a series of transactions that includes the Proposed Transactions otherwise than as described herein or as a result of a disposition in the ordinary course of business.
50. Except as described herein, no shares of DCAmalco or any other corporation referred to herein will be acquired or disposed of as part of a series of transactions or events that includes the Proposed Transactions.
51. None of the Predecessor Corporations is, and none of DCAmalco, the SiblingCos and Sibling2Subco will be at any time during the series of transactions or events that includes the Proposed Transactions, a specified financial institution, a restricted financial institution, or a corporation described in any of paragraphs (a) to (f) of the definition of "financial intermediary corporation" in subsection 191(1).
52. None of the shares of the Predecessor Corporations has been, and none of their shares and the shares of DCAmalco, the SiblingCos and Sibling2Subco will be at any time during the implementation of the Proposed Transactions
(a) subject to a guarantee agreement that is given by a specified financial institution or a specified person in relation to a specified financial institution for any purpose referred to in subsection 112(2.2);
(b) a share issued or acquired as part of a transaction or event or a series of transactions or events contemplated by subsection 112(2.5); or
(c) the subject of a "dividend rental arrangement", as defined in subsection 248(1).
53. None of the Predecessor Corporations has the ability to exercise significant influence over any other corporation or other entity in which it invests.
54. Due to specific non-tax-related personal circumstances, both Siblings considered it advisable to relinquish control of certain Predecessor Corporations in favour of Mrs. X. Mrs. X acquired the thin-voting special shares of each Predecessor Corporation in XXXXXXXXXX to provide her with control of the Predecessor Corporations during her lifetime and the right to determine by will who should control the Predecessor Corporations upon her death.
PART V - PURPOSES OF PROPOSED TRANSACTIONS
55. The main purposes of the proposed transactions are to freeze the value of Mrs. X's interest in the property of the Predecessor Corporations so that all future growth in value will enure to the benefit of Sibling1 and Sibling2 and their own families equally, and to split up ownership of the Siblings' ownership interests in the rental property of the Predecessor Corporations so as to give each Sibling the flexibility to separately plan and provide for the financial needs of his or her own family through his or her own holding company.
56. Mrs. X's purpose in acquiring thin-voting special shares of each SiblingCo is to enable her to retain control over the rental properties of the Predecessor Corporations after the distribution so she can ensure that, during the remainder of her lifetime, the rental properties continue to be properly managed and their value is not depleted. None of the purposes of Mrs. X's acquisition of thin-voting special shares was to cause two or more persons to be related to each other.
PART VI - RULINGS
Provided that the preceding statements constitute a complete and accurate disclosure of all relevant facts, the Proposed Transactions, and the purpose of the Proposed Transactions, and provided that the Proposed Transactions are completed as described, our rulings are as follows:
A. The provisions of subsection 107(2) will apply to the distribution of the DC4 and DC5 common shares by the Spousal Trust to Mrs. X, as described in Paragraph 30 above, with the result that:
(a) the proceeds of disposition to the Spousal Trust and the cost to Mrs. X of such shares will be deemed to be the cost amount thereof to the Spousal Trust immediately before that time, by virtue of paragraphs 107(2)(a) and (b); and
(b) Mrs. X will be deemed to have disposed of part of her capital interest in the Spousal Trust for proceeds equal to the adjusted cost base thereof to her, by virtue of paragraphs 107(1)(a) and 107(2)(c) and subparagraph (a)(ii) of the definition of "cost amount" of a taxpayer's capital interest in a trust in subsection 108(1).
B. The amalgamation of the Predecessor Corporations, as described in Paragraph 31 above, will be an amalgamation within the meaning of subsection 87(1), and:
(a) subject to (d) below, each of Sibling2, Sibling1 and Mrs. X will be deemed by paragraph 87(4)(a) to have disposed of his or her shares of a particular Predecessor Corporation for proceeds equal to the adjusted cost base thereof to him or her immediately before the amalgamation;
(b) each of Sibling2, Sibling1 and Mrs. X will be deemed by paragraph 87(4)(b) to have acquired the shares of DCAmalco received by him or her on the amalgamation at a cost equal to the total of the adjusted cost bases to him or her of all shares of the Predecessor Corporations owned by him or her immediately before the amalgamation;
(c) the provisions of paragraphs 87(4)(c), (d) and (e) will not apply to the amalgamation; and
(d) for purposes of subsection 88(2.1) and determining the cost and adjusted cost base to any particular shareholder of any shares of a Predecessor Corporation held by a particular shareholder that are shares to which subsection 26(21) of the ITAR applies on the amalgamation, such shares shall be deemed not to have been disposed of by that shareholder on the amalgamation but to have been altered, in form only, because of the amalgamation and to have continued in existence in the form of the shares of DCAmalco that were received by the shareholder in exchange for such shares of such Predecessor Corporation, and the DCAmalco shares so received by such shareholder in exchange for such shares of such Predecessor Corporation shall be deemed not to have been acquired by such shareholder because of the amalgamation but to have been in existence prior thereto in the form of such shares of such Predecessor Corporation.
C. Subsection 80.01(3) will apply to deem any commercial obligation owing by a Predecessor Corporation (a "debtor") to another Predecessor Corporation (a "creditor") to have been settled immediately prior to the amalgamation by a payment made by the debtor of an amount equal to the amount that would have been the cost amount thereof to the creditor at that time if such "cost amount" were determined without reference to paragraph (e) of the definition thereof in subsection 248(1).
D. Subject to the application of the provisions of subsection 26(5) of the ITAR, the provisions of subsection 85(1) will apply to the transfers of DCAmalco shares described in Paragraph 35 above, so that the agreed amount in respect of each such transfer will be deemed to be the proceeds of disposition to the transferor and the cost to the transferee pursuant to paragraph 85(1)(a). For greater certainty, paragraph 85(1)(e.2) will not apply to any of the transfers of DCAmalco shares referred to herein.
E. Subsection 84.1(1) will not apply to reduce the paid-up capital of the shares issued by a particular SiblingCo in exchange for the DCAmalco shares transferred to it, as described in Paragraph 35 above, nor will it deem a dividend to have been paid to the transferor of such DCAmalco shares.
F. Subject to the application of the provisions of subsection 26(5) of the ITAR and to the application of paragraph 88(2.2)(b), which applies for the purposes stated in the preamble to subsection 88(2.2), the provisions of subsection 85(1) will apply to the transfer of each eligible property of DCAmalco to Sibling2Subco, as described in Paragraph 40 above, so that the agreed amount in respect of each such property shall be deemed to be the proceeds of disposition thereof to DCAmalco and the cost thereof to Sibling2Subco pursuant to paragraph 85(1)(a). For greater certainty,
(a) paragraph 85(1)(e.2) will not apply to the transfers of DCAmalco property referred to herein; and
(b) the reference in subparagraph 85(1)(e)(i) to "...the undepreciated capital cost to the taxpayer of all property of that class immediately before the disposition..." shall be interpreted to mean the proportion of the undepreciated capital cost to DCAmalco of all property of that class that the capital cost of the property immediately before the disposition is of the capital cost of all property of that class immediately before the disposition.
G. The provisions of subsection 85(2.1) will not apply to reduce the paid-up capital of the preference shares of the capital stock of Sibling2Subco issued to DCAmalco in consideration for the transfers of its property to Sibling2Subco, as described in Subparagraph 41(b) above.
H. Provided that the condition specified in paragraph 1100(2.2)(f) or (g) of the Regulations is satisfied, the rules in paragraph 1100(2.2) of the Regulations will apply in respect of depreciable property of a prescribed class that is acquired by Sibling2Subco from DCAmalco pursuant to the transfers described above in Paragraph 40 above, and then by Sibling2Co from Sibling2Subco on the winding-up of Sibling2Subco described in Paragraph 44 above, with the result that no amount will be included by Sibling2Co in respect of such property under paragraph 1100(2)(a) of the Regulations (the so-called "half-year rule").
I. By reason of the application of subsection 1102(14) of the Regulations, each property which, prior to the commencement of the proposed transactions, was depreciable property of a prescribed class or of a separate prescribed class of a Predecessor Corporation, and which is acquired by Sibling2Subco from DCAmalco pursuant to the transfers described above in Paragraph 40 above, and by Sibling2Co on the winding-up of Sibling2Subco described in Paragraph 44 above, will be depreciable property of the same prescribed class or separate class, as the case may be, of Sibling2Co.
J. By reason of the application of subsection 1101(1ad) of the Regulations, each rental property (within the meaning given in subsection 1100(14) of the Regulations) acquired by Sibling2Subco from DCAmalco pursuant to the transfers described above in Paragraph 40 above, and by Sibling2Co on the winding-up of Sibling2Subco described in Paragraph 44 above, which otherwise would be rental property of Sibling2Subco or Sibling2Co of a separate prescribed class under subsection 1101(1ac) of the Regulations, will be deemed not to be property of a separate prescribed class of Sibling2Subco or Sibling2Co under subsection 1101(1ac) of the Regulations, provided that such property was rental property of a prescribed class of a particular Predecessor Corporation other than a separate class prescribed under subsection 1101(1ac) of the Regulations.
K. On the redemption by Sibling2Subco of the preference shares of its capital stock held by DCAmalco, as described in Paragraph 43 above, Sibling2Subco will be deemed to have paid, by virtue of paragraph 84(3)(a), and DCAmalco will be deemed to have received, by virtue of paragraph 84(3)(b), a dividend equal to the amount by which the amount paid on the redemption exceeds the paid-up capital of the preference shares so redeemed.
L. On the purchase for cancellation of the shares of DCAmalco owned by Sibling2Co, as described in Paragraph 45 above, DCAmalco will be deemed to have paid, by virtue of paragraph 84(3)(a), and Sibling2Co will be deemed to have received by virtue of paragraph 84(3)(b), a dividend (where the purchase is effected in one transaction) or two or more separate dividends (where the purchase is effected in two transactions) equal to, or each of which is equal to, the amount by which the amount paid by DCAmalco on the purchase of such shares of its capital stock exceeds the paid-up capital of such DCAmalco shares. Provided that DCAmalco elects pursuant to subsection 83(2), as described in Subparagraph 45(a) above, in respect of the full amount of each deemed dividend described in that Subparagraph, each such dividend will be deemed to be a capital dividend.
M. With respect to each deemed dividend referred to in K and L above
(a) the amount thereof shall be excluded from the proceeds of disposition of the shares redeemed or cancelled, as the case may be, by virtue of paragraph (j) of the definition of "proceeds of disposition" in section 54, and
(b) the amount thereof will be a taxable dividend unless the payer thereof elects in respect thereof in accordance with subsection 83(2).
N. To the extent that any particular deemed dividend referred to in K and L above is a taxable dividend, such dividend
(a) will be included in the recipient's income pursuant to subsection 82(1) and paragraph 12(1)(j);
(b) will be deductible by the recipient thereof pursuant to subsection 112(1) in computing its taxable income for the year in which such dividend is deemed to have been received, and such deduction will not be denied by any of subsections 112(2.1) to (2.4); and
(c) will be an "excepted dividend" for purposes of section 187.2, and an "excluded dividend" for purposes of Part VI.1 because the dividend recipient will have a "substantial interest" in the dividend payer by virtue of paragraph 191(2)(a) and, therefore, none of such dividends will be subject to tax under Part IV.1 or Part VI.1.
O. By virtue of paragraph 186(4)(a), Sibling2Subco will be connected with DCAmalco and DCAmalco will be connected with Sibling2Co, so that DCAmalco, as the recipient of the dividend referred to in K above, will not be subject to tax thereon under Part IV, and Sibling2Co, as the recipient of the dividend referred to in L above, will not be subject to tax thereon pursuant to paragraph 186(1)(a). However, the recipient of the particular dividend referred to in L above will be subject to tax pursuant to paragraph 186(1)(b) in an amount equal to that proportion of the dividend refund, if any, to which the payer thereof will become entitled for its taxation year in which it is deemed to have paid the particular dividend that the amount of the particular dividend that is a taxable dividend is of the aggregate of all taxable dividends paid by the payer in such taxation year.
P. The provisions of subsection 88(1) will apply to the winding-up of Sibling2Subco, as described in Paragraph 44 above, so that:
(a) each property of Sibling2Subco distributed to Sibling2Co on the winding-up will be deemed by paragraph 88(1)(a) to have been disposed of by Sibling2Subco for proceeds of disposition determined under that paragraph;
(b) the shares in the capital stock of Sibling2Subco held by Sibling2Co immediately before the winding-up will be deemed by paragraph 88(1)(b) to have been disposed of by Sibling2Co for proceeds of disposition determined under that paragraph; and
(c) each property of Sibling2Subco distributed to Sibling2Co on the winding-up will be deemed to have been acquired by Sibling2Co for an amount equal to the amount deemed by paragraph 88(1)(a) to be Sibling2Subco's proceeds of disposition.
Q. Provided that as part of the series of transactions or events that includes the proposed transactions described herein, there is not
(i) a disposition of property in the circumstances described in subparagraph 55(3.1)(b)(i),
(ii) an acquisition of control in the circumstances described in subparagraph 55(3.1)(b)(ii),
(iii) an acquisition of shares of the capital stock of a distributing corporation in the circumstances described in subparagraph 55(3.1)(b)(iii), or
(iv) an acquisition of property in the circumstances described in paragraph 55(3.1)(c) or (d)
which has not been described herein, by virtue of paragraph 55(3)(b), subsection 55(2) will not apply to the taxable dividends referred to in K and L above, and for greater certainty, subsection 55(3.1) will not apply to preclude the application of paragraph 55(3)(b) to the transactions proposed herein.
R. The extinguishment of the debt obligations of Sibling2Co and DCAmalco as a result of the cancellation of the DCAmalco Note and Sibling2Subco Note, as described in Paragraph 46 above, will not give rise to a "forgiven amount", within the meaning of subsections 80(1) and 80.01(1).
S. Subject to paragraphs (a) and (c) of 'Our Comments' below, the provisions of subsections 15(1), 56(2), 69(4) and 246(1) will not apply to any of the proposed transactions described above, in and by themselves.
T. The provisions of subsection 245(2) will not be applied as a result of the proposed transactions, in and by themselves, to redetermine the tax consequences confirmed herein.
U. Provided that Sibling2Co continues to use the property acquired from Sibling2Subco, which it acquired from DCAmalco pursuant to the proposed transactions, for the purpose of gaining or producing income therefrom and provided that the interest payable on the liabilities assumed by the Sibling2Co from Sibling2Subco pursuant to the proposed transactions was deductible in computing the income of DCAmalco, Sibling2Co will be entitled to deduct an amount in computing its income pursuant to paragraph 20(1)(c), not exceeding a reasonable amount, equal to the amounts paid or payable by it as interest in or in respect of a year, depending upon the method regularly followed in computing its income, pursuant to a legal obligation to pay interest on any such liabilities.
Our rulings are given subject to the limitations set out in Information Circular 70-6R5 dated May 17, 2002, and are binding on the CRA provided the Proposed Transactions are completed within six months of the date of this letter. Our rulings are based on the law as it currently reads and do not take into account any proposed amendments to the Act or Regulations. Nothing in this ruling should be construed as implying that CRA has reviewed any tax consequences relating to the facts or the Proposed Transactions other than those described in the rulings given above, or has agreed:
(a) to the fair market value or adjusted cost base of any asset or to the paid-up capital of any share;
(b) to the CDA or RDTOH balances of any corporation; or
(c) that the non-voting preference shares and the thin-voting special shares of Sibling1Co and Sibling2Co issued to Mrs. X as described in Paragraphs 35(c) and (d) represent fair market value consideration for the transfers to Sibling1Co and Sibling2Co of Mrs. X's common shares, non-voting preference shares, and thin-voting special shares in DCAmalco.
Yours truly,
for Director
Reorganizations and Resources Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch
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