2007 Ruling 2007-0245711R3 - full split-up butterfly

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CRA.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ARC.

Principal Issues: Standard butterfly. No contentious issues.

Position: Rulings given.

Reasons: Complies with paragraph 55(3)(b).

XXXXXXXXXX 									2007-024571

XXXXXXXXXX , 2007

Dear XXXXXXXXXX :

Re: XXXXXXXXXX Advance Income Tax Ruling

This is in reply to your letter of XXXXXXXXXX , and your other correspondence, in which you requested an advance income tax ruling on behalf of the above-noted taxpayer. We also acknowledge the information provided during our various telephone conversations (XXXXXXXXXX ).

To the best of your knowledge, and that of the taxpayer involved, none of the issues contained herein:

(i) is in an earlier return of the taxpayer 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 the taxpayer or a related person;

(iii) is under objection by the taxpayer or a related person;

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

(v) is the subject of a ruling previously issued by this Directorate.

Definitions

In this letter, the following terms have the meanings specified:

"Act" means the Income Tax Act, R.S.C. 1985 (5th Supp.) c.1, as amended to the date hereof, and unless otherwise stated, every reference herein to a part, section, subsection, paragraph, subparagraph or clause is a reference to the relevant provision of the Act;

"ACB" means adjusted cost base, as defined in section 54;

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

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

"Butterfly Transfers" means the transfers of property by DC described in Paragraph 18;

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

"CRA" means the Canada Revenue Agency;

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

"CDA" means "capital dividend account" as defined in section 89;

"capital property" has the meaning assigned by section 54;

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

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

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

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

"FMV" means fair market value, being the highest price available in an open and unrestricted market between informed prudent parties acting at arm's length and without compulsion to act, expressed in terms of cash;

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

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

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

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

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

"Proposed Transactions" means the transactions described in Paragraphs 11 to 22;

"RDTOH" means "refundable dividend tax on hand" as that expression is defined in subsection 129(3);

"Regulations" means the Income Tax Regulations promulgated under the Act;

"related persons" has the meaning assigned by subsection 251(2);

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

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

"Sibling 1" means XXXXXXXXXX an individual resident in Canada for the purposes of the Act;

"Sibling 2" means XXXXXXXXXX an individual resident in Canada for the purposes of the Act;

"Sibling 3" means XXXXXXXXXX an individual resident in Canada for the purposes of the Act;

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

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

"stated capital" has the meaning assigned by the provisions of the BCA;

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

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

Our understanding of the relevant facts, proposed transactions and purpose of the proposed transactions is as follows:

Facts

1. XXXXXXXXXX ("DC") is a CCPC and a TCC. DC was incorporated in XXXXXXXXXX under the BCA. Its issued and outstanding capital consists of the following:

Shareholder		Number of 		PUC 		ACB 		Redemption
			shares 						Value 

Class A preferred
shares (voting)

Sibling 1 		XXXXXXX 		XXXXXXX 	XXXXXXX 	XXXXXXX
Sibling 2 		XXXXXXX 		XXXXXXX 	XXXXXXX 	XXXXXXX
Sibling 3 		XXXXXXX 		XXXXXXX 	XXXXXXX 	XXXXXXX 

Class B preferred
shares (non-voting)

Sibling 1 		XXXXXXX 		XXXXXXX 	XXXXXXX 	XXXXXXX
Sibling 2 		XXXXXXX 		XXXXXXX 	XXXXXXX 	XXXXXXX
Sibling 3 		XXXXXXX 		XXXXXXX 	XXXXXXX 	XXXXXXX 

Class C preferred
shares (voting)

Sibling 1 		XXXXXXX 		XXXXXXX 	XXXXXXX 	XXXXXXX
Sibling 2 		XXXXXXX 		XXXXXXX 	XXXXXXX 	XXXXXXX
Sibling 3 		XXXXXXX 		XXXXXXX 	XXXXXXX 	XXXXXXX  

Class F preferred
shares (non-voting)

Sibling 1 		XXXXXXX 		XXXXXXX 	XXXXXXX 	XXXXXXX
Sibling 2		XXXXXXX 		XXXXXXX 	XXXXXXX 	XXXXXXX
Sibling 3 		XXXXXXX 		XXXXXXX 	XXXXXXX 	XXXXXXX 

Class G preferred
shares (non-voting)

Sibling 1 		XXXXXXX 		XXXXXXX 	XXXXXXX 	XXXXXXX
Sibling 2 		XXXXXXX 		XXXXXXX 	XXXXXXX 	XXXXXXX
Sibling 3 		XXXXXXX 		XXXXXXX 	XXXXXXX 	XXXXXXX 

Class H preferred
shares (non-voting)

Sibling 1 		XXXXXXX 		XXXXXXX 	XXXXXXX 	XXXXXXX
Sibling 2 		XXXXXXX 		XXXXXXX 	XXXXXXX 	XXXXXXX
Sibling 3 		XXXXXXX 		XXXXXXX 	XXXXXXX 	XXXXXXX 

Class I preferred
shares (non-voting)

Sibling 1 		XXXXXXX 		XXXXXXX 	XXXXXXX 	XXXXXXX
Sibling 2 		XXXXXXX 		XXXXXXX 	XXXXXXX 	XXXXXXX
Sibling 3 		XXXXXXX 		XXXXXXX 	XXXXXXX 	XXXXXXX 

Class J preferred
shares (non-voting)

Sibling 1 		XXXXXXX 		XXXXXXX 	XXXXXXX 	XXXXXXX
Sibling 2 		XXXXXXX 		XXXXXXX 	XXXXXXX 	XXXXXXX
Sibling 3 		XXXXXXX 		XXXXXXX 	XXXXXXX 	XXXXXXX 

common shares
(voting)

Sibling 1 		XXXXXXX 		XXXXXXX 	XXXXXXX 	XXXXXXX
Sibling 2 		XXXXXXX 		XXXXXXX 	XXXXXXX
Sibling 3 		XXXXXXX 		XXXXXXX 	XXXXXXX 

2. The principal assets of DC are shares of public corporations and other marketable securities. DC does not carry on an active business and thus has no business property but investment property. DC holds the principal assets described above as capital property.

DC's liabilities include trade payables, shareholders loans (owing to Siblings 1, 2 and 3) and a loan payable to XXXXXXXXXX ("Aco"), an unrelated corporation to DC. DC currently does not own any Aco shares.

DC's taxation year ends on XXXXXXXXXX . DC files its federal tax returns at the XXXXXXXXXX Taxation Centre and the XXXXXXXXXX TSO administers its federal tax matters.

DC had RDTOH and CDA on the date its XXXXXXXXXX taxation year ended.

3. Siblings 1, 2 and 3 are siblings and their mother was XXXXXXXXXX ("Parent"). Siblings 1, 2 and 3 are related to each other pursuant to paragraph 251(2)(a). DC is related to each of Siblings 1, 2 and 3 pursuant to subparagraphs 251(2)(b)(ii).

However, for the purposes of section 55, by virtue of subparagraph 55(5)(e)(i), Siblings 1, 2 and 3 are not related to each other and are not related to DC.

Siblings 1, 2 and 3 hold all of their DC shares as capital property.

4. DC was incorporated by XXXXXXXXXX ("Grand-Parent") who was the father of Parent and the grandfather of Siblings 1, 2 and 3. In XXXXXXXXXX , Grand-Parent subscribed for 1 DC Class A preferred share and each of Siblings 1, 2 and 3 subscribed for XXXXXXXXXX DC common shares. In addition, in that year, each of Grand-Parent, Parent, Siblings 1, 2 and 3 transferred their shares in XXXXXXXXXX ("Bco") to DC in exchange for the following shares in DC:

(a) Grand-Parent: XXXXXXXXXX DC Class C preferred shares and XXXXXXXXXX DC Class F preferred shares;

(b) Sibling 1: XXXXXXXXXX DC Class G preferred shares and XXXXXXXXXX DC Class H preferred shares;

(c) Sibling 2: XXXXXXXXXX DC Class G preferred shares and XXXXXXXXXX DC Class H preferred shares;

(d) Sibling 3: XXXXXXXXXX DC Class G preferred shares and XXXXXXXXXX DC Class H preferred shares; and

(e) Parent: XXXXXXXXXX DC Class B preferred shares.

Grand-Parent controlled DC. Bco was wound up in XXXXXXXXXX and its assets were distributed to DC and its other shareholders.

5. Grand-Parent also settled the XXXXXXXXXX ("Trust 1") for the benefit of his children. Parent was one of the beneficiaries under Trust 1.

6. Grand-Parent died in XXXXXXXXXX and Parent died in XXXXXXXXXX . Parent was one of the beneficiaries under Grand-Parent's estate ("Estate 1") and Siblings 1, 2 and 3 were the beneficiaries under Parent's estate ("Estate 2").

Prior to her death, Parent owned assets which included a number of Aco shares.

7. In XXXXXXXXXX , Estate 2 subscribed for XXXXXXXXXX DC Class A preferred shares for XXXXXXXXXX . In XXXXXXXXXX , Estate 2 received

(a) from Estate 1 all of its DC Classes A, C and F shares in satisfaction of a part of Parent's capital interest in Estate 1; and

(b) from Trust 1 a certain number of Aco shares in satisfaction of a part of Parent's capital interest in Trust 1 .

8. In XXXXXXXXXX , the trustees of Estate 2 transferred all of Estate 2's Aco shares to DC in exchange for XXXXXXXXXX DC Class I preferred shares and XXXXXXXXXX DC Class J preferred shares. At the time of the transfer, the trustees of Estate 2 controlled DC. Thereafter, the trustees of Estate 2 distributed to each of Siblings 1, 2 and 3 one-third (1/3) of Estate 2's DC Classes A, B, C, F, I and J shares in satisfaction of a part of Siblings 1, 2 and 3's capital interests in Estate 2.

None of Parent, Grand-Parent, Sibling 1, Sibling 2 or Sibling 3 has claimed any capital gains deduction under section 110.6 with respect to any of the shares of DC.

9. In XXXXXXXXXX , DC's Aco shares were redeemed by Aco and a loan that DC owed to Aco was set-off by Aco as consideration for such redemption.

In XXXXXXXXXX , DC sold some of its portfolio investments and received cash proceeds of approximately $XXXXXXXXXX . Those sales were triggered by an advice from DC's investment advisor, XXXXXXXXXX that, because of the potential downturn in the stock market, DC should sell some of its portfolio investments to raise cash.

10. Since XXXXXXXXXX Siblings 1, 2 and 3 have not been getting along with each other. They no longer have the same investment objectives in DC and so they want to break up DC such that each of them can make their own independent investment decisions.

Proposed Transactions

11. Prior to XXXXXXXXXX , DC will pay two cash dividends on the DC common shares that Siblings 1, 2 and 3 own.

(a) The first dividend will be a taxable dividend that will be equal to XXXXXXXXXX times DC's RDTOH at the end of DC's XXXXXXXXXX taxation year. The first dividend will result in a dividend refund to DC for its XXXXXXXXXX taxation year.

(b) The second dividend will be an amount that will be equal to the balance of DC's CDA immediately before the payment of the second dividend. DC will elect, pursuant to subsection 83(2), in prescribed manner and prescribed form, to treat the full amount of the second dividend as a capital dividend. It is anticipated that, after the payment of the second dividend, DC will not have CDA at the end of its XXXXXXXXXX taxation year.

12. Sibling 1 will incorporate Newco 1 under the BCA. Sibling 2 will incorporate Newco 2 under the BCA. Sibling 3 will incorporate Newco 3 under the BCA (Newco 1, Newco 2 and Newco 3 are collectively referred to hereinafter as the "Newcos" and individually as a "Newco"). Each of the Newcos will be a CCPC and a TCC.

The authorized capital of each of the Newcos will consist of:

(a) an unlimited number of voting common shares;

(b) an unlimited number of Class A non-voting, redeemable and retractable special shares ("Newco Class A Special Shares"), bearing a non-cumulative dividend rate of XXXXXXXXXX % per annum on the redemption price; and

(c) an unlimited number of Class B non-voting, redeemable and retractable special shares ("Newco Class B Special Shares"), bearing a non-cumulative dividend rate of XXXXXXXXXX % per annum on the redemption price.

The Newco Class A and B Special Shares will rank equally and will be entitled to preference over the Newco common shares on liquidation, dissolution or winding-up.

13. On incorporation of Newco 1, Sibling 1 will subscribe for 1 Newco 1 common share for $XXXXXXXXXX . On incorporation of Newco 2, Sibling 2 will subscribe for 1 Newco 2 common share for $XXXXXXXXXX . On incorporation of Newco 3, Sibling 3 will subscribe for 1 Newco 3 common share for $XXXXXXXXXX .

14. Sibling 1 will transfer all of her DC shares to Newco 1. As consideration therefor, Newco 1 will issue to Sibling 1 a number of Newco Class A Special Shares having an aggregate redemption amount and aggregate FMV equal to the aggregate FMV of the DC shares so transferred by Sibling 1 to Newco 1.

Newco 1 and Sibling 1 will jointly elect, in prescribed form and within the time determined under subsection 85(6), for the provisions of subsection 85(1) to apply to the transfer of Sibling 1's DC shares to Newco 1. The agreed amount specified in the election will be an amount that will be equal to the aggregate ACB of the DC shares to Sibling 1 immediately before such transfer. For greater certainty, the agreed amount will not be less than the lesser of the amounts specified in subparagraphs 85(1)(c.1)(i) and (ii) and will not exceed the aggregate FMV of the DC shares so transferred to Newco 1.

For the purposes of the Act, the increase to the PUC of the Newco Class A Special Shares that are issued by Newco 1 as consideration for the DC shares so transferred to Newco 1, will not exceed the amount determined as B for the purposes of paragraph 84.1(1)(a).

15. Sibling 2 will transfer all of her DC shares to Newco 2. As consideration therefor, Newco 2 will issue to Sibling 2 a number of Newco Class A Special Shares having an aggregate redemption amount and aggregate FMV equal to the aggregate FMV of the DC shares so transferred by Sibling 2 to Newco 2.

Newco 2 and Sibling 2 will jointly elect, in prescribed form and within the time determined under subsection 85(6), for the provisions of subsection 85(1) to apply to the transfer of Sibling 2's DC shares to Newco 2. The agreed amount specified in the election will be an amount that will be equal to the aggregate ACB of the DC shares to Sibling 2 immediately before such transfer. For greater certainty, the agreed amount will not be less than the lesser of the amounts specified in subparagraphs 85(1)(c.1)(i) and (ii) and will not exceed the aggregate FMV of the DC shares so transferred to Newco 2.

For the purposes of the Act, the increase to the PUC of the Newco Class A Special Shares that are issued by Newco 2 as consideration for the DC shares so transferred to Newco 2, will not exceed the amount determined as B for the purposes of paragraph 84.1(1)(a).

16. Sibling 3 will transfer all of his DC shares to Newco 3. As consideration therefor, Newco 3 will issue to Sibling 3 a number of Newco Class A Special Shares having an aggregate redemption amount and aggregate FMV equal to the aggregate FMV of the DC shares so transferred by Sibling 3 to Newco 3.

Newco 3 and Sibling 3 will jointly elect, in prescribed form and within the time determined under subsection 85(6), for the provisions of subsection 85(1) to apply to the transfer of Sibling 3's DC shares to Newco 3. The agreed amount specified in the election will be an amount that will be equal to the aggregate ACB of the DC shares to Sibling 3 immediately before such transfer. For greater certainty, the agreed amount will not be less than the lesser of the amounts specified in subparagraphs 85(1)(c.1)(i) and (ii) and will not exceed the aggregate FMV of the DC shares so transferred to Newco 3.

For the purposes of the Act, the increase to the PUC of the Newco Class A Special Shares that are issued by Newco 3 as consideration for the DC shares so transferred to Newco 3, will not exceed the amount determined as B for the purposes of paragraph 84.1(1)(a).

17. Immediately before the Butterfly Transfers, the property owned by DC will be classified into the following three types of property for the purposes of the definition of "distribution" in subsection 55(1), as follows:

(a) cash or near-cash property, comprising all of the current assets of DC including any cash, marketable securities (other than those held as portfolio investments), accounts receivable and prepaid expenses;

(b) investment property, comprising all of the assets of DC (other than cash or near-cash property), any income from which would, for the purposes of the Act, be income from property or from a specified investment business including marketable securities held as portfolio investment; and

(c) business property, comprising all of the assets of DC (other than cash or near-cash property), any income from which would, for the purposes of the Act, be income from an active business carried on by DC (other than a specified investment business) including any goodwill.

Based on the types of property classifications described above, it is anticipated that DC will only have cash or near-cash property and investment property at the time of the Butterfly Transfers.

For greater certainty, any tax accounts of DC, including the balance of its RDTOH, CDA and any losses available for carry forward, if any, will not be considered property of DC for the purposes of the Proposed Transactions.

18. Immediately following the determination of its types of property as described in Paragraph 17, DC will transfer to each of Newco 1, Newco 2 and Newco 3 a proportionate share of each of its three types of property, such that, immediately after the transfer, the FMV of each type of property so transferred to each such Newco as described herein will be equal to or approximate that proportion of the FMV of all the properties of DC of that type, determined immediately before such transfer, that:

(a) the aggregate FMV, immediately before such transfer, of all of the shares of DC owned by the particular Newco at that time,

is of

(b) the aggregate FMV, immediately before such transfer, of all of the issued and outstanding shares of DC at that time (such proportion in respect of a particular Newco is hereinafter referred to as that Newco's "Newco Proportion").

For the purpose of this paragraph, the expression "approximate that proportion" means that the discrepancy from that proportion, if any, would not exceed 1%, determined as a percentage of the FMV of each type of property which each such Newco will receive as compared to what each such Newco would have received had such Newco received its appropriate pro rata share of the FMV of that type of property.

As consideration for the property so transferred by DC, each such Newco will

(i) assume its Newco Proportion of all the outstanding liabilities of DC; and

(ii) issue to DC a number of Newco Class B Special Shares having an aggregate redemption amount and aggregate FMV equal to the amount by which the aggregate FMV of the particular properties so transferred to such Newco exceeds the amount of DC's liabilities assumed by such Newco as described in (i) above.

For greater certainty, DC's debts owing to Sibling 1, Sibling 2 and Sibling 3 will be assumed by Newco 1, Newco 2 and Newco 3, respectively.

19. DC and each of the Newcos, will jointly elect, in prescribed form and within the time referred to in subsection 85(6), but prior to the dissolution of DC as described in Paragraph 21, to have the provisions of subsection 85(1) apply to the transfer, by DC, of each eligible property to each such Newco as described in Paragraph 18. The agreed amount in respect of each eligible property so transferred will be as follows:

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

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

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

In each case, the agreed amount will not exceed the FMV of the respective property, nor will it be less than the amount permitted under paragraph 85(1)(b).

The amount of DC's liabilities to be assumed by each such Newco and to be allocated to property that will be the subject of an election under subsection 85(1) will not exceed the total of the agreed amounts elected for all such properties. The amount of DC's liabilities to be assumed by each such Newco and to be allocated to property that will not be the subject of an election under subsection 85(1) will not exceed the FMV of such property.

For the purposes of the Act, the increase to the PUC of the Newco Class B Special Shares issued by a Newco to DC as consideration for the property transferred by DC to that Newco will not exceed the amount by which the aggregate cost amount of such property to that Newco, as determined pursuant to subsection 85(1) where applicable, exceeds the aggregate amount of DC's liabilities assumed by that Newco for such property. For greater certainty, the increase to the PUC of the Newco Class B Special Shares so issued by that Newco will not exceed the maximum amount that could be added to the PUC of such shares, having regard to subsection 85(2.1).

20. On XXXXXXXXXX , each of the Newcos will redeem its Newco Class B Special Shares that were issued to DC as described in Paragraph 18, for their FMV. Each of the Newcos will pay the aggregate redemption price for these Newco Class B Special Shares by issuing to DC a non-interest-bearing demand promissory note (the "Newco 1 Note", the "Newco 2 Note", the "Newco 3 Note" and collectively referred to hereinafter as the "Newco Notes") having a principal amount and FMV equal to the aggregate FMV of the Newco Class B Special Shares so redeemed. DC will accept the Newco Notes as full payment of the purchase price of such shares with the risk of the notes being dishonoured.

At the end of the day on which the Newco Class B Special Shares are redeemed, each of the Newcos will cause its first taxation year to end.

21. On XXXXXXXXXX , the day following the redemption of the Newco Class B Special Shares as described in Paragraph 20, the shareholders of DC will, by special resolution, resolve to wind up and dissolve DC pursuant to the provisions of the BCA.

On the wind-up of DC, under the terms of the agreement governing the winding-up of DC, the Newco 1 Note, the Newco 2 Note and the Newco 3 Note will be assigned and distributed to Newco 1, Newco 2 and Newco 3, respectively. As a result of the assignment and distribution of the Newco 1 Note, the Newco 2 Note and the Newco 3 Note by DC, the obligation of each of Newco 1, Newco 2 and Newco 3 under its own note will be cancelled.

Immediately after the distribution of the Newco 1 Note, the Newco 2 Note and the Newco 3 Note by DC to Newco 1, Newco 2 and Newco 3 as described herein but before the formal dissolution of DC, DC will not own or acquire any property or carry on any activity or undertaking.

22. Following receipt of the dividend refund to which DC will become entitled as a result of the Proposed Transactions, DC will immediately distribute it (under the terms of the agreement governing the winding-up of DC) to each of Newco 1, Newco 2 and Newco 3 in the same proportions as described in Paragraph 18. Within a reasonable time following the distribution of such dividend refund, articles of dissolution will be filed by DC with the appropriate Corporate Registry and upon receipt of a certificate of dissolution, DC will be dissolved.

Purpose of the Proposed Transactions

23. The purpose of the Proposed Transactions is to transfer to each of Newco 1, Newco 2 and Newco 3 its proportionate share of the properties of DC such that each of Newco 1, Newco 2 and Newco 3 will be able to separate its interest from another to allow for easier succession planning and the ability to make independent investment decisions.

Additional Information

24. 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 described in Paragraphs 14, 15, 16 and 19, which will be filed on or before the applicable due date and for greater certainty, in respect of the Proposed Transaction described in Paragraph 19, before the dissolution of DC.

25. The agreement respecting the transfer of property described in Paragraphs 14, 15, 16 and 18 will contain a price adjustment clause which will allow the parties thereto to alter the transfer price, the agreed amount and the consideration paid in the event that the taxation authorities do not concur with the FMV and/or cost amount assigned to the property transferred by the parties.

26. None of the corporations referred to herein is or will be, at any time during the series of transactions herein described, a specified financial institution or a restricted financial institution.

27. No property has been or will be acquired by DC and no liabilities have been or will be incurred by of DC in contemplation of and before the transfers of property as described in Paragraph 18, except as described herein.

28. There are not, and will not be at any time prior to the completion of the Proposed Transactions, any agreements or undertakings which constitute or include a "guarantee agreement" in respect of any of the DC shares or the Newco Class B Special Shares.

29. None of DC, Newco 1, Newco 2 or Newco 3 has, or will have, entered into a "dividend rental arrangement" in respect of any of the DC shares or the Newco Class B Special Shares.

30. None of the DC shares or the Newco Class B Special Shares has been, or will be issued or acquired as part of a transaction or event or series of transactions or events of the type described in subsection 112(2.5).

31. None of the corporations described above is or will be, at any time before the completion of the Proposed Transactions, a corporation described in any of the paragraphs (a) to (f) of the definition "financial intermediary corporation" in subsection 191(1).

32. Each of Newco 1, Newco 2 and Newco 3 will have the financial capacity to honour, upon presentation for payment, the amount payable under the promissory note issued by it as part of the Proposed Transactions.

Rulings

Provided that the preceding statements constitute a complete and accurate disclosure of all of the relevant facts, proposed transactions and the purpose of the Proposed Transactions, and provided that the Proposed Transactions are completed in the manner described above, our rulings are as follows:

A. The provisions of subsection 85(1) will apply to:

(a) the transfer by Sibling 1 of her DC shares to Newco 1 described in Paragraph 14;

(b) the transfer by Sibling 2 of her DC shares to Newco 2 described in Paragraph 15;

(c) the transfer by Sibling 3 of his DC shares to Newco 3 described in Paragraph 16; and

(d) subject to the application of subsection 69(11), the transfer of each eligible property by DC to Newco 1, Newco 2 and Newco 3 described in Paragraph 18,

in respect of which a joint election under subsection 85(1) is made such that the agreed amount in respect of each transfer will be deemed to be the proceeds of disposition to the transferor and the cost amount thereof to the transferee pursuant to paragraph 85(1)(a).

For greater certainty, paragraph 85(1)(e.2) will not apply to the transfers referred to herein.

B. Subsection 84(3) will apply on the redemption by each of Newco 1, Newco 2 and Newco 3 of the Newco Class B Special Shares owned by DC, as described in Paragraph 20, to deem DC to have received and each of Newco 1, Newco 2 and Newco 3 to have paid, as the case may be, a dividend on such shares equal to the amount, if any, by which the aggregate amount paid upon such redemption exceeds the aggregate PUC in respect of such shares immediately before such redemption.

C. As a result of the distribution by DC in the course of its winding-up as described in Paragraphs 21 and 22, pursuant to paragraph 88(2)(b) and subsection 84(2), DC will be deemed to have paid, and Newco 1, Newco 2 and Newco 3 will each be deemed to have received, a dividend (the "winding-up dividend") on the DC shares of a particular class, equal to the proportion of the amount by which the aggregate FMV of the property of DC distributed to each of Newco 1, Newco 2 and Newco 3 in respect of the DC shares of that class on the winding-up exceeds the amount by which the PUC of the DC shares of that class is reduced, that the number of the DC shares of that class held by each of Newco 1, Newco 2 and Newco 3, as the case may be, is of the total number of issued DC shares of that class, and, pursuant to subparagraph 88(2)(b)(iii), such winding-up dividend will be deemed to be a taxable dividend.

D. To the extent that each deemed dividend referred to in Rulings B and C is a taxable dividend, each such dividend:

(a) will be included, pursuant to subsection 82(1) and paragraph 12(1)(j), in computing the income of the person deemed to have received such dividend;

(b) will be deductible, pursuant to subsection 112(1), by the corporation deemed to have received the dividend;

(c) will not be a dividend to which any of subsections 112(2.1), (2.2), (2.3) or (2.4) will apply;

(d) will be excluded, pursuant to paragraph (j) of the definition of "proceeds of disposition" in section 54, in determining the proceeds of disposition to the recipient corporation of the shares so redeemed or purchased;

(e) by virtue of subsection 112(3), will reduce the loss, if any, in respect of the disposition of the shares on which the dividend is deemed to be received; and

(f) will not be subject to tax under Parts IV.1 or VI.1 by virtue of paragraph (b) of the definition of "excepted dividend" in section 187.1 and paragraph (a) of the definition of "excluded dividend" in subsection 191(1).

E. No taxes under Part IV will be payable in respect of the dividends described in Rulings B and C above except to the extent of the amount, if any, determined under paragraph 186(1)(b).

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

(a) an acquisition of property in circumstances described in paragraph 55(3.1)(a);

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

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

(d) an acquisition of shares of a distributing corporation in the circumstances described in subparagraph 55(3.1)(b)(iii); or

(e) an acquisition of property in the circumstances described in subparagraph 55(3.1)(c) or 55(3.1)(d);

which has not been described herein, then by virtue of paragraph 55(3)(b), subsection 55(2) will not apply to the taxable dividends described in Rulings B and C. For greater certainty, subsection 55(3.1) will not apply to deny the exemption under paragraph 55(3)(b).

G. The cancellation of the Newco 1 Note, the Newco 2 Note and the Newco 3 Note, as described in Paragraph 21, will not, in and by itself, give rise to a forgiven amount, within the meaning thereof in subsection 80(1) or 80.01(1).

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

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

The above rulings are subject to the limitations and qualifications set out in Information Circular 70-6R5 dated May 17, 2002 and are binding on the CRA provided that the Proposed Transactions (other than the filing of articles of dissolution of DC as described in Paragraph 22) are completed by XXXXXXXXXX .

The above rulings are based on the law as it presently reads and do not take into account any proposed amendments to the Act and the Regulations which, if enacted into law, could have an effect on the rulings provided herein.

Comments

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

(a) the PUC of any share or the ACB or FMV of any property referred to herein;

(b) the balance of CDA or RDTOH of any corporation; or

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

2. You have informed us, in Paragraph 25, that the transactions described in Paragraphs 14, 15, 16 and 18 will be subject to a price adjustment clause. Nothing in this letter should be construed as confirmation, express or implied, that, for the purpose of any of the rulings given above, any adjustment to the FMV of the properties transferred and the redemption amount of the shares issued as consideration, will be effective retroactively to the time of the transfer and issuance of shares. In addition, any such adjustment could affect the ruling given in Ruling F above. Furthermore, none of the rulings given in this letter are intended to apply to the operation of a price adjustment clause, since its coming into effect will be due to circumstances that do not constitute proposed transactions that are seriously contemplated. The general position of the CCRA with respect to price adjustment clauses is stated in Interpretation Bulletin IT-169.

Yours truly,

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