2008 Ruling 2007-0249451R3 - 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: Whether a two-stage transfer of property to be made by DC to each TC's respective Subco in the course of the proposed butterfly as described in the ruling would comply with the requirement in clause 55(3)(b)(i)(A)?

Position: Yes

Reasons: The two-stage transfer would comply with the requirement in clause 55(3)(b)(i)(A).

XXXXXXXXXX 								2007-024945

XXXXXXXXXX , 2008

Dear XXXXXXXXXX :

Re: XXXXXXXXXX
Advance Income Tax Ruling Request

This is in reply to your letter of XXXXXXXXXX in which you requested an advance income tax ruling on behalf of the above-noted taxpayer. In your subsequent letters you provided additional information concerning the facts and proposed transactions described in your original letter. 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 involved in this ruling request is

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

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

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

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

The taxpayer has also represented that the Proposed Transactions described herein will not result in the taxpayer or a related person described herein being unable to pay its existing outstanding tax liabilities.

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 that expression is defined in subsection 248(1);

"agreed amount" means the amount that the taxpayer and the corporation have jointly elected in prescribed form in respect of an eligible property;

"BCA 1" means the Canada Business Corporations Act, R.S.C. 1985;

"BCA 2" means the Business Corporations Act (XXXXXXXXXX ) and, where applicable, its predecessor statutes;

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

"capital" has the meaning assigned by the provisions of the BCA 2;

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

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

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

"depreciable property" has the meaning assigned by subsection 13(21);

"distribution" has the meaning assigned by subsection 55(1);

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

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

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

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

"FMV" represents fair market value which means the highest price available in an open and unrestricted market between informed prudent parties acting at arm's length and under no compulsion to act and contracting for a taxable purchase and sale;

"financial intermediary corporation" has the meaning assigned by subsection 191(1);

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

"PUC" means paid-up capital as that expression is defined in subsection 89(1);

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

"par value" has the meaning assigned by the provisions of the BCA 2;

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

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

"Proposed Transactions" means the proposed transactions described in Paragraphs 4 to 14;

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

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

"related persons" has the meaning assigned by section 251;

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

"series of transactions" has the meaning assigned by subsection 248(10);

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

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

"stated capital" has the meaning assigned by the BCA 1;

"subsidiary wholly-owned corporation" has the meaning assigned by subsection 248(1);

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

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

"undepreciated capital cost" has the meaning assigned by subsection 13(21).

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 formed on XXXXXXXXXX under the BCA 1 as a result of an amalgamation ("Amalgamation") of XXXXXXXXXX . ("Old DC") and its XXXXXXXXXX subsidiary wholly-owned corporations: XXXXXXXXXX (herein referred to individually as a "PC" and collectively as the "PCs").

DC's first fiscal and taxation year will end on XXXXXXXXXX . DC will deal with the XXXXXXXXXX Tax Services Office and will file its corporate income tax returns at the XXXXXXXXXX Taxation Centre.

The issued and outstanding capital of DC consists of XXXXXXXXXX common shares ("DC Common Shares") which are owned equally by XXXXXXXXXX ("Mr. X"), his spouse XXXXXXXXXX ("Mrs. X") and their XXXXXXXXXX adult children: XXXXXXXXXX (herein referred to individually as a "Child" and collectively as the "Children").

Old DC, PC XXXXXXXXXX were all incorporated under the BCA 2 after 1971. PC XXXXXXXXXX were all incorporated under the BCA 1 also after 1971. Old DC owned all of the issued and outstanding shares of PCs and controlled each of the PCs immediately before the Amalgamation.

Prior to the Amalgamation, Old DC, PC XXXXXXXXXX were continued under the BCA 1 to facilitate the Amalgamation.

The PUC and ACB of each DC Common Share is $XXXXXXXXXX .

The DC Common Shares are held by Mr.and Mrs. X and the Children as capital property and were not acquired in contemplation of the Proposed Transactions.

DC does not have any RDTOH and will not have any such amount at the end of the taxation year in which the Proposed Transactions are completed.

2. DC's principal business is the rental of real estate property owned by it. DC employs more than XXXXXXXXXX full-time employees in its rental business.

The assets of DC consist of:

a) cash, accounts receivable and rights arising from the prepayment of certain expenses ("prepaid expenses");

b) real property held for the purpose of earning rental income. DC owns XXXXXXXXXX commercial or residential rental properties;

c) vacant land ("Land") which was acquired for the purpose of reselling at a profit. DC actively tried to sell it but withdrew the offer to sell when no reasonable offers were received. It currently remains vacant land with only incidental revenues being received. The revenues are insignificant in relation to the value and no action has been taken by DC to enhance those revenues; and

d) loans receivable ("Loans Receivable") from tenants of its commercial rental properties. All loans were made to new tenants to assist them with capital improvements. In every case, the tenant would not have entered into the lease without the assistance from DC or its predecessor corporations. Currently there are three loans outstanding, each with bona fide repayment terms.

DC holds the rental properties described in (b) above as capital property.

DC's liabilities consist of:

e) current liabilities which include accounts payable, security deposits and amounts due to shareholders ("Shareholders' Loans"); and

f) long-term debts ("Long-Term Debts") which include bank loans ("Bank Loans") used to acquire the rental properties described in (b) above.

The Shareholder's Loans are payable on demand. The Bank Loans are secured by the rental properties described in (b) above.

3. Mr. and Mrs. X and the Children are residents of Canada and are related to each other pursuant to paragraph 251(2)(a). Consequently, DC, TC XXXXXXXXXX are related to each other pursuant to subparagraphs 251(2)(c)(ii) and (iii).

However, for the purposes of section 55, by virtue of subparagraph 55(5)(e)(i):

(a) Child XXXXXXXXXX are not related to each other and are not related to DC; and

(b) TC XXXXXXXXXX will not be related to each other and will not be related to DC.

Proposed Transactions

4. Child XXXXXXXXXX will each incorporate a new corporation, being TC XXXXXXXXXX , respectively (herein referred to individually as a "TC" and collectively as the "TCs"), pursuant to the provisions of the BCA 2. Each TC will be a CCPC and a TCC. The share capital of each TC will include a class of voting common shares with no par value ("TC Common Shares"). No shares will be issued on the incorporation of each TC.

Each Child will make an interest free demand loan of $XXXXXXXXXX to his or her respective TC to enable such TC to fund the nominal purchase price of its respective Subco Common Share as described in Paragraph 5.

5. Each of TC XXXXXXXXXX will incorporate a new corporation, being Subco XXXXXXXXXX respectively (herein referred to individually as a "Subco" and collectively as the "Subcos"), pursuant to the provisions of the BCA 2. Each such Subco will be a CCPC and a TCC. The share capital of each such Subco will include:

(a) a class of voting common shares ("Subco Common Shares") with no par value; and

(b) XXXXXXXXXX Class A non-voting preferred shares ("Subco Class A Preferred Shares") with no par value. Each of the Subco Class A Preferred Shares will be redeemable and retractable, subject to applicable law, at any time for an amount equal to the amount determined by dividing the aggregate FMV of the property received by the corporation on the issuance of the Subco Class A Preferred Shares less the aggregate FMV of any non-share consideration issued or liabilities assumed by the corporation, by the number of the Subco Class A Preferred Shares issued ("Subco Class A Redemption Amount").

Each Subco Class A Preferred Share will be entitled to a preferential and non-cumulative annual dividend at a rate of XXXXXXXXXX % per annum of the Subco Class A Redemption Amount.

On dissolution or other distribution by the corporation, the Subco Class A Preferred Shares will rank ahead of the Subco Common Shares.

Each TC will subscribe for one Subco Common Share of its respective Subco for cash consideration of $XXXXXXXXXX upon its incorporation.

6. Child XXXXXXXXXX will each transfer his or her DC Common Share to TC XXXXXXXXXX , respectively. As sole consideration for the transfer, TC XXXXXXXXXX will each issue one TC Common Share to Child XXXXXXXXXX , respectively, which will be the only issued share of each TC.

XXXXXXXXXX , will jointly elect, in prescribed form and within the time limit referred to in subsection 85(6), to have the provisions of subsection 85(1) apply to each transfer described herein. The agreed amount in respect of the DC Common Share so transferred by a particular Child to his or her respective TC will be equal to the ACB, at the time of such transfer, to the particular Child of such share owned by the particular Child and transferred to his or her respective TC. For greater certainty, the DC Common Share owned by the particular Child will be property described in paragraph 85(1)(c.1) and the elected amount will be within the limits prescribed by that paragraph.

For the purposes of the Act, the increase to the PUC of the TC Common Share that is issued by TC XXXXXXXXXX , as the case may be, as consideration for the DC Common Share so transferred to TC XXXXXXXXXX , as the case may be, will not exceed the amount determined as B for the purposes of paragraph 84.1(1)(a).

Each TC will hold its DC Common Share as capital property.

7. Immediately before the transfer of property described in Paragraph 10, the property of DC will be classified into 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 cash, accounts receivable, prepaid expenses and the current portion of the Loans Receivable;

(b) 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 a business (other than a SIB), and

(c) 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 a SIB.

For the purposes of determining the types of property described herein, the following properties of DC will be considered to be business property of DC:

(d) the Land, as it is held for the purpose of resale;

(e) the real property, as it is used in a rental business that employs more than 5 full-time employees; and

(f) the long-term portion of the Loans Receivable from tenants of the rental properties, as they were made solely for the purpose of inducing tenants to enter into lease agreements with DC or its predecessor corporations.

8. In determining the net FMV of each type of property of DC immediately before the transfer described in Paragraph 10, the liabilities of DC will be allocated to, and will be deducted in the calculation of, the net FMV of each such type of property of DC in the following manner:

(a) current liabilities of DC (including the current portion of the Long-Term Debts and the Shareholders' Loans) will be allocated to the cash or near cash property of DC in the proportion that the FMV of each such property is of the FMV of all cash or near cash property owned by it. The amount of current liabilities allocated as described herein will not exceed the aggregate FMV of the cash or near cash property of DC;

(b) liabilities of DC, other than current liabilities, that relate to a particular property will be allocated to the particular property (and effectively to the type to which the particular property belongs) to the extent of its FMV. The liabilities that pertain to a type of property, but not to a particular property, then will be allocated to that type of property, but not in excess of the net FMV of such type of property after the allocation of liabilities to a particular property as described herein; and

(c) if any liabilities remain after the allocations described in steps (a) and (b) above are made ("Excess Unallocated Liabilities"), such Excess Unallocated Liabilities will then be allocated to the cash or near cash property, business property, and investment property, if any, of DC, based on the relative net FMV of each type of property prior to the allocation of such Excess Unallocated Liabilities.

9. For greater certainty, in determining the net FMV of the property of DC as described in Paragraphs 7 and 8, the following principles will apply:

(a) no amount will be considered to be a liability unless it represents a true legal liability which is capable of quantification;

(b) the amount of any deferred income tax will not be considered a liability because such amount does not represent a legal obligation of DC; and

(c) 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.

10. Immediately following the determination of its types of property as described in Paragraph 7, DC will transfer, in two stages, one after the other, to each of the Subcos a proportionate share of

(a) its cash or near cash property, if any;

(b) its business property; and

(c) its investment property, if any;

as follows:

(d) in the first stage, DC will transfer its business property located in provinces other than XXXXXXXXXX to each of the Subcos; and

(e) in the second stage, DC will transfer its business property located in XXXXXXXXXX , and its cash or near cash property, if any, and its investment property, if any, to each of the Subcos,

such that, immediately after such two-stage transfer, the aggregate net FMV of each type of property of DC (after allocating and deducting, in the manner described in Paragraphs 7, 8 and 9, the liabilities of DC which are to be assumed by each such Subco described in (h) below) so transferred to each such Subco as described herein, will be equal to or approximate that proportion of the net FMV of all of that type of property of DC, determined immediately before such two-stage transfer, that:

(f) the FMV of the DC Common Share owned by XXXXXXXXXX as the case may be, immediately before such two-stage transfer,

is of

(g) the aggregate FMV of all of the issued and outstanding shares of DC immediately before such two-stage transfer.

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 net FMV of each type of property which each such Subco has received in such two-stage transfer as compared to what each such Subco would have received had such Subco received its appropriate pro rata share of the net FMV of that type of property.

You have advised us that, following the allocation of liabilities described in Paragraph 8 and immediately before such two-stage transfer of property described herein, on a net asset basis, DC will not have any cash or near-cash property, or any investment property.

As consideration for the transfer of property described herein, each such Subco will, in each stage:

(h) assume debt of DC that is allocable to the property of DC transferred to it as described herein; and

(i) issue Subco Class A Preferred Shares to DC having an aggregate FMV, redemption and retraction amount equal to the amount by which the aggregate FMV of the particular properties of DC so transferred to such Subco exceeds the amount of the liabilities of DC assumed by such Subco as described in (h) above.

11. DC and each of the Subcos, will jointly elect, in prescribed form and within the time referred to in subsection 85(6), to have the provisions of subsection 85(1) apply to the transfer, by DC, of each eligible property that has a FMV in excess of its cost amount, to each such Subco as described in Paragraph 10. Specifically, the agreed amount under such election in respect of each eligible property so transferred will be an amount that is not less than:

(a) in the case of eligible capital property, the least of the amounts specified in subparagraphs 85(1)(d)(i), (ii) and (iii);

(b) in the case of depreciable property of a prescribed class, the least of the amounts specified in subparagraphs 85(1)(e)(i), (ii) and (iii); and

(c) in the case of property described in paragraph 85(1)(c.1), the lesser of the amounts specified in subparagraphs 85(1)(c.1)(i) and (ii).

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).

For greater certainty, the amount of DC's liabilities to be assumed by each such Subco 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.

For the purposes of the Act, the increase to the PUC of the Subco Class A Preferred Shares issued by a particular Subco to DC as consideration for the property transferred by DC to the particular Subco will not exceed the amount by which the aggregate cost amount of such property to the particular Subco, as determined pursuant to subsection 85(1) where applicable, exceeds the aggregate amount of DC's liabilities assumed by the particular Subco for such property as described in Paragraph 10(h). For greater certainty, the increase to the PUC of the Subco Class A Preferred Shares so issued by the particular Subco will not exceed the maximum amount that could be added to the PUC of such shares, having regard to subsection 85(2.1).

12. Immediately following the transfer of property as described in Paragraph 10, each of the Subcos will redeem all of the Subco Class A Preferred Shares that were issued to DC as described in Paragraph 10(i) and will issue to DC in consideration therefor, a demand non-interest bearing promissory note having a principal amount and FMV equal to the aggregate redemption amount and FMV of the Subco Class A Preferred Shares (XXXXXXXXXX and individually as a "Subco Redemption Note", and collectively as the "Subco Redemption Notes") so redeemed. DC will accept each such Subco Redemption Note as full satisfaction for the redemption price of such shares with the risk of such note being dishonored.

13. DC will purchase for cancellation each DC Common Share owned by each of the TCs. As consideration for each such purchase, DC will assign and transfer the XXXXXXXXXX Each such TC will accept its respective Subco

Redemption Note as full satisfaction for the purchase price of its DC Common Share so purchased with the risk of such note being dishonored.

14. At the end of the day in which the DC Common Share owned by each of the TCs is purchased for cancellation as described in Paragraph 13, Subco XXXXXXXXXX will be wound up into TC XXXXXXXXXX , respectively, pursuant to the applicable provisions of the BCA 2. On the winding-up of each such Subco, all of the property of such Subco will be distributed by such Subco to its respective TC, and all of the liabilities of such Subco, including its Subco Redemption Note, will be assumed by its respective TC.

Each such TC will elect, in prescribed form and within the time referred to in paragraph 80.01(4)(c), to have the rules in subsection 80.01(4) apply with respect to the settlement of the Subco Redemption Note owing by its respective Subco on the winding-up of such Subco.

Additional Information

15. Neither DC nor any of the TCs is or will be, at any time during a series of transactions or events that includes the Proposed Transactions, a specified financial institution or a restricted financial institution.

16. No property has or will become property of DC, and no liabilities have been, or will be, incurred or discharged by DC, in contemplation of and before the proposed transfers described in Paragraph 10, except as described herein.

17. Neither DC nor any of the TCs has any expectation or intention of disposing of any property owned by it, as part of a series of transactions or events that includes the Proposed Transactions, to a person to whom it is not related or to a partnership, subsequent to the Proposed Transactions, other than in the ordinary course of such corporation's business.

18. None of the shares of DC nor any of the shares of any TC is or will be, at any time during a series of transactions or events that includes the Proposed Transactions:

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

(b) 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); or

(c) the subject of a dividend rental arrangement.

19. Neither DC nor any of the TCs is or will be, at any time during a series of transactions or events that includes the Proposed Transactions, a corporation described in any of paragraphs (a) to (f) of the definition of "financial intermediary corporation" as defined in subsection 191(1).

20. Each of DC and the TCs 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.

Purpose of the Proposed Transactions

21. The purpose of the Proposed Transactions is to permit some of the shareholders of DC to separate their respective interests in DC, in order to enable each Child to own his or her various property interests independently from his or her siblings and parents.

The purpose of transferring DC's business property located in provinces other than XXXXXXXXXX in the first stage, and DC's business property located in XXXXXXXXXX in the second stage, to each such Subco as described in Paragraph 10 is to avoid XXXXXXXXXX transfer tax under the XXXXXXXXXX

Rulings

Provided that the preceding statements constitute 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. Provided that the requisite joint elections are filed in prescribed form and within the prescribed time, the provisions of subsection 85(1) will apply to:

(a) the transfer by each Child of his or her DC Common Share to the respective TC described in Paragraph 6; and

(b) subject to the application of subsection 69(11), the transfer by DC of each eligible property to each of the Subcos described in Paragraph 10,

such that the agreed amount in respect of each transfer of eligible property will be deemed to be the transferor's proceeds of disposition and the transferee's cost thereof pursuant to paragraph 85(1)(a). In respect of depreciable property, to the extent that the transferor's capital cost exceeds the transferor's proceeds of disposition of the property, the transferee's capital cost of each such property will be determined in accordance with subsection 85(5).

For the purposes of the joint elections described herein, the reference to the "undepreciated capital cost to the taxpayer of all property of that class immediately before the disposition" found in subparagraph 85(1)(e)(i) shall be interpreted to mean that proportion of the undepreciated capital cost to the taxpayer of all property of that class immediately before the disposition, that the FMV at that time of the property that is transferred is of the FMV at that time of all property of that class.

For greater certainty, paragraph 85(1)(e.2) will not apply to each transfer.

B. Subsection 84(3) will apply on the redemption or purchase for cancellation

(a) of the Subco Class A Preferred Shares owned by DC described in Paragraph 12, to deem each of the Subcos to have paid and DC to have received; and

(b) of the DC Common Share owned by each of the TCs described in Paragraph 13, to deem DC to have paid and each of the TCs to have received,

a dividend on such shares equal to the amount, if any, by which the aggregate amount paid upon such redemption or purchase for cancellation exceeds the aggregate PUC in respect of such shares immediately before such redemption or purchase for cancellation, and any such dividend

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

(d) will be deductible by each recipient of such dividend in computing its respective taxable income pursuant to subsection 112(1). For greater certainty, the provisions of subsections 112(2.1), (2.2), (2.3) or (2.4) will not apply to deny the subsection 112(1) deduction in respect of such dividend;

(e) will be excluded from the proceeds of disposition of the shares by virtue of paragraph (j) of the definition of "proceeds of disposition" in section 54;

(f) 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;

(g) will not be subject to tax under Part IV.1 or Part VI.1; and

(h) will not be subject to tax under Part IV, except to the extent that a dividend payer is entitled to a dividend refund for its taxation year in which it paid such dividend.

C. Provided that as part of a series of transactions or events that includes the Proposed Transactions, there is not:

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

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

(c) an acquisition of shares in the circumstances described in subparagraph 55(3.1)(b)(iii);

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

(e) an acquisition of property in the circumstances described in paragraph 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 referred to in Ruling B above. For greater certainty, subsection 55(3.1) will not apply to deny the exemption under paragraph 55(3)(b).

D. Provided that each of TC XXXXXXXXXX , as the case may be, elects in prescribed form and within the time referred to in paragraph 80.01(4)(c) to have the provisions of subsection 80.01(4) apply with respect to the settlement of XXXXXXXXXX Redemption Note, as the case may be, as described in Paragraph 14, the provisions of paragraphs 80.01(4)(c) and (d) will apply to the settlement of such note.

E. Provided that the condition specified in paragraph 1100(2.2)(f) of the Regulations is satisfied, paragraph 1100(2.2)(h) of the Regulations will apply so that no amount will be included by any of the TCs under paragraph 1100(2)(a) of the Regulations in respect of depreciable property of a prescribed class that is property acquired by a particular Subco from DC, on the transfer described in Paragraph 10, and then by a particular TC from its respective Subco, on the winding-up of such Subco described in Paragraph 14.

F. Provided that each of TC XXXXXXXXXX , as the case may be,

(a) continues to use the property acquired as a result of the transfer of property described in Paragraph 10, and the winding-up of the particular Subco described in Paragraph 14, for the purpose of gaining or producing income therefrom (other than income which is exempt from taxation); and

(b) has a legal obligation to pay interest in respect of any liabilities (other than any liabilities in respect of which DC was not entitled to deduct interest under paragraph 20(1)(c)) that are assumed by the particular Subco from DC as consideration for such property described in Paragraph 10, and by the particular TC on the winding-up of the particular Subco described in Paragraph 14,

any such interest paid in the taxation year or payable in respect of the taxation year (depending on the method regularly followed by such corporation in computing its income for the purposes of the Act) by TC XXXXXXXXXX , as the case may be, in respect of such liabilities, not in excess of a reasonable amount, will be deductible in computing the income of such corporation for the taxation year under paragraph 20(1)(c).

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

H. 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 in the rulings given above.

These rulings are given subject to the limitations and qualifications set out in Information Circular 70-6R5 issued by Canada Revenue Agency ("CRA") on May 17, 2002 and are binding on the CRA provided that the Proposed Transactions are completed by XXXXXXXXXX .

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

Comments

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

(a) the FMV or the cost amount of any particular asset or the PUC of any shares referred to herein; and

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

Yours truly,

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