2009 Ruling 2008-0275881R3 - Butterfly reorganization

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

Principal Issues: 1) Whether the distribution of DC's cash & near cash and investment property to holding companies to be incorporated by each beneficiary of a Family Trust qualifies for the butterfly exemption stated in paragraph 55(3)(b) of the Act; (2) Whether the shares of DC that will be wound-up in the course of the butterfly reorganization are only deemed to be disposed of upon the Registrar's acceptance of the surrender and cancellation of DC's certificate of incorporation

Position: (1) Yes; (2) Yes

Reasons: (1) The various transactions completed prior to the distribution of DC's property will neither be subject to the pro rata requirement stated in the definition of "distribution" in subsection 55(1), nor the butterfly exemption denial rules stated paragraph 55(3.1)(a) and subparagraph 55(3.1)(b)(i) of the Act. (2) The DC shares will be deemed to have been disposed of when they are formally cancelled pursuant to the applicable corporate legislation since the taxpayer elected not to avail itself of the administrative concession found in interpretation bulletin IT-126R2 (paragraph 9)

XXXXXXXXXX 							2008-027588
								François Mathieu
XXXXXXXXXX , 2009

Dear XXXXXXXXXX :

Re: Advance Income Tax Rulings
XXXXXXXXXX (BN: XXXXXXXXXX , XXXXXXXXXX TSO, XXXXXXXXXX Tax Centre)

We are writing in response to your request for an income tax ruling dated XXXXXXXXXX , which was amended on XXXXXXXXXX , in response to our requests for clarification dated XXXXXXXXXX .

We also took notice of the additional information that you provided in the correspondence that we exchanged regarding the various transactions entered into by the participants to the proposed butterfly reorganization and their predecessors before DC's assets are transferred to corporations to be formed by the beneficiaries of the Family Trust.

For greater certainty, all the documents and correspondence submitted in support of your request are part of this letter only to the extent described herein.

PRELIMINARY MATTERS

To the best of your knowledge, none of the issues involved in this letter:

(a) is in an earlier return of DC or a related person;

(b) is being considered by a tax services office or a taxation centre in connection with a previously filed tax return of DC or a related person;

(c) is under objection by DC or a related person;

(d) is before the Courts or, if a judgment has been issued, the time limit for appeal to a higher court has expired; and

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

DC has confirmed that the proposed transactions described herein will not affect its ability to pay any outstanding tax liabilities.

Unless otherwise indicated, all references to monetary amounts in this letter are in Canadian dollars.

DEFINITIONS

In this letter, unless the context otherwise requires, the following terms have the meanings specified below:

"A" means XXXXXXXXXX ;

"Aco" means XXXXXXXXXX ;

"ABC Inc." means XXXXXXXXXX .;

"Absolute Discretion" refers to the unfettered discretion that the FT Trustees have in managing the FT Trust Fund as described in paragraph (a) of the Definitions section of the Family Trust Agreement;

"ACB" means adjusted cost base as that term is defined in section 54 of the Act;

"Act" means the means the Income Tax Act, R.S.C. 1985 (5th Supp.) c. 1, as amended to the date hereof;

"AET Beneficiaries" means A as a primary beneficiary, and, upon his death, the Family;

"AET Distribution Date" means the earliest of: (i) the date when the AET Trust Fund has been wholly paid or transferred to the AET Beneficiaries, (ii) the date next following the date when there is no AET Beneficiaries alive, (iii) XXXXXXXXXX years after A's death, and (iv) such earlier date as the AET Trustees unanimously determine in writing;

"AET Property" means the property transferred by A to the Alter Ego Trust upon settlement of the Alter Ego Trust described in paragraph 14 below;

"AET Trustees" means the original trustees of the Alter Ego Trust, namely XXXXXXXXXX who was added as trustee of the Alter Ego Trust pursuant to an amendment to the Alter Ego Trust Agreement dated XXXXXXXXXX ;

"AET Trust Fund" means any sum of money and any property under the management of the AET Trustees (including any property substituted therefor, any accretions thereto and all income therefrom) under their management;

"Agreed Amount" means the amount that a transferor and transferee have agreed upon in a joint election under subsection 85(1) of the Act in respect of a transfer of Eligible Property as adjusted in accordance with paragraphs 85(1)(b) to 85(1)(e.4) of the Act inclusively;

"Alter Ego Trust" means the trust described in paragraphs 14 and 15 below;

"Alter Ego Trust Agreement" means the agreement dated XXXXXXXXXX governing the settlement of the Alter Ego Trust, and the AET Trustees' management of the AET Trust Fund;

"Amalgamation" means the amalgamation of PC1, PC2, PC3, PC4, PC5 and PC6 under XXXXXXXXXX the Companies Act described in paragraph 33 below;

"Amending Agreement" means the agreement dated XXXXXXXXXX pursuant to which illegitimate children of A shall not be entitled to any benefit from the FT Trust Fund with the exception of X and Y;

"Arm's Length" has the meaning assigned by section 251 of the Act;

"Bco" means XXXXXXXXXX whose shares were held by A prior to being transferred to the Alter Ego Trust on XXXXXXXXXX ;

"Broker" means the XXXXXXXXXX

"Butterfly Reorganization" means the proposed butterfly reorganization described in paragraphs 62 to 99 below;

"CC Inc." means XXXXXXXXXX .;

"Canadian-Controlled Private Corporation" has the meaning assigned by subsection 125(7) of the Act;

"Capital Dividend" means a dividend in respect of which an election was made pursuant to subsection 83(2) of the Act;

"Capital Dividend Account" has the meaning assigned by subsection 89(1) of the Act;

"Companies Act" means the Companies Act XXXXXXXXXX ;

"Connected Corporation" has the meaning assigned by subsection 186(4) of the Act;

"Corporate Group" means the group of companies under A`s control, or the Estate`s control after his death;

"Courtco" means the corporation that will be created by DC, and to which DC will assign its right of proceeding in a court of law to seek damages in respect of the cause of action described in paragraph 20 below that DC acquired from PC3 upon the Amalgamation;

"DC" means XXXXXXXXXX , which is a corporation described in paragraph 33 below;

"Disposition" has the meaning assigned by subsection 248(1) of the Act;

"Distribution" has the meaning assigned to subsection 55(1) of the Act;

"Dividend Refund" has the meaning assigned by subsection 129(1) of the Act;

"Eligible Property" has the meaning assigned by subsection 85(1.1) of the Act;

"Estate" means the estate of A described in paragraphs 56 and 57 below;

"Estate Freeze" means the transactions completed by A in order to freeze his interest in PC1 described in paragraphs 7 to 11 below;

"Excepted dividends" has the meaning assigned by section 187.1 of the Act;

"Excluded dividends" has the meaning assigned by subsection 191(1) of the Act;

"Executors" means the individuals appointed as executors of the Will, namely XXXXXXXXXX ;

"Family" means the issue of A and their issue but excludes any illegitimate children of A`s issue to the exclusion of X and Y;

"Family Trust" means the trust described in paragraphs 58 and 59 below;

"Family Trust Agreement" means the agreement dated XXXXXXXXXX governing the settlement of the Family Trust, and the FT Trustees' management of the FT Trust Fund;

"FMV" means the highest price available in an open and unrestricted market between informed and prudent parties acting at Arm's Length, and under no compulsion to act, expressed in cash;

"Forgiven Amount" has the meaning assigned in subsections 80(1) and 80.01(1) of the Act;

"FT Beneficiaries" mean the beneficiaries of the Family Trust, namely the Family as defined above;

"FT Trustees" mean the trustees of the Family Trust, namely XXXXXXXXXX

"FT Trust Fund" means all moneys, and other assets under the control of the FT Trustees as defined in paragraph 1(p) of the Family Trust Agreement;

"Guarantee Agreement" has the meaning assigned by subsection 112(2.2) of the Act;

"Holding Companies" collectively means Holding Company 1, Holding Company 2, Holding Company 3 and Holding Company 4;

"Holding Company" means any of Holding Company 1, Holding Company 2, Holding Company 3 or Holding Company 4;

"Holding Company 1" means the Holding Company incorporated by Sibling 1;

"Holding Company 2" means the Holding Company incorporated by Sibling 2;

"Holding Company 3" means the Holding Company incorporated by Sibling 3;

"Holding Company 4" means the Holding Company incorporated by Sibling 4;

"Holding Company Note 1" means the non-interest bearing demand note issued by Holding Company 1;

"Holding Company Note 2" means the non-interest bearing demand note issued by Holding Company 2;

"Holding Company Note 3" means the non-interest bearing demand note issued by Holding Company 3;

"Holding Company Note 4" means the non-interest bearing demand note issued by Holding Company 4;

"Holding Company Notes" means the aggregate non-interest bearing demand notes issued by each Holding Company described in paragraph 92 below;

"Legal Control" means the right of control that rests in the ownership of such a number of shares of a corporation as carries with it the right to a majority of the votes in the election of the board of directors of that corporation;

"Net Assets Butterfly" means DC's proportionate transfer of each Type of Property to each Holding Company on a net basis after deducting the liabilities, if any, attached to the transferred assets as described in paragraph 80 below;

"Paid-up Capital" means the paid-up capital of DC's common shares for the purposes of the Companies Act;

"PC1" means XXXXXXXXXX further to the continuance of XXXXXXXXXX under the Companies Act on XXXXXXXXXX ;

"PC2" means XXXXXXXXXX further to the continuance of XXXXXXXXXX under the Companies Act on XXXXXXXXXX ;

"PC3" means XXXXXXXXXX further to the continuance of XXXXXXXXXX under the Companies Act on XXXXXXXXXX ;

"PC4" means XXXXXXXXXX , which was formerly named XXXXXXXXXX prior to the Amalgamation;

"PC5" means XXXXXXXXXX , which was formerly named XXXXXXXXXX prior to the Amalgamation;

"PC6" means XXXXXXXXXX ;

"Predecessor Corporation" has the meaning assigned by subsection 87(1) of the Act;

"Prescribed Stock Exchange" has the meaning assigned by section 3200 of the Income Tax Regulations;

"Private Corporation" has the meaning assigned by subsection 89(1) of the Act;

"Proceeds of Disposition" has the meaning assigned by section 54 of the Act as extended pursuant to paragraph 85(1)(a) and subsection 104(4) of the Act;

"Proposed Transactions" means the transactions described in paragraphs 62 to 99 below;

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

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

"Registrar" means the XXXXXXXXXX

"Relatedco" means XXXXXXXXXX , which was created to hold shares whose value was equal to the amount payable on the life insurance policies held by PC2 on A's life;

"Repayment Period" means the period of time starting XXXXXXXXXX and ending XXXXXXXXXX during which DC's indebtedness to the Alter Ego Trust was repaid as described in paragraphs 49 and 50 below;

"Restricted Financial Institution" has the meaning assigned by subsection 248(1) of the Act;

"Sibling 1" means XXXXXXXXXX ;

"Sibling 2" means XXXXXXXXXX ;

"Sibling 3" means XXXXXXXXXX ;

"Sibling 4" means XXXXXXXXXX ;

"Siblings" mean Sibling 1, Sibling 2, Sibling 3 and Sibling 4, who are the legitimate children of A;

"Specified Financial Institution" has the meaning assigned by subsection 248(1) of the Act;

"Stock Dividend" has the meaning assigned by subsection 248(1) of the Act;

"Supreme Court" means the Supreme Court of XXXXXXXXXX ;

"Taxable Canadian Corporation" has the meaning assigned by subsection 89(1) of the Act;

"Taxable Dividend" has the meaning assigned by subsection 89(1) of the Act;

"Taxable Preferred Share" has the meaning assigned by subsection 248(1) of the Act;

"Transferco" means XXXXXXXXXX , which was incorporated under the Companies Act on XXXXXXXXXX ;

"Types of Property" means the three (3) types of property DC's assets may be classified into for the purposes of the Distribution: (a) cash or near cash property, comprising all of DC's current assets, cash, marketable securities (other than portfolio investments), accounts receivable, inventory and prepaid expenses; (b) business property, comprising all of DC's assets other than cash or near cash property, any income from which would, for purposes of the Act, be income from a business (other than a specified investment business) carried on by DC; and (c) investment property, comprising all of DC's assets other than cash or near cash property, any income from which would, for purpose of the Act, be income from property or a specified investment business (including a portfolio investment holding approximately XXXXXXXXXX different shares listed on a Prescribed Stock Exchange as well as XXXXXXXXXX Class A and the XXXXXXXXXX Class B common shares in CC Inc.). For greater certainty, any tax accounts, such as the balance of DC's non-capital losses, RDTOH or Capital Dividend Account will not be considered as property for the purposes of the Butterfly Reorganization;

"Will" means the last will and testament of A dated XXXXXXXXXX ;

"Winding-Up Dividend" has the meaning assigned by subsection 84(2) of the Act;

"X" means XXXXXXXXXX ; and

"Y" means XXXXXXXXXX .

FACTS

The reorganization of the Corporate Group prior to A's death

A's shareholding in the Corporate Group prior to the Estate Freeze

1. Immediately before the Estate Freeze, A held XXXXXXXXXX Class A common shares (voting) and XXXXXXXXXX Class B common shares (voting) in PC1 having an aggregate PUC and ACB of $XXXXXXXXXX , and an aggregate FMV of $XXXXXXXXXX . As a result of his shareholding in PC1, A had Legal Control over that corporation at that time. PC1 was a holding corporation that owned Class A and B common shares (voting) in PC2, which owned Class A and B special shares (voting), and Class D special shares (non-voting) in PC3, which was the corporate entity that held most of cash in the Corporate Group. PC3 owned all the common shares (voting) respectively issued by PC4, PC5 and PC6.

2. In addition, A held XXXXXXXXXX Class C special shares in PC3 having an aggregate PUC and ACB of $XXXXXXXXXX , and an aggregate redemption value of $XXXXXXXXXX as well as XXXXXXXXXX common shares in Bco having an aggregate PUC and ACB of $XXXXXXXXXX , and an aggregate FMV of $XXXXXXXXXX . Finally, A held XXXXXXXXXX common shares in Relatedco, which had a PUC, ACB and FMV of $XXXXXXXXXX .

The life insurance policy PC2 held on A's life

3. PC2 held life insurance policies on A's life for approximately $XXXXXXXXXX in death benefits prior to the completion of the Estate Freeze.

The Family Trust's acquisition of the common and equity shares in PC3

4. On XXXXXXXXXX , PC2 subscribed for the following common and equity shares in PC3 for an aggregate cash consideration of $XXXXXXXXXX :

Consideration
Number of Shares
Class A common
XXXXXXXXXX
XXXXXXXXXX
Class B common
XXXXXXXXXX
XXXXXXXXXX
Class C common
XXXXXXXXXX
XXXXXXXXXX
Class A equity
XXXXXXXXXX
XXXXXXXXXX
Class B equity
XXXXXXXXXX
XXXXXXXXXX
Class C equity
XXXXXXXXXX
XXXXXXXXXX
Class D equity
XXXXXXXXXX
XXXXXXXXXX
* Total
XXXXXXXXXX
XXXXXXXXXX

The ACB, PUC and FMV of the common and equity shares in PC3 subscribed for by PC2 was equal to $XXXXXXXXXX .

5. On XXXXXXXXXX , PC3 declared and paid a Stock Dividend on each class of its common and equity shares listed in paragraph 4 above by issuing the following Class A special shares to PC2:

Number of Class A special shares issued
Declared amount of dividend
PUC of issued shares
Redemption value of the Class A special shares issued

Class A common
XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX
Class B common
XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX
Class B common
XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX
* Class A equity
XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX
Class B equity
XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX
Class C equity
XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX
Class D equity
XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX
Total
XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX

The issuance of the XXXXXXXXXX Class A special shares to PC2 reduced the FMV of the common and equity shares that PC2 held in PC3 to $XXXXXXXXXX .

6. The Family Trust was settled on XXXXXXXXXX . On XXXXXXXXXX , the Family Trust purchased the common and equity shares that PC2 held in PC3 for an aggregate amount of $XXXXXXXXXX . The ACB and FMV of the common and equity shares of PC3 that were acquired by the Family Trust were equal to $XXXXXXXXXX whereas the PUC of these shares was equal to $XXXXXXXXXX .

The Estate Freeze

7. On XXXXXXXXXX , A completed an Estate Freeze pursuant to which he exchanged the XXXXXXXXXX Class A common shares (voting) and the XXXXXXXXXX Class B common shares (voting) that he held in PC1 for XXXXXXXXXX Class B preferred shares in PC1 (non-voting) having an aggregate PUC and an ACB of $XXXXXXXXXX , and an aggregate redemption value of $XXXXXXXXXX as well as XXXXXXXXXX Class X preferred shares in PC1 (non-voting) having an aggregate PUC and ACB of $XXXXXXXXXX , and an aggregate redemption value of $XXXXXXXXXX .

8. On XXXXXXXXXX , PC2 declared and paid a stock dividend to PC1 by issuing XXXXXXXXXX Class A preferred shares having an aggregate PUC and ACB of $XXXXXXXXXX , and an aggregate redemption value of $XXXXXXXXXX .

9. On XXXXXXXXXX , the Family Trust subscribed for XXXXXXXXXX common shares in PC1 for an aggregate subscription price of $XXXXXXXXXX . Further to the Family Trust's subscription for XXXXXXXXXX common shares in PC1, A relinquished, and the Family Trust acquired Legal Control over PC1.

10. On XXXXXXXXXX , A transferred the XXXXXXXXXX Class X preferred shares that he held in PC1 to Relatedco in exchange for XXXXXXXXXX common shares in Relatedco having an aggregate PUC and ACB of $XXXXXXXXXX , and an aggregate redemption value of $XXXXXXXXXX .

11. On XXXXXXXXXX , PC1 transferred the XXXXXXXXXX Class A preferred shares that it held in PC2 to Relatedco in exchange for XXXXXXXXXX Class A preferred shares in Relatedco having an aggregate PUC and ACB of $XXXXXXXXXX , and an aggregate redemption value of $XXXXXXXXXX .

A's subscription of PC1's Class A voting preferred shares

12. On XXXXXXXXXX , A subscribed for XXXXXXXXXX Class A voting preferred shares in PC1 for a $XXXXXXXXXX cash consideration. The aggregate PUC, ACB and redemption value of these shares was equal to $XXXXXXXXXX . Further to A's subscription for XXXXXXXXXX Class A voting preferred shares in PC1, A re-acquired Legal Control over PC1.

The cross-redemption of PC1`s Class A preferred shares in Relatedco, and Relatedco`s Class X preferred shares in PC1

13. On XXXXXXXXXX , the XXXXXXXXXX Class X preferred shares that Relatedco held in PC1 and the XXXXXXXXXX Class A preferred shares that PC1 held in Relatedco that are respectively described in paragraphs 7, 8 and 11 above were cross-redeemed in consideration for promissory notes, which were subsequently cancelled by way of set-off.

The settlement of the Alter Ego Trust

14. On XXXXXXXXXX , the Alter Ego Trust was settled pursuant to the terms of the Alter Ego Trust Agreement to provide for the financial well-being, maintenance and advancement of A as a primary beneficiary, and, upon his death, the Family as contingent beneficiaries. The settlement of the Alter Ego Trust was also intended to ensure that the AET Trust Fund be excluded from the Estate, and, instead be handled privately upon A's death as opposed to being subject to the public probate system XXXXXXXXXX .

15. The Alter Ego Trust has the following characteristics:

(a) The Alter Ego Trust is an inter vivos trust;

(b) The Alter Ego Trust was settled by A;

(c) The terms of the Alter Ego Trust are revocable during A's lifetime;

(d) XXXXXXXXXX were in charge of managing the AET Trust Fund between XXXXXXXXXX and XXXXXXXXXX ;

(e) After XXXXXXXXXX , the AET Trustees were in charge of managing the AET Trust Fund;

(f) The AET Trustees must hold the AET Trust Fund until the AET Distribution Date; and

(g) Upon the AET Distribution Date, the AET Trustees shall apply the AET Trust Fund to:

(i) pay all the funeral and testamentary expenditures incurred in connection with the Estate,

(ii) make the gifts to A's grandchildren and cash donations listed in paragraphs XXXXXXXXXX of the Alter Ego Trust Agreement, and

(iii) distribute the balance of the AET Trust Fund to the AET Beneficiaries.

16. On XXXXXXXXXX , A transferred the following property to the Alter Ego Trust: (i) XXXXXXXXXX Class B preferred shares in PC1 (non-voting) having an aggregate PUC and ACB of $XXXXXXXXXX and a redemption value of $XXXXXXXXXX ; (ii) XXXXXXXXXX Class C special shares in PC3 (non-voting) having an aggregate PUC and ACB of $XXXXXXXXXX and a redemption value of $XXXXXXXXXX ; (iii) XXXXXXXXXX common shares in Relatedco having an aggregate PUC and ACB of $XXXXXXXXXX , and an aggregate FMV of $XXXXXXXXXX , and (iv) XXXXXXXXXX common shares in Bco having an aggregate PUC and ACB of $XXXXXXXXXX , and an aggregate FMV of $XXXXXXXXXX . A's transfer of the property listed above to the Alter Ego Trust did not alter A's Legal Control over PC1.

The disposition of the Alter Ego Trust's interest in PC3 and PC1

17. On XXXXXXXXXX , the Alter Ego Trust transferred XXXXXXXXXX of the XXXXXXXXXX Class C special shares it held in PC3 having an aggregate PUC and ACB of $XXXXXXXXXX , and a redemption value of $XXXXXXXXXX to PC2 in consideration for XXXXXXXXXX Class B special shares in PC2 having an aggregate PUC and ACB of $XXXXXXXXXX , and a redemption value of $XXXXXXXXXX pursuant to section 85 of the Act.

18. On XXXXXXXXXX , the Alter Ego Trust transferred the XXXXXXXXXX Class B special shares it held in PC2 having an aggregate PUC and ACB of $XXXXXXXXXX , and a redemption value of $XXXXXXXXXX to PC4 in consideration for XXXXXXXXXX Class B special shares in PC4 having an aggregate PUC and ACB of $XXXXXXXXXX , and a redemption value of $XXXXXXXXXX pursuant to section 85 of the Act.

19. On XXXXXXXXXX , PC4 redeemed the XXXXXXXXXX Class B special shares the Alter Ego Trust held in that corporation in consideration for a promissory note in the amount of $XXXXXXXXXX . A dividend in the amount of $XXXXXXXXXX was deemed to have been paid by PC4, and received by the Alter Ego Trust upon PC4's redemption of the Class B special shares the Alter Ego Trust held in that corporation. The deemed dividend in the amount of $XXXXXXXXXX was subject to an election under subsection 83(2) of the Act so that the dividend was deemed to be paid out of PC4's Capital Dividend Account, and excluded in computing the Alter Ego Trust's income in respect of its XXXXXXXXXX taxation year.

The lawsuit filed by PC3

20. On XXXXXXXXXX , PC3 filed a lawsuit with the Supreme Court claiming, among others, damages in the amount of $XXXXXXXXXX it allegedly suffered as a result of the breach of a contractual and fiduciary duty it was owed by the Broker in respect of its acquisition of shares in ABC Inc. on or about XXXXXXXXXX .

The reorganization of the Corporate Group after A's death

The tax liability arising from A's death

21. The Estate was created upon A's death, which occurred on XXXXXXXXXX . The Estate held A's property that had not been transferred to the Alter Ego Trust, which included, among other things, the XXXXXXXXXX Class A voting preferred shares A held in PC1. As a result, the Estate had Legal Control over PC1 further to A's death.

22. A's death triggered a deemed disposition of the AET Property at FMV on that date. The capital gain realized by the Alter Ego Trust as a result of A's death was equal to $XXXXXXXXXX .

23. On A's death, the Alter Ego Trust was deemed to have disposed of the XXXXXXXXXX common shares that it held in Relatedco for Proceeds of Disposition equal to $XXXXXXXXXX , and to have reacquired them for $XXXXXXXXXX . After A's death, the aggregate PUC of the XXXXXXXXXX common shares that the Alter Ego Trust held in Relatedco was equal to $XXXXXXXXXX whereas the aggregate ACB and FMV of these shares was equal to $XXXXXXXXXX .

24. Prior to the end of its XXXXXXXXXX taxation year, the Alter Ego Trust exchanged the XXXXXXXXXX common shares it held in Relatedco for: (i) XXXXXXXXXX Class B preferred shares in Relatedco having an aggregate PUC of $XXXXXXXXXX , and an aggregate ACB and redemption value of $XXXXXXXXXX , and (ii) XXXXXXXXXX Class C preferred shares in Relatedco having an aggregate PUC of $XXXXXXXXXX , and an aggregate ACB and redemption value of $XXXXXXXXXX .

25. On XXXXXXXXXX , PC2 used the life insurance proceeds it received upon A's death to redeem the XXXXXXXXXX Class A preferred shares that Relatedco held for $XXXXXXXXXX . An election under subsection 83(2) of the Act was made in respect of the deemed dividend of $XXXXXXXXXX resulting from the redemption of the XXXXXXXXXX Class A preferred shares that Relatedco held in PC2.

26. On XXXXXXXXXX , Relatedco redeemed the XXXXXXXXXX Class B preferred shares that the Alter Ego Trust held for $XXXXXXXXXX . An election under subsection 83(2) of the Act was made in respect of the deemed dividend of $XXXXXXXXXX resulting from the redemption of the XXXXXXXXXX Class B preferred shares that the Alter Ego Trust held in Relatedco.

27. The redemption of the XXXXXXXXXX Class B preferred shares that the Alter Ego Trust held in Relatedco triggered a capital loss of $XXXXXXXXXX , which was realized by the Alter Ego Trust for its taxation year ended XXXXXXXXXX .

Transfer of the PC1 shares to Transferco

28. On XXXXXXXXXX , the Alter Ego Trust subscribed for XXXXXXXXXX common shares in Transferco for a $XXXXXXXXXX cash consideration.

29. On XXXXXXXXXX , the directors for PC1 authorized a stock split pursuant to which the Alter Ego Trust ended up holding XXXXXXXXXX Class B preferred shares in PC1 (non-voting) having an aggregate PUC of $XXXXXXXXXX , and an aggregate ACB and redemption value of $XXXXXXXXXX .

30. On XXXXXXXXXX , the Alter Ego Trust transferred the XXXXXXXXXX Class B preferred shares that it held in PC1 (non-voting) to Transferco in exchange for XXXXXXXXXX Class B preferred shares in Transferco (non-voting) having an aggregate PUC of $XXXXXXXXXX (par value of $XXXXXXXXXX per share), and an aggregate ACB and redemption value of $XXXXXXXXXX .

31. On XXXXXXXXXX , the Alter Ego Trust transferred the XXXXXXXXXX Class C special shares that it held in PC3 (non-voting) to Transferco for XXXXXXXXXX Class C preferred shares in Transferco (non-voting) having an aggregate PUC of $XXXXXXXXXX , and an aggregate ACB and redemption value of $XXXXXXXXXX .

32. On XXXXXXXXXX , PC3 redeemed the XXXXXXXXXX Class C special shares that Transferco held in consideration for a promissory note in the amount of $XXXXXXXXXX payable to Transferco. An election under subsection 83(2) of the Act was made in respect of the dividend of $XXXXXXXXXX deemed to be paid by PC3, and received by Transferco as a result of the redemption of the XXXXXXXXXX Class C preferred shares that Transferco held in PC3.

The Amalgamation

The amalgamating entities

33. On XXXXXXXXXX , DC was formed on the Amalgamation of PC1, PC2, PC3, PC4, PC5 and PC6.

34. Upon Amalgamation, DC's authorized share capital was as follows:

DC's authorized share capital
*
Par value
Per share
Total Par Value

* XXXXXXXX common shares (1 vote per share)
XXXXXXX
XXXXXXX
* XXXXXXXX Class A preferred shares (1 vote per share)
XXXXXXX
XXXXXXX
* XXXXXXXX Class B preferred shares (non-voting)
XXXXXXX
XXXXXXX

35. Upon Amalgamation:

(a) The Family Trust surrendered the common and equity shares it held in PC3 described in paragraph 6 above, and the XXXXXXXXXX Class A Common Shares that it held in PC1 for XXXXXXXXXX common shares in DC (voting) having an ACB and a PUC respectively equal to $XXXXXXXXXX and $XXXXXXXXXX ;

(b) The Estate surrendered the XXXXXXXXXX Class A preferred shares (voting) that it held in PC1 for XXXXXXXXXX Class A preferred shares (voting) in DC having an ACB, a PUC and a redemption value equal to $XXXXXXXXXX ; and

(c) Transferco surrendered the XXXXXXXXXX Class B preferred shares that it held in PC1 for XXXXXXXXXX Class B preferred shares in DC (non-voting) having a PUC equal to $XXXXXXXXXX , and an aggregate ACB and redemption value equal to $XXXXXXXXXX .

Further to the Amalgamation, the Estate retained Legal Control over DC by reason of the XXXXXXXXXX Class A preferred shares (voting) it held in that corporation.

The transactions undertaken by the Amalgamated Entity after the Amalgamation

36. As a result of the Amalgamation, DC received all the property owned, and assumed all the liabilities payable by the amalgamating entities, which includes the promissory note formerly payable by PC3 to Transferco as described in paragraph 32 above.

37. On XXXXXXXXXX , DC declared and paid a dividend in the amount of $XXXXXXXXXX out of its Capital Dividend Account on the XXXXXXXXXX Class B preferred shares (non-voting) that Transferco held in DC. DC issued a promissory note in the amount of $XXXXXXXXXX payable to Transferco as a consideration for the payment of this dividend, which was subject to an election under subsection 83(2) of the Act.

38. On XXXXXXXXXX , DC declared and paid a Taxable Dividend in the amount of $XXXXXXXXXX on the XXXXXXXXXX Class B preferred shares (non-voting) that Transferco held in DC. DC issued a promissory note in the amount of $XXXXXXXXXX payable to Transferco as a consideration for the payment of this dividend.

39. On XXXXXXXXXX , DC redeemed the XXXXXXXXXX Class B preferred shares (non-voting) that Transferco held in that corporation in consideration for a promissory note in the amount of $XXXXXXXXXX payable to Transferco, which was equal the PUC, and ACB of these shares.

40. On XXXXXXXXXX , DC created XXXXXXXXXX preferred shares (non-voting), which were issued to the Estate in exchange for XXXXXXXXXX common shares in Aco in order to simplify the structure of the Corporate Group.

41. Given that Aco's business operations had been discontinued and there were no assets left in that corporation at the time of the Amalgamation, the FMV of the Aco shares was nominal when they were subsequently transferred to the Estate. As a result, the ACB, the PUC and the redemption value of the XXXXXXXXXX preferred shares (non-voting) issued to the Estate in consideration for the XXXXXXXXXX common shares in Aco was equal to $XXXXXXXXXX .

The wind-up of Transferco into the Alter Ego Trust

42. On XXXXXXXXXX , the board of directors of Transferco prepared a resolution, which was approved by shareholders holding at least XXXXXXXXXX % of the voting rights in that corporation, to file a petition with the Registrar for the surrender of its certificate of incorporation.

43. On XXXXXXXXXX , Transferco's assets (including the promissory note in the amount of $XXXXXXXXXX receivable from PC3 as a result of the redemption of the XXXXXXXXXX Class C preferred shares that Transferco held in PC3 described in paragraph 32 above, and the promissory notes totalling $XXXXXXXXXX receivable from DC as a result of the dividend payments, and the redemption of the XXXXXXXXXX Class B preferred shares that Transferco held in DC described in paragraph 39 above) and liabilities were distributed to the Alter Ego Trust as a result of Transferco's wind-up. The distribution of Transferco's assets to the Alter Ego Trust resulted in a dividend deemed to have been paid by Transferco, and received by the Alter Ego Trust equal to the amount by which the FMV of the distributed property (i.e. $XXXXXXXXXX ) exceeds the aggregate PUC in respect of the XXXXXXXXXX common shares, the XXXXXXXXXX Class B preferred shares and the XXXXXXXXXX Class C special shares of Transferco that were purchased for cancellation (i.e. $XXXXXXXXXX ) ("Winding-Up Dividend").

44. A portion of the Winding-Up Dividend equal to $XXXXXXXXXX was subject to an election under subsection 83(2) of the Act, and deemed to be a separate dividend paid out of Transferco's Capital Dividend Account to the Alter Ego Trust. However, a portion of the Winding-Up Dividend equal to $XXXXXXXXXX was deemed to be a Taxable Dividend paid to the Alter Ego Trust. The grossed up portion of the separate Taxable Dividend deemed to be received by the Alter Ego Trust equal to $XXXXXXXXXX was included in computing the taxable income of the Alter Ego Trust for the taxation year that included the distribution of Transferco's assets to the Alter Ego Trust.

45. On XXXXXXXXXX , Transferco was formally dissolved upon the Registrar's acceptance of Transferco's surrender and the cancellation of its certificate of incorporation.

46. The surrender and cancellation of Transferco's certification of incorporation resulted in a Disposition of the shares in Transferco held by the Alter Ego Trust.

47. The wind-up of Transferco into the Alter Ego Trust triggered a capital loss, which was carried back to offset, for the most part, the capital gain inclusion for the taxation year that included the day on which A's death occurred as described in paragraph 21 above.

48. The series of transactions undertaken to wind-up Transferco, and trigger a capital loss into the Alter Ego Trust did not alter the Estate's Legal Control over DC.

The distribution of the assets held by the Alter Ego Trust

49. As of XXXXXXXXXX , the balance of the accounts payable by the Alter Ego Trust to DC, which had financed cash distributions in the amount of $XXXXXXXXXX to the AET Beneficiaries as well various operational expenditures and other extraordinary items incurred by the Alter Ego Trust, was equal to $XXXXXXXXXX . However, the balance of the accounts receivable by Alter Ego Trust from DC, which resulted from DC's redemption of the XXXXXXXXXX Class C preferred shares that it held in PC3 and of the XXXXXXXXXX Class B preferred shares that it held in DC as well as from the wind-up of Transferco into the Alter Ego Trust, was equal to $XXXXXXXXXX at that time. Therefore, the outstanding balance of the accounts receivable by the Alter Ego Trust from DC was equal to $XXXXXXXXXX as of XXXXXXXXXX .

50. Starting XXXXXXXXXX , DC made monthly cash distributions to the Alter Ego Trust to gradually repay its debt payable to the Alter Ego Trust. DC's indebtedness to the Alter Ego Trust was fully repaid, and extinguished on XXXXXXXXXX .

51. The consolidation of the cash position of the Alter Ego Trust and DC during the Repayment Period allowed the AET Trustees to attract favourable broker fees, and to facilitate the exercise of their managerial powers with respect to the AET Trust Fund.

The proposed Butterfly Reorganization

The participants to the Butterfly Reorganization

DC

52. DC is an investment holding corporation, which qualifies as a Canadian-Controlled Private Corporation, and a Taxable Canadian Corporation.

53. As of XXXXXXXXXX , DC's balance sheet includes the following assets having a FMV approximately equal to $XXXXXXXXXX :

(a) a small amount of cash maintained to cover operating expenses.

(b) investment assets such as publicly traded Canadian stocks and bonds (including the XXXXXXXXXX Class A, and XXXXXXXXXX Class B common shares in CC Inc.) mutual fund units, guaranteed investment certificates and term deposits issued by Canadian financial institutions as well as treasury bills issued by the Government of Canada.

(c) a small amount of capital assets; and

(d) nominal accounts payable and accruals related to its operations.

54. As a result of the Amalgamation, DC also acquired the outstanding right to seek judicial remedy in respect of the lawsuit originally filed by PC3 described in paragraph 20 above.

55. As of XXXXXXXXXX , DC had: (i) a Capital Dividend Account balance of $XXXXXXXXXX , and (ii) a RDTOH account balance of $XXXXXXXXXX on XXXXXXXXXX . The balances in the Capital Dividend Account and RDTOH accounts will have changed based on the current year activity. However, DC will not have pre-1972 capital surplus on hand when it enters into the Proposed Transactions.

The Estate

56. The Estate was created upon A's death, which occurred on XXXXXXXXXX .

57. The Estate has the following characteristics:

(a) The Estate is administered by the Executors, who are all residents of Canada;

(b) The Executors must administer A's property that was not transferred to the Alter Ego Trust according to the terms of the Will; and

(c) The Siblings are the residual capital and income beneficiaries of the Estate, and are all residents in Canada.

The Family Trust

58. On XXXXXXXXXX , the Family Trust was settled to ensure the financial well-being of the Family.

59. The Family Trust has the following characteristics:

(a) The Family Trust was settled by XXXXXXXXXX , who is not related to the Family;

(b) The terms of the Family Trust are irrevocable;

(c) The FT Trust Fund is administered by the FT Trustees, who are all residents of Canada, and are not related to the Siblings;

(d) The FT Trustees have the Absolute Discretion to make any payment or distribution, whether of income or capital, to the FT Beneficiaries;

(e) The FT Beneficiaries are the capital and income beneficiaries of the Family Trust; and

(f) The decisions of the FT Trustees will be final and binding upon all the FT Beneficiaries.

The Siblings

60. The Siblings qualify as FT Beneficiaries.

DC's shareholding prior to the Butterfly Reorganization

61. DC's authorized share capital consists of XXXXXXXXXX common shares, XXXXXXXXXX Class A voting preferred shares and XXXXXXXXXX preferred shares that are being held by the following entities, and have the following tax attributes:

Number of shares
Aggregate
paid-up capital
Aggregate ACB
Redemption
Amount
The Family Trust

Common shares (1 vote per share)
XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX

The Estate

Class A preferred shares (1 vote per share)

XXXXXXXXXX
XXXXXXXXXX

XXXXXXXXXX

XXXXXXXXXX
The Estate

XXXXXXXXXX preferred shares
(non-voting)
XXXXXXXXXX

XXXXXXXXXX

XXXXXXXXXX
XXXXXXXXXX

PROPOSED TRANSACTIONS

Prior to the Butterfly Reorganization

Step 1: Appointment of additional directors of DC

62. Sibling 2, Sibling 3 and Sibling 4 will be appointed as additional directors of DC.

Step 2: DC incorporates a wholly-owned subsidiary to proceed with the lawsuit

63. DC will incorporate Courtco pursuant to the Companies Act. Immediately thereafter, DC will assign to Courtco the right of proceeding described in paragraph 20 above that it acquired from PC3 as a result of the Amalgamation.

Step 3: Reduction in DC's PUC for corporate purposes

64. Pursuant to XXXXXXXXXX the Companies Act, DC's shareholders will pass a special resolution to authorize a reduction in the Paid-up Capital of DC's common shares from $XXXXXXXXXX to $XXXXXXXXXX for corporate purposes. DC will not pay any amount nor distribute any realizable assets to the Family Trust as a consideration for the reduction of the Paid-up Capital of its common shares.

The Butterfly Reorganization

Step 4: The Family Trust's distribution of the common shares it owns in DC to the Siblings

65. Subsequent to the reduction in DC's Paid-Up Capital, the FT Trustees will resolve to distribute XXXXXXXXXX common shares in DC to each of the Siblings in satisfaction of their respective capital interest in the Family Trust. The Family Trust will be legally terminated following the transfer of all the common shares that the Family Trust held in DC to the Siblings, and the subsequent filing of a final T3 return for DC in respect of the fiscal period in which such a distribution occurs.

Step 5: Incorporation of the Holding Companies

66. The Siblings will respectively incorporate their own Holding Company. Each Holding Company will be a Taxable Canadian Corporation;

67. The shares that will be held by each Sibling in their Holding Company will be as follows: (i) Sibling 1 will own all the shares of Holding Company 1; (ii) Sibling 2 will own all the shares of Holding Company 2; (iii) Sibling 3 will own all the shares of Holding Company 3; and (iv) Sibling 4 will own all the shares of Holding Company 4.

68. The share capital of each Holding Company will consist of: (i) XXXXXXXXXX voting common shares with a par value of $XXXXXXXXXX per share ($XXXXXXXXXX in aggregate), and (ii) XXXXXXXXXX voting Class A preferred shares with a par value to be set at the time of their issuance, and a redemption value equal to the value of the assets that will be transferred to each Holding Company in the course of the Butterfly Reorganization less the value of any other consideration issued for the assets received.

69. Each Sibling will be appointed as the sole director to their Holding Company.

Step 6: Transfer of the DC Shares to each Holding Company

70. Each Sibling will transfer the XXXXXXXXXX common shares in DC they will receive from the Family Trust to the Holding Company that they will have incorporated.

71. Each Sibling will jointly elect with their respective Holding Company in prescribed form and within the time allowed by subsection 85(6) of the Act to have the provisions of subsection 85(1) of the Act apply to the transfer of the XXXXXXXXXX common shares in DC to be transferred to each Holding Company.

72. The Agreed Amount elected by each Sibling and their respective Holding Company will be equal to the lesser of: (i) the ACB or (ii) the FMV of the XXXXXXXXXX common shares to be transferred to each Holding Company in accordance with paragraph 85(1)(c.1) of the Act.

73. Each Holding Company will issue XXXXXXXXXX common shares in consideration for the XXXXXXXXXX common shares in DC that it will have received from its incorporating Sibling. The common shares held by each Sibling in their Holding Company will be as follows: (i) Sibling 1 will own XXXXXXXXXX common shares in Holding Company 1; (ii) Sibling 2 will own XXXXXXXXXX common shares in Holding Company 2: (iii) Sibling 3 will own XXXXXXXXXX common shares in Holding Company 3; (iv) Sibling 4 will own XXXXXXXXXX common shares in Holding Company 4.

74. The FMV and the PUC of the XXXXXXXXXX common shares to be issued by each Holding Company will be equal to the FMV and the PUC of the XXXXXXXXXX common shares in DC they will receive from the Siblings.

75. Immediately after the completion of the above transactions, each Holding Company will own 25% of the outstanding common shares of DC whereas the Estate will continue to hold the XXXXXXXXXX class A preferred shares (voting) and the XXXXXXXXXX preferred shares in DC.

Step 7: Transfer of DC's assets to each Holding Company

The transferred assets

76. DC will not have any business property when the Butterfly Reorganization is undertaken. For that reason, the only Types of Property to be transferred to each Holding Company will be cash and near cash property and investment property;

The liabilities to be allocated to the transferred assets

77. For the purpose of the definition of Distribution, the FMV of DC's cash and near cash property as well as DC's investment property to be transferred to each Holding Company will be determined on a "net FMV basis".

78. In determining the net FMV of the Types of Property to be transferred to each Holding Company, DC's current liabilities (including income taxes payable for the taxation year of the Butterfly Reorganization but excluding the amount of any deferred income taxes in the absence of a legal obligation to pay such an amount) will be allocated to the cash or near cash property in the proportion that the FMV of each such property is of the FMV of all cash or near cash property owned by DC at that time. The allocation of current liabilities will not exceed the aggregate FMV of the cash or near cash property.

79. There are no outstanding liabilities related to DC's investment property to be allocated to such investment properties upon their transfer to each Holding Company.

The proportionate transfer of DC's net assets to each Holding Company

80. DC will proceed with the Distribution by transferring to each Holding Company a proportionate amount of each Type of Property that DC owned at such time such that the "net FMV" of each Type of Property received by each Holding Company will be equal or approximate the proportion of the "net FMV" of all property of that type owned by DC immediately before the transfer that:

(a) the aggregate of FMV of all the common shares of DC that is owned by that Holding Company, immediately before the transfer,

is of:

(b) the aggregate FMV of all of the issued and outstanding common shares and preferred shares of DC immediately before the transfer.

81. For the purposes of this calculation, the expression "approximates the 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 that each respective Holding Company would have received from DC had it received its pro rata share of the net FMV of that Type of Property.

The consideration issued by each Holding Company

82. The consideration to be received by DC on the Distribution to each Holding Company will be a combination of assumed liabilities and XXXXXXXXXX Class A preferred shares.

83. The tax attributes of the Class A preferred shares to be issued in respect of DC's cash & near cash and investment property with unrealized losses (Group 1 assets) will differ from the tax attributes of the Class A preferred shares to be issued in respect of DC's cash & near cash and investment property with unrealized gains (Group 2 assets).

84. For Part IV tax purposes, the redemption value of the Class A preferred shares to be issued by each Holding Company to DC in consideration for Distribution will be greater than 10% of the FMV of all the shares to be issued by such Holding Company. In addition, the voting rights attached to the Class A preferred shares to be issued by each Holding Company to DC will be greater than 10% of the voting rights attached to all the shares to be issued by such Holding Company.

The Group 1 assets

85. The Group 1 assets refer to DC's cash & near cash and investment property having a FMV less than or equal to their ACB. No election will be made pursuant to section 85 of the Act in respect of their transfer to a Holding Company the course of the Butterfly Reorganization.

Cash & near-cash property

86. Each Holding Company will assume DC's liabilities up to the FMV of the Group 1 cash & near cash property that it receives, and will issue Class A preferred shares to DC if the FMV of the cash & near cash property that it receives exceeds the liabilities that it assumes in respect of such property. The redemption value of the Class A preferred shares to be issued by a Holding Company to DC will be equal to such excess.

Investment property

87. In the absence of liabilities related to DC's Group 1 investment property, each Holding Company will issue Class A preferred shares to DC.

The Group 2 assets

88. The Group 2 assets refer to DC's cash & near cash and investment property having a FMV greater than or equal to their ACB, which may be transferred to each Holding Company on a tax-deferred basis pursuant to section 85 of the Act in the course of the Butterfly Reorganization.

89. If Group 2 assets are transferred to each Holding Company, DC and each Holding Company will jointly elect in prescribed form and within the time allowed by subsection 85(6) of the Act an Agreed Amount equal to the ACB of the transferred property. In accordance with the requirement stated in paragraph 85(1)(b) of the Act, the Agreed Amount will not be less than the amount of liabilities assumed by each Holding Company as a consideration for the transfer of DC's properties.

Cash & near cash property

90. Each Holding Company will assume liabilities up to the FMV of the Group 2 cash & near cash property that it received, and will issue Class A preferred shares to DC if the FMV of the cash & near cash property that it receives exceeds the liabilities that it assumes in respect of such property. The redemption value of the Class A preferred shares to be issued by a Holding Company to DC will be equal to such excess.

Investment property

91. In the absence of liabilities related to DC's Group 2 investment property, each Holding Company will issue Class A preferred shares to DC in consideration for the investment property that it receives upon the transfer. The redemption value of the Class A preferred shares to be issued to DC so issued will be equal to the Group 2 FMV of the investment property that each Holding Company received upon the transfer.

Step 8: Redemption of the Class A preferred shares that DC held in each Holding Company

92. After the Distribution to each Holding Company, each Holding Company will redeem the XXXXXXXXXX Class A preferred shares held by DC on the last day of their first taxation year. As a consideration for the redemption the XXXXXXXXXX Class A preferred shares, each Holding Company will issue a Holding Company Note to DC with a principal amount equal to the redemption value of the redeemed XXXXXXXXXX Class A preferred shares.

Step 9: DC's shareholders resolve to wind-up DC, and distribute all or substantially all DC's assets to each Holding Company

93. On the day following the redemption of the Class A preferred shares, each Holding Company and the Estate will pass a special resolution to liquidate and dissolve DC pursuant to XXXXXXXXXX the Companies Act.

The extinguishment of the Holding Company Notes

94. Under the terms of the agreement governing the wind-up, DC will first transfer to the Estate the redemption value attributable to the XXXXXXXXXX Class A voting preferred shares, and the XXXXXXXXXX preferred shares that the Estate held in DC.

95. Immediately thereafter, DC will assign the remainder of its assets to each Holding Company in consideration for the redemption of the XXXXXXXXXX common shares that they respectively held in DC as follows: (i) DC will assign the Holding Company Note 1 to Holding Company 1; (ii) DC will assign the Holding Company Note 2 to Holding Company 2; (iii) DC will assign the Holding Company Note 3 to Holding Company 3; and (iv) DC will assign the Holding Company Note 4 to Holding Company 4.

96. Prior to the distribution of the Holding Company Notes, DC will elect in prescribed form and manner pursuant to subsection 83(2) of the Act that the full amount of any dividend on DC's common shares referred to in subparagraph 88(2)(b)(i) of the Act be deemed to be paid out of DC's Capital Dividend Account.

97. The Holding Company Notes will be settled and legally extinguished further to their respective assignment and distribution to each Holding Company as a result of DC's wind-up.

The dividend refund arising from DC's wind-up

98. As a result of the wind-up, DC will be entitled to receive a Dividend Refund. The Dividend Refund to which DC will be entitled as a result of the Proposed Transactions will immediately be distributed to each Holding Company in the same proportion as described in paragraph 80 above.

The surrender of DC's certificate of incorporation

99. Further to DC's distribution of a portion of the Dividend Refund to each Holding Company, a special resolution of DC's shareholders along with a petition and an affidavit of one of the officers of the company will be filed with the Registrar for the surrender of DC's certificate of incorporation pursuant to the Companies Act. DC will be formally dissolved upon the Registrar's acceptance of the surrender and cancellation of its certificate of incorporation.

PURPOSE OF THE TRANSACTIONS DESCRIBED ABOVE:

The purpose of the transactions undertaken prior to the Butterfly Reorganization

100. The Corporate Group was primarily restructured prior to A's death for estate planning considerations.

101. The Alter Ego Trust is deemed to have disposed of the AET Property at FMV on the day on which A's death occurred, which triggered a significant tax liability for its taxation year ended XXXXXXXXXX . For that reason, the AET Trustees determined that it would be in the AET Beneficiaries' best interest to minimize the adverse tax consequences resulting from A's death, and simplify the structure of the Corporate Group prior to distributing the AET Trust Fund to the AET Beneficiaries.

The purpose of the Butterfly Reorganization

102. The purpose underlying the Butterfly Reorganization is to allow the Siblings to transfer to each Holding Company the proportionate share of DC's net assets they are respectively entitled to receive in order to allow each of them:

(a) to invest their share of the assets in the manner that best meets their objectives and investment goals, and

(b) to address personal estate planning objectives on an individual and independent basis.

RULINGS

Provided that the preceding statements constitute a complete and accurate disclosure of all the relevant facts, the Proposed Transactions, and the purpose underlying the transactions undertaken prior to the Butterfly Reorganization and the Proposed Transactions, and that the Proposed Transactions are completed in the manner described above, our rulings are as follows:

A. In determining the amount of PUC in respect of the DC common shares held by the Family Trust further to the reduction of the Paid-up Capital of DC's common shares described in paragraph 64 above, the PUC will be reduced by the lesser of the amount of PUC immediately before that reduction and the amount by which the Paid-up Capital is reduced.

B. Provided that the joint elections are filed in the prescribed form and within the time limits specified in subsections 85(6) or 85(7) of the Act, and subject to the application of subsection 69(11) of the Act, the provisions of subsection 85(1) of the Act will apply to DC's transfer of the Group 2 assets that are Eligible Property to each Holding Company as described in paragraphs 88 to 91 above, such that the Agreed Amount in respect of each transfer will be deemed to be the transferor's Proceeds of Disposition and the transferee's cost thereof pursuant to paragraph 85(1)(a) of the Act. For greater certainty, paragraph 85(1)(e.2) of the Act will not apply to the transfers of the Group 2 assets referred to herein.

C. As a result of the redemption of the Class A preferred shares issued by each Holding Company to DC as described in paragraph 92 above, DC will be deemed to have received and each Holding Company will be deemed to have paid a Taxable Dividend pursuant to paragraph 84(3)(b) of the Act equal to the amount by which the amount paid by each Holding Company upon the redemption of the Class A preferred shares exceeds the PUC of the Class A preferred shares so redeemed immediately before their redemption.

D. The Taxable Dividends described in Ruling C above deemed to be received by DC, and deemed to be paid by each Holding Company:

(a) Will be included in computing DC's income pursuant to subsection 82(1) and paragraph 12(1)(j) of the Act;

(b) Will be deductible by DC in computing its taxable income for the year in which such a dividend is deemed to have been received pursuant to subsection 112(1) of the Act subject to the application of subsections 112(2.1), (2.2), (2.3) or (2.4) of the Act;

(c) Will be excluded in determining the Proceeds of Disposition in respect of the Class A preferred shares so redeemed pursuant to paragraph (j) of the definition of Proceeds of Disposition; and

(d) Will not be subject to Part IV tax except to the extent that any Holding Company is entitled to a Dividend Refund for the taxation year in which they are deemed to have paid such a dividend.

E. As a result of the distribution of all or substantially all of DC's property in the course of the wind-up of DC:

(a) Pursuant to paragraph 88(2)(b) and subsection 84(2) of the Act, but subject to paragraphs (b) and (c) referred below, DC will be deemed to have paid a dividend ("Winding-up Dividend") on DC's common shares equal to the amount by which the aggregate FMV of the property distributed to each Holding Company in respect of their DC common shares on the wind-up exceeds the amount by which the aggregate PUC in respect of the common shares that each Holding Company held in DC is reduced as a result of the distribution, and each Holding Company will be deemed to have received a dividend equal to the proportion of the Winding-Up Dividend that the number of DC common shares held by each Holding Company is of the total number of DC common shares issued and outstanding immediately before that time;

(b) Pursuant to subparagraph 88(2)(b)(i) of the Act, such portion of the Winding-up Dividend referred to paragraph (a) above as does not exceed DC's Capital Dividend Account determined immediately before the payment of the Winding-up Dividend will be deemed, for purposes of the election under subsection 83(2) of the Act to be the full amount of a separate dividend; and

(c) Pursuant to subparagraph 88(2)(b)(iii) of the Act, the Winding-up Dividend described in paragraph (a) above, to the extent that it exceeds the portion thereof referred to in paragraph (b) above that is deemed to be a separate dividend, will be deemed to be a separate dividend that is a Taxable Dividend.

F. The Taxable Dividend described in Ruling E (c) above deemed to be received by each Holding Company as a result of DC's wind-up:

(a) Will be included in computing the income of each Holding Company pursuant to subsection 82(1) and paragraph 12(1)(j) of the Act;

(b) Will be deductible in computing the taxable income for each Holding Company pursuant to subsection 112(1) of the Act in computing its taxable income for the taxation year in which such a dividend is deemed to have been received subject to the application of subsections 112(2.1), (2.2), (2.3) or (2.4) of the Act; and

(c) Will not be subject to Part IV tax except to the extent that DC is entitled to a Dividend Refund for the taxation year in which it paid such a dividend.

G. Pursuant to subsection 112(3) of the Act, the portion of the Winding-Up Dividend described in Ruling E (a) above that is deemed to be a separate dividend described in Rulings E (b) and (c) will reduce the loss, if any, realized by each Holding Company in respect of the shares on which the dividend referred in Rulings E (b) and (c) above is deemed to be received.

H. Provided that, as part of the series of transactions or events that include the Butterfly Reorganization, there is not:

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

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

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

(d) an acquisition of shares of DC in the circumstances described in subparagraph 55(3.1)(b)(iii) of the Act; or

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

which has not been described in this letter, then by virtue of paragraph 55(3)(b) of the Act, subsection 55(2) of the Act will not apply to the Taxable Dividends described in Rulings C and E above, and for greater certainty, subsection 55(3.1) of the Act will not apply to deny the exemption under paragraph 55(3)(b) of the Act.

I. The "stop loss" rule provided in subsections 40(3.3) and (3.4) of the Act will not apply to the losses realized on the transfer of DC's Group 1 assets described in paragraphs 85 to 87 above.

J. The wind-up of DC will trigger a Disposition of the common shares that each Holding Company holds in DC upon the Registrar's acceptance of the surrender and cancellation of DC's certificate of incorporation. The Proceeds of Disposition of the common shares that each Holding Company holds in DC will be equal to the net FMV of the funds or property received by each Holding Company at the time of their distribution less the Winding-Up Dividend described in Ruling E (a) above that each Holding Company is deemed to have received as a result of the distribution of all or substantially all of DC's property in the course of its wind-up.

K. The cancellation of the Holding Company Notes described in paragraph 97 above on DC's wind-up will not give rise to a Forgiven Amount.

L. Subsection 245(2) will not be applied to the Proposed Transactions, in and by themselves, to re-determine the tax consequences confirmed in the rulings listed above.

The above rulings are subject to the limitations and qualifications set out in Information Circular 70-6R5 issued by the Canada Revenue Agency ("CRA") on May 17, 2002, and are binding on the CRA provided that the steps described in the Proposed Transactions are completed within 6 months of the date of this letter.

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

OTHER COMMENTS

Nothing in this letter should be construed as implying that the CRA has confirmed, reviewed or made any determination in respect of:

(a) Any tax consequences relating to the facts, and Proposed Transactions other than those specifically described in the above rulings;

(b) The FMV or the ACB of any particular asset, the PUC of any share, and the outstanding balance of various tax accounts such as GRIP and RDTOH for any of the corporate entities described herein;

(c) The related transactions to be included in the series of transactions that includes the receipt of a dividend deemed to be paid and received in the course to the Butterfly Reorganization;

(d) The timing of the termination of the Family Trust further to the distribution of the common shares it held in DC to the Siblings.

An invoice for our fees in connection with this ruling request will be forwarded to you under separate cover.

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