2008 Ruling 2008-0292121R3 - Alter ego trust for XXXXXXXXXX

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) Will subsection 73(1) apply to the contribution of the existing Aco shares by XXXXXXXXXX ? (2) Will the transmission of the shares of Trustco from XXXXXXXXXX to the executors of his estate result in an acquisition of control of Trustco or Aco? (3) As a consequence of the transaction contemplated in the Share Exchange Agreement, and pursuant to subsection 84(3), will the alter ego trust be deemed to receive a dividend? (4) Is a capital loss realized when the alter ego trust makes a gift of shares of capital property to the Foundation pursuant to provisions in the trust's indenture that gives its trustees the discretion to do so? (5) Will the gifts of property by the alter ego trust to the Foundation be included in the trust's total charitable gifts? (6) Does GAAR apply to post-mortem tax planning where capital gains of an alter ego trust realized under subsection 104(4) are effectively sheltered?

Position: (1) Yes. (2) No. (3) Yes. (4) Yes. (5)Yes. (6) No.

Reasons: (1) All the conditions apply in subsections 73(1.01) and (1.02) so that a roll-over under subsection 73(1) can apply. (2) Clause 257(1)(i)(C) applies. (3) Plain reading of paragraph 84(3)(b). (4) The alter-ego trust will wind-up, at which point any suspended capital losses will be realized under paragraph 40(3.4)(b)(i) for it will not be possible for the alter ego trust to be affiliated with any person or partnership upon winding-up. (5) The trustee has absolute discretion as to whether to make the gift and the possibility exists that all the property could be gifted to an entity that is not a qualified donee. (6) It is arguable whether there is a tax benefit, and in the event that there is one, there is no clear policy against such dispositions. Previous Rulings have also been given

XXXXXXXXXX 								2008-029212

XXXXXXXXXX , 2008

XXXXXXXXXX :

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

This is in reply to your letter of XXXXXXXXXX in which you requested an advance income tax ruling on behalf of the above-named Taxpayers. We also acknowledge our subsequent correspondence (XXXXXXXXXX ).

We understand that, to the best of your knowledge and that of the Taxpayers, none of the issues involved in the ruling is:

(i) in an earlier return of the Taxpayers 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 Taxpayers or a related person;
(iii) under objection by the Taxpayers or a related person; or
(iv) before the courts, or if a judgment has been issued, the time limit for appeal to a higher court has not expired.

Unless otherwise stated, all references to a statute are to the Income Tax Act (Canada), R.S.C. 1985, c.1 (5th Supp.), as amended to the date of this letter, (the "Act"), and all terms and conditions used herein that are defined in the Act have the meaning given in such definition unless otherwise indicated.

This document is based solely on the facts and proposed transactions described below. The documentation submitted with your request does not form part of the facts and proposed transactions and any references thereto are provided solely for the convenience of the reader.

DEFINITIONS

"Aco" means XXXXXXXXXX ;

"AE Trust" means XXXXXXXXXX

"B Portion" under the terms of the AE Trust, means the sum of $XXXXXXXXXX or such other amount as the Trustee may determine at any time prior to the Material Date;

"B Trust" means the XXXXXXXXXX ;

"C Portion" under the terms of the AE Trust, means the sum of $XXXXXXXXXX or such other amount as the Trustee may determine at any time prior to the Material Date;

"C Trust" means the XXXXXXXXXX ;

"D Portion" under the terms of the AE Trust, means the sum of $XXXXXXXXXX or such other amount as the Trustee may determine at any time prior to the Material Date;

"D Trust" means the XXXXXXXXXX ;

"Designated Entities" under the terms of the AE Trust means:

(i) the Foundation;

(ii) such other registered Canadian charities as the Trustee may add to the list of Designated Entities prior to the Material Date;

(iii) such societies incorporated under the XXXXXXXXXX Society Act
(that are not registered charities) as the Trustee may select;

"E Portion" under the terms of the AE Trust, means the sum of $XXXXXXXXXX or such other amount as the Trustee may determine prior to the Material Date;

"E Trust" means the XXXXXXXXXX ;

"Existing Aco Shares" means XXXXXXXXXX Common shares of Aco;

"Final Distribution Date" under the terms of the AE Trust, means such date as the Trustee shall select that is after the Material Date but prior to the final day of the third taxation year of the AE Trust to end after the death of Individual A;

"Foundation" means the XXXXXXXXXX ;

"Individual A" means XXXXXXXXXX ;

"Individual A's Will" means the will of Individual A;

"Legacy Portion" under the terms of the AE Trust, means the sum of $XXXXXXXXXX or such other amount as the Trustee may determine at any time prior to the Material Date;

"Legacy Trust" means the Individual A's Legacy Trust;

"Material Date" under the terms of the AE Trust, means the date of death of Individual A;

"New Aco Shares" means XXXXXXXXXX Class A Preferred shares in Aco that will be created and then issued to the AE Trust pursuant to the Share Exchange Agreement;

"Share Exchange" means the transaction whereby the AE Trust exchanges the Subject Aco Shares for the New Aco Shares;

"Share Exchange Agreement" means the Agreement whereby the AE Trust will exchange the Subject Aco Shares for the New Aco Shares;

"Shareholder Loan Accounts" means all indebtedness owing at a particular time by Aco to the AE Trust;

"Subject Aco Shares" means all of the shares of Aco that will be owned by the AE Trust immediately before the time of the Share Exchange, except for XXXXXXXXXX common Aco share;

"Terminal Year" means the taxation year of the AE Trust in which the death of Individual A occurs;

"Trustee" means Trustco or any replacement trustee appointed for the AE Trust;

"Trustees" means XXXXXXXXXX or any replacement trustee appointed for the B Trust, C Trust, D Trust, E Trust or Legacy Trust;

"Trustco" means the XXXXXXXXXX company that will be incorporated for the purpose of acting as trustee of the AE Trust.

The facts, proposed transactions and the purpose of the proposed transactions are as follows:

FACTS

1. Individual A was born on XXXXXXXXXX and is a resident of XXXXXXXXXX . His principal residence is located at XXXXXXXXXX . Individual A files his tax returns with the XXXXXXXXXX Tax Centre and his tax affairs are administrated by the XXXXXXXXXX Tax Services Office.

2. Aco is a corporation governed by XXXXXXXXXX Business Corporations Act. Aco has a registered office at XXXXXXXXXX . Aco files its tax return with the XXXXXXXXXX Tax Centre and its tax affairs are administered by the XXXXXXXXXX Tax Services Office. Aco has diverse assets, including publicly traded shares, private company shares and real estate.

3. Individual A owns the Existing Aco Shares, which constitute all of the issued shares of Aco. The Existing Aco Shares have fair market value of roughly

XXXXXXXXXX dollars and a nominal paid up capital.

4. The Foundation is a society incorporated on XXXXXXXXXX pursuant to the XXXXXXXXXX Society Act under incorporation number XXXXXXXXXX . The Foundation is a registered charity (registration number XXXXXXXXXX ) and is designated as a public foundation. The address of the Foundation is XXXXXXXXXX . The Foundation files its annual information return with the XXXXXXXXXX Tax Centre and its tax affairs are administered by the XXXXXXXXXX Tax Services Office.

PROPOSED TRANSACTIONS

5. Trustco will be incorporated under the XXXXXXXXXX Business Corporations Act. Trustco will have an office at XXXXXXXXXX . The sole purpose of Trustco will be to serve as trustee of the AE Trust. Individual A will be the sole shareholder of Trustco. Trustco will earn no income. Trustco will file its tax returns with the XXXXXXXXXX Tax Centre and its tax affairs will be administered by the XXXXXXXXXX Tax Services Office.

6. The B Trust will be established by Individual A, as settlor, and the Trustees, as trustees. It will be settled with a gift of XXXXXXXXXX that it will receive from the settlor. It is intended that the B Trust will receive a distribution from the AE Trust after the death of Individual A. The primary beneficiary of the B Trust will be XXXXXXXXXX of Individual A. The B Trust will have an address at XXXXXXXXXX . Its tax returns will be filed at the XXXXXXXXXX Tax Centre and its tax affairs will be administered by the XXXXXXXXXX Tax Services Office.

7. The D Trust will be established by Individual A, as settlor, and the Trustees, as trustees. It will be settled with a gift of XXXXXXXXXX that it will receive from the settlor. It is intended that the D Trust will receive a distribution from the AE Trust after the death of Individual A. The primary beneficiary of the D Trust will be XXXXXXXXXX of Individual A. The D Trust will have an address at XXXXXXXXXX . Its tax returns will be filed at the XXXXXXXXXX Tax Centre and its tax affairs will be administrated by the XXXXXXXXXX Tax Services Office.

8. The E Trust will be established by Individual A, as settlor, and the Trustees, as trustees. It will be settled with a gift of XXXXXXXXXX that it will receive from the settlor. It is intended that the E Trust will receive a distribution from the AE Trust after the death of Individual A. The primary beneficiary of the E Trust will be XXXXXXXXXX of Individual A. The E Trust will have an address at XXXXXXXXXX . Its tax returns will be filed at the XXXXXXXXXX Tax Centre and its tax affairs will be administered by the XXXXXXXXXX Tax Services Office.

9. The C Trust will be established by Individual A, as settlor, and the Trustees, as trustees. It will be settled with a gift of XXXXXXXXXX that it will receive from the settlor. It is intended that the C Trust will receive a distribution from the AE Trust after the death of Individual A. The primary beneficiaries of the C Trust are XXXXXXXXXX of Individual A. The C Trust will have an address at XXXXXXXXXX . Its tax returns will be filed at the XXXXXXXXXX Tax Centre and its tax affairs will be administered by the XXXXXXXXXX Tax Services Office.

10. The Legacy Trust will be established by Individual A, as settlor, and the Trustees, as trustees. It will be settled with a gift of XXXXXXXXXX that it will receive from the settlor. It is intended that the Legacy Trust will receive a distribution from the AE Trust after the death of Individual A. The beneficiaries of the Legacy Trust are various individuals. The Legacy Trust will have an address at XXXXXXXXXX . Its tax returns will be filed at the XXXXXXXXXX Tax Centre and its tax affairs will be administered by the XXXXXXXXXX Tax Services Office.

11. The AE Trust will be established by Individual A, as settlor, and Trustco, as Trustee. The address of the AE Trust will be XXXXXXXXXX . The AE Trust will file its tax returns with the XXXXXXXXXX Tax Centre and its tax affairs will be administered the XXXXXXXXXX Tax Services Office.

12. The terms of the AE Trust will provide as follow:

(a) prior to the Material Date, the income of the AE Trust will be paid to Individual A;

(b) prior to the Material Date, the trustee shall have the discretion to encroach on capital for the benefit of Individual A;

(c) prior to the Material Date, no person other than Individual A shall have any use or derive any benefit from the trust property;

(d) after the Material Date, but prior to the Final Distribution Date, the amounts are to be given to each of the following as determined in accordance with the AE Trust's indenture, and indicated in the definition section of this Ruling:

(i) the B Portion to the B Trust;

(ii) the C Portion to the C Trust;

(iii) the D Portion to the D Trust;

(iv) the E Portion to the E Trust; and

(v) the Legacy Portion to the Legacy Trust;

(e) after making such distributions, but prior to the Final Distribution Date, the Trustees shall have the power to make a gift of the whole or any part or parts of the trust property and/or the net income derived therefrom to one or more of the Designated Entities; and

(f) upon the Final Distribution Date, any property which has not been gifted to the Designated Entities shall be distributed to such registered Canadian charities or societies incorporated under the XXXXXXXXXX Society Act as Trustco as the Trustee shall select; provided that under no circumstances shall such property be distributed to the Foundation or any other registered Canadian charity that is one of the Designated Entities on the Material Date.

12.1 No election will be made by the AE Trust under subparagraph 104(4)(a)(ii.1).

13. Individual A will gift the Existing Aco Shares to the AE Trust.

14. On the death of Individual A, the shares in Trustco will be transferred to the executors of Individual A's Will.

15. After the death of the Individual A, the share capital of Aco will be altered to create the New Aco Shares. The rights and restrictions attached to the New Aco Shares will provide that:

(a) the shares will be redeemable and retractable preferred shares, without par value;

(b) the aggregate redemption price of such shares shall be equal to the fair market value of any consideration received by Aco in consideration for the issuance of such shares; and

(c) upon the issuance of such shares, the directors of Aco shall add such amount as they shall determine to the stated capital account, provided that such amount shall equal but not exceed the fair market value of the consideration received for the issuance of such shares.

16. After the death of Individual A, the Existing Aco Shares owned by the AE Trust will be sub-divided into XXXXXXXXXX common shares.

17. After the death of Individual A and the subdivision of the Existing Aco Shares, the AE Trust and Aco will enter into the Share Exchange Agreement whereby the AE Trust will exchange the Subject Aco Shares for the New Aco Shares and cash of $XXXXXXXXXX .

17.1 The Directors of Aco shall determine that the amount to be added to the stated capital account of Aco with respect to the issuance of the New Aco Shares will be the fair market value of the Subject Aco Shares less $XXXXXXXXXX .

18. After the Share Exchange Agreement has been implemented, some of the assets of Aco will be liquidated such that Aco will have cash to redeem such number of New Aco Shares as is necessary to permit the AE Trust to distribute the B Portion to the B Trust, the C Portion C Trust, the D Portion to the D Trust, the E Portion to the E Trust and the Legacy Portion to the Legacy Trust. Aco will redeem the necessary number of shares.

19. The AE Trust will distribute the B Portion to the B Trust, the C Portion C Trust, the D Portion to the D Trust, the E Portion to the E Trust and the Legacy Portion to the Legacy Trust.

20. After such distributions have been implemented, and on the Final Distribution Date, the Trustee will exercise its discretion and cause the AE Trust to make a gift to the Foundation of all the remaining property of the AE Trust and such gift will be substantially all comprised of the New Aco Shares and the Existing Aco Share that are remaining after the transaction described in paragraph 18, above.

21. After the gift to the Foundation has been implemented, on or after the Final Distribution Date, and, in accordance with paragraph XXXXXXXXXX of the AE Trust's indenture, the AE Trust will be wound-up within XXXXXXXXXX years of the Material Date.

OTHER INFORMATION

22. Individual A holds the Existing Aco Shares as capital property and the AE Trust will hold the Existing Aco Shares as capital property.

23. No unanimous shareholders agreements or similar arrangements will be in force among the shareholders of Trustco or Aco that (i) restrict, in whole or in part, the powers of the directors of Trustco or Aco to manage the business and affairs of each respective corporation or (ii) affect the power of any shareholder of Trustco or Aco to control the election of the board of directors for the respective corporations.

24. The B Trust, the C Trust, the D Trust, the E Trust and the Legacy Trust will cease to be beneficiaries of the AE Trust upon receipt of the B Portion, the C Portion, the D Portion, the E Portion and the Legacy Portion, respectively. These distributions will occur before the gift of property described in paragraph 20 above.

25. No New Aco Shares will be disposed of by the AE Trust in transactions other than those described in paragraphs 18 and 20 above.

26. There will be no advantage in respect of the gift of property described in paragraph 20, above, provided that the proposed amendment to subsection 248(32) of the Income Tax Act is enacted in substantially the same form as was proposed by the Department of Finance in former Bill C-10 [formerly C-33], as amended by the Standing Committee on Finance on December 4, 2007.

27. Individual A will establish the AE Trust as the vehicle by which to make post-mortem distributions of Individual A's assets (as opposed to Individual A's Will) in order to protect Individual A's privacy; to avoid potential claims against such assets pursuant to the Wills Variation Act, R.S.B.C. 490; and to avoid the impo-sition of probate filing fees with respect to potential claims against such assets.

28. Upon the date of death of Individual A, the AE Trust will be deemed to dispose of the Existing Aco Shares for proceeds of disposition equal to the fair market value pursuant to subsection 104(4). As a consequence, it is expected that the AE Trust will realize significant capital gains, the taxable portion of which will be included in the income of the AE Trust for the Terminal Year. It is Individual A's desire to provide Trustco, the Trustee of the AE Trust, with the discretionary power, but not the legal obligation, to donate a large portion of Individual A's wealth, which will be held by the AE Trust, to the Foundation so that the capital gains arising on the disposition of the Existing Aco shares may be fully sheltered from tax by claiming a charitable donation tax credit in respect of any donation. However, it would not be possible to fully shelter such gains from tax since the AE Trust's total gifts for the Terminal Year will, in general terms, be limited to 75% of the AE Trust's income for the Terminal Year. Due to this limitation, the AE Trust would not be able to fully shelter the capital gains realized by the AE Trust pursuant to subsection 104(4) by simply donating the Existing Aco Shares to the Foundation after Individual A's death.

29. In contrast, had Individual A not established the AE Trust and allowed such property to pass to Individual A's estate, Individual A would be able to direct in Individual A's Will that the donation be made to a qualified donee. This would allow for a charitable donation tax credit to be claimed in computing Individual A's taxes payable for the year of Individual A's death. Since the amount of total gifts for the taxation year of an individual in the year the individual dies is not limited to 75% of the individual's income for the year, Individual A's estate could have donated property to a qualified donee to fully offset any capital gains tax liability otherwise payable in respect of the year of Individual A's death.

30. The proposed transactions, above, are intended to provide the Trustee of the AE Trust with the discretion to make a charitable donation to registered charities that would indirectly offset the entire amount of the tax liability pertaining to the capital gains realized by the AE Trust as a consequence of Individual A's death, thereby replicating the tax result that Individual A could have achieved by allowing Individual A's holdings to devolve to Individual A's estate. This would be accomplished by causing the deemed payment of a dividend by Aco to the AE Trust on the exchange of the Subject Aco Shares under the Share Exchange Agreement. The amount of the dividend would be included, along with the "gross-up" amount to be determined in respect of the dividend pursuant to subsection 82(1), in computing the total gifts to the Foundation from the AE Trust for the taxation year in which the AE Trust receives the dividend and makes a gift to the Foundation. The inclusion of the dividend and the gross-up amount in the AE Trust's income for the purpose of computing the "total gifts" of the AE Trust as defined in subsection 118.1(1) for that taxation year would increase the amount of charitable donations tax credit that the AE Trust can claim in that year as a deduction against its taxes otherwise payable. The exchange of shares of Aco would also give rise to a denied capital loss that would be added to the adjusted cost base of the shares of Aco held by the AE Trust immediately after the exchange, thereby creating a latent capital loss in the shares of the corporation. Because the 75% donation limit will apply to the grossed-up amount of the deemed dividend (rather than the taxable capital gain), tax that would otherwise by payable by the AE Trust will be fully offset by the dividend tax credit and the charitable tax credit that the AE Trust will receive from the gift to the Foundation.

31. The purposes of any gift to the Foundation would be to provide the Foundation with economic resources that would be applied in furtherance of the Foundation's charitable purposes, allow the AE Trust to claim a charitable donation tax credit and allow the AE Trust to realize a capital loss on the disposition of the shares of Aco held by the AE Trust so that those losses may be used to offset the capital gain (whether as a deduction of an allowable capital loss in computing the AE Trust's capital gains in the Terminal Year or as a carry-back of a net capital loss as a deduction in computing the AE Trust's taxable capital gains in the Terminal Year) realized by the AE Trust in respect of the Existing Aco Shares pursuant to subsection 104(4).

32. The Share Exchange Agreement will provide that the Subject Aco Shares will be exchanged, which means that the AE Trust will continue to hold one of the Existing Aco Shares. The purpose for retaining one share is to prevent section 86 from applying to the exchange contemplated under the Share Exchange Agreement which would preclude the AE Trust from being deemed to have received a dividend from Aco by reducing the paid-up capital of the New Aco Shares in accordance with subsection 86(2.1). In addition, the Share Exchange Agreement will provide that cash consideration will be received by the AE Trust in exchange for the Subject Aco Shares in order to prevent section 51 from applying to the exchange, which would otherwise preclude the AE Trust from being deemed to have received a dividend from Aco by virtue of the reduction to the paid-up capital of the New Aco Shares that would be made under subsection 51(3).

33. Since the AE Trust must retain one Existing Aco Share to prevent the application of section 86 to the transaction contemplated under the Share Exchange Agreement, the purpose for subdividing the Existing Aco Shares as described in paragraph 16, above, is to allow the AE Trust to exchange shares that represent substantially all of the value of the corporation and substantially all of the adjusted cost base of the shares of the corporation. This will allow the AE Trust to generate the required amount of dividend income and the amount of denied capital losses which will be added to the adjusted cost base of the shares of Aco and will create a latent capital loss in those shares that, when realized, will offset the capital gain realized by the AE Trust pursuant to subsection 104(4) on Individual A's death.

34. The purpose for adding the amounts described in paragraph 17.1, above, to the stated capital accounts maintained in respect of the New Aco Shares is to maximize the amount of the dividend pursuant to subsections 84(3) and 84(5) on completing the exchange contemplated by the Share Exchange Agreement.

35. The purpose of the transaction contemplated in the Share Exchange Agreement is to create a capital loss by converting the proceeds of disposition of the Subject Aco Shares into a deemed dividend. While such loss is denied and added to the New Aco Shares it will later be triggered and become available to offset the capital gain that will arise in the AE Trust upon the death of Individual A.

36. The purpose of the gift to the Foundation is to obtain a charitable tax credit for the AE Trust.

RULINGS

Provided that the preceding statements constitute a complete and accurate disclosure of all 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:

A. subsection 73(1) will apply to the contribution of the Existing Aco Shares by Individual A to the AE Trust described in paragraph 13, above, such that Individual A will be deemed to have disposed of each such Existing Aco Share for proceeds of disposition equal to the adjusted cost base, thereof determined as of the time immediately before the contribution of that Existing Aco Share;

B. for the purposes of the provisions of the Act enumerated in subsection 256(7), the transmission of shares of Trustco from Individual A to the executors of his estate upon the death of Individual A will not, in and of itself, result in an acquisition of control of Trustco and will not, in and of itself, result in an acquisition of control of Aco;

C. pursuant to paragraph 84(3)(b), the AE Trust will be deemed to have received a dividend as a consequence of the transaction contemplated in the Share Exchange Agreement described in paragraph 17, above, in an amount equal to the paid-up capital value of the New Aco Shares plus $XXXXXXXXXX , less the paid-up capital of the Subject Aco Shares;

D. as a consequence of the Share Exchange and the addition to the stated capital account described in paragraphs 17 and 17.1, above, the paid-up capital of the New Aco Shares will be equal to the fair market value of the Subject Aco Shares determined at the time of the share exchange, less $XXXXXXXXXX ;

E. provided the fair market value of the consideration given by Aco to the AE Trust for each Subject Aco Share is, at the time of its disposition on the Share Exchange, equal to the fair market value of the Subject Aco Share, but for subsection 40(3.6), the AE Trust will realize a capital loss, on the disposition of the Subject Aco Shares as contemplated in the Share Exchange Agreement, equal to the amount by which the total of the adjusted cost base of the Subject Aco Shares and the amount of any costs incurred by the AE Trust for the purpose of disposing of the Subject Aco Shares exceeds the paid-up capital of the Subject Aco Shares (which will be nominal);

F. pursuant to paragraphs 40(3.6)(a) and (b) and paragraph 53(1)(f.2), the capital loss from the disposition of the Subject Aco Shares resulting from the Share Exchange will be deemed to be nil and, in computing the adjusted cost base of the each New Aco Share and the remaining Existing Aco Share, there shall be added the proportion of the amount of the capital loss of the AE Trust from the disposition of the Subject Aco Shares on the Share Exchange; determined without reference to subsection 40(3.6), that

(a) the fair market value, determined immediately after the Share Exchange, of the particular New Aco Share or Existing Aco Share, as the case may be,

is of

(b) the aggregate fair market value, determined immediately after the Share Exchange, of all the New Aco Shares and the Existing Aco Share owned by the AE Trust;

G. pursuant to paragraphs 40(3.6)(a) and (b) and paragraph 53(1)(f.2), the capital loss from the disposition of the New Aco Shares resulting from the transaction described in paragraph 18, above, will be deemed to be nil and, in computing the adjusted cost base of the each New Aco Share remaining and the remaining Existing Aco Share, there shall be added the proportion of the amount of the capital loss of the AE Trust from the disposition of the Subject Aco Shares on the transaction described in paragraph 18; determined without reference to subsection 40(3.6), that

(a) the fair market value, determined immediately after the disposition described in paragraph 18, above, of the particular New Aco Share or Existing Aco Share, as the case may be,

is of

(b) the aggregate fair market value, determined immediately after the disposition described in paragraph 18, above, of all the New Aco Shares and the Existing Aco Shares owned by the AE Trust;

H. provided the AE Trust winds-up on or before the Final Distribution Date, the AE Trust will realize, at a time that is prior to the end of the final day of the third taxation year of the AE Trust to end after the death of Individual A, from the disposition of each New Aco Share described in paragraph 20, above, a capital loss equal to the amount, if any, by which the adjusted cost base of the New Aco Share and the amount of any costs incurred by the AE Trust for the purpose of disposing of the New Aco Share exceeds its fair market value, determined at the time of the disposition of the New Aco Shares;

I. where Trustco in its capacity of Trustee of the AE Trust, exercises its discretion to make a gift of property described in paragraph 20 to the Foundation and provided it is a qualified donee, as defined in subsection 149.1(1), at the time of the gift described in paragraph 20 above, and the AE Trust does not make a designation in respect of the gift or distribution pursuant to subsection 118.1(6), and subject to paragraph 2 of the COMMENTS below, the AE Trust may include in its total charitable gifts, as defined in subsection 118.1(1), for the taxation year in which the first of distribution is made, an amount equal to the to the fair market value of the property gifted by the AE Trust, determined at the time the gift or distribution is made; and

J. subsection 245(2) will not apply to the proposed transactions, in and by themselves, to re-determine the tax consequences confirmed in the rulings given in paragraphs A to I above.

These rulings are given subject to the limitations and qualifications set forth in Information Circular 70-6R5 issued on May 17, 2002, and are binding on the CRA provided that the undertakings described in paragraph 3 of the COMMENTS below are fulfilled.

As the proposed transactions may not be carried out for several years, we wish to emphasize the limitations on the validity of the above rulings that are explained in paragraph 14 of Information Circular 70-6R5. In particular, the above rulings are based on the law in its present form and do not take into account any statutory amendments (whether currently proposed or not) that are enacted after the date of this letter, or any court decisions rendered after the date of this letter.

COMMENTS

1. Nothing in this letter should be construed as implying that the CRA has agreed to or reviewed:

(a) the determination of the adjusted cost base, paid-up capital or fair market value of any shares or other property referred to herein;

(b) whether the designation of any dividends described in ruling C, above, as eligible dividends will result in an excessive eligible dividend designation; and

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

2. Although ruling I, above, provides that the AE Trust may include the fair market value of the property that will be gifted or distributed by the AE Trust as described in paragraph 20, above, in its total charitable gifts for the taxation year of the AE Trust in which such gifts or distributions are made, we are not providing any comment as to whether the gifts of the Shareholder Loan Accounts, the Existing Aco Share, the New Aco Shares, would constitute a gift of non-qualifying securities by the AE Trust. The determination of whether the AE Trust will deal at arm's length with Aco and with respect to the Shareholder Loan Accounts, or any debtor corporation, at any particular time is ultimately a question of fact that can only be determined upon reviewing the facts and circumstances in existence at that time. If it is determined that the AE Trust does not deal at arm's length with any such corporation immediately after the time that it makes a gift or distribution of a share or obligation of the corporation as described in paragraph 20, above, the AE Trust will be deemed by subsection 118.1(13) not to have made any charitable gift, which could preclude the AE Trust from including the fair market value of the property in the AE Trust's total charitable gifts for the taxation year of the AE Trust in which it is deemed to receive a dividend from Aco, as described in ruling C, above.

3. Although paragraph 4.1 of the AE Trust's indenture provides that all property is to be distributed prior to the end of the third taxation year of the Trust that ends after the death of Individual A, it is anticipated that the proposed transactions will be completed in the Terminal Year, in which case the amount of any capital losses realized by the AE Trust would be offset against the capital gains that will be realized by the AE Trust in the Terminal Year in respect of the disposition of the Existing Aco Shares, pursuant to subsection 104(4). However, if Individual A dies late in the Terminal Year, there may not be sufficient time to complete the transactions contemplated by the Share Exchange Agreement and to make the gift described in paragraph 20 by the end of the Terminal Year. Such transactions would then occur in the following taxation year of the AE Trust. Under these circumstances, the gains realized by the AE Trust in respect of the disposition of the Existing Aco Shares, pursuant to subsection 104(4) would likely give rise to a substantial amount of tax that will become payable by the AE Trust 90 days after the end of the Terminal Year. It is anticipated that the amount of such gains will be offset in full by deducting the net capital losses of the AE Trust for the taxation year of the AE Trust for the following taxation year. Nonetheless, for some period of time, taxes will be owed by the AE Trust under such circumstances and, if left unpaid interest would accrue and become owing by the AE Trust in respect of such taxes. In the event that the transactions contemplated by the Share Exchange Agreement and those described in paragraph 20 do not occur in the Terminal Year, a number of undertakings have been proposed by the Taxpayers, which must be fulfilled in order for the rulings contained herein to be binding on the CRA. In the event that any of the undertakings set out below are not honoured, the above rulings are void and will not be binding on the CRA. The undertakings are as follows:

(a) the return of income for the AE Trust for the Terminal Year will be filed within 90 days after the end of the Terminal Year;

(b) a written acknowledgment of the taxes payable by the AE Trust for the Terminal Year will be submitted in conjunction with the filing of its return of income for the Terminal Year, which will also indicate that such liability will be reduced upon deducting the AE Trust's net capital losses that will arise in a subsequent taxation year of the AE Trust;

(c) the AE Trust will, if required by the CRA, provide security to defer collection of the taxes payable by the AE Trust for the Terminal Year, which may entail providing a letter of credit, a pledge of corporate shares or a cash payment to the CRA;

(d) arrangements will be made with the CRA for the payment of any interest that may accrue on the amount of any taxes payable by the AE Trust for the Terminal Year;

(e) an objection to the assessment of income of the AE Trust for the Terminal Year will not be made solely for the purpose of prohibiting the Minister from carrying out any act of collecting the taxes payable by the AE Trust for the Terminal Year, including the actions described in paragraphs (a) to (g) of subsection 225.1(1);

(f) the Trustee of the AE Trust will take all reasonable steps to ensure that the proposed transactions are completed in the taxation year of the AE Trust immediately following the Terminal Year and that the return of income for such taxation year will be filed and the request to deduct the net capital losses of the AE Trust for such taxation year in computing the taxable income of the AE Trust for the Terminal Year will be made prior to the end of such taxation year;

(g) in the event that the proposed transactions are not completed prior to the end of the taxation year of the AE Trust immediately following the Terminal Year, the Trustee of the AE Trust will take all reasonable steps to ensure that the proposed transactions and related tax filings occur forthwith; and

(h) the Trustee or other legal representatives of the AE Trust will make an application for a certificate pursuant to subsection 159(2) prior to distributing the property of the AE Trust to the B Trust, the C Trust, the D Trust, E Trust, the Legacy Trust and the Foundation as contemplated in the proposed transactions.

Yours truly,

XXXXXXXXXX
for Director
International and Trusts Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch