2009 Ruling 2008-0296141R3 - Butterfly Transaction

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: Split-up butterfly transaction.

Position: Favourable rulings provided.

Reasons: In compliance with the law and previous positions.

XXXXXXXXXX 									2008-029614

XXXXXXXXXX , 2009

Dear XXXXXXXXXX :

RE: Advance Income Tax Ruling
XXXXXXXXXX ("DC")
Account Number: XXXXXXXXXX
XXXXXXXXXX (previously named XXXXXXXXXX .) ("TC1")
Account Number: XXXXXXXXXX
XXXXXXXXXX ("TC2")
Account Number: XXXXXXXXXX
Tax Services Office: XXXXXXXXXX
Taxation Centre: XXXXXXXXXX

We are writing in response to your letter dated XXXXXXXXXX in which you request an advance income tax ruling on behalf of the above-noted taxpayers. We also acknowledge the additional information provided in your letters dated XXXXXXXXXX , and in your subsequent letters and emails, as well as the information provided during our various telephone conversations and our meeting in connection with your ruling request (XXXXXXXXXX ).

You have advised us that to the best of your knowledge, and that of the taxpayers involved, none of the issues contained in this advance income tax ruling:

1. is in an earlier return of the taxpayers or a related person;
2. is being considered by a tax services office or a taxation centre in connection with a previously filed tax return of the taxpayers or a related person;
3. is under objection by the taxpayers or related person;
4. is before the courts or, if a judgment has been issued, the time limit for appeal to a higher court has not expired; is the subject of a ruling previously issued by the Directorate; or
5. will impact the outstanding tax liabilities, if there are any, of the parties to the ruling.

However, we understand that similar transactions involving DC have been the subject of XXXXXXXXXX Advance Income Tax Rulings XXXXXXXXXX .

Unless otherwise indicated, all monetary amounts are expressed in Canadian dollars.

Throughout this letter, the corporate and individual taxpayers will be referred to as follows:

(a) "DC" means XXXXXXXXXX a corporation incorporated in XXXXXXXXXX under the laws of the province of XXXXXXXXXX , the shareholding of which is described in Paragraph 2;

(b) "Family Trust" means the XXXXXXXXXX ;

(c) "Investco A" means XXXXXXXXXX .;

(d) "Investco B" means XXXXXXXXXX ;

(e) "Investco C" means XXXXXXXXXX .;

(f) "JV1" means the XXXXXXXXXX ;

(g) "JV2" means the XXXXXXXXXX ;

(h) "Joint Ventures" means JV1 and JV2;

(i) "LP1" means the XXXXXXXXXX ;

(j) "LP2" means the XXXXXXXXXX ;

(k) "Limited Partnerships" mean LP1 and LPs;

(l) "Opco A" means XXXXXXXXXX ., a corporation incorporated under the CBCA, the shareholding of which is described in Paragraph 36;

(m) "Opco B" means XXXXXXXXXX ., a corporation to be incorporated under the CBCA, as described in Paragraph 38;

(n) "Opco LP" means XXXXXXXXXX , a limited partnership to be formed under the laws of XXXXXXXXXX , as described in Paragraph 37;

(o) "Sibling 1" means XXXXXXXXXX ;

(p) "Sibling 2" means XXXXXXXXXX ;

(q) "Subco 1" means a corporation to be incorporated under the laws of XXXXXXXXXX , as described in paragraph 16;

(r) "Subco 2" means a corporation to be incorporated under the laws of XXXXXXXXXX , as described in paragraph 17;

(s) "Subco Investments" means XXXXXXXXXX ., a corporation incorporated under the laws of the State of XXXXXXXXXX , and more specifically described in Paragraph 12b;

(t) "Subco Properties" means XXXXXXXXXX ., a corporation incorporated under the laws of XXXXXXXXXX , and more specifically described in Paragraph 12a;

(u) "Subsidiaries" collectively refers to the Canadian subsidiaries controlled by DC including Subco Investments, Subco Properties and various inactive corporations of nominal value (namely, XXXXXXXXXX .);

(v) "TC1" means XXXXXXXXXX a corporation incorporated under the laws of XXXXXXXXXX , the shareholding of which is described in Paragraph 5;

(w) "TC2" means XXXXXXXXXX a corporation incorporated under the laws of XXXXXXXXXX , the shareholding of which is described in Paragraph 6;

I. DEFINITIONS

In this letter, unless otherwise expressly stated, the following terms or expressions have the meaning specified:

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

(b) XXXXXXXXXX

(c) "ACB" means "adjusted cost base" as that expression is defined in paragraph 54 and subsection 248(1);

(d) "CBCA" means the Canada Business Corporations Act, R.S.C. 1985, c. C44, as amended to the date hereof;

(e) "agreed amount" in respect of a property means the amount that the transferor and transferee of the property have agreed upon in their election under subsection 85(1) in respect of the property;

(f) "DC Class "A" preferred shares" means the voting preferred shares as described in Paragraph 2;

(g) "DC Special Shares" means a new class of non-voting preferred shares to be issued from the capital stock of DC in the course of the Proposed Transaction described in Paragraph 13;

(h) "Distribution" means the transfer of property as described in Paragraph 20;

(i) "CRA" means Canada Revenue Agency;

(j) "Canadian-Controlled Private Corporation" ("CCPC") has the meaning assigned by Paragraph 125(7);

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

(l) "capital property" has the meaning assigned by section 54;

(m) "disposition" has the meaning assigned by subsection 248(1);

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

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

(p) "eligible dividend" has the meaning assigned by subsection 89(1);

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

(r) "fair market value" ("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 transact;

(s) "forgiven amount" has the meaning assigned by subsections 80(1) and 80.01(1);

(t) "general rate income pool" ("GRIP") has the meaning assigned by subsection 89(1);

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

(v) "Notes Receivable" means the non-interest bearing notes issued by joint venture partners and secured by an assignment of joint venture interests;

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

(x) "Paragraph" means a numbered paragraph in this letter;

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

(z) "Proposed Transactions" means the proposed transactions which are described in Paragraphs 13 to 30.

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

(bb) "related person" has the meaning assigned by section 251;

(cc) "significant influence" has the meaning assigned by section 3051 of the CICA Handbook;

(dd) "Share Exchanges" means the exchange by each of TC1 and TC2 of all of their common shares of the capital stock of DC for one DC Special Share and new common shares, as described in Paragraph 14;

(ee) "Shareholders' Loans" means the amount owing to TC1 by DC which is unsecured, non-interest bearing and payable upon demand;

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

(gg) "stated capital" means stated capital as that term is used in the XXXXXXXXXX ;

(hh) "Subco 1 Class "A" preferred shares" means the new non-voting preferred share authorized to be issued from the capital stock of Subco 1 as described in Paragraph 16;

(ii) "Subco 2 Class "A" preferred shares" means the new non-voting preferred share authorized to be issued from the capital stock of Subco 2 as described in Paragraph 17;

(jj) "Subco 1 Note" means the demand promissory note to be issued by Subco 1 in payment of the redemption price of the Subco 1 Class "A" preferred shares as described in Paragraph 22;

(kk) "Subco 2 Note" means the demand promissory note to be issued by Subco 2 in payment of the redemption price of the Subco 2 Class "A" preferred shares as described in Paragraph 22;

(ll) "taxable Canadian corporation" has the meaning assigned by Paragraph 89(1); and,

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

II. FACTS

1. DC is and will be, at any relevant time and for all purposes of the Act, a CCPC and a taxable Canadian corporation. The registered head office of DC is located in XXXXXXXXXX . DC's taxation year and fiscal period ends on XXXXXXXXXX of each year. DC engages in various activities including management services, investment and real estate development, either on its own account or through subsidiaries, joint ventures and partnerships. As at XXXXXXXXXX , the value of DC's assets (before adjusting the cost of the shares of the Subsidiaries from cost to FMV), net of liabilities, was approximately $XXXXXXXXXX . The marketable security portfolio held by DC amounts to approximately $XXXXXXXXXX and of that, over XXXXXXXXXX % represents shares held in the capital stock of Investco A, Investco B, and Investco C.

The assets of DC consist of:

a. cash, marketable securities (including portfolio investments, other than shares of the capital stock of Investco A, Investco B, and Investco C), accounts receivable and rights arising from the prepayment of certain expenses ("prepaid expenses");

b. holdings in Investco A, Investco B, and Investco C;

c. shares of the capital stock of various Canadian subsidiaries (the "Subsidiaries") controlled by DC including Subco Properties and Subco Investments;

d. interests in two joint ventures, JV1 and JV2;

e. investments in two limited partnerships (as a limited partner), LP1 and LP2; and

f. loans receivable from TC2, Subco Properties and joint venture partners.

DC's liabilities consist of:

g. current liabilities which include accounts payable, promissory notes payable, Shareholder Loans and the current portion of long-term debt.

The Shareholder's Loans are payable on demand.

There has not been a material change in the composition of DC's assets and liabilities described herein, since XXXXXXXXXX . Moreover, there will not be any material change in the composition of DC's assets or liabilities (except as contemplated in the Proposed Transactions) from the date of this letter until the date the Proposed Transactions described herein are completed.

2. DC's authorized share capital is as follows:

a. XXXXXXXXXX voting common shares without nominal or par value.

b. XXXXXXXXXX Class "A" preference XXXXXXXXXX % cumulative voting redeemable preference shares. The shares are redeemable at their Stated Capital amount.

c. XXXXXXXXXX Class "B" XXXXXXXXXX % cumulative non-voting redeemable preference shares. The shares are redeemable at their Stated Capital amount.

DC has XXXXXXXXXX Class "A" preferred shares issued and outstanding, with a total FMV, stated capital and PUC of $XXXXXXXXXX . The DC Class "A" preferred shares are held by Sibling 1 and the ACB of these shares to Sibling 1 is $XXXXXXXXXX . Though the DC Class "A" preferred shares are voting, the shares were issued prior to XXXXXXXXXX . Consequently, the DC Class "A" preferred shares are not subject to the additional requirement provided under the Proposed Amendment to the definition of "specified class" in paragraph 55(1)(d). The DC Class "A" preferred shares are therefore shares of a specified class as that term is defined in subsection 55(1).

The issued and outstanding common shares of the capital stock of DC are held as follows:

TC1 XXXXXXXXXX
TC2 XXXXXXXXXX
XXXXXXXXXX

The XXXXXXXXXX common shares of the capital stock of DC held by TC1 have an aggregate stated capital of $XXXXXXXXXX and a PUC and ACB of $XXXXXXXXXX per share. The XXXXXXXXXX common shares of the capital stock of DC held by TC2 have an aggregate stated capital of $XXXXXXXXXX and a PUC and ACB of $XXXXXXXXXX per share. There has been no change to the shareholding of DC described above since XXXXXXXXXX , the date of issuance of the Advance Income Tax Ruling XXXXXXXXXX in connection with DC.

Sibling 1 continues to have de jure control of DC, until such time as the proposed redemption of the DC Class "A" preferred shares occurs as set out in Paragraph 18. Subsequent to the redemption, and prior to the distribution of the butterfly assets, TC1 and TC2 will, as a group, have de jure control of DC.

All of the common shares of DC represent capital property to its shareholders.

3. DC had the following tax balances at the date of its XXXXXXXXXX , taxation year end:

RDTOH: $XXXXXXXXXX
CDA: $XXXXXXXXXX
GRIP: $XXXXXXXXXX

4. TC1 and TC2 are corporations incorporated under the laws of the province of XXXXXXXXXX with head offices located in XXXXXXXXXX . TC1 and TC2 are and will be, at any relevant time and for all purposes of the Act, CCPCs and taxable Canadian corporations.

5. TC1's issued and outstanding share capital consists of XXXXXXXXXX common shares. All of the issued and outstanding shares of the capital stock of TC1, have been held by Sibling 1 since XXXXXXXXXX .

6. TC2's issued and outstanding shares capital currently consists of XXXXXXXXXX common shares and XXXXXXXXXX voting preferred shares. Since XXXXXXXXXX , all of the issued and outstanding common shares of the capital stock of TC2, have been held by the Family Trust and all of the issued and outstanding voting preferred shares have been held by Sibling 2, except as outlined below. Accordingly, Sibling 2 has de jure control of TC2.

Commencing in XXXXXXXXXX , TC2 has periodically redeemed some of its preferred shares. These redemptions of shares were made to extract the RTDOH balance of TC2. In XXXXXXXXXX , Sibling 2 transferred XXXXXXXXXX voting preferred shares of the capital stock of TC2 to Opco A (a corporation controlled by Sibling 2). Subsequently, these preferred shares of the capital stock of TC2 owned by Opco A were redeemed in XXXXXXXXXX .

7. Sibling 1 and Sibling 2 are residents of Canada for purposes of the Act and are related to each other by virtue of being siblings in accordance with paragraphs 251(2)(a) and 251(6)(a). Sibling 1 and Sibling 2 are each related to their respective holding companies, TC1 and TC2, pursuant to subparagraph 251(2)(b)(i). Sibling 1 and Sibling 2 are related to DC. DC is related to each of TC1 and TC2, and TC1 and TC2 are related to each other.

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

a. Sibling 1 and Sibling 2 are not related to each other and are not related to DC; and

b. TC1 and TC2 will not be related to each other and will not be related to DC.

Types of Property - General

8. Immediately before the transfers of property described in Paragraph 20, the property of DC will be determined and will be classified into three types of property for the purposes of the definition of "Distribution" in subsection 55(1), as follows:

a. cash or near-cash property comprising all of the current assets of DC, including any cash, deposits, accounts receivable and prepaid expenses;

b. business property, comprising all of the assets of DC, other than cash or near-cash property, any income from which would, for the purposes of the Act, be income from a business other than a specified investment business; and

c. investment property, comprising all of the assets of DC, other than cash or near-cash property, any income from which would, for purposes of the Act, be income from property or from a specified investment business.

For greater certainty, any tax accounts or other tax-related amounts, such as the balance of any RDTOH, GRIP or CDA of DC will not be considered property for purposes of the Distribution. No amount will be considered to be a liability unless it represents a true legal liability which is capable of quantification and deferred income taxes will not be considered to be a property or liability, as the case may be.

9. In determining on a consolidated basis, the net FMV of its cash or near-cash property, business property, and any investment property immediately before the Distribution, the liabilities of DC will be allocated to, and be deducted in the calculation of the net FMV of each type of property of DC in the following manner:

a. current liabilities of DC will be allocated to cash or near-cash property (including any cash, accounts receivable and prepaid expenses) in proportion that the FMV of each property is of the FMV of all cash or near cash property. The allocation of current liabilities as described herein will not exceed the aggregate FMV of all cash or near cash property of DC;

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

c. any liabilities ("excess unallocated liabilities"), that remain after the allocations described in "a." and "b." are made (including excess current liabilities, if any), will then be allocated to the cash or near cash property, business property and any investment property of DC on a consolidated basis based on the relative net FMV of each type of property prior to the allocation of such excess unallocated liabilities.

You have advised us that after the allocation of current liabilities to the cash or near-cash property, as described in Paragraph 9a. above, the accounts receivable and prepaid expenses will not be reclassified as business property.

10. The classification of the types of property of DC can be summarized as follows:

a. marketable securities (other than the holdings in Investco A, Investco B and Investco C) and current assets (including the advances receivable from TC2 and the Notes Receivable from joint venture partners) will be classified as cash or near cash property;

b. XXXXXXXXXX along with the interests in the Joint Ventures will be classified as business property; and

c. holdings in Investco A, Investco B and Investco C and the interests in the Limited Partnerships will be classified as investment property.

Types of Property - Specific

11. The assets of DC include cash balances denominated in both Canadian and U.S. dollars, marketable securities, shares of the capital stock of private companies, interests in partnerships and joint ventures in the land development business, accounts and notes receivable, and other business assets more fully described below.

The marketable securities (which, for greater certainty, do not include the shares of the capital stock of Investco A, Investco B and Investco C described below), together with cash balances, accrued interest, accounts receivable and a note receivable from TC2 will be categorized as cash and near-cash assets net of liabilities which include approximately $XXXXXXXXXX owing to TC1 and nominal trade payables. It is the intention of DC to settle the $XXXXXXXXXX TC1 debt by the transfer of cash or near cash coincidental with the butterfly.

DC holds two non-interest bearing Notes Receivable from joint venture partners, which have either reached maturity or are due to reach maturity XXXXXXXXXX . These notes, which are secured by an assignment of joint venture interests, will be classified as cash and near-cash assets.

DC holds XXXXXXXXXX . DC also has an interest of XXXXXXXXXX % in JV1 and a XXXXXXXXXX % interest in JV2. These assets will be classified as business property.

The company also has a XXXXXXXXXX which will be categorized as business property together with the Joint Ventures.

The more significant investment properties are:

a. Approximately XXXXXXXXXX % of the Class "A" shares and XXXXXXXXXX % of the Class "B" shares of the capital stock of Investco A;

b. Approximately a XXXXXXXXXX % interest in the common shares of the capital stock of Investco B, and

c. Approximately XXXXXXXXXX % of the Class "A" common shares and XXXXXXXXXX % of the Class "B" shares of the capital stock of Investco C.

The shares of the capital stock of Investco A, Investco B and Investco C are capital properties to DC. The FMV and ACB, to DC, of the Class "A" shares of the capital stock of Investco A are approximately $XXXXXXXXXX and $XXXXXXXXXX , respectively. The FMV and ACB, to DC, of the Class "B" shares of the capital stock of Investco A are approximately $XXXXXXXXXX and $XXXXXXXXXX , respectively. The FMV and ACB, to DC, of the shares of the capital stock of Investco B are approximately $XXXXXXXXXX and $XXXXXXXXXX respectively. The FMV and ACB, to DC, of the Class "A" shares of the capital stock of Investco C are approximately $XXXXXXXXXX and $XXXXXXXXXX , respectively. The FMV and ACB, to DC, of the Class "B" shares of the capital stock of Investco C are approximately $XXXXXXXXXX and $XXXXXXXXXX , respectively.

The investments in LP1 and LP2 are also capital property to DC.

DC does not have significant influence over Investco A, Investco B, Investco C, LP1 or LP2.

The shares held by DC in Investco A, Investco B and Investco C, together with a XXXXXXXXXX % limited partnership interest in LP1, and an XXXXXXXXXX % limited partnership interest in LP2 will be classified as investment property.

12. DC owns all of the preferred shares and XXXXXXXXXX of the common shares of the capital stock of the following companies:

a. Subco Properties is a corporation that owns and develops real estate property. In addition, Subco Properties has a XXXXXXXXXX % investment in XXXXXXXXXX . The issued and outstanding shares of the capital stock of Subco Properties consists of XXXXXXXXXX voting common shares and XXXXXXXXXX non-participating, voting Class C preferred shares with a FMV and a redemption value of $XXXXXXXXXX per share.

b. Subco Investments owns XXXXXXXXXX

Subco Investments also has cash, marketable securities, accrued interest, and accounts and notes receivable.

The issued and outstanding shares of the capital stock of Subco Investments consists of XXXXXXXXXX voting common shares and XXXXXXXXXX non-participating, voting Class B preferred shares with a FMV and a redemption value of US$XXXXXXXXXX per share.

TC1 and TC2 will each receive its pro rata portion of the common shares of Subco Properties and Subco Investments owned by DC. Furthermore, the interest of DC in any other entity over which DC, directly or indirectly, has the ability to exercise significant influence within the meaning of section 3051 of the CICA Handbook is inactive and valueless. Consequently, the determination using the consolidated look-through method will not actually be undertaken for the purposes of the Proposed Transactions.

III. PROPOSED TRANSACTIONS

13. DC will file Articles of Amendment pursuant to which a new class of shares will be added to the share capital of DC. The DC Special Shares will be non-voting, and entitled to a non-cumulative dividend at the rate of XXXXXXXXXX % of the redemption amount. The DC Special Shares will also be redeemable at the option of the corporation and retractable at the option of the holder for an amount equivalent to $XXXXXXXXXX per share plus XXXXXXXXXX of DC's GRIP balance at the end of the taxation year in which the Share Exchanges take place.

14. Each of TC1 and TC2 will exchange all of their common shares of the capital stock of DC for one DC Special Share and new common shares. The old common shares of the capital stock of DC will be cancelled.

The aggregate FMV of the DC Special Share and the DC new common shares that each TC1 and TC2 will receive as described above will be equal to the aggregate FMV of the DC old common shares that each TC1 and TC2 so exchanged.

No election under subsection 85(1) will be made with respect to the Share Exchanges.

15. The aggregate amount that will be added to the stated capital account of DC Special Shares issued by DC to each TC1 and TC2 as described in Paragraph 14 will be $XXXXXXXXXX , for an aggregate amount of $XXXXXXXXXX . In addition, the aggregate amount that will be added to the stated capital account of the DC new common shares issued to TC1 and TC2 will be equal to the PUC of the DC old common shares so exchanged by each of TC1 and TC2 as described in Paragraph 14 less $XXXXXXXXXX .

16. TC1 will cause a new corporation, Subco 1, to be incorporated under the XXXXXXXXXX . Subco 1 will be, at any relevant time and for all purposes of the Act, a CCPC and a taxable Canadian corporation. The authorized share capital of Subco 1 will consist of an unlimited number of common shares and an unlimited number of Class "A" preferred shares. The Subco 1 Class "A" preferred shares will be non-voting, and entitled to a non-cumulative dividend at the rate of XXXXXXXXXX % of the redemption amount. The Subco 1 Class "A" preferred shares will also be redeemable at the option of the corporation and retractable at the option of the holder for an amount equivalent to the FMV of the property received by the corporation on the issuance of the preferred shares. TC1 will subscribe for XXXXXXXXXX common share of the capital stock of Subco 1 upon incorporation for a nominal subscription price.

17. TC2 will cause a new corporation, Subco 2, to be incorporated under the XXXXXXXXXX . Subco 2 will be, at any relevant time and for all purposes of the Act, a CCPC and a taxable Canadian corporation. The authorized share capital of Subco 2 will consist of an unlimited number of common shares and an unlimited number of Class "A" preferred shares. The Subco 2 Class "A" preferred shares will be non-voting, and entitled to a non-cumulative dividend at the rate of XXXXXXXXXX % of the redemption amount. The Subco 2 Class "A" preferred shares will also be redeemable at the option of the corporation and retractable at the option of the holder for an amount equivalent to the FMV of the property received by the corporation on the issuance of the preferred shares. TC2 will subscribe for XXXXXXXXXX common share of the capital stock of Subco 2 upon incorporation for a nominal subscription price.

18. DC will redeem its Class "A" preferred shares owned by Sibling 1 and in exchange will transfer the XXXXXXXXXX non-participating voting Class C preferred shares of the capital stock of Subco Properties, the XXXXXXXXXX Class B preferred shares of the capital stock of Subco Investments and cash to Sibling 1. The preferred shares of Subco Properties and Subco Investments along with the cash will have a total value equal to the redemption price of the DC Class "A" preferred shares, which is $XXXXXXXXXX .

19. Immediately prior to the transfer of property described in Paragraph 20, the property of DC will be determined and will be classified into three types of property for the purposes of the definition of "Distribution" in subsection 55(1), as described above.

20. Immediately following the classification of DC's three types of property, DC will transfer to Subco 1 and Subco 2 a pro rata portion of its cash or near-cash property, business property, and investment. As a result of such transfer, the net FMV of the cash and near-cash property, business property, and investment property received by Subco 1 and Subco 2 determined in the manner described in Paragraph 8 (after allocating and deducting liabilities, in the manner described in Paragraph 9) will approximate the proportion (the "Proportion") of the net FMV of each type of property of DC, determined in the manner described in Paragraphs 8 and 9, immediately before the transfer, that:

a. the FMV, immediately before the transfer, of the shares of the capital stock of DC owned respectively by TC1 and TC2, at that time;

is of

b. the FMV, immediately before the transfer, of all of the issued shares of the capital stock of DC at that time.

For purpose of this letter, the phrase "approximates the proportion", means that a discrepancy of the proportion, if any, will not exceed one percent (1%), as determined as a percentage of the FMV of each type of property which each Subco 1 and Subco 2 will receive as compared to what each such recipient corporation would have received had each such corporation received its appropriate pro rata share of the FMV of that type of property.

For greater certainty, the following properties will be split accordingly:

a. One-half of each of the Notes Receivable will be transferred to Subco 1 and Subco 2.

b. One-half of the shares of the capital stock of the Subsidiaries (other than the preferred shares described in Paragraph 18 above) and one-half of the amounts owing by the Subsidiaries to DC will be transferred to Subco 1 and Subco 2.

c. One-half of DC's interest in the XXXXXXXXXX will be transferred to each of Subco 1 and Subco 2.

d. Similarly, one-half of DC's interest in the Limited Partnerships and DC's undivided interest in the properties and net debt of the Joint Ventures will be transferred to each of Subco 1 and Subco 2.

As consideration for such transfers, Subco 1 will assume some of DC's liabilities and will issue to DC Subco 1 Class "A" preferred shares with an aggregate redemption amount equal to the FMV of the properties at the time of the transfer less the amount of liabilities assumed by Subco 1. The liabilities assumed by Subco 1 will not exceed the aggregate of the agreed amounts in respect of such properties.

As consideration for such transfers, Subco 2 will assume some of DC's liabilities and will issue to DC Subco 2 Class "A" preferred shares with an aggregate redemption amount equal to the FMV of the properties at the time of the transfer less the amount of liabilities assumed by Subco 2. The liabilities assumed by Subco 2 will not exceed the aggregate of the agreed amounts in respect of such properties.

Subco 1 and Subco 2 will respectively add to their stated capital account maintained for its Class "A" preferred shares an amount not to exceed the amount by which the aggregate of the cost amounts (or elected amounts where such elected amount exceed the cost amount), in the case of eligible properties, and the FMV, in the case of other properties, of the properties transferred respectively to Subco 1 and Subco 2 exceeds the liabilities assumed respectively by Subco 1 and Subco 2. For greater certainty, the addition to the stated capital will not exceed the maximum amount that could be added to the PUC of the shares, pursuant to subsection 85(2.1).

21. In respect of the transfers of property described in Paragraph 20 above, each of DC and Subco 1 and DC and Subco 2, as the case may be, will jointly elect, in prescribed form and within the time specified in subsection 85(6), to have the provisions of subsection 85(1) apply to the transfer of each property transferred by DC respectively to Subco 1 and Subco 2 that is an eligible property. The agreed amount for purposes of subsection 85 (1) in respect of such property will not be less than:

a. Where the particular property is depreciable property of a prescribed class, the least of the amounts specified in subparagraphs 85(1)(e)(i), (ii) and (iii); and

b. Where the particular property is inventory or capital property (other than depreciable property of a prescribed class), the lesser of the cost amount of the property to DC immediately before the transfer and the FMV of such property.

However, the agreed amount in respect of each of the properties so transferred will be less than or equal to its FMV at the time of the transfer. The amount of the liabilities to be allocated to the property that is subject of an election under subsection 85(1) will not exceed the total agreed amounts elected for that property. The amount of liabilities to be allocated to the property that is not subject of an election under subsection 85(1) will not exceed the FMV of any such property.

22. Subco 1 and Subco 2 will redeem the Subco 1 Class "A" preferred shares and Subco 2 Class "A" preferred shares held by DC, respectively, and will each issue to DC, in full payment of the aggregate redemption price payable therefore, a demand, non-interest bearing, promissory note, being the Subco 1 Note and the Subco 2 Note respectively, having a principal amount and FMV equal to the redemption amount of the preferred shares so redeemed.

23. Subco 1 will be wound up into its parent corporation TC1. As a consequence, Subco 1's assets will be transferred to TC1 and TC1 will assume Subco 1's liabilities, including the Subco 1 Note.

24. Subco 2 will be wound up into its parent corporation TC2. As a consequence, Subco 2's assets will be transferred to TC2 and TC2 will assume Subco 2's liabilities, including the Subco 2 Note.

25. TC1 and TC2 will resolve to wind up and dissolve DC pursuant to the applicable provisions of the XXXXXXXXXX . In the course of the winding up, under the terms of the agreement governing the winding-up of DC, DC will assign and distribute the Subco 1 Note and the Subco 2 Note to TC1 and TC2, respectively. Immediately after the distribution of the Subco 1 Note to TC1 and of the Subco 2 Note to TC2 as described herein but before the formal dissolution of DC, DC will not own or acquire any property or carry on any activity or undertaking.

26. The Subco 1 Note will be extinguished by virtue of its distribution by DC to TC1 and such note will be cancelled.

27. The Subco 2 Note will be extinguished by virtue of its distribution by DC to TC2 and such note will be cancelled.

28. DC will designate the dividend that it is deemed by subsection 84(2) to have paid on the DC Special Shares to TC1 and TC2, at the time of distributing its assets to TC1 and TC2 as described in Paragraph 25, to be an eligible dividend by notifying in writing at that time each of TC1 and TC2 that the dividend is an eligible dividend, pursuant to subsection 89(14).

29. DC will elect pursuant to subsection 83(2) of the Act, in prescribed manner and prescribed form, that the full amount of any resulting dividend on DC common shares referred to in subparagraph 88(2)(b)(i), be deemed to be paid out of CDA.

30. Following the receipt of the dividend refund to which DC will become entitled as a result of the Proposed Transactions described herein, DC will immediately distribute one half of such refund (under the terms of the agreement governing the winding-up of DC) to each TC1 and TC2. Within a reasonable time following the distribution of dividend refund, articles of dissolution will be filed with the appropriate Corporate Registry and upon receipt of a certificate of dissolution, DC will be dissolved.

IV. ADDITIONAL INFORMATION

31. DC, TC1 and TC2 are not and will not be specified financial institutions.

32. None of the issued shares referred to herein (including the shares to be issued as described in the Proposed Transactions) is or will be the subject of a guarantee agreement.

33. None of the issued shares referred to herein (including the shares to be issued as described in the Proposed Transactions) is or will be the subject of a dividend rental agreement.

34. None of the issued shares referred to herein (including the shares to be issued as described in the Proposed Transactions) has been or will be issued or acquired as part of a transaction or event or series of transactions or events of the type described in subsection 112(2.5).

35. Except as described herein, no liabilities have been or will be incurred and no assets have been or will be acquired by or disposed of by DC or a corporation controlled by DC in contemplation of and before the proposed transfer of properties described in Paragraph 20 above, other than in the normal course of business. It is not contemplated that subsequent to the implementation of the transactions described herein under Proposed Transactions that TC1 and TC2 will transfer or sell any of its assets to any other person except as described below or in the normal course of its business.

36. Sibling 2 owns XXXXXXXXXX % of the common shares of Opco A, a company which owns a XXXXXXXXXX . DC has guaranteed a loan in the amount of $XXXXXXXXXX and has agreed to pledge shares of the capital stock of Investco A in support of the loan. Opco A requires approximately $XXXXXXXXXX per month for its operations. As of XXXXXXXXXX , DC has made advances to TC2, as required, for the purpose of funding Opco A in an amount of approximately $XXXXXXXXXX . These advances are not convertible into other property.

37. A proposed restructuring of Opco A was approved by XXXXXXXXXX . Under the proposed restructuring, Opco LP was formed. Opco A became the general partner of Opco LP and TC2 became a limited partner. Opco LP acquired the assets and liabilities in the business of XXXXXXXXXX for nominal consideration from Opco A. For greater certainty, Opco LP has not and will not acquire property described in subparagraph 55(3.1)(c)(ii).

38. Opco B was incorporated. Opco B is and will be, at any relevant time and for all purposes of the Act, a CCPC and a taxable Canadian Corporation. Opco A subscribed for XXXXXXXXXX % of the common shares of the capital stock of Opco B in exchange for Opco A's general partnership interest in Opco LP.

39. Employees of DC became employees of TC1 on XXXXXXXXXX . A management contract will be entered into between TC1 and TC2 to manage the jointly held interest in the joint ventures and partnerships. The agreement will allow TC1 to recover its costs on a reasonable basis. For greater certainty, this management agreement will not result in the creation of a partnership at law, nor in the acquisition of property by a partnership as described in paragraph 55(3.1)(c).

40. Subsequent to the butterfly transaction, TC2 may dispose of shares of the capital stock of Investco A, Investco B and/or Investco C received on the Distribution, to unrelated third parties. The disposition of these assets will be taxable transactions and the value of these assets will not represent more than 10% of the FMV, at the time of the distribution, of all the property (other than money and indebtedness that is not convertible into other property) received by TC2 on the Distribution. The proceeds received from the disposition of these assets will be used to invest in other investment opportunities including Opco A.

An escrow agreement will be entered into between TC1 and TC2, whereby TC1 will hold in escrow certain assets owned by TC2. TC2 will at all relevant times remain the beneficial owner of the escrowed assets, such that the escrow agreement will not, inter alia, result in a disposition of property for legal or tax purposes. The agreement will be concluded to give assurance to TC1 that there will be no subsequent disposition by TC2 of the assets as described above, as part of the series of transactions or events that includes the Proposed Transactions, in excess of what is permitted by paragraph 55(3.1)(c).

41. Subsequent to the butterfly, TC2 may pledge shares of the capital stock of Investco A received on the Distribution, in support of borrowings from third parties. TC2 will at all relevant times remain the beneficial owner of the property described in the pledge agreement, such that the pledge agreement will not, inter alia, result in a disposition of property for legal or tax purposes.

42. Marketable securities, classified as cash or near cash property (other than portfolio investments which have been classified as investment property), may be sold by DC in contemplation of the Distribution for cash consideration only, in accordance with the exception in clause 55(3.1)(a)(iv)(C).

43. DC's CDA does not and will not, at any time, include any amount that is described in paragraphs 83(2.4)(a) to (e).

44. DC will submit a request to the relevant Tax Services Office of the CRA to have a change of year-end.

V. PURPOSES OF THE PROPOSED TRANSACTIONS

45. The purpose of the Proposed Transactions is to transfer to each TC1 and TC2 its proportional share of the properties of DC so that Sibling 1 and Sibling 2 may pursue their investment objectives independently.

46. The creation by DC of the Special Shares and the exchange of shares described in Paragraph 14, is made to allow DC to transfer its GRIP balance to TC1 and TC2.

47. The purpose of incorporating Subco 1 and Subco 2 is to use these corporations to receive the property of the distributing corporation, DC, prior to the acquisition of such property by TC1 and TC2, respectively. In addition, the use of Subco 1 and Subco 2 will avoid the possible circular calculation of Part IV on the dividends that will be deemed to be paid and received as a result of the reorganization.

48. Sibling 1 will obtain the preferred shares of the capital stock of Subco Properties and Subco Investments. This will allow Sibling 1 to continue to retain control over these subsidiaries in the future.

VI. RULINGS GIVEN

Provided that the preceding statements constitute a complete and accurate disclosure of all relevant Facts, Proposed Transactions and the Purposes of the Proposed Transactions, and provided that the Proposed Transactions are completed in the manner described above, we confirm the following:

A. Subject to the application of subsection 69(11), provided the appropriate joint elections are filed in the prescribed form and manner within the time limits specified in subsection 85(6) and provided that each particular property so transferred is an eligible property in respect of which shares have been issued as full or partial consideration therefore, the provisions of subsection 85(1) will apply to the transfers of DC's property to Subco 1 and Subco 2 as described in Paragraph 20, such that the agreed amount in respect of each such transfer shall be deemed to be the transferor's proceeds of disposition and the transferee's cost thereof pursuant to paragraph 85(1)(a).

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

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

B. As a result of the redemption by Subco 1 of the Subco 1 Class "A" preferred shares described in Paragraph 22 and the redemption by Subco 2 of the Subco 2 Class "A" preferred shares described in Paragraph 22, by virtue of Subsection 84(3),

(a) Subco 1 will be deemed to have paid, and DC will be deemed to have received, a taxable dividend equal to the amount by which the amount paid by Subco 1 in respect of the redemption of its Subco 1 Class "A" preferred shares owned by DC exceeds the PUC of such Subco 1
Class "A" preferred shares immediately before the redemption; and,

(b) Subco 2 will be deemed to have paid, and DC will be deemed to have received, a taxable dividend equal to the amount by which the amount paid by Subco 2 in respect of the redemption of its Subco 2 Class "A" preferred shares owned by DC exceeds the PUC of such Subco 2

Class "A" preferred shares immediately before the redemption.

C. In the course of the winding-up of DC described in Paragraphs 25 and 28,

(a) pursuant to paragraph 88(2)(b) and subsection 84(2), but subject to (b) to (d) herein:

i. TC1 and TC2 will each be deemed to have received a winding-up dividend on DC Special Shares equal to the proportion, of the amount by which the aggregate FMV of the property of DC distributed to each of TC1 and TC2 in respect of the DC Special Shares on the winding-up exceeds the amount by which the PUC of DC Special Shares is reduced, that the number of the DC Special Shares held by each TC1 and TC2, as the case may be, is of the total number of issued DC Special Shares, and pursuant to subparagraph 88(2)(b)(iii), such dividend will be deemed to be a taxable dividend; and

ii. TC1 and TC2 will each be deemed to have received, a winding-up dividend on DC new common shares, equal to the proportion, of the amount by which the aggregate FMV of the property distributed by DC to each TC1 and TC2 in respect of the DC new common shares on the winding-up exceeds the amount by which the PUC of the DC new common shares is reduced as a result of the distribution, that the number of shares of such new common shares held by TC1 and TC2 is of the number of issued shares of such new common shares outstanding immediately before the distribution;

(b) pursuant to subparagraph 88(2)(b)(i), such portion of the winding-up dividend referred to in (a)(ii) herein as does not exceed DC's CDA determined immediately before the payment of the winding-up dividend will be deemed, for purposes of the subsection 83(2) election referred to in Paragraph 29, to be a full amount of a separate dividend;

(c) pursuant to subparagraph 88(2)(b)(ii), the portion of the winding-up dividend that is equal to the lesser of:

(A) DC's pre-1972 CSOH as determined immediately before the payment of the winding-up dividend and,

(B) the amount by which the winding-up dividend exceeds the portion thereof in respect of which DC will elect under subsection 83(2)
will be deemed not to be a dividend; and

(d) pursuant to subparagraph 88(2)(b)(iii), the winding-up dividend described in paragraph (a)(ii) above, to the extent that it exceeds the portion thereof referred to in (b) herein that is deemed to be a separate dividend and the portion referred to in (c) herein that is deemed not to be a dividend, will be deemed to be a separate dividend that is a taxable dividend.

D. The taxable dividends described in Rulings "B" and "C" above:

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

(b) will be deductible by the recipient pursuant to subsection 112(1) in computing its taxable income in the year in which such a dividend is deemed to have been received, and, for greater certainty, will not be prohibited by subsections 112(2.1), (2.2), (2.3) or (2.4);

(c) will be excluded in determining proceed of disposition to the recipient of the shares redeemed, purchased or cancelled pursuant to paragraph (j) of the definition of proceed of disposition in section 54 of the Act;

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

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

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

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

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

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

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

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

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

which has not been described in the Facts and Proposed Transactions, then by virtue of paragraph 55(3)(b), subsection 55(2) will not apply to the taxable dividends referred to in Ruling B and C, and, for greater certainty, subsection 55(3.1) will not apply to deny the exemption under paragraph 55(3)(b).

F. The cancellation of the promissory notes described in Paragraphs 26 and 27 will not give rise to a forgiven amount within the meaning of subsections 80(1) and 80.01(1) of the Act.

G. Provided that DC designated the dividend described in Paragraph 28 to be an eligible dividend in prescribed manner and within the time referred to in subsection 89(14), the portion of that dividend to each TC1 and TC2 received will be added to the GRIP account of each TC1 and TC2 under paragraph G(a) of the definition of GRIP in subsection 89(1) in the taxation year in which each received that portion from DC.

H. The provisions of subsection 88(1) will apply to the winding-up of Subco1 and Subco2, as described in Paragraphs 23 and 24.

I. The provisions of subsections 15(1), 56(2), 69(4), 83(2.1) and 246(1) will not apply to the Proposed Transactions, in and by themselves.

J. Subsection 245(2) will not be applied to the Proposed Transactions, in and by themselves, to redetermine the tax consequences confirmed in the rulings given.

The above 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 Proposed Transactions are completed before XXXXXXXXXX

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

COMMENT

Paragraph 55(3.1)(c) would technically apply to the possible sale of marketable securities by DC prior to the Distribution, as described in Paragraph 42 of the Additional Information section. However, the Department of Finance has issued a comfort letter on June 8, 2005, indicating that it was prepared to recommend to the Minister of Finance that paragraphs 55(3.1)(c) and (d) be amended to prevent such paragraphs from applying where transactions, such as those described in Paragraph 42, are carried out before a distribution.

OTHER COMMENTS

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

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

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

(c) any other tax consequence relating to the Facts, Proposed Transactions or any transaction or event taking place either prior to the Proposed Transactions or subsequent to the Proposed Transactions, whether described in this letter or not, other than those specifically described in the rulings given above.

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

Yours truly,

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