2010 Ruling 2009-0346671R3 - Standard Split-up Butterfly

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

Principal Issues: Standard Butterfly Ruling

Position: Ruling issued.

Reasons: Satisfies all statutory and administrative requirements

XXXXXXXXXX 							2009-034667

XXXXXXXXXX , 2010

Dear Sir:

Re: Advance Income Tax Ruling Request
XXXXXXXXXX

This is in reply to your letters of XXXXXXXXXX in which you requested an advance income tax ruling on behalf of the taxpayers referred to above. We also acknowledge our subsequent telephone conversations and correspondence concerning your request. The information or documents submitted with your request are part of this letter only to the extent described herein.

We understand that to the best of your knowledge and that of the taxpayers on whose behalf this ruling is being requested, none of the issues involved in this ruling request:

(a) is in an earlier return of the taxpayers or related persons;
(b) is being considered by a tax services office or taxation centre in connection with a previously filed tax return of the taxpayers or related persons;
(c) is under objection by the taxpayers or related persons;
(d) is before the courts or, if a judgment has been issued, the time limit for appeal to a higher court has expired; or
(e) is the subject of a ruling previously considered by the Income Tax Rulings Directorate.

You have also advised that, to the best of your knowledge and that of each of the taxpayers, the Proposed Transactions will not result in any of the taxpayers or any related person described herein being unable to pay its outstanding tax liabilities.

Definitions

Unless otherwise expressly stated, every reference herein to a part, section or subsection, paragraph or subparagraph and clause or subclause is a reference to the relevant provision of the Income Tax Act (Canada), R.S.C. 1985 (5th Supp.) c.1, as amended from time to time and consolidated to the date of this letter and the Income Tax Regulations thereunder are referred to as the "Regulations."

In this letter all monetary amounts are expressed in Canadian dollars unless otherwise indicated, and the following terms or expressions have the meaning specified:

"BCA" means the Business Corporations Act XXXXXXXXXX

"adjusted cost base" ("ACB") has the meaning assigned by section 54;

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

"BN" means the tax identification number assigned by the CRA to the particular entity;

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

"capital dividend" has the meaning assigned by section 83;

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

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

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

"DC" refers to XXXXXXXXXX .;

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

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

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

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

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

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

"Father" refers to XXXXXXXXXX ;

"FMV" or "fair market value" means the highest price available in an open unrestricted market, between informed prudent parties, acting at arm's length and with no compulsion to act, expressed in terms of cash;

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

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

"Mother" refers to XXXXXXXXXX ;

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

"Paragraph" refers to a numbered paragraph in this letter;

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

"Proposed Transactions" means the proposed transactions described in Paragraphs 23 to 45;

"RDTOH" or "Refundable Dividend Tax on Hand" has the meaning assigned by subsection 129(3);

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

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

"Sibling1" refers to XXXXXXXXXX ;

"Sibling2" refers to XXXXXXXXXX ;

"Sibling3" refers to XXXXXXXXXX ;

"Siblings" means collectively, Sibling1, Sibling2, and Sibling3;

"SIN" means Social Insurance Number;

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

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

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

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

"TC" or "TCs" refers individually to any of, or collectively to all of, TC1, TC2, and TC3;

"TC1" refers to XXXXXXXXXX ;

"TC2" refers to XXXXXXXXXX ;

"TC3" refers to XXXXXXXXXX .;

"TC1 Redemption Note" has the meaning assigned by Paragraph 40;

"TC2 Redemption Note" has the meaning assigned by Paragraph 40;

"TC3 Redemption Note" has the meaning assigned by Paragraph 40; and

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

Facts

1. Mother and Siblings are all individuals resident in Canada. Father is deceased and was Mother's spouse. Sibling 1, Sibling 2 and Sibling 3 are brothers and are the adult children of Mother and Father.

2. DC is a CCPC and a TCC incorporated in the Province of XXXXXXXXXX under the BCA on XXXXXXXXXX . DC's taxation year ends on XXXXXXXXXX .

3. DC was incorporated by Father, Mother and Siblings to carry on a XXXXXXXXXX farming business that included XXXXXXXXXX . DC is a cash basis taxpayer.

4. The authorized share capital of DC consists of an unlimited number of Class "A" common voting shares; an unlimited number of Class "B" common voting shares; an unlimited number of Class "C"

common non-voting shares; an unlimited number of Class "D" voting preferred shares; an unlimited number of Class "E" non-voting preferred shares; an unlimited number of Class "F" non-voting preferred shares; an unlimited number of Class "G" non-voting preferred shares; and an unlimited number of Class "H" non-voting preferred shares. The DC preferred shares are entitled to receive non-cumulative dividends at a fixed or floating rate if and when declared by the directors.

5. There are currently XXXXXXXXXX Class "A" shares, XXXXXXXXXX Class "B" shares, XXXXXXXXXX Class "C" shares, XXXXXXXXXX Class "D" shares, XXXXXXXXXX Class "E" shares, XXXXXXXXXX Class "F" shares, XXXXXXXXXX Class "G" shares and XXXXXXXXXX Class "H" shares issued and outstanding. The issued and outstanding DC shares are held as follows:

      Shareholder		Share Class			

      Sibling1		XXXXXXXXXX   Class "A" common
      		 	XXXXXXXXXX  Class "E" preferred
      Sibling2 		XXXXXXXXXX  Class "A" common
       			XXXXXXXXXX  Class "G" preferred
      Sibling3		XXXXXXXXXX  Class "A" common
      			XXXXXXXXXX  Class "F" preferred
      TC1			XXXXXXXXXX  Class "B" common
      			XXXXXXXXXX  Class "D" preferred
      TC2			XXXXXXXXXX  Class "C" common
      TC3			XXXXXXXXXX  Class "C" common
      Mother 		XXXXXXXXXX  Class "H" preferred

6. The shareholders of DC hold their shares as capital property.

7. TC1 is a CCPC and a TCC incorporated in the Province of XXXXXXXXXX under the BCA on XXXXXXXXXX . The taxation year of TC1 ends on XXXXXXXXXX .

8. TC2 is a CCPC and a TCC incorporated in the Province of XXXXXXXXXX under the BCA on XXXXXXXXXX . The taxation year of TC2 ends on XXXXXXXXXX .

9. TC3 is a CCPC and a TCC incorporated in the Province of XXXXXXXXXX under the BCA on XXXXXXXXXX . The taxation year of TC3 ends on XXXXXXXXXX

10. Each of TC1, TC2 and TC3 is authorized to issue Class "A" voting common shares; Class "B" non-voting common shares; Class "C" non-voting preferred shares; and Class "D" voting preferred shares.

11. The issued and outstanding shares of TC1 consist of XXXXXXXXXX Class "A" common shares, XXXXXXXXXX Class "C" preferred shares, and XXXXXXXXXX Class "D" preferred shares, all of which are owned by Sibling1. Sibling 1 holds his TC1 shares as capital property.

12. The issued and outstanding shares of TC2 consist of XXXXXXXXXX Class "A" common shares and XXXXXXXXXX Class "C" preferred shares, all of which are owned by Sibling2. Sibling 2 holds his TC2 shares as capital property.

13. The issued and outstanding shares of TC3 consist of XXXXXXXXXX Class "A" common shares and XXXXXXXXXX Class "C" preferred shares, all of which are owned by Sibling3. Sibling 3 holds his TC3 shares as capital property.

14. In XXXXXXXXXX , the Siblings made the decision to discontinue DC's XXXXXXXXXX operations and focus exclusively on its XXXXXXXXXX operations. Sibling1 was XXXXXXXXXX years old and the Siblings were finding that the XXXXXXXXXX was becoming very grueling. Formal planning for the sale started on XXXXXXXXXX . The final decision to sell was made in XXXXXXXXXX . DC ceased carrying on the XXXXXXXXXX operations in XXXXXXXXXX . DC commenced selling the assets used in the XXXXXXXXXX business including the XXXXXXXXXX

15. The most significant asset used in the XXXXXXXXXX operation was XXXXXXXXXX

XXXXXXXXXX

XXXXXXXXXX

16. Part of the proceeds from the sale of the XXXXXXXXXX was used to pay off substantially all of the debts and liabilities of DC. Such payments were made between XXXXXXXXXX More than XXXXXXXXXX % of the liabilities that were repaid from the sale proceeds were either due or were required by the terms of the related security to be repaid on the sale of the XXXXXXXXXX . The decision to pay the other XXXXXXXXXX % of the liabilities was made as part of the process of planning the sale as the shareholders had agreed to pay off such liabilities at the time they agreed to sell the XXXXXXXXXX . Part of the proceeds was advanced to TC1, TC2 and TC3 as short terms loans. The balance was distributed as a capital dividend as described in Paragraphs 17, 18 and 19.

17. The Siblings were advised in XXXXXXXXXX that approximately XXXXXXXXXX % of the proceeds from the sale of XXXXXXXXXX would be added to DC's capital dividend account as the proceeds from the disposition of eligible capital property. The Siblings decided at that time that they wished to pay out a tax free capital dividend.

18. The proceeds from the XXXXXXXXXX sale of XXXXXXXXXX were added to DC's capital dividend account on XXXXXXXXXX .

19. DC paid a capital dividend on XXXXXXXXXX of approximately XXXXXXXXXX % of the proceeds received from the XXXXXXXXXX sale of XXXXXXXXXX . The payment of the capital dividend was initially discussed in XXXXXXXXXX and agreed to at the time the XXXXXXXXXX was sold in XXXXXXXXXX and the capital dividend was paid out on XXXXXXXXXX days after the amount of the proceeds from the sale were added to the capital dividend account.

20. In XXXXXXXXXX , the Siblings met with you to discuss the future operation of the farming business. The Siblings indicated they wished to continue to carry on the XXXXXXXXXX farming operations. You raised the idea of splitting up the farming assets in a "butterfly transaction." Splitting up the farm assets would enable the Siblings to own the various assets of DC independently in their respective holding companies. This would allow each of the Siblings to independently decide how to carry on their business operations. It would also allow each of the Siblings to have more independent control over their retirement planning and estate planning for their respective families.

21. In XXXXXXXXXX the Siblings agreed to separate their ongoing farming operations in an orderly fashion starting for the upcoming XXXXXXXXXX crop year.

22. The decision by the Siblings in XXXXXXXXXX to sell DC's XXXXXXXXXX operations and to use the proceeds from the sale to pay off the liabilities of DC, and pay out the tax free proceeds from the sale of the XXXXXXXXXX as a capital dividend was made prior to and was not made in contemplation of the decision by the Siblings to undertake the Proposed Transactions. The sale of the XXXXXXXXXX operations by DC would have taken place regardless of whether the Proposed Transactions were undertaken. The Proposed Transactions would have been undertaken regardless of whether the sale of the XXXXXXXXXX operations occurred.

Proposed Transactions

23. Prior to DC's year end of XXXXXXXXXX , DC will declare and pay a cash dividend on its issued and outstanding Class "A" common shares, all of which are held by the Siblings, in an amount equal to 3 times the balance of its RDTOH immediately before such payment.

24. The share capital of each of TC1, TC2 and TC3 will be amended to increase the authorized capital by creating Class "E", "F", "G", and "H" non-voting preferred shares and to amend the terms and conditions of the Class "D" preferred shares to remove the voting rights.

25. The share capital of DC will be amended to increase the authorized capital by creating a class of special shares, Class "I" voting common shares and Class "J" non-voting common shares. The DC special shares will be non-voting, and entitled to a non-cumulative dividend at the rate of XXXXXXXXXX % of the redemption amount. Each DC special share will be redeemable at the option of DC and retractable at the option of the holder for an amount equal to $XXXXXXXXXX plus XXXXXXXXXX % of DC's GRIP balance at the end of the taxation year in which the shares are redeemed, acquired or otherwise cancelled.

26. Sibling1 will transfer all of his Class "A" common shares and Class "E" preferred shares of DC to TC1. Sibling1 will jointly elect with TC1 in prescribed form and within the time limit referred to in subsection 85(6), to have the provisions of subsection 85(1) apply to the transfer. The agreed amount will be an amount equal to the lesser of the amounts described in subparagraphs 85(1)(c.1)(i) and (ii). Consideration for the transfer of the Class "A" common shares of DC will consist of a number of Class "E" preferred shares of TC1 with a FMV and redemption amount equal to the FMV of the Class "A" common shares of DC transferred. Consideration for the transfer of the Class "E" preferred shares of DC will consist of a number of Class "F" preferred shares of TC1 with a FMV and redemption amount equal to the FMV of the Class "E" preferred shares of DC transferred. TC1 will add an amount equal to the PUC of the Class "A" common shares of DC to the stated capital of the

Class "E" preferred shares of TC1 and an amount equal to the PUC of the Class "E" preferred shares of DC to the stated capital of the Class "F" preferred shares of TC1.

27. Sibling2 will (contemporaneously with the transfer described in Paragraph 26) transfer all of his Class "A" common shares and Class "G" preferred shares of DC to TC2. Sibling2 will jointly elect with TC2 in prescribed form and within the time limit referred to in subsection 85(6), to have the provisions of subsection 85(1) apply to the transfer. The agreed amount will be an amount equal to the lesser of the amounts described in subparagraphs 85(1)(c.1)(i) and (ii). Consideration for the transfer of the Class "A" common shares of DC will consist of a number of Class "D" preferred shares of TC2 with a FMV and redemption amount equal to the FMV of the Class "A" common shares of DC transferred. Consideration for the transfer of the Class "G" preferred shares of DC will consist of a number of Class "F" preferred shares of TC2 with a FMV and redemption amount equal to the FMV of the Class "G" preferred shares of DC transferred. TC2 will add an amount equal to the PUC of the Class "A" common shares of DC to the stated capital of the Class "D" preferred shares of TC2 and an amount equal to the PUC of the Class "G" preferred shares of DC to the stated capital of the Class "F" preferred shares of TC2.

28. Sibling3 will (contemporaneously with the transfer described in Paragraph 26) transfer all of his Class "A" common shares and Class "F" preferred shares of DC to TC3. Sibling3 will jointly elect with TC3 in prescribed form and within the time limit referred to in subsection 85(6), to have the provisions of subsection 85(1) apply to the transfer. The agreed amount will be an amount equal to the lesser of the amounts described in subparagraphs 85(1)(c.1)(i) and (ii). Consideration for the transfer of the Class "A" common shares of DC will consist of a number of Class "D" preferred shares of TC3 with a FMV and redemption amount equal to the FMV of the Class "A" common shares of DC transferred. Consideration for the transfer of the Class "F" preferred shares of DC will consist of a number of Class "F" preferred shares of TC3 with a FMV and redemption amount equal to the FMV of the Class "F" preferred shares of DC transferred. TC3 will add an amount equal to the PUC of the Class "A" common shares of DC to the stated capital of the Class "D" preferred shares of TC3 and an amount equal to the PUC of the Class "F" preferred shares of DC to the stated capital of the Class "F" preferred shares of TC3.

29. Mother will (contemporaneously with the transfer described in Paragraph 26) transfer all of her Class "H" preferred shares in the capital stock of DC to TC1. Mother will jointly elect with TC1 in prescribed form and within the time limit referred to in subsection 85(6), to have the provisions of subsection 85(1) apply to the transfer. The agreed amount will be an amount equal to the lesser of the amounts described in subparagraphs 85(1)(c.1)(i) and (ii).

Consideration for the transfer of the Class "H" preferred shares of DC will consist of a number of Class "H" preferred shares in the capital stock of TC1 with a FMV and redemption amount equal to the FMV of the Class "H" preferred shares of DC transferred. TC1 will add an amount equal to the PUC of the Class "H" preferred shares of DC to the stated capital of the Class "H" preferred shares of TC1.

30. Pursuant to the BCA, DC will reduce the aggregate stated capital of the Class "D" preferred shares and the Class "E" preferred shares held by TC1, the Class "G" preferred shares held by TC2, and the Class "F" preferred shares held by TC3, in each case, by an amount equal to the excess of the aggregate PUC of such class of shares immediately before the reduction over the holder's aggregate ACB of such shares. No consideration of any kind will be paid by DC as a result of such reduction of stated capital.

31. TC1 will exchange all of its Class "A" common shares and Class "B" common shares of DC for XXXXXXXXXX special shares and XXXXXXXXXX Class "I" common shares of DC. TC2 will exchange all of its Class "A" common shares and Class "C" common shares of DC for XXXXXXXXXX special shares, XXXXXXXXXX Class "I" common shares and XXXXXXXXXX Class "J" common shares of DC. TC3 will exchange all of its Class "A" common shares and Class "C" common shares of DC for XXXXXXXXXX special shares, XXXXXXXXXX Class "I" common shares and XXXXXXXXXX Class "J" common shares of DC. The Class "A" common shares, Class "B" common shares and Class "C" common shares of DC will be cancelled. The aggregate FMV of the special shares and the common shares of DC that each of TC1, TC2 and TC3 will receive as described above will be equal to the aggregate FMV of the common shares of DC that each of TC1, TC2 and TC3 so exchanged.

32. No election under subsection 85(1) will be made with respect to the share exchanges described in Paragraph 31.

33. The aggregate amount that will be added to the stated capital of the DC special shares issued by DC to each TC1, TC2 and TC3 as described in Paragraph 31 will be $XXXXXXXXXX . In addition, the aggregate amount that will be added to the stated capital of the Class "I" common shares of DC issued to TC1, TC2 and TC3 and the Class "J" common shares of DC issued to TC2 and TC3 will be equal to the aggregate PUC of the Class "A" common shares, Class "B" common shares and Class "C" common shares of DC so exchanged by each of TC1, TC2 and TC3 as described in Paragraph 31 less the aggregate amount added to the stated capital of the DC special shares. For greater certainty, the PUC of each class of DC shares will be determined with regard to subsection 86(2.1).

34. Immediately before the transfer of property described in Paragraph 37, the property owned by DC will be classified into the following three types of property for the purposes of the distribution, as follows:

a) cash or near-cash property, comprising all of the current assets of DC, including cash, short-term certificates of deposit, prepaid expenses and trade accounts receivable;

b) 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; and

c) business 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 a business carried on by DC (other than a specified investment business).

35. In determining the net FMV of its cash or near cash property, investment property and business property immediately before the transfers described in Paragraph 37, liabilities of DC will be allocated to, and be deducted in the calculation of, the net FMV of each such type of property of DC in the following manner:

a) current liabilities of DC will be allocated to cash or near cash property (including any cash, accounts receivable and prepaid expenses) in the proportion that the FMV of each such 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) if any liabilities (hereinafter referred to as "excess unallocated liabilities") remain after the allocations described in steps a) and b) are made, such excess unallocated liabilities (including any excess current liabilities, if any), will then be allocated to the cash or near cash property, investment property, and business property of DC based on the relative net FMV of each type of property prior to the allocation of such excess unallocated liabilities.

36. For purposes of determining the net FMV of the property of DC as described in Paragraphs 34 and 35, the following principles will apply:

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

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

(c) any tax accounts of DC, including the balance of its GRIP, RDTOH, CDA and any losses available for carry forward, if any, will not be considered property of DC.

37. DC will contemporaneously transfer to each of TC1, TC2 and TC3, a pro rata portion of the net FMV of each type of property owned by DC, as determined in accordance with Paragraphs 34, 35, and 36 such that immediately following such property transfers and liability assumptions, the net FMV of each of the three types of property of DC so transferred to each of TC1, TC2 and TC3 will, for greater certainty, approximate the proportion determined by the formula:

A x B/C

where:

A is the net FMV, immediately before the transfer, of all property of that type owned at that time by DC;

B is the FMV, immediately before the transfer, of all of the shares of the capital stock of DC owned, at that time, by either TC1, TC2 or TC3, as the case may be; and

C is the FMV, immediately before the transfer, of all the issued and outstanding shares of the capital stock of DC.

For the purposes of this Paragraph, the expression "approximate that proportion" means that the discrepancy of that proportion, if any, will not exceed one percent (1%), determined as a percentage of the net FMV of the property that each TC will receive as compared to what it would have received had it received its appropriate pro rata share of DC's property.

38. As consideration for the property transferred by DC to each of TC1, TC2 and TC3, as the case may be, each of TC1, TC2 and TC3 will:

a) assume an appropriate amount of liabilities of DC (so that on a net basis each of TC1, TC2 and TC3 will receive its pro rata share of each type of property owned by DC); and

b) issue to DC a number of its Class "G" Preferred Shares having an aggregate redemption amount and aggregate FMV equal to the FMV of the property received, less the amount of the liabilities of DC assumed by the particular corporation as described in (a).

39. In respect of the transfers described in Paragraph 37 above, DC will jointly elect with each TC, in prescribed form and within the time limit referred to in subsection 85(6), to have the provisions of subsection 85(1) apply to the transfer of each type of property that is an eligible property. The agreed amount in respect of each type of eligible property transferred will be as follows:

(i) in the case of capital property (other than depreciable property of a prescribed class) and inventory, an amount equal to the lesser of the amounts described in subparagraphs 85(1)(c.1)(i) and (ii);

(ii) in the case of the depreciable property of a prescribed class, an amount equal to the least of the amounts described in subparagraphs 85(1)(e)(i), (ii) and (iii);

(iii) in the case of eligible capital property, an amount equal to the least of the amounts described in subparagraphs 85(1)(d)(i), (ii) and (iii); and

(iv) in the case of inventory to which paragraph 85(1)(c.2) applies, the amount deemed by that paragraph.

For greater certainty, the increase to the PUC of the Class "G" Preferred Shares of TC1, TC2 and TC3 will be determined having regard to subsection 85(2.1).

The aggregate of such agreed amounts will not be less than the aggregate amount of DC's liabilities so assumed by each TC for such properties.

40. Each of TC1, TC2 and TC3 will redeem all of its issued Class "G" Preferred Shares at their redemption amount in exchange for consideration consisting of a debt evidenced by non-interest bearing promissory notes, payable on demand, each of which will have a principal amount and FMV equal to the aggregate redemption amount of the shares redeemed (the "TC1 Redemption Note" in the case of TC1, the "TC2 Redemption Note" in the case of TC2, and the "TC3 Redemption Note" in the case of TC3). DC will accept the TC1 Redemption Note, the TC2 Redemption Note and the TC3 Redemption Note as payment in full for the shares redeemed.

41. The shareholders of DC will by a special resolution resolve to wind-up and dissolve DC pursuant to the BCA. On the wind-up of DC, under the terms of the agreement governing the winding-up of DC, the TC1 Redemption Note, TC2 Redemption Note and TC3 Redemption Note will be assigned and distributed to TC1, TC2, and TC3 respectively. As a result of the assignment and distribution of the TC1 Redemption Note, the TC2 Redemption Note and the TC3 Redemption Note held by DC, the obligation of each of TC1, TC2 and TC3 under its own note will be cancelled.

42. DC will designate the dividend, that is deemed by subsection 84(2) to be paid on the DC special shares owned by TC1, TC2, and TC3 at the time of distributing its assets to TC1, TC2, and TC3 as described in Paragraph 37, to be an eligible dividend by notifying in writing at that time each of TC1, TC2 and TC3 that the dividend is an eligible dividend, pursuant to subsection 89(14).

43. 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 the Class "I" and Class "J" common shares, referred to in subparagraph 88(2)(b)(i), be deemed to be a capital dividend.

44. Immediately after the distribution of the TC1 Redemption Note, the TC2 Redemption Note and the TC3 Redemption Note by DC to TC1, TC2 and TC3 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.

45. Within a reasonable time following the winding-up resolution, articles of dissolution will be filed by DC with the appropriate Corporate Registry and upon receipt of a certificate of dissolution, DC will be dissolved.

Additional Information

46. Unless otherwise specified, the Proposed Transactions described herein will occur in the order presented, with the exception of the filing of the applicable election forms described herein which will be filed before the applicable due dates.

47. No property has or will become property of DC and no liabilities have been, or will be, incurred or discharged by DC, in contemplation of and before the transfers described in Paragraph 37, except as described herein or in the ordinary course of business. Moreover, except as specifically outlined herein, there is no expectation or intention of DC or any of the TCs, to dispose of any property owned by them as part of the series of transactions or events that includes the Proposed Transactions, other than in the ordinary course of business.

48. Neither DC nor any of the TCs is or will be at any time during a series of transactions or events that includes the Proposed Transactions be a "specified financial institution" as defined in subsection 248(1)

49. None of the shares in the capital of DC or TC will be at any time during a series of transactions or events that includes the Proposed Transactions:

a) the subject of a "guarantee agreement" within the meaning assigned by subsection 112(2.2);

b) a share that is issued or acquired as part of a transaction, event or series of transactions or events of the type described in subsection 112(2.5); or

c) the subject of a "dividend rental arrangement" within the meaning assigned by subsection 248(1).

Purpose of Proposed Transactions

50. The purpose of the Proposed Transactions is to permit the shareholders of DC to separate their business interests so they can make farming decisions independent of each other and so they can make their own succession planning, retirement planning, and estate planning arrangements.

The purpose for amending the authorized share capital of DC to add a class of special shares and for exchanging all of the DC common shares for special shares described in Paragraphs 25 and 31 is to isolate DC's GRIP balance in a single class of shares to facilitate an eligible dividend designation under subsection 89(14).

The purpose for amending the attributes of DC's Class D preference shares to remove voting rights described in Paragraph 24 is for consistency to make all classes of DC's preference shares non-voting and not for any tax-related purpose.

The purpose for reducing the stated capital of the DC Class "D" preferred shares, the Class "E" preferred shares and the Class "F" preferred shares described in Paragraph 30 is to avoid a capital gain on the disposition of such shares on the winding-up of DC.

Rulings

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

A. The provisions of subsection 85(1) will apply to the transfer by each of Sibling1, Sibling 2, Sibling 3 and Mother of all of their shares in the capital stock of DC to their respective TC described in Paragraphs 26, 27, 28 and 29. For greater certainty, paragraph 85(1)(e.2) shall not apply to such transfers.

B. Subject to the application of subsection 69(11), the provisions of subsection 85(1) will apply to the transfer by DC of each eligible property to each of the transferee corporations described in Paragraph 37, such that the agreed amount in respect of each transfer of eligible property will be deemed to be the transferor's proceeds of disposition and the transferee's cost thereof pursuant to paragraph 85(1)(a). For greater certainty, paragraph 85(1)(e.2) shall not apply to such transfers.

For the purpose of this Ruling B, the reference in subparagraph 85(1)(e)(i) to "the undepreciated capital cost to the taxpayer of all property of that class immediately before the disposition" shall be interpreted to mean the portion of the undepreciated capital cost of all property of that class immediately before the transfer that the fair market value of the assets of that class transferred to each TC is of the fair market value of all assets of that class.

C. On the redemption by each of TC1, TC2 and TC3 of its Class "G" Preferred Shares, issued to DC, as described in Paragraph 40 above, by virtue of paragraphs 84(3)(a) and 84(3)(b), each of TC1, TC2 and TC3 will be deemed to have paid, and DC will be deemed to have received, a taxable dividend at that time equal to the amount, if any, by which the amount paid in respect of the redemption of the shares issued by each of TC1, TC2 and TC3 exceeds the PUC of those shares immediately before the redemption;

D. As a result of the winding-up of DC as described in Paragraph 41:

(a) By virtue of paragraph 88(2)(b) and subsection 84(2), but subject to (b) to (c) herein:

(i) TC1, TC2 and TC3 will each be deemed to have received a winding-up dividend on its 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, TC2 and TC3 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, TC2 and TC3, as the case may be, is of the total number of issued DC special shares, and pursuant to subparagraph 88(2)(b)(iii), such winding-up dividend will be deemed to be a taxable dividend;

(ii) TC1, TC2 and TC3 will each be deemed to have received a winding-up dividend, in the case of TC1, on the Class "D" preferred shares, the Class

"E"preferred shares and the Class "H" preferred shares, in the case of TC2, on the Class "G" preferred shares and in the case of TC3, on the Class "F" preferred shares, of DC held by it, equal to the amount by which the aggregate FMV of the property of DC distributed to each of TC1, TC2 and TC3 in respect of such preferred shares of DC on the winding-up exceeds the amount by which the PUC of such preferred shares is reduced, and, pursuant to subparagraph 88(2)(b)(iii), such winding-up dividend will be deemed to be a taxable dividend;

(iii) TC1, TC2 and TC3 will be deemed to have received a winding-up dividend, in the case of TC1 on the Class "I" common shares of DC, and in the case of TC2 and TC3, on the Class "I" and Class "J" common shares of DC, equal to the proportion, of the amount by which the aggregate FMV of the property of DC distributed to each of TC1, TC2 and TC3 in respect of such class of common shares on the winding-up exceeds the amount by which the PUC of such class of common shares is reduced, that the number of common shares of such class, held by each of TC1, TC2 and TC3, as the case may be, is of the total number of issued common shares of that class of DC;

(b) pursuant to subparagraph 88(2)(b)(i), such portion of the winding-up dividend referred to in paragraph (a)(iii) above as does not exceed DC's CDA determined immediately before the payment of the winding-up dividend will be deemed, for the purposes of the subsection 83(2) election referred to in Paragraph 43, to be the full amount of a separate dividend; and

(c) pursuant to subparagraph 88(2)(b)(iii), the winding-up dividend described in paragraph (a)(iii) above, to the extent that it exceeds the portion thereof referred to in (b) herein that is deemed to be a separate dividend, will be deemed to be a separate dividend that is a taxable dividend.

E. To the extent that a dividend described in Rulings C or D is a taxable dividend, each such dividend:

(a) will be excluded from the proceeds of disposition of the shares so redeemed or purchased for cancellation, as the case may be, by virtue of paragraph (j) of the definition of "proceeds of disposition" in section 54;

(b) will be included in the recipient's income pursuant to section 82 and paragraph 12(1)(j);

(c) will be deductible pursuant to subsection 112(1) in computing the taxable income of the recipient for the year in which the dividend is deemed to have been received and such deduction will not be denied by any of subsections 112(2.1), (2.2), (2.3) or (2.4);

(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 payor of the dividend is entitled to a dividend refund for the taxation year in which it paid such dividend; and

(f) will not be subject to tax under Parts IV.1 or VI.1.

F. The cancellation of the TC1 Redemption Debt, the TC2 Redemption Debt and the TC3 Redemption Debt, as described in Paragraph 41 above, will not, in and of itself, result in a forgiven amount within the meaning of either subsection 80(1) or section 80.01.

G. Provided that as part of the series of transactions or events that includes the Proposed Transactions, 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 property in the circumstances described in subparagraph 55(3.1)(b)(iii);

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

(f) an acquisition of property in the circumstances described in paragraph 55(3.1)(d),

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

H. The provisions of subsections 15(1), 56(2), 56(4) and 246(1) will not apply as a result of the Proposed Transactions described herein, in and by themselves.

I. Subsection 245(2) will not apply as a result of the Proposed Transactions, in and by themselves, to redetermine the tax consequences confirmed in the rulings given.

The above rulings are subject to the limitations and qualifications set out in Information Circular 70-6R5 dated May 17, 2002 and are binding on the CRA provided that the Proposed Transactions (other than the filing of articles of dissolution of DC as described in Paragraph 45) are completed by XXXXXXXXXX .

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

Comments

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

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

(b) the balance of CDA, 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.

2. Nothing in this letter should be construed as confirmation, express or implied, that, for the purpose of any of the rulings given above, any adjustment to the FMV of the properties transferred and the redemption amount of the shares issued as consideration, whether pursuant to a price adjustment clause or otherwise, will be effective retroactively to the time of the transfer and issuance of shares. In addition, any such adjustment could affect Ruling G above. Furthermore, none of the rulings given in this letter are intended to apply to, or in the event of, the operation of a price adjustment clause, since such adjustment will be due to circumstances that do not constitute proposed transactions that are seriously contemplated. The general position of the CRA with respect to price adjustment clauses is stated in Interpretation Bulletin IT-169.

Yours truly,

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