2013 Ruling 2011-0425221R3 - Butterfly reorganization

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

Principal Issues: Whether the proposed transaction qualifies for the butterfly exemption found in paragraph 55(3)(b)

Position: Yes

Reasons: The proposed transaction meets the statutory requirements found in paragraph 55(3)(b)

XXXXXXXXXX
2011-042522

Dear XXXXXXXXXX:

XXXXXXXXXX, 2013
Re: Advance income tax ruling / Butterfly reorganization
XXXXXXXXXX

This is in reply to your letter dated XXXXXXXXXX in which you request an advance income tax ruling in respect of the transaction described below.

You have advised us that to the best of your knowledge and that of the taxpayer involved none of the issues involved in this ruling request are:

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

b) being considered by a tax services office ("TSO") or taxation centre ("TC") in connection with a previously filed tax return by the taxpayer or any related person;

c) under objection by the taxpayers or any related person;

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

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

You also confirmed that the proposed transactions described herein will not affect the ability of its participants to pay any of their outstanding tax liabilities.

All statutory references herein are to provisions or parts of the Income Tax Act (Canada),R.S.C. 1985 (5th Supp.) c. 1, as amended to the date hereof (the "Act") and all references to monetary amounts are in Canadian dollars.

DEFINITIONS

In this letter, the following terms have the meanings specified below:

"Act" means 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, unless otherwise expressly stated, every reference herein to a part, section or subsection, paragraph or subparagraph and clause or sub-clause is a reference to the relevant provision of the Act.

"ACB" means adjusted cost base as that term is defined in section 54.

"Additional Capital Contribution" refers to any additional capital contribution that each of the Parties may have to make in the same proportion as their Percentage Interest pursuant to section XXXXXXXXXX of the Agreement.

"Agreed Amount" means the amount that a transferor and a transferee have agreed in a joint election under subsection 85(1) in respect of the transfer of an Eligible Property.

"Agreement" refers to the Joint Venture Agreement entered into on XXXXXXXXXX and amended by the Amending Agreement providing for the purchase, the construction and the rental of the Property to be owned by each of the Parties as Tenant in Common in accordance with their respective Percentage Interest.

"Amending Agreement" refers to the agreement dated XXXXXXXXXX pursuant to which XXXXXXXXXX disposed of, and the rest of the Parties acquired in proportion with their Percentage Interest, an XXXXXXXXXX% Percentage Interest in the Property.

"Articles of Amendment" means the articles of amendment filed by Subco and XCo in accordance with XXXXXXXXXX of the XXXXXXXXXX to create the Class B preferred shares.

"B" means XXXXXXXXXX, who is an individual resident in Canada.

XXXXXXXXXX.

"B & C Proportionate Amount" means the proportion that the number of common shares that B and C hold in DC immediately before the steps described in Paragraph 26 and 27 are implemented is of the number of all DC's issued and outstanding common shares.

"Bare Trustee" refers to a trustee that merely holds legal title to real property on behalf of the beneficial owners of the property, and refrains from performing any duty other than to hold the property and obey the instructions of the beneficiaries of the property.

"Board" means DC's board of directors.

"Business Property" means 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 the business of DC (other than a specified investment business). The inventory of DC will be considered to be Business Property (prior to reclassification of certain Cash or Near-Cash Property as Business Property) to the extent that its disposition gives rise to business income.

The net FMV of the Business Property, immediately before the transfer of half of DC's property to BCo, will be calculated as follows: (i) liabilities, other than current liabilities, that relate to a particular Business Property will be allocated to that property to the extent of its FMV; (ii) liabilities that pertain to Business Property but not to a particular property will be allocated to Business Property. For clarification purposes, an amount will not be considered a liability of DC unless it represents a true legal liability that is capable of quantification; (iii) deferred revenue, representing revenue received or receivable in the ordinary course of DC's business, the recognition of which has been deferred due to the legal obligation of DC to render services or deliver products from which such revenue was received, will only be considered a liability to the extent that the amount of such deferred revenue gives rise to a legal obligation to repay the amount should the services not be provided or the products not be delivered; (iv) any deferred charges, deferred taxes, and tax accounts such as the outstanding balance of DC's non-capital losses, RDTOH or CDA will be ignored in determining the net fair market value of Business Property. (v) provided that the amount of Cash or Near-Cash Property exceeds DC's current liabilities, the FMV of all accounts receivable, inventory and prepaid expenses of DC that will relate to the DC's business, net of allocated liabilities, will be reclassified as Business Property and the net FMV thereof will be included in the net FMV of the Business Property and will not be included in the net fair market value of the Cash or Near-Cash Property; (vi) any liabilities that remain after the allocation to Cash or Near-Cash Property and the allocations and reclassifications described above in this definition will be allocated to the Business Property based on the relative net FMV of the Business Property prior to the allocation of such excess unallocated liabilities. To the extent that the liabilities allocated to Business Property exceed the total fair market value of the Business Property, DC will be considered to have a negative amount of Business Property.

"C" means XXXXXXXXXX, who is an individual resident in Canada.

"CCPC" means Canadian-controlled private corporation as that term is defined in subsection 125(7).

"Capital Contribution" refers to the initial contribution made on or before XXXXXXXXXX by the Parties in accordance with subsection XXXXXXXXXX of the Agreement.

"Capital Dividend Account" means capital dividend account as that term is defined by subsection 89(1).

"Capital Property" has the meaning assigned by section 54.

"Cash or Near-Cash" means all the current assets of DC, including: (i) cash; (ii) accounts receivable; (iii) inventory; (iv) income taxes recoverable; (v) prepaid expenses; and (vi) deposits and advances to related persons that are due within the next XXXXXXXXXX months or those with no fixed term of repayment.

In determining the net FMV of the Cash or Near-Cash Property, immediately before the transfer: (i) current liabilities will be allocated to a Cash or Near-Cash Property of DC in the proportion that the net FMV of each such property is of the FMV of all its Cash or Near-Cash Property. Current liabilities will include accounts payable, accrued liabilities, amounts owing to shareholders, income taxes payable and the current portion of long-term debt. For clarification purposes, an amount will not be considered a liability of DC unless it represents a true legal liability that is capable of quantification; (ii) deferred revenue, representing revenue received or receivable in the ordinary course of DC's business, the recognition of which has been deferred due to the legal obligation of DC to render services or deliver products from which such revenue was received, will only be considered a liability to the extent that the amount of such deferred revenue gives rise to a legal obligation to repay the amount should the services not be provided or the products not be delivered; (iii) any deferred charges, deferred taxes, and tax accounts such as the outstanding balance of DC's non-capital losses, RDTOH or CDA will be ignored in determining the net fair market value of the Cash or Near-Cash Property.

"Class B Preferred Shares" refers to the class of preferred shares to be created by Subco and XCo having the following terms and conditions: (i) each Class B Preferred Share is non-voting and redeemable at the Redemption Amount (ii) the holder of each Class B Preferred Share is entitled to a non-cumulative cash dividend as and when declared by the board of directors (iii) the holder of each Class B Preferred Share is entitled, upon liquidation, dissolution or winding-up to a payment in priority to all other classes of shares of an amount equal to the Redemption Amount to the extent of the value of property available under the applicable law for payment to shareholders upon dissolution.

"D" means XXXXXXXXXX, who is an individual resident in Canada.

"DC" means XXXXXXXXXX, which is a Taxable Canadian Corporation and a CCPC that was incorporated on XXXXXXXXXX under the XXXXXXXXXX, and which has a XXXXXXXXXX taxation year-end. The authorized capital of DC includes an unlimited number of common shares, and an unlimited number of Class A preferred shares, which are non-voting and are redeemable at the Redemption Price. The holders of the Class A preferred shares are also entitled to receive non-cumulative cash dividends at a rate of XXXXXXXXXX% on the amount of the Redemption Price as well as an amount equal to the Redemption Price in priority to any distribution to the common shareholders in the event of the liquidation, dissolution or winding-up of DC.

"Disposition" has the meaning assigned by subsection 248(1).

"Distribution" has the meaning assigned by subsection 55(1).

"Dividend Refund" has the meaning assigned by subsection 129(1).

"Dividend Rental agreement" has the meaning assigned by subsection 248(1).

"E" means XXXXXXXXXX, who is an individual resident in Canada.

"Effective Date" means the day in which the Proposed Transactions described in Paragraphs 25 to 45 are carried out.

"Eligible property" has the meaning assigned by subsection 85(1.1).

"F" means XXXXXXXXXX, who is an individual resident in Canada.

"F Proportionate Amount" means the percentage that the number of common shares that F holds in DC immediately before the step described in Paragraph 37 is of DC's issued and outstanding common shares.

"FMV" means fair market value, which refers to the amount, expressed in money terms, that is the highest price available in an open and unrestricted market, between informed and prudent parties acting at arm's length.

"G" means XXXXXXXXXX, who is an individual resident in Canada.

"GRIP" means general rate income pool as that term is defined in subsection 89(1).

"Guarantee Agreement" has the meaning assigned by subsection 112(2.2).

"H" means XXXXXXXXXX, who is an individual resident in Canada.

"Holdco" means XXXXXXXXXX, which is a Taxable Canadian Corporation incorporated on XXXXXXXXXX under the XXXXXXXXXX for the purpose of acquiring the legal title of the real property described in Schedule XXXXXXXXXX to the Agreement as Bare Trustee for the Parties in accordance with section XXXXXXXXXX and Schedule XXXXXXXXXX of the Agreement.

"Investment Property" means all of the assets other than Cash or Near-Cash Property, any income from which would, for the purposes of the Act, be income from property or from a Specified Investment Business. Any liabilities other than current liabilities, liabilities allocated to a particular property and liabilities that pertain to a type of property ("excess unallocated liabilities") will be allocated to the Cash or Near-Cash Property, Investment Property and Business Property of that entity, based on the relative net FMV of each Type of Property prior to the allocation of such excess unallocated liabilities but after the allocation of the aforementioned liabilities. For clarification purposes, an amount will not be considered a liability of DC unless it represents a true legal liability that is capable of quantification.

"Management Committee" refers to the management committee composed of one representative for each of the Parties that is in charge of the overall management of the Property in accordance with section XXXXXXXXXX of the Agreement.

"Net Cash Flow" means the amount that the Management Committee shall distribute to the Parties in accordance with their Percentage Interest in the Property, which is equal to the gross receipts arising from the Property rental less the operating expenses incurred in respect of the Property for each quarter as described in subsection XXXXXXXXXX of the Agreement.

"Paragraph" means a numbered paragraph in this letter.

"Parties" means XXXXXXXXXX, XCo and DC.

"Percentage Interest" refers to the percentage of the initial Capital Contribution that each of the Parties had to make over the aggregate Capital Contributions that were made by all the Parties upon entering into the Agreement.

"Private Corporation" has the meaning assigned by subsection 89(1).

"Proceeds of Disposition" has the meaning assigned by section 54.

"Promissory Note #1" means the non-interest bearing note issued by Subco to DC on the redemption of the class B Preferred Shares held by DC having a principal amount and FMV equal to the aggregate Redemption Amount of the redeemed class B Preferred Shares.

"Promissory Note #2" means the non-interest bearing note issued by DC to Subco on the purchase for cancellation of the XXXXXXXXXX common shares that DC held in Subco having a principal amount and FMV equal to the aggregate FMV of the XXXXXXXXXX common shares so purchased and cancelled by DC.

"Promissory Note #3" means the non-interest bearing note issued by XCo to DC on the redemption of the class B Preferred Shares held by DC having a principal amount and FMV equal to the aggregate Redemption Amount of the redeemed class B Preferred Shares.

"Promissory Note #4" means the non-interest bearing note issued by DC to Xco on the purchase for cancellation of the XXXXXXXXXX common shares that DC held in XCo having a principal amount and FMV equal to the aggregate FMV of the XXXXXXXXXX common shares so purchased and cancelled by DC.

"Property" means real property described in Schedule XXXXXXXXXX to the Agreement, and the commercial development constructed thereon for rental purposes.

"Proposed Transactions" means the transactions described in Paragraphs 25 to 45 below.

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

"RDTOH" means refundable dividend tax on hand as that term is defined in subsection 129(3).

"Redemption Amount" means the amount equal to the aggregate FMV of the property received on the Effective Date as consideration for the issuance of Class B Preferred Shares divided by the number of Class B Preferred Shares issued as consideration therefor plus any declared but unpaid dividends.

"Redemption Price" means the amount payable to the holders of DC's Class A preferred shares upon redemption of their shares equal to $XXXXXXXXXX per share together with all dividends declared thereon.

"Related person" has the meaning assigned by section 251.

"Restricted Financial Institution" has the meaning assigned by subsection 248(1).

"Special Resolution" means a resolution submitted to a special meeting of the shareholders of a corporation called in accordance to XXXXXXXXXX, and passed by at least XXXXXXXXXX of the votes cast at that meeting.

"Specified Financial Institution" has the meaning assigned by subsection 248(1).

"Specified Investment Business" has the meaning assigned by subsection 125(7).

"Subco" means XXXXXXXXXX, which is a Taxable Canadian Corporation and a CCPC that was incorporated on XXXXXXXXXX under the XXXXXXXXXX, and which has a XXXXXXXXXX taxation year-end. The authorized capital of Subco includes an unlimited number of common shares.

"Subco Class B Preferred Shares" refers to the number of Class B Preferred Shares issued by Subco having an aggregate FMV and redemption value equal to the amount by which the Redemption Amount exceeds the aggregate amount of DC's liabilities assumed by Subco.

"Taxable Canadian Corporation" has the meaning assigned by subsection 89(1).

"Taxable Dividend" has the meaning assigned by subsection 89(1).

"Tenant in Common" refers to a participation in an arrangement pursuant to which XXXXXXXXXX or more persons have an individual and undivided interest in the subject property.

"Trust" means the XXXXXXXXXX.

"XCo" means XXXXXXXXXX, which is a Taxable Canadian Corporation having a XXXXXXXXXX taxation year-end.

"XCo Class B Preferred Shares" refers to the number of Class B Preferred Shares issued by XCo having an aggregate FMV and redemption value equal to the amount by which the Redemption Amount exceeds the aggregate amount of DC's liabilities assumed by XCo.

FACTS

DC

1. DC is an investment holding corporation which owns as a Tenant in Common a XXXXXXXXXX% Percentage Interest in the beneficial ownership of the Property having a FMV approximately equal to $XXXXXXXXXX and cash ($XXXXXXXXXX as of XXXXXXXXXX).

2. As of XXXXXXXXXX, DC held XXXXXXXXXX% of the issued and outstanding shares in Holdco, which holds the legal ownership of the real property described in Schedule XXXXXXXXXX to the Agreement as a Bare Trustee for and on behalf of the Parties. The FMV attributed to DC's participation interest in Holdco is nominal.

3. As of XXXXXXXXXX, the current liabilities of DC amount to $XXXXXXXXXX. The long-term liabilities of DC include non-interest bearing advances from its shareholders in the amount of $XXXXXXXXXX.

4. DC is entitled to receive Net Cash Flow, whenever available, at the end of each quarter. DC may also have to make Additional Capital Contributions in connection with the Property.

5. DC's authorized capital consists of an unlimited number of common shares, and Class A preferred shares which are held as follows:

Shareholder	# common shares	ACB	FMV	PUC
B	XXXX	$XXXX	$XXXX	$XXXX
C	XXXX	$XXXX	$XXXX	$XXXX
D	XXXX	$XXXX	$XXXX	$XXXX
E	XXXX	$XXXX	$XXXX	$XXXX
Trust	XXXX	$XXXX	$XXXX	$XXXX
	XXXX	$XXXX	$XXXX	$XXXX

Shareholder	# Class A preferred shares	ACB	FMV	PUC
B	XXXX	$XXXX	$XXXX	$XXXX
C	XXXX	$XXXX	$XXXX	$XXXX
D	XXXX	$XXXX	$XXXX	$XXXX
E	XXXX	$XXXX	$XXXX	$XXXX
Trust	XXXX	$XXXX	$XXXX	$XXXX
	XXXX	$XXXX	$XXXX	$XXXX

6. The Board is comprised of XXXXXXXXXX directors, namely B and D.

7. As of XXXXXXXXXX, the outstanding balance of DC's GRIP and RDTOH was respectively equal to XXXXXXXXXX.

The Property

8. The aggregate FMV of the Percentage Interest of the Parties in the Property is approximately equal to $XXXXXXXXXX.

9. As of XXXXXXXXXX, the FMV of the assets and liabilities pertaining to the Property can be broken down as follows:

Assets	FMV
Land	$XXXXXXXXXX
Buildings	$XXXXXXXXXX $XXXXXXXXXX
Liabilities	FMV
Short-Term	$XXXXXXXXXX
Long-Term	$XXXXXXXXXX $XXXXXXXXXX

10. For the period ended XXXXXXXXXX, the rental income arising from the Property was equal to $XXXXXXXXXX.

11. The management of the Property and the distribution of the rental income arising therefrom is vested with the Management Committee in accordance with the procedure described in section XXXXXXXXXX of the Agreement.

Holdco

12. Holdco acquired the legal title of the real property described in Schedule XXXXXXXXXX to the Agreement as a Bare Trustee for and on behalf of the Parties.

13. Holdco's authorized capital consists in an unlimited number of common shares, which are held as follows:

Shareholder	# shares	ACB	FMV	PUC
XXXXXXXXXX	XXXX	$XXXX	$XXXX	$XXXX
XXXXXXXXXX	XXXX	$XXXX	$XXXX	$XXXX
XXXXXXXXXX	XXXX	$XXXX	$XXXX	$XXXX
XXXXXXXXXX	XXXX	$XXXX	$XXXX	$XXXX
XXXXXXXXXX	XXXX	$XXXX	$XXXX	$XXXX
XXXXXXXXXX	XXXX	$XXXX	$XXXX	$XXXX
XXXXXXXXXX	XXXX	$XXXX	$XXXX	$XXXX
XXXXXXXXXX	XXXX	$XXXX $XXXX	$XXXX $XXXX	$XXXX $XXXX

Subco

14. Subco was formerly in the XXXXXXXXXX business. Subco's assets and liabilities were as follows on XXXXXXXXXX:

Assets	FMV
Cash	$XXXXXXXXXX
Capital assets (after depreciation)	$XXXXXXXXXX
Accounts receivable	$XXXXXXXXXX $XXXXXXXXXX
Liabilities	FMV
Advances from shareholders	$XXXXXXXXXX
Accounts payable	$XXXXXXXXXX $XXXXXXXXXX

As of XXXXXXXXXX, the outstanding balance of Subco's RDTOH was equal to XXXXXXXXXX.

15. Subco's authorized capital consists of an unlimited number of common shares, which are held as follows:

Shareholder	# shares	ACB	FMV	PUC
B	XXXX	$XXXX	$XXXX	$XXXX
C	XXXX	$XXXX	$XXXX	$XXXX
	XXXX	$XXXX	$XXXX	$XXXX

16. The directors of Subco are B and C.

XCo

17. XCo is an investment holding corporation whose shares are held by D, E, F, G and H.

18. As of XXXXXXXXXX, XCo's authorized capital consists of an unlimited number of common shares, and Class A preferred shares which are held as follows:

Shareholder	# common shares	ACB	FMV	PUC
B	XXXX	$XXXX	$XXXX	$XXXX
C	XXXX	$XXXX	$XXXX	$XXXX
	XXXX	$XXXX	$XXXX	$XXXX

Shareholder	# preferred shares	ACB	FMV	PUC
B	XXXX	$XXXX	$XXXX	$XXXX
C	XXXX	$XXXX	$XXXX	$XXXX
G	XXXX	$XXXX	$XXXX	$XXXX
H	XXXX	$XXXX	$XXXX	$XXXX
	XXXX	$XXXX	$XXXX	$XXXX

19. As of XXXXXXXXXX, XCo held as a Tenant in Common a XXXXXXXXXX% Percentage Interest in the Property having a FMV approximately equal to $XXXXXXXXXX.

D, E, F, G and H

20. D is the husband of E.

21. G is the husband of H.

22. F is the son of G and H.

23. D and G are siblings.

24. E and C are siblings.

PROPOSED TRANSACTIONS

The Proposed Transactions will occur in the order presented unless otherwise indicated, with the exception of filing the applicable election forms, which will be filed within the applicable due dates following the completion of the Proposed Transactions.

The transfer of DC's assets to Subco

The transfer of the DC shares held by B and C to Subco

25. Subco will file Articles of Amendment to authorize the issue of an unlimited number of Class B Preferred Shares.

26. B will transfer the XXXXXXXXXX common shares and the XXXXXXXXXX preferred shares that he holds in DC to Subco and will receive, as sole consideration therefor, a number of common shares of Subco having a FMV equal to the aggregate FMV of the DC common shares transferred to Subco.

The aggregate amount added to the PUC of the Subco common shares issued to B will be equal to the aggregate PUC attributable to the XXXXXXXXXX common shares of DC that B transferred to Subco.

B and Subco will jointly elect under subsection 85(1), in prescribed form and within the time limits prescribed by subsection 85(6), in respect of the transfer of the DC common shares to Subco. The agreed amount specified in respect of the transfer will be equal to the aggregate ACB to B of the XXXXXXXXXX DC common shares so transferred to Subco. For greater certainty, the ACB of the XXXXXXXXXX DC common shares will not be greater than the FMV of such shares at the time of the transfer.

27. C will transfer the XXXXXXXXXX common shares and the XXXXXXXXXX preferred shares that she holds in DC to Subco in exchange for a number of common shares of Subco having a FMV equal to the aggregate FMV of the DC common shares assigned to Subco.

The aggregate amount added to the PUC of the Subco common shares issued to C will be equal to the aggregate PUC attributable to the XXXXXXXXXX common shares of DC that C transferred to Subco.

C and Subco will jointly elect under subsection 85(1), in prescribed form and within the time limits prescribed by subsection 85(6), in respect of the transfer of the DC common shares to Subco. The agreed amount specified in respect of the transfer will be equal to the aggregate ACB to C of the XXXXXXXXXX DC common shares so transferred to Subco. For greater certainty, the ACB of the XXXXXXXXXX DC common shares will not be greater than the FMV of such shares at the time of the transfer.

28. Immediately before the transfer of property described in Paragraph 29 below, DC's property will be classified into three types of property for the purposes of the definition of Distribution: Cash or Near-Cash Property, Business Property; and Investment Property. DC will only have Cash and Near-Cash and Investment Property at the Effective Date.

The transfer of a pro rata portion of each type of property held by DC to Subco

29. DC will transfer to Subco property of each type of property owned by DC such that immediately after such property transfers, the net aggregate FMV of the property of each type of property so transferred to Subco will 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 of property owned at that time by DC;

B: is the aggregate FMV, immediately before DC's transfer of property to Subco, of all of the shares of DC owned by Subco at that time; and

C: is the aggregate FMV, immediately before DC's transfer of property to BCo, of all of the issued and outstanding shares of the capital stock of DC.

For the purpose of this Paragraph, the expression "approximate the proportion" means that the discrepancy of the proportion, if any, between the percentage of the net FMV of all the property of each type of property which Subco will receive as compared to what Subco would have received had Subco received its appropriate pro rata share of the net FMV of all the property for that type of property will not exceed XXXXXXXXXX percent (XXXXXXXXXX%).

30. On the transfer of property described in Paragraph 29 above, Subco will receive:

i. the beneficial ownership of the B & C Proportionate Amount of DC's Percentage Interest in the real property described in Schedule XXXXXXXXXX to the Agreement,

ii. the A& B Proportionate Amount of DC's Percentage Interest in the commercial development constructed on the real property described in Schedule XXXXXXXXXX to the Agreement, and

iii. the A& B Proportionate Amount of the cash that DC will own at the Effective Date

31. As consideration for DC's transfer of property to Subco:

i. Subco will assume the B & C Proportionate Amount of the liabilities owing by DC (including the liabilities pertaining to the real property described in Schedule XXXXXXXXXX to the Agreement, and the commercial development constructed thereon), and

ii. Subco will issue to DC the Subco Class B Preferred Shares.

In accordance with XXXXXXXXXX, the directors of Subco will resolve to add to the stated capital account for the Class B Preferred Shares an amount not exceeding the amount by which the FMV of DC's property transferred to Subco as described in Paragraph 31 exceeds the aggregate amount of liabilities assumed by Subco in consideration for such Class B Preferred Shares. For greater certainty, the amount added to the stated capital account for the Class B Preferred Shares to be issued by Subco as partial consideration for the transferred property will not exceed the maximum amount that could be added to the PUC of the Class B Preferred Shares pursuant to subsection 85(2.1)

32. In respect of the property described in Paragraph 29 above, DC will jointly elect with Subco in prescribed form and within the time allowed by subsection 85(6), to have the provisions of subsection 85(1) apply to the transfer of each property of DC that is an Eligible Property transferred to Subco.

In the case of Capital Property (other than Depreciable Property), the Agreed Amount in respect of each of Eligible Property will be an amount equal to the lesser of the amounts described in subparagraph 85(1)(c.1)(i) and (ii).

The Agreed Amount in respect of each of the properties so transferred will also 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 to the election under subsection 85(1) will not exceed the Agreed Amount elected for that property. The amount of liabilities to be allocated to the property that is not subject to the election under 85(1) will not exceed the FMV of any such property.

The cross-redemption of the DC common shares and the Subco Class B Preferred Shares

33. Immediately after receiving its pro rata share of DC's property, Subco will redeem all the issued Class B Preferred Shares held by DC at their Redemption Amount in exchange for Promissory Note #1. DC will accept Promissory Note #1 as payment in full for the Class B Preferred Shares so redeemed.

34. DC will then purchase for cancellation the XXXXXXXXXX common shares of its capital stock held by Subco. As a consideration for the purchase for cancellation of the XXXXXXXXXX common shares of its capital stock held by Subco, DC will issue the Promissory Note #2 as payment in full for the common shares so purchased for cancellation.

35. The principal amount owing by Subco to DC under Promissory note #1 will be set-off against the principal amount owing by DC to Subco under Promissory note #2 such that each such note will be cancelled in full satisfaction of their respective underlying obligations.

The transfer of DC`s assets to XCo

The transfer of the DC common shares held by F to XCo

36. XCo will file Articles of Amendment to authorize the issue an unlimited number of Class B Preferred Shares.

37. Immediately after the distribution of property described in Paragraph 29 above, F will transfer the XXXXXXXXXX common shares that he holds in DC to XCo and will receive, as sole consideration therefor, a number of common shares of XCo having a FMV equal to the aggregate FMV of the DC common shares assigned to XCo.

The aggregate amount added to the PUC of the XCo common shares issued to F will be equal to the aggregate PUC attributable to the XXXXXXXXXX common shares of DC that F transferred to Xco.

F and Subco will jointly elect under subsection 85(1), in prescribed form and within the time limits prescribed by subsection 85(6), in respect of the transfer of the DC common shares to XCo. The agreed amount specified in respect of the transfer will be equal to the aggregate ACB to F of the XXXXXXXXXX DC common shares so transferred to Subco. For greater certainty, the ACB of the XXXXXXXXXX DC common shares will not be greater than the FMV of such shares at the time of the transfer.

The transfer of a pro rata portion of each type of property held by DC to XCo

38. DC will transfer to XCo property of each type of property owned by DC such that immediately after such property transfers, the net aggregate FMV of the property of each type of property so transferred to XCo will 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 of property owned at that time by DC;

B: is the aggregate FMV, immediately before DC's transfer of property to XCo, of all of the shares of DC owned by XCo at that time; and

C: is the aggregate FMV, immediately before DC's transfer of property to XCo, of all of the issued and outstanding shares of the capital stock of DC.

For the purpose of this Paragraph, the expression "approximate the proportion" means that the discrepancy of the proportion, if any, between the percentage of the net FMV of all the property of each type of property which XCo will receive as compared to what XCo would have received had XCo received its appropriate pro rata share of the net FMV of all the property for that type of property will not exceed XXXXXXXXXX percent (XXXXXXXXXX%).

39. On the transfer of property described in Paragraph 38 above, XCo will receive:

i. the beneficial ownership of the F Proportionate Amount of DC's Percentage Interest in the real property described in Schedule XXXXXXXXXX to the Agreement,

ii. the F Proportionate Amount of DC's Percentage Interest in the commercial development constructed on the real property described in Schedule XXXXXXXXXX to the Agreement, and

iii. the F Proportionate Amount of the cash that DC will own at the Effective Date

40. As consideration for DC's transfer of property to XCo:

i. XCo will assume the F Proportionate Amount of the liabilities owing by DC (including the liabilities pertaining to the Property), and

ii. XCo will issue a number of Class B Preferred Shares having an aggregate FMV and redemption value equal to the amount by which the Redemption Amount exceeds the aggregate amount of DC's liabilities assumed by XCo.

In accordance with XXXXXXXXXX, the directors of XCo will resolve to add to the stated capital account for the Class B Preferred Shares an amount not exceeding the amount by which the FMV of DC's property transferred to XCo exceeds the aggregate amount of liabilities assumed by XCo in consideration for such Class B Preferred Shares. For greater certainty, the amount added to the stated capital account for the Class B Preferred Shares to be issued by XCo as partial consideration for the transferred property will not exceed the maximum amount that could be added to the PUC of the Class B Preferred Shares pursuant to subsection 85(2.1).

For the purposes of subsection 191(4), the terms and conditions of the Class B Preferred Shares will specify that the Redemption Amount will be expressed as a dollar amount, will not be determined by a formula and will not exceed the FMV of the property to be received by XCo as consideration for the issuance of such Class B Preferred Shares;

41. In respect of the property described in Paragraph 38 above, DC will jointly elect with XCo in prescribed form and within the time allowed by subsection 85(6), to have the provisions of subsection 85(1) apply to the transfer of each property of DC that is an Eligible Property transferred to XCo.

In the case of Capital Property (other than Depreciable Property), the Agreed Amount in respect of each of the Eligible Property will be an amount equal to the lesser of the amounts described in subparagraph 85(1)(c.1)(i) and (ii).

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 to the election under subsection 85(1) will not exceed the Agreed Amount elected for that property. The amount of liabilities to be allocated to the property that is not subject to the election under 85(1) will not exceed the FMV of any such property

The cross-redemption of the DC common shares and the XCo Class B Preferred Shares

42. Immediately after receiving its pro rata share of DC's property, XCo will redeem all the issued Class B Preferred Shares held by DC at their Redemption Amount in exchange for Promissory Note #3. DC will accept Promissory Note #3 as payment in full for the Class B Preferred Shares so redeemed.

43. DC will then purchase for cancellation the XXXXXXXXXX common shares of its capital stock held by XCo. As a consideration for the purchase for cancellation of the XXXXXXXXXX common shares of its capital stock held by XCo, DC will issue the Promissory Note #4 as payment in full for the common shares so purchased for cancellation.

44. The principal amount owing by XCo to DC under Promissory note #3 will be set-off against the principal amount owing by DC to XCo under Promissory note #4 such that each such note will be cancelled in full satisfaction of their respective underlying obligations.

45. Further to the completion of the Proposed Transactions, (i) DC will only be held by D, E and the Trust and will hold a reduced interest as a Tenant in Common in the Property, (ii) Subco will directly own an interest as a Tenant in Common in the Property proportionate to the participation interest that B and C held in DC before the transfers described in Paragraphs 26 and 27, and (iii) XCo's interest in the Property will be increased proportionately to the participation interest that F held in DC before the transfer described in Paragraph 37.

ADDITIONAL INFORMATION

46. 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 transfer described in Paragraph 38, except as described in the Proposed Transactions.

47. 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.

48. Except as described in this letter, neither Subco nor XCo will dispose of any shares of DC as part of the series of transactions or events that includes the Proposed Transactions.

49. Except as described in this letter, neither B nor C will dispose of any shares of Subco as part of the series of transactions or events that includes the Proposed Transactions.

50. Except as described in this letter, F will not dispose of any shares of XCo as part of the series of transactions or events that includes the Proposed Transactions.

51. Except as described in this letter, none of Subco, XCo or DC has any intention, subsequent to the Proposed Transactions, of disposing of any property that it owned as part of a series of transactions or events that includes the Proposed Transactions, to a person to whom it is not related or to a partnership other than in the ordinary course of its business.

52. None of DC, Subco and XCo is or will be at any time during the series of transactions or events that includes the Proposed Transactions, a Specified Financial Institution, a Restricted Financial Institution or a corporation described in any of paragraphs (a) to (f) of the definition of "financial intermediary corporation" in subsection 191(1).

53. None of the shares of DC, Subco and XCo is or will be, at any time during the series of transactions or events that includes the Proposed Transactions:

i. the subject of any undertaking or agreement that is a Guarantee Agreement;

ii. the subject of a Dividend Rental Arrangement;

iii. the subject of any secured undertaking of the type described in paragraph 112(2.4)(a); or

iv. a share that was issued for consideration that is or includes:

a. an obligation of the type described in subparagraph 112(2.4)(b)(i), other than an obligation of a corporation that is related (otherwise than by reason of a right referred to in paragraph 251(5)(b)); or

b. any right of the type described in subparagraph 112(2.4)(b)(ii) held on condition that it or property substituted therefor may revert or pass to DC or BCo or a person to be determined by DC or BCo, and

as part of a transaction or event or series of transactions or events of the type described in subsection 112(2.5).

54. Each of DC, Subco and XCo will have the financial capacity to honour, upon presentation for payment, the amount payable under the promissory note issued by it as part of the Proposed Transactions.

PURPOSE OF THE PROPOSED TRANSACTIONS

B and C wish to manage the interest they indirectly own in the Property independently from DC whose management is allegedly detrimental to their business interest. F wishes to assign the interest he indirectly owns in the Property to XCo.

RULINGS

Provided that the above statements of facts, Proposed Transactions, additional information and purpose of the proposed transaction are accurate and constitute complete disclosure of all relevant facts and proposed transactions, our rulings are as follows:

The transfer of DC`s assets to Subco

A. Subject to the application of subsection 69(11) and paragraph 85(1)(b), and provided that the appropriate elections are filed in the prescribed form and manner within the time limits specified in subsection 85(6), and that each particular property so transferred is an Eligible Property in respect of which shares have been issued as full or partial consideration therefor, the provisions of subsection 85(1) will apply to DC's transfer of the property described in Paragraph 29 above with result that the Agreed Amount in respect of each transfer of Eligible Property will be deemed pursuant to paragraph 85(1)(a) to be proceeds of disposition thereof to DC and the cost thereof to Subco.

B. On the redemption of Subco Class B Preferred Shares issued to DC as described in Paragraph 33 above, Subco will be deemed by paragraph 84(3)(a) to have paid and DC will be deemed by paragraph 84(3)(b) to have received a Taxable Dividend at that time equal to the amount by which the excess of the Redemption Amount over the aggregate amount of DC's liabilities assumed by Subco exceeds the PUC of the Subco Class B Preferred Shares.

C. On the purchase for cancellation by DC of the XXXXXXXXXX common shares owned by Subco as described in Paragraph 34, DC will be deemed by paragraph 84(3)(a) to have paid and Subco will be deemed by paragraph 84(3)(b) to have received a Taxable Dividend at that time equal to the amount by which the amount paid by DC on the purchase for cancellation of the XXXXXXXXXX common shares exceeds the PUC of the XXXXXXXXXX common shares.

D. To the extent that the dividend described in Ruling B is a Taxable Dividend, such dividend:

i. will be excluded in determining DC's Proceeds of Disposition of the Class B Preferred Shares that it holds in Subco pursuant to paragraph (j) of the definition of Proceeds of Disposition;

ii. will be included in computing DC's income pursuant to subsection 82(1) and paragraph 12(1)(j);

iii. will be deductible in computing DC's taxable income for the taxation year in which such a dividend is deemed to be received pursuant to subsection 112(1), and, for greater certainty, the provisions of subsections 112(2.1), (2.2), (2.3), or (2.4) will not apply to deny the deduction of such deemed dividend;

iv. will reduce any loss that would otherwise be realized as a result of the Disposition of the shares on which the dividend is deemed to be received pursuant to subsection 112(3);

v. will only be subject to tax under Part IV 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;

vi. will not be subject to tax under Part IV.1 by virtue of paragraph (c) of the definition of "excepted dividend" in subsection 187.1; and

vii. will not be subject to tax under Part VI.1 to the extent that the Redemption Amount referred in Paragraph 31 meets the requirements found in the mid-amble of subsection 191(4).

E. To the extent that a dividend described in Ruling C is a Taxable Dividend, each such dividend:

i. will be excluded in determining Subco's Proceeds of Disposition of the common shares that it holds in DC pursuant to paragraph (j) of the definition of Proceeds of Disposition,

ii. will be included in computing Subco's income pursuant to subsection 82(1) and paragraph 12(1)(j);will be deductible in computing Subco's taxable income for the taxation year in which such a dividend is deemed to be received pursuant to subsection 112(1), and, for greater certainty, the provisions of subsections 112(2.1), (2.2), (2.3), or (2.4) will not apply to deny the deduction of such deemed dividend;

iii. will reduce any loss that would otherwise be realized as a result of the Disposition of the shares on which the dividend is deemed to be received pursuant to subsection 112(3);

iv. will only be subject to tax under Part IV 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;

v. will not be subject to tax under Part IV.1 by virtue of paragraph (c) of the definition of "excepted dividend" in subsection 187.1; and

vi. will not be subject to tax under Part VI.1 by virtue of paragraph (a) of the definition of "excluded dividend" in subsection 191(1).

F. Provided that, as part of the series of transaction or events that includes the Proposed Transactions, there is not:

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

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

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

iv. an acquisition of any shares of DC in contemplation of the distribution in the circumstances described in subparagraph 55(3.1)(b)(iii);

v. an acquisition of property in the circumstances described in subparagraph 55(3.1)(c) and (d)

which has not been described herein, then by virtue of paragraph 55(3)(b), subsection 55(2) will not apply to the Taxable Dividends referred to in ruling B and C above. For greater certainty, subsection 55(3.1) will not apply to deny the butterfly exemption found in paragraph 55(3)(b).

G. The set-off and cancellation of Promissory note #1 against Promissory note #2 described in Paragraph 35 above will not, in and of itself, give rise to a forgiven amount within the meaning of subsection 80(1) or section 80.01. In addition, neither DC nor Subco will realize a gain or incur any loss as a result of such set-off and cancellation.

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

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

The transfer of DC`s assets to XCo

J. Subject to the application of subsection 69(11) and paragraph 85(1)(b), and provided that the appropriate elections are filed in the prescribed form and manner within the time limits specified in subsection 85(6), and that each particular property so transferred is an Eligible Property in respect of which shares have been issued as full or partial consideration therefor, the provisions of subsection 85(1) will apply to DC's transfer of the property described in Paragraph 38 above with result that the Agreed Amount in respect of each transfer of Eligible Property will be deemed pursuant to paragraph 85(1)(a) to be proceeds of disposition thereof to DC and the cost thereof to XCo.

K. On the redemption of XCo Class B Preferred Shares issued to DC as described in Paragraph 42, XCo will be deemed by paragraph 84(3)(a) to have paid and DC will be deemed by paragraph 84(3)(b) to have received a Taxable Dividend at that time equal to the amount by which the excess of the Redemption Amount over the aggregate amount of DC's liabilities assumed by XCo exceeds the PUC of the XCo Class B Preferred Shares.

L. On the purchase for cancellation by DC of the XXXXXXXXXX common voting shares owned by XCo as described in Paragraph 43, DC will be deemed by paragraph 84(3)(a) to have paid and XCo will be deemed by paragraph 84(3)(b) to have received a Taxable Dividend at that time equal to the amount by which the amount paid by DC on the purchase for cancellation of the XXXXXXXXXX common shares exceeds the PUC of the XXXXXXXXXX common shares.

M. To the extent that the dividend described in Rulings K is a Taxable Dividend, such dividend:

i. will be excluded in determining DC's Proceeds of Disposition of the Class B Preferred Shares that it holds in XCo pursuant to paragraph (j) of the definition of Proceeds of Disposition;

ii. will be included in computing DC's income pursuant to subsection 82(1) and paragraph 12(1)(j);

iii. will be deductible in computing DC's taxable income for the taxation year in which such a dividend is deemed to be received pursuant to subsection 112(1), and, for greater certainty, the provisions of subsections 112(2.1), (2.2), (2.3), or (2.4) will not apply to deny the deduction of such deemed dividend;

iv. will reduce any loss that would otherwise be realized as a result of the Disposition of the shares on which the dividend is deemed to be received pursuant to subsection 112(3);

v. will only be subject to tax under Part IV 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;

vi. will not be subject to tax under Part IV.1 by virtue of paragraph (c) of the definition of "excepted dividend" in subsection 187.1; and

vii. will not be subject to tax under Part VI.1 to the extent that the Redemption Amount referred in Paragraph 31 meets the requirements found in the mid-amble of subsection 191(4).

N. To the extent that a dividend described in Ruling L is a Taxable Dividend, each such dividend:

i. will be excluded in determining XCo's Proceeds of Disposition of the common shares that it holds in DC pursuant to paragraph (j) of the definition of Proceeds of Disposition,

ii. will be included in computing XCo's income pursuant to subsection 82(1) and paragraph 12(1)(j);

iii. will be deductible in computing XCo's taxable income for the taxation year in which such a dividend is deemed to be received pursuant to subsection 112(1), and, for greater certainty, the provisions of subsections 112(2.1), (2.2), (2.3), or (2.4) will not apply to deny the deduction of such deemed dividend;

iv. will reduce any loss that would otherwise be realized as a result of the Disposition of the shares on which the dividend is deemed to be received pursuant to subsection 112(3);

v. will only be subject to tax under Part IV 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;

vi. will not be subject to tax under Part IV.1 by virtue of paragraph (c) of the definition of "excepted dividend" in subsection 187.1; and

vii. will not be subject to tax under Part VI.1 by virtue of paragraph (a) of the definition of "excluded dividend" in subsection 191(1).

O. Provided that, as part of the series of transaction or events that includes the Proposed Transactions, there is not:

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

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

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

iv. an acquisition of any shares of DC in contemplation of the distribution in the circumstances described in subparagraph 55(3.1)(b)(iii);

v. an acquisition of property in the circumstances described in subparagraph 55(3.1)(c) and (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 K and L above. For greater certainty, subsection 55(3.1) will not apply to deny the exemption found in paragraph 55(3)(b).

P. The set-off and cancellation of Promissory note #3 against Promissory note #4 described in Paragraph 44 above will not, in and of itself, give rise to a forgiven amount within the meaning of subsection 80(1) or section 80.01. In addition, neither DC nor Subco will realize a gain or incur any loss as a result of such set-off and cancellation.

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

R. Subsection 245(2) will not apply as a result of the Proposed Transactions, in and by themselves, to re-determine the tax consequences confirmed in the rulings given above.

These rulings are given subject to the limitations and qualifications set forth in Information Circular 70-6R5 issued on May 17, 2002, and are binding on the CRA, provided that the Proposed Transactions are completed no later than six months of the date of this letter.

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.

COMMENTS

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

i. the determination of the amount of the ACB, PUC or FMV of any shares referred to herein;

ii. the balance of GRIP or RDTOH of any corporation; and

iii. any tax consequences relating to the Definitions, Facts and Proposed Transaction described herein, other than those described in the rulings given above, including whether any subsequent transaction or event is or is not considered to be part of the series of transactions or events described herein.

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

Yours truly,

XXXXXXXXXX
Manager
Reorganizations Division
Income Tax Ruling Directorate
Legislative Policy and Regulatory Affairs Branch