2014 Ruling 2012-0432441R3 - 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 satisfies the requirements applicable to the butterfly exemption found in paragraph 55(3)(b)

Position: Yes

Reasons: The law

XXXXXXXXXX
2012-043244

Attention: XXXXXXXXXX

XXXXXXXXXX, 2014

Dear Sir,
Re: Advance Income Tax Ruling
XXXXXXXXXX

This is in reply to your amended letter dated XXXXXXXXXX, in which you requested an advance income tax ruling on behalf of the above-referenced taxpayer ("Rulings Request"). The information that you provided in the aforementioned letter, our email correspondence and the telephone conversations that we had concerning the Rulings Request only forms part of this letter to the extent described herein.
To the best of your knowledge and that of the above-referenced taxpayer, none of the issues raised in the Rulings Request is:

(i) in an earlier income tax return of the above-referenced taxpayer or a person related to that taxpayer;
(ii) being considered by a tax services office or a taxation centre in connection with a previously filed tax return of the above-referenced taxpayer or a person related to that taxpayer;
(iii) under objection by the above-referenced taxpayer or a person related to that taxpayer;
(iv) before the courts or, if a judgement has been issued, the time limit for appeal to a higher court has not expired; or
(v) the subject of a ruling previously issued by the Income Tax Rulings Directorate.

Furthermore, the above-referenced taxpayer has confirmed that the proposed transactions described herein will not result in it or any related person described herein being unable to pay any of its outstanding tax liabilities. Unless otherwise expressly stated, all statutory references herein are to sections, subsections, paragraphs, subparagraphs, clauses or subclauses 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 all references to monetary amounts are in Canadian dollars.

DEFINITIONS

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

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

"Agreed Amount" means the amount that the transferor and transferee of an Eligible Property have agreed in a joint election filed pursuant to the rules found in section 85.

"Arm's Length" has the meaning assigned by section 251.

"BCA" means the Business Corporations Act XXXXXXXXXX.

"Brother 1" means XXXXXXXXXX, who is an individual resident in Canada.

"Brother 1 Shares" means the XXXXXXXXXX class A common shares, the XXXXXXXXXX series A first preferred shares, and the 1 series B first preferred shares in DC that Brother 1 will transfer to Newco in consideration for class F preferred shares in Newco.

"Brother 2" means XXXXXXXXXX, who is an individual resident in Canada.

"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 net FMV of the Business Property, immediately before the transfer of DC's property to Newco as further described in Paragraph 17 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; (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 be considered a liability only to the extent that it 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 will be ignored in determining the net FMV 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 FMV 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 FMV of the Business Property, DC will be considered to have a negative amount of Business Property.

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

"CDA" means capital dividend account as that term is defined in 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, shareholders of DC or persons related to such shareholders 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; (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 be considered a liability only to the extent that it 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 will be ignored in determining the net fair market value of the 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.

"Class F Redemption Amount" in respect of the class F preferred shares to be issued by Newco means the amount equal to the aggregate FMV of the property to be transferred by DC to Newco as further described in Paragraph 17 less the aggregate FMV of the portion of DC's liabilities to be assumed by Newco as a result of DC's transfer of each Type of Property to Newco.

"Companies Act" means the Companies Act XXXXXXXXXX.

"Corporation 1" means XXXXXXXXXX, which is a Taxable Canadian Corporation and a CCPC that was originally incorporated pursuant to the Companies Act on XXXXXXXXXX, and later continued under the BCA on XXXXXXXXXX, and which has a taxation year ending XXXXXXXXXX of each year.

Corporation 1's authorized capital consists of XXXXXXXXXX common shares and XXXXXXXXXX non-voting preferred shares having the following terms: (i) At the discretion of the directors, the preferred shareholders may receive non-cumulative dividends at the rate of XXXXXXXXXX% of their redemption amount on all profits and surplus available for dividends in priority to the holders of common shares in the company; (ii) The preferred shares can be redeemed, at the option of the company, at their redemption amount of $XXXXXXXXXX per share together with all accrued and unpaid dividends thereon; (iii) In the event of the liquidation, dissolution or wind-up of the company, the preferred shareholders are entitled to receive an amount equal to their redemption amount together with all accrued and unpaid dividends thereon in priority to the holders of common shares in that company.

Corporation 1's issued and outstanding shares are held as follows: (i) Brother 1: XXXXXXXXXX common shares; (ii) Wife 1: XXXXXXXXXX common share; (iii) Corporation 2: XXXXXXXXXX preferred shares, and (iv) Corporation 4: XXXXXXXXXX preferred shares.

"Corporation 2" means XXXXXXXXXX, which is a Taxable Canadian Corporation and a CCPC that was originally incorporated pursuant to the BCA on XXXXXXXXXX, and which has a taxation year ending XXXXXXXXXX of each year.

Corporation 2's authorized capital consists of an unlimited number of class A common shares (voting), Class B common shares (voting), class C common shares (non-voting) class D common shares (non-voting) and XXXXXXXXXX non-voting class E preferred shares (Series 1).

If declared by the directors of Corporation 2, the holders of class E preferred shares are entitled to receive a non-cumulative annual dividend per share not exceeding XXXXXXXXXX% of the redemption price of the class E preferred shares that they hold in Corporation 2 in priority to the holders of the Class A and B common shares in that corporation. The directors of Corporation 2 shall not declare and pay a dividend on the class A common shares and the Class B common shares if the ability of the corporation to pay any dividend declared unpaid on the class E preferred shares or to redeem all of the issued and outstanding class E preferred shares at their redemption price would be impaired. The class E preferred shares are redeemable and retractable at a redemption price per share equal to the aggregate FMV of the property acquired by Corporation 2 in exchange therefor less the aggregate FMV of the non-share consideration issued by Corporation 2 as partial consideration for the property divided by the number of class E preferred shares issued by Corporation 2. Upon liquidation, dissolution or wind-up of Corporation 2, and after payment of all the creditors of Corporation 2, the remaining funds shall be distributed as follows: (i) to the holders of class E preferred shares to the extent of the redemption price of these shares; (ii) to the holders of class D common shares to the extent of the aggregate stated capital of these shares; (iii) to the holders of class C common shares to the extent of the aggregate stated capital of these shares; (iv) to the holders of class B common shares to the extent of the aggregate stated capital of these shares; and (v) to the holders of Class A common shares to the extent of the aggregate stated capital of these shares.

Corporation 2's issued and outstanding shares are held as follows: (i) Brother 1: XXXXXXXXXX class A common shares; (ii) DC: XXXXXXXXXX class E preferred shares.

"Corporation 2 Shares" means the XXXXXXXXXX class A common shares and the XXXXXXXXXX series A first preferred shares that Corporation 2 holds in DC that will be transferred to Newco in consideration for class F preferred shares in Newco as further described in Paragraph 13.

"Corporation 3" means XXXXXXXXXX, which is a Taxable Canadian Corporation and a CCPC that was originally incorporated pursuant to the Companies Act on XXXXXXXXXX, and later continued under the BCA on XXXXXXXXXX, and which has a taxation year ending XXXXXXXXXX of each year.

Corporation 3's authorized capital consists of XXXXXXXXXX common shares and XXXXXXXXXX non-voting preferred shares having the following terms: (i) At the discretion of the directors, the holders of the voting preferred shares may receive a non-cumulative dividend at the rate of XXXXXXXXXX% of their redemption amount on all profits and surplus available for dividends in priority to the holders of common shares in the company; (ii) The preferred shares can be redeemed, at the option of the company, at their redemption amount of $XXXXXXXXXX per share together with all accrued and unpaid dividends thereon; (iii) In the event of the liquidation, dissolution or wind-up of the company, the holders of the voting preferred shares are entitled to receive an amount equal to their redemption amount together with all accrued and unpaid dividends thereon in priority to the holders of common shares in that company.

Corporation 3's issued and outstanding shares are held as follows: (i) Brother 2: XXXXXXXXXX common shares and XXXXXXXXXX preferred shares; (ii) Wife 2: 1 common share; (iii) Corporation 2: XXXXXXXXXX preferred shares, and (iv) Corporation 4: XXXXXXXXXX preferred shares.

"Corporation 4" means XXXXXXXXXX, which is a Taxable Canadian Corporation and a CCPC that was originally incorporated pursuant to the BCA on XXXXXXXXXX, and which has a taxation year ending XXXXXXXXXX of each year.

Corporation 4's authorized capital consists of an unlimited number of class A common shares (voting), class B common shares (voting), class C common shares (non-voting) class D common shares (non-voting), class E common shares (non-voting) and class F non-voting preferred shares (series 1).

If declared by the directors of Corporation 4, the holders of class F preferred shares are entitled to receive a non-cumulative annual dividend per share not exceeding XXXXXXXXXX% of the redemption price of the preferred shares that they hold in Corporation 4. No dividend shall be declared and paid on the class A, B, C, D and E common shares until the preferential non-cumulative dividend, if any, has been declared and paid to the holders of class F preferred shares. The class F preferred shares are redeemable, at the option of the company, on payment of an amount of $XXXXXXXXXX for each share to be redeemed. Upon liquidation, dissolution or wind-up of Corporation 4, the holders of class F preferred shares shall be entitled to receive a sum equivalent to the aggregate amounts paid to subscribe for the class F preferred shares together with all declared and unpaid non-cumulative dividends, if any, before any amount is paid to the holders of class A, B, C, D and E common shares, who shall rank in parity with each other.

Corporation 4's issued and outstanding shares are held as follows: (i) Brother 2: XXXXXXXXXX class A common shares; (ii) DC: XXXXXXXXXX class F preferred shares (series 1).

"Corporation 5" means XXXXXXXXXX, a corporation controlled by an arm's-length non-resident, which was issued in XXXXXXXXXX, at Father's direction, XXXXXXXXXX Series B preferred shares in DC having an aggregate redemption value of $XXXXXXXXXX. Since Father's passing, DC's shareholders and legal counsel have unsuccessfully attempted to track down Corporation 5's shareholders. Corporation 5's taxation year-end is unknown. It is uncertain whether Corporation 5 has any knowledge of its shareholding in DC.

"CRA" means the Canada Revenue Agency.

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

"DC" means XXXXXXXXXX, which is a Taxable Canadian Corporation and a CCPC that was originally incorporated pursuant to the Companies Act on XXXXXXXXXX, and later continued under the BCA on XXXXXXXXXX, and which has a taxation year ending on XXXXXXXXXX of each year.

DC's authorized capital consists of an unlimited number of class A common shares (voting), and class B common shares (non-voting), series A first redeemable and retractable preferred shares (voting), series B first redeemable preferred shares (non-voting) and second preferred shares (non-voting).

Subject to the preference granted to the holders of preferred shares, the holders of DC's class A and class B common shares are entitled to receive dividends, if any, in such amounts as the directors of DC may determine, and to receive equally the remaining property of DC in the event of its liquidation, dissolution or wind-up.

The holders of DC's series A and series B first preferred shares are entitled to a preference over the holders of second preferred shares and the holders of Class A and B common shares if the directors of DC elect to declare and pay a dividend. No dividend shall be declared or paid on DC's series A or series B first preferred shares if the realizable value of the DC's assets would, after the payment, be less than the aggregate of its liabilities and the amount that would be required to be paid to the holders of DC's series A and series B first preferred shares and to the holders of second preferred shares if all their shares were redeemed or purchased for cancellation. If DC is liquidated, dissolved or wound-up or if the series A first preferred shares or the series B first preferred shares are redeemed and/or retracted, the holders of DC's series A first preferred shares are entitled to receive an amount of $XXXXXXXXXX per share, and the holders of DC's series B first preferred shares are entitled to receive an amount of $XXXXXXXXXX per share together with an amount equal to all declared and unpaid dividends to the date of such liquidation, dissolution or wind-up or up to the redemption date. The series A and series B first preferred shareholders rank equally with respect to the amounts having to be paid on the redemption/retractation of their shares or upon DC's liquidation, dissolution or wind-up. Each DC's series A and B first preferred shares qualify as Taxable Preferred Shares.

"Depreciable Property" has the meaning assigned by subsection 13(21).

"Distribution" means the transfer by DC of each Type of Property to Newco as described in Paragraph 17.

"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).

"Excepted Dividend" has the meaning assigned by paragraph 187.1(1)(b).

"Excluded Dividend" has the meaning assigned by paragraph 191(1)(a).

"Financial Intermediary Corporation" has the meaning assigned by subsection 191(1).

"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 dealing at Arm's Length and under no compulsion to act.

"Father" means XXXXXXXXXX, who was the father of Brother 1 and Brother 2 and who died on XXXXXXXXXX.

"Forgiven Amount" has the meaning assigned by subsection 80(1) or 80.01(1).

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

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

"Investment Property" of an entity 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 of that entity. Any liabilities of that entity other than current liabilities or liabilities allocated to Business Property 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 other liabilities.

"Newco" means a Taxable Canadian Corporation and a CCPC that is not yet in existence, which will be incorporated under the BCA. Newco's authorized capital will include an unlimited number of class A common shares (voting), class B common shares (voting), class C common shares (non-voting), class D common shares (non-voting), class E common shares (non-voting) and class F preferred shares (non-voting). Subject to the preference granted to the holders of class F preferred shareholders, the holders of Newco's class A, B, C, D and E common shares are entitled to receive dividends, if any, in such amounts as the directors of DC may determine and to receive equally the remaining property of DC in the event of its liquidation, dissolution or wind-up. If and when declared by the directors of Newco, the class A, B, C, D and E common shareholders are entitled to receive non-cumulative dividends to the extent that such a dividend payment does not impair Newco's ability to redeem its class F preferred shares at their redemption amount.

The class F preferred shareholders are entitled to a preference over the holders of class A, B, C, D and E common shares if the directors of DC elect to declare and pay a dividend. If and when declared by the directors of Newco, the class F preferred shareholders are entitled to receive non-cumulative dividends at a rate not exceeding XXXXXXXXXX% of their redemption amount per year to the extent that such a dividend payment does not impair Newco's ability to redeem its class F preferred shares at their redemption amount. The class F preferred shares are redeemable and retractable for a redemption amount equal to the FMV of the consideration for which they were issued. If Newco is liquidated, dissolved or wound-up, the class F preferred shareholders are entitled to receive an amount equal to the FMV of the consideration for which they were issued, in priority to the holders of the class A, B, C, D and E common shares. Each Newco's class F preferred share will qualify as Taxable Preferred Shares.

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

"Paragraph" means a numbered paragraph in this letter.

"Proposed Transactions" means the transactions described in the Proposed Transactions section of this letter.

"Promissory Note 1" means the non-interest-bearing promissory note that Newco will issue to DC in consideration for the redemption of the class F preferred to be issued to DC in partial consideration for the Distribution as further described in Paragraph 21. The principal amount and FMV of Promissory Note 1 will be equal to the class F Redemption Amount.

"Promissory Note 2" means the non-interest-bearing promissory note that DC will issue to Newco in consideration for the purchase for cancellation of the Brother 1 Shares, the Corporation 2 Shares and the XXXXXXXXXX class A common shares that Newco will hold in DC as further described in Paragraph 22. The principal amount and FMV of Promissory Note 2 will be equal to the aggregate FMV of the Brother 1 Shares, the Corporation 2 Shares and the XXXXXXXXXX class A common shares that Newco will hold in DC.

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

"Related Person" has the meaning assigned by subsection 251(2) as modified by paragraph 55(5)(e) for the purposes of section 55.

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

"Series of Transactions or Events or Events" includes the related transactions or events referred to in subsection 248(10).

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

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

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

"Stated Capital" means the amount reported in the Stated Capital Account attributable to a share.

"Stated Capital Account" refers to the account that a corporation is required to maintain for each class of shares that it issues in accordance with subsection XXXXXXXXXX of the BCA.

"Substantial Interest" has the meaning assigned by subsection 191(2).

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

"Taxable Preferred Share" has the meaning assigned by subsection 248(1).

"Type of Property" means one of the following three (3) types of property into which DC's property will be classified: (a) Cash or Near-Cash property; (b) Business Property; and (c) Investment Property. For greater certainty, any tax accounts of DC including the outstanding balance of its capital and non-capital losses available for carry-forward, GRIP, RDTOH or CDA will not be considered property of DC.

"Wife 1" means XXXXXXXXXX, who is an individual resident in Canada and the spouse of Brother 1.

"Wife 2" means XXXXXXXXXX, who is an individual resident in Canada and the spouse of Brother 2.

FACTS

DC

1. DC carries on the business of farming exclusively in Canada and reports its income for income tax purposes using the cash method as set out in subsection 28(1).

2. DC's assets include cash, accounts receivable and note receivable, land, machinery, buildings and structures. DC will also own XXXXXXXXXX class E preferred shares in Corporation 2 having a redemption price of $XXXXXXXXXX and XXXXXXXXXX class F preferred shares in Corporation 4 having a redemption price of $XXXXXXXXXX. DC's liabilities include accounts payable, accrued interest payable and shareholders' loans.

3. The issued and outstanding shares of the capital stock of DC, which represent Capital Property to its shareholders, are held as follows:

Class A common shares (voting)

Shareholder # shares PUC ACB FMV
Brother 1 XXXX $ XXXX $ XXXX $ XXXX
Corporation 1 XXXX $ XXXX $ XXXX $ XXXX
Corporation 2 XXXX $ XXXX $ XXXX $ XXXX
Brother 2 XXXX $ XXXX $ XXXX $ XXXX
Corporation 3 XXXX $ XXXX $ XXXX $ XXXX
Corporation 4 XXXX $ XXXX $ XXXX $ XXXX

Series A first preferred shares (voting)

Shareholder # shares PUC ACB FMV
Brother 1 XXXX $ XXXX $ XXXX $ XXXX
Corporation 2 XXXX $ XXXX $ XXXX $ XXXX
Brother 2 XXXX $ XXXX $ XXXX $ XXXX
Corporation 4 XXXX $ XXXX $ XXXX $ XXXX

Series B first preferred shares (non-voting)

Shareholder # shares PUC ACB FMV
Brother 1 XXXX $ XXXX $ XXXX $ XXXX
Brother 2 XXXX $ XXXX $ XXXX $ XXXX
Corporation 5 XXXX $ XXXX $ XXXX $ XXXX

4. As of XXXXXXXXXX, the outstanding balance of DC's tax accounts was as follows: (i) RDTOH: $XXXXXXXXXX, (ii) GRIP: nil, and (iii) CDA: nil.

DC's shareholders

5. Brother 1 and Brother 2 are siblings.

6. Corporation 1 is a holding company with no material assets other than the XXXXXXXXXX class A common shares that it owns in DC, and a loan receivable from DC. More than XXXXXXXXXX% of the FMV of the issued and outstanding shares in Corporation 1 is derived from its debt investment in DC.

7. Corporation 2 is a holding corporation with no material assets other than the XXXXXXXXXX preferred shares that it owns in Corporation 1, the XXXXXXXXXX preferred shares that it owns in Corporation 3 as well as the XXXXXXXXXX class A common shares and the XXXXXXXXXX series A first preferred shares that it owns in DC.

8. Corporation 3 is a holding company with no material assets other than the XXXXXXXXXX class A common shares that it owns in DC, and a loan receivable from DC. More than XXXXXXXXXX% of the FMV of the issued and outstanding shares in Corporation 3 is derived from its debt investment in DC.

9. Corporation 4 is a holding corporation with no material assets other than the XXXXXXXXXX preferred shares that it owns in Corporation 1, the XXXXXXXXXX preferred shares that it owns in Corporation 3 as well as the XXXXXXXXXX class A common shares and the XXXXXXXXXX series A first preferred shares that it owns in DC.

Pre-butterfly transactions

10. Brother 1 will incorporate Newco under the BCA. Upon Newco's incorporation, Brother 1 will subscribe for XXXXXXXXXX class A common shares in Newco in consideration for an amount of cash equal to $XXXXXXXXXX. The PUC and ACB of Brother's 1 class A common shares in Newco will be $XXXXXXXXXX.

11. Immediately before DC`s taxation year-end, DC will increase the PUC in respect of the series A first preferred shares by an amount equal to XXXXXXXXXX times the outstanding balance of DC's RDTOH at that time.

PROPOSED TRANSACTIONS

The transfer of the shares that Brother 1, Corporation 1 and Corporation 2 held in DC to Newco

12. Brother 1 will transfer the Brother 1 Shares to Newco in exchange for class F preferred shares in Newco having an aggregate FMV equal to the aggregate FMV of the Brother 1 Shares.

Brother 1 and Newco 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 Brother 1 Shares. The Agreed Amount specified by Brother 1 and Newco in respect of the transfer will not exceed the FMV of the Brother 1 Shares at the time of the transfer. Specifically, the Agreed Amount will not be less than the lesser of the amounts specified in subparagraphs 85(1)(c.1)(i) and (ii).

The aggregate amount to be added to the Stated Capital of the Newco class F preferred shares to be issued to Brother 1 will be equal to the aggregate PUC attributable to the Brother 1 Shares. For greater certainty, the increase to the PUC of the Newco class F preferred shares will not exceed the greater of the aggregate PUC and the aggregate ACB of the Brother 1 Shares.

13. Contemporaneously with the transaction described in Paragraph 12, Corporation 2 will transfer the Corporation 2 Shares to Newco in exchange for class F preferred shares in Newco having an aggregate FMV equal to the aggregate FMV of the Corporation 2 Shares.

Corporation 2 and Newco 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 Corporation 2 Shares. The Agreed Amount specified by Corporation 2 and Newco in respect of the transfer will not exceed the FMV of the Corporation 2 Shares at the time of the transfer. Specifically, the Agreed Amount will not be less than the lesser of the amounts specified in subparagraphs 85(1)(c.1)(i) and (ii).

The aggregate amount to be added to the Stated Capital of the Newco class F preferred shares that will be issued to Corporation 2 will not exceed the aggregate cost to Newco of the Corporation 2 Shares. For greater certainty, the increase to the PUC of the Newco class F preferred shares will not exceed the aggregate maximum amount that could be added to the Stated Capital of such shares pursuant to subsection 85(2.1).

14. Contemporaneously with the transactions described in Paragraphs 12 and 13, Corporation 1 will transfer the XXXXXXXXXX class A common shares that it holds in DC to Newco in exchange for Newco class F preferred shares having an aggregate FMV equal to the aggregate FMV the XXXXXXXXXX class A common shares so transferred to Newco.

Corporation 1 and Newco will jointly elect under subsection 85(1), in prescribed form and within the time limits prescribed by subsection 85(6), in respect of the aforementioned transfer of the DC class A common shares to Newco. The Agreed Amount specified by Corporation 1 and Newco in respect of the transfer will not exceed the FMV of the DC class A common shares so transferred at the time of the transfer. Specifically, the Agreed Amount will not be less than the lesser of the amounts specified in subparagraphs 85(1)(c.1)(i) and (ii).

The aggregate amount to be added to the Stated Capital of the Newco class F preferred shares that will be issued to Corporation 1 will not exceed the aggregate cost to Newco of the XXXXXXXXXX class A common shares that Corporation 1 holds in DC. For greater certainty, the increase to the PUC of the Newco class F preferred shares will not exceed the aggregate maximum amount that could be added to the PUC of such shares pursuant to subsection 85(2.1).

The classification of DC's property

15. Immediately prior to the transfers of property described in Paragraph 17, DC's property will be classified into three Types of Property. For the purposes of determining the net FMV of each Type of Property, no amount will be considered to be a liability of DC unless it represents a true legal liability that is capable of quantification. Furthermore, the amount of any deferred income tax will not be considered a liability because such amount does not represent a legal obligation of DC.

16. [Reserved]

The transfer of a pro rata portion of each Type of Property held by DC to Newco

17. DC will proceed with the Distribution by transferring to Newco property that it owned such that immediately after such property transfers, the net FMV of each Type of Property so transferred to Newco will approximate the proportion determined by the following 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 the transfer, of all the shares of DC owned by Newco at that time; and

C: is the aggregate FMV, immediately before the transfer, of all the issued and outstanding shares of DC's capital stock.
For the purposes of this Paragraph, the expression "approximate that proportion" means that the discrepancy of that proportion, if any, will not exceed XXXXXXXXXX percent (XXXXXXXXXX%) determined as a percentage of the net FMV of all the property of each Type of Property that Newco will receive as compared to what Newco would have received if Newco had received its appropriate pro-rata share of the net FMV of all the property of that Type of Property.

18. As part of the Distribution, DC will transfer the XXXXXXXXXX class E preferred shares that it holds in Corporation 2 to Newco, and will retain the XXXXXXXXXX class E preferred shares in Corporation 4.

19. As consideration for the Distribution:

(a) Newco will assume a portion of the aggregate liabilities of DC immediately before the property transfers in the proportion described in Paragraph 17; and

(b) Newco will issue class F preferred shares having an aggregate redemption value equal to the Class F Redemption Amount.

For greater clarity, the aggregate FMV of all such consideration to be paid by Newco to DC will be equal to the aggregate FMV of the property transferred to Newco.

20. In respect of the property transfer described in Paragraph 17, DC and Newco will jointly elect in prescribed form and within the time specified in subsection 85(6) to have the provisions of subsection 85(1) apply to the transfer of each property of DC that is an Eligible Property to Newco.

The Agreed Amount will not exceed the FMV of the respective property, nor will it be less than the amount permitted under paragraph 85(1)(b).

Specifically, the Agreed Amount in respect of the Eligible Property will be as follows:

(a) In the case of property described in paragraph 85(1)(c.1), an amount equal to the lesser of the amounts specified in subparagraphs 85(1)(c.1)(i) and (ii);

(b) In the case of inventory described in paragraph 85(1)(c.2), an amount determined by the formula listed in subparagraph 85(1)(c.2)(i);

(c) In the case of Eligible Capital Property, an amount equal to the least of the amounts specified in subparagraphs 85(1)(d)(i), (ii) and (iii); and

(d) In the case of Depreciable Property of a prescribed class, an amount equal to the least of the amounts specified in subparagraph 85(1)(e).

For the purpose of the joint elections under subsection 85(1) described in this Paragraph, the reference to the undepreciated capital cost to the taxpayer of all the property of that class immediately before the disposition in subparagraph 85(1)(e)(i) will be read to mean the proportion of the undepreciated capital cost to DC of all the property of that class that the capital cost of the property immediately before the disposition is of the aggregate capital cost of all property of that class immediately before the disposition.

The aggregate amount to be added to the Stated Capital of the class F preferred shares to be issued by Newco as partial consideration for the Distribution will not exceed the aggregate cost to Newco of such property less the amount of DC's liabilities assumed by Newco. For greater certainty, the increase to the Stated Capital of the Newco class F preferred shares will not exceed the aggregate maximum amount that could be added to the Stated Capital in the absence of a consequential adjustment pursuant to subsection 85(2.1).

Newco's redemption of the class F preferred shares held by DC

21. Immediately after the Distribution, Newco will redeem all of the class F preferred shares held by DC in consideration for Promissory Note 1. DC will accept Promissory Note 1 as full and absolute payment for the redemption amount of the Newco class F preferred shares.

DC's purchase for cancellation of the class A common shares and the series A and B first preferred shares held by Newco

22. Immediately after the Distribution, DC will purchase for cancellation the aggregate of the Brother 1 Shares, the Corporation 2 Shares and the XXXXXXXXXX class A common shares that Newco will hold in DC in consideration for Promissory Note 2. Newco will accept Promissory Note 2 as full and absolute payment for the redemption amount of the Brother 1 Shares, the Corporation 2 Shares and the XXXXXXXXXX class A common shares that Newco will hold in DC.

Cancellation of the Promissory Notes

23. Immediately after the transaction described in Paragraphs 21 and 22, the principal amount owing by Newco under Promissory Note 1 and the principal amount owing by DC under Promissory Note 2 will be set off in full satisfaction of the respective obligations of Newco and DC thereunder. As a result, Promissory Note 1 and Promissory Note 2 will be legally cancelled and extinguished.

Property retained by DC

24. Immediately after the transfer of property described in Paragraph 17, the net FMV of each Type of Property retained by DC will approximate that proportion of the aggregate FMV of that Type of Property determined immediately before such transfer, that:

(a) the aggregate FMV, immediately before the transfer of property described in Paragraph 17, of the DC class A common shares and the DC series A and B first preferred shares owned by Brother 2, Corporation 3, Corporation 4 and Corporate 5

is of

(b) the aggregate FMV, immediately before the transfer of property described in Paragraph 17, of all the issued and outstanding shares of DC.

ADDITIONAL INFORMATION

25. Each of DC and Newco will have the financial capacity to honour, upon presentation for payment, the amount payable under any promissory note issued as part of the Proposed Transactions.

26. Except as described in this letter, no property has been or will be acquired, and no liabilities have been or will be incurred by DC in contemplation of and before the Distribution, other than in a transaction described in subparagraphs 55(3.1)(a)(i) to (iv).

27. Neither DC nor Newco is or will be at any time during a 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 the paragraphs (a) to (f) of the definition of Financial Intermediary Corporation.

28. None of the shares of DC or Newco, is, or will be, at any time during the Series of Transactions or Events that includes the Proposed Transactions:

(a) The subject of any undertaking or agreement which constitutes a guarantee agreement as defined in subsection 112(2.2);

(b) The subject of a Dividend Rental Arrangement; or

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

PURPOSE OF THE PROPOSED TRANSACTIONS

The purpose of the Proposed Transactions is to provide for the separation of Brother 1's interest (direct or indirect) in DC in order to allow each of Brother 1 and Brother 2 to independently formulate their estate and succession plans. Furthermore, the Proposed Transactions will also permit Brother 1's family and Brother 2's family to independently formulate and implement their own long term strategic plans for the future development of DC's current business.

RULINGS

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

A. Subject to the application of subsection 69(11), provided that the appropriate joint elections are filed in the prescribed form and manner within the time limits specified in subsection 85(6) and that each particular property described below 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:

(a) Brother 1's transfer of the Brother 1 Shares to Newco as described in Paragraph 12
(b) Corporation 2's transfer of the Corporation 2 Shares to Newco as described in Paragraph 13, and
(c) Corporation 1's transfer of the XXXXXXXXXX class A common shares that it holds in DC to Newco as described in Paragraph 14

such that the Agreed Amount in respect of each such transfer will be deemed to be the transferor's proceeds of disposition of the particular property and the transferee's cost thereof pursuant to paragraph 85(1)(a). For greater certainty, paragraph 85(1)(e.2) will not apply to the property transfers referred to in Paragraphs 12, 13 and 14.

B. As a result of the Newco's redemption of the class F preferred shares owned by DC as described in Paragraph 21 and the purchase for cancellation by DC of the Brother 1 Shares, the Corporation 2 Shares and the XXXXXXXXXX class A common shares that Newco will hold in DC as described in Paragraph 22, by virtue of subsection 84(3):

(a) Newco will be deemed to have paid, and DC will be deemed to have received, a taxable dividend equal to the amount by which the amount paid by Newco in respect of the redemption of the class F preferred shares owned by DC exceeds the aggregate PUC attributable to such shares immediately before the redemption; and

(b) DC will be deemed to have paid, and Newco will be deemed to have received, a taxable dividend equal to the amount by which the amount paid by DC in respect of the purchase for cancellation of the class A common shares, the series A first preferred shares and the series B first preferred share owned by Newco exceeds the aggregate PUC respectively attributable to the class A common shares, the series A first preferred shares and the series B first preferred shares immediately before their purchase for cancellation.

C. The taxable dividends described in Ruling B above:

(a) will be included in computing the income of the person deemed to have received such a dividend pursuant to subsection 82(1) and paragraph 12(1)(j);
(b) will be deductible by the recipient pursuant to subsection 112(1) in computing its taxable income for the year in which such a dividend is deemed to have been received, and, for greater certainty, such deduction will not be prohibited by subsections 112(2.1), (2.2), (2.3) or (2.4);
(c) will be excluded in determining the recipient's proceeds of disposition of the shares so redeemed, purchased or cancelled pursuant to paragraph (j) of the definition of "proceeds of disposition" in section 54;
(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.1 or Part VI.1 because they respectively qualify as an Excepted Dividend and Excluded Dividend as each of DC and TC, as the case may be, will have a Substantial Interest in the payer corporation at the time of the redemption or purchase for cancellation of such shares and,
(f) will be subject to Part IV tax under paragraph 186(1)(b) to the extent that the payer corporation is entitled to a Dividend Refund for its taxation year in which it is deemed to pay the dividends referred to in Ruling B above.

D. 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 a share in the circumstances described in subparagraph 55(3.1)(b)(iii); or
(e) an acquisition of property in the circumstances described in subparagraph 55(3.1)(c) or 55(3.1)(d);

E. which has not been described in the Facts and the Proposed Transactions, then by virtue of paragraph 55(3)(b), subsection 55(2) will not apply to the taxable dividends referred to in Ruling B and, for greater certainty, subsection 55(3.1) will not apply to deny the exemption under paragraph 55(3)(b).The set-off and cancellation of the principal amounts owing by Newco to DC on Promissory Note 1 with the principal amount owing by DC to Newco on Promissory Note 2, which is described in Paragraph 23, will not, in and of itself, result in a Forgiven Amount. In addition, neither DC nor Newco will otherwise realize any gain or loss as a result of such set-off and cancellation.

F. The provisions of subsections 15(1), 56(2), 56(4), 69(1), 69(4) and 246(1) will not apply to any of the Proposed Transactions, in and by themselves. The provisions of subsection 245(2) will not be applied as a result of the Proposed Transactions, in and by themselves, to re-determine the tax consequences confirmed in the rulings given above. 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 CRA provided that the Proposed Transactions are completed within 6 months of the date of this letter.

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

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

(a) the determination of the amount of the ACB, PUC or FMV of any shares referred to herein;

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

(c) the safe-income on hand attributable to any shares of any corporation; or

(d) any tax consequences relating to the Definitions, Facts and Proposed Transactions 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
Reorganizations Division
Income Tax Ruling Directorate
Legislative Policy and Regulatory Affairs Branch