2013 Ruling 2012-0435341R3 - Single-Wing Split-up Farm Butterfly

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

Principal Issues: Whether the butterfly dividends are exempt from the application of subsection 55(2) by virtue of paragraph 55(3)(b)?

Position: Yes, favourable Rulings given.

Reasons: Complies with paragraph 55(3)(b) and previous CRA positions.

XXXXXXXXXX
2012-043534

Attention: XXXXXXXXXX

XXXXXXXXXX, 2013

Dear Madam:

RE: Advance Income Tax Ruling
XXXXXXXXXX

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

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

1. in an earlier return of the taxpayers or a related person;

2. being considered by a tax services office or taxation centre in connection with a previously filed tax return of the taxpayer or a related person;

3. under objection by the taxpayer or a related person;

4. before the courts or, if a judgment has been issued, the time limit for appeal to a higher court has not expired, or

5. the subject of a ruling previously considered by the Directorate.

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

Definitions of taxpayers

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

(a) "Bare Trusteeco" means a corporation to be incorporated under the provisions of the XXXXXXXXXX and for the purposes described in Paragraph 12;

(b) "DC" means XXXXXXXXXX, a corporation incorporated on XXXXXXXXXX under the XXXXXXXXXX, the shareholding of which is described in Paragraph 3;

(c) "Sibling 1" means XXXXXXXXXX;

(d) "Sibling 2" means XXXXXXXXXX;

(e) "Sibling 3" means XXXXXXXXXX;

(f) "Siblings" means Sibling 1, Sibling 2 and Sibling 3;

(g) "Spouse 1" means XXXXXXXXXX, the spouse of Sibling 1;

(h) "TC" means XXXXXXXXXX a corporation incorporated by Sibling 1 and Spouse 1 on XXXXXXXXXX under the XXXXXXXXXX as described in Paragraphs 10 and 11;

I. DEFINITIONS

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

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

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

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

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

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

(f) "Class A3 Redemption Amount" means the amount equal to the aggregate FMV of the consideration received by TC for the issuance of a Class A3 special share plus any dividend declared but unpaid on that share as described in Paragraph 14(i), and, furthermore, is the amount for which the Class A3 special shares of the capital stock of TC will be redeemed by TC as described in Paragraph 27(a);

(g) "Class A1 special shares" means a newly created class of preferred shares of the capital stock of TC as described in Paragraph 14;

(h) "Class A2 special shares" means a newly created class of preferred shares of the capital stock of TC as described in Paragraph 14;

(i) "Class A3 special shares" means a newly created class of preferred shares of the capital stock of TC as described in Paragraph 14;

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

(k) "DC Note" means a promissory note issued by DC on the purchase for cancellation and/or redemption of the common and Class A shares of the capital stock of DC, payable to DC on demand without interest or fixed terms of repayment, having a principal amount and FMV equal to the aggregate fair market value and/or redemption amount of the common and Class A shares, as the case may be, as described in Paragraph 27(b);

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

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

(n) "fair market value" ("FMV") means the highest price, expressed in terms of money or money's worth, obtainable in an open and unrestricted market between knowledgeable, informed and prudent parties acting at arm's length, neither party being under any compulsion to transact;

(o) "Farm Property" means the portion of the real property owned by DC immediately before the distribution, which, for greater certainty, will include the personal residences occupied by each of Sibling 1 and Sibling 3, that will be transferred by DC to TC on the butterfly distribution as described in Paragraph 22;

(p) "general rate income pool" or "GRIP" has the meaning assigned to that term in subsection 89(1);

(q) "income of the corporation for the year from an active business" has the meaning assigned by subsection 125(7);

(r) XXXXXXXXXX;

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

(t) "Paragraph" refers to a numbered paragraph in this letter;

(u) "proceeds of disposition" has the meaning assigned by section 54;

(v) "Proposed Transactions" means the transactions described in Paragraphs 12 to 29;

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

(x) "related persons" has the meaning assigned by subsection 251(2), as modified for the purposes of section 55 by paragraph 55(5)(e);

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

(z) "Special Shares" refers collectively to the newly created preferred shares of the capital stock of TC as described in Paragraph 14;

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

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

(cc) "stated capital" has the meaning assigned by the XXXXXXXXXX;

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

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

(ff) "TC Redemption Note" means a promissory note issued by TC on the redemption of the Class A3 special shares of the capital stock of TC, payable to DC on demand without interest or fixed terms of repayment, having a principal amount and FMV equal to the aggregate Class A3 Redemption Amount of the Class A3 special shares so redeemed as set out in Paragraph 27(a).

II. FACTS

1. DC is and will be, at any relevant time and for all purposes of the Act, a CCPC and a taxable Canadian corporation. DC is involved in XXXXXXXXXX and is located in XXXXXXXXXX. DC was incorporated on XXXXXXXXXX under the laws of the province of XXXXXXXXXX. DC's taxation year and fiscal period ends on XXXXXXXXXX of each year.

2. The assets of DC consist of the following:

a. current assets including cash, accounts receivable, an investment account, prepaid expenses and inventory (XXXXXXXXXX);

b. inventory (XXXXXXXXXX);

c. mutual fund investments;

d. note receivable;

e. XXXXXXXXXX;

f. equipment & vehicles;

g. land and buildings (including XXXXXXXXXX personal residences); and,

h. an investment in a co-operative.

DC's liabilities consist of:

a. current liabilities which include accounts payable, accrued liabilities, income taxes payable, amounts due to shareholders and the current portion of a capital lease obligation;

b. long-term debt; and,

c. an obligation under a capital lease.

The land and buildings, which are capital property to DC, includes the personal residences (XXXXXXXXXX) of the shareholders. The income realized from the rented dwellings has been reported by DC as income from an active business for tax purposes. As at XXXXXXXXXX, the approximate fair market value of the assets, net of liabilities, was $XXXXXXXXXX.

As of the XXXXXXXXXX financial statement year end, there has not been a change in the composition and value of DC's assets and liabilities described above that would impact the butterfly. Moreover, there will not be any significant change in DC's assets or liabilities (except as contemplated in the Proposed Transactions) from the date of this letter until the date the Proposed Transactions outlined below are completed.

3. DC's authorized share capital consists of:

• an unlimited number of Class A shares which are non-participating, non-voting entitling the holder to discretionary non-cumulative dividends, are redeemable and/or retractable at $XXXXXXXXXX per share together with all dividends declared thereon and unpaid, and which rank, in regards to the payment of dividends and the return of capital on the liquidation, dissolution or winding-up of the corporation, in priority to the holders of all other issued and outstanding classes shares of the capital stock of DC;
• an unlimited number of Class B shares which are non-participating, non-voting, entitling the holder to discretionary non-cumulative dividends, are redeemable without the consent of the holder at the amount paid-up thereon per share together with all dividends declared thereon and unpaid, and which rank, in regards to the payment of dividends and the return of capital on the liquidation, dissolution or winding-up of the corporation, in priority to the holders of all other issued and outstanding the common shares of the capital stock of DC;
• an unlimited number of common shares, voting (1 vote), without par value.

The aggregate paid-up capital of the Class A and common shares of the capital stock of DC is $XXXXXXXXXX and $XXXXXXXXXX respectively.

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

Shareholder's Number of Number of
Name Class A shares ACB ($) common shares ACB ($)

Sibling 1 XXXX XXXX XXXX XXXX
Sibling 2 XXXX XXXX XXXX XXXX
Sibling 3 XXXX XXXX XXXX XXXX
Spouse 1 XXXX XXXX - -

All of the shares of the capital stock of DC represent capital property to the shareholders.

There has been no significant change to the shareholding of DC described above since DC was incorporated.

Sibling 1, Sibling 2 and Sibling 3 collectively have de jure control of DC, prior to the commencement of the Proposed Transactions.

4. DC has the following approximate amounts in its tax accounts (computed as of XXXXXXXXXX). It is not expected that the tax accounts of DC will change substantially as at the end of the taxation year in which the proposed transactions described herein are completed.

a. RDTOH - $XXXXXXXXXX;

b. GRIP – $XXXXXXXXXX; and

c. CDA - $XXXXXXXXXX

5. TC is and will be, at any relevant time and for all purposes of the Act, a CCPC and a taxable Canadian corporation. TC was incorporated on XXXXXXXXXX under the laws of the province of XXXXXXXXXX and its taxation and fiscal year ends on XXXXXXXXXX each year. TC is currently inactive and TC does not own any assets.

6. The authorized share capital of TC currently consists of the following:

• an unlimited number of Class A special shares which are non-participating, non-voting, entitling the holder to discretionary non-cumulative dividends where the dividend rate shall not exceed the prescribed rate established by Canada Revenue Agency by more than XXXXXXXXXX%, are redeemable and/or retractable at $XXXXXXXXXX per share together with all dividends declared thereon and unpaid, and which rank, in regards to the payment of dividends and the return of capital on the liquidation, dissolution or winding-up of the corporation, in priority to the holders of all other issued and outstanding classes shares of the capital stock of TC;
• an unlimited number of Class B special shares which are non-participating, voting, entitling the holder to discretionary non-cumulative dividends where the dividend rate shall not exceed the prescribed rate established by Canada Revenue Agency by more than XXXXXXXXXX%, are redeemable and/or retractable at $XXXXXXXXXX per share together with all dividends declared thereon and unpaid, and which rank, in regards to the payment of dividends and the return of capital on the liquidation, dissolution or winding-up of the corporation, in priority to the holders of the Class C, D and E common shares of the capital stock of TC;
• an unlimited number of Class C common shares, voting (1 vote), without par value;
• an unlimited number of Class D common shares, non-voting, without par value;
• an unlimited number of Class E common shares, voting (1 vote), without par value.

The aggregate paid-up capital of the Class C and Class E common shares of the capital stock of TC is $XXXXXXXXXX each respectively.

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

Shareholder's Number of Class C Number of Class E
Name common shares ACB ($) common shares ACB ($)

Sibling 1 XXXX XXXX - -
Spouse 1 - - XXXX XXXX

All of the shares of the capital stock of TC represent capital property to the shareholders.

There has been no change to the shareholding of TC described above since TC was incorporated.

Sibling 1 and Spouse 1 collectively have de jure control of TC, prior to the commencement of the Proposed Transactions.

7. Each of Sibling 1, Sibling 2, Sibling 3 and the Spouse 1 is a resident of Canada for purposes of the Act.

8. Sibling 1 and Spouse 1 are spouses of one another.

9. Sibling 1, Sibling 2 and Sibling 3 are related to each other by virtue of being siblings of one another and Sibling 1 and Spouse 1 are related by marriage in accordance with paragraphs 251(2)(a) and either 251(6)(a) or (b), as the case may be. Spouse 1 and Sibling 2, and Spouse 1 and Sibling 3 are each related to the other pursuant to the foregoing paragraphs in respect of siblings and paragraphs 252(2)(b) and (c).

Sibling 1, Sibling 2 and Sibling 3 are related to DC under subparagraph 251(2)(b)(ii). Sibling 1 and Spouse 1 are related to TC pursuant to subparagraph 251(2)(b)(ii). Sibling 2 and Sibling 3 are related to TC pursuant to subparagraph 251(2)(b)(iii). DC is related to TC under subparagraph 251(2)(b)(iii).

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

(a) the Siblings are not related to each other and are not related to DC;

(b) each of Sibling 2 and Sibling 3 is not related to Spouse 1 and, similarly, each of Sibling 2 and Sibling 3 is not related to TC; and,

(c) DC and TC are not related.

III. PRELIMINARY TRANSACTIONS

10. TC was incorporated on XXXXXXXXXX under the XXXXXXXXXX. The corporation is currently inactive.

11. Sibling 1 and Spouse 1 each subscribed for XXXXXXXXXX voting common shares of the capital stock of TC (Class C and Class E, respectively), with a subscription price of $XXXXXXXXXX per share. The ACB to each of Sibling 1 and Spouse 1 on their respective common shares of the capital stock of TC is $XXXXXXXXXX and the aggregate PUC for each of the Class C and Class E shares of the capital stock of TC is $XXXXXXXXXX.

IV. PROPOSED TRANSACTIONS

12. A new corporation, Bare Trusteeco, will be incorporated pursuant to the provisions of the XXXXXXXXXX. Bare Trusteeco will, at all relevant times, be a TCC and a CCPC. The authorized share capital of Bare Trusteeco will consist of an unlimited number of common shares. On the incorporation of Bare Trusteeco, each of Sibling 1 and Spouse 1 will subscribe for one common share of the capital stock of Bare Trusteeco for nominal consideration.

Bare Trusteeco will have no purpose or activity other than to acquire legal title (but not beneficial title) to the Farm Property situated in XXXXXXXXXX, and to hold such title to all such property solely as nominee, agent and bare trustee for the beneficial owner of such property, as described below.

13. Prior to the implementation of any of the transactions described below, DC will transfer legal title to the Farm Property situated in XXXXXXXXXX to Bare Trusteeco such that Bare Trusteeco will hold legal title to the Farm Property transferred by DC to TC described in Paragraph 22 below.

DC will enter into a bare trust agreement with Bare Trusteeco in respect of the Farm Property situated in XXXXXXXXXX, the terms of which will include the following:

(a) Bare Trusteeco will hold legal title to the property described above as nominee, agent and bare trustee for the sole benefit and account of DC, and for greater certainty, DC will be the only beneficiary of such trust and will remain the beneficial owner of such property; and

(b) Bare Trusteeco, as agent for DC, will deal with the property described in (a) exclusively as directed by DC.

In the subsequent transfer of the beneficial ownership of the Farm Property by DC to TC as contemplated by the Proposed Transactions and described in Paragraph 22, a similar bare trust agreement between Bare Trusteeco and TC will be implemented.

14. TC will amend its Articles of Incorporation in order to eliminate the Class A special shares and Class B special shares of its capital stock and provide that the authorized share capital will include an unlimited number of the following separate classes of preferred shares (collectively the "Special Shares"):

(a) Class A1 non-participating, non-voting, redeemable, retractable preferred shares ("Class A1 special shares");
(b) Class A2 non-participating, non-voting, redeemable, retractable preferred shares ("Class A2 special shares"); and,
(c) Class A3 non-participating, non-voting, redeemable, retractable preferred shares ("Class A3 special shares");

The Special Shares will have the following attributes:

(i) each share will be redeemable and retractable, subject to applicable law, for an amount equal to the aggregate FMV of the consideration received by TC on issuance thereof divided by the number of Special Shares issued as consideration therefor (plus any declared but unpaid dividends);
(ii) the holder of each share will be entitled to a non-cumulative cash dividend as and when declared by the board of directors from time to time, where the dividend rate shall not exceed the prescribed rate established by Canada Revenue Agency by more than XXXXXXXXXX%;
(iii) each special share will rank pari passu with the other Special Shares and before the Class C, Class D and Class E common shares, such that no dividends or other distributions will be paid on any shares ranking junior to the Special Shares if the effect of such dividend or other distribution would be to reduce the net realizable value of the assets of TC to an amount less than the aggregate of the redemption amounts of all of the issued and outstanding Special Shares at that time; and,
(iv) the holder of each share will be entitled, upon the liquidation, dissolution or winding-up of TC, to a distribution of the net assets of TC, in priority to all other classes of common shares of TC and on a pari passu basis with the other Special Shares of TC, in an amount equal to the redemption amount therefor to the extent of the amount or value of property available under applicable law for payment to shareholders upon dissolution.

Permitted Exchange

15. Spouse 1 will sell her XXXXXXXXXX Class A shares of the capital stock of DC, with a redemption value of $XXXXXXXXXX and which represent all of her shareholdings in DC, to TC for consideration consisting solely of Class A1 special shares of the capital stock of TC, with an aggregate FMV equal to the aggregate FMV of the shares of the capital stock of DC transferred to TC. The aggregate paid-up capital of the Class A1 special shares of the capital stock issued by TC will be nominal.

16. Sibling 1 will transfer his XXXXXXXXXX common shares and his XXXXXXXXXX Class A shares of the capital stock of DC, which represent all of his shareholdings in DC, for consideration consisting solely of Class A2 special shares of the capital stock of TC, such that the aggregate FMV of the special shares so issued is equal to the aggregate FMV of the shares of the capital stock of DC transferred by Sibling 1 to TC.

Sibling 1 will jointly elect with TC in prescribed form and within the time referred to in subsection 85(6), to have the rules in subsection 85(1) apply to the transfer described in the preceding Paragraph. The agreed amount in respect of the transfer will be an amount equal to the aggregate ACB of Sibling 1's common and Class A shares of the capital stock of DC immediately prior to such transfer. For greater certainty, the agreed amount will not be less than the lesser of the two amounts described in subparagraphs 85(1)(c.1)(i) and (ii), nor will the agreed amount exceed the aggregate FMV of the common and Class A shares of the capital stock of DC transferred to TC.

17. TC will add to the stated capital of the Class A2 special shares of the capital stock of TC, an amount equal to the aggregate paid-up capital of the XXXXXXXXXX common shares and the XXXXXXXXXX Class A shares of the capital stock of DC transferred to TC, which is $XXXXXXXXXX.

Types of Property

18. Immediately before the distribution of property described in Paragraph 22, the property of DC will be classified into three types of property for the purposes of the definition of distribution in subsection 55(1), as follows:

(a) Cash or near cash property, comprising all of the current assets of DC, including any cash, short-term investment accounts, accounts receivable, prepaid expenses, demand promissory notes and inventory;

(b) Business property, comprising all of the assets of DC other than cash or near cash property, any income from which would, for the purposes of the Act, be income from a business (other than a specified investment business), including the personal residences and the investment in a co-operative; and,

(c) Investment property, comprising all of the investments of DC 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, including the mutual fund investments.

19. For greater certainty, for the purposes of the distribution, the following principles will apply:

(a) deferred expenses, which were expenditures deferred and amortized for accounting purposes but fully deducted for tax purposes, will not be considered property for purposes of the Proposed Transactions;
(b) any tax accounts of DC, such as any non-capital loss, net capital loss, the balance of any RDTOH or CDA, will not be considered property or a liability, as the case may be, for purposes of the Proposed Transactions;
(c) no amount will be considered a liability unless it represents a true legal liability capable of quantification; and
(d) any loans to related persons, which have no specified terms of repayment, will be considered current liabilities of DC.

20. In determining the net FMV of each of the three types of property of DC, immediately before the transfer of property described in Paragraph 22 the liabilities of DC will be allocated to and will be deducted in the calculation of the net FMV of each type of property of DC in the following manner:

(a) current liabilities of DC, other than those specifically mentioned in (c) below, will be allocated to each cash or near-cash property of DC in the proportion that the FMV of each such property is of the FMV of all cash or near-cash property owned by DC, such that the amount of current liabilities so allocated will not exceed the aggregate FMV of all cash or near cash property of DC;
(b) following the allocation of current liabilities to cash or near-cash property of DC as described in (a), any remaining net FMV of accounts receivable, prepaid expenses and inventory will be reclassified as business property and excluded from the net FMV of DC's cash or near-cash property, to the extent that such property will be collected, sold or consumed by DC or TC in the ordinary course of the business to which they relate;
(c) liabilities, other than current liabilities, of DC that relate to a particular property will then be allocated to the particular property to the extent of its FMV and liabilities that pertain to a type of property, but not to a particular property, will then be allocated to that type of property, but not in excess of the net FMV of such type of property after the allocation of liabilities to a particular property, as described herein; and
(d) if any liabilities (hereinafter referred to as "excess unallocated liabilities") remain after the allocations described in steps (a) and (c) are made, such excess unallocated liabilities, will then be allocated to the cash or near cash property, investment property, and business property of DC based on the relative net FMV of each type of property prior to the allocation of such excess unallocated liabilities. However, where DC is considered to have a negative amount of a type of property because of Paragraph 20(a) or (c), for the purposes of allocating those remaining liabilities, the net FMV of that type of property will be deemed to be nil resulting in none of those remaining liabilities being allocated to that type of property.

21. It is anticipated that DC and TC will each have immaterial RDTOH balances immediately prior to the butterfly distribution, as described in the Proposed Transactions below.

Butterfly Distribution

22. Immediately following the determination of the net FMV of DC's three types of property as described above, DC will transfer to TC its pro rata proportionate shares of the net FMV of each type of property owned by DC as determined in accordance with the following:
The aggregate net FMV of each of the three types of property of DC so transferred to TC will be equal to or approximate the proportion of the net FMV, immediately before the transfer described in this Paragraph, of all property of that type of owned at that time by DC, that:

(a) the aggregate FMV, immediately before the transfer, of all of the common and preferred shares of the capital stock of DC owned at that time by TC,
is of
(b) the aggregate FMV, immediately before the transfer, of all of the issued and outstanding shares of the capital stock of DC.

The term "approximate" means that the discrepancy between the percentage of the net FMV of each type of property that TC receives compared to what TC would have received had it received its appropriate pro rata share of the net FMV of all of the property of that type owned by DC, will not exceed XXXXXXXXXX percent (XXXXXXXXXX%).

23. TC will enter into a bare trust agreement with Bare Trusteeco, similar to the bare trust agreement described in Paragraph 13, which will specify for greater certainty that Bare Trusteeco will hold legal title to the property transferred by DC to TC described in Paragraph 22 as nominee, agent and bare trustee for the sole benefit and account of TC as principal and beneficial owner.

24. As consideration for the transfer of the property of DC to TC, TC will:

(a) assume a proportionate amount of the liabilities of DC, such that on a net basis TC will receive its pro rata share of each type of property owned by DC; and,

(b) issue Class A3 special shares of its capital stock to DC that will have an aggregate redemption amount, retraction value and fair market value equal to the amount by which the aggregate fair market value of the properties transferred to TC, as the case may be, exceeds the aggregate of the liabilities of DC assumed by TC.

25. DC and TC will jointly elect under subsection 85(1) in prescribed form and within the time limits referred to in subsection 85(6) in respect of each property of DC that is an eligible property transferred to TC. The agreed amount in respect of each eligible property so transferred will not be greater than the FMV of such property nor will it be less than the lesser of the FMV and the cost amount to DC of such property. For greater certainty, the aggregate of such elected amounts will be greater than the aggregate amount of DC's liabilities so assumed for such properties.

Specifically, the agreed amount under such election in respect of each eligible property so transferred will be within the limits prescribed as follows:

(a) 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);
(b) in the case of depreciable property of a prescribed class, an amount equal to the least of the amounts specified in subparagraphs 85(1)(e)(i), (ii) and (iii);
(c) 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), and
(d) in the case of inventory described (cash method) in paragraph 85(1)(c.2), the amount determined in that paragraph to ensure a transfer of such inventory at nil cost to avoid the mandatory inventory adjustment under paragraph 28(1)(c).

In each case, 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).

26. TC will add to the stated capital of the Class A3 special shares of the capital stock of TC issued as consideration for the transfer of property of DC to TC, the amount of $XXXXXXXXXX, which is equal to the aggregate paid-up capital of the XXXXXXXXXX common shares and the XXXXXXXXXX Class A shares of the capital stock of DC transferred to TC.

Permitted Redemption

27. Immediately following the transfer of the property described in Paragraph 22, the following share purchase for cancellation transactions or share redemption transactions will occur:

(a) TC will redeem the Class A3 special shares of its capital stock that were issued to DC as consideration for the transfers of property described above in Paragraph 20 for the aggregate Class A3 Redemption Amount. TC will issue a non-interest bearing demand promissory note to DC which will have a principal amount and FMV equal to the aggregate Class A3 Redemption Amount, and will be assignable by the holder thereof (the "TC Redemption Note"). DC will accept the TC Redemption Note as full and absolute payment for the aggregate Class A3 Redemption Amount of the Class A3 special shares of the capital stock of TC; and,

(b) DC will purchase for cancellation or redeem, as the case may be, all of its common shares and Class A shares that are owned by TC for an amount equal to their aggregate FMV and/or aggregate redemption amount, as applicable. As consideration therefor, DC will issue to TC a non-interest bearing demand promissory note having a principal amount and FMV equal to the aggregate FMV and/or aggregate redemption amount, as applicable, of such shares so purchased for cancellation or redeemed (the "DC Note"). TC will accept the DC Note as full and absolute payment for the aggregate FMV and/or redemption amount, if applicable, of such shares of the capital stock of DC.

28. Immediately following the transactions described in Paragraph 27 and pursuant to an agreement entered into between DC and TC, the principal amount owing by DC to TC under the DC Note and the principal amount owing by TC to DC under the TC Redemption Note will be set off in full against each other and each such note will be marked paid in full and cancelled.

29. Immediately following the Proposed Transactions described in Paragraphs 22 to 28 above, the net fair market value of each type of property retained by DC, determined in the manner described in Paragraphs 18 to 20 above, will approximate that proportion of the aggregate net fair market value of that type of property of DC, determined immediately before the transfers described in Paragraph 22 above, that:

(a) the aggregate fair market value, immediately before the transfers of property described in Paragraph 22 above, of all of the common shares and Class A shares of the capital stock of DC owned at that time by each of Sibling 2 and Sibling 3,

is of

(b) the aggregate fair market value, immediately before the transfers of property, of all of the issued and outstanding shares of DC.

V. ADDITIONAL INFORMATION

30. For greater certainty, and in accordance with paragraph 55(3.1)(c), TC will not dispose of butterfly property, including the personal residence occupied by Sibling 3, subsequent to the implementation of the Proposed Transactions described herein, to a person not related to TC or that, as part of the series, will cease to be related to TC or to a partnership.

31. None of the corporations referred to herein (including any corporation to be incorporated as described in the Proposed Transactions) is or will be, at any relevant time, 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.

32. None of the shares of any corporation described herein (including any shares to be issued as described in the Proposed Transactions) is or will be, at any time throughout the series of transactions or events that includes the Proposed Transactions:

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

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

(c) the subject of a "dividend rental arrangement" as that term is defined in subsection 248(1).

33. Except as described in this letter, no property has been or will be acquired by DC and no liabilities have been or will be incurred by DC in contemplation of and before the Proposed Transactions described above.

34. Other than as described herein, no significant transactions have been completed in contemplation of the Proposed Transactions described herein and none are contemplated after the Proposed Transactions are completed.

VI. PURPOSES OF THE PROPOSED TRANSACTIONS

35. The purpose of the Proposed Transactions is to distribute Sibling 1 and Spouse 1's pro rata share of DC's property to TC to allow for the separation of their business interests from that of Sibling 2 and Sibling 3.

36. The purpose of the transfer by DC of its legal title to the Farm Property situated in XXXXXXXXXX to Bare Trusteeco as described in Paragraph 13 is to allow the subsequent transfer of the beneficial ownership of the Farm Property described in Paragraph 22 to be exempt from XXXXXXXXXX land transfer tax under a specific exemption in the XXXXXXXXXX.

VII. RULINGS GIVEN

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

A. Subject to the application of 69(11), provided the appropriate joint elections are filed in the prescribed form and manner within the time limits specified in subsection 85(6) and provided that each particular property so transferred is an eligible property in respect of which shares have been issued as full or partial consideration therefore, subsection 85(1) will apply to:

(i) the transfer to TC of common shares and Class A shares of the capital stock of DC owned by Sibling 1 as described in Paragraph 16 of the Proposed Transactions; and,

(ii) the transfer of each property owned by DC to the TC described in Paragraph 22 of the Proposed Transactions,

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, and the transferor's cost of the shares received as consideration for such disposition. For greater certainty, paragraph 85(1)(e.2) will not apply to the transfers referred to herein.

B. The transfer by DC of its legal title to the Farm Property to Bare Trusteeco described in Paragraph 13 will not constitute a disposition for the purposes of the Act provided Bare Trusteeco can reasonably be considered to act as agent for DC, and ultimately TC as described in Paragraph 23, with respect to all dealings with the Farm Property.

C. As a result of the redemption by TC of the Class A3 special shares of its capital stock owned by DC as described in Paragraph 27(a) and the purchase for cancellation or redemption, as the case may be, by DC of the common shares and Class A shares of its capital stock as described in Paragraph 27(b), by virtue of subsection 84(3);

(a) TC 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 TC in respect of its redemption of the Class A3 special shares of the capital stock of TC owned by DC exceeds the paid-up capital of such class of shares immediately before the redemption; and

(b) DC will be deemed to have paid, and TC will be deemed to have received, a taxable dividend equal to the amount by which the amount paid by DC in respect of the repurchase of the common shares of the capital stock of DC owned by TC exceeds the paid-up capital attributable to such common shares immediately before the purchase for cancellation, and DC will be deemed to have paid, and TC will be deemed to have received, a taxable dividend equal to the amount by which the amount paid by DC in respect of its redemption of the Class A shares of the capital stock of DC owned by TC exceeds the paid-up capital of such class of shares immediately before the redemption; and

D. The taxable dividends described in described in Ruling C 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 by virtue of paragraph (b) of the definition of "excepted dividend" in section 187.1 and paragraph (a) of the definition of "excluded dividend" in subsection 191(1), as each of DC and TC, as the case may be, will have a substantial interest, within the meaning assigned by paragraph 191(2)(a), 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 C above.

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

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

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

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

(d) an acquisition of 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);

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

F. Section 84.1 will not apply to reduce the PUC of the Class A1 special shares or of the Class A2 special shares of the capital stock TC on the transfer to TC of shares of the capital stock of DC held by each of Spouse 1 and Sibling 1 as described in Paragraphs 15 and 16 respectively, provided that the PUC of the Class A1 special shares and of the Class A2 special shares of the capital stock of TC issued to Spouse 1 and Sibling 1, respectively, on that transfer is a nominal amount not exceeding the maximum amount that could be added to the PUC of such shares having regard to paragraph 84.1(1)(a).

G. The set-off and cancellation of the principal amounts owing by TC to DC on the TC Redemption Note with the principal amount owing by DC to TC on the DC Note as described in Paragraph 28 will not result in a "forgiven amount" within the meaning of either subsection 80(1) or section 80.01. In addition, neither DC nor TC will otherwise realize any gain or loss as a result of such set-off and cancellation.

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

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

COMMENTS

For greater certainty, we note that the matters described below may be subject to future analysis and assessment by the CRA for the following reasons:

(a) we have not been provided with a copy of the proposed bare trust agreements referred to in Paragraphs 13 and 23 and, as such, no determination has been made as to whether or not the terms of any such bare trust agreement will be as described in those Paragraphs and Ruling B; and,

(b) we cannot confirm that subsection 15(1) does not apply to any transaction or event that would be part of the series of transactions or events that includes the Proposed Transactions that is not described in this letter.

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

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

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

(c) any other tax consequence relating to the Facts, Preliminary Transactions, Proposed Transactions or any transaction or event that would be part of the series of transactions or events that includes the Proposed Transactions, other than those specifically described in the Rulings given above.

As a result of the redemptions and/or the purchase for cancellation as provided for in Paragraph 27 of the Proposed Transactions, a problem of circularity may arise when computing the Part IV tax and the dividend refund of each corporation. You do not propose to enter into transactions that would avoid the potential circularity issue. Therefore, we do not provide any comment on that possible issue.

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

Yours truly,

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