2012 Ruling 2012-0440021R3 - Standard split-up butterfly

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

Principal Issues: Standard butterfly.

Position: Rulings given.

Reasons: Complies with paragraph 55(3)(b).

XXXXXXXXXX
2012-044002

XXXXXXXXXX, 2012

Dear XXXXXXXXXX:

Re: XXXXXXXXXX
Advance Income Tax Ruling Request

This is in reply to your letter of XXXXXXXXXX in which you requested an advance income tax ruling on behalf of the above-noted taxpayer. We also acknowledge the information provided in correspondence and telephone conversations concerning your request. You have advised that to the best of your knowledge, and that of the taxpayer involved, none of the issues contained herein is:

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

b) being considered by a Tax Services Office or Taxation Centre in connection with any tax return previously filed by the taxpayer or a related person;

c) under objection or appeal by the taxpayer or a 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 have also advised that to the best of your knowledge, and that of the responsible officers of the taxpayer, that the proposed transactions will not result in the taxpayer or any related person described herein being unable to pay its existing outstanding tax liabilities.

DEFINITIONS

In this letter, all monetary amounts are expressed in Canadian dollars unless otherwise indicated, and the following terms or expressions have the meaning specified":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 subclause is a reference to the relevant provision of the Act, and the Income Tax Regulations thereunder are referred to as the "Regulations";"adjusted cost base" has the meaning assigned by section 54;
"agreed amount" means the amount that a transferor and transferee have agreed upon in a joint election under subsection 85(1) in respect of a transfer of eligible property;
"arm's length" has the meaning assigned by subsection 251(1);

"associated corporations" has the meaning assigned by subsection 256(1);

"BCA" means the XXXXXXXXXX Business Corporations Act, XXXXXXXXXX, as amended;

"BN" means the business number assigned to the particular entity by the CRA;"Canadian-controlled private corporation" has the meaning assigned by subsection 125(7);

"capital dividend" means a dividend to which subsection 83(2) applies;

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

"capital gains deduction" means the amount available to be deducted against taxable income, as described in subsection 110.6(2);

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

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

"CRA" means the Canada Revenue Agency;

"DC" means XXXXXXXXXX, a corporation described in Paragraph 1;

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

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

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

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

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

"Gasco" means XXXXXXXXXX, a corporation described in Paragraph 10;

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

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

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

"personal residence" means the personal residence in which Sibling2 and his spouse reside located at XXXXXXXXXX;

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

"Proposed Transactions" means the transactions described in Paragraphs 11 to 31;

XXXXXXXXXX;

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

"related person" has the meaning assigned by subsection 251(2);

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

"Senior" means XXXXXXXXXX to Sibling1, Sibling2, and Sibling3;

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

"Sibling1" means XXXXXXXXXX;

"Sibling2" means XXXXXXXXXX;

"Sibling3" means XXXXXXXXXX;

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

"stated capital" has, in relation to a corporation that exists under the BCA, the meaning assigned by the BCA;

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

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

"TC1" means the new corporation incorporated by Sibling1, as described in Paragraph 13;

"TC1 Preferred Shares" has the meaning assigned by Paragraph 14;

"TC2" means the new corporation incorporated by Sibling2, as described in Paragraph 13;

"TC2 Preferred Shares" has the meaning assigned by Paragraph 14; and

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

FACTS

1. DC is a Canadian controlled private corporation and a taxable Canadian corporation. DC was incorporated under the BCA on XXXXXXXXXX. DC carries on XXXXXXXXXX operations in XXXXXXXXXX at multiple locations and reports its XXXXXXXXXX income, for tax purposes, on a cash basis. DC files its federal income tax returns with the XXXXXXXXXX Tax Centre and its income tax affairs are administered by the XXXXXXXXXX Tax Services Office.

2. DC's authorized share capital consists of XXXXXXXXXX common shares, having no par value, and not to be issued for more than $XXXXXXXXXX in aggregate.

3. Sibling1 and Sibling2, are Canadian residents and the sole shareholders of DC, each owning XXXXXXXXXX common shares of the outstanding share capital of DC. The shares of DC represent capital property to each of Sibling1 and Sibling2 and are also XXXXXXXXXX.

4. On the incorporation of DC one common share was issued to each of Sibling1, Sibling2, Sibling3, and Senior.

5. Each of Sibling1, Sibling2, Sibling3, and Senior purchased an additional XXXXXXXXXX common shares of DC from treasury on XXXXXXXXXX for $XXXXXXXXXX each in aggregate.

6. On XXXXXXXXXX, Sibling3 sold his XXXXXXXXXX common shares of DC for an aggregate consideration in the amount of $XXXXXXXXXX as follows:

a) XXXXXXXXXX common shares to Sibling1 for $XXXXXXXXXX
b) XXXXXXXXXX common shares to Sibling2 for $XXXXXXXXXX
c) XXXXXXXXXX common shares to Senior for $XXXXXXXXXX

7. On the disposition of Sibling3's shares of DC, as described in Paragraph 6, Sibling3 claimed a capital gains deduction equal to the full amount of the capital gain resulting from the disposition on the shares of DC.

8. On XXXXXXXXXX death in XXXXXXXXXX, Senior left one half of his common shares of DC to each of Sibling1 and Sibling2.

9. The adjusted cost base of each of Sibling1 and Sibling2's DC common shares is $XXXXXXXXXX. The total paid-up capital of the common shares of DC is $XXXXXXXXXX.

10. Gasco XXXXXXXXXX located on various XXXXXXXXXX properties owned by DC. Gasco is a taxable Canadian corporation and a Canadian controlled private corporation. DC and Gasco are associated corporations as Sibling1 and Sibling2 own all of the outstanding shares of Gasco equally. Each of Sibling1 and Sibling2 acquired one share for $XXXXXXXXXX on incorporation in XXXXXXXXXX and one half of a share from their XXXXXXXXXX for $XXXXXXXXXX each in XXXXXXXXXX.

PROPOSED TRANSACTIONS

11. Sibling2 will purchase the personal residence from DC for fair market value consideration.

12. Sibling2 will purchase the shares of Gasco owned by Sibling1 for fair market value consideration.

13. Sibling1 will incorporate a new corporation under the BCA ("TC1") and Sibling2 will incorporate a new corporation under the BCA ("TC2"). Both TC1 and TC2 will be Canadian-controlled private corporations and taxable Canadian corporations.

14. The authorized share capital of both TC1 and TC2 will consist of an unlimited number of voting common shares and an unlimited number of non-voting, redeemable and retractable preferred shares with a redemption amount of $XXXXXXXXXX per share (the "TC1 Preferred Shares" in the case of TC1 and "TC2 Preferred Shares" in the case of TC2). The TC1 Preferred Shares and the TC2 Preferred Shares will contain a price adjustment clause. Sibling1 will subscribe for one common share of TC1 for $XXXXXXXXXX and Sibling2 will subscribe for one common share of TC2 for $XXXXXXXXXX.

15. Sibling1 will transfer all of his common shares of DC to TC1 and, as consideration therefor, Sibling1 will receive XXXXXXXXXX common shares of TC1 with an aggregate fair market value equal to the aggregate fair market value, at the time of the transfer, of Sibling1's common shares of DC transferred by Sibling1 to TC1.

16. Sibling2 will transfer all of his common shares of DC to TC2 and, as consideration therefor, TC2 will issue XXXXXXXXXX common shares with an aggregate fair market value equal to the aggregate fair market value, at the time of the transfer, of Sibling2's common shares of DC transferred by Sibling2 to TC2.

17. Sibling1 and TC1 and Sibling2 and TC2, as the case may be, will file a joint election in the prescribed form and within the term referred to in subsection 85(6) to have the provisions of subsection 85(1) apply to the transfer. The agreed amount for purposes of such election will not be less than the lesser of the two amounts specified in paragraph 85(1)(c.1), nor will such amount exceed the fair market value of the common shares of DC that are transferred to TC1 and TC2, as the case may be.

18. The increase to the paid-up capital of the common shares of TC1 and TC2, as the case may be, will not exceed the paid-up capital attributable to the common shares of DC for which such common shares of TC1 and TC2, as the case may be, were issued. For greater certainty, the increase to the paid-up capital of the common shares of TC1 and the common shares of TC2, as the case may be, will not exceed the maximum amount that could be added to the paid up capital of such shares having regard to paragraph 84.1(1)(a).

19. Immediately before the transfer of property described in Paragraph 21, the property owned by DC will be classified into the following three types of property for the purposes of the definition of distribution, as follows:

a) Cash or near cash property, comprising all of the current assets of DC, including cash, accounts receivable, deposits, trust funds, and inventory;

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

c) Business property, comprising all of the assets of DC, other than cash or near-cash property, any income from which would, for purposes of the Act, be income from an active business carried on by DC (other than a specified investment business).

For greater certainty, for the purposes of this distribution:

d) Tax accounts or other tax related amounts of DC, such as the balance of non-capital losses, net capital losses, refundable dividend tax on hand and/or capital dividend account, if any, will not be considered property, as the case may be;

e) No amount will be considered to be a liability unless it represents a true legal liability which is capable of quantification; and

f) The amount of any deferred tax will not be considered to be a property or a liability, as the case may be, for the purposes of the Proposed Transactions.

20. In determining the net fair market value of its cash or near cash property, investment property and business property immediately before the transfers, described in Paragraph 21, the liabilities of DC will be allocated to, and be deducted in the calculation of, the net fair market value of each such type of property of DC in the following manner:

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

b) liabilities of DC, other than current liabilities, that relate to a particular property, will then be allocated to the particular property (and effectively to the type to which the particular property belongs) to the extent of its fair market value. 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 fair market value of such type of property after the allocation of liabilities to a particular property, as described herein;

c) if any liabilities (hereinafter referred to as "excess unallocated liabilities") remain after the allocations described in steps a) and b) are made, such excess unallocated liabilities, will then be allocated to the cash or near cash property, investment property, and business property of DC based on the relative net fair market value of each type of property prior to the allocation of such excess unallocated liabilities.

21. DC will contemporaneously transfer to each of TC1 and TC2, a pro rata portion of the net fair market value of each type of property owned by DC, as determined in accordance with Paragraphs 19 and 20, such that immediately following such property transfers and liability assumptions, the net fair market value of each of the three types of property of DC so transferred to each of TC1 and TC2 will, for greater certainty, approximate that proportion determined by the formula:

A x B/C

where:

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

B is the fair market value, immediately before the transfer, of all of the shares of the capital stock of DC owned, at that time, by TC1 and TC2, as the case may be; and

C is the fair market value, immediately before the transfer, of all the issued and outstanding shares of the capital stock of DC at that time.

For the purposes of this Paragraph, the expression "approximate that proportion" means that the discrepancy from that proportion, if any, will not exceed XXXXXXXXXX percent (XXXXXXXXXX%), determined as a percentage of the net fair market value of each type of property that TC1 and TC2, as the case may be, will receive as compared to what it would have received had it received its appropriate pro rata share of the net fair market value of that type of property of DC.

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

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

b) issue to DC a number of TC1 Preferred Shares and TC2 Preferred Shares, as the case may be, having an aggregate redemption amount and aggregate fair market value equal to the aggregate fair market value of the property received by TC1 and TC2, as the case may be, less the amount of the liabilities of DC assumed by TC1 and TC2, as the case may be, as described in (a) above.

23. DC and each of TC1 and TC2 will file a joint election in the prescribed form and within the time referred to in subsection 85(6) to have the provisions of subsection 85(1) apply to the transfer of each eligible property that is transferred by DC to TC1 and TC2, as the case may be, as described in Paragraph 21. The agreed amount in respect of each eligible property so transferred will not be greater than the fair market value of such property nor will it be less than the amount permitted under paragraph 85(1)(b). For greater certainty, the agreed amount in respect of each such transferred property will be within the limits prescribed as follows:

a) in the case of capital property (other than depreciable property of a prescribed class), an amount not less than the lesser of the amounts described in subparagraphs 85(1)(c.1)(i) and (ii);

b) in the case of depreciable property of a prescribed class, an amount not less than the least of the amounts described in subparagraphs 85(1)(e)(i), (ii) and (iii);

c) in the case of eligible capital property, an amount not less than the least of the amounts described in subparagraphs 85(1)(d)(i), (ii) and (iii); and

d) in the case of inventory, described in paragraph 85(1)(c.2), the amount determined in that paragraph.

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, as described in Paragraph 22(a).

24. The increase to the paid-up capital of the TC1 Preferred Shares and the TC2 Preferred Shares, as the case may be, that are issued to DC, as consideration for the property transferred by DC to TC1 and TC2, as the case may be, will not exceed the aggregate cost of such property to TC1 and TC2, as the case may be, as determined pursuant to subsection 85(1) where applicable, less the aggregate amount of DC's liabilities assumed by TC1 and TC2, as the case may be, for such property. For greater certainty, the increase to the paid-up capital of the TC1 Preferred Shares and the TC2 Preferred Shares, as the case may be, will not exceed the maximum amount that could be added to the paid-up capital of such shares, having regard to subsection 85(2.1).

25. Immediately following the transfer of property described in Paragraph 21, TC1 and TC2 will redeem its TC1 Preferred Shares and TC2 Preferred Shares, as the case may be, for an amount equal to the aggregate redemption amount and fair market value of such shares. As consideration therefor, TC1 and TC2, as the case may be, will issue a non-interest bearing demand promissory note ( the "TC1 Note" and the "TC2 Note", respectively) having a principal amount and fair market value equal to the aggregate redemption amount of the TC1 Preferred Shares and the TC2 Preferred Shares, as the case may be. DC will accept the TC1 Note and the TC2 Note as full payment for the aggregate redemption amount of the TC1 Preferred Shares and the TC2 Preferred Shares so redeemed, as the case may be.

25.1 TC1 and TC2 will each cause its first taxation year to end at the end of the day on which the TC1 Preferred Shares and the TC2 Preferred Shares, as the case may be, are redeemed. This will occur at least one day prior to the transactions described in Paragraph 28.1.

26. [Reserved].

27. [Reserved].

28. [Reserved].

28.1 TC1 and TC2 will, by special resolution, resolve to liquidate and dissolve DC pursuant to the provisions of the BCA. In connection with the winding-up of DC, DC will assign and distribute the TC1 Note to TC1 and the TC2 Note to TC2. As a result of the assignment and distribution of the TC1 Note and the TC2 Note by DC, the obligation of each of TC1 and TC2 under the TC1 Note and the TC2 Note, as the case may be, will be extinguished and such notes will be cancelled.

Prior to the distribution of the TC1 Note and the TC2 Note, DC will elect, pursuant to subsection 83(2), an amount not exceeding the balance in DC's capital dividend account at that time, in the prescribed manner and in the prescribed form, to treat the portion of the winding-up dividend referred to in subparagraph 88(2)(b)(i) as a separate capital dividend paid on the common shares of DC. Pursuant to subparagraph 88(2)(b)(iv), each of TC1 and TC2 will be deemed to have received a proportionate capital dividend from DC.

29. Following receipt of the dividend refund to which DC will become entitled as a result of the Proposed Transactions, DC will immediately distribute it (under the terms of the agreement governing the winding-up of DC) to each of TC1 and TC2 in the same proportions as described in Paragraph 28.1. Within a reasonable time following the distribution of such dividend refund, articles of dissolution will be filed by DC with the appropriate Corporate Registry and upon receipt of a certificate of dissolution, DC will be dissolved.

30. Gasco will lease at fair market value from TC1 and TC2 all the XXXXXXXXXX that are located on the XXXXXXXXXX properties owned by TC1 and TC2 that were acquired pursuant to the aforementioned reorganization. The leasing arrangement between Gasco and TC1 and TC2 will be the same as the arrangement between Gasco and DC except that a formal lease agreement will be signed and a fair market value lease amount will be paid by Gasco to TC1 and TC2.

31. TC1 will sell to TC2, within XXXXXXXXXX days following the completion of the Proposed Transactions described above, its XXXXXXXXXX% interest in the XXXXXXXXXX for fair market value consideration.

ADDITIONAL INFORMATION

32. The Proposed Transactions described herein will occur in the order presented unless otherwise indicated, with the exception of the filing of the applicable election forms described in Paragraphs 17 and 23, which will be filed by the applicable due date following completion of the Proposed Transactions.

33. Sibling2 will undertake not to transfer the personal residence to TC2 or any company related thereto, unless he receives an advance ruling from the CRA that such transfer will not affect the rulings requested herein.

34. None of the shares of DC, TC1 or TC2 will be at any time during a series of transactions or events that includes the Proposed Transactions:

a) the subject of a guarantee agreement;

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 agreement.

35. The fair market value of the XXXXXXXXXX% interest in the XXXXXXXXXX will represent less than XXXXXXXXXX% of the fair market value, at the time of the reorganization described in Paragraph 21, of all assets (other than money and indebtedness that is not convertible into other property) received by TC1 on the reorganization.

35.1 Each of TC1 and TC2 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.

35.2 DC is not, and each of TC1 and TC2 will not be, a restricted financial institution nor a specified financial institution.

PURPOSES OF THE PROPOSED TRANSACTIONS

36. Sibling1 and Sibling2 desire to sever their current business relationships through DC by dividing the assets of DC on a pro rata basis. Sibling1 and Sibling2 desire to commence separate and distinct XXXXXXXXXX operations.

37. The purpose of the disposition of the shares of Gasco by Sibling1 to Sibling2 is that Sibling2 desires to carry on alone the current activities of Gasco.

38. The purpose of the disposition of the personal residence, as described in Paragraph 11, is that Sibling2 desires to own the personal residence personally and to facilitate the pro rata distribution of the assets of DC to TC1 and TC2.

39. The purpose of the sale of the land, received by TC1 on the reorganization, to TC2, described in Paragraph 31, is to ensure that the land required for TC2 to operate its XXXXXXXXXX business is owned by TC2.

RULINGS

Provided that the preceding statements constitute a complete and accurate disclosure of all of the relevant facts, proposed transactions and the purposes of the Proposed Transactions, and provided that the Proposed Transactions are completed in the manner described above, our rulings are as set forth below.

A. The provisions of subsection 85(1) will apply to the transfers of the common shares in the capital of DC held by each of Sibling1 and Sibling2 to TC1 and TC2, as the case may be, as described in Paragraphs 15 and 16, such that the agreed amount in respect of such transfers will be deemed to be Sibling1 and Sibling2's, as the case may be, proceeds of disposition and TC1 and TC2's, as the case may be, cost of acquisition. For greater certainty, paragraph 85(1)(e.2) will not apply to the transfers referred to herein.

B. Subject to the application of subsection 69(11), the provisions of subsection 85(1) will apply to the transfers of eligible property held by DC to TC1 and TC2, as the case may be, as described in Paragraph 21, such that the agreed amount in respect of each such transfer will be deemed to be DC's proceeds of disposition and TC1 and TC2's, as the case may be, cost of such property. For greater certainty, paragraph 85(1)(e.2) will not apply to the transfers referred to herein.

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

C. The application of subsection 84.1(1) to the transfers of shares described in Paragraphs 15 and 16 will not result in a dividend being deemed to be paid by TC1 or TC2 to the respective transferor pursuant to paragraph 84.1(1)(b).

D. As a result of the redemption by TC1 and TC2, as the case may be, of the TC1 Preferred Shares and the TC2 Preferred Shares, as the case may be, described in Paragraph 25, by virtue of subsection 84(3), each of TC1 and TC2 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 TC1 and TC2, as the case may be, in respect of its redemption of the TC1 Preferred Shares and the TC2 Preferred Shares, as the case may be, owned by DC exceeds the paid-up capital of such class of shares immediately before the redemption.

E. As a result of the distribution by DC in the course of its winding-up, as described in Paragraph 28.1

a) by virtue of paragraph 88(2)(b) and subsection 84(2), but subject to (b), (c), and (d) below, DC will be deemed to have paid a dividend (the "winding-up dividend") on the DC common shares equal to the amount by which

i) the aggregate fair market value of the property of DC distributed to each of TC1 and TC2 on the winding-up

exceeds

ii) the amount, if any, by which the paid-up capital in respect of the DC common shares is reduced on the distribution, and

each of TC1 and TC2 will be deemed to have received a taxable dividend equal to that proportion of the amount of the excess that the number of the DC common shares held by TC1 and TC2, as the case may be, is of the number of the DC common shares issued and outstanding immediately before the distribution;

b) pursuant to subparagraph 88(2)(b)(i), such portion of the winding-up dividend referred to in (a) herein as does not exceed the capital dividend account of DC determined immediately before the payment of the winding-up dividend will be deemed, for purposes of the subsection 83(2) election referred to in Paragraph 28.1, to be the full amount of a separate dividend;

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

d) pursuant to subparagraph 88(2)(b)(iv), each of TC1 and TC2 will be deemed to have received its proportional share of the dividends described in (b) and (c) herein.

F. The taxable dividends received by TC1, TC2 and DC, as described in Rulings D and E:

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

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

c) will be excluded in determining the proceeds of disposition to the recipient 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 give rise to tax under Part IV except as provided in paragraph 186(1)(b) that the payer corporation is entitled to a dividend refund for its taxation year in which it paid such dividend; and

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

G. Provided that, as part of a 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.l)(a);

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

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

d) an acquisition of shares in the circumstances described in subparagraph 55(3.l)(b)(iii); or

e) an acquisition of property in the circumstances described in subparagraph 55(3.l)(c) or 55(3.1)(d);

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

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

I. The cancellation of the TC1 Note and the TC2 Note owing by TC1 and TC2, as the case may be, as described in Paragraph 28.1, will not, in and of itself, result in a forgiven amount.

J. 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 herein.

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 (other than the filing of articles of dissolution of DC, as described in Paragraph 29) 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.

OTHER COMMENTS

Unless otherwise confirmed in the above rulings, 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 paid-up capital of any share or the adjusted cost base or fair market value of any property referred to herein;

b) whether the shares of DC are XXXXXXXXXX;

c) the balance of the capital dividend account, general rate income pool, or refundable dividend tax on hand of any corporation; or

d) any other tax consequence relating to the facts, Proposed Transactions or any transaction or event taking place either prior to the Proposed Transactions or subsequent to the Proposed Transactions, whether described in this letter or not, other than those specifically described in the rulings given above, including whether any of the Proposed Transactions would also be included in a series of transactions or events that includes other transactions or events that are not described in this letter.

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

Yours truly,

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