2013 Ruling 2012-0443081R3 - Distribution of pre-72 Capital Surplus on Hand

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: The distribution of the pre-72 CSOH of ACo to its shareholders without winding-up ACo under subsection 88(2).

Position: Yes.

Reasons: Previous GAAR Committee conclusions and legislation.

XXXXXXXXXX
2012-044308

XXXXXXXXXX, 2013

Dear XXXXXXXXXX:

Re: XXXXXXXXXX
Advance Income Tax Ruling Request

We are writing in response to your letter of XXXXXXXXXX wherein you requested an advance income tax ruling on behalf of the above-referenced taxpayer. We also acknowledge the information provided in correspondence and telephone conversations concerning your request. Any information you have provided to us forms part of this ruling only to the extent it is expressly referred to or described herein.

To the best of your knowledge and that of the above-referenced taxpayer, none of the issues involved in this ruling is:

a) dealt with in an earlier tax return of the above-referenced taxpayer, or a related person,

b) being considered by a Tax Services Office or Taxation Centre in connection with a previously filed tax return of the above-referenced taxpayer or a related person,

c) under objection or appeal by the above-referenced 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.

Further, the above-referenced taxpayer represents that the Proposed Transactions described herein will not result in it or any related person being unable to pay its outstanding tax liabilities.

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

DEFINITIONS

In this letter, unless otherwise specified, all references to monetary amounts are in Canadian dollars and the following terms have the meanings specified:

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

"actual cost" has the meaning assigned by ITAR 26(13);

"adjusted cost base" (also referred to as "ACB") has the meaning assigned by section 54;

"agreed amount" means the amount agreed on in respect of a property in an election filed pursuant to subsection 85(1);

"arm's-length" has the meaning assigned by subsection 251(1);

XXXXXXXXXX;

"BCo" means XXXXXXXXXX, a corporation described in Paragraph 21;

"BCo Shares" means the XXXXXXXXXX Class F BCo Shares owned by ACo, as described in Paragraph 34 and transferred to Newco, as described in Paragraph 45;

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

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

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

"Common Shareholders" means S-1, S-2, S-3 and S-4 and "Common Shareholder" means any one of them;

"Common Shares" means the Class A shares and Class B shares in the share capital of ACo;

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

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

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

"Estate" means the Estate of Father 3-4;

"excluded dividend" has the meaning assigned by subsection 191(1);

"Father 1-2" means the father (now deceased) of S-1 and S-2;

"Father 3-4" means the father (now deceased) of S-3 and S-4;

"fair market value" (also referred to as "FMV") 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;

"guarantee agreement" has the meaning assigned by subsection 112(2.2);

"ITAR" means the Income Tax Application Rules, R.S.C. 1985, (5th Supp) c.2, as amended;

"Mother Trust" means the inter vivos trust having the mother of S-1 and S-2 (widow of Father 1-2) as income beneficiary and S-1 and S-2 as capital beneficiaries;

"Newco" is a newly incorporated corporation, further described in Paragraph 41;

"paid-up capital" (also referred to as "PUC") has the meaning assigned by subsection 89(1);

"Paragraph" refers to a numbered paragraph in this advance income tax ruling;

"pre-72 capital surplus on hand" (also referred to as "pre-72 CSOH") has the meaning assigned by subsection 88(2.1);

"Predecessors" means XXXXXXXXXX and its subsidiaries prior to the issuance of letters patent on XXXXXXXXXX (as described in Paragraph 1) and "Predecessor" means any one of them;

"Preferred Shares" means the Class D shares, Class E shares and Class F shares in the share capital of ACo;

"Preferred Shareholders" at the time of the Proposed Transactions, means S-1, S-2, S-3, S-4, Spousal Trust, Estate, and Testamentary Trust, and "Preferred Shareholder" means any one of them;

"private holding corporation" has the meaning assigned by subsection 191(1);

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

"Proposed Transactions" means the transactions described in Paragraphs 35 to 51;

"refundable dividend tax on hand" (also referred to as "RDTOH") has the meaning assigned by subsection 129(3);

"S-1" means XXXXXXXXXX;

"S-2" means XXXXXXXXXX;

"S-3" means XXXXXXXXXX;

"S-4" means XXXXXXXXXX;

"Sco" means XXXXXXXXXX, a Canadian-controlled private corporation;

"Shareholders" means the Common Shareholders and the Preferred Shareholders, and "Shareholder" means any one of them;

"Spousal Trust" means the testamentary trust created under the will of Father 1-2 for the benefit of his spouse;

"Subco" means XXXXXXXXXX, a former wholly-owned subsidiary of ACo;

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

"taxable Canadian property" has the meaning assigned by subsection 248(1);

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

"Testamentary Trust" means the trust created under the will of Father 1-2 for the benefit of the children of S-1 and S-2;

"unrelated group" has the meaning assigned by subsection 251(4);

"Valuation day" (also referred to as "V-day") has the meaning assigned by ITAR 24; and

"winding-up dividend" has the meaning assigned by paragraph 88(2)(b).

FACTS

ACo

1. ACo is a Canadian-controlled private corporation and a taxable Canadian corporation governed by the XXXXXXXXXX. ACo was constituted (under the name of one of its Predecessors) by Letters Patent granted by the XXXXXXXXXX whereby its Predecessor, which had been constituted by Letters Patent on XXXXXXXXXX, was amalgamated with its subsidiaries. The taxation year end of ACo is XXXXXXXXXX. ACo 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. ACo is a family owned corporation in the business of XXXXXXXXXX. The assets of ACo consist of interests in partnerships, trusts and shares of private corporations, including BCo, as well as directly owned interests in real estate. Some of the shares of BCo have been held by ACo since V-day.

3. The Common Shareholders own all of the issued and outstanding Common Shares, having held them since V-day. The Preferred Shareholders own all of the issued and outstanding Preferred Shares.

4. Each of S-1 and S-2 formerly held XXXXXXXXXX non-voting Class G preferred shares of ACo, being all of the issued Class G shares of ACo. On XXXXXXXXXX, all of the Class G preferred shares of ACo were redeemed to provide S-1 and S-2 with funds to enable them to repay shareholder loans.

5. On V-day, the authorized share capital of ACo consisted of $XXXXXXXXXX divided into XXXXXXXXXX common shares having par value of $XXXXXXXXXX each, XXXXXXXXXX Class A preferred shares having par value of $XXXXXXXXXX each and XXXXXXXXXX Class B preferred shares having par value of $XXXXXXXXXX each.

6. The issued and outstanding shares of ACo were held as follows on V-day:

S-1	XXXX common shares (voting)
S-2	XXXX common shares (voting)
S-3	XXXX common shares (voting)
S-4	XXXX common shares (voting)
Father 1-2	XXXX Class A preferred shares XXXX Class B preferred shares (voting)
Father 3-4	XXXX Class A preferred shares XXXX Class B preferred shares (voting)

The common shares had an actual cost of $XXXXXXXXXX per share.

7. On XXXXXXXXXX, ACo was continued under its current name under XXXXXXXXXX. On the continuance, the issued and outstanding common shares were redesignated as Class A shares and a right was attached thereto entitling the holder to convert such shares for newly created Class B shares, in accordance with the procedure set out in former Interpretation Bulletin IT-146R3 Shares Entitling Shareholders to Choose Taxable or Other Kinds of Dividends, dated August 25, 1980. In accordance with IT-146R3, the redesignation and addition of the conversion right did not constitute a disposition. Also, as part of the articles of continuance, the former Class A preferred shares were redesignated as Class C shares and the former Class B preferred shares were redesignated as Class D shares.

8. On XXXXXXXXXX, S-3 and S-4 converted their Class A shares of ACo to Class B shares of ACo in accordance with the procedure described in said IT-146R3 Shares Entitling Shareholders to Choose Taxable or Other Kinds of Dividends. The Class A and Class B shares are both voting common shares and rank pari passu with one another. The conversion, carried out pursuant to section 51, did not constitute a disposition by virtue of ITAR 26(24). Following such conversion, the Common Shares of ACo were held as follows:

S-1	XXXXXXXXXX Class A
S-2	XXXXXXXXXX Class A
S-3	XXXXXXXXXX Class B
S-4	XXXXXXXXXX Class B

and they continue to be held on that basis today.

9. Articles of Amendment were filed in XXXXXXXXXX to authorize the creation of additional shares. Since then, the authorized share capital of ACo consists of an unlimited number of Class A, B, C, D, E, F, G and H shares. Currently, the issued and outstanding shares of ACo are held as follows:

Common Shares

S-1	XXXXXXXXXX Class A shares (voting)
S-2	XXXXXXXXXX Class A shares (voting)
S-3	XXXXXXXXXX Class B shares (voting)
S-4	XXXXXXXXXX Class B shares (voting)

Preferred Shares

S-3	XXXXXXXXXX Class A shares (voting)
S-4	XXXXXXXXXX Class A shares (voting)
Estate	XXXXXXXXXX Class B shares (voting)
Testamentary Trust	XXXXXXXXXX Class D shares (voting)
Mother Trust (to be transferred to S-1 and S-2, as explained below)	XXXXXXXXXX Class F shares (non-voting)
Spousal Trust	XXXXXXXXXX Class F shares (non-voting)

10. Father 1-2 and Father 3-4, both deceased, XXXXXXXXXX. S-1 and S-2 are the children of Father 1-2 and are both Canadian residents. S-3 and S-4 are the children of Father 3-4 and are residents of XXXXXXXXXX. Other than S-3 and S-4, all of the Shareholders are residents of Canada.

11. The trustees of the Testamentary Trust were S-1, S-2, the mother of S-1 and S-2, and XXXXXXXXXX other individuals. Pursuant to the terms of Father 1-2's will, decisions are made by a majority of the trustees. The mother of S-1 and S-2 died XXXXXXXXXX. In accordance with the terms of the will, the remaining trustees are required to appoint a replacement trustee. Prior to the Proposed Transactions, the remaining trustees will appoint the spouse of S-2 as replacement trustee.

12. The XXXXXXXXXX Class F shares held by Mother Trust will be distributed to S-1 and S-2, the residual beneficiaries, in accordance with the terms of the Mother Trust prior to the Proposed Transactions. S-1 and S-2 will be the holders of such Class F shares (XXXXXXXXXX shares each) at the time of the Proposed Transactions. The XXXXXXXXXX Class F shares held by the Spousal Trust shall continue to be held in trust pursuant to the terms of the will of Father 1-2.

13. The Estate has one XXXXXXXXXX executor who is a Canadian resident individual but who is not a shareholder of ACo, nor is he related to any of the Shareholders.

14. At the time of the Proposed Transactions, ACo will be controlled by the unrelated group consisting of S-1, S-2, S-3, S-4, and the spouse of S-2.

15. The shares of ACo constitute taxable Canadian property.

16. The attributes of the Preferred Shares are as follows:

Number and Class	Voting or Non-Voting	Redemption Value/FMV	ACB	PUC
XXXX Class D	Voting	$ XXXX	$ XXXX	$ XXXX
XXXX Class E	Non-Voting	$ XXXX	$ XXXX (footnote 1)	$ XXXX
XXXX Class F	Non-Voting	$ XXXX	$ XXXX	$ XXXX

17. The fair market value of the Common Shares is equal to the total fair market value of ACo less the redemption value of the Preferred Shares. Substantially all of the fair market value is attributable to the Common Shares.

18. Taking into account the ITAR, the adjusted cost base of the Common Shares of ACo has been estimated to be $XXXXXXXXXX per share ($XXXXXXXXXX in the aggregate, or $XXXXXXXXXX per Common Shareholder), based on the V-day value of such shares less dividends deducted in accordance with subparagraph 53(2)(a)(i). The current fair market value of the Common Shares exceeds their adjusted cost base. The paid-up capital of the Class A shares is $XXXXXXXXXX and the paid-up capital of the Class B shares is $XXXXXXXXXX.

19. ACo continues to operate and, for commercial reasons, has no current plans to dispose of all its assets.

20. ACo currently has an RDTOH balance as of XXXXXXXXXX of $XXXXXXXXXX.

BCo

21. BCo is a Canadian-controlled private corporation and a taxable Canadian corporation governed by the XXXXXXXXXX. BCo was constituted by Letters Patent in XXXXXXXXXX and was continued under XXXXXXXXXX.

22. ACo and its Shareholders deal at arm's length with BCo.

23. The issued and outstanding share capital of BCo consists of XXXXXXXXXX Class A shares, XXXXXXXXXX Class B shares, XXXXXXXXXX Class D shares, XXXXXXXXXX Class E shares and XXXXXXXXXX Class F shares, for a total of XXXXXXXXXX issued and outstanding shares. ACo owns the following shares of BCo:

(a) XXXXXXXXXX Class F shares, representing XXXXXXXXXX% of total votes and XXXXXXXXXX% of the total equity, which were held, directly or indirectly, on V-day, and

(b) XXXXXXXXXX Class B shares, representing XXXXXXXXXX% of total votes and XXXXXXXXXX% of the total equity, which were acquired subsequent to V-day.

24. A Predecessor of ACo acquired XXXXXXXXXX Class C shares of BCo from treasury in XXXXXXXXXX at an actual cost of $XXXXXXXXXX.

25. On XXXXXXXXXX, ACo's XXXXXXXXXX Class C shares of BCo were redesignated as Class E shares in a transaction carried out in accordance with former Interpretation Bulletin IT-146R3 Shares Entitling Shareholders to Choose Taxable or Other Kinds of Dividends. In accordance with IT-146R3, the redesignation did not constitute a disposition.

26. On XXXXXXXXXX, ACo converted its XXXXXXXXXX Class E shares of BCo into XXXXXXXXXX Class F shares of BCo in accordance with the procedure described in IT-146R3 Shares Entitling Shareholders to Choose Taxable or Other Kinds of Dividends. The conversion, carried out pursuant to section 51, did not constitute a disposition and ITAR 26(24) applied in respect of such transaction. The XXXXXXXXXX Class F shares of BCo were converted to Class E shares of BCo in XXXXXXXXXX and were subsequently converted back to XXXXXXXXXX Class F shares in conversions governed by ITAR 26(24) and (28).

27. On V-day, ACo also owned XXXXXXXXXX% of the shares of SCo, which in turn owned XXXXXXXXXX Class C shares of BCo on V-day, having acquired them from treasury in XXXXXXXXXX at an actual cost of $XXXXXXXXXX.

28. The XXXXXXXXXX Class C shares of BCo held by SCo were redesignated as Class E shares by the certificate and articles of continuance dated XXXXXXXXXX. This was part of the same transaction described in Paragraph 25 and, therefore, did not constitute a disposition of the Class C shares of BCo.

29. On XXXXXXXXXX, SCo converted its XXXXXXXXXX Class E shares of BCo into XXXXXXXXXX Class F shares of BCo. ITAR(24) applied to the conversion, carried out pursuant to section 51, such that the conversion did not constitute a disposition.

30. As part of a reorganization that took place in XXXXXXXXXX, XXXXXXXXXX of the Class F shares of BCo, owned by SCo, were transferred by SCo to Subco, a wholly-owned subsidiary of ACo, pursuant to subsection 85(1). Subco was wound-up and dissolved as of XXXXXXXXXX. All of Subco's assets (including the XXXXXXXXXX shares of BCo) were conveyed to (and liabilities assumed by) ACo in the course of the winding-up.

31. ACo also owns XXXXXXXXXX Class B shares of BCo which were acquired in two separate transactions on XXXXXXXXXX. More specifically, XXXXXXXXXX Class B shares of BCo were acquired from Father 1-2 in consideration for XXXXXXXXXX Class E shares of ACo and XXXXXXXXXX Class B shares of BCo were acquired from Father 3-4 in consideration for XXXXXXXXXX Class E shares of ACo. The Class E shares of ACo have a redemption and retraction value equal to the value of the transferred BCo shares. Joint elections pursuant to subsection 85(1) were filed in respect of these transfers.

32. Each of the XXXXXXXXXX issued and outstanding shares of BCo are entitled to share rateably in its residual property and assets in the event of a winding-up.

33. BCo has $XXXXXXXXXX of assets, substantially all of which are loans receivable. BCo's pre-72 CSOH balance is approximately $XXXXXXXXXX. The pre-72 CSOH arose on the sale of XXXXXXXXXX assets that were owned by BCo on V-day. In accordance with subsection 88(2.1), amounts in respect of such assets were added to BCo's pre-72 CSOH. Amounts in excess of such pre-72 CSOH have been distributed over time to BCo's shareholders in the form of taxable dividends and capital dividends. The remaining amount, equal to the pre-72 CSOH balance, has been retained by BCo.

34. The actual cost of the XXXXXXXXXX Class F shares of BCo held by ACo (the "BCo Shares") is $XXXXXXXXXX and their adjusted cost base, determined in accordance with the Act and the ITAR, is $XXXXXXXXXX which is estimated to be equal to the V-day value of the shares less dividends deducted in accordance with subparagraph 53(2)(a)(i). The V-day value of the BCo Shares is $XXXXXXXXXX and their paid-up capital is $XXXXXXXXXX.

PROPOSED TRANSACTIONS

35. The Shareholders of ACo will adopt a resolution authorizing the modification of its share capital, and articles of amendment will be filed to authorize the creation of two new classes of common shares ("Class X common shares" and "Class Y common shares"), and three new classes of preferred shares ("Class Z preferred shares", "Class Z.1 preferred shares" and "Class Z.2 preferred shares") of ACo. The Class X common shares and the Class Y common shares shall carry one vote per XXXXXXXXXX shares. The Class Z.2 preferred shares will carry one vote per share. The Class Z preferred shares and the Class Z.1 preferred shares will be non-voting. The Class Z preferred shares and the Class Z.1 preferred shares will be redeemable and retractable for $XXXXXXXXXX per share. The Class Z.2 preferred shares will be redeemable and retractable for the fair market value of the consideration for which they were issued. The Class Z.2 preferred shares will contain a price adjustment clause.

36. The board of directors of ACo will adopt a resolution (pursuant to the provisions of the XXXXXXXXXX) where simultaneously, the XXXXXXXXXX issued and outstanding Class A shares will be split on a XXXXXXXXXX basis into XXXXXXXXXX Class A shares, the XXXXXXXXXX issued and outstanding Class B shares will be split on a XXXXXXXXXX basis into XXXXXXXXXX Class B shares, and the XXXXXXXXXX issued and outstanding Class D shares will be split on a XXXXXXXXXX basis into XXXXXXXXXX Class D shares.

37. Immediately thereafter, a reorganization of the share capital of ACo will take place such that the following will occur simultaneously;

(a) the issued and outstanding Class A shares of ACo will be converted into

(i) such number of Class Z preferred shares having an aggregate redemption value equal to the portion of the fair market value of the BCo Shares attributed to the Class A shares, as described in Paragraph 38;

(ii) such number of Class Z.1 preferred shares having an aggregate redemption value equal to the adjusted cost base of the outstanding Class A shares less the redemption price of the Class Z preferred shares issued on the conversion; and

(iii) XXXXXXXXXX Class X common shares.

(b) the issued and outstanding Class B shares of ACo will be converted into

(i) such number of Class Z preferred shares having an aggregate redemption value and fair market value equal to the portion of the fair market value of the BCo Shares attributed to the Class B shares, as described in Paragraph 38;

(ii) the number of Class Z.1 preferred shares having an aggregate redemption value equal to the adjusted cost base of the outstanding Class B shares less the redemption price of the Class Z preferred shares, issued on the conversion; and

(iii) XXXXXXXXXX Class Y common shares.

(c) the issued and outstanding Class D shares of ACo will be converted into

(i) such number of Class Z preferred shares having an aggregate redemption value equal to the portion of the fair market value of the BCo Shares attributed to the Class D shares, as described in Paragraph 38; and

(ii) XXXXXXXXXX Class Z.2 preferred shares having an aggregate redemption value equal to $XXXXXXXXXX less the redemption value of the Class Z preferred shares issued to the holders of the Class D shares.

The Class A, B and D shares will be cancelled.

38. For the purpose of Paragraphs 37 and 42, the portion of the fair market value of the BCo Shares attributed to a particular class of issued and outstanding shares of ACo is equal to the fair market value of the BCo Shares multiplied by the fair market value of all the issued and outstanding shares of the particular class of ACo divided by the fair market value of all the issued and outstanding shares of ACo.

39. The fair market value of all the shares of ACo held by each Shareholder following the proposed transactions described in Paragraph 37 will be equal to the fair market value of the shares of ACo held by such Shareholder immediately prior thereto. Each shareholder will continue to hold the same number of votes of ACo as before the Proposed Transactions described in Paragraphs 36 and 37.

40. Each of the Common Shareholders, Class D shareholders and ACo will agree to elect to have the provisions of subsection 85(1) apply to the proposed transactions described in Paragraph 37, and, in each case, will elect an amount within the limits prescribed by section 85. For greater certainty, the agreed amount for the purpose of each 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 amount permitted under paragraph 85(1)(c). In accordance with XXXXXXXXXX, ACo will add to its issued and paid-up share capital accounts maintained for the Class Z preferred shares, Class Z.1 preferred shares, Class Z.2 preferred shares, Class X common shares, and Class Y common shares amounts equal, in the aggregate, to the paid-up capital of the ACo Common Shares and Class D shares. More specifically, the paid-up capital will be allocated as follows: in relation to the conversion of the Common Shares, $XXXXXXXXXX to the Class Z preferred shares, $XXXXXXXXXX to the Class Z.1 shares, $XXXXXXXXXX to the Class X common shares, $XXXXXXXXXX to the Class Y common shares, and in relation to the conversion of the Class D shares, an amount equal to the redemption value of the Class Z preferred shares will be allocated to the Class Z preferred shares and an amount equal to the redemption value of the Class Z.2 preferred shares will be added to the issued and paid-up share capital account in respect of the Class Z.2 preferred shares. The parties will comply with the filing requirements described in section 116 in respect of the shares held by S-3 and S-4.

41. The Shareholders will cause the incorporation of a new corporation ("Newco") under the XXXXXXXXXX. The authorized share capital of Newco will include an unlimited number of Class A common shares, and an unlimited number of redeemable and retractable Class 1 preferred, Class 2 preferred, Class 3 preferred and Class 4 preferred shares. The Class A Shares and the Class 1 preferred shares will entitle the holder to one vote per share. The Class 1 preferred shares, Class 2 preferred shares, Class 3 preferred shares, and the Class 4 preferred shares will be redeemable and retractable for an amount equal to the fair market value of the consideration for which they were issued. The Class 1 preferred shares, Class 2 preferred shares, Class 3 preferred shares, and the Class 4 preferred shares will contain a price adjustment clause. The majority of the Board of Directors of Newco will be Canadian residents.

42. Shares of Newco will be issued simultaneously on the following basis following its incorporation:

(a) The Common Shareholders will transfer their Class Z preferred shares of ACo, received by virtue of the transactions described in Paragraphs 37(a) and (b), to Newco and each Common Shareholder will receive XXXXXXXXXX Class A common shares of Newco having a fair market value and an adjusted cost base equal to the fair market value and adjusted cost base of the transferred Class Z preferred shares. The paid-up capital of the Class A common shares of Newco will be $XXXXXXXXXX.

(b) The former holders of the Class D shares of ACo will transfer their Class Z preferred shares of ACo, received by virtue of the transaction described in Paragraph 37(c), to Newco and receive as consideration XXXXXXXXXX Class 1 preferred shares of Newco having an aggregate redemption value equal to the fair market value of the transferred Class Z preferred shares and an aggregate stated capital and paid-up capital equal to the paid-up capital of the transferred Class Z preferred shares.

(c) The Class E shareholders of ACo will transfer to Newco such number of Class E shares having an aggregate redemption value equal to the portion of the fair market value of the BCo Shares attributed to the Class E shares, as described in Paragraph 38, and will receive as consideration XXXXXXXXXX Class 2 preferred shares of Newco having an aggregate redemption value equal to the fair market value of the transferred Class E shares, and an aggregate stated capital (and paid-up capital) equal to the paid-up capital of the transferred Class E shares.

(d) The Class F shareholders of ACo will transfer to Newco such number of Class F shares having an aggregate redemption value equal to the portion of the fair market value of the BCo Shares attributed to the Class F shares of ACo, as described in Paragraph 38, and will receive as consideration XXXXXXXXXX Class 3 preferred shares of Newco having an aggregate redemption value equal to the fair market value of the transferred Class F shares of ACo, and an aggregate stated capital (and paid-up capital) equal to the paid-up capital of the transferred Class F shares of ACo.

43. Newco will be controlled by the unrelated group of S-1, S-2, S-3, S-4 and the spouse of S-2. This is the same unrelated group that controls ACo, as described in Paragraph 14.

44. Joint elections will be filed by each of the Shareholders and Newco pursuant to subsection 85(1) in respect of each of the transfers, described in Paragraph 42, with an agreed amount, in each case, equal to the fair market value of the transferred shares. The parties will comply with the filing requirements described in section 116 in respect of the disposition of the shares of ACo by S-3 and S-4.

45. ACo will transfer its BCo Shares to Newco and will receive as consideration Class 4 preferred shares of Newco having an aggregate redemption value equal to the fair market value of the transferred BCo Shares. A joint election will be filed, pursuant to subsection 85(1), with an elected amount equal to the said fair market value. Newco will add to the paid-up capital of the Class 4 preferred shares an amount equal to the aggregate paid-up capital of the Class Z preferred, Class E, and Class F shares that it holds of ACo.

46. ACo will redeem the Class Z preferred shares, Class E shares and Class F shares held by Newco and, in payment of the redemption amount, will issue a demand, non-interest- bearing, promissory note to Newco in an amount equal to the fair market value of such shares.

47. Newco will redeem the Class 4 preferred shares held by ACo and, in payment of the redemption amount, will issue a demand, non-interest-bearing, promissory note to ACo in an amount equal to the fair market value of such shares. The promissory note will be equal to the promissory note described in Paragraph 46.

48. The promissory notes issued by ACo and Newco in favour of one another will be offset and cancelled by compensation in accordance with the XXXXXXXXXX.

49. The transactions described in Paragraphs 46, 47, and 48 will occur on the same day and Newco will adopt a fiscal period ending at the end of such day.

50. Shortly after the Proposed Transactions described above, BCo will be wound-up and its remaining assets, consisting of cash in Canadian currency in an amount which will not exceed its pre-72 CSOH, will be distributed rateably to its shareholders, including ACo and Newco. On the wind-up of BCo, each shareholder of BCo will receive a cash distribution in respect of its shares in an amount equal to its proportionate share of BCo's assets.

51. It is contemplated that Newco will wind-up within XXXXXXXXXX months following the winding-up of BCo. In the course of winding-up, Newco will distribute to its shareholders its only remaining asset, being cash. The parties will comply with the provisions of section 116 in respect of the disposition of Newco shares by S-3 and S-4.

ADDITIONAL INFORMATION

52. 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 40, 44, and 45, which will be filed by the applicable due date and the filing of forms or notices to comply with section 116 (as described in Paragraphs 40 and 44), which will be filed within the applicable due dates set out in that provision.

53. Except on the redemption of Class Z preferred shares, Class E shares and Class F shares described in Paragraph 46, during its fiscal year in which the Proposed Transactions take place, ACo will not pay any taxable dividends nor redeem or repurchase any of its shares where a taxable deemed dividend would arise. Except on the redemption of Class 4 preferred shares described in Paragraph 47, during the fiscal year in which the Proposed Transactions described in Paragraphs 46 and 47 take place, Newco will not pay any taxable dividends nor redeem or repurchase any of its shares where a taxable deemed dividend would arise.

54. In determining the pre-72 CSOH of ACo, the sum of all the amounts described in paragraph 88(2.1)(b), that are related to capital property owned by ACo on December 31, 1971 other than the BCo Shares, and paragraphs 88(2.1)(a), (c) and (d) will exceed the total of all amounts described in paragraph 88(2.1)(e) related to capital property owned by ACo on December 31, 1971, other than the BCo Shares.

55. None of the shares of ACo or Newco will be at any time during a series of transactions or events that includes the Proposed Transactions:

(a) the subject of any undertaking that is a guarantee agreement;

(b) the subject of a dividend rental arrangement;

(c) the subject of any secured undertaking of the type described in paragraph 112(2.4)(a)

(d) issued for consideration that is or includes:

(i) an obligation of the type described in subparagraph 112(2.4)(b)(i),

or

(ii) any right of the type described in subparagraph 112(2.4)(b)(ii).

56. ACo is not and Newco will not be, at any time before the completion of the Proposed Transactions, a "specified financial institution" as that term is defined in subsection 248(1).

57. The assets remaining in BCo at the time of its winding-up will have a fair market value equal to or less than the pre-72 CSOH of BCo calculated immediately before the winding-up of BCo.

58. BCo will not have a balance in its capital dividend account at the time of its winding-up, as described in Paragraph 50. Newco will not have a balance in its capital dividend account at the time of its winding-up, as described in Paragraph 51.

59. The unrelated group that controls ACo does not deal at arm's length with ACo. The unrelated group that controls Newco does not deal at arm's length with Newco.

60. ACo will not elect under ITAR 26(7) on the disposition of the BCo Shares to Newco.

61. At the time of the winding-up of Newco, as described in Paragraph 51, Newco will be a private holding corporation.

62. Paragraph 88(2.2)(a) will not apply to deem the amount calculated under paragraph 88(2.1)(b) on the disposition of the BCo Shares by Newco to be nil.

PURPOSES OF THE PROPOSED TRANSACTIONS

63. The purpose of the Proposed Transactions is to allow the Shareholders of ACo to arrange for the receipt of pre-72 CSOH in conjunction with the disposition of the assets giving rise to such pre-72 CSOH. In particular, the Shareholders wish to avoid the risk of an otherwise innocuous transaction or event resulting in an inadvertent loss of their right to receive their share of existing pre-72 CSOH.

Stock Split

64. The Common Shareholders wish to become the holders of preferred shares on the conversion, described in Paragraph 37, with a redemption amount of $XXXXXXXXXX per share. In order to facilitate the reporting for S-3 and S-4 in their jurisdiction of residence, the stock split ensures that S-3 and S-4 will have the same number of shares outstanding both before and after the conversion.

65. The purpose of the stock split of the Class D shares described in Paragraph 36 is to ensure that the holders of those shares retain the same proportionate voting rights in relation to the Class A and B shares.

Share Conversions

66. The purpose of the steps described in Paragraph 37 is to allow the Common Shareholders to isolate, on the Class Z preferred shares, the portion of the adjusted cost base of their ACo shares equal to the pre-72 CSOH allocable to the BCo Shares, and to further isolate, on the Class Z.1 preferred shares, the balance of their adjusted cost base in respect of the Class A and Class B shares. A portion of the adjusted cost base related to the Class A and Class B shares will be isolated on the Class Z.1 preferred shares as it is convenient to perform this transaction at the same time as a portion of the adjusted cost base of the Class A and Class B shares is being isolated on the Class Z preferred shares. There are no transactions related to the Class Z.1 preferred shares contemplated at this time.

67. The purpose of filing the section 85 elections described in Paragraphs 40, 44, and 45 is to ensure that the cost of the assets acquired by the corporate transferee, as well as the cost to the transferors of the different shares issued as consideration on the rollovers, will be the agreed amounts in respect thereof.

Transfer of the BCo Shares to Newco

68. The purpose of the transaction described in Paragraph 45 is to transfer ACo's entitlement to pre-72 CSOH to Newco.

69. The purpose of electing that the transfer of the BCo Shares to Newco takes place at their fair market value is to ensure that the adjusted cost base of the Class 4 preferred shares of Newco, issued on the exchange, is equal to the fair market value of those shares.

70. The purpose of electing under subsection 85(1) on the transfer of the BCo Shares to Newco is to ensure that paragraph 88(2.2)(b) applies on the transfer.

71. The purpose of allocating paid-up capital to the Class 4 preferred shares in an amount equal to the aggregate paid up capital of the Class Z, Class E, and Class F preferred shares of ACo held by Newco is to ensure that the deemed dividends on the redemptions described in Paragraphs 46 and 47 will be equal.

Fiscal Period

72. The purpose of having Newco adopt a fiscal period immediately after the transactions described in Paragraphs 46 to 48 are completed is to avoid the possibility of other transactions which could impact the RDTOH balance of ACo.

RULINGS

Provided that the preceding statements constitute a complete and accurate disclosure of all the relevant facts, proposed transactions, and purposes of the Proposed Transactions and provided further that the Proposed Transactions are carried out as described above, we rule as follows:

A. Provided that joint elections are filed, as described in Paragraph 40, in the prescribed form and manner and within the time specified in subsection 85(6), the provisions of subsection 85(1), other than paragraph 85(1)(e.2), will apply to the transfer of shares, described in Paragraphs 37(a) and (b), such that

(a) the agreed amount with respect to each transfer of eligible property will be deemed to be the transferor's proceeds of disposition and the transferee's cost thereof, pursuant to paragraph 85(1)(a);

(b) the aggregate cost of the Class Z preferred shares and the Class Z.1 preferred shares, as the case may be, that are issued to a transferor on the exchange will, pursuant to paragraph 85(1)(g), be equal to the lesser of the fair market value of the Class Z preferred shares and the Class Z.1 preferred shares, as the case may be, immediately after the exchange, and that proportion of the proceeds of disposition that

(i) the fair market value, immediately after the disposition, of the Class Z preferred shares and Class Z.1 preferred shares, as the case may be,

is of

(ii) the fair market value, immediately after the disposition, of all preferred shares of the capital stock of the corporation receivable by that transferor, as the case may be, as consideration for the disposition; and

(c) the cost of the Class X common shares and the Class Y common shares, as the case may be, issued to a transferor on the exchange will, pursuant to paragraph 85(1)(h), be equal to the amount, if any, by which the agreed amount exceeds the aggregate cost to the transferor of the Class Z preferred shares and Class Z.1 preferred shares received on the exchange, as described in (b).

B. Provided that joint elections are filed, as described in Paragraph 40, in the prescribed form and manner and within the time specified in subsection 85(6), the provisions of subsection 85(1), other than paragraph 85(1)(e.2), will apply to the transfer of shares, described in Paragraph 37(c), such that

(a) the agreed amount with respect to the transfer of eligible property will be deemed to be the transferor's proceeds of disposition and the transferee's cost thereof, pursuant to paragraph 85(1)(a); and

(b) the aggregate cost of the Class Z preferred shares and the Class Z.2 preferred shares, as the case may be, that are issued to a transferor on the exchange will, pursuant to paragraph 85(1)(g), be equal to the lesser of the fair market value of the Class Z preferred shares and the Class Z.2 preferred shares, as the case may be, immediately after the exchange, and that proportion of the proceeds of disposition that

(i) the fair market value, immediately after the disposition, of the Class Z preferred shares and Class Z.2 preferred shares, as the case may be,

is of

(ii) the fair market value, immediately after the disposition, of all preferred shares of the capital stock of the corporation receivable by that transferor as consideration for the disposition.

C. Provided that joint elections are filed, as described in Paragraph 44, in the prescribed form and manner and within the time specified in subsection 85(6), the provisions of subsection 85(1), other than paragraph 85(1)(e.2), will apply to the transfer of shares, described in Paragraph 42, such that the agreed amount with respect to the transfer of eligible property will be deemed to be the transferor's proceeds of disposition and the transferee's cost thereof, pursuant to paragraph 85(1)(a).

D. By virtue of paragraph 84(1)(c), subsection 84(1) will not apply to deem ACo to have paid a dividend on the increase in the paid-up capital, described in Paragraph 40, of the Class Z preferred shares, Class Z.1 preferred shares, Class Z.2 preferred shares, Class X common shares and Class Y common shares as the aggregate reduction to the paid-up capital of the Class A shares, Class B shares, and Class D preferred shares is not less than the amount of the increase to the paid-up capital of the Class Z preferred shares, Class Z.1 preferred shares, Class Z.2 preferred shares, Class X common shares and Class Y common shares, as described in Paragraph 37.

E. Subject to the application of paragraph 88(2.2)(b), which applies for the purposes stated in the preamble to subsection 88(2.2), subsection 85(1) will apply to the transfer of the eligible property owned by ACo to Newco, as described in Paragraph 45, provided Newco and ACo file a valid election, within the time limits specified in subsection 85(6), in respect of such transfer such that the agreed amount in respect of the transfer shall be deemed to be the proceeds of disposition thereof to ACo and the cost thereof to Newco pursuant to paragraph 85(1)(a). For greater certainty, paragraph 85(1)(e.2) will not apply to the transfer referred to herein.

F. Provided that the fair market value of the Class Z preferred shares, Class E shares, and the Class F shares, as the case may be, does not exceed the adjusted cost base of such shares at the time such shares are redeemed by ACo, as described in Paragraph 46, subsection 55(2) will not apply to any dividend deemed to be received by Newco by virtue of subsection 84(3) in respect of that redemption.

G. Provided that the fair market value of the Class 4 preferred shares does not exceed the adjusted cost base of such shares at the time such shares are redeemed by Newco, as described in Paragraph 47, subsection 55(2) will not apply to any dividend deemed to be received by ACo by virtue of subsection 84(3) in respect of that redemption.

H. On the redemption of the Class Z preferred shares, Class E shares and Class F shares by ACo, described in Paragraph 46, and the redemption of the Class 4 preferred shares by Newco, described in Paragraph 47, by virtue of subsection 84(3):

(a) ACo will be deemed to have paid, and Newco will be deemed to have received, a dividend, at that time, equal to the amount, if any, by which

the amount paid by ACo in respect of the redemption of the Class Z Preferred Shares, Class E shares and Class F shares, as the case may be, owned by Newco

exceeds

the paid-up capital of such shares immediately before the redemption;

(b) Newco will be deemed to have paid, and ACo will be deemed to have received, a dividend, at that time, equal to the amount, if any, by which the amount paid by Newco in respect of the redemption of the Class 4 Preferred Shares owned by ACo exceeds the paid-up capital of such shares immediately before the redemption; and

(c) The taxable dividends deemed to have been received by each of ACo and Newco, as described in (a) and (b) above:

(i) will be included in computing the particular recipient's income, pursuant to subsection 82(1) and paragraph 12(1)(j);

(ii) will be deductible by the particular recipient pursuant to subsection 112(1) in computing its taxable income in the year in which such dividend is deemed to have been received and, for greater certainty, the provisions of subsection 112(2.1), (2.2), (2.3) or (2.4) will not apply to deny the subsection 112(1) deduction in respect of such dividend;

(iii) will be excluded from the proceeds of disposition of the shares so redeemed by virtue of paragraph (j) of the definition of proceeds of disposition in section 54;

(v) will not give rise to tax under Part IV except to the extent that the payer corporation is entitled to a dividend refund for its taxation year in which it paid such dividend; and

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

I. By virtue of paragraph 88(2)(b) and subsection 84(2), but subject to (c) herein, on the wind-up of BCo:

(a) Newco will be deemed to have received a winding-up dividend on the BCo Shares equal to the proportion of the amount by which the aggregate fair market value of the property of BCo distributed in respect of the Class F shares of BCo on the winding-up exceeds the amount by which the paid-up capital of the Class F shares of BCo is reduced, that the Class F shares of BCo held by Newco is of the total number of issued Class F shares of BCo;

(b) ACo will be deemed to have received a winding-up dividend on the Class B shares of BCo equal to the proportion of the amount by which the aggregate fair market value of the property of BCo distributed in respect of the Class B shares of BCo on the winding-up exceeds the amount by which the paid-up capital of the Class B shares is reduced, that the Class B shares of BCo held by ACo is of the total number of issued Class B shares of BCo;

(c) pursuant to subparagraph 88(2)(b)(ii), the portion of the winding-up dividend that is equal to BCo's pre-1972 CSOH, as determined immediately before the payment of the winding-up dividend, shall be deemed not to be a dividend; and

(d) pursuant to subparagraph 88(2)(b)(iii), the winding-up dividend, to the extent that it exceeds the portion thereof referred to in (c) herein that is deemed not to be a dividend, will be deemed to be a separate dividend that is a taxable dividend.

J. By virtue of paragraph 88(2)(b) and subsection 84(2), but subject to (b) and (c) herein, on the wind-up of Newco:

(a) each Shareholder will be deemed to have received a winding-up dividend on the Class A common shares, Class 1 preferred shares, Class 2 preferred shares and Class 3 preferred shares of Newco, as the case may be, equal to the proportion, of the amount by which the aggregate fair market value of the property of Newco distributed to each Shareholder in respect of the Class A common shares, Class 1 preferred shares, Class 2 preferred shares and Class 3 preferred shares of Newco, as the case may be, on the winding-up exceeds the amount by which the paid-up capital of such Class A common shares, Class 1 preferred shares, Class 2 preferred shares, and Class 3 preferred shares, as the case may be, is reduced on the distribution, that the number of such Class A common shares, Class 1 preferred shares, Class 2 preferred shares, and Class 3 preferred shares, as the case may be, held by each Shareholder of Newco is of the total number of issued Class A common shares, Class 1 preferred shares, Class 2 preferred shares, and Class 3 preferred shares, as the case may be;

(b) pursuant to subparagraph 88(2)(b)(ii), the portion of the winding-up dividend that is equal to Newco's pre-1972 CSOH, as determined immediately before the payment of the winding-up dividend, shall be deemed not to be a dividend; and

(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 not to be a dividend, will be deemed to be a separate dividend that is a taxable dividend.

K. To the extent that a dividend described in Ruling J is a taxable dividend, each such dividend:

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

(b) will be excluded from the proceeds of disposition of the shares of Newco by virtue of paragraph (j) of the definition of proceeds of disposition in section 54; and

(c) will not be subject to tax under Part VI.1 on the basis that the dividends will be excluded dividends.

L. Paragraph 88(2.2)(b) will apply to the transfer of the BCo Shares to Newco, as described in Paragraph 45, such that ACo will be deemed not to have disposed of the BCo Shares, Newco will be deemed to have owned the BCo Shares on December 31, 1971, and Newco will be deemed to have acquired the BCo Shares at an actual cost equal to the actual cost thereof to ACo.

M. Paragraph 88(2.1)(b) will apply on the disposition of the BCo shares by Newco, such that an amount equal to the amount by which the lesser of the proceeds of disposition and the V-day value of the BCo Shares exceeds Newco's actual cost of the BCo Shares, determined in the manner described in paragraph 88(2.1)(b), will be added to the pre-72 CSOH of Newco.

N. To the extent the winding-up dividend, as described in Ruling J, received by S-3 and S-4 is deemed not to be a dividend by virtue of subparagraph 88(2)(b)(ii), no amount will be is required to be withheld by Newco under subsection 212(1).

O. The amount of the winding-up dividend that is deemed not to be a dividend, described in Ruling I(c), will be included in the proceeds of disposition, by virtue of paragraph (i) of the definition of that term in section 54, of the BCo Shares held by Newco and the Class B shares of BCo held by ACo. The amount of the winding-up dividend that is deemed not to be a dividend, as described in Ruling J(b), will be included in the proceeds of disposition, by virtue of paragraph (i) of the definition of that term in section 54, of the Class A common shares, Class 1 preferred shares, Class 2 preferred shares, and Class 3 preferred shares, as the case may be, held by the Shareholders.

P. By virtue of paragraph 40(3.6)(a), any loss incurred by ACo on the redemption of the Class 4 preferred shares of Newco, as described in Paragraph 47, will be deemed to be nil. By virtue of paragraph 40(3.6)(a), any loss incurred by Newco on the redemption of the Class Z preferred shares, Class E shares and Class F shares of ACo, as described in Paragraph 46, will be deemed to be nil. For greater certainty, paragraph 40(3.6)(b) and paragraph 53(1)(f.2) will not apply to add any loss denied under paragraph 40(3.6)(a) to the adjusted cost base of a class of the capital stock of Newco or ACo, as the case may be, owned by Newco and ACo, as the case may be, immediately after the disposition since, at that time, Newco will not own any shares of the capital stock of ACo and ACo will not own any shares of the capital stock of Newco.

Q. The provisions of subsection 245(2) will not be applied as a result of the Proposed Transactions, in and by themselves, to redetermine 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 the CRA provided that the Proposed Transactions are completed prior to 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, could have an effect on the rulings provided herein.

COMMENTS

1. 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, V-day value, actual cost, or fair market value of any property referred to herein;

(b) the amount of any non-capital loss, RDTOH, pre-72 CSOH, or any other tax account of any corporation referred to herein;

(c) whether the BCo Shares are capital property owned by ACo on December 31, 1971 and whether they have ever been disposed of by ACo after 1978 and prior to the Proposed Transactions; and 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.

2. To the extent there is a separate taxable dividend, by virtue of subparagraph 88(2)(b)(iii), received by S-3 and S-4 on the wind-up of Newco, Newco will be required to withhold an amount as determined by subsection 212(2).

3. 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 converted or 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 conversion, transfer, or time of the issuance, of shares. Furthermore, none of the rulings given in this letter are intended to apply to or in the event of the operation of a price adjustment clause. The general position of the CRA with respect to price adjustment clauses is stated in Income Tax Folio S4-F3-C1 Price Adjustment Clauses.

4. ACo is expected to have a balance in its RDTOH at its year-end, and the taxation year of Newco in which it redeems its preferred shares owned by ACo will, subject to the comments below, coincide with the taxation year of ACo in which it redeems the preferred shares owned by Newco. Consequently, this gives rise to what is referred to as a "circular" calculation of RDTOH. You have indicated that you do not wish to avoid this "circularity problem". Consequently, we must inform you that, in our view, this could result in each of ACo and Newco being subject to Part IV tax under paragraph 186(1)(b). It is also our view that the circularity problem causes uncertainty as to which corporation is ultimately entitled to a dividend refund and which corporation is ultimately liable for Part IV tax. Since the problem will affect the assessment of the income tax returns of ACo and Newco, the district taxation office at which each of ACo and Newco files its T2 income tax return will have to be consulted in order to determine which corporation will receive the dividend refund and which corporation will be subject to the Part IV tax liability under paragraph 186(1)(b) described in these comments.

Yours truly,

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

FOOTNOTES

Note to reader: Because of our system requirements, the footnotes contained in the original document are shown below instead:

1 The XXXXXXXXXX Class E shares held by S-3 and S-4 have an aggregate ACB of $XXXXXXXXXX, and the XXXXXXXXXX Class E shares held by the Estate have an aggregate ACB of $XXXXXXXXXX.