2013 Ruling 2012-0449611R3 - single-wing butterfly reorganization

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

Principal Issues: Whether the dividends arising on the single-wing butterfly reorganization as described in the Proposed Transactions are exempt from the application of subsection 55(2) by virtue of paragraph 55(3)(b)?

Position: Yes.

Reasons: Wording of the provision.

XXXXXXXXXX
2012-044961

XXXXXXXXXX, 2013

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-referenced taxpayer. In your subsequent letters and emails you provided additional information concerning the facts and proposed transactions described in your original letter. We also acknowledge the information provided during our various telephone conversations (XXXXXXXXXX). Any information you have provided to us forms part of this ruling only to the extent described herein.

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

(i) in an earlier return of the above-referenced taxpayer or a related person;

(ii) 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;

(iii) under objection by the above-referenced taxpayer or a related person;

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

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

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

Unless otherwise expressly stated, every reference herein to the "Act" or 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 and the Income Tax Regulations thereunder are referred to as the "Regulations."

Unless otherwise noted, all references herein to a currency are a reference to Canadian dollars.

DEFINITIONS

In this letter, the following terms have the meanings specified and, where the circumstances so require, the singular should be read as plural and vice versa:

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

"agreed amount" in respect of an eligible property means the amount that the transferor and transferee of the property have agreed upon in an election under subsection 85(1);

"arm's length" has the meaning assigned by section 251;

"Articles" means, in relation to a particular corporation, the constating documents of the corporation;

XXXXXXXXXX;

"CRA" means the Canada Revenue Agency;

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

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

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

"Child 1" means XXXXXXXXXX, as described in Paragraph 12;

"Child 2" means XXXXXXXXXX, as described in Paragraph 12;

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

"DC" means XXXXXXXXXX as described on Paragraph 1;

"DC Common Shares" means the common shares of DC that are currently issued and outstanding;

"DC Common Share Purchase Amount" has the meaning assigned in Paragraph 41;

"DC Purchase Note" has the meaning assigned in Paragraph 41;

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

"Dispute" means the dispute between Mrs. A and Mr. B, as described in Paragraphs 22 and 23;

"Distribution Property" has the meaning assigned in Paragraph 35;

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

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

"fair market value" ("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 and contracting for a taxable purchase and sale, expressed in terms of cash;

"financial intermediary corporation" has the meaning assigned by subsection 191(1);

"forgiven amount" has the meaning assigned by subsection 80(1) or 80.01(1);

"Grandparent" means XXXXXXXXXX, as described in Paragraph 12;

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

"Holdco A" means XXXXXXXXXX, as described in Paragraph 8;

"Holdco A2" means XXXXXXXXXX, as described in Paragraph 21;

"Holdco B" means XXXXXXXXXX, as described in Paragraph 10;

"Holdco B Sub" has the meaning assigned in Paragraph 28;

"Holdco B Sub Redemption Note" has the meaning assigned in Paragraph 42;

"Holdco B Sub Special Shares" has the meaning assigned in Paragraph 28;

"Holdco B Sub Special Share Redemption Amount" has the meaning assigned in Paragraph 28;

XXXXXXXXXX;

"Minutes of Settlement" has the meaning assigned in Paragraph 24;

"Mr. B" means XXXXXXXXXX as described in Paragraph 12;

"Mrs. A" means XXXXXXXXXX, as described in Paragraph 8;

"Nominee A" means XXXXXXXXXX, as described in Paragraph 16;

"Nominee B" means XXXXXXXXXX, as described in Paragraph 18;

"Nominee B2" has the meaning assigned in Paragraph 30;

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

"Paragraph" means a numbered paragraph in this letter;

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

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

"Proposed Transactions" means those transactions and events described in Paragraphs 28 through and including 46;

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

"related persons" or "persons related to each other" has the meaning assigned by subsection 251(2);

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

"safe-income determination time" has the meaning assigned to that term by
subsection 55(1);

"safe income on hand" in respect of a particular share of a corporation at a particular time means the portion of the unrealized gain inherent in such share of the corporation at that time that cannot reasonably be considered to be attributable to anything other than income earned or realized (as determined pursuant to subsection 55(5)), to the extent that it is on hand, by any corporation after 1971 and before the safe-income determination time for the transaction, event or series of transactions or events that includes the Proposed Transactions described herein;

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

"Shareholder Loans" has the meaning assigned in Paragraph 4;

"short-term preferred share" has the meaning assigned by subsection 248(1);

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

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

XXXXXXXXXX;

"subsidiary wholly-owned corporation" has the meaning assigned by subsection 248(1);

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

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

"taxable preferred share" has the meaning assigned by subsection 248(1).

FACTS

DC

1. DC is a CCPC and a TCC. It has a taxation year ending XXXXXXXXXX. DC files its federal corporate tax returns at the XXXXXXXXXX Tax Centre and its tax affairs are administered by the XXXXXXXXXX Tax Services Office.

DC was formed on XXXXXXXXXX by an amalgamation ("Amalgamation") of a predecessor corporation, XXXXXXXXXX ("Predecessor DC") and Predecessor DC's subsidiary wholly-owned corporation, XXXXXXXXXX, under the XXXXXXXXXX.

Predecessor DC was incorporated on XXXXXXXXXX under the XXXXXXXXXX.

2. The issued and outstanding share capital of DC consists of XXXXXXXXXX DC common shares ("DC Common shares"), of which each of Holdco A and Holdco B owns XXXXXXXXXX shares.

The DC Common Shares are participating and are entitled to one vote per share.

None of the DC Common Shares were acquired by any person in contemplation of the Proposed Transactions.

Each of Holdco A and Holdco B holds its DC Common Shares as capital property.

3. DC's assets consist of:

(a) cash in the amount of approximately $XXXXXXXXXX;

(b) account receivables (net of allowance for doubtful accounts) in the amount of approximately $XXXXXXXXXX;

(c) prepaid property taxes (these represent property tax payments paid to mortgage companies that are held in escrow and that are in excess of property taxes charged to date) in the amount of approximately $XXXXXXXXXX;

(d) deposits (being a fixed payment to utilities to open the account) and deferred expenses (being prepaid insurance, that is, insurance paid annually but expensed on a monthly basis) in the amount approximately $XXXXXXXXXX; and

(e) XXXXXXXXXX (collectively referred to hereinafter as the "XXXXXXXXXX Buildings")

Legal title to Buildings XXXXXXXXXX are held by Nominee A and Nominee B, respectively, as the agent, nominee and bare trustee for the sole benefit of DC.

4. DC's liabilities include:

(a) current liabilities, which consist of:

(i) accounts payable and accrued liabilities in the amount of approximately $XXXXXXXXXX;

(ii) tenant deposits in the amount of approximately $XXXXXXXXXX;

(iii) shareholder payable to Holdco A, in the amount of approximately $XXXXXXXXXX;

(iv) shareholder payable to Holdco B, in the amount of approximately $XXXXXXXXXX; and

(b) long term liabilities which consist of mortgages payable in respect of the XXXXXXXXXX Buildings, in the aggregate amount of approximately $XXXXXXXXXX.

(shareholder payables to Holdco A and Holdco B are collectively referred to hereinafter as the "Shareholder Loans")

Tenant deposits are for "last month's rent" that tenants have paid. The tenant deposits are a current liability since the rental periods are for periods of not more than one year.

The Shareholder Loans are non-interest bearing, unsecured, payable on demand and otherwise have no specific terms of repayment and no reference to a specific property. They have been reported by DC as current liabilities under Accounting Standards for Private Enterprises under Part II of the CICA Handbook.

5. The XXXXXXXXXX Buildings are revenue producing rental properties, which consist of land, buildings and some equipment. The buildings are depreciable property and each is included in a separate class (either Class 1 or 3) of schedule II to the Regulations. The equipment is included in Class 8 of schedule II to the Regulations.

DC acquired Buildings XXXXXXXXXX from Holdco A and Holdco B on XXXXXXXXXX. Prior to the transfers, Holdco A and Holdco B each owned a XXXXXXXXXX% interest in Buildings XXXXXXXXXX. As consideration for the transfers, DC assumed the existing mortgages on Buildings XXXXXXXXXX and certain liabilities of Holdco A and Holdco B and issued XXXXXXXXXX DC Common Shares to each of Holdco A and Holdco B.

DC acquired Buildings XXXXXXXXXX from arm's-length parties during the period XXXXXXXXXX to XXXXXXXXXX.

6. DC does not employ more than 5 full-time employees. All of DC's income from the rental properties is reported for income tax purposes as income from a SIB.

7. DC currently has RDTOH of approximately $XXXXXXXXXX and a balance of approximately $XXXXXXXXXX in its CDA.

The CDA and RDTOH of DC arose as a result of a capital gain realized by DC on the sale of a property at XXXXXXXXXX ("Building XXXXXXXXXX") in XXXXXXXXXX, as described in Paragraphs 25 and 26.

Holdco A

8. Holdco A is a CCPC and a TCC. Holdco A has a taxation year ending XXXXXXXXXX.

All of the issued and outstanding common shares of Holdco A are owned by XXXXXXXXXX ("Mrs. A"), who is a Canadian resident. Consequently, Holdco A is controlled by Mrs. A.

Holdco A was formed as a result of an amalgamation of XXXXXXXXXX and XXXXXXXXXX under the XXXXXXXXXX on XXXXXXXXXX. Prior to the amalgamation, Mrs. A owned all of the issued and outstanding shares of both corporations.

9. Holdco A is an investment holding company. Its assets include:

(a) XXXXXXXXXX DC Common Shares;

(b) XXXXXXXXXX common shares of Nominee A;

(c) XXXXXXXXXX common shares of Nominee B; and

(d) a loan receivable from DC in the amount of approximately $XXXXXXXXXX.

Holdco A subscribed for XXXXXXXXXX common shares of Predecessor DC on the incorporation of Predecessor DC in XXXXXXXXXX. Holdco A's XXXXXXXXXX common shares of Predecessor DC became Holdco A's XXXXXXXXXX DC Common Shares on the Amalgamation, as described in Paragraph 1. Also, in XXXXXXXXXX, Holdco A acquired an additional XXXXXXXXXX DC Common Shares, as described in Paragraph 5.

Holdco B

10. Holdco B is a XXXXXXXXXX and a XXXXXXXXXX. It has a taxation year ending XXXXXXXXXX. Holdco B was incorporated under the XXXXXXXXXX.

The issued and outstanding share capital of Holdco B consists of:

(a) XXXXXXXXXX voting common shares, all of which are owned by XXXXXXXXXX ("Trust 1");

(b) XXXXXXXXXX Class A non-voting preference shares, all of which are owned by XXXXXXXXXX ("Mr. B"); and

(c) XXXXXXXXXX Class B voting preference shares and XXXXXXXXXX Class C non-voting convertible preference shares, all of which are owned by XXXXXXXXXX ("Trust 2").

The Holdco B common shares and the Holdco B Class B preference shares entitle the holders to vote on the basis of one vote per share.

The Holdco B Class C preference shares are convertible into Holdco B common shares, on a one-for-one basis, so long as Mr. B is alive.

11. The assets of Holdco B include:

(a) XXXXXXXXXX DC Common Shares;

(b) XXXXXXXXXX common shares of Nominee A;

(c) XXXXXXXXXX common shares of Nominee B;

(d) a loan receivable from DC in the amount of approximately $XXXXXXXXXX; and

(e) other investments, including real estate.

Holdco B subscribed for XXXXXXXXXX common shares of Predecessor DC on the incorporation of Predecessor DC in XXXXXXXXXX. Holdco B's XXXXXXXXXX common shares of Predecessor DC became Holdco B's XXXXXXXXXX DC Common Shares on the Amalgamation, as described in Paragraph 1. Also, in XXXXXXXXXX, Holdco B acquired an additional XXXXXXXXXX DC Common Shares, as described in Paragraph 5.

Trust 1, Trust 2 and Mr. B

12. The settlor of Trust 1 was XXXXXXXXXX ("Grandparent"). The trustees of Trust 1 are Mr. B, XXXXXXXXXX ("Child 1") and XXXXXXXXXX ("Child 2"). The beneficiaries of Trust 1 are Mr. B, Child 1 and Child 2.

Grandparent is the father of Mr. B. Child 1 and Child 2 are the adult children of Mr. B. Mr. B is a Canadian resident.

13. Grandparent was the settlor of Trust 2. Mr. B is the sole trustee and the sole beneficiary of Trust 2.

14. Trust 1 and Trust 2 were established for estate planning purposes.

15. Mr. B previously owned all of the issued and outstanding Holdco B common shares. In an estate freeze transaction, Mr. B exchanged all of his Holdco B common shares for the XXXXXXXXXX Holdco B Class A non-voting preference shares. Mr. B controls Holdco B through his ownership of the XXXXXXXXXX Holdco B Class B voting preference shares as the trustee of Trust 2.

Nominee A

16. Nominee A is a CCPC and a TCC, which was incorporated under the XXXXXXXXXX.

The issued and outstanding share capital of Nominee A consists of XXXXXXXXXX common shares, all of which are owned by Holdco A and Holdco B equally.

17. Nominee A has no activity. It holds the legal title to Building XXXXXXXXXX. Nominee A has no other assets and earns no revenue.

Pursuant to a nominee agreement between Nominee A and DC, Nominee A holds the legal title to Building XXXXXXXXXX as the nominee, agent and bare trustee for the sole benefit of DC and it will not deal with Building XXXXXXXXXX in any way without receiving the prior written instructions, consent or direction of DC.

Nominee B

18. Nominee B is a CCPC and a TCC, which was incorporated under the XXXXXXXXXX.

The issued and outstanding share capital of Nominee B consists of XXXXXXXXXX common shares, all of which are owned by Holdco A and Holdco B equally.

19. Nominee B has no activity. It holds legal title to Building XXXXXXXXXX. Nominee B has no other assets and earns no revenue.
Pursuant to a nominee agreement between Nominee B and DC, Nominee B holds the legal title to Building XXXXXXXXXX as the nominee, agent and bare trustee for the sole benefit of DC and it will not deal with Building XXXXXXXXXX in any way without receiving the prior written instructions, consent or direction of DC.

Dispute between Mrs. A and Mr. B

20. Mrs. A and Mr. B are not related to each other for purposes of the Act.

21. Following the incorporation of Predecessor DC in XXXXXXXXXX, Holdco B, or an entity related to Holdco B, had provided property management services and other professional services to Predecessor DC, DC, Mrs. A and XXXXXXXXXX ("Holdco A2"). However, this arrangement ceased in XXXXXXXXXX, because of the Dispute between Mrs. A and Mr. B described in Paragraphs 22 and 23.

Mrs. A owns all of the issued and outstanding shares of Holdco A2. Holdco A2 is a CCPC and a TCC, which owns commercial and industrial properties.

22. A dispute arose between Mrs. A and Mr. B (the "Dispute") XXXXXXXXXX. As a result, in XXXXXXXXXX, an independent property manager was hired to manage DC's and Holdco A2's portfolio of buildings.

23. In XXXXXXXXXX, a lawsuit ("Lawsuit") was filed by Mrs. A, Holdco A and Holdco A2 against Mr. B and Holdco B. DC was also named as a defendant to bind it to the litigation.

Mr. B and Holdco B filed a counter-claim against Mrs. A, Holdco A and Holdco A2.

24. In XXXXXXXXXX, the Lawsuit was settled in mediation. The terms of minutes of settlement ("Minutes of Settlement") included:

(a) a payment by Holdco B to the plaintiffs (being Mrs. A, Holdco A and Holdco A2) in the amount of $XXXXXXXXXX; and

(b) a "butterfly" reorganization to be structured on a "single-wing" basis such that Buildings XXXXXXXXXX (including their related assets) will be transferred to Holdco B, as described in the Proposed Transactions.

DC was not liable for the payment of the settlement amount as described in (a) above.

Disposition of Building XXXXXXXXXX and Repayment of Shareholder Loans

25. DC acquired Building XXXXXXXXXX from an arm's length party prior to XXXXXXXXXX. The first mortgage ("Mortgage") on Building XXXXXXXXXX was held by XXXXXXXXXX ("Bank"). The Mortgage matured in XXXXXXXXXX. Efforts were made to renew the Mortgage from XXXXXXXXXX to XXXXXXXXXX; however, acceptable arrangements for a renewal could not be agreed upon between the Bank, DC and DC's shareholders primarily because of the Dispute.

26. In XXXXXXXXXX, Holdco A2 purchased the Mortgage from the Bank. DC failed to repay the principal amount of the Mortgage. Holdco A2, as the mortgagor, exercised its power of sale under the Mortgage. As a result, Building XXXXXXXXXX was sold to XXXXXXXXXX, an arm's length party to DC, in XXXXXXXXXX under the power of sale process for a sale price of $XXXXXXXXXX.

The sale proceeds from the disposition of Building XXXXXXXXXX were used: (a) first, to repay the principal amount of the Mortgage held by Holdco A2 plus accrued interest and enforcement costs (including legal fees and sales commission), and (b) second, the remaining balance in the amount of $XXXXXXXXXX was paid to DC.

The disposition of Building XXXXXXXXXX resulted in a capital gain to DC of approximately $XXXXXXXXXX and in recapture depreciation of approximately $XXXXXXXXXX.

27. On XXXXXXXXXX, it was decided that it would be prudent to use a portion of the sale proceeds from the disposition of Building XXXXXXXXXX, as described in Paragraph 26, that was not required for the ongoing operations and expenses of DC, to make a payment to each of Holdco A and Holdco B in the amount of $XXXXXXXXXX as a repayment of the shareholder loans owing to each of Holdco A and Holdco B.

PROPOSED TRANSACTIONS

The following transactions will be implemented in the order presented unless otherwise noted.

Incorporation of Holdco B Sub

28. Holdco B will incorporate a new corporation pursuant to the XXXXXXXXXX ("Holdco B Sub"). Holdco B Sub will be authorized to issue:

(a) an unlimited number of common shares; and

(b) an unlimited number of Holdco B Sub special shares ("Holdco B Sub Special Shares"), which will have the following attributes:

(i) the Holdco B Sub Special Shares will be voting;

(ii) each Holdco B Sub Special Share will be redeemable and retractable at an amount ("Holdco B Sub Special Share Redemption Amount") equal to the amount by which the aggregate FMV of the Distribution Property transferred to Holdco B Sub, at the time of the transfer by DC to Holdco B Sub, as described in Paragraph 35, less the aggregate amount of the liabilities of DC assumed by Holdco B Sub for the acquisition of such property, as described in Paragraph 36, divided by the number of Holdco B Sub Special Shares issued as consideration for such transfer, plus all declared but unpaid dividends thereon;

(iii) the Holdco B Sub Special Shares will entitle the holder to receive a preferential non-cumulative dividend of XXXXXXXXXX% of the Holdco B Sub Special Share Redemption Amount;

(iv) the Holdco B Sub Special Shares will rank in priority to the common shares of Holdco B Sub with respect to the payment of dividends and amounts paid on the wind-up or dissolution of Holdco B Sub or other return of capital event; and

(v) for the purposes of subsection 191(4), the terms and conditions of the Holdco B Sub Special Shares will, at the time of their issuance, specify an amount in respect of each such share, for which the share is to be redeemed, acquired or cancelled.

The amount to be specified in respect of each of such shares:

(I) will be pursuant to a resolution of the board of directors of Holdco B Sub;

(II) will be expressed as a dollar amount;

(III) will not be determined by a formula;

(IV) will not exceed the FMV of the property received by Holdco B Sub as consideration for the issuance of such share; and

(V) will not be subject to change thereafter.

29. Holdco B will subscribe for one common share of Holdco B Sub for $XXXXXXXXXX.

Preliminary Conveyancing Matters

30. Holdco B Sub will incorporate a new corporation pursuant to the XXXXXXXXXX ("Nominee B2"). Nominee B2 will be authorized to issue an unlimited number of common shares.

Holdco B Sub will subscribe for one common share of Nominee B2 for $XXXXXXXXXX.

31. DC will transfer the legal title to Buildings XXXXXXXXXX to Nominee B2 for a nominal amount. Concurrent with such transfer, Nominee B2 and DC will enter into a nominee agreement, pursuant to which Nominee B2 will acknowledge that it will hold the legal title to Buildings XXXXXXXXXX as the nominee, agent and bare trustee for the sole benefit of DC and that it will not deal with Buildings XXXXXXXXXX in any way without receiving the prior written instructions, consent or direction of DC.

PUC increase – subsection 84(1) deemed dividend

32. XXXXXXXXXX days prior to the implementation of the following Proposed Transactions, the directors of DC will pass a resolution to increase the stated capital (and, consequently, the PUC) of the issued and outstanding DC Common Shares, which are held by Holdco A and Holdco B, by an amount equal to XXXXXXXXXX times DC's RDTOH at the end of the taxation year that will end immediately before the acquisition of control of DC by Holdco A, as described in Ruling F below. In addition, such increased amount will not exceed the safe income on hand that is attributable to such common shares of DC held by Holdco A and Holdco B at the safe-income determination time in respect of the Proposed Transactions. This PUC increase will not be implemented by way of one of the transactions or events described in paragraphs 84(1)(a) to (c.3) and specifically will not be as a result of the conversion of contributed surplus into PUC.

DC will be deemed to have paid a dividend to Holdco A and Holdco B, and Holdco A and Holdco B each will be deemed to have received a dividend, under subsection 84(1) as a result of the PUC increase as described above.

Holdco A and Holdco B each will make appropriate designations pursuant to paragraph 55(5)(f) to treat such deemed dividend received by them as consisting of two or more separate dividends.

Types of property of DC

33. Immediately before the transfer of property described in Paragraph 35, the property owned by DC will be classified into the following three types of property for the purposes of the definition of "distribution" in subsection 55(1), as follows:

(a) cash or near-cash property, consisting of all the current assets of DC, including cash, account receivables, prepaid property taxes, deposits, deferred expenses and a dividend refund receivable;

(b) investment property, consisting of 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 SIB;

(c) business property, consisting of 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 a business carried on by DC (other than a SIB).

For greater certainty, for purposes of this distribution:

(d) the XXXXXXXXXX Buildings will be considered to be investment properties; and

(e) any tax accounts, such as the balance of any non-capital losses, net capital losses, RDTOH or CDA of DC, will not be considered property.

It is expected that DC will only have cash or near-cash property and investment property immediately before the transfer of property described in Paragraph 35.

34. In determining the net FMV of each type of property of DC immediately before the transfer described in Paragraph 35, the liabilities of DC will be allocated to, and will be deducted in the calculation of, the net FMV of each such type of property of DC, in the following manner:

(a) current liabilities of DC (including the Shareholder Loans) will be allocated to a cash or near-cash property in the proportion that the FMV of each such property is of the FMV of all cash or near-cash property. The allocation of current liabilities, as described herein, will not exceed the aggregate FMV 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 FMV. 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

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

For greater certainty, for purposes of determining the net FMV of each type of property of DC, as described in this paragraph:

(d) the Shareholder Loans will be considered to be current liabilities;

(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 income taxes recorded in the financial statements of DC will not be considered to be a liability on the basis that deferred income taxes do not represent a legal obligation of DC.

Single-wing split-up butterfly of DC's assets

35. Immediately following the determination of the net FMV of its types of property, as described in Paragraphs 33 and 34, DC will transfer to Holdco B Sub a proportionate share of its:

(a) cash or near-cash property;

(b) investment property (being its beneficial ownership of Buildings XXXXXXXXXX and related assets); and

(c) business property, if any,

(collectively referred to as the "Distribution Property")

such that, immediately after such property transfers, and liability assumptions described in Paragraph 36, the net FMV, calculated as described in Paragraphs 33 and 34, of each such type of property of DC so transferred to Holdco B Sub, will approximate that proportion of the net FMV of that type of property of DC, determined immediately before the transfer that:

(d) the aggregate FMV, immediately before the transfer, of all of the DC Common Shares owned by Holdco B,

is of

(e) the aggregate FMV, immediately before the transfer, of all of the issued and outstanding shares of DC.

For greater certainty, the portion of the net FMV of each type of DC's property that is transferred to Holdco B Sub, as described in this paragraph, will represent Holdco B's pro rata share of the net FMV of that type of property of DC.

For the purposes of this paragraph and Paragraph 46, the expression "approximate that proportion" means that the discrepancy from that proportion, if any, will not exceed one percent (1%), determined as a percentage of the net FMV of each type of property of DC that Holdco B Sub has received (or DC has retained) as compared to what Holdco B Sub would have received (or DC would have retained) had it received (or retained) its appropriate pro rata share of the net FMV of that type of property of DC.

36. As consideration for the property transferred by DC to Holdco B Sub described in Paragraph 35, Holdco B Sub will:

(a) assume an appropriate amount of liabilities of DC (so that on a net basis, Holdco B Sub will receive Holdco B's pro rata share of each type of property owned by DC); and

(b) issue to DC a number of Holdco B Sub Special Shares having an aggregate redemption amount and aggregate FMV equal to the aggregate FMV, at the time of the transfer, of the Distribution Property received by Holdco B Sub, less the amount of the liabilities of DC assumed by Holdco B Sub, as described in (a) above.

The Holdco B Sub Special Shares issued to DC, as described in (b) above, will entitle DC to more than 10% (but less than 50%) of the voting rights under all circumstances in respect of the issued share capital of Holdco B Sub and will represent more than 10% of the FMV of all of the issued and outstanding shares of the capital stock of Holdco B Sub, such that Holdco B Sub will be "connected" with DC by virtue of paragraph 186(4)(b).

The Holdco B Sub Special Shares will be taxable preferred shares.

37. With respect to the transfer of property by DC to Holdco B Sub, as described in Paragraph 35, legal title to Building XXXXXXXXXX will continue to be held by Nominee A, Building XXXXXXXXXX by Nominee B, and Buildings XXXXXXXXXX by Nominee B2. Each of Nominee A, Nominee B and Nominee B2 will enter into a new nominee agreement with Holdco B Sub, pursuant to which, Nominee A, Nominee B and Nominee B2 each will hold the legal title to Buildings XXXXXXXXXX, as the case may be, as the nominee, agent and bare trustee for the sole benefit of Holdco B Sub and each will not deal with the property, as the case may be, in any way without receiving the prior written instructions, consent or direction of Holdco B Sub.

38. Concurrent with the transfer of property as described in Paragraph 35, Holdco A will transfer all of the shares that it owns in Nominee A and Nominee B to Holdco B Sub for a nominal amount.

Thereafter, Holdco B and Holdco B Sub will each own one-half of all of the issued and outstanding shares of Nominee A and Nominee B.

39. DC will jointly elect with Holdco B Sub, in prescribed form and within the time referred to in subsection 85(6), but prior to the dissolution of Holdco B Sub, as described in Paragraph 43, to have the provisions of subsection 85(1) apply to the transfer described in Paragraph 35 of each eligible property of DC. The agreed amount in respect of each eligible property will not be greater than the FMV 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); and

(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) to (iii).

For greater certainty, the aggregate of such elected amounts will be greater than the aggregate amount of DC's liabilities so assumed by Holdco B Sub for such properties, as described in Paragraph 36(a).

40. The increase to the PUC of the Holdco B Sub Special Shares that are issued to DC as consideration for the property transferred by DC to Holdco B Sub, as described in Paragraph 36(b), will not exceed the aggregate cost of such property to Holdco B Sub, as determined pursuant to subsection 85(1), where applicable, less the aggregate amount of DC's liabilities assumed by Holdco B Sub for such property, as described in Paragraph 36(a). For greater certainty, the increase to the PUC of the Holdco B Sub Special Shares will not exceed the maximum amount that could be added to the PUC of such shares, having regard to subsection 85(2.1).

Purchase for Cancellation of DC Common Shares held by Holdco B

41. DC will purchase for cancellation all of the DC Common Shares held by Holdco B and, in consideration therefor, DC will issue to Holdco B a non-interest bearing note (the "DC Purchase Note") payable on demand and having a principal amount and FMV equal to the aggregate FMV of such DC Common Shares (the "DC Common Share Purchase Amount") so repurchased.

Holdco B will accept the DC Purchase Note as full and absolute payment of the DC Common Share Purchase Amount, with the risk of the note being dishonoured.

DC will not file an election for its taxation year that will end immediately before the acquisition of control of DC by Holdco A, as described in Ruling F below, not to have subsection 256(9) apply.

Redemption of the Holdco B Sub Special Shares held by DC

42. Holdco B Sub will redeem all of the Holdco B Sub Special Shares held by DC and, in consideration therefor, Holdco B Sub will issue to DC a non-interest bearing note (the "Holdco B Sub Redemption Note") payable on demand and having a principal amount and FMV equal to the aggregate Holdco B Sub Special Share Redemption Amount of the Holdco B Sub Special Shares so redeemed.

DC will accept the Holdco B Sub Redemption Note as full and absolute payment for the redemption price of the Holdco B Sub Special Shares so redeemed by Holdco B Sub with the risk of the note being dishonored.

Wind-Up of Holdco B Sub

43. Holdco B will, by a special resolution, resolve to wind-up and dissolve Holdco B Sub pursuant to the XXXXXXXXXX. On the wind-up of Holdco B Sub, under the terms of the agreement governing the winding-up of Holdco B Sub:

(a) all of the property of Holdco B Sub, including all of the property that Holdco B Sub received from DC, as described in Paragraph 35, will be distributed to DC; and

(b) all of the liabilities of Holdco B Sub, including the Holdco B Sub Redemption Note, will be assumed by Holdco B.

Articles of dissolution will be filed by Holdco B Sub with the appropriate corporate registry and upon receipt of a certificate of dissolution, Holdco B Sub will be dissolved.

After the wind-up of Holdco B Sub, Holdco B will own all of the issued and outstanding shares of Nominee A, Nominee B and Nominee B2.

44. Each of Nominee A, Nominee B and Nominee B2 will enter into a new nominee agreement with Holdco B, pursuant to which Nominee A, Nominee B and Nominee B2 each will hold the legal title to Buildings XXXXXXXXXX, as the case may be, as the nominee, agent and bare trustee for the sole benefit of Holdco B and each will not deal with the property, as the case may be, in any way without receiving the prior written instructions, consent or direction of Holdco B.

Cancellation of Notes

45. The Holdco B Sub Redemption Note and the DC Purchase Note will be settled in full through the set-off of such notes in full satisfaction of the respective obligations of Holdco B Sub, Holdco B and DC thereunder and each such Note will be extinguished and cancelled.

Property retained by DC

46. Immediately following the transfer as described in Paragraph 35, the net FMV of each type of property retained by DC, determined in the manner described in Paragraphs 33 and 34, will approximate that proportion of the aggregate net FMV of that type of property of DC, determined immediately before the transfer described in Paragraph 35, that:

(a) the aggregate FMV, immediately before the transfer of property, of the DC Common Shares owned by Holdco A,

is of

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

ADDITIONAL INFORMATION

47. Some portion of the mortgage indebtedness that Holdco B assumes, on the wind-up of Holdco B Sub, as described in Paragraph 43, may be refinanced by Holdco B with another lender immediately following the acquisition, by Holdco B, of the properties of Holdco B Sub on its wind-up.

48. Holdco A and Mrs. A have provided guarantees for the mortgages on Buildings XXXXXXXXXX that will be owned by Holdco B after the transfer as described in Paragraph 35. All parties will endeavor to have these guarantees removed.

49. Holdco B and Mr. B have provided guarantees for the mortgages on Buildings XXXXXXXXXX that will continue to be owned by DC after the transfer as described in Paragraph 35. All parties will endeavor to have these guarantees removed.

50. XXXXXXXXXX.

51. Except as described herein, no property has been or will be acquired by DC, in contemplation of and before the transfer, by DC, of its properties to Holdco B Sub as described in Paragraph 35, other than in a transaction described in subparagraphs 55(3.1)(a)(i) to (iv).

52. None of DC, Holdco B Sub or Holdco B has any expectation or intention of disposing any property owned by it, as part of a series of transactions or events that includes the Proposed Transactions, to a person who is not a related person or to a partnership, other than in the ordinary course of such corporation's business.

53. None of DC, Holdco B Sub or Holdco B is or will be, at any time during a series of transactions or events that includes the Proposed Transactions,

(a) a specified financial institution;

(b) a restricted financial institution; or

(c) a corporation described in any of paragraphs (a) to (f) of the definition of "financial intermediary corporation."

54. None of the shares of DC or Holdco B Sub (including the shares to be issued as described in the Proposed Transactions) is or will be, at any time during a series of transactions or events that includes the Proposed Transactions:

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

(b) the subject of a dividend rental arrangement; or

(c) issued or acquired as part of a series of transactions or events of the type described in subsection 112(2.5).

55. None of the DC Common Shares is a taxable preferred share or a short-term preferred share.

56. Each of DC, Holdco B Sub and Holdco B will have the financial capacity to honour, upon presentation for payment, the amount payable under the promissory note issued by it (or assumed by it, in the case of Holdco B), as the case may be, as part of the Proposed Transactions.

PURPOSES OF THE PROPOSED TRANSACTIONS

57. The purpose of the Proposed Transaction is to effect a "split-up" of the ownership of DC by way of a single-wing butterfly reorganization in accordance with the Minutes of Settlement.

58. The purpose of the PUC increase, as described in Paragraph 32, is to enable DC to receive a dividend refund equal to the amount of DC's RDTOH at the end of the year that will end immediately before the acquisition of control of DC by Holdco A, as described in Ruling F below.

59. The purpose of Nominee B2 in the Proposed Transactions is XXXXXXXXXX.

60. The purpose for Holdco B incorporating Holdco B Sub in the Proposed Transactions is to avoid circularity in the calculation of DC's RDTOH and Part IV tax, that would otherwise occur if the Distribution Property were transferred directly to Holdco B by DC.

61. The purpose for DC not filing a subsection 256(9) election, as described in Paragraph 41, is to ensure that the dividend refund that DC will obtain, arising on the PUC increase, as described in Paragraph 32, will occur in the taxation year of DC that will end immediately before the acquisition of control of DC by Holdco A, as described in Ruling F below.

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 undertaken in the manner described above, our rulings are set forth below:

A. Subject to the application of subsection 69(11), the provisions of subsection 85(1) will apply to the transfer by DC of each eligible property to Holdco B Sub, as described in Paragraph 35, such that the agreed amount in respect of 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).

For greater certainty, paragraph 85(1)(e.2) will not apply to such transfer.

B. Pursuant to paragraphs 84(3)(a) and 84(3)(b):

(i) on the redemption by Holdco B Sub of the Holdco B Sub Special Shares owned by DC, as described in Paragraph 42, Holdco B Sub will be deemed to have paid, and DC will be deemed to have received, a taxable dividend at that time equal to the amount, if any, by which the amount paid in respect of the redemption of the Holdco B Sub Special Shares exceeds the aggregate PUC of those shares immediately before the redemption; and

(ii) on the purchase for cancellation by DC of all of the DC Common Shares owned by Holdco B, as described in Paragraph 41, DC will be deemed to have paid, and Holdco B will be deemed to have received, a taxable dividend at that time equal to the amount, if any, by which the amount paid in respect of the purchase for cancellation of all of the DC Common Shares owned by Holdco B exceeds the aggregate PUC of those shares immediately before the purchase.

C. The taxable dividends as described in Ruling B above:

(a) will be included in the recipient's income 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 the dividend is deemed to have been received. For greater certainty, such deduction will not be denied by any of the provisions of subsections 112(2.1), (2.2), (2.3) and (2.4);

(c) will be excluded from the proceeds of disposition of the shares so redeemed or purchased for cancellation, as the case may be, by virtue 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 except as provided in paragraph 186(1)(b);

(f) will not be subject to tax under Part IV.1;

(g) with respect to the taxable dividend described in Ruling B (a) above, will not be subject to tax under Part VI.1, to the extent that the amount paid by Holdco B Sub to DC on the redemption of each Holdco B Sub Special Share, as described in Paragraph 42, is equal to the amount specified in respect of such share for the purpose of subsection 191(4); and

(h) with respect to the taxable dividend described in Ruling B (b) above, will not be subject to tax under Part VI.1.

D. Provided that as part of a series of transactions or events that includes the taxable dividends as described in Ruling B 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 property in the circumstances described in subparagraph 55(3.1)(b)(iii); or

(e) an acquisition of property in the circumstances described in paragraph 55(3.1)(c) or (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 as described in Ruling B above. For greater certainty, subsection 55(3.1) will not apply to deny the exemption under paragraph 55(3)(b).

E. The extinguishment of the DC Purchase Note and the Holdco B Sub Redemption Note, as described in Paragraph 45, will not, in and of itself, result in a forgiven amount, nor will any of DC, Holdco B and Holdco B Sub otherwise realize any gain or incur any loss as a result of the extinguishment of the DC Purchase Note and the Holdco B Sub Redemption Note.

F. As a result of the purchase for cancellation of the DC Common Shares owned by Holdco B, as described in Paragraph 41, Holdco A will acquire control of DC such that subsection 249(4) will apply to deem a taxation year of DC to have ended immediately before the time control of DC is acquired by Holdco A.

G. The provisions of subsections 15(1), 56(2), 69(1), 69(4) and 246(1) will not be applied as a result of the Proposed Transactions, in and by themselves.

H. 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 given 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 on or before 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 above.

COMMENTS

Unless otherwise confirmed, nothing in this letter should be construed as implying that the CRA has confirmed, reviewed, made any determination, or accepted any method for the 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 or RDTOH of any corporation;

(c) the safe-income on hand attributable to any shares 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.

Yours truly,

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