2013 Ruling 2013-0475681R3 - Family holding butterfly transaction

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

Principal Issues: Whether the proposed reorganization qualifies for the paragraph 55(3)(b) exemption.

Position: Favourable rulings given.

Reasons: In compliance with the law and previous positions.

XXXXXXXXXX
2013-047568

XXXXXXXXXX, 2013

Dear XXXXXXXXXX,

Re: Advance Income Tax Ruling
XXXXXXXXXX ("DC")
XXXXXXXXXX ("TC1")
XXXXXXXXXX ("TC2")
XXXXXXXXXX ("TC3")
XXXXXXXXXX ("TC4")
XXXXXXXXXX ("TC5")

This is in reply to your letters of XXXXXXXXXX, (and related emails) in which you requested an advance income tax ruling on behalf of the above-named taxpayers.

We understand that, to the best of your knowledge and that of the taxpayers, none of the issues involved in the ruling request is:

(a) in an earlier return of the taxpayers 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 taxpayers or a related person,

(c) under objection by the taxpayers or a related person,

(d) before the courts, or

(e) the subject of a ruling previously considered by the Directorate involving the taxpayers or a related person.

DEFINITIONS

In this letter, the following terms have the meaning specified:

"ACB" means "adjusted cost base" as that term is defined in section 54;

"Aco" means XXXXXXXXXX;

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

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

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

"XXXXXXXXXXBCA" means the XXXXXXXXXX Business Corporations Act;

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

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

"CBCA" means the Canada Business Corporations Act;

"CCPC" means a "Canadian-controlled private corporation" as defined in subsection 125(7);

"CDA" means "capital dividend account" as that term is defined in subsection 89(1);

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

"CRA" means the Canada Revenue Agency;

"DC" means XXXXXXXXXX, a corporation described in Paragraphs 1 and 6;

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

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

"eligible dividend" has the meaning assigned to that term in subsection 89(1);

"Estate" means the estate of Senior;

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

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

"Fund Units" means XXXXXXXXXX;

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

"Manager" means XXXXXXXXXX;

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

"Partnership1" means XXXXXXXXXX;

"Partnership2" means XXXXXXXXXX;

"pre-1972 CSOH" has the meaning assigned by subsection 88(2.1);

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

"Proposed Transactions" means the transactions described in Paragraphs 32 to 57;

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

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

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

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

"Senior" means XXXXXXXXXX, mother of Sibling1, Sibling2, Sibling3, Sibling4 and Sibling5;

"Senior Trust" means the XXXXXXXXXX as described in Paragraph 1;

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

"Sibling1" means XXXXXXXXXX;

"Sibling2" means XXXXXXXXXX;

"Sibling3" means XXXXXXXXXX;

"Sibling4" means XXXXXXXXXX;

"Sibling5" means XXXXXXXXXX;

"significant influence" has the meaning assigned by section 3051.04 of the Accounting Standards for Private Enterprises or by IAS 28 of the International Financial Reporting Standards;

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

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

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

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

"TC1" means XXXXXXXXXX, as described in Paragraph 24;

"TC2" means XXXXXXXXXX, a new corporation incorporated by Sibling2, as described in Paragraph 25;

"TC3" means XXXXXXXXXX, a new corporation incorporated by Sibling3, as described in Paragraph 26;

"TC4" means XXXXXXXXXX, a new corporation incorporated by XXXXXXXXXX, as described in Paragraph 27;

"TC5" means XXXXXXXXXX, as described in Paragraph 28;

"TCs" means TC1, TC2, TC3, TC4 and TC5;

FACTS

1. DC is a corporation which was formed in XXXXXXXXXX at the direction of Senior. At that time, DC acquired all the shares of the capital stock of Aco owned by Senior. Aco is a corporation which was, at that time, owned directly or indirectly by Senior, her siblings and children of her siblings.

DC is a holding corporation. The investment in Aco continues to represent substantially all of the assets of DC based on value. The company also holds marketable securities.

In XXXXXXXXXX, Senior implemented an "estate freeze" of her interest in DC in favour of her five children. In the course of this series of transactions, Senior acquired Class "A" Preferred shares of the capital stock of DC. These shares were subsequently transferred to the Senior Trust – an alter ego trust. The last of the Class "A" Preferred shares were redeemed in XXXXXXXXXX.

2. Senior died on XXXXXXXXXX. She had been a resident of Canada at all relevant times.
Sibling 1, 2, 3, 4 and 5 are the children of the Late Senior. Each sibling is a resident of Canada.

3. The executors of the Estate of Senior are Sibling5 and XXXXXXXXXX. XXXXXXXXXX is a resident of Canada. He is not related to any of the children of Senior.

4. At the time of her death, Senior owned XXXXXXXXXX Class "B" shares of the capital stock of DC. Under the terms of her will, XXXXXXXXXX of these shares were bequeathed to each of her five children. These shares were distributed by the Estate to the children on XXXXXXXXXX.

DC is a corporation existing under the XXXXXXXXXXBCA. It was incorporated under the laws of XXXXXXXXXX in XXXXXXXXXX, continued under the XXXXXXXXXX Business Corporations Act on XXXXXXXXXX and continued under the XXXXXXXXXXBCA on XXXXXXXXXX. DC is a taxable Canadian corporation and a CCPC. The authorized capital of DC currently consists of an unlimited number of Class "A", Class "B" and Class "A" Preferred shares. The Class "A" shares have a PUC and ACB of $XXXXXXXXXX per share. While these shares were initially not entitled to a vote, they became entitled to one vote per share as a consequence of the death of Senior. A Class "A" share is entitled to a dividend at the discretion of the directors. As a result of the XXXXXXXXXX estate freeze by Senior, the XXXXXXXXXX Class "A" shares of the capital stock of DC were originally held by a personal trust where the five children of Senior were the beneficiaries. In XXXXXXXXXX, the trust distributed to each children of Senior XXXXXXXXXX Class "A" shares. The Class "B" shares are voting, non-participating with a PUC and an ACB of $XXXXXXXXXX per share. The Class "B" shares were issued prior to XXXXXXXXXX. Consequently, the Class "B" shares are not subject to the additional requirement provided under proposed paragraph (d) of the definition of "specified class" in subsection 55(1). The Class "B" shares are therefore shares of a specified class as that term is defined in subsection 55(1).

5. The issued and outstanding shares of the capital stock of DC are beneficially owned as follows:

XXXXXXXXXX

6. XXXXXXXXXX.

7. The principal asset of DC is a XXXXXXXXXX% interest in the common and preferred shares of the capital stock of Aco, a taxable Canadian corporation and a CCPC existing under the CBCA. Siblings of Senior and/or the descendants of her siblings own, directly or indirectly, substantially all of the balance of the Aco shares. Sibling5 is a XXXXXXXXXX of Aco. A majority of the board of directors of Aco is made up of XXXXXXXXXX of Senior. DC does not have significant influence over Aco. Aco carries on the business of XXXXXXXXXX subsidiaries in Canada, XXXXXXXXXX and XXXXXXXXXX. It also operates (a) a XXXXXXXXXX business through a subsidiary in XXXXXXXXXX and (b) a XXXXXXXXXX through a subsidiary in XXXXXXXXXX.

10. The authorized share capital of Aco consists of:

(a) Common shares;

(b) Class "B" common shares convertible into common shares on a one for one basis;

(c) Class "C" common shares convertible into common shares on a one for one basis; and

(d) Preferred shares, issuable in series, of which XXXXXXXXXX are designated as Series "A" preferred shares and XXXXXXXXXX are designated as Series "B" preferred shares.

11. As at XXXXXXXXXX, the number of issued common and preferred shares of the capital stock of Aco was as follows:
XXXXXXXXXX

The Aco common, Class "B" common and Class "C" common are essentially identical to one another.

12. DC owns the following Aco shares (with the ACB per share):

XXXXXXXXXX

13. The Series "A" Preferred shares of the capital stock of Aco have a redemption price of $XXXXXXXXXX per share and a PUC of $XXXXXXXXXX per share. The Series "B" Preferred shares of the capital stock of Aco have a redemption price of $XXXXXXXXXX per share and a PUC of $XXXXXXXXXX per share. These preferred shares are not retractable nor are they entitled to dividends. Of the Series "B" Preferred shares of the capital stock of Aco, XXXXXXXXXX were acquired in XXXXXXXXXX by way of a stock dividend paid on the common shares of the capital stock of Aco. The balance was purchased subsequent to XXXXXXXXXX.
DC holds the Aco shares subject to a shareholders' agreement (the "Deposit Agreement") dated XXXXXXXXXX, as subsequently amended. While this agreement generally imposes conditions on a Depositor wishing to sell Aco shares, those conditions do not apply on a transfer of shares within a "XXXXXXXXXX" as defined. The proposed distribution of Aco shares by DC to the TCs will qualify for this exception.

14. With one exception, DC has never disposed of Aco shares. In XXXXXXXXXX, DC was party to a "partial butterfly" with Aco which included a disposition of some of the Aco shares that it owned at that time.

15. From time to time, Aco shares trade between Depositors. DC last purchased Aco shares on XXXXXXXXXX when it purchased XXXXXXXXXX units (a unit consisting of one common of any of the three classes and one preferred share of either class). Under the terms of the Deposit Agreement, a Depositor (e.g. DC) that becomes entitled to purchase units offered for sale by another Aco unit holder, may transfer that right to other members of its XXXXXXXXXX. Accordingly, DC has from time to time transferred its right to acquire units to its shareholders including the rights acquired in XXXXXXXXXX to date.

16. Aco follows the practice of paying dividends quarterly. After XXXXXXXXXX, a taxable dividend paid has been designated to be an eligible dividend as provided under subsection 89(14). The most recent dividend was paid on XXXXXXXXXX. DC is subject to Part IV tax on a Aco taxable dividend and has a significant Part IV tax payable as of XXXXXXXXXX. In addition, Aco pays capital dividends from time to time. DC also paid taxable dividends and capital dividends in XXXXXXXXXX. The amounts of these dividends did not exceed the total amount of dividends received from Aco in XXXXXXXXXX. However, DC will not pay a taxable dividend in the period from XXXXXXXXXX to XXXXXXXXXX.

17. As at XXXXXXXXXX, DC owned XXXXXXXXXX Fund Units which is managed by XXXXXXXXXX. As at that date, these units had an aggregate FMV of $XXXXXXXXXX and an ACB of $XXXXXXXXXX.
As at XXXXXXXXXX, DC owned marketable securities in an account with Manager. The aggregate FMV of the marketable securities at that time was $XXXXXXXXXX and the aggregate ACB was $XXXXXXXXXX.

20. DC owned two partnership interests:

(a) XXXXXXXXXX units of Partnership1: The principal asset of this partnership, a XXXXXXXXXX, was sold in the first quarter of XXXXXXXXXX and the partnership was wound up. The wind-up distribution was made in cash for an amount of $XXXXXXXXXX/unit ($XXXXXXXXXX in aggregate); and

(b) XXXXXXXXXX units of Partnership2: this partnership was also wound up - a final distribution of approximately $XXXXXXXXXX/unit ($XXXXXXXXXX in aggregate) was made in XXXXXXXXXX.
The dispositions of these partnership interests were made for cash consideration only.

21. As at XXXXXXXXXX DC had current assets of $XXXXXXXXXX consisting of cash and near cash and $XXXXXXXXXX due from the Estate. Under the proposed plan, these accounts will be liquidated with the proceeds applied to settle the debts of DC, with the balance to be distributed pro-rata to the TCs.

22. The taxation year end of DC is XXXXXXXXXX. As at XXXXXXXXXX, DC had:

(a) a balance of $XXXXXXXXXX in its CDA;

(b) a balance of $XXXXXXXXXX in its GRIP;

(c) a balance of $XXXXXXXXXX in RDTOH; and

(d) limited partnership losses of $XXXXXXXXXX.

At the time of the winding-up of DC, described below, DC will not have any CDA or pre-1972 CSOH balance.

23. As at XXXXXXXXXX, DC had current liabilities of $XXXXXXXXXX (including income taxes payable) and $XXXXXXXXXX due to shareholders. All these liabilities will be settled for cash before XXXXXXXXXX.

24. TC1 is a corporation existing under the XXXXXXXXXXBCA (incorporated XXXXXXXXXX). TC1 is a taxable Canadian corporation and a CCPC. The sole shareholder of TC1 is Sibling1. TC1 was formed for the purpose of carrying out the Proposed Transactions. The taxation year end of TC1 will be XXXXXXXXXX. TC1 was formed for the purpose of carrying out the Proposed Transactions. TC1 will not carry on any business transactions prior to the time of the Proposed Transactions.

25. TC2 is a corporation existing under the XXXXXXXXXXBCA (incorporated XXXXXXXXXX). TC2 is a taxable Canadian corporation and a CCPC. Sibling2 is the sole shareholder of TC2. TC2 was formed for the purpose of carrying out the Proposed Transactions. The taxation year end of TC2 will be XXXXXXXXXX. TC2 will not carry on any business transactions prior to the time of the Proposed Transactions.

26. TC3 is a corporation existing under the XXXXXXXXXXBCA (incorporated XXXXXXXXXX). TC3 is a taxable Canadian corporation and a CCPC. Sibling3 is the sole shareholder of TC3. TC3 was formed for the purpose of carrying out the Proposed Transactions. The taxation year end of TC3 will be XXXXXXXXXX. TC3 will not carry on any business transactions prior to the time of the Proposed Transactions.

27. TC4 is a corporation existing under the XXXXXXXXXXBCA (incorporated XXXXXXXXXX). TC4 is a taxable Canadian corporation and a CCPC. Sibling4 is the sole shareholder of TC4. TC4 was formed for the purpose of carrying out the Proposed Transactions. The taxation year end of TC4 will be XXXXXXXXXX. TC4 will not carry on any business transactions prior to the time of the Proposed Transactions.

28. TC5 is a corporation existing under the XXXXXXXXXXBCA (incorporated XXXXXXXXXX). TC5 is a taxable Canadian corporation and a CCPC. Sibling5 is the controlling shareholder.

29. The authorized capital of TC5 consists of:

(a) an unlimited number of Class "A" voting common shares without par value;

(b) an unlimited number of Class "B" voting preferred shares with a par value of $XXXXXXXXXX per share;

(c) an unlimited number of Class "C" non-voting preferred shares with a par value of $XXXXXXXXXX per share;

(d) XXXXXXXXXX Class "D" voting common shares with a par value of $XXXXXXXXXX per share; and

(e) an unlimited number of Class "E" non-voting preferred shares with a par value of $XXXXXXXXXX per share.

30. The issued and outstanding shares of the capital stock of TC5 are beneficially owned as follows:

XXXXXXXXXX

On XXXXXXXXXX, TC5 issued from treasury XXXXXXXXXX Class "B" preferred shares (voting, non-participating) to Sibling5 for $XXXXXXXXXX and XXXXXXXXXX Class "A" shares (voting and participating common shares) to XXXXXXXXXX for $XXXXXXXXXX. On XXXXXXXXXX, Sibling5 transferred her XXXXXXXXXX Class "A" shares of the capital stock of DC to TC5 for consideration that consisted of preferred shares of the capital stock of TC5.

31. The taxation year end of TC5 is XXXXXXXXXX. TC5 is projected to have a balance of $XXXXXXXXXX in its RDTOH as at XXXXXXXXXX.

PROPOSED TRANSACTIONS

Steps set out in Paragraphs 32 to 52 below will be implemented before XXXXXXXXXX. Steps set out in Paragraphs 53 to 57 will be implemented after XXXXXXXXXX and before XXXXXXXXXX.

32. DC will dispose of marketable securities for consideration that consists only of cash.

33. [Reserved].

34. DC will purchase for cancellation its XXXXXXXXXX Class "B" shares for a consideration of $XXXXXXXXXX per share, which represents the FMV of the consideration for which the Class "B" shares were issued originally to Senior.

35. TC1 will acquire the XXXXXXXXXX Class "A" shares of the capital stock of DC owned by Sibling1 for FMV consideration. The consideration received by Sibling1 will be additional common shares of the capital stock of TC1. Sibling1 and TC1 will jointly elect, in prescribed form and within the time limit referred to in subsection 85(6), to have the provisions of subsection 85(1) apply to the transfer. The agreed amount will be equal to the ACB, to Sibling1, of the DC shares transferred. For greater certainty, the increase to the PUC of the TC1 common shares will not exceed the maximum amount that could be added to the PUC of such shares, having regard to paragraph 84.1(1)(a).

36. TC2 will acquire the XXXXXXXXXX Class "A" shares of the capital stock of DC owned by Sibling2 for FMV consideration. The consideration received by Sibling2 will be additional common shares of the capital stock of TC2. Sibling2 and TC2 will jointly elect, in prescribed form and within the time limit referred to in subsection 85(6), to have the provisions of subsection 85(1) apply to the transfer. The agreed amount will be equal to the ACB, to Sibling2, of the DC shares transferred. For greater certainty, the increase to the PUC of the TC2 common shares will not exceed the maximum amount that could be added to the PUC of such shares, having regard to paragraph 84.1(1)(a).

37. TC3 will acquire the XXXXXXXXXX Class "A" shares of the capital stock of DC owned by Sibling3 for FMV consideration. The consideration received by Sibling3 will be additional common shares of the capital stock of TC3. Sibling3 and TC3 will jointly elect, in prescribed form and within the time limit referred to in subsection 85(6), to have the provisions of subsection 85(1) apply to the transfer. The agreed amount will be equal to the ACB, to Sibling3, of the DC shares transferred. For greater certainty, the increase to the PUC of the TC3 common shares will not exceed the maximum amount that could be added to the PUC of such shares, having regard to paragraph 84.1(1)(a).

38. TC4 will acquire the XXXXXXXXXX Class "A" shares of the capital stock of DC owned by Sibling4 for FMV consideration. The consideration received by Sibling4 will be additional common shares of the capital stock of TC4. Sibling4 and TC4 will jointly elect, in prescribed form and within the time limit referred to in subsection 85(6), to have the provisions of subsection 85(1) apply to the transfer. The agreed amount will be equal to the ACB, to Sibling4, of the DC shares transferred. For greater certainty, the increase to the PUC of the TC4 common shares will not exceed the maximum amount that could be added to the PUC of such shares, having regard to paragraph 84.1(1)(a).

39. TC1 will amend its capital to add a class of preferred share ("Class X") with a par value of $XXXXXXXXXX per share and characteristics which are described below in Paragraph 44.

40. TC2 will amend its capital to add a class of preferred share ("Class X") with a par value of $XXXXXXXXXX per share and characteristics which are described below in Paragraph 44.

41. TC3 will amend its capital to add a class of preferred share ("Class X") with a par value of $XXXXXXXXXX per share and characteristics which are described below in Paragraph 44.

42. TC4 will amend its capital to add a class of preferred share ("Class X") with a par value of $XXXXXXXXXX per share and characteristics which are described below in Paragraph 44.

43. TC5 will amend its capital to add a class of preferred share ("Class X") with a par value of $XXXXXXXXXX per share and characteristics which are described below in Paragraph 44.

44. The attributes of the Class X Preferred Shares to be issued by each of the TCs will be as follows:

(a) Non-voting;

Redeemable and retractable at an amount (the "Redemption Amount") equal to the aggregate FMV of the property transferred to the TC, at the time of its transfer by DC to the particular TC, divided by the number of preferred shares issued as consideration for such transfer, plus declared but unpaid dividends thereon;

(b) The holder of the share shall be entitled to receive, as and when declared from time to time by the board of directors, dividends not exceeding an amount equal to XXXXXXXXXX% per year calculated on the Redemption Amount;

(c) The holder of the share shall rank in priority to any class of shares issued by the TC on the dissolution or winding-up of the TC to the extent of the Redemption Amount. No dividends or other distribution will be paid on any shares ranking junior to the share if the effect of such dividends or other distribution would be to reduce the net realizable value of the assets of the TC to an amount less than the aggregate Redemption Amount of the issued and outstanding shares at that time; and

(d) The Redemption Amount will be subject to adjustment in accordance with the terms of a price adjustment clause.

45. Immediately before the transfer of property described in Paragraph 47, the property owned by DC will be classified into the following two types of property for the purposes of the definition of distribution, as follows:

(a) cash or near cash property, comprising all of the current assets of DC, including cash, accounts receivable, deposits, and marketable securities (other than portfolio investments) (or cash received from their liquidation); and

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

46. For the purpose of determining the types of property described herein, the ACo shares that DC owns will be classified as investment property; and

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

DC is not expected to have any business property, and will not have any liabilities, at the time of the transfer of property as described in Paragraph 47.

47. Immediately following the determination of its types of property, as described in Paragraphs 45 and 46, DC will contemporaneously transfer to each of the TCs a proportionate share of each type of property owned by DC, such that, immediately following such property transfer, the aggregate FMV of each type of property of DC transferred to a particular TC, will be equal to or approximate the proportion determined by the formula:

A x B/C

where:

A is the FMV, immediately before the transfer, of all property of that type owned at that time by DC,

B is the FMV, immediately before the transfer, of all of the shares of the capital stock of DC owned at that time by that particular TC, and

C is the FMV, immediately before the transfer, of all the issued and outstanding shares of the capital stock of DC.

For the purposes of this Paragraph, the expression "approximate the proportion" means that the discrepancy of that proportion, if any, will not exceed one percent (1%), determined as a percentage of the FMV of each type of property that each such TC has received on such transfer as compared to what it would have received had it received its appropriate pro rata share of the FMV of that type of property.

48. As consideration for the transfer of their proportionate share of Aco Common shares, Aco Class "B" shares and Fund Units by DC to each TC, each TC will issue XXXXXXXXXX Class X Preferred shares to DC. Each TC and DC will jointly elect, in prescribed form and within the time limit referred to in subsection 85(6), to have the provisions of subsection 85(1) apply to the transfer. The agreed amount will be equal to the ACB, to DC, of these assets transferred. For greater certainty, the increase to the PUC of the Class X Preferred Shares will not exceed the maximum amount that could be added to the PUC of each such shares, having regard to subsection 85(2.1).

49. As consideration for the transfer of their proportionate share in Aco Series "A" Preferred shares and Aco Series "B" Preferred shares by DC to each TC, each TC will issue to DC a non-interest-bearing note ("TC1 Note1", "TC2 Note1", "TC3 Note1" "TC4 Note1" and "TC5 Note1").

50. As consideration for the transfer of their proportionate share in the cash on hand by DC to each TC, each TC will issue to DC a non-interest-bearing note ("TC1 Note2", "TC2 Note2", "TC3 Note2" "TC4 Note2" and "TC5 Note2").

51. Each TC will redeem its XXXXXXXXXX Class X Preferred shares owned by DC. As consideration, each TC will issue a non-interest-bearing note ("TC1 Note3", "TC2 Note3", "TC3 Note3" "TC4 Note3" and "TC5 Note3").

52. DC will pay a dividend on its Class A shares equal to the balance in its CDA at that time divided by XXXXXXXXXX. The dividend will be paid by the issuance by DC of a non-interest-bearing note to each TC (DC-TC1 Note, DC-TC2 Note, DC-TC3 Note, DC-TC4 Note and DC-TC5 Note). Pursuant to subsection 83(2), DC will elect, in respect of the full amount of the dividend, in the prescribed manner and prescribed form at or before the time the dividend is paid to have the dividend deemed to be a capital dividend. After the payment of this dividend, the CDA balance will be nil.

53. The shareholders of DC will, by way of a special resolution, resolve to wind-up and dissolve DC pursuant to the XXXXXXXXXXBCA. In connection with the winding-up of DC, DC will assign and distribute the TC1 Note 1, 2 and 3 to TC1, the TC2 Note 1, 2 and 3 to TC2, the TC3 Note 1, 2 and 3 to TC3, the TC4 Note 1, 2 and 3 to TC4 and the TC5 Note 1, 2 and 3 to TC5.

54. As a result of the assignment and distribution of the TC1 Notes, the TC2 Notes, the TC3 Notes, the TC4 Notes and the TC5 Notes by DC, the obligations of DC under the DC-TC1 Note, the DC-TC2 Note, the DC-TC3 Note, the DC-TC4 Note and the DC-TC5 Note will be extinguished and such notes will be cancelled.

Also, as a result of the assignment and distribution of the TC1 Notes, the TC2 Notes, the TC3 Notes, the TC4 Notes and the TC5 Notes by DC, the remaining obligations of each of TC1, TC2, TC3, TC4 and TC5 under the TC1 Notes, TC2 Notes, TC3 Notes, TC4 Notes and TC5 Notes, as the case may be, will be extinguished and such notes will be cancelled.

At that point in time, DC will not own or acquire any property (other than a possible dividend refund) or carry on any activity or undertaking.

55. DC will designate, pursuant to subsection 89(14), a portion of the deemed dividend under subsection 84(2) resulting from the distribution described in Paragraph 53 to be an eligible dividend by notifying each of the relevant TC in writing, in a timely manner, that the dividend is an eligible dividend (each TC being designated XXXXXXXXXX% of the balance of the GRIP at that time).

56. Any dividend refund to which DC becomes entitled as a result of the Proposed Transactions will be distributed (under the terms of the agreement governing the wind-up of DC) to each of the TC on a pro rata basis.

57. Within a reasonable time following the distribution of such tax refund, articles of dissolution will be filed by DC with the XXXXXXXXXX and, upon the receipt of a certificate of dissolution, DC will be dissolved.

ADDITIONAL INFORMATION

58. TC1, TC2, TC3 and TC4 were incorporated for the purpose of participating in the Proposed Transactions. None of the shares of the capital stock of TC5 were acquired by their shareholders as part of the series of transactions or events that includes the Proposed Transactions.

59. Other than as described in the Facts and Proposed Transactions, no property has been or will be acquired or disposed of by DC, or a corporation controlled by it, in contemplation of and before the Proposed Transactions.

60. None of the TCs has any expectation or intention, subsequent to the Proposed Transactions, of disposing of 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.

61. None of the shareholders of the TCs are contemplating the sale or transfer of any shares of the capital stock of those corporations subject to two exceptions:

(a) as described in this letter; and, with the exception of TC5

(b) as part of an estate plan in favour of a child of the current shareholder, a spouse of the current shareholder or a personal trust the only beneficiaries of which are one or more of the current shareholder, a spouse or child of that shareholder and/or a registered charity.

62. Except as described in this letter, none of the shareholders of DC are contemplating the sale or transfer of any shares of the capital stock of DC.

63. There will not be any material change in the composition of DC's assets or liabilities (except as contemplated in the Proposed Transactions) from the date of this letter until the date of the Proposed Transactions described herein are completed.

64. DC may pay dividends on the Class "A" shares of the capital stock owned by the current shareholders before the Proposed Transactions (such dividends not to exceed the income of DC for the current taxation year).

65. DC, TC1, TC2, TC3, TC4 and TC5 are not and will not be at the time of the Proposed Transactions, "specified financial institutions" as that term is defined in subsection 248(1).

66. None of DC, TC1, TC2, TC3, TC4 or TC5 are or will be at any time throughout the series of transactions that includes the Proposed Transactions:

(a) the subject of any undertaking that is referred to in subsection 112(2.2) as a "guarantee agreement";

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

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

67. Neither DC nor any of the TCs is or will be, at any time during the series of transactions or events that includes the Proposed Transactions, a corporation described in any of the paragraphs (a) to (f) of the definition of "financial intermediary corporation" in subsection 191(1).

68. Each of DC and the TCs will have the financial capacity to honour, upon presentation for payment, the amount payable under the promissory note issued by it as part of the Proposed Transactions.

PURPOSE OF THE PROPOSED TRANSACTIONS

The purpose of the Proposed Transactions is to permit the children of Senior to separate their interest in DC into five corporations.

RULINGS

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

A. With respect to the transfers described in Paragraphs 35 to 38, subject to the application of 69(11), provided the appropriate joint elections are filed in the prescribed form and manner within the time limits specified in subsection 85(6) and provided that each particular property so transferred is an eligible property in respect of which shares have been issued as full or partial consideration therefor, subsection 85(1) will apply to such transfers.

B. With respect to the transfers described in Paragraph 47, subject to the application of 69(11), provided the appropriate joint election is filed in the prescribed form and manner within the time limits specified in subsection 85(6) and provided that each particular property so transferred is an eligible property in respect of which shares have been issued as full or partial consideration therefor, subsection 85(1) will apply to such transfers. For greater certainty, paragraph 85(1)(e.2) will not apply to such transfers.

C. Subsection 84(3) will apply to the redemption by each of the TC of its Class X Preferred shares described in Paragraph 51 of the Proposed Transactions such that each TC will be deemed to have paid, and DC will be deemed to have received, a taxable dividend on such shares equal to the amount by which the amount paid to redeem the preferred shares of the capital stock of the TCs exceeds the PUC thereof immediately before such redemption.

D. By virtue of paragraph 88(2)(b) and subsection 84(2), on the wind-up of DC:

(a) each TC will be deemed, pursuant to subparagraph 88(2)(b)(iv), to have received a winding-up dividend on the Class "A" shares equal to the amount or value of the funds or property distributed that exceeds the amount, if any, by which the PUC in respect of the Class "A" shares is reduced on the distribution, and each TC will be deemed to have received a taxable dividend equal to that proportion of the amount of the excess that the number of the Class "A" shares held by the recipient is of the number of Class "A" shares outstanding before the distribution. Pursuant to subsection 89(14), a portion of this taxable dividend will be an eligible dividend to the extent designated by DC; and

(b) pursuant to subparagraph 88(2)(b)(iii), the winding-up dividend will be deemed to be a separate dividend that is a taxable dividend.

E. The taxable dividends described in rulings C and D above:

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

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

(c) will be excluded in determining the recipient's proceeds of disposition of the shares so redeemed, purchased or cancelled pursuant to paragraph (j) of the definition of "proceeds of disposition" in section 54;

(d) will, by virtue of subsection 112(3), reduce the loss, if any, in respect of the disposition of the shares on which the dividend is deemed to be received;

(e) will not be subject to tax under Part IV.1 or Part VI.1 by virtue of paragraph (b) of the definition of "excepted dividend" in section 187.1 and paragraph (a) of the definition of "excluded dividend" in subsection 191(1), respectively;

(f) will be subject to Part IV tax under paragraph 186(1)(b) to the extent that the payer corporation is entitled to a dividend refund for its taxation year in which it paid such dividend; and

(g) will, provided such a dividend is designated to be an eligible dividend in the prescribed manner and within the time referred to in subsection 89(14), be added to the GRIP accounts of TC1, TC2, TC3, TC4 and TC5 to the extent of the portion of the dividend that each respective TC received, in the taxation year in which it received that portion from DC, pursuant to variable E(a) of the definition of GRIP in subsection 89(1).

F. Subsection 129(1.2) will not apply to deem the taxable dividends referred to in rulings C, and D above not to be taxable dividends.

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

(a) an acquisition of property in the 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 shares of the capital stock of DC in the circumstances described in subparagraph 55(3.1)(b)(iii); or,

(e) an acquisition of property in the circumstances described in paragraphs 55(3.1)(c) or 55(3.1)(d),

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

H. The extinguishment of the TCs Notes and the DC-TCs Notes described in Paragraph 54 of the Proposed Transactions will not give rise to a "forgiven amount" within the meaning of subsections 80(1) or 80.01(1). In addition, neither DC nor the TCs will otherwise realize any gain or loss as a result of the extinguishment of the TC Notes and the DC-TCs Notes.

I. Subsections 15(1), 56(2), 56(4) and 246(1) will not apply to the Proposed Transactions.

J. Subsection 245(2) will not apply to the Proposed Transactions, in and by themselves, to redetermine the tax consequences confirmed in the rulings given.

The above rulings are given subject to the limitations and qualifications set forth in Information Circular 70-6R5 issued on May 17, 2002, and are binding on the CRA provided that the Proposed Transactions are completed before XXXXXXXXXX.

The above rulings are based on the Act in its present form and do not take into account any proposed amendments to the Act which if enacted, could have an effect on the rulings provided herein.

COMMENTS

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

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

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

(c) any other tax consequence relating to the Facts, 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.

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 FMV of the properties transferred or the redemption amount of the shares issued as consideration, whether pursuant to a price adjustment clause or otherwise, will be effective retroactively to the time of the transfer and issuance of shares. In addition, any such adjustment could affect the ruling given in ruling G above. 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, since such adjustment will be due to circumstances that do not constitute proposed transactions that are seriously contemplated. The general position of the CRA with respect to price adjustment clauses is stated in Income Tax Folio S4-F3-C1, Price Adjustment Clauses, which replaces and cancels Interpretation Bulletin IT-169.

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

Yours truly,

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