2014 Ruling 2013-0498951R3 - Split-up Butterfly

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

Principal Issues: Typical split-up butterfly

Position: Ruling given

Reasons: complies with paragraph 55(3)(b)

XXXXXXXXXX
2013-049895

XXXXXXXXXX, 2014

Dear XXXXXXXXXX:

Re: XXXXXXXXXX
Advance Income Tax Ruling

This is in reply to your letter of XXXXXXXXXX in which you requested an advance income tax ruling on behalf of the above-noted taxpayers. In your subsequent letters and emails you provided additional information concerning the facts and proposed transactions described in your original letter. The documents submitted as part of your request are only part of this document to the extent described herein.

We understand that to the best of your knowledge and that of the Applicants none of the issues described in this letter:

(a) is in an earlier return of an Applicant or person related to an Applicant;
(b) is being considered by a tax services office or taxation centre in connection with a previously filed tax return of an Applicant or a person related to an Applicant;
(c) is under objection by an Applicant or a person related to an Applicant;
(d) is before the courts or, if a judgment has been issued, the limit for appeal to a higher court has expired; or
(e) is the subject of a ruling previously issued by the Income Tax Rulings Directorate of the CRA.

You have also advised that to the best of your knowledge, and that of the responsible officers of the taxpayer, that the Proposed Transactions will not result in the taxpayer or any related person described herein being unable to pay its existing outstanding tax liabilities.

DEFINITIONS

In this letter, all monetary amounts are expressed in Canadian dollars unless otherwise indicated, and the following terms or expressions have the meaning specified:

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

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

"agreed amount" means the amount that a transferor and transferee have agreed upon in a joint election under subsection 85(1) in respect of a transfer of eligible property within the meaning of subsection 85(1.1);

"Applicants" means the following persons:

XXXXXXXXXX

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

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

"Brother" means XXXXXXXXXX;

"Brother's Wife" means XXXXXXXXXX, who is the wife of Brother;

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

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

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

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

"Child1" means XXXXXXXXXX, who is the son of Brother;

"Child2" means XXXXXXXXXX, who is the daughter of Brother

"CRA" means the Canada Revenue Agency;

"DC" means XXXXXXXXXX, a corporation formed on XXXXXXXXXX by virtue of an amalgamation pursuant to the BCA described in Paragraph 5;

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

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

"Father" means the late XXXXXXXXXX, who was the father of Brother and Sister. Father was a resident of Canada at the time of his death;

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

"Mother" means XXXXXXXXXX, the late mother of Brother and Sister and the spouse of Father;

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

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

"personal trust" has the meaning assigned to that term in subsection 248(1);

"Portfolio Investments" means DC's portfolio of long-term investments in publicly traded securities;

"Proposed Transactions" means the transactions described in Paragraphs 8 to 24;
"refundable dividend tax on hand" or "RDTOH" has the meaning assigned by subsection 129(3);

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

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

"Sister" means XXXXXXXXXX;

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

"Spousal Trust" has the meaning described in Paragraph 2;

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

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

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

"TC1" means the new corporation to be incorporated by Brother under the BCA as described in Paragraph 10;

"TC1 Note" has the meaning assigned by Paragraph 20;

"TC1 Butterfly Shares" has the meaning assigned by Paragraph 11;

"TC2" means the new corporation to be incorporated by Sister under the BCA as described in Paragraph 10;

"TC2 Butterfly Shares" has the meaning assigned by Paragraph 12;

"TC2 Note" has the meaning assigned by Paragraph 20;

"testamentary trust" has the meaning assigned to that term in subsection 108(1); and

"Trust" means the trust described in Paragraph 9.

FACTS

1. Brother and Sister are siblings. Each of Brother, Sister, Brother's Wife, Child1 and Child2 is resident in Canada for purposes of the Act.

2. At the time of his death on XXXXXXXXXX, Father controlled DC by virtue of his ownership of XXXXXXXXXX Class A Special shares and XXXXXXXXXX Preferred shares of DC. Upon the death of Father, these shares of DC passed to his estate. Pursuant to the terms of Father's will, these shares were transferred to a spousal trust (the "Spousal Trust") as described in paragraph 70(6)(b) on XXXXXXXXXX. The terms of the Spousal Trust provided that Mother was the sole beneficiary of the Spousal Trust during her lifetime, with Brother and Sister as equal remainder beneficiaries after the death of Mother.

3. To accomplish the objectives of Father's will and provide financial support for Mother, the XXXXXXXXXX Preferred shares of DC and XXXXXXXXXX of the Class A Special shares of DC owned by the Spousal Trust were redeemed for their redemption/retraction price of $XXXXXXXXXX per share and $XXXXXXXXXX per share, respectively, on XXXXXXXXXX. Upon the death of Mother on XXXXXXXXXX, Brother and Sister became the sole beneficiaries of the Spousal Trust.

4. The Spousal Trust is a testamentary trust and a personal trust that is resident in Canada. The trustees of the Spousal Trust are Brother and a Canadian resident individual who deals at arm's length with each of the Applicants. Decisions made by the Spousal Trust require agreement of both trustees.

5. DC is a Canadian-controlled private corporation and a taxable Canadian corporation. The registered head office of DC is located in XXXXXXXXXX. DC's taxation year ends on XXXXXXXXXX of each year.

The issued share capital of DC is owned as follows:

Shareholder No. and Class of Shares ACB PUC
Brother: XXXX First Common shares $ XXXX $ XXXX
Sister: XXXX Second Common shares $ XXXX $ XXXX
Spousal Trust: XXXX Class A Special Share $ XXXX $ XXXX

The shares of DC are held as capital property by each of Brother, Sister and the Spousal Trust.

The First Common shares and the Second Common shares of DC have identical rights except that the First Common shares have a priority to XXXXXXXXXX% of the paid-up capital in respect of such shares over the issued Second Common shares on liquidation. Each First Common share and Second Common share of DC entitles the holder thereof to one (1) vote per share at meetings of the shareholders of DC, are entitled to such dividends as may be declared thereon in the discretion of the board of directors of DC and, but for the priority of the First Common shares to XXXXXXXXXX% of their paid-up capital , are otherwise entitled to participate equally in any distribution of the property of DC on its liquidation, dissolution or winding up.

The Class A Special Share of DC entitles the holder thereof to votes equal to XXXXXXXXXX% of the votes attached to all other issued and outstanding voting shares of the corporation at meetings of the shareholders of DC and is entitled to such dividends as may be declared thereon in the discretion of the board of directors of DC. The Class A Special Share of DC has a redemption/retraction price of $XXXXXXXXXX.

6. DC is the registered and beneficial owner of the DC Properties. As at XXXXXXXXXX, DC held cash and term deposits of approximately $XXXXXXXXXX. The ACB and FMV of the Portfolio Investments at XXXXXXXXXX were approximately $XXXXXXXXXX and $XXXXXXXXXX, respectively.

The Portfolio Investments represent a diverse portfolio of long-term investments in publicly traded securities, which are held as capital property by DC. All securities owned by DC are held in even numbers. DC does not exercise any "significant influence", as that term is defined in paragraph 3051.05 of the CICA Handbook, over any issuer of the Portfolio Investments. The Portfolio Investments are held in an independent investment account that is managed solely by a third party investment advisor who is responsible for making any investment decisions relating to the Portfolio Investments. Any acquisition or disposition of Portfolio Investments is made by DC in the ordinary course of managing its Portfolio Investments. The independent investment advisor is not aware of the Proposed Transactions.

The only liabilities of DC at the date of the Proposed Transactions will be professional fees, the amount of which will not exceed the fair market value of the property of DC.

7. At the end of its XXXXXXXXXX taxation year, DC had an RDTOH balance of $XXXXXXXXXX and its capital dividend account is currently $XXXXXXXXXX.

PROPOSED TRANSACTIONS

8. XXXXXXXXXX of the Class A Special Share of DC owned by the Spousal Trust will be distributed to each of Brother and Sister in satisfaction of their capital interests in the Spousal Trust. Brother and Sister will each receive a share certificate evidencing legal and beneficial ownership of their XXXXXXXXXX Class A Special Share of DC.

9. A trust (the "Trust") will be established for the benefit of Brother's Wife, Child1, Child2 and any unborn issue of Brother and Brother's Wife. The Trust will be settled by a family friend, who is not related to any of Brother, Brother's Wife, Child1 or Child2, contributing $XXXXXXXXXX cash to the Trust. The trustees of the Trust will be Brother, Brother's Wife and a third person who is a resident of Canada. The trust indenture will allow for the replacement of a trustee by certain persons, including Brother. Decisions of the trustees will be made by majority vote. The trustees will have unfettered discretion to allocate any income or capital at their discretion.

10. Each of Brother and Sister will incorporate a new corporation under the BCA ("TC1" and "TC2", respectively). Each of TC1 and TC2 will be a Canadian-controlled private corporation and a taxable Canadian corporation. No shares will be issued upon the incorporation of either TC1 or TC2

11. The authorized share capital of TC1 will consist of the following classes of shares:

(a) Non-voting common shares which will entitle the holder thereof to receive a dividend which will be determined at the discretion of the directors of TC1;

(b) Voting preferred shares that will be redeemable and retractable at any time for $XXXXXXXXXX per share, will entitle the holder thereof to one vote per share, will not be entitled to receive any dividend and will have priority over the common shares on a liquidation or other dissolution of TC1;

(c) Non-voting preferred shares that will be redeemable and retractable at any time, subject to applicable law, for an amount equal to the aggregate FMV of the consideration received by TC1 on the issuance thereof divided by the number of Non-voting preferred shares issued as consideration therefor (plus any declared but unpaid dividends), will entitle the holder to receive dividends at the discretion of the directors of TC1and will have priority over the Non-voting common shares and the Voting preferred shares on a liquidation or other dissolution of TC1; and

(d) Butterfly shares (the "TC1 Butterfly Shares") that will be a class of non-voting preferred shares that are redeemable and retractable at any time, subject to applicable law, for an amount equal to the aggregate net FMV of the consideration received by TC1on the issuance thereof divided by the number of TC1 Butterfly shares issued as consideration (plus any declared but unpaid dividends), will entitle the holder to receive dividends at the discretion of the directors of TC1and will have priority over all other classes of shares of TC1 on a liquidation or other dissolution of TC1.

12. The authorized capital of TC2 will consist of the following classes of shares:

(a) Common shares that will entitle the holder thereof to one vote per share;

(b) Voting preferred shares that will be redeemable and retractable at any time for $XXXXXXXXXX per share, will entitle the holder thereof to one vote per share, will not be entitled to receive any dividend and will have priority over the common shares on a liquidation or other dissolution of TC2;

(c) Non-voting preferred shares that will be redeemable and retractable at any time, subject to applicable law, for an amount equal to the aggregate FMV of the consideration received by TC2 on the issuance thereof divided by the number of Non-voting preferred shares issued as consideration therefor (plus any declared but unpaid dividends), will entitle the holder to receive dividends at the discretion of the directors of TC2 and will have priority over the Common shares, the Non-voting common shares and the Voting preferred shares on a liquidation or other dissolution of TC2;

(d) Non-voting common shares which will entitle the holder thereof to receive a dividend which will be determined at the discretion of the directors of TC2; and

(e) Butterfly shares (the "TC2 Butterfly Shares") that will be a class of non-voting preferred shares that are redeemable and retractable at any time, subject to applicable law, for an amount equal to the aggregate net FMV of the consideration received by TC2 on the issuance thereof divided by the number of TC2 Butterfly shares issued as consideration therefor (plus any declared but unpaid dividends), will entitle the holder to receive dividends at the discretion of the directors of TC2 and will have priority over all other classes of shares of TC2 on a liquidation or other dissolution of TC2.

13. Brother will transfer all of his shares of DC, being XXXXXXXXXX First Common shares and XXXXXXXXXX of a Class A Special share, to TC1 and, as sole consideration therefor, TC1 will issue XXXXXXXXXX Voting preferred shares and XXXXXXXXXX Non-voting Preferred shares of TC1 to Brother. The aggregate FMV of the XXXXXXXXXX Voting preferred shares and XXXXXXXXXX Non-voting Preferred shares of TC1 so issued will be equal to the aggregate FMV of the XXXXXXXXXX First Common shares and XXXXXXXXXX of a Class A Special share of DC transferred by Brother to TC1. Each of the XXXXXXXXXX Voting preferred shares and XXXXXXXXXX Non-voting Preferred shares issued by TC1 to Brother will be issued as consideration for a proportionate portion of each of the First common shares and the XXXXXXXXXX of a Class A share of DC transferred to TC1.

Brother will jointly elect with TC1 in prescribed form and within the time referred to in subsection 85(6), to have the rules in subsection 85(1) apply to the transfer described herein. The agreed amount in respect of each capital property so transferred will not be less than the lesser of the amounts described in subparagraphs 85(1)(c.1)(i) and (ii), will not be greater than the fair market value of such property nor will it be less than the amount permitted under paragraph 85(1)(b).

The aggregate amount that TC1 will add to the stated capital of its XXXXXXXXXX Voting preferred shares and XXXXXXXXXX Non-voting Preferred shares so issued will not exceed the aggregate paid-up capital of the XXXXXXXXXX First Common shares and XXXXXXXXXX of a Class A Special share of DC transferred to TC1.

14. Sister will transfer all of her shares of DC, being XXXXXXXXXX Second Common shares and XXXXXXXXXX of a Class A Special share, to TC2 and, as sole consideration therefor, TC2 will issue XXXXXXXXXX Common shares of TC2 to Sister.

Sister will jointly elect with TC2 in prescribed form and within the time referred to in subsection 85(6), to have the rules in subsection 85(1) apply to the transfer described herein. The agreed amount in respect of each capital property so transferred will not be less than the lesser of the amounts described in subparagraphs 85(1)(c.1)(i) and (ii), will not be greater than the fair market value of such property nor will it be less than the amount permitted under paragraph 85(1)(b).

The aggregate amount that TC2 will add to the stated capital of its XXXXXXXXXX Common shares so issued will not exceed the aggregate paid-up capital of the XXXXXXXXXX Second Common shares and XXXXXXXXXX of a Class A Special share of DC transferred to TC2.

15. Immediately before the transfer of property described in Paragraph 16, the property owned by DC will be classified into the following three types of property for the purposes of the definition of distribution, as follows:

a) Cash or near cash property, comprising all of the current assets of DC, including cash and short-term investment accounts;

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

c) 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, including the Portfolio Investments.

DC will not own any property that would be classified as business property immediately before the transfer of property described in Paragraph 16.

For greater certainty, for the purposes of applying the definition of distribution to the transfer of property described in Paragraph 16:

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

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

f) The amount of any deferred tax will not be considered to be a property or a liability.

16. DC will contemporaneously transfer to each of TC1 and TC2 its respective pro rata share of the FMV of each type of property owned by DC as determined under Paragraph 15 such that immediately following such property transfers the fair market value of each of the three types of property of DC so transferred to each of TC1 and TC2 will, for greater certainty, be equal to that proportion determined by the formula:

A x B/C

where:

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

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

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

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

(a) each assume of XXXXXXXXXX of DC's liabilities; and

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

18. DC and each of TC1 and TC2 will file a joint election in the prescribed form and within the time referred to in subsection 85(6) to have the provisions of subsection 85(1) apply to the transfer of each capital property that is transferred by DC to that corporation as described in Paragraph 16. The agreed amount in respect of each capital property so transferred will not be less than the lesser of the amounts described in subparagraphs 85(1)(c.1)(i) and (ii), will not be greater than the fair market value of such property nor will it be less than the amount permitted under paragraph 85(1)(b).

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

20. Immediately following the transfer of property described in Paragraph 19, each of TC1 and TC2 will redeem its respective TC1 Butterfly Shares and TC2 Butterfly Shares for an amount equal to the aggregate redemption amount and fair market value of such shares. As consideration therefor, each of TC1 and TC2 will issue a non-interest bearing demand promissory note ( the "TC1 Note" and the "TC2 Note", respectively) having a principal amount and fair market value equal to the aggregate redemption amount of the shares so redeemed. DC will accept the TC1 Note and the TC2 Note as full payment for the aggregate redemption amount of the TC1 Butterfly Shares and the TC2 Butterfly Shares so redeemed.

21. TC1 and TC2 will each cause its first taxation year to end at the end of the day on which the TC1 Butterfly Shares and the TC2 Butterfly Shares are redeemed. This will occur at least one day prior to the transactions described in Paragraph 22.

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

Prior to the distribution of the TC1 Note and the TC2 Note, DC will elect pursuant to subsection 83(2) to treat the portion of the winding-up dividend referred to in subparagraph 88(2)(b)(i) in respect of each of the First Common shares and Second Common shares of DC as a separate capital dividend paid on the First Common shares and Second Common shares of DC. DC will elect in a manner such that the capital dividend deemed to have been received by each of TC1 and TC2 will be equal.

23. Following receipt of the dividend refund to which DC will become entitled as a result of the Proposed Transactions, DC will immediately distribute it (under the terms of the agreement governing the winding-up of DC) to each of TC1 and TC2 in the same proportions as described in Paragraph 16. Within a reasonable time following the distribution of such dividend refund, articles of dissolution will be filed by DC with the appropriate Corporate Registry and upon receipt of a certificate of dissolution, DC will be dissolved.

24. The Trust will subscribe for XXXXXXXXXX Non-Voting Common shares of TC1 for cash consideration of $XXXXXXXXXX.

ADDITIONAL INFORMATION

25. 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 13, 14, 18 and 22, which will be filed by the applicable due date following completion of the Proposed Transactions.

26. No property has or will become property of DC in contemplation of and before the Proposed Transactions, except as described in this letter or in the ordinary course of business.

27. Except as specifically outlined in this letter, there is no expectation or intention of any of DC or the TCs to dispose of any property owned by it as part of the series of transactions or events that includes the Proposed Transactions, other than in the ordinary course of business.

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

a) the subject of a guarantee agreement;

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

c) the subject of a dividend rental agreement.

29. Each of TC1 and TC2 will have the financial capacity to honour, upon presentation for payment, the amount payable under the TC1 Note or the TC2 Note, as the case may be.

30. DC is not, and each of TC1 and TC2 will not be, a restricted financial institution or a specified financial institution.

PURPOSES OF THE PROPOSED TRANSACTIONS

31. The purpose of the Proposed Transactions is to allow Brother and Sister to separate their interests in DC and to permit them to undertake their future investment and estate planning independent from one another.

RULINGS

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

A. The provisions of subsection 85(1) will apply:

(i) to the transfer of the First Common shares and the XXXXXXXXXX of a Class A Special share in the capital of DC by Brother to TC1 as described in Paragraph 13 and

(ii) to the transfer of the Second Common shares and the XXXXXXXXXX of a Class A Special share in the capital of DC by Sister to TC2 as described in Paragraph 14,

such that the agreed amount in respect of each such transfer will be deemed to be the proceeds of disposition of such shares to the transferor and the cost of such shares to the transferee. For greater certainty, paragraph 85(1)(e.2) will not apply to the transfers.

B. Subject to the application of subsection 69(11), the provisions of subsection 85(1) will apply to the transfer of the capital property of DC to each of TC1 and TC2, as the case may be, as described in Paragraph 16, such that the agreed amount in respect of each such transfer will be deemed to be DC's proceeds of disposition and the cost of such property to TC1 and TC2, as the case may be. For greater certainty, paragraph 85(1)(e.2) will not apply to the transfers.

C. The application of subsection 84.1(1) to the transfers of shares described in Paragraphs 13 and 14 will not result in a dividend being deemed to be paid by TC1 or TC2 to the respective transferor pursuant to paragraph 84.1(1)(b).

D. As a result of the redemption by TC1 and TC2, as the case may be, of the TC1 Butterfly Shares and the TC2 Butterfly Shares described in Paragraph 20, by virtue of subsection 84(3), each of TC1 and TC2 will be deemed to have paid, and DC will be deemed to have received, a taxable dividend equal to the amount by which the amount paid by TC1 and TC2, as the case may be, in respect of its redemption of the TC1 Butterfly Shares and the TC2 Butterfly Shares, owned by DC exceeds the paid-up capital of such class of shares immediately before the redemption.

E. As a result of the distribution by DC in the course of its winding-up, as described in Paragraph 22:

a) by virtue of paragraph 88(2)(b) and subsection 84(2), but subject to (b), (c), and (d) below, DC will be deemed to have paid a dividend (the "winding-up dividend") on its First Common shares, Second Common shares and Class A Special share, as the case may be, equal to the amount by which

i) the aggregate fair market value of the property of DC distributed to TC1 and TC2 in respect of each of the First Common shares, Second Common shares and Class A Special share of DC, as the case may be, on the winding-up

exceeds

ii) the amount, if any, by which the paid-up capital in respect of the First Common shares, Second Common shares and Class A Special share of DC, as the case may be, is reduced on the distribution, and

each of TC1 and TC2 will be deemed to have received a dividend equal to that proportion of the amount of the excess that the number of the First Common shares, Second Common shares and Class A Special share of DC, as the case may be, held by TC1 and TC2, as the case may be, is of the number of such shares issued and outstanding immediately before the distribution;

b) pursuant to subparagraph 88(2)(b)(i), such portion of the winding-up dividend paid on the First Common shares and Second Common shares of DC referred to in (a) herein that does not in aggregate exceed the capital dividend account of DC determined immediately before the payment of the winding-up dividend will be deemed, for purposes of the subsection 83(2) elections referred to in Paragraph 22, to be the full amount of a separate dividend;

c) pursuant to subparagraph 88(2)(b)(ii), the portion of the winding-up dividend on the First Common shares and Second Common shares of DC that in aggregate is equal to DC's pre-1972 CSOH, as determined immediately before the payment of the winding-up dividends, shall be deemed not to be a dividend;

d) pursuant to subparagraph 88(2)(b)(iii), the winding-up dividend on each of the First Common shares, Second Common shares and Class A share of DC, to the extent that it exceeds the portion thereof referred to in (b) and (c) herein that is deemed to be a separate dividend, will be deemed to be a separate dividend that is a taxable dividend; and

e) pursuant to subparagraph 88(2)(b)(iv), each of TC1 and TC2 will be deemed to have received its proportional share of the winding up dividend relating to the Class A share described in (c) herein.

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

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

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

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

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

e) will not give rise to tax under Part IV except as provided in paragraph 186(1)(b); and

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

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

a) an acquisition of property in circumstances described in paragraph 55(3.l)(a);

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

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

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

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

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

H. The provisions of subsections 15(1), 56(2), and 246(1) will not apply to any of the Proposed Transactions described in Paragraphs 10 to 23 herein, in and by themselves. For greater certainty, this Ruling does not apply to any of the transactions described in Paragraph 9 or 24.

I. The cancellation of either the TC1 Note or the TC2 Note as described in Paragraph 22 will not, in and of itself, result in a forgiven amount.

J. Subsection 245(2) will not be applied as a result of the Proposed Transactions, in and by themselves, to re-determine the tax consequences confirmed herein.

The above rulings are subject to the limitations and qualifications set out in Information Circular 70-6R5 dated May 17, 2002 and are binding on CRA provided that the Proposed Transactions (other than the filing of articles of dissolution of DC, as described in Paragraph 23) are completed by XXXXXXXXXX. The above rulings are based on the law as it presently reads and do not take into account any proposed amendments to the Act and the Regulations which, if enacted into law, could have an effect on the rulings provided herein.

OTHER COMMENTS

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

a) the paid-up capital of any share or the adjusted cost base or fair market value of any property referred to herein;

b) the balance of the capital dividend account, pre-1972 CSOH, refundable dividend tax on hand or any other tax account 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, 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
for Division Director
Reorganizations Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch