2013 Ruling 2013-0502921R3 - Split-Up Butterfly - Farm

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 butterfly dividends are exempt from 55(2) as a result of qualifying under 55(3)(b)?

Position: Yes

Reasons: Proposed transactions meet the requirements of 55(3)(b)

XXXXXXXXXX
2013-050292

Attention: XXXXXXXXXX

XXXXXXXXXX, 2013

Dear Sir:

Re: XXXXXXXXXX
Advance Income Tax Ruling

We are writing in response to your letter of XXXXXXXXXX and our subsequent communications, wherein you requested an advance income tax ruling on behalf of the Applicants. The information contained in any documents submitted as part of your request is only part of this letter to the extent it is specifically described herein.

We understand that to the best of your knowledge and that of the Applicants none of the issues involved in this advance income tax ruling:

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.

To the best of the knowledge of the Applicants, the Proposed Transactions will not have any impact on the outstanding tax liabilities, if any, of the Applicants.

DEFINITIONS

In this letter, unless otherwise stated, the following terms have the meaning specified below:

"Act" means the Income Tax Act, RSC 1985, c. 1 (5th Supp.), as amended to the date of this letter and unless otherwise indicated all statutory references in this letter are to the Act;

"adjusted cost base" or "ACB" has the meaning assigned to that term in section 54;

"agreed amount" has the meaning assigned by subsection 85(1);

"Applicants" means the following persons, all of whom file their returns at, and deal with, the XXXXXXXXXX tax services office and the XXXXXXXXXX taxation centre:

XXXXXXXXXX

"approximate the proportion" means, for the purposes of Paragraph 36, a discrepancy from that proportion, if any, that would not exceed XXXXXXXXXX percent (XXXXXXXXXX%), determined as a percentage of the FMV of each type of property which TC1, TC2 and TC3 will each receive as compared to what TC1, TC2 and TC3 would have each received had each such corporation received its appropriate pro rata share of the FMV of that type of property;

"BCA" means the Business Corporations Act (XXXXXXXXXX);

"Canadian-controlled private corporation" or "CCPC" has the meaning assigned to that term in subsection 125(7);

"capital dividend account" or "CDA" has the meaning assigned to that term in subsection 89(1);

"capital property" has the meaning assigned to that term in section 54;

"Class A Shares" means the Class A shares in the capital of TC1, TC2 or TC3, as the case may be, as described in Paragraph 20;

"Class B Shares" means the Class B shares in the capital of TC1, TC2 or TC3, as the case may be;

"Class C Redemption Amount" has the meaning set forth in Paragraph 21(b);

"Class C Shares" means the Class C shares in the capital of TC1, TC2 or TC3, as the case may be, as described in Paragraph 21;

"Class D Redemption Amount" has the meaning set forth in Paragraph 22(b);

"Class D Shares" means the Class D shares in the capital of TC1, TC2 or TC3, as the case may be, as described in Paragraph 22;

"Class E Shares" means the Class E shares in the capital of TC1, TC2 or TC3, as the case may be;

"Class F Shares" means the Class F shares in the capital of TC1, TC2 or TC3, as the case may be;

"cost amount" has the meaning assigned to that term in subsection 248(1);

"CRA" means the Canada Revenue Agency;

"DC" means XXXXXXXXXX, a corporation formed by the amalgamation on XXXXXXXXXX of XXXXXXXXXX and XXXXXXXXXX pursuant to the BCA;

"DC Properties" means all the property owned by DC, at the time of the Distribution, that will comprise cash and term deposits, the Portfolio Investments, the Patronage Reserves, the portion of the Lands that shall not have been disposed of before that time and the portion, if any, of the inventory and equipment related to the farming operations of DC as shall not have been disposed of before that time;

"DC-A Shares" means the Class "A" common shares in the capital of DC, as described in Paragraph 2(a);

"DC-A Repurchase Note" has the meaning assigned in Paragraph 45;

"DC-B Shares" means the Class "B" common shares in the capital of DC;

"DC-C Shares" means the Class "C" non-cumulative redeemable preferred shares in the capital of DC;

"DC-D Shares" means the Class "D" non-cumulative redeemable preferred shares in the capital of DC, as described in Paragraph 2(b);

"DC-D Redemption Amount" means $XXXXXXXXXX per Class D Share;

"DC-D Redemption Note" has the meaning assigned in Paragraph 44;

"Distribution" means the transfer of the DC Properties to each of TC1, TC2 and TC3, as described in Paragraphs 36 and 37;

"ED Note" has the meaning assigned in Paragraph 26.1;

"eligible property" has the meaning assigned to that term in subsection 85(1.1);

"fair market value" or "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;

"Farm Leases" means the real property leases which pertain to certain parcels of the Lands and entitle DC to receive annual rents from the lessees in respect of the lessees' use of the subject Lands for agricultural purposes;

"general rate income pool" or "GRIP" has the meaning assigned to that term in subsection 89(1);

"Home Quarter" means the lands described in the second part of Title No. XXXXXXXXXX of the XXXXXXXXXX Land Titles Registry, legally described as follows:

XXXXXXXXXX

"Lands" means real property owned by DC that is located near XXXXXXXXXX, in the Province of XXXXXXXXXX, and consists of XXXXXXXXXX parcels having an aggregate area of approximately XXXXXXXXXX acres, including the Home Quarter;

"Mother" means XXXXXXXXXX;

XXXXXXXXXX;

"paid-up capital" or "PUC" has the meaning assigned to that term in subsection 89(1);

"Paragraph" means a numbered paragraph in this letter;

"Patronage Reserves" means the membership equity of DC in various co-operatives from which DC purchases agricultural-related supplies for maintaining the Lands and carrying on its XXXXXXXXXX business and in respect of which DC is entitled to receive an annual patronage dividend, the amount, if any, of which depends on the level of DC's patronage for such year;

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

"Proposed Transactions" means those transactions and events described in Paragraphs 26.1 through 49;

"refundable dividend tax on hand" or "RDTOH" has the meaning assigned to that term in subsection 129(3);

"related persons" has the meaning assigned to that term in section 251;

"Shareholders' Loans" means the amounts owing by DC to Son1, Son2 and Mother, that are unsecured, non-interest bearing loans that have no specific terms of repayment, and that are in the separate amounts set out in Paragraph 14;

"Son1" means XXXXXXXXXX;

"Son2" means XXXXXXXXXX;

"stated capital" means stated capital as that expression is used in the BCA;

"taxable Canadian corporation" has the meaning assigned to that term in subsection 89(1);

"TC" means any one of TC1, TC2 or TC3 and "TCs" means TC1, TC2 and TC3;

"TC1" means XXXXXXXXXX, a corporation incorporated pursuant to the BCA, as described in Paragraph 18;

"TC1 Note" has the meaning assigned in Paragraph 42;

"TC2" means XXXXXXXXXX, a corporation incorporated pursuant to the BCA, as described in Paragraph 18;

"TC2 Note" has the meaning assigned in Paragraph 42;

"TC3" means XXXXXXXXXX, a corporation incorporated pursuant to the BCA, as described in Paragraph 18;

"TC3 Note" has the meaning assigned in Paragraph 42; and

"undepreciated capital cost" or "UCC" has the meaning assigned to that term in subsection 13(21).

FACTS

1. DC is a CCPC and a taxable Canadian corporation. The head office of DC is located in XXXXXXXXXX, in the Province of XXXXXXXXXX. DC's taxation year ends on XXXXXXXXXX of each year.

2. The authorized share capital of DC consists of (i) an unlimited number of DC-A Shares, (ii) an unlimited number of DC-B Shares, (iii) an unlimited number of DC-C Shares, and (iv) an unlimited number of DC-D Shares, of which only the DC-A Shares and the DC-D Shares are issued and outstanding.

(a) The DC-A Shares are voting shares and entitle the holders thereof to receive, subject to the prior rights of the holders of the DC-D Shares, dividends in such amounts as and when declared by the directors of DC, and the remaining property and assets of DC in the event of a liquidation, dissolution or winding-up.

(b) The DC-D Shares are non-voting shares and entitle the holders thereof to receive an annual non-cumulative dividend equal to XXXXXXXXXX% of the DC-D Redemption Amount as and when declared by the directors of DC, and to receive, in priority to the holders of the DC-A Shares, the DC-D Redemption Amount plus any declared but unpaid dividends on such share in the event of a liquidation, dissolution or winding-up.

3. The issued and outstanding shares of DC are beneficially owned as follows:

SHAREHOLDER DC-A SHARES DC-D SHARES
Son1 XXXXXXXXXX XXXXXXXXXX
Son2 XXXXXXXXXX XXXXXXXXXX
Mother XXXXXXXXXX XXXXXXXXXX
Total XXXXXXXXXX XXXXXXXXXX

4. The aggregate ACB and PUC of the DC-A Shares and the DC-D Shares held by each of Son1, Son2 and Mother are as follows:

DC-A SHARES DC-D SHARES
SHAREHOLDER ACB PUC ACB PUC
Son1 $XXXX $XXXX $XXXX $XXXX
Son2 $XXXX $XXXX $XXXX $XXXX
Mother $XXXX $XXXX $XXXX $XXXX
Total $$XXXX $XXXX $XXXX $XXXX

5. Son1, Son2 and Mother hold their respective DC-A Shares and DC-D Shares as capital property for the purposes of the Act.

6. DC will be the registered and beneficial owner of the DC Properties at the time of the Distribution.

7. Prior to XXXXXXXXXX, DC used the Lands in an active farming business involving XXXXXXXXXX for commercial sale. After ceasing its active farming business in XXXXXXXXXX, DC began leasing certain parcels of the Lands to local farmers pursuant to the Farm Leases. A portion of the Lands are also subject to the XXXXXXXXXX Leases. DC holds the Lands as capital property for the purposes of the Act.

8. Son1, Son2 and Mother lived in separate residences situated on the Home Quarter prior to XXXXXXXXXX. Both Son2 and Mother vacated their respective residences on the Home Quarter in XXXXXXXXXX. Son1 continues to live in his residence on the Home Quarter. Each year, DC has included in its taxable income an amount in respect of rent from Son1, Son2 and Mother in connection with residing in the Home Quarter residences and an amount as compensation for the value of the corporate property consumed (e.g. XXXXXXXXXX) by them. DC then deducts this amount from the amounts owing to Son1, Son2 and Mother under the Shareholders' Loans.

9. The Home Quarter is currently listed for sale at a price of $XXXXXXXXXX, which is approximately equal to its FMV. In the event the Home Quarter has not been sold by DC by the date the Distribution takes place, it will form part of the Distribution described in Paragraphs 36 and 37.

10. In connection with carrying on its active farming business prior to XXXXXXXXXX, DC built up a significant inventory of XXXXXXXXXX for commercial sale. Since ceasing to carry on its active farming business, DC has been gradually selling the XXXXXXXXXX inventory to arm's-length purchasers for cash proceeds. As at XXXXXXXXXX, the FMV of DC's XXXXXXXXXX inventory was $XXXXXXXXXX. Prior to implementing the Distribution, DC will attempt to sell all of its remaining XXXXXXXXXX inventory to arm's length purchasers for cash proceeds.

11. In connection with carrying on its active farming business prior to XXXXXXXXXX, DC acquired various farming implements, including XXXXXXXXXX. However, in conjunction with ceasing farming operations, DC gradually sold substantially all the farming equipment to arm's-length purchasers for cash proceeds. As at the date of this letter, the remaining farming equipment is used to store and sell DC's XXXXXXXXXX inventory and maintain the Home Quarter. DC intends to sell this remaining farming equipment in conjunction with a sale of the Home Quarter. Therefore, if the Home Quarter has not been sold by the date the Distribution takes place, the remaining farming equipment will form part of the Distribution described in Paragraphs 36 and 37.

12. DC is the registered and beneficial owner of the Patronage Reserves and holds the Patronage Reserves as capital property for the purposes of the Act.

13. With the cash generated from its active farming business, the Farm Leases, the XXXXXXXXXX Leases and the sale of the farming equipment and XXXXXXXXXX inventory, DC acquired the Portfolio Investments. The Portfolio Investments represent a diverse portfolio of long-term investments in publicly-traded securities, which are held as capital property by DC. DC does not exercise any "significant influence", as that term is defined in section 3051.04 of the Accounting Standards for Private Enterprise, over any issuer of the Portfolio Investments.

14. As at XXXXXXXXXX, DC owes the following amounts to Son1, Son2 and Mother as the Shareholders' Loans:

(a) Son1: $XXXXXXXXXX;
(b) Son2: $XXXXXXXXXX; and
(c) Mother: $XXXXXXXXXX.

15. For accounting purposes, the Shareholders' Loans are classified as current liabilities on DC's financial statements, which are prepared on a modified cash basis.

16. At the time the Distribution takes place, DC will not have any liabilities.

17. At the end of its XXXXXXXXXX taxation year, DC had the following tax account balances:

(a) RDTOH: $XXXXXXXXXX;
(b) GRIP: $XXXXXXXXXX; and
(c) Capital loss carry-forwards: $XXXXXXXXXX.

18. In order to complete the Proposed Transactions, Son1 has incorporated TC1, Son2 has incorporated TC2 and Mother has incorporated TC3. Each TC is a taxable Canadian corporation and a CCPC.

19. The authorized capital of each TC is identical and consists of an unlimited number of Class A Shares, Class B Shares, Class C Shares, Class D Shares, Class E Shares and Class F Shares.

20. The Class A Shares are voting shares that have the following attributes:

(a) Subject to the prior rights of the holders of the Class C Shares, the Class D Shares and the Class F Shares, the Class A Shares entitle the holders thereof to receive dividends in such amounts as and when declared by the directors of the particular TC; and

(b) Subject to the prior rights of the holders of the Class C Shares, the Class D Shares, the Class E Shares and the Class F Shares, the Class A Shares entitle the holders thereof to receive the remaining property and assets of the particular TC in the event of a liquidation, dissolution or winding-up.

21. The Class C Shares are non-voting and have the following attributes:

(a) Each holder of a Class C Share is entitled to receive dividends in such amounts as and when declared by the directors of the particular TC, provided that such dividends shall not exceed XXXXXXXXXX% per annum of the Class C Redemption Amount;

(b) Each Class C Share is retractable at the option of the holder thereof at an amount equal the aggregate FMV of the consideration paid to the particular TC on the issuance of the Class C Shares divided by the number of shares issued as consideration therefor (the "Class C Redemption Amount"), together with any declared but unpaid dividends;

(c) Each Class C Share is redeemable at the option of the issuer thereof at an amount equal to the Class C Redemption Amount, together with any declared but unpaid dividends; and

(d) Each holder of a Class C Shares is entitled to receive, pari passu with the holders of the Class D Shares and the Class F Shares and in priority to the holders of the Class A Shares, the Class B Shares and the Class E Shares, the Class C Redemption Amount plus any declared but unpaid dividends on such share in the event of a liquidation, dissolution or winding-up.

22. The Class D Shares are non-voting and have the following attributes:

(a) Each holder of a Class D Share is entitled to receive dividends in such amounts as and when declared by the directors of the particular TC, provided that such dividends shall not exceed XXXXXXXXXX% per annum of the Class D Redemption Amount;

(b) Each Class D Share is retractable at the option of the holder thereof at an amount equal the aggregate FMV of the consideration paid to the particular TC on the issuance of the Class D Shares divided by the number of shares issued as consideration therefor (the "Class D Redemption Amount"), together with any declared but unpaid dividends;

(c) Each Class D Share is redeemable at the option of the issuer thereof at an amount equal to the Class D Redemption Amount, together with any declared but unpaid dividends; and

(d) Each holder of a Class D Shares is entitled to receive, pari passu with the holders of the Class C Shares and the Class F Shares and in priority to the holders of the Class A Shares, the Class B Shares and the Class E Shares, the Class D Redemption Amount plus any declared but unpaid dividends on such share in the event of a liquidation, dissolution or winding-up.

23. Upon the incorporation of TC1, TC2 and TC3, Son1, Son2 and Mother subscribed for XXXXXXXXXX Class A Shares in their respective TC for an aggregate subscription price of $XXXXXXXXXX. In each case, no other person has owned any shares of the particular TC.

24. Son1, Son2 and Mother are individuals and each is a resident of Canada for the purposes of the Act.

25. Mother is the mother of Son1 and Son2.

26. [RESERVED]

PROPOSED TRANSACTIONS

The Proposed Transactions will occur in the order presented unless otherwise indicated, with the exception of filing the applicable election forms in respect of the elections, designations and transfers described in Paragraphs 26.1, 26.2, 28, 29, 30, 36, 37 and 46, which will be filed within the applicable due dates following the completion of the Proposed Transactions.

26.1. On or before XXXXXXXXXX, DC will declare and pay a dividend on the DC-A Shares held by Son1, Son2 and Mother in an amount sufficient to entitle DC to a refund of the balance of RDTOH at the end of its taxation year ending XXXXXXXXXX and, pursuant to subsection 89(14), DC will designate and notify each of Son1, Son2 and Mother in writing that the dividend is an "eligible dividend" as defined in subsection 89(1). In full satisfaction of the dividend payable, DC will issue to each holder of DC-A Shares, a non-interest bearing promissory note, payable on demand, having a principal amount equal to the amount of the dividend declared on the holder's DC-A Shares (each an "ED Note"). Each of Son1, Son2 and Mother will accept their ED Note in full satisfaction of the dividend payable on the holder's DC-A Shares.

26.2. After XXXXXXXXXX but at or before the time that DC will repay the amounts described in Paragraph 27, DC will declare and pay on the DC-A Shares held by Son1, Son2 and Mother a dividend equal to the approximate balance, if any, in its CDA at that time. DC will elect, in prescribed manner and prescribed form, within the time determined under subsection 83(2), for the provisions of subsection 83(2) to apply to the dividend paid.

27. With its cash on hand, DC will:

(a) pay to Son1, Son2 and Mother the principal amounts outstanding under the ED Notes held by each of them; and

(b) pay to Son1, Son2 and Mother the outstanding balances noted in Paragraph 14, which are owing under the Shareholders' Loans.

28. Son1 will transfer his DC-A Shares and DC-D Shares to TC1. In consideration for this transfer, TC1 will issue to Son1 Class C Shares having an aggregate Class C Redemption Amount and FMV equal to the aggregate FMV of the DC-A Shares and the DC-D Shares transferred.

29. Son2 will transfer his DC-A Shares and DC-D Shares to TC2. In consideration for this transfer, TC2 will issue to Son2 Class C Shares having an aggregate Class C Redemption Amount and FMV equal to the aggregate FMV of the DC-A Shares and the DC-D Shares transferred.

30. Mother will transfer her DC-A Shares and DC-D Shares to TC3. In consideration for this transfer, TC3 will issue to Mother Class C Shares having an aggregate Class C Redemption Amount and FMV equal to the aggregate FMV of the DC-A Shares and the DC-D Shares transferred.

31. In respect of the share transfers described in Paragraphs 28 to 30, each of the transferors will, within the time determined under subsection 85(6), make a joint election in prescribed form with the relevant TC for the provisions of subsection 85(1) to apply to each of those share transfers.

32. The agreed amount in each of the joint elections will be equal to each transferor's ACB, immediately before the above-noted transfers, of the particular DC-A Shares and the DC-D Shares transferred by that transferor and, in respect of each such share, will not be greater than the FMV of that share. For purposes of the Act, the amount to be added to the stated capital of the Class C Shares of each of TC1, TC2 and TC3 that will be issued to Son1, Son2 and Mother, respectively, will be equal to the aggregate PUC of the DC-A Shares and the DC-D Shares transferred to their respective TCs by each of them.

33. Immediately before the Distribution described in Paragraphs 36 and 37, the DC Properties will be classified into the following three types of property for the purposes of the definition of "distribution" in subsection 55(1):

(a) cash or near-cash property comprising all of the current assets of DC, including cash and term deposits;

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

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

34. For the purpose of determining the FMV of the DC Properties, any tax accounts of DC, including the balance of its RDTOH, GRIP and net-capital losses, will not be considered property of DC.

35. The specific classification of the types of the DC Properties can be summarized as follows:

(a) DC's cash and term deposits will be classified as cash or near-cash property;

(b) the Portfolio Investments will be classified as investment property on the basis that they are held by DC as long-term "portfolio investments" (as that term is defined in the CICA Handbook);

(c) the Lands (which will include the Home Quarter unless sold prior to the date of the Distribution) will be classified as investment property on the basis that they are currently being used by DC to generate income from property in the form of rent (from the Farm Leases and the XXXXXXXXXX Leases);

(d) the Patronage Reserves will be classified as investment property on the basis that they currently generate income from property for DC in the form of patronage dividends; and

(e) the XXXXXXXXXX inventory will be classified as business property, as will the remaining farming equipment (unless sold prior to the date of the Distribution), on the basis that it is currently being used by DC to generate business income from its sale.

36. Immediately following the classification of the DC Properties described in Paragraph 33, DC will transfer to each of TC1, TC2 and TC3, a pro rata portion of each of its cash or near-cash property, business property and investment property. As a result of this Distribution, the FMV of the cash or near-cash property, business property and investment property received by each of TC1, TC2 and TC3 will approximate the proportion of the FMV of each type of property of DC immediately before the transfer, that:

(a) the aggregate FMV, immediately before the transfer, of the DC-A Shares and the DC-D Shares owned respectively by TC1, TC2 and TC3, is of

(b) the FMV, immediately before the transfer, of all of the issued and outstanding shares in the capital stock of DC.

37. In the event the Home Quarter has not been sold by DC prior to the date of the Distribution, then as part of the Distribution DC will transfer the Home Quarter, together with the remaining farming equipment, to the TCs, as tenants in common, each obtaining an undivided interest proportionate to its pro rata portion described in Paragraph 36.

38. Any property referred to in Paragraph 37 transferred to the TCs will continue to be listed, following the Distribution, with a real estate broker for the purpose of selling it, together with the remaining farming equipment, to an arm's-length third-party for cash proceeds.

39. As consideration for the DC Properties transferred on the Distribution, each of the TCs will issue Class D Shares to DC that have an aggregate FMV and Class D Redemption Amount equal to the FMV, at the time of the transfer, of the DC Properties transferred to the particular TC.

40. In respect of the Distribution, DC will jointly elect with each TC, in prescribed form and within the time determined under subsection 85(6), for the provisions of subsection 85(1) to apply to the transfer of each of the DC Properties transferred to the particular TC pursuant to the Distribution, excluding any cash. The agreed amount specified in the election in respect of each such property transferred to the particular TC will be as follows:

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

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

(c) in the case of farm inventory owned in connection with the farming business carried on by DC, an amount determined in accordance with the formula set out in paragraph 85(1)(c.2) of the Act.

41. For purposes of the Act, the amount to be added to each TC's stated capital of the Class D Shares issued to DC as consideration for the eligible property transferred to the particular TC on the Distribution will not exceed the aggregate of the agreed amounts described in Paragraph 40 in respect of such properties. The amount to be added to each TC's stated capital of the Class D Shares issued to DC as consideration for any non-eligible property (i.e., cash) transferred to the particular TC on the Distribution will be equal to the FMV of such transferred property at the time of the transfer.

42. Following the Distribution, each TC will redeem its Class D Shares held by DC. In full payment and satisfaction of the aggregate redemption amounts payable therefor, TC1, TC2 and TC3 will each issue to DC a non-interest bearing promissory note, payable on demand, having a principal amount equal to the aggregate Class D Redemption Amount of the Class D Shares redeemed by the particular TC (respectively, the "TC1 Note", the "TC2 Note" and the "TC3 Note").

43. Immediately after the TCs redeem their respective Class D Shares held by DC, DC will redeem the outstanding DC-D Shares and repurchase the outstanding DC-A Shares concurrently.

44. With respect to the redemption of the DC-D Shares held by a particular TC, DC will issue to the TC, in full satisfaction of the aggregate redemption amount payable therefor, a non-interest bearing promissory note, payable on demand, having a principal amount equal to the aggregate DC-D Redemption Amount of the DC-D Shares redeemed from the particular TC (the "DC-D Redemption Note").

45. With respect to the repurchase of the DC-A Shares held by a particular TC, the purchase price therefor will be satisfied by issuing and delivering to the TC a non-interest bearing promissory note, payable on demand, having a principal amount equal to the FMV of the DC-A Shares repurchased from the particular TC (the "DC-A Repurchase Note"). The particular TC will accept the DC-A Repurchase Note in full satisfaction of the aggregate purchase price payable for the repurchase of its DC-A Shares.

46. Pursuant to subsection 89(14), DC will designate and notify each TC in writing that the portion of the dividend deemed by subsection 84(3) to arise on the purchase for cancellation by DC of the DC-A Shares held by the particular TC and on the redemption by DC of the DC-D Shares held by that TC that is equal to that TC's pro rata share of DC's GRIP for the end of DC's taxation year in which the Distribution and repurchase occurs will be an "eligible dividend" as defined in subsection 89(1).

47. Immediately following the redemption of the Class D Shares, the redemption of the DC-D Shares and the repurchase of the DC-A Shares, the following promissory notes will be off-set against each other and accepted as full payment by the holders of such notes:

(a) the DC-D Redemption Note and the DC-A Repurchase Note held by TC1 will be set off against the TC1 Note;

(b) the DC-D Redemption Note and the DC-A Repurchase Note held by TC2 will be set off against the TC2 Note; and

(c) the DC-D Redemption Note and the DC-A Repurchase Note held by TC3 will be set off against the TC3 Note.

48. Upon set-off, all promissory notes described in Paragraph 47 will be marked "paid in full" and cancelled.

49. Within a reasonable time, DC will file tax returns, and, after the receipt of any dividend refund or other tax related refunds, file articles of dissolution to wind up and dissolve pursuant to the BCA. Upon receipt of a Certificate of Dissolution, DC will be formally dissolved.

ADDITIONAL INFORMATION

50. None of the TCs nor DC is or will be at any time during the series of transactions or events that includes the Proposed Transactions a "specified financial institution" as defined in subsection 248(1), a "restricted financial institution" as defined in subsection 248(1) or a corporation described in any of paragraphs (a) to (f) of the definition of "financial intermediary corporation" in subsection 191(1).

51. No property has or will become property of DC in contemplation of and before the Distribution, except as described in this letter or in the ordinary course of business, and no liabilities have been, or will be, incurred or discharged by DC in contemplation of and before the Distribution, except as described in this letter or in the ordinary course of business.

52. 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.

53. None of the shares described in this letter are or will be, at any time during the implementation of the Proposed Transactions:

(a) the subject of an undertaking or agreement that is a "guarantee agreement" as defined in subsection 112(2.2);

(b) the subject of a "dividend rental arrangement" as defined in subsection 248(1); or

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

PURPOSE OF PROPOSED TRANSACTIONS

54. The purpose of the Proposed Transactions is to distribute to each of TC1, TC2 and TC3 their proportionate share of the assets of DC, such that Son1 (through TC1), Son2 (through TC2) and Mother (through TC3) will have separate ownership of his or her pro rata share of DC's assets. This will allow Son1, Son2 and Mother to pursue, in an independent manner, his or her own particular interests with respect to his or her proportionate share of DC's assets, including individual estate and succession plans to be developed and implemented independently by each such individual.

RULINGS

Provided the foregoing statements constitute a complete and accurate disclosure of all the relevant facts, proposed transactions, additional information and purposes of the Proposed Transactions, and provided that the Proposed Transactions are completed in the manner described above, we confirm the following:

A. Provided that the requisite 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 transferred is an eligible property, subject to the application of subsection 69(11), the provisions of subsection 85(1) will apply to:

(a) the transfer of the DC-A Shares and the DC-D Shares held by each of Son1, Son2 and Mother to the respective TCs, as described in Paragraphs 28 to 30; and

(b) the transfer of the DC Properties by DC to the TCs, as described in Paragraphs 36 and 37,

such that the agreed amount in respect of each such transfer 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 those transfers.

For the purposes of the joint election described in Paragraph 40(b), the reference to "the UCC to the taxpayer of all of the property of that class immediately before the disposition" in subparagraph 85(1)(e)(i) shall mean the proportion of the UCC to DC of all the property of that class immediately before the transfer that the FMV at that time of the property that is transferred is of the FMV of all the property of that class at that time.

B. As a result of the redemption by each of TC1, TC2 and TC3 of its Class D Shares held by DC, as described in Paragraph 42, each of TC1, TC2 and TC3 will, by virtue of paragraph 84(3)(a), be deemed to have paid and DC will, by virtue of paragraph 84(3)(b), be deemed to have received a taxable dividend at that time on the Class D Shares redeemed by the particular TC equal to the amount, if any, by which the aggregate amount paid by the particular TC on the redemption exceeds the aggregate PUC in respect of such Class D Shares immediately before the redemption.

C. As a result of the purchase for cancellation or redemption, as the case may be, by DC of its DC-A Shares and DC-D Shares held by each of TC1, TC2 and TC3, as described in Paragraphs 43 to 45, DC will, by virtue of paragraph 84(3)(a), be deemed to have paid at that time to each TC, and each TC will, by virtue of paragraph 84(3)(b), be deemed to have received at that time:

(a) a taxable dividend equal to the amount, if any, by which the aggregate amount paid by DC to the particular TC on the redemption of its DC-D Shares exceeds the aggregate PUC in respect of such DC-D Shares immediately before the redemption, and

(b) a taxable dividend equal to the amount, if any, by which the aggregate amount paid by DC to the particular TC on the purchase for cancellation of its DC-A Shares exceeds the aggregate PUC in respect of such DC-A Shares immediately before the purchase.

D. Provided that DC designates a portion of the dividends described in Ruling C to be an eligible dividend in the prescribed manner and within the time referred to in subsection 89(14), the designated amount will be added to the GRIP accounts of each of TC1, TC2 and TC3 to the extent of the portion of the dividend that each respective TC received, in its taxation year in which the particular TC received that portion from DC, pursuant to variable E(a) of the definition of GRIP in subsection 89(1).

E. The taxable dividends described in Rulings B and C:

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

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

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

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

f) will not be subject to tax under Part IV except to the extent of the amount, if any, determined under paragraph 186(1)(b).

F. 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 in the circumstances described in subparagraph 55(3.1)(b)(iii); or

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

which has not, otherwise than in Paragraph 38, 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 B and C and, for greater certainty, subsection 55(3.1) will not apply to deny the exemption under paragraph 55(3)(b).

For greater certainty, paragraph 55(3.1)(c) will apply to deny the exemption under paragraph 55(3)(b) to a taxable dividend referred to in Ruling C that is received by a TC if the aggregate value of:

i) property described in Paragraph 37, and

ii) any other property described in clauses 55(3.1)(c)(ii)(A), (B) and (C)

that is disposed of by the particular TC, as part of the series of transactions that includes the receipt by the particular TC of the dividend, exceeds the 10% threshold described in that part of paragraph 55(3.1)(c) following clause 55(3.1)(c)(ii)(C).

G. The set-off and cancellation of the obligations represented by:

a) the DC-D Redemption Note, the DC-A Repurchase Note and the TC1 Note, as described in Paragraph 47(a);

b) the DC-D Redemption Note, the DC-A Repurchase Note and the TC2 Note, as described in Paragraph 47(b); and

c) the DC-D Redemption Note, the DC-A Repurchase Note and the TC3 Note, as described in Paragraph 47(c);

will not give rise to a "forgiven amount" within the meaning of either subsection 80(1) or section 80.01, and none of DC, TC1, TC2 or TC3 will realize any gain or incur any loss as a result of the set-off and cancellation.

H. The provisions of subsection 15(1), 56(2), 69(1) and 246(1) will not apply to any of the Proposed Transactions, in and by themselves.

I. 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 herein.

These 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 not later than six months of the date of this letter.

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

1. Although we received, for review, certain documents relating to the proposed transactions, our rulings are based solely on the representations contained in the Facts and Proposed Transactions herein.

2. Except as expressly stated, our rulings do not imply acceptance, approval or confirmation of any income tax implications of the facts or proposed transactions. In particular, nothing in this letter should be interpreted as confirming, either expressly or implicitly

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

b) the amount to be added to the stated capital of a class of shares issued as consideration for any property;

c) the balance of CDA, GRIP, RDTOH or any other tax account of any corporation; or

d) any other tax consequences relating to the Definitions, Facts, Proposed Transactions and Additional Information described herein, other than those described in the rulings given above, including whether any subsequent transaction or event is or is not considered to be part of a series of transactions or events described herein.

3. DC may have a balance in its RDTOH at its year-end immediately following the redemption and repurchase of its shares described in Paragraph 43. Consequently, redemption by each of the TCs of its Class D Shares owned by DC and the said redemption and repurchase by DC of its shares owned by the TCs could give rise to what is referred to as a "circular" calculation of RDTOH. Consequently, we must inform you that, in our view, this could result in each TC and DC being subject to Part IV tax under paragraph 186(1)(b). It is also our view that the circularity problem causes uncertainty as to which corporation is ultimately entitled to a dividend refund and which corporation is ultimately liable for Part IV tax. Since the problem will affect the assessment of the income tax returns of DC and each of the TCs, the district taxation office at which each of the corporations files its T2 income tax return will have to be consulted in order to determine which corporation will receive the dividend refund and which corporation will be subject to the Part IV tax liability under paragraph 186(1)(b) described in these comments.

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

Yours truly,

XXXXXXXXXX
Reorganizations Division
Income Tax Ruling Directorate
Legislative Policy and Regulatory Affairs Branch