2015 Ruling 2014-0548491R3 - Split-up XXXXXXXXXX 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: Whether the butterfly dividends are exempt from the application of subsection 55(2) by virtue of paragraph 55(3)(b).

Position: Yes, favourable rulings given.

Reasons: Complies with paragraph 55(3)(b) and previous CRA positions.

XXXXXXXXXX 2014-054849

XXXXXXXXXX, 2015

Dear Sir:

RE: XXXXXXXXXX

We are writing in response to your letter of XXXXXXXXXX, wherein you requested an advance income tax ruling on behalf of the above-referenced taxpayers. The documents submitted as part of your request are only part of this document to the extent described herein.

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

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

All statutory references herein are to provisions or parts of the Income Tax Act (Canada), R.S.C. 1985 (5th Supp.) c.1, as amended to the date hereof (the "Act") and all references to monetary amounts are in Canadian dollars.

DESIGNATION OF THE PARTIES INVOLVED

In this letter, except for Paragraph 57, the names of the taxpayers are replaced with the following:

XXXXXXXXXX DC
XXXXXXXXXX ACo.
XXXXXXXXXX BCo.
XXXXXXXXXX Mr. A
XXXXXXXXXX Mr. B
XXXXXXXXXX Mr. C

DEFINITIONS

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

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

"Agreed Amount" means the amount agreed on by the transferor and transferee in respect of the transfer of an eligible property in a joint election filed pursuant to subsection 85(1);

"Business Corporations Act" refers to the Business Corporations Act of XXXXXXXXXX;

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

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

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

"CEC" means cumulative eligible capital as that term is defined in subsection 14(5);

XXXXXXXXXX;

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

"CRA" means the Canada Revenue Agency;

"Dividend Rental Arrangement" has the meaning assigned by subsection 248(1);

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

"XXXXXXXXXX shares" consist of XXXXXXXXXX;

"FMV" means fair market value which is the amount, expressed in money terms, that is the highest price available in an open and unrestricted market between informed and prudent parties dealing at arm's length;

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

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

XXXXXXXXXX;

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

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

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

"Private Corporation" has the meaning assigned by subsection 89(1);

"Promissory Note #1" means the non-interest bearing demand promissory note issued by ACo. to DC on the redemption of the Class F preferred non-voting shares held by DC as described in Paragraph 51;

"Promissory Note #2" means the non-interest bearing demand promissory note issued by DC to ACo. on the purchase for cancellation of the XXXXXXXXXX Class A common voting shares and XXXXXXXXXX Class D preferred non-voting shares as described in Paragraph 52;

"Promissory Note #3" means the non-interest bearing demand promissory note issued by BCo. to DC on the redemption of the Class F preferred non-voting shares held by DC as described in Paragraph 54;

"Promissory Note #4" means the non-interest bearing demand promissory note issued by DC to BCo. on the purchase for cancellation of the XXXXXXXXXX Class A common voting shares as described in Paragraph 55;

"Proposed Transactions" means the proposed transactions which are described in Paragraphs 28 to 56 inclusively;
"RDTOH" means refundable dividend tax on hand as that term is defined in subsection 129(3);

"Specified Financial Institution" has the meaning assigned by subsection 248(1);

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

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

"TCC" means taxable Canadian corporation as that term is defined in subsection 89(1); and

"UCC" means undepreciated capital cost as that term is defined in subsection 13(21).

FACTS

1. Mr. A, Mr. B and Mr. C all reside in Canada for the purposes of the Act.

2. Mr. A, Mr. B and Mr. C are brothers.

3. DC is and will be, at any relevant time and for all purposes of the Act, a TCC and a CPCC. DC was incorporated on XXXXXXXXXX under the XXXXXXXXXX. DC was continued under the Business Corporations Act on XXXXXXXXXX. DC has a taxation year ending on XXXXXXXXXX of every year.

4. DC carries on the business of XXXXXXXXXX.

5. The authorized capital of DC consists of the following:

Unlimited Class A Common voting shares;
Unlimited Class B Common non-voting shares;
Unlimited Class C Preferred non-voting shares; and
Unlimited Class D Preferred non-voting shares.

6. The issued share capital of DC consists of:

Shareholder # of shares Class PUC ACB

Mr. A XXXXXX A $ XXXXXX $ XXXXXX
Mr. B XXXXXX A $ XXXXXX $ XXXXXX
Mr. C XXXXXX A $ XXXXXX $ XXXXXX
Mr. A XXXXXX D $ XXXXXX $ XXXXXX
Mr. C XXXXXX D $ XXXXXX $ XXXXXX

All of the shares of the capital stock of DC represent capital property to the shareholders.

7. On XXXXXXXXXX, DC issued XXXXXXXXXX Class A common voting shares to Mr. C for $XXXXXXXXXX and issued XXXXXXXXXX Class A common voting shares to Mr. A. for $XXXXXXXXXX.

8. On XXXXXXXXXX, Mr. A exchanged his XXXXXXXXXX Class A common voting shares of the capital stock of DC for XXXXXXXXXX Class D preferred non-voting shares of the capital stock of DC with a total redemption value of $XXXXXXXXXX ($XXXXXXXXXX per share).

9. On XXXXXXXXXX, Mr. C exchanged his XXXXXXXXXX Class A common voting shares of the capital stock of DC for XXXXXXXXXX Class D preferred non-voting shares of the capital stock of DC with a total redemption value of $XXXXXXXXXX ($XXXXXXXXXX per share).

10. Subsequent to the above share exchanges on XXXXXXXXXX, Mr. A, Mr. B and Mr. C were each issued XXXXXXXXXX Class A common voting shares of the capital stock of DC for $XXXXXXXXXX.

There has been no significant change to the shareholding of DC described above since the share exchanges and the issuance of the Class A common voting shares in XXXXXXXXXX.

Mr. A, Mr. B and Mr. C collectively have de jure control of DC, prior to the commencement of the Proposed Transactions.

11. Mr. A and his family and Mr. B and his family each live XXXXXXXXXX.

12. DC has the following opening UCC and CEC balances as of XXXXXXXXXX:

a) Class 1: XXXXXXXXXX
b) Class 6: XXXXXXXXXX
c) Class 8: XXXXXXXXXX
d) Class 10: XXXXXXXXXX
e) CEC: XXXXXXXXXX

13. As of XXXXXXXXXX, DC has a XXXXXXXXXX CDA balance.

14. As of XXXXXXXXXX, DC had a RDTOH account balance of $XXXXXXXXXX and a GRIP balance of $XXXXXXXXXX.

15. XXXXXXXXXX

16. ACo. is a TCC and a CCPC that was incorporated on XXXXXXXXXX under the Business Corporations Act by Mr. A. ACo. has a XXXXXXXXXX taxation year-end. Mr. A is the sole director of ACo. and has been the sole director of ACo. since it was incorporated.

17. At the time of the Proposed Transactions, ACo. does not have any business operations.

18. ACo. will file its income tax return with the XXXXXXXXXX Tax Centre and will deal with the XXXXXXXXXX Tax services office.

19. The authorized capital of ACo. consists of the following:

Unlimited Class A Common voting shares
Unlimited Class B Common voting shares
Unlimited Class C Common non-voting shares
Unlimited Class D Common non-voting shares
Unlimited Class E Common non-voting shares
Unlimited Class F Preferred non-voting shares;
Unlimited XXXXXXXXXX Classes G Preferred non-voting shares; and
Unlimited Class H Preferred non-voting shares.

20. At the time of the Proposed Transactions, there is no issued share capital of ACo.

21. ACo. has XXXXXXXXXX opening UCC, CEC, CDA, GRIP and RDTOH balances as of XXXXXXXXXX.

22. BCo. is a TCC and a CCPC that was incorporated on XXXXXXXXXX under the Business Corporations Act by Mr. B. BCo. has a XXXXXXXXXX taxation year-end. Mr. B is the sole director of BCo. and has been the sole director of BCo. since it was incorporated.

23. At the time of the Proposed Transactions, BCo. does not have any business operations.

24. BCo. will file its income tax return with the XXXXXXXXXX Tax Centre and will deal with the XXXXXXXXXX Tax services office.

25. The authorized capital of BCo. consists of the following:

Unlimited Class A Common voting shares;
Unlimited Class B Common voting shares;
Unlimited Class C Common non-voting shares;
Unlimited Class D Common non-voting shares;
Unlimited Class E Common non-voting shares;
Unlimited Class F Preferred non-voting shares;
Unlimited XXXXXXXXXX Classes G Preferred non-voting shares; and
Unlimited Class H Preferred non-voting shares.

26. At the time of the Proposed Transactions, there is no issued share capital of BCo.

27. BCo. has XXXXXXXXXX opening UCC, CEC, CDA, GRIP and RDTOH balances as of XXXXXXXXXX.

PROPOSED TRANSACTIONS

28. Mr. A will transfer XXXXXXXXXX Class A common voting shares and XXXXXXXXXX Class D preferred non-voting shares of the capital stock of DC to ACo. under the provisions of subsection 85(1).

29. As consideration for the transfer of the shares described in Paragraph 28, ACo. will issue XXXXXXXXXX Class A common voting shares of its capital stock to Mr. A, which will have a FMV equal to the amount of the FMV of the property received by ACo. from Mr. A. ACo. will add an amount equal to the PUC of the XXXXXXXXXX Class A common voting shares and XXXXXXXXXX Class D preferred non-voting shares of the capital stock of DC that were transferred to the stated capital of the XXXXXXXXXX Class A common shares of the capital stock of ACo.

30. Mr. A and ACo. will jointly elect under subsection 85(1), in prescribed form and within the time limit described in subsection 85(6), in respect of the transfer of the DC Class A and Class D shares to ACo. Specifically, the Agreed Amount will not be less than the lesser of the amounts specified in subparagraphs 85(1)(c.1)(i) and (ii).

31. The amount added to the stated capital account for the XXXXXXXXXX Class A common voting shares issued by ACo. as consideration for the transferred property will not exceed the maximum amount permitted to be added to the PUC of the XXXXXXXXXX Class A common voting shares having reference to paragraph 84.1(1)(a).

32. Mr. B will transfer XXXXXXXXXX Class A common voting shares of the capital stock of DC to BCo. under the provisions of subsection 85(1).

33. As consideration for the transfer of the shares described in Paragraph 32, BCo. will issue XXXXXXXXXX Class A common voting shares of its capital stock to Mr. B, which will have a FMV equal to the amount of the FMV of the property received by BCo. from Mr. B. BCo. will add an amount equal to the PUC of the XXXXXXXXXX Class A common voting shares of the capital stock of DC that were transferred to the stated capital of the XXXXXXXXXX Class A common shares of the capital stock of BCo.

34. Mr. B and BCo. will jointly elect under subsection 85(1), in prescribed form and within the time limit described by subsection 85(6), in respect of the transfer of the DC Class A shares to BCo. Specifically, the Agreed Amount will not be less than the lesser of the amounts specified in subparagraphs 85(1)(c.1)(i) and (ii).

35. The amount added to the stated capital account for the XXXXXXXXXX Class A common voting shares issued by BCo. as consideration for the transferred property will not exceed the maximum amount permitted to be added to the PUC of the XXXXXXXXXX Class A common voting shares having reference to paragraph 84.1(1)(a).

36. Immediately before the transfers of property described in Paragraphs 39 and 45, DC's property will be classified into three types of property for the purposes of the definition of distribution in subsection 55(1), as follows:

(a) cash or near-cash property, comprising all of the current assets of DC, including any cash, XXXXXXXXXX accounts, accounts receivable, income taxes recoverable, prepaid expenses, inventory and deposits and advances to related persons, shareholders of DC or persons related to such shareholders that are due within the next 12 months or those with no fixed term of repayment;

(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), XXXXXXXXXX; and,

(c) investment 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 property or from a specified investment business.

37. For greater certainty, for the purposes of the distribution, the following principles will apply:

(a) any tax accounts of DC, such as any non-capital loss, XXXXXXXXXX, net capital loss, the balance of any RDTOH, CDA or GRIP, will not be considered property or a liability, as the case may be, for purposes of the Proposed Transactions;

(b) no amount will be considered a liability unless it represents a true legal liability capable of quantification;

(c) the amount of any deferred tax will not be considered to be a property or a liability, as the case may be, for the purposes of the Proposed Transactions; and

(d) any loans to related persons, which have no specified terms of repayment, will be considered current liabilities of DC.

38. For the purposes of determining the net FMV of each type of property, immediately before the transfer of property described in Paragraphs 39 and 45, the liabilities of DC will be allocated to and will be deducted in the calculation of the net FMV of each type of property of DC in the following manner:

(a) current liabilities of DC, other than those specifically mentioned in (c) below, will be allocated to each cash or near-cash property of DC in the proportion that the FMV of each such property is of the FMV of all cash or near-cash property owned by DC, such that the amount of current liabilities so allocated will not exceed the aggregate FMV of all cash or near-cash property of DC;

(b) following the allocation of current liabilities to cash or near-cash property of DC as described in (a), any remaining net FMV of accounts receivable, prepaid expenses and inventory will be reclassified as business property and excluded from the net FMV of DC's cash or near-cash property, to the extent that such property will be collected, sold or consumed by DC or ACo or BCo in the ordinary course of the business to which they relate;

(c) liabilities, other than current liabilities, of DC that relate to a particular property will then be allocated to the particular property to the extent of its FMV (and effectively to the type to which the particular property belongs). Liabilities that pertain to a type of property, but not to a particular property, will then be allocated to that type of property, but not in excess of the net FMV of such type of property after the allocation of liabilities to a particular property, as described herein; and

(d) if any liability (hereinafter referred to as "excess unallocated liability") remain after the allocations described in steps (a) and (c) are made, such excess unallocated liabilities, will then be allocated to the cash or near-cash property, investment property and business property of DC based on the relative net FMV of each type of property prior to the allocation of such excess unallocated liabilities. However, where DC is considered to have a negative amount of a type of property because of Paragraph 38(a) or (c), for the purposes of allocating those remaining liabilities, the net FMV of that type of property will be deemed to be nil resulting in none of those remaining liabilities being allocated to that type of property.

39. Contemporaneously with the transfer described in Paragraph 45, ACo. will receive from DC property of each type of property owned by DC and the aggregate net FMV of the property of each type of property so received will be equal to or approximate the amount that is equal to the proportion of the net FMV of all property of DC of that Type of Property that:

a) the aggregate FMV, immediately before the transfer of the property by DC to ACo., of all of the shares of the capital stock of DC owned by ACo. at that time;

is of

b) the aggregate FMV, immediately before the transfer of the property by DC to ACo., of all of the issued and outstanding shares of the capital stock of DC at that time.

40. The expression "approximate" used above means that the discrepancy between the percentage of the net FMV of all the property of each type of property which ACo. will receive as compared what ACo. would have received had ACo. received its appropriate pro rata share of the net FMV of all the property for that type of property, will not exceed 1%.

41. As consideration for DC's transfer of property to ACo.:

a) ACo. will assume an appropriate amount of the liabilities owing by DC (so that on a net basis ACo. will receive its pro rata share of each type of property owned by DC); and

b) ACo. will issue Class F preferred non-voting shares, which will have an aggregate redemption amount and aggregate FMV of an amount equal to the amount by which the aggregate FMV of the property received by ACo. from DC exceeds the amount of the liabilities of DC assumed by ACo.

42. DC will jointly elect with ACo. in prescribed form and within the time allowed by subsection 85(6), to have the provisions of subsection 85(1) apply to the transfer of each property of DC that is an eligible property transferred to ACo. The Agreed Amount in respect of each of the eligible properties will be:

a) in the case of capital property (other than depreciable property of a prescribed class), an amount equal to the lesser of the amounts described in subparagraph 85(1)(c.1)(i) and (ii);

b) in the case of XXXXXXXXXX, an amount equal to the amount described in subparagraph XXXXXXXXXX; and

c) in the case of depreciable property of a prescribed class, an amount not less than the least of the amounts described in subparagraphs 85(1)(e)(i), (ii) and (iii).

The Agreed Amount in respect of each eligible property so transferred will not be greater than the FMV of such property. The Agreed Amount for a property will be greater than the amount of DC's liabilities so assumed for such property.

43. For purposes of the joint elections in Paragraph 42, the reference to the "undepreciated capital cost to the taxpayer of all of the property of that class immediately before the disposition" in subparagraph 85(1)(e)(i) shall be interpreted to mean the portion of the UCC to the taxpayer of all the property of that class that the FMV of the assets of that class transferred to ACo. is of the FMV of all assets of that class owned by DC immediately before the transfer.

44. The amount added to the stated capital account for the Class F preferred non-voting shares issued by ACo. as partial consideration for the transferred property will be the maximum amount permitted to be added to the PUC of the Class F preferred non-voting shares having reference to subsection 85(2.1).

45. Contemporaneously with the transfer described in Paragraph 39, BCo. will receive from DC property of each type of property owned by DC and the aggregate net FMV of the property of each type of property so received will be equal to or approximate the amount that is equal to the proportion of the net FMV of all property of DC of that type of property that:

a) the aggregate FMV, immediately before the transfer of the property by DC to BCo., of all of the shares of the capital stock of DC owned by BCo. at that time;

is of

b) the aggregate FMV, immediately before the transfer of the property by DC to BCo., of all of the issued and outstanding shares of the capital stock of DC at that time.

46. The expression "approximate" used above means that the discrepancy between the percentage of the net FMV of all the property of each type of property which BCo. will receive as compared what BCo. would have received had BCo. received its appropriate pro rata share of the net FMV of all the property for that type of property, will not exceed 1%.

47. As consideration for DC's transfer of property to BCo.:

a) BCo. will assume an appropriate amount of the liabilities owing by DC (so that on a net basis BCo will receive its pro rata share of each type of property owned by DC); and

b) BCo. will issue Class F preferred non-voting shares, which will have an aggregate redemption amount and aggregate FMV of an amount equal to the amount by which the aggregate FMV of the property received by BCo. from DC exceeds the amount of the liabilities of DC assumed by BCo.

48. DC will jointly elect with BCo. in prescribed form and within the time allowed by subsection 85(6), to have the provisions of subsection 85(1) apply to the transfer of each property of DC that is an eligible property transferred to BCo. The Agreed Amount in respect of each of the eligible properties will be:

a) in the case of capital property (other than depreciable property of a prescribed class), an amount equal to the lesser of the amounts described in subparagraph 85(1)(c.1)(i) and (ii);

b) in the case of XXXXXXXXXX, an amount equal to the amount described in subparagraph XXXXXXXXXX; and

c) in the case of depreciable property of a prescribed class, an amount not less than the least of the amounts described in subparagraphs 85(1)(e)(i), (ii) and (iii).

The Agreed Amount in respect of each eligible property so transferred will not be greater than the FMV of such property. The Agreed Amount for a property will be greater than the amount of DC's liabilities so assumed for such property.

49. For purposes of the joint elections in Paragraph 48, the reference to the "undepreciated capital cost to the taxpayer of all of the property of that class immediately before the disposition" in subparagraph 85(1)(e)(i) shall be interpreted to mean the portion of the UCC to the taxpayer of all the property of that class that the FMV of the assets of that class transferred to BCo. is of the FMV of all assets of that class owned by DC immediately before the transfer.

50. The amount added to the stated capital account for the Class F preferred non-voting shares issued by BCo. as partial consideration for the transferred property will be the maximum amount permitted to be added to the PUC of the Class F preferred non-voting shares having reference to subsection 85(2.1).

51. Immediately after the transfers described in Paragraphs 39 and 45 above:

a) ACo. will redeem all the Class F preferred non-voting shares held by DC for their aggregate redemption amount in exchange for Promissory Note #1. DC will accept Promissory Note #1 as payment in full for the Class F preferred non-voting shares that it holds in the capital stock of ACo., and

b) the principal amount and FMV of Promissory Note #1 will be equal to the aggregate redemption amount of the redeemed Class F preferred non-voting shares.

52. DC will purchase for cancellation the XXXXXXXXXX Class A common voting shares and XXXXXXXXXX Class D preferred non-voting shares that ACo. holds in the capital stock of DC in exchange for Promissory Note #2. ACo. will accept Promissory Note #2 as payment in full for the XXXXXXXXXX Class A common shares and XXXXXXXXXX Class D preferred non-voting shares that it holds in DC.

53. Promissory Note #1 will be set-off against Promissory Note #2.

54. Immediately after the transfers described in Paragraphs 39 and 45 above:

a) BCo. will redeem all the Class F preferred non-voting shares that DC holds in BCo. for their aggregate redemption amount in exchange for Promissory Note #3. DC will accept Promissory Note #3 as payment in full for the Class F preferred non-voting shares that it holds in BCo.; and

b) the principal amount and FMV of Promissory Note #3 will be equal to the aggregate redemption amount of the redeemed Class F preferred non-voting shares.

55. DC will purchase for cancellation the XXXXXXXXXX Class A common voting shares that BCo. holds in DC in exchange for Promissory Note #4. BCo. will accept Promissory Note #4 as payment in full for the XXXXXXXXXX Class A common shares that it holds in DC.

56. Promissory Note #3 will be set-off against under Promissory Note #4.

ADDITIONAL INFORMATION

57. Additional material facts relating to the persons involved in this Advanced Income Tax Ruling are as stated below:

XXXXXXXXXX
Business Number: XXXXXXXXXX
Tax Services Office: XXXXXXXXXX
Tax Centre: XXXXXXXXXX
Address: XXXXXXXXXX

XXXXXXXXXX
Social Insurance Number: XXXXXXXXXX
Tax Services Office: XXXXXXXXXX
Tax Centre: XXXXXXXXXX
Address: XXXXXXXXXX

XXXXXXXXXX
Social Insurance Number: XXXXXXXXXX
Tax Services Office: XXXXXXXXXX
Tax Centre: XXXXXXXXXX
Address: XXXXXXXXXX

XXXXXXXXXX
Social Insurance Number: XXXXXXXXXX
Tax Services Office: XXXXXXXXXX
Tax Centre: XXXXXXXXXX
Address: XXXXXXXXXX

58. No property has or will become property of DC and no liabilities have been or will be incurred or discharged by DC in contemplation of and before the Proposed Transactions, except as otherwise described in the Proposed Transactions.

59. Except as described in this letter, Mr. A, Mr. B and Mr. C will not dispose of any shares of the capital stock of DC as part of the series of transactions or events that includes the Proposed Transactions. Furthermore, Mr. A will not dispose of any shares of the capital stock of ACo. and Mr. B will not dispose of any shares of the capital stock of BCo., as part of the series of transactions or events that includes the Proposed Transactions.

60. Except as described in this letter, ACo. and BCo. will not dispose of any shares of the capital stock of DC as part of the series of transactions or events that includes the Proposed Transactions.

61. Except as described in the Proposed Transactions, no acquisition of control of one of the corporations described herein is contemplated.

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

63. None of the shares of DC, ACo., or BCo. is or will be, at any time during the series of transactions or events that includes the Proposed Transactions:

a) the subject of any undertaking or agreement that is a guarantee agreement, within the meaning referred to in subsection 112(2.2);

b) the subject of a dividend rental arrangement;

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

d) issued for consideration that is or includes:

(i) an obligation of the type described in subparagraph 112(2.4)(b)(i), other than an obligation of a corporation that is related (otherwise than by reason of a right referred to in paragraph 251(5)(b));

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

e) issued or acquired as part of a transaction or event or series of transactions or events of the type describe in subsection 112(2.5).

64. Each of DC, ACo. and BCo. 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.

65. Neither DC, ACo., nor BCo. has any expectation or intention 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 to whom it is not related or to a partnership, subsequent to the Proposed Transactions, other than in the ordinary course of such corporation's business.

PURPOSE OF THE PROPOSED TRANSACTIONS

66. Mr. A, Mr. B, and Mr. C wish to carry on XXXXXXXXXX businesses independent of one another. The Proposed Transactions will allow Mr. A, Mr. B, and Mr. C and their respective immediate family to have direct and separate control over their pro rata share of DC's property so they can run their businesses independently.

RULINGS

Provided that the above statements of facts, Proposed Transactions, additional information and purpose of the Proposed Transactions thereof are accurate and constitute complete disclosure of all relevant facts and proposed transactions, our rulings are as follows:

A. Subject to the application of subsection 69(11), provided that the requisite joint elections are filed in prescribed form and manner within the prescribed time 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, the provisions of subsection 85(1) will apply to:

(a) DC's transfers of property to ACo. and BCo. described in Paragraphs 39 and 45;

(b) the transfer of DC Class A common voting shares and DC Class D preferred non-voting shares by Mr. A to ACo. described in Paragraph 28; and

(c) the transfer of DC Class A common voting shares by Mr. B to BCo. described in Paragraph 32,

such that the Agreed Amount in respect of each such transfer will be deemed pursuant to paragraph 85(1)(a) to be the transferor's proceeds of disposition of the particular property and the transferee's cost thereof.

For greater certainty, paragraph 85(1)(e.2) will not apply to the transfers referred to herein.

B. For purposes of the Ruling A when determining the Agreed Amount of depreciable property in the course of the transfers described in Paragrahs 39 and 45, the reference to the "undepreciated capital cost to the taxpayer of all of the property of that class immediately before the disposition" in subparagraph 85(1)(e)(i) shall mean that portion of the undepreciated capital cost to the taxpayer of all the property of that class that the FMV of the assets of that class transferred to the taxpayer (ACo. or BCo., as the case may be) is of the FMV of all assets of that class owned by DC immediately before the transfer.

C. As a result of the redemption by ACo. of the Class F preferred non-voting shares of its capital stock owned by DC as described in Paragraph 51 and the purchase for cancellation or redemption, as the case may be, by DC of the Class A common voting shares and the Class D preferred non-voting shares of its capital stock owned by ACo. as described in Paragraph 52, by virtue of subsection 84(3):

(a) ACo. 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 ACo. in respect of its redemption of the Class F preferred non-voting shares of its capital stock owned by DC exceeds the PUC of such class of shares immediately before the redemption;

(b) DC will be deemed to have paid, and ACo. will be deemed to have received, a taxable dividend equal to the amount by which the amount paid by DC in respect of the repurchase of the Class A common voting shares of the capital stock of DC owned by ACo. exceeds the PUC attributable to such class of shares immediately before the purchase for cancellation, and DC will be deemed to have paid, and ACo. will be deemed to have received, a taxable dividend equal to the amount by which the amount paid by DC in respect of its redemption or repurchase of the Class D preferred non-voting shares of the capital stock of DC owned by ACo. exceeds the PUC of such class of shares immediately before the redemption or the repurchase.

D. As a result of the redemption by BCo. of the Class F preferred non-voting shares of its capital stock owned by DC as described in Paragraph 54 and the purchase for cancellation by DC of the Class A common voting shares of its capital stock owned by BCo. as described in Paragraph 55, by virtue of subsection 84(3):

(a) BCo. 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 BCo. in respect of its redemption of the Class F preferred non-voting shares of its capital stock owned by DC exceeds the PUC of such class of shares immediately before the redemption;

(b) DC will be deemed to have paid, and BCo. will be deemed to have received, a taxable dividend equal to the amount by which the amount paid by DC in respect of the repurchase of the Class A common voting shares of the capital stock of DC owned by BCo. exceeds the PUC attributable to such class of shares immediately before the purchase for cancellation.

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 taxation year in which such 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 by virtue of paragraph (c) of the definition of "excepted dividend" in section 187.1;

(f) will not be subject to tax under Part VI.1 by virtue of paragraph (a) of the definition of "excluded dividend" in subsection 191(1); and

(g) will not be subject to tax under Part IV except to the extent that the payer corporation is entitled to a dividend refund for its taxation year in which it paid such dividend, which, for greater certainty, will include the taxable dividends described in Rulings C and D above.

F. Provided that, as part of the series of transaction 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 property in the circumstances described in subparagraph 55(3.1)(b)(iii);

(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 and D above and for greater certainty, subsection 55(3.1) will not apply to deny the exemption under paragraph 55(3)(b).

G. The set-off and cancellation of Promissory Note #1 against Promissory Note #2 described in paragraph 53 above will not, in and of itself, give rise to a "forgiven amount" within the meaning of subsections 80(1) or 80.01(1). In addition, neither DC nor ACo. will otherwise realize a gain or incur any loss as a result of such set-off and cancellation.

H. The set-off and cancellation of Promissory Note #3 against Promissory Note #4 described in paragraph 56 above will not, in and of itself, give rise to a "forgiven amount" within the meaning of subsections 80(1) or 80.01(1). In addition, neither DC nor BCo. will otherwise realize a gain or incur any loss as a result of such set-off and cancellation.

I. The provisions of subsections 15(1), 56(2), 56(4) and 246(1) will not apply to the Proposed Transactions, in and by themselves.

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

These rulings are given subject to the limitations and qualifications set forth in Information Circular 70-6R6 issued on August 29, 2014, 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 has made any determination in respect of:

a) the ACB, PUC or FMV of any shares referred to herein;

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

c) the safe-income on hand attributable to any shares of any corporation; or

d) any other tax consequences relating to the definitions, facts and Proposed Transactions described herein, 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.

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 and 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 F 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, dated March 28, 2013.

As a result of the redemptions and/or the purchases for cancellation as provided for in Paragraphs 51, 52, 54 and 55 of the Proposed Transactions, a problem of circularity may arise when computing the Part IV tax and the dividend refund of each corporation. You do not propose to enter into transactions that would avoid the potential circularity issue. Therefore, we do not provide any comment on that possible issue.

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 Ruling Directorate
Legislative Policy and Regulatory Affairs Branch