2016 Ruling 2016-0635101R3 - 55(3)(a) Spin-Off to Use Parent Losses

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: Where 13(21.1) denies a terminal loss on the disposition of a building and deducts the terminal loss from the proceeds of disposition of associated land, are the proceeds of disposition referred to those that are the agreed amount pursuant to an election under 85(1)?

Position: Yes.

Reasons: The agreed amount is, pursuant to 85(1)(a), deemed to be the proceeds of disposition of the property and it is those proceeds of disposition to which 13(21.1) applies (XXXXXXXXXX).

XXXXXXXXXX						2016-063510

XXXXXXXXXX, 2016

Dear XXXXXXXXXX:

Re: XXXXXXXXXX
Advance Income Tax Ruling

We are writing in response to your letter of XXXXXXXXXX, as most recently amended by your letter of XXXXXXXXXX, 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.

To the best of your knowledge and that of the Applicants, none of the issues involved in this Ruling request is:

(a) in a previously filed return of the Applicants or a related person;

(b) being considered by a Tax Services Office or Taxation Centre in connection with a previously filed tax return of the Applicants or a related person;

(c) under objection by the Applicants or a related person;

(d) before the courts or, if a judgment has been issued, a matter in respect of which the time limit for appeal to a higher court has expired, or

(e) the subject of an advance income tax ruling previously considered by the Income Tax Rulings Directorate.

The Applicants have represented that the transactions described herein will not result in the Applicants or any related person being unable to pay its existing outstanding tax liabilities.

DEFINITIONS

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

“Act” means the Income Tax Act, R.S.C. 1985 (5th Supp.) c. 1, as amended to the date hereof;

“ACB” or “adjusted cost base” has the meaning assigned by section 54 and subsection 248(1);

“Applicants” means Parent and Subco;

“arm’s length” has the meaning assigned by subsection 251(1);

“Assumed Liabilities” is defined in Paragraph 31 and consists mainly of unascertained amounts that are generally assumed in connection with a purchase of real property, such as environmental liabilities;

“Buildings” refers to the XXXXXXXXXX

XXXXXXXXXX

“Canadian corporation” has the meaning assigned by subsection 89(1);

“capital property” has the meaning assigned by section 54;

“Controlling Shareholder” means XXXXXXXXXX resident in Canada;

“Corporations Act I” means the Business Corporations Act XXXXXXXXXX;

“Corporations Act II” means the XXXXXXXXXX Business Corporations Act, XXXXXXXXXX;

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

“CRA” means the Canada Revenue Agency;

“depreciable property” has the meaning assigned in subsection 13(21);

XXXXXXXXXX

XXXXXXXXXX

“Exchanged Shares” is defined in Paragraph 26;

“FMV” or “fair market value” means the highest price expressed in money or money’s worth obtainable in an open and unrestricted market between knowledgeable, informed and prudent parties acting at arm’s length and under no compulsion to act;

“Lands” means the parcels of land, determined separate and apart from any fixtures thereon or improvements XXXXXXXXXX

“net capital loss” has the meaning assigned in subsection 111(8);

“Newco” is defined in Paragraph 28;

“Newco Note” is defined in Paragraph 34;

“Newco Preferred Shares” is defined in Paragraph 29;

“Newco Redemption Amount” is defined in Paragraph 34;

“Nominee” means XXXXXXXXXX;

“non-capital loss” has the meaning assigned in subsection 111(8);

“Other Land” is defined in Paragraph 11;

“PUC” has the meaning assigned to “paid-up capital” in subsection 89(1);

“Paragraph” refers to a numbered paragraph in this letter;

“Parent” means XXXXXXXXXX;

“Parking Lot” is defined in Paragraph 11;

“Property” is defined in Paragraph 11;

“Property Sale Agreement” is defined in Paragraph 14;

“Proposed Transactions” means the transactions described in Paragraphs 24 to 39;

“public corporation” has the meaning assigned by subsection 89(1);

“Purchaser” is defined in Paragraph 14;

“Regulations” means the Income Tax Regulations promulgated under the Act;

“Subco” means XXXXXXXXXX;

“Subco A Common Shares” is defined in Paragraph 25;

“Subco A Preferred Shares” is defined in Paragraph 25;

“Subco Note” is defined in Paragraph 35;

“Subco Old Common Shares” is defined in Paragraph 10 and “Subco Old Common Share” means one of such shares;

“Subco Old Preferred Shares” is defined in Paragraph 10;

“Subco Redemption Amount” is defined in Paragraph 35;

“synthetic equity arrangement” has the meaning given in subsection 248(1);

“UCC” or “undepreciated capital cost” has the meaning given in subsection 13(21);

XXXXXXXXXX

XXXXXXXXXX

Except as otherwise noted, all statutory references in this letter are references to the provisions of the Act and all terms and conditions used herein that are defined in the Act have the meaning given in such definition unless otherwise indicated. Unless otherwise noted, all references to currency are to Canadian dollars.

Facts

1. Parent is a taxable Canadian corporation governed by the Corporations Act I XXXXXXXXXX. The taxation year of Parent ends on XXXXXXXXXX.

2. Parent’s head office is located at XXXXXXXXXX. Parent files its tax and information returns at the XXXXXXXXXX Tax Centre and deals with the XXXXXXXXXX Tax Services Office.

3. Parent is controlled by, and related to, the Controlling Shareholder.

4. Parent owns shares directly or indirectly in subsidiary corporations XXXXXXXXXX.

5. Subco is a taxable Canadian corporation governed by the Corporations Act I, whose taxation year ends on XXXXXXXXXX.

6. Subco was formed by a vertical amalgamation on XXXXXXXXXX of XXXXXXXXXX with its wholly-owned subsidiary corporation, XXXXXXXXXX.

7. Subco’s head office, where it and other Canadian corporations in the Parent group of companies carry on certain of their business activities, is located at XXXXXXXXXX. Subco files its tax and information returns at the XXXXXXXXXX Tax Centre and deals with the XXXXXXXXXX Tax Services Office.

8. Subco principally provides XXXXXXXXXX (as well as to another of Parent’s subsidiary corporations), and provides XXXXXXXXXX for the benefit of Parent and its subsidiary corporations.

9. Subco reports its “Canadian tax results” (within the meaning of subsection 261(1)) in Canadian currency.

10. Subco is authorized to issue an unlimited number of common shares (“Subco Old Common Shares”) and an unlimited number of non-voting, redeemable and retractable preferred shares (“Subco Old Preferred Shares”). Subco (XXXXXXXXXX) has been a wholly-owned subsidiary of Parent (or its predecessors) since XXXXXXXXXX with all of its issued and outstanding shares being owned by Parent, present particulars of which are approximately as follows:

No. Shares	Description		FMV			ACB		PUC

		Subco Old
XXXX		Common Shares	XXXX			XXXX		XXXX

		Subco Old
XXXX		Preferred Shares	XXXX			XXXX		XXXX

11. Subco is the beneficial owner of the Lands, Buildings, a parking lot (the “Parking Lot”) and other improvements on the Lands in XXXXXXXXXX (together referred to as the “Property”). XXXXXXXXXX.

12. The Lands, Buildings, Parking Lot and other improvements constitute capital property of Subco and each of the Lands is an “eligible property” of Subco within the meaning of subsection 85(1.1). Each of the Buildings is a depreciable property of Subco included in a separate class that is in Class 1 of Schedule II to the Regulations and the Parking Lot is a depreciable property included in Class 17 of Schedule II to the Regulations.

13. Nominee is a taxable Canadian corporation governed by the Corporations Act I, all of the issued and outstanding shares of which are owned by Parent. Nominee holds title to the Property as nominee for and on behalf of Subco.

14. Effective XXXXXXXXXX, Subco entered into an agreement of purchase and sale (the “Property Sale Agreement”) to sell the Property for an amount equal to its FMV to XXXXXXXXXX (“Purchaser”), XXXXXXXXXX.

15. In respect of the Proposed Transactions, the Controlling Shareholder, Parent and Subco have each dealt with, and will continue to deal with, the Purchaser at arm’s length.

16. Subco is not prohibited from assigning its rights as vendor under the Property Sale Agreement so that such rights may be assigned to Newco and Parent, respectively.

17. The Property Sale Agreement provides that Nominee will deliver title to the Property to Purchaser at closing.

18. XXXXXXXXXX.

19. XXXXXXXXXX, it is anticipated that substantially all of the purchase price for the Property will be allocated to the Lands, with the remainder of the purchase price allocated to the Buildings (to the extent of $XXXXXXXXXX for each Building), the Parking Lot (similarly, to the extent of $XXXXXXXXXX) and any other improvements forming part of the Property.

20. Subco has computed the relevant amounts in respect of the Lands, the Buildings and the Parking Lot, as at XXXXXXXXXX, as follows:

Description		Class	ACB/Capital Cost	Cost Amount	FMV (estimated)

XXXXXXXXXX

21. The FMV of each of the XXXXXXXXXX and the Other Land is generally equal to that proportion of the aggregate FMV of the Lands that the site area of such parcel is of the aggregate site area of the Lands. At the time of the transfer of the Property by Subco to Newco, described in Paragraph 31, the FMV of the XXXXXXXXXX will exceed the cost amount of the XXXXXXXXXX and the FMV of the XXXXXXXXXX will exceed the cost amount of the XXXXXXXXXX. All of the XXXXXXXXXX is subjacent to, or immediately contiguous to and necessary for the use of, the XXXXXXXXXX and all of the XXXXXXXXXX is subjacent to, or immediately contiguous to and necessary for the use of, the XXXXXXXXXX.

22. In the absence of the Proposed Transactions, it is estimated that a taxable capital gain would be realized by Subco on the sale of the Property (after taking into account subsection 13(21.1) of the Act).

23. Parent has net capital losses and non-capital losses, the aggregate amount of which exceeds the amount of the anticipated taxable capital gain described in Paragraph 22.

Proposed Transactions

The following transactions will be completed in the order described below.

24. Parent will transfer all of the Subco Old Preferred Shares to Subco in consideration for one newly issued Subco Old Common Share XXXXXXXXXX. Parent and Subco will jointly elect in prescribed form and within the time limits referred to in subsection 85(6) to have the rules set out in subsection 85(1) apply to the transfer of the Subco Old Preferred Shares to Subco. The agreed amount specified in the election will be equal to the lesser of the FMV of the transferred Subco Old Preferred Shares immediately before the transfer, and Parent’s ACB of those shares, which is a nominal amount. XXXXXXXXXX will be added to the stated capital account of the Subco Old Common Shares pursuant to section XXXXXXXXXX of the Corporations Act I.

25. Subco will file articles of amendment pursuant to which the share capital of Subco will be amended:

(a) to authorize the issuance of an unlimited number of Class A preference shares (the “Subco A Preferred Shares”), and

(b) to authorize the issuance of an unlimited number of Class A common shares (the “Subco A Common Shares”).

Each Subco A Preferred Share will be non-voting and will be redeemable and retractable for an amount which, in aggregate, will be equal to the FMV of the consideration received by Subco in exchange for the issuance of such Subco A Preferred Share. The terms of the Subco A Preferred Shares will include a price adjustment clause. In order to distinguish the Subco A Preferred Shares from the Subco Old Preferred Shares, the Subco A Preferred Shares will be entitled to a XXXXXXXXXX% non-cumulative dividend.

In order to distinguish them from the Subco Old Common Shares, the Subco A Common Shares will be entitled to XXXXXXXXXX votes per share. Holders of Subco A Common Shares will rank pari passu with holders of the Subco Old Common Shares in the distribution of assets upon the liquidation, dissolution or winding-up of Subco, and will rank equally with holders of Subco Old Common Shares with respect to dividends.

26. Pursuant to a share exchange agreement, Parent will exchange all of the Subco Old Common Shares owned by it, being all of the issued Subco Old Common Shares (the “Exchanged Shares”), for

(a) newly issued Subco A Preferred Shares having an aggregate FMV equal to the FMV of the Property, net of the Assumed Liabilities; and

(b) newly issued Subco A Common Shares having an aggregate FMV equal to the excess of the FMV of the Exchanged Shares over the FMV of the Subco A Preferred Shares issued in exchange for the Exchanged Shares, and the Exchanged Shares will be cancelled.

27. In connection with the exchange of the Exchanged Shares:

(a) Subco will not make a joint election under subsection 85(1) with Parent; and

(b) the aggregate amount to be added by Subco to the stated capital accounts of the Subco A Preferred Shares and the Subco A Common Shares issued on the exchange of the Exchanged Shares will be equal to the aggregate PUC of the Exchanged Shares immediately before such exchange, and such PUC will be allocated between the Subco A Preferred Shares and Subco A Common Shares based on the proportion that the FMV of the Subco A Preferred Shares or the Subco A Common Shares, as the case may be, issued in exchange for the Exchanged Shares, is of the FMV of all of the shares of Subco issued by Subco for the Exchanged Shares.

28. Parent will incorporate a new corporation (“Newco”) under the Corporations Act I. Newco will report its “Canadian tax results” (within the meaning of subsection 261(1)) in Canadian currency.

29. Newco’s authorized share capital will include an unlimited number of common shares, and an unlimited number of preferred shares (“Newco Preferred Shares”). Each Newco Preferred Share will be a non-voting share and will be redeemable and retractable for an amount equal to the FMV of the consideration received by Newco in exchange for the issuance of such Newco Preferred Share. The terms of the Newco Preferred Shares will include a price adjustment clause. As with the Subco A Preferred Shares, the Newco Preferred Shares will be entitled to a XXXXXXXXXX% non-cumulative dividend.

30. Parent will transfer its Subco A Preferred Shares to Newco, in consideration for XXXXXXXXXX newly issued common shares of Newco. Parent and Newco will jointly elect in prescribed form and within the time limits referred to in subsection 85(6) to have the rules set out in subsection 85(1) apply to the transfer of the Subco A Preferred Shares to Newco. The agreed amount specified in the election will be equal to the FMV of the transferred Subco A Preferred Shares immediately before the transfer, which will be less than Parent’s ACB of those shares. The transfer of the Subco A Preferred Shares to Newco for proceeds of disposition equal to the agreed amount will give rise to a capital loss to which subsection 40(3.4) will apply. XXXXXXXXXX will be added to the stated capital account of the Newco common shares pursuant to section XXXXXXXXXX of the Corporations Act I.

31. Subco will transfer the Property to Newco in consideration for the assumption by Newco of the liabilities of Subco that relate to the Property, if any (the “Assumed Liabilities”), and Newco will issue XXXXXXXXXX Newco Preferred shares to Subco having an aggregate redemption amount equal to the aggregate FMV of the Property, less the Assumed Liabilities. The aggregate amount of any Assumed Liabilities assumed in respect of any of the XXXXXXXXXX and the Other Land will not exceed the lesser of the FMV and cost amount of such Land to Subco, and the aggregate amount of the Assumed Liabilities assumed in respect of either of the Buildings or any other improvement will not exceed the lesser of the FMV and cost amount of such Building or improvement to Subco, in each case immediately before the transfer.

32. Subco and Newco will jointly elect in prescribed form and within the time limits referred to in subsection 85(6) to have the rules set out in subsection 85(1) apply to the transfer of the Lands to Newco. In respect of the XXXXXXXXXX, the parties will elect at an agreed amount that, after having regard to the application of subsection 13(21.1) to each such transfer, will not result in the realization of any capital loss in respect of the transfer of such Lands to Newco; that is, in respect of each parcel of Land so transferred, they will elect an amount at least equal to the aggregate of the ACB of the particular Land and the terminal loss that, but for the application of subsections 13(21.1) and (21.2), would otherwise be determined for the purposes of subsection 20(16) on the disposition of the Building situate upon that Land. For greater certainty, each agreed amount will neither be greater than the FMV of the particular Land at the time of the transfer nor less than the lesser of the amounts set out in subparagraphs 85(1)(c.1)(i) and (ii) in respect of that Land at that time. No election will be made under subsection 85(1) in respect of the transfer by Subco to Newco of any property included in the Property other than the Lands.

33. The amount that will be added to the stated capital account of the Newco Preferred Shares pursuant to section XXXXXXXXXX of the Corporations Act I will be equal to the aggregate of the agreed amount in respect of the Lands and the FMV of the Buildings, the Parking Lot and any other improvements forming part of the Property, less the amount of the Assumed Liabilities.

34. Immediately after the transfer described in Paragraph 31, Newco will redeem all of the Newco Preferred Shares held by Subco for an amount equal to the aggregate redemption price and FMV of such shares (the “Newco Redemption Amount”). Newco will pay the Newco Redemption Amount by issuing a Canadian dollar-denominated non-interest bearing demand promissory note (the “Newco Note”) to Subco having a principal amount and FMV equal to the Newco Redemption Amount. Subco will accept the Newco Note as full payment of the Newco Redemption Amount.

35. Immediately after the redemption of the Newco Preferred Shares described in Paragraph 34, Subco will redeem all of the Subco A Preferred Shares held by Newco for an amount equal to the aggregate redemption price and FMV of such shares (the “Subco Redemption Amount”), which amount will be equal to the Newco Redemption Amount. Subco will pay the Subco Redemption Amount by issuing a Canadian dollar-denominated non-interest bearing demand promissory note (the “Subco Note”) to Newco having a principal amount and FMV equal to the Subco Redemption Amount. Newco will accept the Subco Note as full payment of the Subco Redemption Amount.

36. The obligations under the Newco Note held by Subco and the Subco Note held by Newco will be settled by way of set-off, one against the other. At the time of settlement, the principal amount and FMV of the Newco Note will be equal to the principal amount and FMV of the Subco Note.

37. Immediately following the set-off of the Newco Note and Subco Note described in Paragraph 36, Parent, as the sole shareholder of Newco, will resolve to wind up Newco. Under the terms of the winding-up of Newco, Newco will assign and distribute to Parent all of its property, which will consist of the Property acquired by it from Subco and any cash received by Newco from Parent in connection with its incorporation, and Parent will assume the Assumed Liabilities, if any. Following the distribution of all of its property, the filing of final tax returns and receipt of the relevant clearance certificates and consents, Articles of Dissolution will be filed and Newco will be dissolved.

38. Shortly following the commencement of the winding-up of Newco described in Paragraph 37, Parent will sell the Property to Purchaser in accordance with the terms of the Property Sale Agreement and will receive FMV consideration of approximately $XXXXXXXXXX that will give rise to the realization by Parent of a capital gain. Parent will apply a portion of its net capital losses and/or non-capital losses, or a combination of both, to reduce its taxable income resulting from the sale of the Property.

39. XXXXXXXXXX.

Additional Information

40. The Proposed Transactions will be legally effective.

41. Neither of Newco nor Subco is or will be at any time during the implementation of the Proposed Transactions:

(a) a “specified financial institution” as defined in subsection 248(1); or

(b) a corporation described in any of paragraphs (a) to (f) of the definition of “financial intermediary corporation” in subsection 191(1).

42. At no time during the implementation of the Proposed Transactions will either of the Newco Preferred Shares or the Subco A Preferred Shares be:

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

(b) the subject of a “dividend rental arrangement” as contemplated in subsection 112(2.3) and as defined in subsection 248(1);

(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); or

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

43. No arrangement will be entered into as a part of the Proposed Transactions that could constitute a “synthetic equity arrangement”.

44. XXXXXXXXXX.

Purpose of Proposed Transactions

45. The purpose of the Proposed Transactions is to achieve a consolidated tax position for the Parent’s Canadian group of companies by transferring the Property now held by Subco to Parent in order to allow for the application of Parent’s net capital losses and non-capital losses against the taxable capital gain that will be realized on the sale of the Property to Purchaser.

46. It is also a purpose of the transactions proposed in Paragraphs 24 through 27 of the Proposed Transactions to arrange that, on the transfer of the Property to Parent on a rollover basis that is in consideration for the relinquishment by Parent of shares of Subco whose FMV is equal to the proportion that the FMV of the Property bears to all of the property of Subco immediately before the commencement of the Proposed Transactions, there will be a relinquishment of a corresponding proportion of the aggregate ACB and PUC of all of the shares of Subco owned by Parent immediately before commencement of the Proposed Transactions.

Rulings

Provided the above statements are accurate and constitute complete disclosure of all the relevant facts, proposed transactions and purposes of the Proposed Transactions, the Proposed Transactions are completed in the manner described above, and there are no other transactions which may be relevant to the rulings requested, our rulings are as follows:

A. The provisions of subsection 86(1) will apply to the exchange of shares described in Paragraph 26.

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

(a) the transfer of the Subco Old Preferred Shares by Parent to Subco, as described in Paragraph 24;

(b) the transfer of the Subco A Preferred Shares by Parent to Newco, as described in Paragraph 30; and

(c) the transfer of each of the Lands by Subco to Newco, as described in Paragraph 31;

such that the agreed amount in respect of each such transfer will be deemed to be the transferor’s proceeds of disposition of the property (subject to the application of subsections 13(21.1) and (21.2) in the case of the transfer of each of the XXXXXXXXXX by Subco to Newco) and the transferee’s cost thereof. For greater certainty, paragraph 85(1)(e.2) will not apply to the transfers referred to herein.

By virtue of subsection 40(3.3) and paragraph 40(3.4)(a), the loss realized by Parent on the disposition of the Subco A Preferred Shares to Newco, as described in Paragraph 30, will be deemed to be nil and the amount of such loss as otherwise determined under the Act (without reference to paragraph 40(2)(g) and subsection 40(3.4) but, for greater certainty, taking into account the application of subsection 112(3)), will, for the purposes of paragraph 40(3.4)(b), be deemed to be a loss of Parent from the disposition of the Subco A Preferred Shares at the time that -- having regard to the application of paragraph 40(3.5)(d) on the redemption of the Subco A Preferred Shares described in Paragraph 35 that deems Parent to own the Subco A Preferred Shares while it is affiliated with Subco -- is immediately before the first time, after the disposition, that any of the events described in paragraph 40(3.4)(b) occurs.

C. Subject to subsection 13(21.2), the provisions of paragraph 13(21.1)(a) will apply to Subco’s transfer of the XXXXXXXXXX to Newco described in Paragraph 31. In particular, notwithstanding the amount otherwise determined under Ruling B to be Subco’s proceeds of disposition of the XXXXXXXXXX, as the case may be, such proceeds of disposition will be redetermined under paragraph 13(21.1)(a).

D. As a result of the redemption by Newco of the Newco Preferred Shares held by Subco as described in Paragraph 34:

(a) by virtue of paragraphs 84(3)(a) and 84(3)(b) Newco will be deemed to have paid, and Subco will be deemed to have received, a taxable dividend equal to the amount by which the amount paid to redeem the Newco Preferred Shares held by Subco exceeds the PUC thereof immediately before such redemption;

(b) the taxable dividend deemed to be received by Subco as a result of the redemption referred to in Ruling D(a) will be included in computing Subco’s income pursuant to paragraph 12(1)(j), and will be deductible by Subco in computing its taxable income pursuant to subsection 112(1) and, for greater certainty, such deduction will not be prohibited by any of subsections 112(2.1), 112(2.2), 112(2.3) or 112(2.4);

(c) the taxable dividend deemed to have been received by Subco as a result of the redemption referred to in Ruling D(a) will be excluded from the proceeds of disposition of such shares by virtue of paragraph (j) of the definition of “proceeds of disposition” in section 54;

(d) the taxable dividend referred to in Ruling D(a) will, by virtue of subsection 112(3), reduce a loss, if any, in respect of the disposition of the share on which the particular dividend is deemed to be received; and

(e) the taxable dividend referred to in Ruling D(a) will not be subject to tax under Part IV.1 or Part VI.1.

D.1 As a result of the redemption by Subco of the Subco A Preferred Shares held by Newco as described in Paragraph 35, provided the PUC of those shares immediately before such redemption equals or exceeds the amount paid to redeem the shares, no taxable dividend will be deemed to be paid by Subco and received by Newco by virtue of paragraphs 84(3)(a) and 84(3)(b).

E. The cost to Subco of the Newco Note will be equal to the FMV of the Newco Note at the time of receipt.

F. The cost to Newco of the Subco Note will be equal to the FMV of the Subco Note at the time of receipt.

G. The settlement of the Newco Note and the Subco Note by way of set-off one against the other, described in Paragraph 36, will not give rise to a “forgiven amount” within the meaning of subsection 80(1) or 80.01(1), and neither Subco nor Newco will realize any gain or sustain any loss as a result of such set-off.

H. Provided that there is no disposition or increase in interest described in any of subparagraphs 55(3)(a)(i) to (v) as part of a series of transactions or events that includes any of the Proposed Transactions, by virtue of paragraph 55(3)(a) the provisions of subsection 55(2) will not apply to the taxable dividend described in Ruling D(a). For greater certainty, the Proposed Transactions described herein, in and by themselves, will not be considered to result in any disposition or increase in interest described in any of subparagraphs 55(3)(a)(i) to (v).

I. The provisions of subsections 15(1), 56(2), 69(4), 69(11) and 246(1) will not apply to any of the Proposed Transactions, in and by themselves.

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

Our Comments

Nothing in this letter should be construed as implying that the CRA has confirmed, reviewed, made any determination, or accepted any method for the determination in respect of:

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

(b) any other tax account of any corporation referred to herein;

(c) the characterization of any property described herein to the holder thereof; or

(d) any other tax consequence relating to the facts, transactions, 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 (within the meaning assigned by subsection 248(10)) 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 or the redemption amount of the shares issued as consideration, whether pursuant to a price adjustment clause or otherwise, will be effective retroactively to the time of the transfer or issuance of shares. Furthermore, none of the rulings given in this letter are intended to apply to, or in the event of, the operation of a price adjustment clause, since such adjustment will be due to circumstances that do not constitute proposed transactions that are seriously contemplated. The general position of the CRA with respect to price adjustment clauses is stated in Income Tax Folio S4-F3-C1, Price Adjustment Clauses, dated March 28, 2013.

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

Yours truly,

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