2019 Ruling 2018-0774201R3 - Split-up Butterfly

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

Principal Issues: Do the Proposed Transactions qualify for the butterfly exemption under paragraph 55(3)(b)?

Position: Yes.

Reasons: Standard butterfly reorganization.

XXXXXXXXXX						2018-077420

XXXXXXXXXX, 2019

Dear XXXXXXXXXX:

Re: Advance Income Tax Ruling Request
XXXXXXXXXX

This is in reply to your letter of XXXXXXXXXX in which you requested an advance income tax ruling on behalf of the above named taxpayers. We also acknowledge the information provided in subsequent correspondence and during our various telephone conversations in connection with your request. The information that you provided in such correspondence and in the telephone discussions form part of this letter only to the extent described herein.

We understand that, to the best of your knowledge and that of the taxpayers involved, none of the issues contained herein:

(i) is in an earlier return of the taxpayer or a related person;

(ii) is being considered by a tax services office or taxation center in connection with a previously filed tax return of the taxpayer or a related person;

(iii) is under objection by the taxpayer or a related person;

(iv) is before the courts or, if a judgment has been issued, the time limit for appeal to a higher court has not expired; or

(v) is the subject of a ruling previously issued by the Directorate.

DEFINITIONS

In this letter, the singular should be read as plural and vice versa where the circumstances so require, all monetary amounts are expressed in Canadian dollars, and unless otherwise indicated or the context otherwise requires, the following terms have the meanings specified:

XXXXXXXXXX;

XXXXXXXXXX;

“A” means the late XXXXXXXXXX, who was the XXXXXXXXXX of the Siblings and who died on XXXXXXXXXX;

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

“ACB” or “adjusted cost base” has the meaning assigned by section 54;

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

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

“BCA1” refers to the XXXXXXXXXX;

“BCA2” refers to the XXXXXXXXXX;

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

“capital gain inclusion rate” means the fraction referred to in paragraph 38(a);

“capital loss” has the meaning assigned by paragraph 39(1)(b);

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

“CCPC” or “Canadian-controlled private corporation” has the meaning assigned by subsection 125(7);

“CDA” or “capital dividend account” has the meaning assigned by subsection 89(1);

“CRA” means the Canada Revenue Agency;

“DC” means XXXXXXXXXX;

“DC Common Shares” means the common shares in the capital stock of DC referred to in Paragraph 2;

“DC Preferred Shares” means the preferred shares in the capital stock of DC referred to in Paragraph 13(a);

“DC Transfers” refers to the transfers of property by DC to the TCs described in Paragraph 25;

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

“dividend refund” has the meaning assigned by subsection 129(1);

“dividend rental arrangement” has the meaning assigned by subsection 248(1);

“eligible dividend” has the meaning assigned by subsection 89(1);

“eligible property” has the meaning assigned by subsection 85(1.1);

“Estate” means the Estate of A created on XXXXXXXXXX, the date of A’s death. The executor of the Estate was XXXXXXXXXX, who passed away in XXXXXXXXXX. He was succeeded as executor by XXXXXXXXXX. The sole income and capital beneficiaries of the Estate are the Siblings;

“excess unallocated liability” has the meaning assigned in Paragraph 24.1(c);

“financial intermediary corporation” has the meaning assigned by subsection 191(1);

“First DC Note Receivable” means the demand promissory note owed by the JST to DC as described in Paragraph 5(f);

“forgiven amount” has the meaning assigned by subsection 80(1) or 80.01(1);

“FMV” or “fair market value” means the highest price expressed in terms of money or money's worth, available in an open and unrestricted market between knowledgeable, informed and prudent parties acting at arm's length, neither party being under any compulsion to transact;

“GRIP” means “general rate income pool” as that term is defined by subsection 89(1);

“guarantee agreement” has the meaning assigned by subsection 112(2.2);

“Holdco” means XXXXXXXXXX;

“Holdco Class A Shares” means the Class A preferred shares in the capital stock of Holdco referred to in Paragraph 13(b);

“Holdco Class B Shares” means the Class B preferred shares in the capital stock of Holdco referred to in Paragraph 15(a);

“Holdco Class C Shares” means the Class C preferred shares in the capital stock of Holdco referred to in Paragraph 15(a);

“Holdco Common Shares” means the common shares in the capital stock of Holdco referred to in Paragraph 13(b);

“GRIP” or “general rate income pool” has the meaning assigned by subsection 89(1);

“JST” means the A Joint Spousal Trust, which was settled by A on XXXXXXXXXX. At the time of A’s passing, A was a beneficiary of the JST. Following A’s death, the sole income beneficiaries of the JST were the Siblings (XXXXXXXXXX) and the capital beneficiaries were XXXXXXXXXX, and the Siblings as to the balance (XXXXXXXXXX). The sole trustee of the JST was XXXXXXXXXX;

“JST Promissory Note” means the demand promissory note owed by DC to the JST as described in Paragraph 15(e);

“JST Wind-Up Transactions” refers to the transactions described in Paragraph 17.1;

XXXXXXXXXX;

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

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

“Paragraph” means a numbered paragraph in this letter;

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

“Post-Mortem Transactions” refers to the transactions described in Paragraph 15;

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

“pre-1972 capital surplus on hand” has the meaning assigned by subsection 88(2.1);

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

“proceeds of disposition” has the meaning assigned by section 54;

“Proposed Transactions” means the proposed transactions which are described herein under the heading “Proposed Transactions”;

“RDTOH” or “refundable dividend tax on hand” has the meaning assigned by subsection 129(3);

“Registrar” means the XXXXXXXXXX;

“related person” has the meaning assigned by section 251 as modified for the purposes of section 55 by paragraph 55(5)(e);

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

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

“short term preferred share” has the meaning assigned by subsection 248(1);

“SIB” or “specified investment business” has the meaning assigned by subsection 89(1);

“Second DC Note Receivable” means the demand promissory note owed by the JST to DC as described in Paragraph 5(g);

“Siblings” means collectively XXXXXXXXXX, each of whom was an adult child of A, and “Sibling” means any one of them;

“Sibling Notes” means the demand promissory notes owed by DC to each of the Siblings as described in Paragraph 17.1(c) and “Sibling Note” means each such note;

“specified financial institution” has the meaning assigned by subsection 248(1);

“stated capital” means the amount of capital determined in respect of a class or series of shares in accordance with the BCA1 or the BCA2, as the case may be;

“Subco” means XXXXXXXXXX;

“Subco Transfers” refers to the transactions described in Paragraphs 16 and 17;

“taxable capital gain” has the meaning assigned by paragraph 38(a);

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

“taxable preferred share” has the meaning assigned by subsection 248(1);

“taxation year” has the meaning assigned by subsection 249(1);

“TC” refers to the corporation to be incorporated described in Paragraph 20;

“TC Class A Shares” means the Class A preferred shares in the capital stock of TC referred to in Paragraph 20;

“TC Common Shares” means the common shares in the capital stock of TC referred to in Paragraph 20;

“TC Redemption Note” means the non-interest bearing promissory note described in Paragraph 28;

“TCC” or “taxable Canadian corporation” has the meaning assigned by subsection 89(1); and

“Transferred Properties” means the properties described in Paragraph 25.

FACTS

1. DC was formed by amalgamation under the BCA1 on XXXXXXXXXX. DC is and will be, at all relevant times and for all purposes of the Act, a CCPC, a taxable Canadian corporation and is a resident of XXXXXXXXXX for income tax purposes. DC's taxation year and fiscal period end is XXXXXXXXXX. DC engages in XXXXXXXXXX. As at XXXXXXXXXX, the value of DC's assets, net of liabilities, was approximately $XXXXXXXXXX. The FMV of the marketable securities portfolio held by DC was approximately $XXXXXXXXXX as at XXXXXXXXXX and will be approximately the same at the time the Proposed Transactions are completed.

2. The authorized and issued share capital of DC consists of XXXXXXXXXX common shares without par value (the “DC Common Shares”).

3. The DC Common Shares are held by the Siblings (each Sibling owns XXXXXXXXXX DC Common Shares). The DC Common Shares have an ACB and PUC of $XXXXXXXXXX per share. Each Sibling holds its DC Common Shares as capital property.

4. The directors of DC are XXXXXXXXXX.

5. DC's balance sheet as at XXXXXXXXXX consisted of:

(a) cash maintained to cover operating expenses;

(b) investment in the shares of Subco;

(c) investments which consist of publicly traded stocks. These investments are managed by investment managers who endeavour to keep the portfolios invested in publicly traded instruments at all times;

(d) dividends receivable;

(e) income taxes receivable;

(f) a non-interest bearing promissory note receivable by DC, dated XXXXXXXXXX, due on demand from the JST (the “First DC Note Receivable”) having a principal amount and FMV of $XXXXXXXXXX;

(g) a non-interest bearing promissory note receivable by DC, dated XXXXXXXXXX, due on demand from the JST (the “Second DC Note Receivable”) having a principal amount and FMV of $XXXXXXXXXX;

(h) nominal accounts payable and accrued liabilities related to its operations;

(i) income taxes payable;

(j) the JST Promissory Note having a principal amount and FMV of $XXXXXXXXXX;

(k) a promissory note for a nominal amount owed by DC to the Estate; and

(l) an amount owing to Subco.

There will not be any material change in the composition of DC's assets or liabilities or in the FMV of DC’s assets or liabilities from XXXXXXXXXX until the date the Proposed Transactions are completed (except due to FMV fluctuation and except as described in Paragraph 17.1 and as contemplated in the Proposed Transactions).

6. DC has estimated its tax accounts as at XXXXXXXXXX as follows:

(a) RDTOH: $XXXXXXXXXX;
(b) GRIP: $XXXXXXXXXX;
(c) CDA: $XXXXXXXXXX;
(d) pre-1972 capital surplus on hand: XXXXXXXXXX;
(e) Non-capital losses: $XXXXXXXXXX.

DC’s tax accounts will be approximately the same at the time the Proposed Transactions are completed.

7. Subco was incorporated under the BCA1 on XXXXXXXXXX. Subco is and will be, at all relevant times and for all purposes of the Act, a CCPC, a taxable Canadian corporation and is a resident of XXXXXXXXXX for income tax purposes. Subco's taxation year and fiscal period end is XXXXXXXXXX. Subco engages in XXXXXXXXXX. As at XXXXXXXXXX, the value of Subco's assets, net of liabilities, was approximately $XXXXXXXXXX. The FMV of the marketable securities portfolio held by Subco was approximately $XXXXXXXXXX as at XXXXXXXXXX and will be approximately the same at the time the Proposed Transactions are completed.

8. The authorized share capital of Subco consists of an unlimited number of common shares without par value.

9. The issued and outstanding share capital of Subco consists of XXXXXXXXXX common shares, all held by DC.

10. The directors of Subco are XXXXXXXXXX.

11. Subco's balance sheet as at XXXXXXXXXX consisted of:

(a) cash maintained to cover operating expenses;
(b) investments which are made up of publicly traded stocks. These investments are managed by investment managers who endeavour to keep the portfolios invested in publicly traded instruments at all times;
(c) dividends receivable;
(d) income taxes receivable;
(e) an amount owing from DC; and
(f) nominal accounts payable and accrued liabilities related to its operations.

There will not be any material change in the composition of Subco's assets or liabilities or in the FMV of Subco’s assets or liabilities from XXXXXXXXXX until the date the Proposed Transactions are completed (except due to FMV fluctuation and except as contemplated in the Proposed Transactions).

12. Subco has estimated its tax accounts as at XXXXXXXXXX as follows:

(a) RDTOH: $XXXXXXXXXX;
(b) GRIP: $XXXXXXXXXX;
(c) CDA: $XXXXXXXXXX;
(d) pre-1972 capital surplus on hand: XXXXXXXXXX;
(e) Non-capital losses: XXXXXXXXXX

Subco’s tax accounts will be approximately the same at the time the Proposed Transactions are completed.

Post-Mortem Transactions

13. Immediately prior to the death of A on XXXXXXXXXX, DC was part of a corporate structure that included the following entities and shareholdings, where applicable:

(a) The XXXXXXXXXX DC Common Shares were held by the XXXXXXXXXX and the authorized and issued preferred shares of DC were held by Holdco (the “DC Preferred Shares”).

(b) The only issued and outstanding shares in the capital of Holdco were XXXXXXXXXX common shares held by the JST (the “Holdco Common Shares”), having a FMV of approximately $XXXXXXXXXX, and XXXXXXXXXX Class A preferred shares held by A (the “Holdco Class A Shares”), having a FMV of approximately $XXXXXXXXXX.

14. Following A’s death, the Estate contemplated the undertaking of post-mortem transactions together with a reorganization of the corporate structure described in Paragraph 13 that included a divisive reorganization of the shares of Holdco to separate holding companies for each of the Siblings. The Estate requested an advance income tax ruling from the CRA (XXXXXXXXXX) in relation to the contemplated transactions in a letter dated XXXXXXXXXX. The post-mortem transactions and reorganization were not ultimately implemented and the ruling request was withdrawn.

15. The following transactions occurred in XXXXXXXXXX and were undertaken as part of a post-mortem reorganization (the “Post-Mortem Transactions”), the purpose of which was to eliminate the inherent double taxation arising on the disposition of the XXXXXXXXXX Holdco Common Shares held by the JST on the death of A:

(a) The JST exchanged the XXXXXXXXXX Holdco Common Shares for XXXXXXXXXX Class B and XXXXXXXXXX Class C preferred shares of Holdco (respectively, the “Holdco Class B Shares” and the “Holdco Class C Shares”). At the same time, the Estate subscribed for XXXXXXXXXX common shares of Holdco for $XXXXXXXXXX. The exchange was reported by the JST as a tax deferred exchange by virtue of subsection 86(1).

(b) The JST incorporated XXXXXXXXXX and transferred the Holdco Class B Shares and the Holdco Class C Shares to XXXXXXXXXX for common shares of XXXXXXXXXX.

(c) The PUC of the DC Preferred Shares was increased by $XXXXXXXXXX. The increase in the PUC of the DC Preferred Shares was reported as a deemed dividend of $XXXXXXXXXX by virtue of subsection 84(1). DC made a capital dividend election pursuant to subsection 83(2) in respect of the full amount of the deemed dividend.

(d) DC redeemed the DC Preferred Shares and issued promissory notes to Holdco as consideration for the redemptions. The redemptions of the DC Preferred Shares were reported to result in deemed dividends of $XXXXXXXXXX paid by DC and received by Holdco by virtue of subsection 84(3).

(e) Holdco redeemed the XXXXXXXXXX Holdco Class B Shares and the XXXXXXXXXX Holdco Class C Shares held by XXXXXXXXXX and assigned to XXXXXXXXXX the promissory notes owing by DC on the redemptions of the DC Preferred Shares as described in Paragraph 15(d) (hereafter, the “JST Promissory Note”). The redemptions of the XXXXXXXXXX Holdco Class B Shares and the XXXXXXXXXX Holdco Class C Shares were reported as deemed dividends equal to an aggregate amount of $XXXXXXXXXX paid by Holdco and received by XXXXXXXXXX by virtue of subsection 84(3). Holdco made a capital dividend election pursuant to subsection 83(2) in relation to the deemed dividend of $XXXXXXXXXX resulting from the redemption of the XXXXXXXXXX Holdco Class B Shares, being equal to Holdco’s CDA balance immediately before the dividend became payable.

(f) XXXXXXXXXX was wound up into the JST. On the winding-up of XXXXXXXXXX, by virtue of subsection 84(2), a dividend was deemed to be paid by XXXXXXXXXX and received by the JST in an amount equal to the difference between the FMV of the property distributed on the winding-up, being the JST Promissory Note, and the PUC of the XXXXXXXXXX. XXXXXXXXXX made a capital dividend election pursuant to subsection 83(2) of $XXXXXXXXXX, being equal to its CDA balance immediately before the dividend became payable. A capital loss of $XXXXXXXXXX (a net capital loss of $XXXXXXXXXX) was reported by the JST on the disposition of the XXXXXXXXXX. The net capital loss was carried back to the JST’s XXXXXXXXXX taxation year by virtue of subparagraph 111(1)(b) to offset the taxable capital gain that resulted from the deemed disposition of the XXXXXXXXXX Holdco Common Shares held by the JST on A’s death.

(g) Holdco was wound up.

(h) The XXXXXXXXXX distributed its XXXXXXXXXX DC Common Shares equally among the Siblings in satisfaction of their capital interest in the XXXXXXXXXX.

Subco Transfers

16. The following transactions occurred in XXXXXXXXXX:

(a) DC incorporated Subco and XXXXXXXXXX common share was issued to DC on incorporation.

(b) DC transferred marketable securities to Subco and in consideration therefor Subco issued XXXXXXXXXX common shares to DC. DC and Subco elected under subsection 85(1) in prescribed form and within the time limits prescribed by subsection 85(6), in respect of the transfer of the marketable securities. The agreed amount specified in respect of the transfer was equal to the aggregate ACB of the transferred marketable securities.

17. In XXXXXXXXXX, DC transferred marketable securities to Subco and in consideration therefor Subco issued XXXXXXXXXX common shares to DC. DC and Subco elected under subsection 85(1) in prescribed form and within the time limits prescribed by subsection 85(6), in respect of the transfer of the marketable securities. The agreed amount specified in respect of the transfer was equal to the aggregate ACB of the transferred marketable securities.

The purpose of the transactions described in Paragraphs 16 and 17 (the “Subco Transfers”) was to potentially trigger a capital gain on the transferred marketable securities before an anticipated increase in the capital gain inclusion rate.

JST Wind-Up Transactions

17.1 The following transactions occurred in XXXXXXXXXX (the “JST Wind-Up Transactions”):

(a) The First DC Note Receivable and the Second DC Note Receivable were set off against the JST Promissory Note. The remaining principal amount owing under the JST Promissory Note was $XXXXXXXXXX.

(b) DC made a cash payment of $XXXXXXXXXX on the JST Promissory Note, such that the principal amount owing by DC on the JST Promissory Note was $XXXXXXXXXX.

(c) The JST Promissory Note was split into XXXXXXXXXX non-interest bearing promissory notes, due on demand, of $XXXXXXXXXX each (the “Siblings Notes”).

(d) The JST was wound-up, and all of the assets of the JST were distributed in equal shares to the Siblings, including an assignment of XXXXXXXXXX Sibling Note to each Sibling.

The purpose of the JST Wind-Up Transactions was to facilitate the winding-up of the JST since the trustee of the JST had completed the administration of the JST.

PROPOSED TRANSACTIONS

18. DC will, by way of a special resolution, resolve to wind-up and dissolve Subco pursuant to the BCA1.

19. As a result of the winding-up, Subco will distribute its assets to DC, including its marketable securities portfolio.

20. Each of the Siblings will incorporate an investment holding company under the BCA1 or the BCA2 (each a “TC”) that will be at any relevant time and for all purposes of the Act, a CCPC and a taxable Canadian corporation. Each TC will have an authorized share capital consisting of an unlimited number of common shares (the “TC Common Shares”) and of XXXXXXXXXX Class A preferred shares (the “TC Class A Shares”). The TC Common Shares will be voting (XXXXXXXXXX), and the TC Class A Shares will have the following share attributes:

(a) voting (XXXXXXXXXX);

(b) redeemable and retractable at a redemption price equal to the FMV of the property received by TC as part of the Proposed Transactions, less any non-share consideration also issued at that time; and

(c) non-cumulative dividend entitlement equal to the redemption price multiplied by the prescribed interest rate in Regulation 4301(c).

Each Sibling will serve as the sole director of his or her TC.

21. Each of the Siblings will subscribe for one TC Common Share in his or her particular TC for $XXXXXXXXXX.

22. Each of the Siblings will transfer his or her XXXXXXXXXX DC Common Shares to his or her particular TC. As consideration therefor, the TC will issue XXXXXXXXXX TC Common Shares to the Sibling having an aggregate FMV equal to the aggregate FMV at that time of the XXXXXXXXXX DC Common Shares so transferred to the TC. The aggregate amount added to the stated capital of the TC Common Shares issued to the Sibling will equal the aggregate PUC attributable to the XXXXXXXXXX DC Common Shares transferred to the particular TC by the Sibling.

23. Each Sibling and his or her particular TC will jointly elect under subsection 85(1), in prescribed form and within the time limits prescribed by subsection 85(6), in respect of the transfer of the XXXXXXXXXX DC Common Shares to the TC. The agreed amount specified in respect of the transfer will be equal to the aggregate ACB to the Sibling of the XXXXXXXXXX DC Common Shares so transferred. For greater certainty, the aggregate ACB of the XXXXXXXXXX DC Common Shares will not be greater than the FMV of such shares at the time of the transfer.

24. Immediately prior to the DC Transfers, the property owned by DC will be determined and 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 of all of the current assets of DC, including cash, accounts receivable, prepaid expenses, and short term investments other than portfolio investments;

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

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

As a result of the classification of DC’s property described in this Paragraph, DC will have no business property immediately prior to the DC Transfers.

For greater certainty, for the purposes of the DC Transfers:

(d) tax accounts or other tax related amounts of DC, such as the balance of non-capital losses, net capital losses, CDA, GRIP or RDTOH will not be considered property;

(e) advances that are payable on demand or that are due within the next XXXXXXXXXX months will be considered cash or near-cash property;

(f) the amount of any deferred tax will not be considered to be a property or a liability, as the case may be;

(g) no amount will be considered to be a liability unless it represents a true legal liability which is capable of quantification;

(h) any amount of taxes payable pursuant to an assessment or reassessment (whether such assessments or reassessments have been objected to or not) and any amount of taxes that is the subject of a proposed assessment (to the extent that any such amount is accrued as a liability) will be classified as a current liability and will, to the extent that any objection in respect of such unpaid taxes has not been resolved, be deducted from the net FMV of the cash or near cash property; and

(i) any amount in respect of refunds of taxes, and interest thereon, actually receivable will be treated as cash or near-cash property and any potential refunds of taxes and interest thereon will, due to their contingent nature, be ignored;

24.1 In determining the net FMV of each type of property of DC immediately before the DC Transfers, the liabilities of DC will be allocated to, and deducted in, the calculation of the net FMV of each such type of property of DC in the following manner:

(a) current liabilities of DC will be allocated to cash or near cash property (including any cash, accounts receivable, prepaid expenses, and short term investments other than portfolio investments) in the proportion that the FMV of each such property is of the FMV of all cash or near cash property. The allocation of current liabilities as described herein will not exceed the aggregate FMV of all cash or near cash property of DC;

(b) liabilities of DC, other than current liabilities, that relate to a particular property, will then be allocated to the particular property (and effectively to the type to which the particular property belongs) to the extent of its FMV. 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;

(c) if any liability (hereinafter referred to as “excess unallocated liability”) remains after the allocations described in Paragraphs 24.1(a) and (b) are made, such excess unallocated liability, will then be allocated to the cash or near cash property and investment property of DC based on the relative net FMV of each type of property prior to the allocation of such excess unallocated liabilities but after the allocations described in Paragraphs 24.1(a) and (b).

25. DC will contemporaneously transfer (the “DC Transfers”) to each of the TCs a proportionate share of each type of property owned by DC (collectively referred to as the “Transferred Properties”), as determined in accordance with the preceding Paragraph, such that, immediately following the DC Transfers, the aggregate FMV of each type of property of DC transferred to a particular TC, will be equal to or approximate the proportion determined by the formula:

A x B/C

Where:

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

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

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

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

26. As consideration for the DC Transfers, each of the TCs will:

(a) assume an appropriate amount of liabilities of DC, including one Sibling Note (so that on a net basis each of the TCs will receive its pro rata share of each type of property owned by DC); and

(b) issue XXXXXXXXXX TC Class A Shares of its capital stock having an aggregate redemption price and aggregate FMV equal to the FMV of the property received by TC at the time of the DC Transfers, less the amount of the liabilities of DC assumed by TC as described in (a).

The liabilities assumed by each of the TCs will not exceed the aggregate of the agreed amounts in respect of such properties. For greater certainty, the TC Class A Shares of each TC that are issued to DC will represent more than XXXXXXXXXX% of the issued share capital of each of the TCs having full voting rights in all circumstances and such shares will also represent more than XXXXXXXXXX% of the FMV of all the issued shares of the capital stock of each TC. Each TC will add $XXXXXXXXXX to the stated capital maintained for its TC Class A Shares.

27. In respect of the DC Transfers, DC will jointly elect with each TC in the prescribed form and within the time limit referred to in subsection 85(6), to have the provisions of subsection 85(1) apply to the transfer of the Transferred Properties that are an eligible property. The agreed amount for purposes of subsection 85(1) in respect of such property transferred will be an amount equal to the lesser of the amounts described in subparagraphs 85(1)(c.1)(i) and (ii).

28. Each of the TCs will redeem its XXXXXXXXXX TC Class A Shares owned by DC. As consideration therefor, each TC will issue to DC a non-interest bearing promissory note with a principal amount and FMV equal to the respective aggregate FMV of the TC Class A Shares so redeemed (each hereinafter a “TC Redemption Note”).

29. Immediately after the redemptions that are described in Paragraph 28 take place, the first taxation year of each of the TCs will end.

30. The shareholders of DC will, by way of special resolution, resolve to wind-up and dissolve DC pursuant to the BCA1. In the course of its wind-up, DC will assign and distribute to each particular TC the particular TC Redemption Note that TC has issued to DC as described in Paragraph 28. As a result, the obligations of each TC under its respective TC Redemption Note will be extinguished and each such note will be cancelled.

30.1 To the extent that the CDA of DC has a positive balance at the time of the winding-up of DC, and immediately prior to the distribution of the TC Redemption Notes by DC to each TC as described in Paragraph 30, DC will elect, in the prescribed manner and prescribed form required under subsection 83(2), to treat the portion of the winding-up dividend referred to in subparagraph 88(2)(b)(i) as a separate capital dividend paid on the DC Common Shares. Pursuant to subparagraph 88(2)(b)(iv), each TC will be deemed to have received a proportionate capital dividend from DC.

30.2 To the extent that DC has a GRIP balance at the time of the winding-up of DC, DC will designate, pursuant to subsection 89(14), to treat a portion of the winding-up dividend referred to in subparagraph 88(2)(b)(iii), which is deemed to be a separate dividend, to be an eligible dividend by notifying each TC in writing, within the time limit prescribed in subsection 89(14), that the portion of such dividend is an eligible dividend.

30.3 Upon the receipt of any dividend refund to which DC may become entitled as a result of the Proposed Transactions, DC will immediately transfer the cash received in the form of a dividend (under the terms of the agreement governing the winding-up of DC) to each TC in the same proportions as described in Paragraph 25.

31. [Reserved]

32. [Reserved]

33. After the transactions described in Paragraphs 30 to 30.3, DC will not own or acquire any property or carry on any activity or undertaking. A dissolution petition will be filed by DC with the Registrar and DC will be dissolved.

ADDITIONAL INFORMATION

34. DC does not exercise significant influence over any corporation, partnership or other entity in which it invests, other than Subco.

35. The Post-Mortem Transactions and the Subco Transfers are not part of the same series of transactions or events that include the Proposed Transactions. The Proposed Transactions, the Post-Mortem Transactions and the Subco Transfers were not and will not be completed in contemplation of each other. The Post-Mortem Transactions and the Subco Transfers would have been completed whether or not the Proposed Transactions are completed.

36. Except as described in the Facts and the Proposed Transactions, no property has been or will be acquired by DC, in contemplation of and before the transfer by DC of its properties to each of the TCs as described in Paragraph 25, other than in a transaction described in subparagraphs 55(3.1)(a)(i) to (iv).

37. Other than as described in the Facts and Proposed Transactions, no TC has any expectation or intention, subsequent to the Proposed Transactions, of disposing of any of the Transferred Properties owned by it, to a person who is not a related person or to a partnership, as part of a series of transactions or events that includes the Proposed Transactions, except in the ordinary course of such corporation's business.

38. Except as described in this letter, none of the shareholders of DC and/or of the TCs are contemplating the sale or transfer of any shares of DC and/or the TCs.

39. None of DC or the TCs is or will be, at any time during a series of transactions or events that includes the Proposed Transactions, a specified financial institution or a restricted financial institution.

40. None of the shares of DC nor any of the shares of any of the TCs (including the shares to be issued as described in the Proposed Transactions) is or will be, at any time during a series of transactions or events that includes the Proposed Transactions:

(a) the subject of any undertaking or agreement that is a guarantee agreement;

(b) the subject of a dividend rental arrangement; or

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

41. The main purpose for the acquisition of the DC Common Shares by the TCs will be to facilitate a tax-free divisive reorganization of DC amongst the DC shareholders for purposes of permitting the shareholders to independently pursue their investment objectives. For greater certainty, at no time will one of the main purposes of the acquisition of the DC Common Shares be to receive a capital dividend.

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

43. None of the DC shares is a taxable preferred share, a short-term preferred share or a term preferred share.

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

PURPOSE OF THE PROPOSED TRANSACTIONS

45. The purpose of the Proposed Transactions is to allow the Siblings to own their pro rata share of DC's property in order to allow them to invest their share of DC's property in the manner that best meets their individual objectives and investment goals and address personal estate planning objectives on an individual and independent basis.

RULINGS

Provided that the preceding statements constitute a complete and accurate disclosure of all the relevant facts, proposed transactions, and purpose of the Proposed Transactions, and provided further that the Proposed Transactions are carried out as described above, we confirm the following:

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

(a) the transfers of the DC Common Shares by the Siblings to the TCs described in Paragraph 22; and

(b) the transfer of each eligible property owned by DC to the TCs on the DC Transfers, 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. On the redemption by each of the TCs of its TC Class A Shares owned by DC, as described in Paragraph 28, by virtue of paragraphs 84(3)(a) and 84(3)(b), each of the TCs will be deemed to have paid, and DC will be deemed to have received, a dividend at that time equal to the amount, if any, by which the amount paid in respect of the redemption of the TC Class A Shares issued by each of the TCs exceeds the PUC thereof immediately before the redemption.

C. As a result of the distribution by DC in the course of its winding-up, as described in Paragraphs 30 to 30.3:

(a) by virtue of paragraph 88(2)(b) and subsection 84(2), but subject to (b), (c) and (d) below, DC will be deemed to have paid a dividend (the “winding-up dividend”) on its DC Common Shares equal to the amount by which

(i) the aggregate FMV of the property of DC distributed to the TCs in respect of the DC Common Shares on the winding-up

exceeds

(ii) the amount, if any, by which the PUC in respect of the DC Common Shares is reduced on the distribution, and

each TC will be deemed to have received a dividend equal to that proportion of the amount of the excess that the DC Common Shares held by such TC, as the case may be, is of the number of such shares issued and outstanding immediately before the distribution;

(b) to the extent that the CDA of DC has a positive balance immediately prior to its winding-up, pursuant to subparagraph 88(2)(b)(i), such portion of the winding-up dividend paid on the DC Common Shares referred to in (a) that does not in aggregate exceed the CDA of DC determined immediately before the payment of the winding-up dividend will be deemed, for purposes of the subsection 83(2) elections referred to in Paragraph 30.1, to be the full amount of a separate dividend and provided that DC elects pursuant to subsection 83(2) in respect of the full amount of this separate dividend, in prescribed form and manner, such dividend will be deemed to be a capital dividend;

(c) pursuant to subparagraph 88(2)(b)(ii), the portion of the winding-up dividend on the DC Common Shares that is equal to DC's pre-1972 capital surplus on hand, as determined immediately before the payment of the winding-up dividend, shall be deemed not to be a dividend;

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

(e) pursuant to subparagraph 88(2)(b)(iv), each TC will be deemed to have received its proportional share of the winding-up dividend described in (b) and (d) herein.

D. The taxable dividends received by DC and each of the TCs, as described in rulings B and C:

(a) will be included in the recipient’s income pursuant to subsection 82(1) and paragraph 12(1)(j);

(b) will be deductible by the recipient pursuant to subsection 112(1) in computing its taxable income for the year in which such a dividend is deemed to have been received, and, for greater certainty, such deduction will not be denied by any of the provisions of 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;

(f) will not be subject to tax under Part VI.1; and

(g) will not be subject to tax under Part IV except as provided in paragraph 186(1)(b).

E. The extinguishment of each TC Redemption Note as described in Paragraph 30 will not, in and of itself, result in a forgiven amount. In addition, DC will not realize any gain or loss as a result of the extinguishment of each TC Redemption Note.

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 property in the circumstances described in subparagraph 55(3.1)(b)(iii); or,

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

which has not been described herein, then by virtue of paragraph 55(3)(b), subsection 55(2) will not apply to the 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).

G. Subsections 15(1), 56(2), 69(1), 69(4) and 246(1) will not apply to the Proposed Transactions, in and by themselves.

H. Subsection 245(2) will not apply to 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 70-6R9 dated April 23, 2019. They 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 expressively confirmed, nothing in this ruling 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 FMV, ACB of any property referred to herein or the PUC in respect of any share referred to herein;

b) the balance of the RDTOH, GRIP, non-capital losses, CDA, or any other tax account of any corporation referred to herein;

c) any provincial tax consequences of the Proposed Transactions or any other tax consequence relating to the facts, Proposed Transactions or any transaction or event taking place either prior to the Proposed Transactions or subsequent to the Proposed Transactions, whether described in this letter or not, other than those specifically described in the rulings given above, including whether any of the Proposed Transactions would also be included in a series of transactions or events that includes other transactions or events that are not described in this letter.

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. 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 November 26, 2015.

Yours truly,

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