2019 Ruling 2018-0790021R3 - 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: Whether the butterfly dividends arising on the proposed transactions are exempt under paragraph 55(3)(b) from the application of subsection 55(2).

Position: Yes.

Reasons: Proposed transactions meet the requirements of the Act.

XXXXXXXXXX						2018-079002

XXXXXXXXXX, 2019

Dear XXXXXXXXXX

Re: XXXXXXXXXX

We are writing in response to your request for an advance income tax ruling on behalf of the above-noted taxpayers (the “Taxpayers”). We also acknowledge the additional information provided in your letters and in various email correspondence, as well as information provided during our telephone conversations (XXXXXXXXXX).

We understand that to the best of your knowledge and that of the Taxpayers, none of the proposed transactions and/or issues involved in this ruling are the same as or substantially similar to transactions and/or issues that are:

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

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

(d) the subject of a current or completed court process involving the Taxpayers or a related person; or

(e) the subject of a ruling previously considered by the Income Tax Rulings Directorate in relation to the Taxpayers or a related person.

Unless otherwise noted, all references herein to sections or components thereof are references to the Income Tax Act, R.S.C. 1985, c.1 (5th Supp.), as amended (the “Act”) and all references to monetary amounts are in Canadian dollars.

This letter is based solely on the Facts, Proposed Transactions, Additional Information and Purposes of the Proposed Transactions described below. Any documentation submitted in respect of this request does not form part of the Facts, Proposed Transactions or Additional Information unless specifically reproduced therein and any references to documentation are provided solely for the convenience of the reader.

DEFINITIONS

In this letter, unless otherwise noted, the following terms have the meaning specified herein and, where applicable, all references in the singular include the plural and vice versa:

“ACB” means “adjusted cost base” as that term is defined in section 54 and subsection 248(1);

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

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

“BCA” means the Business Corporations Act XXXXXXXXXX, as amended to the date hereof;

“BN” means “business number” as that term is defined in subsection 248(1);

“capital property” has the meaning defined in section 54;

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

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

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

“CRA” means the Canada Revenue Agency;

“DCAmalco Transfer” refers to the transfer of property by DC to TC on the Distribution as described in Paragraph 25;

“Distribution” means “distribution” as that term is defined in subsection 55(1);

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

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

“FMV” means “fair market value”, which refers to 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 and under no compulsion to act and contracting for a taxable purchase and sale, expressed in terms of cash;

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

“Holdco A” means XXXXXXXXXX. Its head office is located at XXXXXXXXXX;

“Holdco B” means XXXXXXXXXX. Its head office is located at XXXXXXXXXX;

“Mr. A” means XXXXXXXXXX, an individual who is resident in Canada for the purposes of the Act and who resides at XXXXXXXXXX;

“Mr. B” means XXXXXXXXXX, an individual who is resident in Canada for the purposes of the Act and who resides at XXXXXXXXXX;

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

“Opco A” means XXXXXXXXXX. Its head office is located at XXXXXXXXXX;

“Opco B” means XXXXXXXXXX. Its head office is located at XXXXXXXXXX;

“Paragraph” means a numbered paragraph in this letter;

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

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

“Proposed Transactions” means the transactions described in the Proposed Transactions section of this letter;

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

“RDTOH” means “refundable dividend tax on hand” as that term is defined in subsection 129(3);

“related person” means, in relation to a particular person, another person who is related to the particular person by virtue of subsection 251(2), modified for the purposes of section 55 by paragraph 55(5)(e) where applicable;

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

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

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

“specified investment business” has the meaning assigned by subsection 125(7);

“SN” means social insurance number;

“TC” means taxation centre;

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

“TC1 Note” means the non-interest bearing demand promissory note to be issued by TC1 to DCAmalco on the redemption of its Class “III” Shares held by DCAmalco as described in Paragraph 29;

“TC2 Note” means the non-interest bearing demand promissory note to be issued by TC2 to DCAmalco on the redemption of its Class “III” Shares held by DCAmalco as described in Paragraph 29;

“TSO” means tax services office;

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

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

“terminal loss” has the meaning assigned by subsection 20(16);

“UCC” means “undepreciated capital cost” as that term is defined in subsection 13(21); and

“Winding-up Dividend” means the dividend arising on the winding-up of DC by virtue of subsection 84(2) and paragraph 88(2)(b), as described in Paragraph 32 and Ruling C.

FACTS

1. Holdco A, Opco A, Holdco B and Opco B are corporations that were all incorporated under the BCA. Each of Holdco A, Opco A, Holdco B and Opco B is a TCC and CCPC.

2. Opco A and Opco B both operate XXXXXXXXXX. In particular, Opco A operates a XXXXXXXXXX referred to as the “XXXXXXXXXX” on real estate owned by Holdco A. Opco B operates a XXXXXXXXXX referred to as the “XXXXXXXXXX” on real estate owned by Holdco B.

3. Holdco A and Opco A both have taxation years ending on XXXXXXXXXX.

4. Holdco B and Opco B both have taxation years ending on XXXXXXXXXX.

5. Each of Holdco A, Opco A, Holdco B and Opco B have a single class of voting and participating common shares issued and outstanding. In particular, Holdco A has XXXXXXXXXX Class “A” Common Voting Shares issued and outstanding having an aggregate PUC of $XXXXXXXXXX. Opco A has XXXXXXXXXX Class A Shares issued and outstanding having an aggregate PUC of $XXXXXXXXXX. Holdco B has XXXXXXXXXX Class “A” Common Voting Shares issued and outstanding having an aggregate PUC of $XXXXXXXXXX. Opco B has XXXXXXXXXX Class “A” Common Voting Shares issued and outstanding having an aggregate PUC of $XXXXXXXXXX.

Additionally, both Opco A and Opco B have issued a single class of non-voting preferred shares with fixed redemption values to their respective Holdco. In particular, Opco A issued XXXXXXXXXX Class “K” Preferred Shares to Holdco A in XXXXXXXXXX as consideration for Holdco A’s transfer of the license to operate the XXXXXXXXXX to Opco A. The Opco A Class “K” Preferred Shares have an aggregate redemption value of $XXXXXXXXXX and an aggregate PUC of $XXXXXXXXXX. Similarly, Opco B issued XXXXXXXXXX Class “K” Preferred Shares to Holdco B in XXXXXXXXXX as consideration for Holdco B’s transfer of the license to operate the XXXXXXXXXX to Opco B. The Opco B Class “K” Preferred Shares have an aggregate redemption value of $XXXXXXXXXX and an aggregate PUC of $XXXXXXXXXX.

6. None of Holdco A, Holdco B, Opco A, Opco B have RDTOH or CDA balances. These balances are not expected to materially change before the implementation of the Proposed Transactions.

7. Holdco A had a GRIP balance of $XXXXXXXXXX as of XXXXXXXXXX. Holdco B had a GRIP balance of $XXXXXXXXXX as of XXXXXXXXXX. Opco A had a GRIP balance of $XXXXXXXXXX as of XXXXXXXXXX. Opco B did not have a GRIP balance as of XXXXXXXXXX. These balances are not expected to materially change before the implementation of the Proposed Transactions.

8. Mr. A owns XXXXXXXXXX% of the issued and outstanding shares of each of Holdco A, Opco A, Holdco B and Opco B. The aggregate ACB of such shares to Mr. A is $XXXXXXXXXX.

Mr. B owns XXXXXXXXXX% of the issued and outstanding shares of each of Holdco A, Opco A, Holdco B and Opco B. The aggregate ACB of such shares to Mr. B is $XXXXXXXXXX.

9. Mr. A and Mr. B are not related persons.

10. Mr. A and Mr. B have always acted jointly and in concert with respect of all important business and financial decisions regarding Holdco A, Opco A, Holdco B and Opco B.

11. Holdco A, Opco A, Holdco B and Opco B have consistently filed their tax returns as associated corporations because Mr. A and Mr. B form a group of persons having de jure control of such corporations.

12. None of the shares of Holdco A, Opco A, Holdco B and Opco B have been acquired by Mr. A or Mr. B as part of the series of transactions or events that includes the Proposed Transactions.

13. The main assets of Holdco A and Holdco B include XXXXXXXXXX by Opco A and Opco B to carry on their respective XXXXXXXXXX business.

14. The main assets of Opco A include XXXXXXXXXX.

15. The main assets of Opco B include XXXXXXXXXX.

PROPOSED TRANSACTIONS

The Proposed Transactions will occur in the order presented unless otherwise indicated, with the exception of filing the applicable election forms, which will be filed within the applicable due dates, unless otherwise indicated, following the completion of the Proposed Transactions.

16. Holdco A, Opco A, Holdco B and Opco B (the “predecessor corporations”) will all amalgamate to form a new corporation (“DCAmalco”) pursuant to the BCA, in such a manner that:

(a) all the property (except amounts receivable from any predecessor corporation) of the predecessor corporations immediately before the merger will become property of DCAmalco by virtue of the merger;

(b) all the liabilities (except amounts payable to any predecessor corporation) of the predecessor corporations immediately before the merger will become liabilities of DCAmalco by virtue of the merger; and

(c) all the shareholders, being Mr. A and Mr. B, of the predecessor corporations before the merger will receive common shares of the capital stock of DCAmalco by virtue of the merger.

17. Each of Mr. A and Mr. B will receive XXXXXXXXXX% of the “new” common shares of DCAmalco (“DCAmalco Shares”). The DCAmalco Shares are fully participating and entitled to XXXXXXXXXX vote per share. The aggregate FMV of the DCAmalco Shares issued to Mr. A and Mr. B, as the case may be, on the amalgamation will equal the aggregate FMV of all the shares of the predecessor corporations owned by such shareholder immediately before the amalgamation. The stated capital of the DCAmalco Shares issued on the amalgamation will not exceed the aggregate PUC of all the shares in the capital stock of the predecessor corporations that were issued and outstanding immediately before the amalgamation.

18. Each of Mr. A and Mr. B. will incorporate a new corporation (“TC1” and “TC2” respectively) pursuant to the BCA. Each of TC1 and TC2 will be a CCPC and a TCC. The authorized share capital of TC1 and TC2 will include:

(a) an unlimited number of Class “A” Common Shares which are fully participating and entitled to XXXXXXXXXX vote per share; and

(b) an unlimited number of voting Class “III” Preferred Shares, which will be redeemable and retractable for a redemption amount equal to $XXXXXXXXXX per share and entitled to non-cumulative dividends at a rate of a maximum of XXXXXXXXXX% per annum on the redemption amount at the discretion of its directors. The aggregate FMV of the shares will be equal to the FMV of the property received by the corporation less any non-share consideration received for the issuance of such shares.

19. Mr. A will transfer all of his DCAmalco Shares to TC1 for sole consideration consisting of a number of Class “A” Common Shares of TC1. Contemporaneously, with Mr. A’s share transfer, Mr. B will transfer all of his DCAmalco Shares to TC2 for sole consideration consisting of a number of Class “A” Common Shares of TC2. The aggregate FMV of the Class “A” Common Shares of TC1 issued to Mr. A will equal the aggregate FMV of the DCAmalco Shares transferred to TC1 by Mr. A at that time. The aggregate FMV of the Class “A” Common Shares of TC2 issued to Mr. B will equal the aggregate FMV of the DCAmalco Shares transferred to TC2 by Mr. B at that time. TC1 and TC2 will each add to their respective stated capital account of their Class “A” Common Shares an amount equal to the PUC attributable to the number of DCAmalco Shares so transferred to TC1 and TC2, as the case may be.

20. Mr. A and TC1 will jointly elect in prescribed form within the time limit referred to in subsection 85(6), to have the provisions of subsection 85(1) apply to the share transfer from Mr. A to TC1 described in Paragraph 19. The agreed amount in respect of this share transfer will be equal to the aggregate ACB of his DCAmalco Shares immediately before the transfer. For greater certainty, the agreed amount will be less than the aggregate FMV of such shares and will be the lesser of the amounts described in subparagraphs 85(1)(c.1)(i) and (ii).

21. Mr. B and TC2 will jointly elect in prescribed form within the time limit referred to in subsection 85(6), to have the provisions of subsection 85(1) apply to the share transfer from Mr. B to TC2 described in Paragraph 19. The agreed amount in respect of this share transfer will be equal to the aggregate ACB of his DCAmalco Shares immediately before the transfer. For greater certainty, the agreed amount will be less than the aggregate FMV of such shares and will be the lesser of the amounts described in subparagraphs 85(1)(c.1)(i) and (ii).

Types of Property

22. Immediately before the DCAmalco Transfer, the property of DCAmalco will be classified into the following three types of property for the purposes of the definition of Distribution as follows:

(a) cash or near-cash property, comprising of DCAmalco’s cash, accounts receivable, taxes receivable, inventory, prepaid expenses;

(b) business property, comprising all of the assets of DCAmalco, other than cash or near-cash property, any income from which would, for purposes of the Act, be income from an active business (other than a specified investment business) including its real estate, and depreciable property; and

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

For greater certainty, for purposes of the DCAmalco Transfer:

(i) any tax accounts of DCAmalco, such as any balance of any RDTOH, GRIP or CDA, if any, will not be considered property;

(ii) deferred expenses, if any, which are expenses that are deferred and amortized for accounting purposes, but fully deducted for tax purposes, and any deferred income tax or future income tax assets recorded in the financial statements of DCAmalco, if any, will not be considered property;

(iii) the amount of any loan or advance owing to DCAmalco that is due in less than XXXXXXXXXX or is due on demand, if any, is considered cash or near-cash property;

(iv) the amount of any loan or advance owing by DCAmalco that is due in less than XXXXXXXXXX or is payable on demand, if any, is considered a current liability; and

(v) no amount will be considered a liability unless it represents a true legal liability capable of quantification. For greater certainty, the amount of any deferred income tax liability or future income taxes owing recorded in the financial statements of DCAmalco, if any, will not be considered a liability because such amount does not represent a legal obligation of DCAmalco at the time of the Proposed Transactions.

23. In determining the net FMV of each type of property of DCAmalco immediately before the DCAmalco Transfer, the liabilities of DCAmalco will be allocated to, and deducted in the calculation of the net FMV of each such type of property of DCAmalco in the following manner:

(a) all current liabilities, will be allocated to each cash or near-cash property of DCAmalco in the proportion that the FMV of each such property is of the aggregate FMV of all cash or near-cash property of DCAmalco. The total amount of DCAmalco’s current liabilities to be allocated to DCAmalco’s cash or near cash property is not expected to exceed the aggregate FMV of all of DCAmalco’s cash or near-cash property;

(b) following the allocation of the current liabilities, described in Paragraph 23(a), any remaining net FMV of accounts receivable, taxes receivable, inventory, prepaid expenses will be reclassified as business property and excluded from the net FMV of DCAmalco’s cash or near-cash property, to the extent that such property will be collected, sold or consumed by TC1 or TC2, as the case may be, in the ordinary course of the business to which they relate (for clarity, cash will not be reclassified as business property);

(c) liabilities of DCAmalco, other than those described in Paragraph 23(a), that relate to a particular property will then be allocated to the particular property (and effectively to the type of property to which the particular property belongs) to the extent of its FMV. The liabilities that pertain to a type of property but not to a particular property will 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 liabilities remain after the allocations described in Paragraphs 23(a) and (c) are made, such remaining liabilities will then be allocated to the cash or near-cash property, business property and investment property of DCAmalco, on the basis of the relative net FMV of each type of property immediately prior to the allocation of such remaining liabilities, but after the allocation of the liabilities as described in Paragraphs 23(a) and (c). However, where DCAmalco is considered to have a negative amount of a type of property because of the allocations in Paragraphs 23(a) or (c), for the purposes of allocating the remaining liabilities, the net FMV of that type of property will be deemed nil resulting in none of those remaining liabilities being allocated to that type of property.

24. It is anticipated that DCAmalco will not own any property that would be classified as investment property immediately before the DCAmalco Transfer.

DCAmalco Transfer

25. Immediately following the determination of the net FMV of each type of property of DCAmalco, as described in Paragraphs 22 and 23, DCAmalco will contemporaneously transfer to each of TC1 and TC2, a pro rata portion of the net FMV of each type of property owned by it at that time, such that immediately following the transfer of the properties and the assumption of DCAmalco’s liabilities as described in Paragraph 27(a), the aggregate net FMV of each type of property transferred by DCAmalco to TC1 or TC2, as the case may be, will be equal to or approximate that proportion of each type of property determined by the formula:

A x B/C, where

A is the net FMV (determined as described above), immediately before the DCAmalco Transfer, of all property of that type owned at that time by DCAmalco;

B is the FMV, immediately before the DCAmalco Transfer, of all the issued and outstanding shares of the capital stock of DCAmalco owned, at that time, by TC1 or TC2, as the case may be; and

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

For the purposes of this Paragraph, the expression “approximate that proportion” means that the discrepancy from that proportion, if any, will not exceed one percent (1%), determined as a percentage of the net FMV of each type of property that TC1 and TC2 has received on such transfer as compared to what it would have received had it received its exact pro rata share of the net FMV of that type of property.

26. Among the business properties to be transferred to TC2 will be the XXXXXXXXXX. The XXXXXXXXXX currently has a FMV of approximately $XXXXXXXXXX and $XXXXXXXXXX, respectively and the FMV of these properties is not expected to materially change at the time of the DCAmalco Transfer. The ACB of the XXXXXXXXXX is $XXXXXXXXXX. The UCC of the XXXXXXXXXX at the time of the DCAmalco Transfer is expected to be $XXXXXXXXXX. As such, the disposition of the XXXXXXXXXX by DCAmalco is expected to trigger a capital loss of $XXXXXXXXXX on the XXXXXXXXXX and terminal loss of $XXXXXXXXXX on the XXXXXXXXXX.

27. As consideration for the property transferred by DCAmalco to TC1 and TC2, TC1 and TC2, as the case may be, will:

(a) assume such liabilities of DCAmalco, as appropriate, so that each of TC1 and TC2 will receive a proportionate share of the net FMV of each type of property owned by DCAmalco; and

(b) issue a number of its Class “III” Preferred Shares to DCAmalco which will have an aggregate redemption amount and aggregate FMV equal to the amount by which the aggregate FMV, at the time of the DCAmalco Transfer, of the property received by such TC, exceeds the aggregate amount of the liabilities of DCAmalco assumed by such TC, as described in Paragraph 27(a).

DCAmalco will hold the Class “III” Preferred Shares of TC1 and TC2 as capital property. The Class “III” Preferred Shares of TC1 and TC2 will be taxable preferred shares and short-term preferred shares.

28. DCAmalco will jointly elect with TC1 and TC2, as the case may be, in prescribed form within the time limit referred to in subsection 85(6), to have the provisions of subsection 85(1) apply to the transfer of each eligible property that is transferred by DCAmalco to TC1 or TC2. The agreed amount in respect of each eligible property so transferred will not be greater than the FMV of such property nor will it be less than the FMV, at the time of disposition, of the consideration therefor other than shares of the capital stock of that corporation or a right to receive such shares. For greater certainty, the agreed amount in respect of each such transferred property will be within the limits prescribed as follows:

(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 subparagraphs 85(1)(c.1)(i) and (ii);

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

TC1 and TC2, as the case may be, will add to its respective stated capital account for the Class “III” Shares, an amount equal to the aggregate of (a) the agreed amounts, in the case of each eligible property transferred to such TC, and (b) the aggregate FMV, in the case of each property transferred to such TC that is not an eligible property, less (c) the aggregate amount of DCAmalco’s liabilities assumed by such TC as described in Paragraph 27(a). For greater certainty, the amount to be added to the stated capital account for TC1’s Class “III” Shares issued as partial consideration for the property transferred to it on the DCAmalco Transfer will not exceed the maximum amount that could be added to the PUC of such shares without a reduction taking place pursuant to subsection 85(2.1). Similarly, the amount to be added to the stated capital account for TC2’s Class “III” Preferred Shares issued as partial consideration for the property transferred to it on the DCAmalco Transfer will not exceed the maximum amount that could be added to the PUC of such shares without a reduction taking place pursuant to subsection 85(2.1).

29. Immediately after the transfer of the property to TC1 and TC2 on the DCAmalco Transfer, each of TC1 and TC2 will redeem its Class “III” Preferred Shares owned by DCAmalco for an amount equal to the aggregate redemption amount and FMV of such shares. As consideration therefor, TC1 and TC2, as the case may be, will issue to DCAmalco a non-interest-bearing demand promissory note (the “TC1 Note” in respect of TC1’s share redemption and the “TC2 Note” in respect of TC2’s share redemption) each having a principal amount and FMV equal to the redemption amount of its Class “III” Preferred Shares. DCAmalco will accept the TC1 Note and the TC2 Note, respectively, as payment in full for the redemption of that particular TC’s Class “III” Preferred Shares.

30. Following the transfer, TC1 and TC2 will resolve to wind-up and dissolve DCAmalco pursuant to the relevant provisions of the BCA.

31. In connection with the winding-up of DCAmalco, DCAmalco will distribute all of its assets, which will consist only of TC1 Note and TC2 Note and the rights to any tax refunds referred to in Paragraph 33, to TC1 and TC2 in accordance with their shareholdings. In particular, DC will:

(a) Assign and distribute TC1 Note issued by TC1 to TC1; and

(b) Assign and distribute TC2 Note issued by TC2 to TC2.

As a result of the assignment and distribution of the Notes held by DCAmalco as described in this Paragraph, the obligation of each TC1 and TC2 under its own note will merge and be extinguished.

32. To the extent that DCAmalco has a GRIP balance at the time of the winding-up of DCAmalco, DCAmalco will designate, pursuant to subsection 89(14), to treat a portion of the Winding-up Dividend referred to in subparagraph 88(2)(b)(iii) to be an eligible dividend by notifying each of TC1 and TC2 in writing, within the time limit prescribed in section 89(14), that the portion of such dividend is an eligible dividend.

33. Any refund of tax to which DCAmalco is entitled pursuant to the provisions of the Act as a result of over-payment of tax instalments will be distributed (under the terms of the agreement governing the winding-up of DCAmalco) pro rata to each of TC1 and TC2.

34. After the distribution of the TC1 and TC2 Notes as described in Paragraph 31 and the distribution of any tax refunds as described in Paragraph 33, but immediately before the formal dissolution of DCAmalco described in Paragraph 35, DCAmalco will not own or acquire any property or carry on any activity or undertaking.

35. Within a reasonable time following the distribution of any tax refund by DCAmalco described in Paragraph 33, articles of dissolution will be filed by DCAmalco with the appropriate Corporate Registry and, upon receipt of a certificate of dissolution, DCAmalco will be dissolved.

36. On the DCAmalco Transfer, one of the XXXXXXXXXX described in Paragraph 15 will be distributed proportionately to the two TCs while one XXXXXXXXXX will be distributed entirely to TC1. Following the Distribution, TC1 will sell its undivided interest in the one XXXXXXXXXX to TC2. This sale will take place at FMV and the purchase price will be paid by TC2 in cash. For greater certainty, the aggregate FMV of TC1’s undivided interest in XXXXXXXXXX to be sold to TC2 will be less than XXXXXXXXXX% of the total net FMV of the property TC1 received from DCAmalco on the DCAmalco Transfer.

ADDITIONAL INFORMATION

37. Neither DCAmalco nor any of the predecessor corporations owned shares of any corporation over which it exercise significant influence within the meaning of section 3050 of the CICA Handbook.

38. Except as described in this letter, no property has been or will be acquired, and no liabilities have been or will be incurred or paid by DCAmalco or any of the predecessor corporations in contemplation of and before the Proposed Transactions, other than in a transaction described in subparagraphs 55(3.1)(a)(i) to (iv).

39. There has not been and will not be, as part of a series of transactions or events that includes the Proposed Transactions, any disposition or acquisition of property in circumstances described in subparagraphs 55(3.1)(b)(i) or (iii), or an acquisition of control in the circumstances described in subparagraph 55(3.1)(b)(ii).

40. Except as described in Paragraph 36, none of the property received by TC1 or TC2 on the DCAmalco Transfer will be acquired by a person unrelated to such TC, or by a partnership, as part of a series of transactions or events that includes the Proposed Transactions, in the circumstances described in paragraph 55(3.1)(c).

41. At any time before and during the series of transactions and events that include the Proposed Transactions, none of the shares of any of the predecessor corporations, DCAmalco, TC1, or TC2 will be:

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

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

(c) the subject of a dividend rental arrangement;

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

(e) 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)); or

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

42. None of the corporations referred to herein is, or will be, a specified financial institution.

43. None of the corporations referred to herein will be a corporation described in any of paragraphs (a) to (f) of the definition of “financial intermediary corporation” in subsection 191(1).

44. TC1 and TC2 will each 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.

45. None of the Taxpayers have any outstanding tax liabilities that could be affected by the Proposed Transactions.

PURPOSES OF THE PROPOSED TRANSACTIONS

46. The purpose of the Proposed Transactions is to allow Mr. A and Mr. B to divide the assets of Holdco A, Opco A, Holdco B and Opco B so that each may individually carry on the businesses of Opco A and Opco B independent from each other.

RULINGS GIVEN

Provided that the above statements of Facts, Proposed Transactions, Purposes of the Proposed Transactions and Additional Information are accurate and constitute a complete disclosure of all relevant information, and provided that the Proposed Transactions are completed in the manner described above, our rulings are as follows:

A. Subject to the application of subsection 69(11), provided the appropriate joint elections are filed in the prescribed form and manner within the prescribed time specified in subsection 85(6) and provided 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) the transfers by each of Mr. A and Mr. B of all of their DCAmalco Shares to TC1 and TC2, respectively, as described in Paragraph 19; and

(b) DCAmalco’s transfers of property to TC1 and TC2 on the DCAmalco Transfer as described in Paragraph 25,

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 of the TC1 Class “III” Preferred Shares and TC2 Class “III” Preferred Shares owned by DCAmalco, as described in Paragraph 29, by virtue of paragraphs 84(3)(a) and (b), each of TC1 and TC2 will be deemed to have paid, and DCAmalco will be deemed to have received, a taxable dividend at that time equal to the amount, if any, by which the amount paid in respect of the redemption of the TC1 Class “III” Preferred Shares and the TC2 Class “III” Preferred Shares, as the case may be, exceeds the aggregate PUC in respect of each respective class of those shares immediately before the redemption.

C. Subsection 84(2) and paragraph 88(2)(b) will apply to the distributions by DCAmalco described in Paragraphs 31 and 33 such that:

(a) DCAmalco will be deemed to have paid a dividend (the “Winding-up Dividend”) on the DCAmalco Shares held by TC1 and TC2, as the case may be, equal to the amount, if any, by which:

(i) the amount or value of the funds or property distributed with respect to the shares of that class, as the case may be,

exceeds

(ii) the amount, if any, by which the aggregate PUC in respect of the shares of that class is reduced on the distribution, as the case may be,

and each of TC1 and TC2 will be deemed to have received a taxable dividend on such class equal to that proportion of the amount of the excess that the number of shares of that class held by TC1 and TC2, as the case may be, immediately before the distribution is of the number of shares of that class outstanding immediately before the distributions.

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

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

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

(c) will be excluded in determining the recipient corporation 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 give rise to tax under Part IV except as provided in paragraph 186(1)(b); and

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

E. Provided that as part of the series of transactions or events that includes any of the Proposed Transactions, there is not:

(a) an acquisition of property in the circumstances described in paragraph 55(3.1)(a);

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

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

(d) an acquisition of shares of DC as described in subparagraph 55(3.1)(b)(iii);

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

(f) an acquisition of property in the circumstances described in paragraph 55(3.1)(d),

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

F. The distribution and extinguishment of the TC1 Note and TC2 Note as described in Paragraph 31 will not give rise to a forgiven amount. In addition, none of DCAmalco, TC1 nor TC2 will otherwise realize any gain or incur any loss therefrom.

G. Neither paragraph 40(3.4) nor paragraph 13(21.2), as the case may be, will apply to deny any loss arising on the disposition of XXXXXXXXXX transferred by DCAmalco to TC2 as described in Paragraph 26.

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

I. The provisions of subsection 245(2) will not be applied to the Proposed Transactions, in and by themselves, to redetermine the tax consequences confirmed herein.

The above rulings are given subject to the general limitations and qualifications set out in Information Circular 70-6R8 dated November 1, 2018, and are binding on the CRA provided that the Proposed Transactions are completed on or before XXXXXXXXXX.

The above rulings are based on the Act in its present form and do not take into account the effect of any proposed amendments to the Act which, if enacted, could have an effect on the rulings provided herein.

OTHER COMMENTS

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

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

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

(c) The amount of any capital loss or terminal loss of any entity referred to herein.

Any other tax consequence relating to the facts, Proposed Transactions, additional information, 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 purposes 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 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 Price Adjustment Clauses.

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

Yours truly,

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