2019 Ruling 2019-0795521R3 - XXXXXXXXXX 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 exception to subsection 55(2) provided in paragraph 55(3)(b) applies to the Proposed Transactions.

Position: Yes.

Reasons: The conditions have been satisfied and the butterfly denial provisions of subsection 55(3.1) do not apply.

XXXXXXXXXX						2019-079552

XXXXXXXXXX, 2019

Dear XXXXXXXXXX,

Re: Advance Income Tax Ruling
XXXXXXXXXX

This is in reply to your letter dated XXXXXXXXXX in which you requested an advance income tax ruling on behalf of the Taxpayers. We also acknowledge the additional information provided in our various other communications in respect of this matter.

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 your 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.

We understand that to the best of your knowledge and that of each of the Taxpayers involved, none of the issues described herein are:

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

(b) being considered by a tax services office or taxation centre in connection with a previously filed tax return of the Taxpayers or a person related to the Taxpayers;

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

(d) before the courts or, if a judgment has been issued, the time limit for appeal to a higher court has expired; and

(e) the subject of an advance income tax ruling previously issued by the Income Tax Rulings Directorate of the CRA in connection with the Taxpayers or a person related to the Taxpayers.

In this letter, unless otherwise expressly stated, the following terms have the meanings specified (and the singular shall be read as plural and vice versa, and words importing any gender or the neuter include all genders and the neuter, all as the circumstances require) and unless otherwise noted, all references to monetary amounts are in Canadian dollars.

DEFINITIONS

“A” means XXXXXXXXXX, an individual who is resident in Canada for the purposes of the Act;

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

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

“BCA” means the XXXXXXXXXX;

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

“B” means XXXXXXXXXX, an individual who is resident in Canada for the purposes of the Act;

“C” means XXXXXXXXXX, an individual who was resident in Canada for the purposes of the Act until the time of his death on XXXXXXXXXX;

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

“capital dividend” has the meaning assigned by subsection 83(2);

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

“capital property” has the meaning assigned by 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);

“CRA” means the Canada Revenue Agency;

“DC” means XXXXXXXXXX, a corporation incorporated under BCA;

“DC Class A Common shares” means the Class A Common shares in the capital of DC which have the attributes described in Paragraph 13;

“DC Class G Preferred shares” means the Class G Preferred shares in the capital of DC which have the attributes described in Paragraph 13;

“DC Common shares” means the Common shares in the capital of DC which have the attributes described in Paragraph 3;

“DC Preferred shares” means the Preferred shares in the capital of DC which have the attributes described in Paragraph 3;

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

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

“ERDTOH” means “eligible refundable dividend tax on hand” which has the meaning assigned by subsection 129(4);

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

“Paragraph” means a numbered or lettered paragraph of this letter;

“Partnership” means XXXXXXXXXX, a general partnership that was formerly operated by A and C as described in Paragraph 1;

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

“Proposed Transactions” means the transactions described in Paragraphs 13 to 27;

“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);

“resident of Canada” means resident of Canada for purposes of the Act;

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

“specified class” has the meaning assigned by subsection 256(1.1);

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

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

“taxable Canadian corporation” has the meaning assigned in 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” means a new corporation to be incorporated under the BCA as described in Paragraph 16;

“TC Class A Common shares” means the Class A Common shares in the capital of TC which have the attributes described in Paragraph 17;

“TC Class G Preferred shares” means the Class G Preferred shares in the capital of TC which have the attributes described in Paragraph 17;

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

“Will” means XXXXXXXXXX last will and testament with respect to public assets and with respect to private assets.

FACTS

1. Prior to XXXXXXXXXX, Partnership operated the business of XXXXXXXXXX that is now operated by DC. A and C each held a XXXXXXXXXX% interest in Partnership. A and C are siblings.

2. On XXXXXXXXXX, DC was incorporated under the BCA. DC is a CCPC and a taxable Canadian corporation.

3. DC is authorized to issue an unlimited amount of the following share capital:

a. DC Common shares

i. entitle the holder to XXXXXXXXXX per share;

ii. entitle the holder to non-cumulative dividends as and when declared by the director of DC to the exclusion of any other class of shares. No dividend can be declared or paid on the DC Common shares nor can such shares be purchased for cancellation, if such dividend or purchase would result in DC having insufficient net assets to redeem any issued and outstanding DC Preferred shares, or to pay the redemption amount on the DC Preferred shares in part, or in full, in the event of a wind-up, liquidation or dissolution of DC; and

iii. participate in the remaining assets of DC in the event of a wind-up, liquidation or dissolution of DC.

b. DC Preferred shares

i. entitle the holder to XXXXXXXXXX per share;

ii. redeemable and retractable at a price equal to XXXXXXXXXX per share;

iii. entitle the holder to non-cumulative dividends, as and when declared by the board of directors of Opco to the exclusion of any other class of shares; and

iv. entitle the holder to the redemption/retraction price, in priority to any participation by the holders of the DC Common shares in the event of a winding-up, liquidation or dissolution of DC.

4. Upon DC’s incorporation, A and C each subscribed for XXXXXXXXXX Common shares of DC for $XXXXXXXXXX cash consideration.

5. On XXXXXXXXXX, Partnership transferred its partnership assets to DC. As consideration for the transfer, Partnership received DC Preferred shares and a non-interest bearing promissory note. The transaction was completed pursuant to subsection 85(2) and the parties jointly filed the appropriate election, Form T2058, within the time set out in subsection 85(6). Immediately following the transfer, each of XXXXXXXXXX and XXXXXXXXXX received XXXXXXXXXX DC Preferred shares and their respective portion of the non-interest bearing promissory note. XXXXXXXXXX pursuant to subsection 85(3). DC continued to carry on the business of XXXXXXXXXX. DC uses the XXXXXXXXXX.

6. On XXXXXXXXXX, C passed away. Pursuant to the terms of C’s Will, all his shares of DC were transferred to his adult XXXXXXXXXX B, pursuant to subsections XXXXXXXXXX. The respective ACBs of such shares owned by C immediately prior to C’s death became the respective ACBs of the shares acquired by B on the transfers pursuant to XXXXXXXXXX.

7. On SXXXXXXXXXX, DC redeemed XXXXXXXXXX of A’s DC Preferred shares and XXXXXXXXXX of B’s DC Preferred shares, such that DC was deemed to have paid a dividend of $XXXXXXXXXX and each of A and B were deemed to receive a dividend of $XXXXXXXXXX. DC elected under subsection 83(2) by filing the prescribed Form T2054 in the prescribed manner to have the full amount of such dividends treated as capital dividends. Immediately prior to these share redemptions, DC had a CDA balance of $XXXXXXXXXX.

8. Currently, there are XXXXXXXXXX DC Common shares and XXXXXXXXXX DC Preferred shares issued and outstanding. A owns XXXXXXXXXX DC Common shares having an aggregate PUC and ACB of $XXXXXXXXXX and XXXXXXXXXX DC Preferred shares having an aggregate PUC and ACB of $XXXXXXXXXX. B owns XXXXXXXXXX DC Common shares having an aggregate PUC and ACB of $XXXXXXXXXX and XXXXXXXXXX DC Preferred shares having an aggregate PUC and ACB of $XXXXXXXXXX.

9. A and C own their shares of DC as capital property, and all such shares are eligible property.

10. As of XXXXXXXXXX, DC had the following balances in its tax accounts:

a. RDTOH - $XXXXXXXXXX,

b. GRIP - $XXXXXXXXXX, and

c. CDA - $XXXXXXXXXX.

It is not anticipated that these tax account balances will change before the commencement of the Proposed Transactions.

As of XXXXXXXXXX, DC does not have any carry forward balances of non-capital losses, net capital losses, or XXXXXXXXXX nor does it anticipate to have any such amounts before the commencement of the Proposed Transactions.

It is expected that as of XXXXXXXXXX, DC will have an ERDTOH balance of $XXXXXXXXXX, pursuant to subsection 129(5).

11. As at XXXXXXXXXX, DC had the following assets:

a. current assets which primarily include XXXXXXXXXX; and

b. long-term assets which primarily include XXXXXXXXXX.

12. As at XXXXXXXXXX, pursuant to its unaudited financial statements, DC had the following liabilities:

a. current liabilities which primarily include bank indebtedness and the current portion of long-term debt; and

b. long-term liabilities which primarily include long-term debt and a shareholder loan.

Since the XXXXXXXXXX there has not been a material change in the composition and value of DC’s assets and liabilities that would impact the Proposed Transactions. Moreover, there will not be any significant change in DC’s assets or liabilities (except as contemplated in the Proposed Transactions) from the date of this letter until the date of the Proposed Transactions.

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 following the completion of the Proposed Transactions.

Preliminary transactions

13. Pursuant to a reorganization of capital, DC will file Articles of Amendment in order to include multiple share classes as follows:

a. Class A, B, C, D, E and F voting Common shares, entitled to discretionary dividends;

b. Class G, H, I and J non-voting Common shares, entitled to discretionary dividends;

c. Class A, B, C, and D voting, non-participating, non-convertible Preferred shares, redeemable and retractable at an amount equal to the FMV of the consideration received for the shares, plus any declared and unpaid dividends thereon. Each class of Preferred shares has a non-cumulative dividend entitlement computed based on a fixed percentage range of the FMV of the consideration received for the shares when first issued; and,

d. Class E, F, G and H non-voting, non-participating, non-convertible Preferred shares, redeemable and retractable at an amount equal to the FMV of consideration received for the shares, plus any declared and unpaid dividends thereon. Each class of Preferred shares has a non-cumulative dividend entitlement computed based on a fixed percentage range of the FMV of the consideration received for the shares when first issued.

14. A and B will each simultaneously enter into share exchange agreements with DC to undertake the following:

a. A will exchange all XXXXXXXXXX DC Common shares and XXXXXXXXXX DC Preferred shares for XXXXXXXXXX DC Class A Common shares and XXXXXXXXXX DC Class G Preferred shares, and

b. B will exchange all XXXXXXXXXX DC Common shares and XXXXXXXXXX DC Preferred shares for XXXXXXXXXX DC Class A Common shares and XXXXXXXXXX DC Class G Preferred shares.

These share exchanges will occur at FMV such that the aggregate FMV of all the DC Class A Common shares and the DC Class G Preferred shares received by A and B, at the time of the exchanges, will be equal to the aggregate FMV of all of the DC Common shares and DC Preferred shares exchanged, immediately before the exchange. No election under subsection 85(1) will be filed with respect to these exchanges.

DC will cancel all XXXXXXXXXX DC Common shares and XXXXXXXXXX DC Preferred shares so exchanged. The stated capital accounts of the cancelled DC Common shares and DC Preferred shares will be reduced by the amount of the stated capital of such shares immediately before the exchange, resulting in nil balances.

An amount equal to the aggregate of the PUC of the DC Common shares immediately before the exchange, will be added to the stated capital amount of the DC Class A Common shares. For clarity, the aggregate PUC of the DC Class A Common shares immediately after the exchange will equal to the PUC of the DC Common shares immediately before the exchange.

An amount equal to the aggregate of the PUC of the DC Preferred shares immediately before the exchange, will be added to the stated capital amount of the DC Class G Preferred shares. For clarity, the aggregate PUC of the DC Class G Preferred shares immediately after the exchange will equal to the PUC of the DC Preferred shares immediately before the exchange.

A and B do not desire to confer a benefit on a related person.

15. DC will withdraw its XXXXXXXXXX account and receive the cash proceeds.

16. TC will be incorporated, pursuant to the BCA, without the issuance of share capital. TC will be a CCPC and a taxable Canadian corporation. B will become the director of TC.

17. The authorized share capital of TC will consist of an unlimited amount of the following shares:

a. Class A, B, C, D, E and F voting Common shares, entitled to discretionary dividends;

b. Class G, H, I and J non-voting Common shares, entitled to discretionary dividends;

c. Class A, B, C, and D voting, non-participating, non-convertible Preferred shares, redeemable and retractable for a redemption amount equal to the FMV of the property transferred to TC in consideration for the first issuance of these shares. For purposes of subsection 191(4), the terms and conditions of these shares will, at the time of their issuance, specify an amount in respect of each such share, for which the share is to be redeemed, acquired or cancelled. Each class of Preferred shares has a non-cumulative dividend entitlement computed based on a fixed percentage range of the FMV of the consideration received for the shares when first issued; and,

d. Class E, F, G and H non-voting, non-participating, non-convertible Preferred shares, redeemable and retractable at an amount equal to the FMV of consideration received for the shares, plus any declared and unpaid dividends thereon. Each class of Preferred shares has a non-cumulative dividend entitlement computed based on a fixed percentage range of the FMV of the consideration received for the shares when first issued.

18. B will transfer his XXXXXXXXXX DC Class A Common shares and XXXXXXXXXX DC Class G Preferred shares to TC. As sole consideration for the XXXXXXXXXX DC Class A Common shares, TC will issue XXXXXXXXXX TC Class A Common shares to B having an aggregate FMV equal to the aggregate FMV of the XXXXXXXXXX DC Class A Common shares, at the time of the transfer. As sole consideration for the XXXXXXXXXX DC Class G Preferred shares, TC will issue XXXXXXXXXX TC Class G Preferred shares to B having an aggregate FMV equal to the aggregate FMV of the XXXXXXXXXX DC Class G Preferred shares, at the time of the transfer. B and TC will jointly elect, 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 this transfer. The respective agreed amounts will not be less than the lesser of the amounts described in subparagraphs 85(1)(c.1)(i) and (ii) as they apply to each transfer of shares, nor will such agreed amounts exceed the FMV of the XXXXXXXXXX DC Class A Common shares and XXXXXXXXXX DC Class G Preferred shares, as the case may be.

The amount added to the stated capital account of the XXXXXXXXXX TC Class A Common shares issued to B will be restricted to the greater of (i) the aggregate PUC, immediately before the disposition, of the XXXXXXXXXX DC Class A Common shares transferred to TC by B; and (ii) the aggregate ACB to B, immediately before the disposition, of the XXXXXXXXXX DC Class A Common shares transferred to TC by B, determined in accordance with paragraph 84.1(2)(a.1). For greater certainty, the increase to the PUC of the XXXXXXXXXX TC Class A Common shares will be $XXXXXXXXXX and such amount will not exceed the maximum amount that could be added to the PUC of that share without an adjustment under paragraph 84.1(1)(a).

The amount added to the stated capital account of the XXXXXXXXXX TC Class G Preferred shares issued to B will be restricted to the greater of (i) the aggregate PUC, immediately before the disposition, of the XXXXXXXXXX DC Class G Preferred shares transferred to TC by B; and (ii) the aggregate ACB to B, immediately before the disposition, of the XXXXXXXXXX DC Class G Preferred shares transferred to TC by B, determined in accordance with paragraph 84.1(2)(a.1). For greater certainty, the increase to the PUC of the XXXXXXXXXX TC Class G Preferred shares will be $XXXXXXXXXX and such amount will not exceed the maximum amount that could be added to the PUC of that share without an adjustment under paragraph 84.1(1)(a).

B does not desire to confer a benefit on any related person as a result of the above transfers.

Types of Property

19. Immediately before the transfer described in Paragraph 21, the property of DC will be classified into the following three types of property for purposes of the definition of distribution, provided in subsection 55(1) as follows:

a. cash or near-cash property, comprising the proceeds of DC’s XXXXXXXXXX;

b. 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 an active business (other than a specified investment business) including its XXXXXXXXXX; and

c. investment property, comprising advances made to related parties.

For greater certainty, for purposes of the transfer described in Paragraph 21:

i. any tax accounts of DC, such as any non-capital loss, XXXXXXXXXX, net capital loss, and the balance of any RDTOH, GRIP or CDA, if any, will not be considered property;

ii. deferred expenses, which are expenses that are deferred and amortized for accounting purposes, but fully deducted for tax purposes, if any, will not be considered property; and

iii. any advances to DC that have a term of less than XXXXXXXXXX or are due on demand, if any, are considered cash or near-cash property.

20. In determining the net FMV of each type of property of DC immediately before the transfer described in Paragraph 21, 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. all current liabilities and shareholder loans will be allocated to each cash or near-cash property of DC in the proportion that the FMV of each such property is of the aggregate FMV of all cash or near-cash property of DC. The total amount of DC’s current liabilities to be allocated to DC’s cash or near cash property will not exceed the aggregate FMV of all of DC’s cash or near-cash property;

b. following the allocation of the current liabilities and shareholder loans described in subparagraph a, any remaining net FMV of accounts receivable, inventory (XXXXXXXXXX), XXXXXXXXXX and prepaid expenses and deposits will be reclassified as business property and excluded from the net FMV of DC’s cash or near-cash property, to the extent that such property will be collected, sold or consumed by DC or TC in the ordinary course of the business to which they relate (for clarity, cash will not be reclassified to business property);

c. liabilities of DC, other than those described in subparagraph 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 and the liabilities that pertain to a 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 subparagraphs 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 DC, on the basis of 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 subparagraphs a and c. However, where DC is considered to have a negative amount of a type of property because of the allocations in subparagraphs a or c, for purposes of allocating the remaining liabilities, the net FMV of that type of property will be deemed nil resulting in none of these liabilities being allocated to that type of property.

For greater certainty, for purposes of determining the net FMV of each type of property of DC:

i. the amount of deferred income tax liability, if any, will not be considered a liability because such amount does not represent a legal obligation;

ii. amounts owing by DC that have a term of less than 12 months or are due on demand with no fixed terms of repayment are considered current liabilities;

iii. current liabilities include amounts normally classified as current liabilities, including accounts payable, accrued liabilities and taxes payable; and

iv. no amount will be considered to be a liability unless it represents a true legal liability that is capable of quantification.

DC Transfer

21. Immediately following the determination of the net FMV of DC’s types of property as described above, DC will transfer to TC, TC’s proportionate share of the net FMV of each type of property owned by DC at that time (collectively referred to as the “distribution property”), such that immediately following the transfer of the properties and the assumption by TC of DC’s liabilities, as described in Paragraph 22, the aggregate net FMV of each type of property transferred by DC to TC 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, immediately before the distribution, of all property of that type owned at that time by DC;

B is the FMV, immediately before the distribution, of all the DC shares owned, at that time, by TC; and

C is the FMV, immediately before the distribution, of all the issued and outstanding DC shares.

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 TC will receive as compared to what it would have received had it received its appropriate pro rata share of the net FMV of that type of property of DC.

22. As consideration for the DC transfer described in Paragraph 21, TC will:

a. assume such liabilities of DC, as appropriate, so that TC will receive a proportionate share of the net FMV of each type of property owned by DC; and

b. issue TC Class A Preferred shares to DC which will have an aggregate redemption amount and aggregate FMV equal to the amount by which the aggregate FMV, at the time of the distribution, of the distribution property received by TC, exceeds the aggregate amount of the liabilities of DC assumed by TC, as described in subparagraph a.

DC will hold the TC Class A Preferred shares as capital property. The TC Class A Preferred shares will be taxable preferred shares and short-term preferred shares.

23. In respect of the distribution of property described in Paragraph 21, DC and TC will jointly elect, in prescribed form and within the time allowed by subsection 85(6), to have the provisions of subsection 85(1) apply to the transfers of each eligible property of DC that is transferred by DC to TC. The agreed amount in respect of each such eligible property will be 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); and

c. in the case of inventory owned in connection with the XXXXXXXXXX business of DC, an amount determined in accordance with the formula set out in paragraph 85(1)(c.2).

The agreed amount in respect of each eligible property so transferred using the provisions of subsection 85(1), will not be greater than the FMV of such eligible property. The amount of the liabilities assumed by TC, which are allocated to a particular eligible property that is subject to an election under subsection 85(1), will not exceed the agreed amount for that particular property. The amount of liabilities assumed by TC, which are allocated to a particular property that is not subject to an election under subsection 85(1), will not exceed the FMV of any such property.

The amount added to the stated capital of the TC Class A Preferred shares received by DC, will be an amount equal to the aggregate of (a) the agreed amounts, in the case of each eligible property transferred to TC, and (b) the aggregate FMV, in the case of each property transferred to TC that is not an eligible property, less (c) the aggregate principal amounts of the liabilities of DC assumed by TC. For greater certainty, the amount added to the stated capital account for the TC Class A Preferred shares to be issued by TC as partial consideration for the distribution of property, will not exceed the maximum amount that could be added to the aggregate PUC of the TC Class A Preferred shares without a reduction taking place pursuant to subsection 85(2.1).

24. Immediately after the distribution, on XXXXXXXXXX, TC will redeem all of the issued TC Class A Preferred shares held by DC for an amount equal to the aggregate redemption amount and FMV of such shares. As consideration therefor, TC will issue Promissory Note #1 to DC, which will have a principal amount and FMV equal to the aggregate FMV and redemption amount of the TC Class A Preferred shares redeemed. DC will accept Promissory Note #1 as payment in full for the TC Class A Preferred shares redeemed. TC will have its first taxation year end on XXXXXXXXXX, immediately after such share redemption.

25. On XXXXXXXXXX, DC will purchase for cancellation all of the XXXXXXXXXX DC Class A Common shares and redeem all of the XXXXXXXXXX DC Class G Preferred shares owned by TC for an amount equal to the aggregate redemption amount and FMV of such shares. As consideration therefor, DC will issue Promissory Note #2 to TC, which will have a principal amount and FMV equal to the aggregate FMV and purchase for cancellation amount of the DC Class A Common shares and the aggregate FMV and redemption amount of the TC Class G Preferred shares redeemed. TC will accept Promissory Note #2 as payment in full for the DC Class A Common shares and DC Class G Preferred shares redeemed.

26. Promissory Note #1 and Promissory Note #2 will be set-off in full against each other and cancelled without payment.

27. Immediately following the above Proposed Transactions, the net FMV of each type of DC’s property retained by DC, determined in the manner described in Paragraphs 19 to 20, will be equal to or approximate that proportion of the aggregate net FMV of that type of property of DC, determined immediately before the distribution that:

a. the aggregate FMV, immediately before the distribution, of all the DC shares owned at that time by TC,

is of

b. the aggregate FMV, immediately before the distribution, of all the issued and outstanding DC shares.

ADDITIONAL INFORMATION

28. 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 DC in contemplation of and before the Proposed Transactions, other than in a transaction described in subparagraphs 55(3.1)(a)(i) to (iv).

29. There has not, and will not be, as part of the 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).

30. None of the property received by TC on the distribution will be acquired by a person unrelated to 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).

31. None of the property retained by DC after the distribution will be acquired by a person unrelated to DC, 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)(d).

32. None of DC or TC is or will be, at any time during a series of transactions or events that includes the Proposed Transactions, a specified financial institution, a restricted financial institution or a corporation described in any of the paragraphs (a) to (f) of the definition of financial intermediary corporation.

33. At any time before and during the series of transactions and events that include the Proposed Transactions, none of the shares of DC or TC 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).

34. Immediately before the redemption of the TC Class A Preferred shares owned by DC, described in Paragraph 24, DC will be connected with TC pursuant to paragraph 186(4)(a) and subsection 186(2). Although DC’s ownership in TC does not constitute a substantial interest, the dividend resulting from the transaction described in Paragraph 26 is deemed to be an excluded and an excepted dividend pursuant to subsection 191(4).

35. Each of DC and TC will have the financial capacity to honor, upon presentation for payment, the amount payable under their respective promissory notes issued as part of the Proposed Transactions.

36. The Proposed Transactions will not result in any of the Taxpayers being unable to pay its existing tax liabilities.

PURPOSE OF THE PROPOSED TRANSACTIONS

The purpose of the Proposed Transactions is to separate the XXXXXXXXXX business into two separate businesses as A and B wish to carry on their respective portion of business independently. The Proposed Transactions will allow A and B to each have direct, separate control over their pro rata share of DC’s property in order to achieve this purpose.

RULINGS GIVEN

Provided the foregoing statements constitute a complete and accurate disclosure of all the relevant facts, additional information, Proposed Transactions and purpose of the Proposed Transactions, and provided that the Proposed Transactions are completed in the manner 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 limit specified in subsection 85(6), subsection 85(1) will apply to:

a. the transfer of the XXXXXXXXXX DC Class A Common shares and XXXXXXXXXX DC Class G Preferred shares, owned by B to TC, as described in Paragraph 18;

b. the transfer of each eligible property owned by DC to TC on the distribution, as described in Paragraphs 21 through to 23;

such that the agreed amount in respect of each such transfer of eligible property will be deemed to be the transferor’s proceeds of disposition and the transferee’s cost of the particular eligible property, pursuant to paragraph 85(1)(a).

For purposes of the joint elections, when determining the agreed amount of depreciable property in the course of the distribution, the reference in subparagraph 85(1)(e)(i) to the “undepreciated capital cost to the taxpayer of all the property of that class immediately before the disposition” shall mean that proportion of the UCC to DC of all the property of that class immediately before the distribution that the FMV at that time of the property that is transferred is of the aggregate FMV of all the property of that class at that time.

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

B. As a result of the redemption by TC of the TC Class A Preferred shares owned by DC, as described in Paragraph 24, by virtue of subsection 84(3), TC will be deemed to have paid, and DC 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 Class A Preferred shares exceeds the aggregate PUC in respect of those shares immediately before the purchase for cancellation.

C. As a result of the purchase for cancellation by DC of the of the XXXXXXXXXX DC Class A Common shares, owned by TC, and the redemption by DC of the XXXXXXXXXX DC Class G Preferred shares, as described in Paragraph 25, by virtue of subsection 84(3):

a. DC will be deemed to have paid, and TC 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 purchase for cancellation of the XXXXXXXXXX DC Class A Common shares exceeds the aggregate PUC in respect of those shares immediately before the purchase for cancellation; and

b. DC will be deemed to have paid, and TC 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 XXXXXXXXXX DC Class G Preferred shares exceeds the aggregate PUC in respect of each class of those shares immediately before the redemption.

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

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 for the taxation year in which such a dividend is deemed to have been received, and, for greater certainty, such deduction will not be prohibited by subsections 112(2.1), (2.2), (2.3) or (2.4);

c. will be excluded in determining the recipient corporation’s proceeds of disposition of the shares so redeemed, purchased or cancelled pursuant to paragraph (j) of the definition of proceeds of disposition;

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 have been received;

e. will not be subject to tax under Part IV.1 or Part VI.1; and

f. will not be subject to tax under Part IV except to the extent that the payer corporation is entitled to a dividend refund for its taxation year in which it is deemed to pay dividends, pursuant to paragraph 186(1)(b).

E. Provided that, as part of a 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 a share in the circumstances described in subparagraph 55(3.1)(b)(iii); or

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

which has not been described in this letter, then by virtue of paragraph 55(3)(b), subsection 55(2) will not apply to the taxable dividends referred to in Rulings B and C above, 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 application of subsection 84.1(1) to the share transfer by B to TC, as described in Paragraph 18, will not result in:

a. a deemed dividend paid by TC, and received by B, pursuant to paragraph 84.1(1)(b); and

b. a reduction of the PUC of the TC Class A Common shares and TC Class G Preferred shares, provided that the PUC of each class of shares of the capital stock of TC issued to B on the transfers is a nominal amount not exceeding the maximum amount that could be added to the PUC of such classes of shares having regard to paragraph 84.1(1)(a).

G. The set-off and cancellation of Promissory Note #1 and Promissory Note #2 described in Paragraph 26 will not, in and of itself, give rise to a forgiven amount. In addition, neither DC nor TC will otherwise realize a gain or incur any loss as a result of such set-off and cancellation.

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 re-determine the tax consequences confirmed in the rulings given above.

The above rulings are given subject to the limitations and qualifications set out in Information Circular 70-6R9 dated April 23, 2019, and are binding on the CRA provided that the Proposed Transactions are completed within the time frame described in this letter, unless otherwise stated.

The above rulings are based on the law as it presently reads and do not take into account any proposed amendments to the Act and the Regulations which, if enacted, could have an effect on the rulings provided therein.

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, UCC or FMV of any share or property referred to herein;

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

(c) whether any of the shares described herein constitute shares of a specified class;

(d) whether there have been other dispositions of property by DC to a corporation controlled by DC or a predecessor of DC.

any other tax consequences relating to the facts, additional information, 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, 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
Director
Reorganizations Division
Income Tax Ruling Directorate
Legislative Policy and Regulatory Affairs Branch