2020 Ruling 2020-0850251R3 - Single-wing 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 are exempt from subsection 55(2) as a result of qualifying under paragraph 55(3)(b)?

Position: Yes.

Reasons: Proposed transactions meet the requirements of the law.

XXXXXXXXXX									2020-085025

XXXXXXXXXX

Dear XXXXXXXXXX,

Re: Advance Income Tax Ruling

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

PRELIMINARY MATTERS

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:

i. in a previously filed return of the Taxpayers or a related person and;

A. being considered by the Canada Revenue Agency in connection with such return;
B. under objection by the Taxpayers or a related person; or
C. the subject of a current or completed court process involving the Taxpayers or a related person; or

ii. the subject of a ruling previously considered by the Income Tax Rulings Directorate.

The tax account numbers, Tax Services Offices and the Tax Centres and addresses of the Taxpayers involved are as follows:

XXXXXXXXXX

The above-referenced Taxpayers have confirmed that the proposed transactions described herein will not affect their ability to pay any of their outstanding tax liabilities.

Unless otherwise stated:

i. all references herein to a part, section, subsection, paragraph or subparagraph is a reference to the relevant provision of the Income Tax Act, R.S.C. 1985 (5th Suppl.) c.1, as amended, (the “Act”), or the Income Tax Regulations, C.R.C., c.945 (the “Regulations”), as appropriate;

ii. all terms and conditions used in this letter that are defined in the Act (or in the Regulations) have the meaning given in such definition;

iii. all references to monetary amounts are in Canadian dollars; and

iv. the singular should be read as plural and vice versa where the circumstances so require.

DEFINITIONS

Unless otherwise specified, the following terms have the meanings specified below:

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

“Act1” means the Quebec Companies Act, XXXXXXXXXX, as amended;

“Act2” means the Canada Business Corporations Act;

“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);

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

“capital property” has the meaning assigned by section 54 and subsection 248(1);

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

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

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

“CRA” means the Canada Revenue Agency;

“DC” means XXXXXXXXXX, a corporation incorporated under Act2 on XXXXXXXXXX;

“DC Class A Shares” means the Class A shares of the capital stock of DC that are currently issued and outstanding, as described in Paragraph 9;

“DC Class B Shares” means the Class B shares of the capital stock of DC that are currently issued and outstanding, as described in Paragraph 9;

“DC Purchase Note” means the non-interest bearing demand promissory note issued by DC to TC1 on the purchase for cancellation of the DC Class A Shares and DC Class B Shares held by TC1 whose principal amount and FMV will be equal to the aggregate FMV of those DC shares, as described in Paragraph 33;

“DC Real Estate” refers to XXXXXXXXXX and any other parts that make up or are located in a XXXXXXXXXX owned by DC;

“DC Transfer” refers to the transfer of property by DC on the distribution as described in Paragraph 28;

“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);

“ERDTOH” means “eligible refundable dividend tax on hand” as that expression is defined in subsection 129(4);

“Estate” refers to Estate of XXXXXXXXXX, a testamentary and personal trust created pursuant to the Will. The Estate is a resident in Canada for all relevant times;

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

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

“Late Father” refers to the XXXXXXXXXX, the father of Sibling 1 and Sibling 2;

“montant de capital” means an amount equal to the sum of the paid up capital and contributed surplus in respect of each such share;

“NERDTOH” means “non-eligible refundable dividend tax on hand” as that expression is defined in subsection 129(4);

“Paragraph” means a numbered paragraph in this Ruling and “Subparagraph” refers to a numbered subparagraph in this letter;

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

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

“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 Paragraphs 17 to 38;

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

“Sibling 1" means XXXXXXXXXX, an individual resident in Canada;

“Sibling 2” means XXXXXXXXXX, an individual resident in Canada;

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

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

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

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

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

“TC1” means a corporation to be incorporated under Act1 as described in Paragraph 19;

“TC1 Sub” means a corporation to be incorporated under Act1 as described in Paragraph 21;

“TC1 Sub Preferred Shares” means the preferred shares as described in Subparagraph 21(b);

“TC1 Sub Redemption Note” means the demand promissory note issued on the redemption of the preferred shares of TC1 Sub as described in Paragraph 32;

“Trust” means the testamentary trust to be created pursuant to the Will for the benefit of the children of Sibling 1. Sibling 1 will be the trustee of the Trust on its creation;

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

“Will” refers to the Last Will and Testament of the Late Father.

FACTS

1. Sibling 1 and Sibling 2 are brothers and are adult children of Late Father.

2. Both Sibling 1 and Sibling 2 are Canadian residents for income tax purposes.

3. Sibling 1 has children, who are beneficiaries of the Trust.

4. Sibling 2 has no children.

5. Late Father passed away on XXXXXXXXXX.

6. In his Will, Late Father gave and bequeathed, as particular legacy, all the shares that he possessed at the time of his death, in the share capital of DC as follows:

a. an undivided one-third (1/3) unto Sibling 1;
b. an undivided one-third (1/3) unto Sibling 2; and
c. an undivided one-third (1/3) unto the Trust for the benefit of his grandchildren (i.e. the children of Sibling 1).

7. The sole liquidator of the Estate is Sibling1. The Estate is not yet settled and some of the particular legacies as well as the residue of the Estate has not yet been distributed by Sibling 1.

8. DC is a CCPC and a TCC. DC was incorporated on XXXXXXXXXX under Act2. DC holds a portfolio of XXXXXXXXXX. DC does not XXXXXXXXXX and therefore all of DC’s income from the XXXXXXXXXX is reported for income tax purposes as income from a specified investment business. DC has a taxation year ending XXXXXXXXXX.

9. DC’s authorized share capital consists of an unlimited number of:

a. Class A shares, Class B shares, Class C shares and Class D shares which are all common shares, voting (XXXXXXXXXX) and participating, the whole pari passu with each other;

b. Class E shares which are voting, redeemable by DC at a redemption price of $XXXXXXXXXX per share and entitled to an annual non-cumulative dividend not exceeding eight percent (XXXXXXXXXX%) of the montant de capital;

c. Class F shares are non-voting and entitled to unfixed discretionary dividends. Each Class F share is redeemable and retractable for the consideration for which each such share has been issued (the redemption amount). In the case of the liquidation or dissolution of DC, the Class F shares shall be entitled to receive, in priority to any other classes of shares, the redemption amount and any declared but unpaid dividends.

10. On XXXXXXXXXX, the shares in the capital stock of DC held by Late Father were transferred to the Estate and the issued and outstanding share capital of DC at that time was as follows:

Shareholder		Shares			PUC		ACB		Redemption Amount
 Sibling 1		XXXX Class A Common	XXXX		XXXX		XXXX
 Sibling 2		XXXX Class A Common	XXXX		XXXX		XXXX
 Estate			XXXX Class A Common	XXXX		XXXX		XXXX

11. On XXXXXXXXXX, DC purchased for cancellation the XXXXXXXXXX DC Class A Shares held by the Estate. As consideration, DC issued and the Estate received XXXXXXXXXX Class F shares having an aggregate stated capital of $XXXXXXXXXX and an aggregate redemption value of $XXXXXXXXXX, as well as XXXXXXXXXX DC Class B Shares having an aggregate stated capital of $XXXXXXXXXX. This share exchange occurred pursuant to section 51.

12. Immediately following the exchange, the issued and outstanding shares in the capital of DC were as follows:

Shareholder		Shares			PUC		ACB		Redemption Amount
 Sibling 1		XXXX Class A Common	XXXX		XXXX		XXXX
 Sibling 2		XXXX Class A Common	XXXX		XXXX		XXXX
 Estate			XXXX Class B Common	XXXX		XXXX		XXXX
 Estate			XXXX Class F Preferred	XXXX		XXXX		XXXX
13. On XXXXXXXXXX, DC redeemed XXXXXXXXXX Class F shares for an aggregate redemption amount of $XXXXXXXXXX and elected pursuant to subsection 83(2) that the full amount of the deemed dividend of $XXXXXXXXXX be a capital dividend payable from the CDA of DC.

14. Immediately before the proposed transactions, the issued and outstanding share capital of DC is held as follows:

Shareholder		Shares			PUC		ACB		Redemption Amount
 Sibling 1		XXXX Class A Common	XXXX		XXXX		XXXX
 Sibling 2		XXXX Class A Common	XXXX		XXXX		XXXX
 Estate			XXXX Class B Common	XXXX		XXXX		XXXX

15. DC had an ERDTOH balance of $XXXXXXXXXX, a NERDTOH balance of $XXXXXXXXXX, a GRIP balance of $XXXXXXXXXX and a CDA balance of $XXXXXXXXXX as at XXXXXXXXXX. These balances are not expected to change before the Proposed Transactions are implemented.

16. The significant assets of DC include: cash, advances to directors, prepaid expenses and the land, building and DC Real Estate. DC’s liabilities include: accounts payable, amounts payable to shareholders and a long term debt (mortgage). Based on the documentation provided, the net asset value of DC is approximately $XXXXXXXXXX.

PROPOSED TRANSACTIONS

The following transactions will be implemented in the order presented unless otherwise noted.

Distribution of shares by the Estate to Sibling 2

17. Pursuant to the provisions of the Will and XXXXXXXXXX, the liquidator of the Estate will distribute XXXXXXXXXX DC Class B Shares to Sibling 2 by way of a capital distribution in satisfaction of his capital entitlement in the Estate.

18. Immediately following the distribution of such property, the issued and outstanding shares of DC will be as follows:

Shareholder		Shares			PUC		ACB		Redemption Amount
 Sibling 1		XXXX Class A Common	XXXX		XXXX		XXXX
 Sibling 2		XXXX Class A Common	XXXX		XXXX		XXXX
 Sibling 2		XXXX Class B Common	XXXX		XXXX		XXXX
 Estate			XXXX Class B Common	XXXX		XXXX		XXXX

Incorporation of TC1 and TC1 Sub

19. TC1 will be incorporated pursuant to the provisions of the Act1. TC1 will, at all relevant times, be a TCC and a CCPC. TC1’s taxation year and fiscal period will end on XXXXXXXXXX. The authorized share capital of TC1 will consist of an unlimited number of common shares, which are voting (XXXXXXXXXX vote per share), participating and entitled to non-cumulative discretionary dividends.

20. On incorporation, Sibling 2 will subscribe for XXXXXXXXXX common share of TC1.

21. TC1 will incorporate TC1 Sub under Act1. TC1 Sub will be a CCPC and a TCC. The authorized share capital of TC1 Sub will consist of:

a. an unlimited number of common shares, which are voting (XXXXXXXXXX vote per share), participating and entitled to noncumulative discretionary dividends; and
b. an unlimited number of TC1 Sub Preferred Shares. A TC1 Sub Preferred Share entitles its holder to: (i) XXXXXXXXXX vote; and (ii) a monthly preferential non-cumulative dividend of one-twelfth of XXXXXXXXXX% of the TC1 Sub Preferred Share redemption amount. The TC1 Sub Preferred Shares will be redeemable and retractable for an amount equal to the amount by which the aggregate FMV of the property received on the issuance of the TC1 Sub Preferred Shares net of the liabilities of DC assumed by TC1 Sub for the acquisition of such property divided by the number of TC1 Sub Preferred Shares issued as consideration for such transfer.

22. TC1 will subscribe for XXXXXXXXXX TC1 Sub common share for $XXXXXXXXXX.

Increase of PUC on Class B common shares of DC

23. The directors of DC will pass a resolution to increase the stated capital (and consequently the PUC) of its Class B common shares by an amount approximating (but not exceeding) its CDA balance at that time, currently expected to be approximately $XXXXXXXXXX. DC will elect in prescribed manner and prescribed form and within the time referred to in subsection 83(2) that the deemed dividend arising as a result of this increase of stated capital/PUC be paid out of its CDA.

Transfer of DC Shares to TC1

24. Sibling 2 will transfer the XXXXXXXXXX Class A common shares and XXXXXXXXXX Class B common shares of DC to TC1 in exchange for XXXXXXXXXX common shares of TC1 having a FMV equal to the aggregate FMV of the shares of DC so transferred. Immediately before, at the time of, and immediately after, the transfer described in this Paragraph, Sibling 2 will own all of the issued and outstanding shares of the capital stock of TC1. Following such transfer, Sibling 2 will not own any shares of the capital stock of DC.

a. Sibling 2 and TC1 will jointly elect, in prescribed form and within the time referred to in subsection 85(6), to have the provisions of subsection 85(1) apply to the transfer of the XXXXXXXXXX Class A common shares and XXXXXXXXXX Class B common shares transferred by Sibling 2 to TC1. The agreed amount in respect of the shares so transferred will be an amount not less than the lesser of the amounts described in subparagraphs 85(1)(c.1)(i) and (ii) and will not exceed the FMV thereof.

b. The amount to be added to the stated capital account maintained for the TC1 Class B common shares in the capital of TC1 as a result of the aforesaid transfer will not exceed the maximum amount that could be added to the PUC of the shares without an adjustment under paragraph 84.1(1)(a).

Types of Property

25. Immediately before the DC Transfer, the property of DC 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 DC’s cash, advances to directors/shareholders and prepaid expenses;
b. investment 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 property or income from a specified investment business, including for greater certainty, all income from DC Real Estate property; and
c. business property, comprising all of the assets of DC, other than cash or near-cash property, any income from a business (other than a specified business).

For greater certainty, for purposes of the DC Transfer:

(i) any tax accounts or tax related amounts of DC, such as the balance of non-capital losses, net capital losses, CDA, GRIP, ERDTOH, or NERDTOH, 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 will not be considered property;

(iii) 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;

(iv) advances that are payable on demand or that are due within the next 12 months will be considered cash or near cash property; 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 DC, if any, will not be considered a liability because such amount does not represent a legal obligation of DC at the time of the Proposed Transactions.

26. As a result of the classification of DC’s property as described in Paragraph 25, it is expected that DC will have only cash and near-cash property and investment property.

27. In determining the net FMV of each type of property of DC immediately before the DC Transfer, 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, which include amounts owing by DC that have a term of less than 12 months, that are due on demand, or that are otherwise normally classified as current liabilities (including amounts payable to shareholders), will be allocated to each cash or near-cash property in the proportion that the FMV of each such property is of the aggregate FMV of all cash or near-cash property. The total amount of current liabilities to be allocated to cash or near cash property is not expected to exceed the aggregate FMV of DC’s cash or near-cash property;

b. liabilities of DC, other than those described in Paragraph 27(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

c. if any liabilities remain after the allocations described in Paragraphs 27(a) and (b) are made, such remaining liabilities will then be allocated to the cash or near-cash property and investment property of DC, 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 26(a) and (b). However, where DC is considered to have a negative amount of a type of property because of the allocations in Paragraphs 27(a) or (b), 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.

DC Transfer

28. Immediately following the determination of the net FMV of the types of property of DC as described in Paragraph 27, DC will transfer to TC1 Sub its pro rata portion of each type of property owned by it at that time, such that immediately following the transfer, the aggregate net FMV of each type of property transferred by DC to TC1 Sub 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 DC Transfer, of all property of that type owned at that time by DC;

B is the FMV, immediately before the DC Transfer, of all the issued and outstanding shares of the capital stock of DC owned, at that time, by TC1; and

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

For the purposes of this Paragraph, the expression “approximate that proportion” means that the discrepancy from that proportion, if any, will not exceed XXXXXXXXXX percent (XXXXXXXXXX%), determined as a percentage of the net FMV of each type of property that TC1 Sub (and ultimately TC1) 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.

29. As consideration for the property transferred by DC to TC1 Sub, TC1 Sub will:

a. assume such liabilities of DC, as appropriate, such that TC1 Sub will receive on a net basis, its pro rata share of each type of property owned by DC; and,

b. issue XXXXXXXXXX TC1 Sub Preferred Shares to DC that will have an aggregate redemption amount and FMV equal to the amount by which the aggregate FMV at the time of the DC Transfer of all the properties received by TC1 Sub, less the aggregate amount of all the liabilities of DC assumed by TC1 Sub, as described in (a).

30. DC and TC1 Sub will jointly elect in 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 each eligible property transferred by DC to TC1 Sub. 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 lesser of the FMV and the cost amount to DC of such property at the time of disposition. For greater certainty, the aggregate of such elected amounts will be greater than the aggregate amount of DC’s liabilities so assumed for such properties.

Specifically, the agreed amount under such election in respect of each eligible property so transferred will be within the limits prescribed as follows:

a. in the case of depreciable property of a prescribed class, an amount equal to the least of the amounts specified in subparagraphs 85(1)(e)(i), (ii) and (iii);

b. in the case of property described in paragraph 85(1)(c.1), an amount equal to the lesser of the amounts specified in subparagraphs 85(1)(c.1)(i) and (ii); and

c. in the case of inventory to which paragraph 85(1)(c.2) applies, the amount deemed by that paragraph.

31. TC1 Sub will add to its stated capital account for the TC1 Sub Preferred Shares, an amount equal to the aggregate of (a) the agreed amounts, in the case of each eligible property transferred by DC to TC1 Sub, and (b) the aggregate FMV, in the case of each property transferred to TC1 Sub that is not an eligible property, less (c) the aggregate amount of DCs liabilities assumed by TC1 Sub as described in Paragraph 29(a). For greater certainty, the amount to be added to the stated capital account for TC1 Sub’s Preferred Shares issued as partial consideration for the property transferred to it on the DC 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).

Redemption of TC1 Sub Preferred Shares

32. Immediately after the transfer of property by DC to TC1 Sub on the DC Transfer, TC1 Sub will redeem the XXXXXXXXXX TC1 Sub Preferred Shares it issued to DC as described in Paragraph 29 for their redemption amount. As consideration therefore, TC1 Sub will issue to DC the TC1 Sub Redemption Note having a principal amount and FMV equal to the aggregate redemption amount and FMV of the TC1 Sub Preferred Shares so redeemed by it. DC will accept the TC1 Sub Redemption Note as payment in full for the redemption of such shares.

Cancellation of DC Shares

33. Immediately following the share redemption described in Paragraph 32, DC will purchase for cancellation its XXXXXXXXXX Class A common shares and XXXXXXXXXX Class B common shares that are owned by TC1 for an amount equal to their aggregate FMV. As consideration therefore, DC will issue to TC1 the DC Purchase Note having a principal amount and FMV equal to the aggregate FMV of such shares so purchased for cancellation. TC1 will accept the DC Purchase Note as payment in full for shares so purchased for cancellation.

34. To the extent that DC has a GRIP balance at the time of the purchase for cancellation described in Paragraph 33, DC will designate, pursuant to subsection 89(14), to treat a portion, equal to one third of the GRIP balance, of the deemed dividend resulting from the purchase for cancellation to be an eligible dividend by notifying TC1 in writing, within the time limit prescribed in subsection 89(14), that the portion of such dividend is an eligible dividend.

Winding-up of TC1 Sub

35. Immediately following the share redemptions described in Paragraph 32 and 33 above, the shareholder of TC1 Sub will pass a Special Resolution to wind-up and dissolve TC1 Sub under the applicable provisions of Act1.

36. All properties of TC1 Sub will be distributed and all liabilities of TC1 Sub will be either discharged or assumed by TC1. In connection with the winding-up of TC1 Sub, the TC1 Sub Redemption Note will be assumed by TC1.

37. Articles of dissolution will be filed by TC1 Sub with the appropriate corporate registry and upon receipt of a certificate of dissolution, TC1 Sub will be dissolved.

Set-off of Intercompany Notes

38. The DC Purchase Note will be set-off in full against the corresponding TC1 Sub Redemption Note and such notes will be cancelled without payment.

ADDITIONAL INFORMATION

39. The Estate will be settled and wound-up at a future time and the remaining assets of the Estate will be distributed in accordance with the Will of the Late Father, including the balance of the shares of DC to Sibling 1 and the Trust to be created for Sibling 1’s children (the Late Father’s grandchildren). As part of the settlement of the Estate, DC may make distributions of cash or indebtedness on the DC Class B Shares by way of a return of stated capital in amounts equal to the proportionate stated capital increase described in Paragraph 23. The winding-up of the Estate, including the distribution of shares of DC to Sibling 1 and the Trust, must take place in accordance with the Will of the Late Father, and will occur regardless of whether the Proposed Transactions are carried out.

40. 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 permitted transaction described in subparagraphs 55(3.1)(a)(i) to (iv).

41. 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).

42. None of the property received by TC1 on the DC Transfer will be acquired by a person unrelated to TC1, 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).

43. None of the property retained by DC after the DC Transfer 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).

44. None of the shares of any corporation described herein (including any shares to be issued as described in the Proposed Transactions) is or will be, at any time throughout the series of transactions or events that includes the Proposed Transactions:

a. the subject of any agreement or undertaking which constitutes a “guarantee agreement” as defined in subsection 112(2.2);

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

c. the subject of a dividend rental arrangement.

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

46. 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).

47. Each of DC and TC1 Sub will have the financial capacity to honour, upon presentation for payment, the amount payable under their respective promissory notes issued as part of the Proposed Transactions as described in Paragraphs 32 and 33.

48. The Proposed Transactions will not result in any of the Taxpayers or a related person being unable to pay its existing tax liabilities.

PURPOSES OF THE PROPOSED TRANSACTIONS

49. The purpose of the divisive reorganization is to bring to an end the ongoing dispute over the administration of DC and to effect a “split-up” of the net assets of DC where Sibling 2 would receive his own real estate properties.

50. The purpose of the increase to the stated capital of the DC Class B common shares described in Paragraph 23 is to elect that the deemed dividend under subsection 84(1) be a capital dividend pursuant to subsection 83(2).

RULINGS GIVEN

Provided that the preceding statements constitute a complete and accurate disclosure of all relevant facts, proposed transactions, additional information and purposes 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 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 transfer by Sibling 2 of all of his XXXXXXXXXX Class A common shares and XXXXXXXXXX Class B common shares to TC1 as described in Paragraph 24; and

b) the transfer of each eligible property owned by DC to TC1 Sub on the DC Transfer as described in Paragraphs 28 to 30,

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 TC1 Sub of its TC1 Sub Preferred Shares owned by DC, as described in Paragraph 32, by virtue of paragraph 84(3)(a) and (b), TC1 Sub 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 TC1 Preferred Shares exceeds the aggregate PUC in respect of those particular shares immediately before the redemption.

C. As a result of the purchase for cancellation by DC of XXXXXXXXXX Class A common shares and XXXXXXXXXX Class B common shares owned by TC1, as described in Paragraph 33, by virtue of subsection 84(3):

a. DC will be deemed to have paid, and TC1 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 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 TC1 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 Class B common shares exceeds the aggregate PUC in respect of those shares immediately before the redemption.

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

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

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

c) will, pursuant to paragraph (j) of the definition of “proceeds of disposition” in section 54, be excluded in determining the proceeds of disposition to the recipient corporation of the shares so redeemed or purchased;

d) will, pursuant to 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, by virtue of paragraph (b) or (c) of the definition of “excepted dividend” in section 187.1 and paragraph (a) of the definition of “excluded dividend” in subsection 191(1), not be subject to tax under Parts IV.1 or VI.1; and

f) will not be subject to tax under Part IV except to the extent of the amount, if any, determined under paragraph 186(1)(b).

E. The provisions of subsection 88(1) will apply on the winding-up of TC1 Sub into TC1 as described in Paragraphs 35 through 37, so that;

a) each property of TC1 Sub distributed to TC1 on the winding-up will be deemed by paragraph 88(1)(a) to have been disposed of by TC1 for proceeds of disposition determined under that paragraph;

b) the shares in the capital stock of TC1 Sub held by TC1 immediately before the winding-up, will be deemed by paragraph 88(1)(b) to have been disposed of by such particular TC for proceeds of disposition determined under that paragraph; and

c) each property of TC1 Sub distributed to TC1, as the case may be, on the winding-up will be deemed to have been acquired by TC1 for an amount equal to the amount deemed by paragraph 88(1)(c) to be TC1 Sub’s proceeds of disposition of the property.

F. 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 in the circumstances 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, 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.

G. The set-off and cancellation of the TC1 Sub Redemption Note and DC Purchase Note as described in Paragraph 38 will not, in and of itself, give rise to a “forgiven amount” within the meaning of either subsection 80(1) or section 80.01. In addition, neither DC nor TC1, as the case may be, will realize any gain or incur a loss as a result of such set-off and cancellation.

H. The provisions of subsection 245(2) will not be applied as a result of the Proposed Transactions, in and by themselves, to redetermine the tax consequences confirmed in the rulings given herein.

These rulings are given subject to the limitations and qualifications set forth in Information Circular 70-6R10 issued on September 29, 2020, and are binding on the CRA, provided that the Proposed Transactions are completed no later than XXXXXXXXXX after the date of this letter.

The above rulings are based on the law as it reads at the date of this letter 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 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;the balance of the CDA, GRIP, ERDTOH or NERDTOH of any corporation;

b) the amount of any capital loss or terminal loss of any entity referred to herein;

c) the income tax consequences pertaining to any of the transactions or events described in Paragraph 39; or

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