2021 Ruling 2021-0882111R3 - Multing 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 dividend is exempt from 55(2) as a result of qualifying under 55(3)(b)?

Position: Yes.

Reasons: Proposed Transactions meet the requirements of 55(3)(b).

XXXXXXXXXX
										2021-088211

XXXXXXXXXX

XXXXXXXXXX, 2021

Dear XXXXXXXXXX,

Re: Advance Income Tax Ruling
XXXXXXXXXX

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.

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

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, c.1 (5th Supp.), as amended (the “Act”);

ii. all terms and conditions used in this Ruling request 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 XXXXXXXXXX;

“Aco” means XXXXXXXXXX, a corporation incorporated under the Act1;

“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;

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

“Cco” means XXXXXXXXXX, a corporation incorporated under the Act1;

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

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

“CRA” means the Canada Revenue Agency;

“DC” means XXXXXXXXXX, a corporation incorporated under the Act1;

“DC Purchase Note 1” means the demand promissory note issued on the purchase for cancellation of the common shares of DC held by TC1, as described in Paragraph 22;

“DC Purchase Note 2” means the demand promissory note issued on the purchase for cancellation of the common shares of DC held by TC2, as described in Paragraph 22;

“DC Transfer” refers to the transfer of property by DC to TC1 and TC2 on the distribution as described in Paragraph 19;

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

“dividend rental arrangement” 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” as that term is defined in subsection 129(4);

“Fco” means XXXXXXXXXX, a corporation incorporated under the Act1;

“FMV” means fair market value;

“Gco” means XXXXXXXXXX, a corporation incorporated under the Act1;

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

“JV A” means XXXXXXXXXX, a Canadian joint venture each of the participants of which deals with each other at arm’s length;

“Ms. A” means XXXXXXXXXX, an individual resident in Canada;

“Ms. B” means XXXXXXXXXX, an individual resident in Canada;

“Ms. C” means XXXXXXXXXX, an individual resident in Canada;

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

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

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

“Proposed Transactions” means the transactions described in Paragraphs 11 to 25;

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

“Partnership A” means XXXXXXXXXX, a widely held partnership which deal at arm’s length with DC;

“Regulations” means the Income Tax Regulations, CRC, c. 945, as amended;

“related” 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);

“significant influence” has the meaning set out in the Accounting Standards for Private Enterprises;

“Specified Investment Business” has the meaning assigned by subsection 125(7);

“TC” means a transferee corporation in relation to the DC Transfer;

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

“TC1” means XXXXXXXXXX, a corporation to be incorporated under Act1 by Ms. B as described in Paragraph 12;

“TC1 Class A Preferred Shares” means the Class A preferred shares of TC1 more fully described in Paragraph 12;

“TC1 Redemption Note” has the meaning assigned in Paragraph 23;

“TC2” means a corporation to be incorporated under Act1 by Aco as described in Paragraph 13;

“TC2 Class A Preferred Shares” means the Class A preferred shares of TC2 more fully described in Paragraph 13;

“TC2 Redemption Note” has the meaning assigned in Paragraph 23.

FACTS

1. DC is a TCC and a CCPC. DC was incorporated on XXXXXXXXXX under Act1. DC’s income is reported for income tax purposes as income from a Specified Investment Business. DC has a taxation year ending XXXXXXXXXX.

2. The authorized share capital of DC includes an unlimited number of shares of the following classes:

(a) Class A Special shares: voting, redeemable and retractable at $XXXXXXXXXX per share, noncumulative annual dividends not to exceed $XXXXXXXXXX per share. (“DC Class A Shares”);

(b) Class B Special shares: voting, redeemable and retractable at $XXXXXXXXXX per share, noncumulative annual dividends not to exceed $XXXXXXXXXX per share. (“DC Class B Shares”);

(c) Class C Special shares: voting, redeemable and retractable at $XXXXXXXXXX per share, noncumulative annual dividends not to exceed $XXXXXXXXXX per share. (“DC Class C Shares”); and

(d) Voting, participating common shares (“DC Common Shares”).

3. DC’s issued and outstanding shares are held as follows:

Shareholder		Shares		PUC		ACB
Ms B			XXXXX		XXXXX		XXXXX
Aco			XXXXX		XXXXX		XXXXX
Cco			XXXXX		XXXXX		XXXXX

Aco received the shares of DC on a tax deferred rollover from Ms. A in XXXXXXXXXX. Ms. A originally received the shares from the estate of her late father. The shares of DC are capital property to Aco and eligible property.

Ms. B inherited her shares of DC from her late husband in XXXXXXXXXX. The shares of DC are capital property to Ms. B and eligible property.

Cco received the shares of DC on a tax deferred rollover from Ms. C in XXXXXXXXXX. Ms.C originally received the shares from the estate of her late father.

Each of Aco, Ms. B and Cco will continue to hold their shares of DC until the share transfers described in Paragraph 14.

4. DC holds XXXXXXXXXX common shares of Fco, which it holds as capital property. The shares of Fco held by DC, which represent XXXXXXXXXX% of the issued and outstanding shares of Fco, are eligible property. The remaining XXXXXXXXXX common shares of FCo are held by individuals or entities that deal at arm’s length with Ms. A, Ms. B, Ms. C, DC and Fco. DC has significant influence over Fco. The other significant assets of DC include: cash, accounts receivable, marketable securities, a XXXXXXXXXX% investment in JV A and a XXXXXXXXXX% partnership interest in Partnership A. DC’s liabilities include: accounts payable, income taxes payable and loans from shareholders. The FMV of the assets of DC is approximately $XXXXXXXXXX

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

6. Fco is a holding company whose main assets include XXXXXXXXXX common shares of Gco, which represents XXXXXXXXXX% of the outstanding shares of Gco, and loans to Gco. DC has significant influence over Gco. The remaining XXXXXXXXXX common shares of GCo are held by individuals or entities that deal at arm’s length with Ms. A, Ms. B, Ms. C, DC, Fco and Gco.

7. Gco’s main assets include cash and income-producing properties. Gco’s liabilities include: accounts payable, income taxes payable and loans from Fco. No amount is owing by GCo to DC. Gco’s income is reported for income tax purposes as income from a Specified Investment Business.

8. Aco is a TCC and a CCPC. Aco was incorporated on XXXXXXXXXX under Act1. Aco has a taxation year ending XXXXXXXXXX. The authorized share capital of Aco consists of unlimited Class A common shares. Ms. A is and has been the sole shareholder of Aco since XXXXXXXXXX. Ms. A holds XXXXXXXXXX Class A common shares of Aco with a PUC and ACB of $XXXXXXXXXX.

9. Cco is a TCC and a CCPC. Cco was incorporated on XXXXXXXXXX under Act1. Cco has a taxation year ending XXXXXXXXXX. The authorized share capital of Cco consists of XXXXXXXXXX Class A Preference shares, XXXXXXXXXX Class B Preference shares, XXXXXXXXXX Class C Preference shares and unlimited common shares. Ms. C is and has been the sole shareholder of Cco since XXXXXXXXXX. Ms. C holds XXXXXXXXXX common shares of Cco with a PUC of $XXXXXXXXXX and an ACB of $XXXXXXXXXX.

10. Ms. A, Ms. B and Ms. C are not related and otherwise deal with one another at arm’s length.

PROPOSED TRANSACTIONS

DC Sale of Marketable Securities

11. DC will sell marketable securities with a fair market of approximately $XXXXXXXXXX to purchasers dealing at arm’s length with DC in exchange for cash consideration.

Incorporation of Transferee Corporations

12. Ms. B will incorporate TC1 under Act1. TC1 will be a CCPC and a TCC. The authorized share capital of TC1 will consist of an unlimited number of:

(a) Voting, participating common shares;

(b) Class A voting, redeemable, retractable at XXXXXXXXXX preferred shares (“TC1 Class A Preferred Shares”); and

On incorporation, no shares will be issued.

13. Aco will incorporate TC2 under Act1. TC2 will be a CCPC and a TCC. The authorized share capital of TC2 will consist of an unlimited number of:

(a) Voting, participating common shares; and

(b) Class A voting, redeemable, retractable at XXXXXXXXXX preferred shares (“TC2 Class A Preferred Shares”).

On incorporation, no shares will be issued.

Transfer of DC Shares to TC1 and TC2

14. The following share transfers will be made on a contemporaneous basis:

(a) Ms. B will transfer XXXXXXXXXX DC Common Shares to TC1 in exchange for XXXXXXXXXX TC1 common shares having an aggregate FMV equal to the aggregate FMV of the DC shares transferred to TC1. Immediately before, at the time of, and immediately after, the transfers described in this Paragraph, Ms. B will own all of the issued and outstanding shares of the capital stock of TC1. Following such transfer, Ms. B will not own any shares of the capital stock of DC.

Ms. B 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 DC Common Shares by Ms. B to TC1. The agreed amount in respect of the DC 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.

The amount to be added to the corporate stated capital account maintained for the TC1 common shares issued by TC1 as a result of the aforesaid transfer will not exceed the maximum amount that could be added to the PUC of those shares, without being subject to adjustment under paragraph 84.1(1)(a).

(b) Aco will transfer XXXXXXXXXX DC Common Shares to TC2 in exchange for XXXXXXXXXX TC2 common shares having an aggregate FMV equal to the aggregate FMV of the DC shares transferred to TC2. Immediately before, at the time of, and immediately after, the transfers described in this Paragraph, Aco will own all of the issued and outstanding shares of the capital stock of TC2. Following such transfer, Aco will not own any shares of the capital stock of DC.

Aco and TC2 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 DC Common Shares by Aco to TC2. The agreed amount in respect of the DC 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.

The amount to be added to the corporate stated capital account maintained for the TC2 Common Shares issued by TC2 as a result of the aforesaid transfers will not exceed the maximum amount that could be added to the PUC of the shares, without being subject to adjustment under subsection 85(2.1).

Types of Property

15. The proposed transactions involve the transfer of a proportionate share of the FMV of each type of property of DC to each TC based on the relative FMV of the shares that each TC owns in DC immediately before the transfer (“DC Transfer”).

16. Immediately prior to the DC Transfer described in Paragraph 19, the property of DC will be determined on a consolidated basis by including the appropriate pro rata share of the FMV of the property of each entity over which DC exercises significant influence (i.e. Fco and Gco). For this purpose, the property of DC and each corporation over which it exercises significant influence will be classified into three types of property for the purposes of the definition of "distribution" in subsection 55(1):

(a) cash or near-cash property, consisting of current assets, including cash, accounts receivable and prepaid expenses;

(b) investment property, consisting of assets, other than cash or near-cash property, any income from which would, for purposes of the Act, be income from property or from a Specified Investment Business; and

(c) business property consisting of property, other than cash or near cash, any income from which would, for purposes of the Act, be income from a business (other than a Specified Investment Business).

Based on the classification of property described above, DC, Fco and Gco will have only cash or near cash property and investment property.

17. In computing the FMV of each type of property that is a attributable to a corporation over which the particular corporation exercises significant influence and of any indebtedness receivable by the particular corporation from the corporation will be allocated among the types of property by multiplying the aggregate FMV of the shares of the corporation owned by the particular corporation and any amounts receivable by the particular corporation from the corporation, by the proportion that the FMV of each type of property owned by the corporation is of the aggregate FMV of all the property owned by the corporation.

18. For greater certainty:

(a) any tax accounts such as any non-capital loss, net capital loss, the balance of any ERDTOH, NERDTOH or CDA, will not be considered property or a liability, as the case may be;

(b) deferred expenses and deferred taxes for accounting purposes will not be considered property or a liability;

(c) any amount in respect of a refund 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; and,

(d) no amount will be considered a liability unless it represents a true legal liability capable of quantification.

DC Transfer

19. Immediately following the determination of the FMV of each type of property of DC, as described in Paragraphs 15 to 18, DC will contemporaneously transfer to each of TC1, and TC2, a pro rata share of the 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 DC’s liabilities as described in Paragraph 20(a), the aggregate FMV of each type of property transferred by DC 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 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 or TC2, as the case may be; 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, determined as a percentage of the FMV of each type of property TC1 and TC2 has received on such as compared to what each such TC would have received had it received its exact pro-rata share of the FMV of that type of property.

20. As consideration for the property transferred by DC to TC1 and TC2, as described in Paragraph 19, each TC will:

(a) assume its proportionate share of the liabilities of DC, as appropriate, so that each TC will receive a proportionate share of the aggregate amount of the liabilities of DC determined immediately before the DC Transfer, that:

i. the aggregate FMV, immediately before the DC Transfer, of the shares of the capital stock of DC held by TC1 and TC2, as applicable;

is of

ii. the aggregate FMV, immediately before the DC Transfer, of all of the issued and outstanding shares of the capital stock of DC; and

(b) issue to DC such number of its Class A Preferred Shares (TC1 Class A Preferred Shares and TC2 Class A Preferred Shares respectively) having an aggregate redemption amount and aggregate FMV equal to the FMV of the property received by such TC less the amount of liabilities of DC assumed by the particular TC as described in (a).

Following the DC Transfer, each of TC1 and TC2 will be connected with DC by virtue of paragraph 186(4)(b).

21. DC will jointly elect with TC1 and TC2, as the case may be, in the 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 each eligible property that is transferred by DC to such TC. The agreed amount in respect of each eligible property so transferred will not be greater than the FMV of such property, at the time of the transfer, nor will it be less than the FMV of the consideration therefor other than shares of the capital stock of the TC 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) and inventory, an amount not less than 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, 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 maintained for its Class A Preferred 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 DC’s liabilities assumed by such TCs, as described in Paragraph 20(a).

For greater certainty, the amount to be added to the stated capital account of each TC in respect of the Class A Preferred Shares issued 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).

Cancellation of DC Common Shares

22. On a contemporaneous basis, DC will purchase for cancellation all of the outstanding common shares owned by TC1 and TC2. As sole consideration therefore, DC will issue to each such TC a non-interest bearing demand promissory note having a principal amount and FMV equal to the sum of the FMV of the common shares of DC held by such TC. In particular, DC will issue the DC Purchase Note 1 payable to TC1 and the DC Purchase Note 2 payable to TC2. The purchase for cancellation of the common shares of DC owned by TC1 and TC2 will result in an acquisition of control of DC by Cco. Pursuant to subsection 256(9), DC will elect in its income tax return for the taxation year immediately before the acquisition of control to not have that subsection apply. Each of TC1 and TC2, will accept the DC Purchase Note 1 and the DC Purchase Note 2, as the case may be, as payment in full for the purchase for cancellation of the particular common shares.

Redemption of TC Class A Preferred Shares

23. Immediately following the DC Transfer, each of TC1 and TC2, as the case may be, will redeem its Class A Preferred Shares owned by DC for an amount equal to the aggregate redemption amount of such shares. As sole consideration for such share redemption, TC1 and TC2, as the case may be, will issue a non-interest bearing demand promissory note (the “TC1 Redemption Note” in respect of TC1’s share redemption and the “TC2 Redemption Note” in respect of TC2’s share redemption) having a principal amount and FMV equal to the aggregate redemption amount of such TC’s Class A Preferred Shares so redeemed. DC will accept the TC1 Redemption Note and TC2 Redemption Note respectively, as payment in full for the redemption of that particular TC’s Class A Preferred Shares.

Set-off of Intercompany Notes

24. DC and TC1 will enter into an agreement under which DC and TC1 will set-off the DC Redemption Note 1 and TC1 Redemption Note, and such notes will be cancelled.

25. DC and TC2 will enter into an agreement under which DC and TC2 will set-off the DC Redemption Note 1 and TC2 Redemption Note, and such notes will be cancelled.

ADDITIONAL INFORMATION

26. 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).

27. 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).

Property received by TC1 on the DC Transfer will not be acquired as part of the series of transactions or events that includes the Proposed Transactions by a person who was not related to TC1 or by a partnership in the circumstances described in paragraph 55(3.1)(c).

28. Property received by TC2 on the DC Transfer will not be acquired as part of the series of transactions or events that includes the Proposed Transactions by a person who was not related to TC2 or by a partnership in the circumstances described in paragraph 55(3.1)(c).

29. Property retained by DC after the DC Transfer will not be acquired as part of the series of transactions or events that includes the Proposed Transactions by a person who was not related to DC or by a partnership, in the circumstances described in paragraph 55(3.1)(d).

30. At any time before and during the series of transactions and events that include the Proposed Transactions, none of the shares of DC, TC1 or TC2, as the case may be, 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).

31. None of the corporations referred to herein is, or will be, a specified financial institution or a corporation described in any of paragraphs (a) to (f) of the definition of “financial intermediary corporation” in subsection 191(1).

32. DC and each of the TCs will have the financial capacity to honour, upon presentation for payment, the amount payable under the demand promissory note issued as part of the Proposed Transactions as described in Paragraphs 22 and 23.

PURPOSE OF THE PROPOSED TRANSACTIONS

33. The purpose of the Proposed Transactions is to allow Ms. A, Ms. B and Ms. C, through their respective corporations, to split-up the assets of DC on a tax-deferred basis so that each may carry on with their share of their assets of DC independent from each other.

RULINGS GIVEN

Provided that the preceding statements constitute a complete and accurate disclosure of all relevant facts, 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 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 Ms. B and Aco as the case may be, of their respective DC common shares to TC1 and TC2, as the case may be, as described in Paragraph 14; and

(b) the transfers of each eligible property owned by DC to TC1 and TC2, as the case may be, as part of the DC Transfer, as described in Paragraph 19,

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 and TC2 of their respective TC1 Class A Preferred Shares and TC2 Class A Preferred shares owned by DC, as described in Paragraph 23, by virtue of paragraphs 84(3)(a) and (b), TC1 and TC2 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 Class A Preferred Shares and TC2 Class A Preferred shares exceed 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 its XXXXXXXXXX and XXXXXXXXXX common shares owned by TC1 and TC2 respectively, as described in Paragraph 22, by virtue of paragraphs 84(3)(a) and (b), DC will be deemed to have paid, and TC1 and TC2 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 and XXXXXXXXXX common shares exceeds the aggregate PUC in respect of those shares immediately before the purchase for cancellation.

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 (d) of subsection 191(4), 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. 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.

F. Provided that an election has been made in the manner prescribed by subsection 256(9), control of DC will be acquired, at the time of the purchase for cancellation of the DC common shares, as described in Paragraph 22 and, pursuant to paragraph 249(4)(a), DC’s taxation year that would, but for paragraph 249(4)(b), have included that time, will be deemed to have ended immediately before that time and a new taxation year will be deemed to begin at that time. DC will be entitled to establish a taxation year end for the new taxation year without the concurrence of the Minister of National Revenue.

G. The set-off and cancellation of the TC1 and TC2 Redemption Notes and the DC Purchase Notes as described in Paragraphs 24 and 25 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, TC1 nor TC2, 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 15(1), 56(2), 69(1) 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 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 70-6R11 issued on April 1, 2021, 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;

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

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

(d) 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,

(e) 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.

To the extent that a deemed dividend arises from a corporation redeeming, acquiring or purchasing for cancellation of its shares, a problem of circularity may arise when computing the Part IV tax and the dividend refund of each corporation. We are not providing any comments on that possible issue.

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. 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
Reorganizations Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch