2022 Ruling 2021-0920791R3 - Butterfly Reorganization

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.

SUBJECT: Butterfly Reorganization

Principal Issues: Will the exception to subsection 55(2) in paragraph 55(3)(b) apply to the proposed transactions?

Position: Yes.

XXXXXXXXXX						2021-092079

XXXXXXXXXX

Dear Mr. Boily:

RE: Advance income tax rulings request
XXXXXXXXXX

This is in reply to your letter dated XXXXXXXXXX, in which you requested an advance income tax ruling on behalf of the above-noted taxpayers. We also acknowledge the additional information that you provided in subsequent letters and email correspondence as well as information provided in our telephone conversations (XXXXXXXXXX).

To the best of your knowledge and that of the Taxpayers involved, none of the Proposed Transactions (as defined below) or the issues involved in this Ruling request are the same as or substantially similar to transactions or issues that are:

(i) in a previously filed tax return of any of the Taxpayers or a related person and:

A. being considered by the CRA in connection with such return;

B. under objection by any of the Taxpayers or a related person; or

C. the subject of a current or completed court process involving any of the Taxpayers or a related person; or

(ii) the subject of a Ruling request previously considered by the Income Tax Rulings Directorate.

Unless otherwise stated, all references to a statute are to the relevant provision of the Income Tax Act, R.S.C. 1985 (5th Supp.), c.1, as amended (“Act”), or where appropriate, the Income Tax Regulations, C.R.C., c.945, as amended (“Regulations”).

In addition, all references to monetary amounts are in Canadian dollars.

DEFINITIONS

ln this letter, unless otherwise noted, the following terms have the meaning specified herein. All references in the singular include the plural.

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

(b) “agreed amount” in respect of a property means the amount that the transferor and the transferee of an eligible property have agreed upon in a joint election pursuant to subsection 85(1) in respect of the property;

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

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

(e) “Butterfly Shares” means shares of capital stock to be issued by a TC Sub, which will be non-voting, will entitle the holder to discretionary non-cumulative dividends, will be redeemable and retractable at any time (subject to applicable law) for an amount equal to the aggregate FMV of the consideration received on the issuance thereof (excluding the amount of any liabilities assumed) plus any declared but unpaid dividends, and will have priority over a share of any other classes of shares of capital stock on a liquidation or other dissolution. No dividends or other distribution will be paid on shares ranking junior to the Butterfly Shares if the effect of such dividends or other distribution would be to reduce the net realizable value of the assets to an amount less than the aggregate redemption amount of the issued and outstanding Butterfly Shares;

(f) “capital dividend” has the meaning assigned by section 83;

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

(h) “CBCA” means the Canada Business Corporations Act, R.S.C. 1985, c. C-44, as amended from time to time and consolidated to the date of this letter;

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

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

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

(l) “CRA” means the Canada Revenue Agency;

(m) “DC” means XXXXXXXXXX, the distributing corporation;

(n) “DC Transfer” refers to the transfer of property by DC to the TC Subs on the Distribution as described in Paragraph 35;

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

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

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

(r) “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 with no compulsion to act, expressed in terms of money or money's worth;

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

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

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

(v) “Parent” means XXXXXXXXXX, father of the Siblings;

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

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

(y) “Proposed Transactions” means the transactions described in Paragraphs 20 to 49;

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

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

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

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

(dd) “Sibling 1” means XXXXXXXXXX, an adult individual resident in Canada and sister of Sibling 2;

(ee) “Sibling 2” means XXXXXXXXXX, an adult individual resident in Canada and sister of Sibling 1;

(ff) “SIN” means social insurance number;

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

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

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

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

(kk) “TC” refers to any of TC1 or TC2 singularly and “TCs” refers to TC1 and TC2 collectively, as the case may be;

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

(mm) “TC1” means a corporation to be incorporated under the CBCA by Sibling 1;

(nn) “TC Sub” refers to any of TC Sub1 or TC Sub2 singularly and “TC Subs” refers to TC Sub1 and TC Sub2 collectively, as the case may be;

(oo) “TC Sub1” means a corporation to be incorporated under the CBCA by TC1;

(pp) “TC Sub1 Butterfly Shares” means the Butterfly Shares to be issued by TC Sub1 to DC;

(qq) “TC Sub1 Redemption Note” means the non-interest bearing demand promissory note to be issued by TC Sub1 to DC as consideration for TC Sub1’s Butterfly Shares to be redeemed as described in Paragraph 39;

(rr) “TC2” means XXXXXXXXXX;

(ss) “TC Sub2” means a corporation to be incorporated under the CBCA by TC2;

(tt) “TC Sub2 Butterfly Shares” means the Butterfly Shares to be issued by TC Sub2 to DC;

(uu) “TC Sub2 Redemption Note” means the non-interest bearing demand promissory note to be issued by TC Sub2 to DC as consideration for TC Sub2’s Butterfly Shares to be redeemed as described in Paragraph 39; and

(vv) “Winding-up Dividend” means the dividend arising on the winding-up of DC by virtue of subsection 84(2) and paragraph 88(2)(b), as described in Paragraph 43 and Ruling D.

FACTS

1. DC was incorporated under the CBCA on XXXXXXXXXX.

2. DC does not carry on any commercial activities other than the holding of marketable securities.

3. The end of the taxation year of DC is XXXXXXXXXX.

4. DC has a single class of voting and participating common shares issued and outstanding.

5. ln particular, the issued and outstanding share capital of DC consists of XXXXXXXXXX common shares.

6. Each of Sibling 1 and Sibling 2 holds XXXXXXXXXX common shares of DC.

7. All of the issued and outstanding common shares of DC are held as capital property by Sibling 1 and Sibling 2.

8. The Siblings subscribed for the common shares of DC on XXXXXXXXXX as part of a reorganization whereby Parent converted his common shareholdings in DC in preferred shares having a redemption value equal to the FMV of such common shareholdings at that time.

9. The common shares of DC have an aggregate PUC of $XXXXXXXXXX.

10. Parent passed away on XXXXXXXXXX and all of the shares he held in the capital of DC have been redeemed or purchased for cancellation on XXXXXXXXXX for their respective redemption price which has been fully paid and satisfied. The redemptions of shares of the capital stock of DC held by the estate of Parent was made in the course of a post mortem planning which among others allowed the estate to claim a capital loss under subsection 164(6). The estate of Parent held prior to their redemption four classes of preferred shares of the capital stock of DC: XXXXXXXXXX Fourth preferred shares having XXXXXXXXXX votes per share and a FMV, PUC and ACB of $XXXXXXXXXX; XXXXXXXXXX Third preferred shares having a FMV of $XXXXXXXXXX and a PUC and ACB of $XXXXXXXXXX Second preferred shares having a FMV of $XXXXXXXXXX and a PUC and ACB of $XXXXXXXXXX and XXXXXXXXXX Preferred shares having a FMV of $XXXXXXXXXX and a PUC of $XXXXXXXXXX and an ACB of $XXXXXXXXXX.

11. DC had an ERDTOH balance of $XXXXXXXXXX as at the end of its XXXXXXXXXX taxation year. The balance of the ERDTOH is not expected to change during its XXXXXXXXXX taxation year.

12. DC had a NERDTOH balance of $XXXXXXXXXX as at the end of its XXXXXXXXXX taxation year. The balance of the NERDTOH is not expected to change during its XXXXXXXXXX taxation year.

13. DC had a GRIP balance of $XXXXXXXXXX as at the end of its XXXXXXXXXX taxation year.

14. DC had a CDA balance of $XXXXXXXXXX as at the end of its XXXXXXXXXX taxation year. DC did not dispose of any capital property since the end of its XXXXXXXXXX taxation year.

15. The significant assets of DC include cash and cash equivalents as well as investments in Formula Growth Fund Class 001 (FGL001).

16. The significant liabilities of DC include accounts payable and a note to a shareholder.

17. TC2 was incorporated under the CBCA on XXXXXXXXXX. The end of the taxation year of TC2 is XXXXXXXXXX.

18. TC2 does not carry on any commercial activities other than the holding of marketable securities.

19. TC2 has a single class of voting and participating common shares issued and outstanding held by Sibling 2.

PROPOSED TRANSACTIONS

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

Capital Dividend

20. The directors of DC will resolve to increase the stated capital of the common shares of DC by an amount of $XXXXXXXXXX.

21. The directors of DC will elect in prescribed manner to have the dividend deemed paid by the increase in the stated capital of the common shares under subsection 84(1) to be a capital dividend.

Incorporation of TC1

22. Sibling 1 will incorporate a new corporation, TC1 under the CBCA. The authorized share capital of TC1 will consist of an unlimited number off fully participating, voting common shares. The end of the taxation year of TC1 will be XXXXXXXXXX.

23. At the time of incorporation of TC1, Sibling 1 will subscribe for XXXXXXXXXX common share for $XXXXXXXXXX. TC1 will be a TCC and a CCPC.

Incorporation of TC Sub1 and TC Sub2

24. TC1 will cause the incorporation of a new wholly-owned subsidiary, TC Sub 1 under the CBCA. The authorized share capital of TC Sub 1 will consist of an unlimited number of fully participating, voting common shares as well as an unlimited amount of Butterfly Shares. TC Sub 1 will be a TCC and a CCPC.

25. On incorporation of TC Sub 1, TC 1 will subscribe for XXXXXXXXXX common shares of TC Sub 1 for $XXXXXXXXXX per share.

26. TC2 will cause the incorporation of a new wholly-owned subsidiary, TC Sub 2 under the CBCA. The authorized share capital of TC Sub 1 will consist of an unlimited number off fully participating, voting common shares as well as an unlimited amount of Butterfly Shares. TC Sub 2 will be a TCC and a CCPC.

27. On incorporation of TC Sub 2, TC2 will subscribe for XXXXXXXXXX common shares of TC Sub 2 for $XXXXXXXXXX per share.

Transfer of DC shares to TCs

28. On a contemporaneous basis, each of Sibling 1 and Sibling 2 will transfer all of their common shares of DC to their respective TC.

29. Sibling 1 will transfer her XXXXXXXXXX common shares of DC to TC1 in exchange for TC1 issuing XXXXXXXXXX of its common shares as sole consideration therefore having an aggregate FMV equal to the aggregate FMV of the XXXXXXXXXX common shares of DC XXXXXXXXXX transferred.

30. Sibling 2 will transfer her XXXXXXXXXX common shares of DC to TC2 in exchange for TC2 issuing XXXXXXXXXX of its common shares as sole consideration therefore having an aggregate FMV equal to the aggregate FMV of the XXXXXXXXXX common shares of DC XXXXXXXXXX transferred.

31. Sibling 1 and Sibling 2, as the case may be, will jointly elect with their respective TC in the prescribed form and within the time limit referred to in subsection 85(6) to have the provisions of subsection 85(1) apply to the transfers. The agreed amount in respect of the shares of DC so transferred will not be greater than their FMV nor will such agreed amounts be less than the lesser of the amounts described in subparagraphs 85(1)(c.1)(i) and (ii).

32. The amount added to the stated capital account in respect of the common shares issued to Sibling 1 and Sibling 2, as the case may be, by their respective TC will be restricted to the greater of (i) the aggregate ACB, immediately before the disposition, in respect of their common shares of DC so transferred to such TC; and (ii) their aggregate ACB of the common shares of DC, immediately before the disposition, determined in accordance with paragraph 84.1(2)(a.1). For greater certainty, the increase to the PUC of each TC’s common shares will not exceed the maximum amount that could be added to the PUC of such shares without an adjustment under paragraph 84.1(1)(a).

Type of property

33. The property of DC will be classified into the following two types of property for the purposes of the definition of Distribution as follows:

a) cash or near-cash property, comprising of DC’s cash, accounts receivable, taxes receivable, advances to related parties, prepaid expenses and guaranteed investment certificates;

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. This will include the XXXXXXXXXX units in FGL.

For greater certainty, for purposes of the DC Transfer:

i) DC will not have any business property at the time of the DC Transfer;

ii) any tax accounts of DC, 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, for purposes of the Proposed Transactions;

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

iv) the amount of any loan or advance owing to DC that is due in less than 30 days or is due on demand, if any, is considered cash or near-cash property;

v) the amount of any loan or advance owing by DC that is due in less than 30 days or is payable on demand, if any, is considered a current liability; and

vi) 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.

34. ln 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, 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 the corporations’ cash or near-cash property;

b) liabilities of DC, other than those described in Paragraph 34(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 34(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 34(a) and (b). However, where DC is considered to have a negative amount of a type of property because of the allocations in Paragraphs 34(a) and (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

35. Immediately following the determination of the net FMV of each type of property of DC, as described in Paragraphs 33 and 34, DC will contemporaneously transfer to each of TC Sub1 and TC Sub2, a pro-rata portion of the net FMV of each type of property owned by it at that time, such that immediately following the transfer of the properties and the assumption of DC’s liabilities as described in Paragraph 36(a), the aggregate net FMV of each type of property transferred by DC to TC Sub1 or TC Sub2, as the case may be, will be equal to or approximate that proportion of each type of property determined by the formula: A x B/C, where:

A) is the net FMV (determined as described above), immediately before the 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 one percent (1%), determined as a percentage of the net FMV of each type of property that TC Sub1 and TC Sub2 has received on such transfer as compared to what it would have received had it received its particular TC’s exact pro-rata share of the net FMV of that type of property.

36. As consideration for the property transferred by DC to TC Sub1 and TC Sub2, TC Sub1 and TC Sub2, as the case may be, will:

a) assume such liabilities of DC, as appropriate, so that each of TC Sub1 and TC Sub2 will receive a proportionate share of the net FMV of each type of property owned by DC; and

b) issue a number of its Butterfly 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 DC Transfer, of the property received by such TC Sub, exceeds the aggregate amount of the liabilities of DC assumed by such TC Sub, as described in Paragraph 36(a).

37. DC will jointly elect with TC Sub1 and TC Sub2, as the case may be, in prescribed form within the time limit referred to in subsection 85(6), to have the provisions of subsection 85(1) apply to the transfer of each eligible property that is transferred by DC to TC Sub1 or TC Sub2. The agreed amount in respect of each eligible property so transferred will not be greater than the FMV of such property nor will it be less than the FMV, at the time of disposition, of the consideration therefor other than shares of the capital stock of that corporation or a right to receive such shares. For greater certainty, the agreed amount in respect of capital property will be an amount equal to the lesser of the amounts described in subparagraphs 85(1)(c.1)(i) and (ii).

38. TC Sub1 and TC Sub2, as the case may be, will add to its respective stated capital account for the Butterfly Shares, an amount equal to the aggregate of (a) the agreed amounts, in the case of each eligible property transferred to such TC Sub, and (b) the aggregate FMV, in the case of each property transferred to such TC Sub that is not an eligible property, less (c) the aggregate amount of DCs liabilities assumed by such TC Sub as described in Paragraph 36(a). For greater certainty, the amount to be added to the stated capital account of a TC Sub for its Butterfly 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 Butterfly Shares

39. Immediately after the transfer of the property to TC Sub1 and TC Sub2 on the DC Transfer, each of TC Sub1 and TC Sub2 will redeem its Butterfly Shares owned by DC for an amount equal to the aggregate redemption amount and FMV of such shares. As consideration therefore, TC Sub1 and TC Sub2, as the case may be, will issue respectively to DC the TC Sub1 Redemption Note in respect of TC Sub1’s share redemption and the TC Sub2 Redemption Note in respect of TC Sub2's share redemption, each having a principal amount and FMV equal to the redemption amount of such TC Sub’s Butterfly Shares. DC will accept the TC Sub1 Redemption Note and TC Sub2 Redemption Note respectively, as payment in full for the redemption of that particular TC Sub's Butterfly Shares.

Winding Up of TC Sub1 and TC Sub2

40. Immediately following the share redemptions described in Paragraph 39 above, TC Sub1 and TC Sub2’s shareholders, as the case may be, will each pass a Special Resolution to wind-up and dissolve their respective TC Sub under the applicable provisions of the CBCA.

41. All properties of TC Sub1 and TC Sub2 will be distributed and all liabilities of TC Sub1 and TC Sub2, if any, will be either discharged or assumed by its TC. ln connection with the winding-up, the TC Sub1 Redemption Note will be assumed by TC1 and the TC Sub2 Redemption Note will be assumed by TC2.

42. Articles of Dissolution for each of TC Sub1 and TC Sub2 will be filed with the Director of Corporations of Canada. Upon receipt of the Articles of Dissolution, the Director will issue a Certificate of Dissolution. TC Sub1 and TC Sub2 will cease to exist on the date shown on its Certificate of Dissolution.

Winding Up of DC

43. Following the wind-up of TC Sub1 and TC Sub2, TC1 and TC2 will resolve to wind-up and dissolve DC pursuant to the relevant provisions of the CBCA.

44. ln connection with the winding-up of DC, DC will distribute all of its assets, which will consist only of TC Sub1 Redemption Note and the TC Sub2 Redemption Note and the rights to any tax refunds referred to in Paragraph 47, to TC 1 and TC2, as the case may be, in accordance with their respective shareholdings. ln particular, DC will:

a) assign and distribute TC Sub1 Redemption Note issued by TC Sub1 to TC1; and

b) assign and distribute TC Sub2 Redemption Note issued by TC Sub2 to TC2.

45. As a result of the assignment and distribution of the Redemption Notes held by DC as described in Paragraph 44, the obligation of TC1 and TC2 under the note it assumed in Paragraph 41 will merge and be extinguished by set-off and legal compensation.

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

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

48. After the distribution of the TC Sub1 Note and TC Sub2 Note as described in Paragraph 44 and the distribution of any tax refunds as described in Paragraph 47, but immediately before the formal dissolution of DC described in Paragraph 49, DC will not own or acquire any property or carry on any activity or undertaking.

49. Within a reasonable time following the distribution of any tax refund by DC described in Paragraph 47, articles of dissolution will be filed by DC with the appropriate Corporate Registry and, upon receipt of a certificate of dissolution, DC will be dissolved.

ADDITIONAL INFORMATION

50. Except as described in this letter, DC did not own shares of any other corporation over which it exercise significant influence.

51. 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).

52. 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). More specifically, the redemptions of the preferred shares of the capital stock of DC held by the estate of Parent on XXXXXXXXXX, are not part of the series of transactions that includes the Proposed Transactions. These redemptions of shares would have occurred regardless of whether the butterfly reorganization were undertaken, and the butterfly reorganization would occur regardless of whether the redemptions of shares were undertaken.

53. None of the property received by a TC on the DC Transfer will be acquired by a person unrelated to a 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).

54. At any time before and during the series of transactions and events that include the Proposed Transactions, none of the shares of any of the predecessor corporations, DC, TC Sub1 or TC Sub2, 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).

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

56. 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).

57. TC Sub1 and TC Sub2 will each have the financial capacity to honour, upon presentation for payment, the amount payable under the promissory note issued by it as part of the Proposed Transactions.

58. None of the Taxpayers have any outstanding tax liabilities that could be affected by the Proposed Transactions and no transactions are contemplated involving TC1 or TC2 aside from holding the assets each acquired as a result of the Proposed Transactions and there is no plan to transfer any other assets into these corporations or to wind-up or amalgamate these corporations.

PURPOSE OF THE PROPOSED TRANSACTIONS

59. The overall purpose of the Proposed Transactions is to allow Sibling 1 and Sibling 2 to separate their interests in DC in a tax efficient manner which allows them to undertake future investments and estate planning independent from each other

RULINGS GIVEN

Provided that the preceding statements constitute a complete and accurate disclosure of all relevant facts, proposed transactions 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 of the common shares of DC held by Sibling 1 and Sibling 2 to their respective TC as described in Paragraph 28; and

(b) the transfer of each eligible property owned by DC to TC Sub1 and TC Sub2, as the case may be, on the DC Transfer described in Paragraph 35;

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

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

B. On the redemption by each of TC Sub1 and TC Sub2 of its particular class of Butterfly Shares owned by DC, as described in Paragraph 39, by virtue of paragraph 84(3)(a) and (b), each of TC Sub1 and TC Sub2, as the case may be, 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 Butterfly Shares of such TC Sub exceeds the aggregate PUC in respect of those particular shares immediately before the redemption.

C. The provisions of subsection 88(1) will apply on the winding-up of TC Sub1 into TC1 and TC Sub2 into TC2, as the case may be, as described in Paragraph 40, so that:

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

b) the shares in the capital stock of TC Sub1 and TC Sub2 held by TC1 and TC2, as the case may be, 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 TC Sub1 and TC Sub2 distributed to TC1 and TC2, as the case may be, on the winding-up will be deemed to have been acquired by such particular TC for an amount equal to the amount deemed by paragraph 88(1)(a) to be the respective TC Sub's proceeds of disposition of the property.

D. Subsection 84(2) and paragraph 88(2)(b) will apply to the distributions by DC described in Paragraph 44 such that:

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

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

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

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

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

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

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

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

d) will, by virtue of subsection 112(3), reduce the loss, if any, in respect of the disposition of the shares on which the dividend is deemed to be received;

e) will not give rise to tax under Part IV except as provided in paragraph 186(1)(b); and

f) will not be subject to tax under Part IV.1 or V1.

F. The distribution and extinguishment of the TC Redemption Notes as described in Paragraph 45 will not, in and of itself, give rise to a “forgiven amount” within the meaning of either subsection 80(1) or section 80.01. ln addition, none of DC, TC1, or TC2, as the case may be, will realize any gain or incur a loss as a result of such extinguishment.

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

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

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

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

d) an acquisition of shares in the circumstances described in subparagraph 55(3.1)(b)(iii); or

e) an acquisition of property in the circumstances described in subparagraph 55(3.1)(c) or (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 D and, for greater certainty, subsection 55(3.1) will not apply to deny the exemption under paragraph 55(3)(b).

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 re-determine the tax consequences confirmed in the rulings given herein

The above rulings are given subject to the limitations and qualifications set forth in Information Circular 70-6R12 issued on April 1, 2022, and are binding on the CRA provided that the Proposed Transactions are completed within six months of the date of this letter.

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

OTHER COMMENTS

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

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

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

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

Nothing in this letter should be construed as confirmation, express or implied, that, for the purpose of any of the rulings given above, any adjustment to the FMV of the properties transferred 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 or 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, updated to November 26, 2015.

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