2022 Ruling 2022-0933091R3 - 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) by virtue of satisfying the requirements of paragraph 55(3)(b).

Position: Yes.

Reasons: Proposed transactions satisfy the requirements of paragraph 55(3)(b).

XXXXXXXXXX								2022-093309

XXXXXXXXXX, 2022

Dear XXXXXXXXXX

Re: Advance Income Tax Ruling
XXXXXXXXXX

This is in reply to your letter dated XXXXXXXXXX, as amended XXXXXXXXXX in which you requested an advance income tax ruling (the "Ruling") on behalf of the above-named taxpayer and the other taxpayers party to the Proposed Transactions (the "Taxpayers"). We understand that to the best of your knowledge and that of the Taxpayers, none of the Proposed Transactions or issues involved in this Ruling are the same as or substantially similar to transactions or issues that are:

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

A. being considered by the CRA 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 request previously considered by the Income Tax Rulings Directorate.

This letter is based solely on the Facts and Proposed Transactions described below. The documentation submitted with the ruling request does not form part of the Facts and Proposed Transactions, and any references thereto are provided solely for the convenience of the reader.

Unless otherwise stated:

(a) 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, (the "Act"), or, where appropriate, the Income Tax Regulations, C.R.C., c.945, as amended, (the "Regulations");

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

(c) all references to monetary amounts are in Canadian dollars; and

(d) the singular should be read as plural and vice versa where the circumstances so require.

DEFINITIONS

The following abbreviations, terms and expressions have the meanings specified, and the relevant parties to the Proposed Transactions will be referred to as follows:

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

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

(c) "BCA" means the Business Corporations Act (XXXXXXXXXX);

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

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

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

(g) "Class A Special Shares" means the Class A Special shares of TC described in Paragraph 9(a);

(h) "Class B Special Shares" means the Class B Special shares of TC described in Paragraph 9(b);

(i) "Class "C" Preference Shares" means the Class "C" Preference shares of DC described in Paragraph 3(c);

(j) "Commercial Properties" has the meaning ascribed thereto in Paragraph 7(a);

(k) "Common Shares" means the Common shares of DC described in Paragraph 3(d);

(l) "cost amount" has the meaning assigned by subsection 248(1);

(m) "DC" means XXXXXXXXXX, a corporation existing under the BCA;

(n) "DC CDA Purchase Note" means the non-interest bearing demand promissory note issued by DC to TC on the purchase for cancellation of such number of Common Shares held by TC, as described in Paragraph 19;

(o) "DC Non-CDA Purchase Note" means the non-interest bearing demand promissory note issued by DC to TC on the purchase for cancellation of such number of then remaining Common Shares and all the XXXXXXXXXX Class "C" Preference Shares held by TC, as described in Paragraph 20;

(p) "distribution" has the meaning assigned by subsection 55(1);

(q) "eligible property" has the meaning assigned by subsection 85(1.1);

(r) "ERDTOH" means "eligible refundable dividend tax on hand" and has the meaning assigned to that term by subsection 129(4);

(s) "FMV" means fair market value, being the highest price available in an open and unrestricted market between informed prudent parties acting at arm's length and without compulsion to act, expressed in terms of money;

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

(u) "NERDTOH" means "non-eligible refundable dividend tax on hand" and has the meaning assigned to that term by subsection 129(4);

(v) "Paragraph" refers to a numbered paragraph in this letter;

(w) "private corporation" has the meaning assigned by subsection 89(1);

(x) "Proposed Transactions" means the transactions described in Paragraph 9 to Paragraph 21, inclusive;

(y) "PUC" means "paid-up capital", as that term is defined in subsection 89(1);

(z) "Sibling1" means XXXXXXXXXX, an individual who is a United States citizen and resident in Canada for the purposes of the Act, and who is the sibling of Sibling2;

(aa) "Sibling1 Receivable" means the aggregate amount of $XXXXXXXXXX payable by XXXXXXXXXX, a TCC wholly-owned by Sibling1, to DC;

(bb) "Sibling2" means XXXXXXXXXX, an individual who is a Canadian citizen and resident in Canada for the purposes of the Act, and who is the sibling of Sibling1;

(cc) "Sibling2 Receivable" means the aggregate amount of $XXXXXXXXXX payable by XXXXXXXXXX, a TCC wholly-owned by Sibling2, to DC;

(dd) "specified financial institution" has the meaning assigned by subsection 248(1);

(ee) "stated capital" means the amount of capital in respect of a class or series of shares determined in accordance with the BCA;

(ff) "TC" means XXXXXXXXXX, a corporation to be formed under the BCA as described in Paragraph 9;

(gg) "TC Common Shares" means the Common shares of TC described in Paragraph 9(c);

(hh) "TC Redemption Note" means the non-interest bearing demand promissory note issued by TC to DC on the redemption of the XXXXXXXXXX Class A Special Shares held by DC, as described in Paragraph 17; and

(ii) "TCC" means "taxable Canadian corporation" and has the meaning assigned by subsection 89(1).

FACTS

A complete description of all the relevant facts is as follows:

Facts Relating to DC

1. DC is a corporation that was incorporated on XXXXXXXXXX under the BCA. DC is a private corporation, a TCC and a CCPC. DC's business number is XXXXXXXXXX.

2. DC's taxation year and fiscal period end on XXXXXXXXXX. DC's tax affairs are administered by the XXXXXXXXXX and its corporate tax returns are filed at the XXXXXXXXXX. DC's address is XXXXXXXXXX. DC's principal activity is XXXXXXXXXX.

3. The authorized capital of DC consists of:

(a) XXXXXXXXXX Class "A" Preference shares (non-voting);
(b) XXXXXXXXXX Class "B" Preference shares (non-voting);
(c) XXXXXXXXXX Class "C" Preference shares (voting); and
(d) XXXXXXXXXX Common shares (voting).

4. At the time of the Proposed Transactions, the only issued and outstanding shares of DC will be as follows:

Shareholder		# of Share	      Class of Shares		      PUC		      ACB
Sibling1		XXXXXX		Common				XXXXXX		XXXXXX
Sibling1		XXXXXX		Class ‘C’ Preference		XXXXXX		XXXXXX
Sibling2		XXXXXX		Common				XXXXXX		XXXXXX
Sibling2		XXXXXX		Class ‘C’ Preference		XXXXXX		XXXXXX

5. Sibling1 and Sibling2 are brothers. They each hold their shares of DC as capital property.

6. As at XXXXXXXXXX, DC had an ERDTOH balance of $XXXXXXXXXX, a NERDTOH balance of $XXXXXXXXXX and a GRIP balance of $XXXXXXXXXX. As at XXXXXXXXXX, DC had a CDA balance of $XXXXXXXXXX.

7. DC's primary assets consist of:

(a) an undivided XXXXXXXXXX% beneficial interest in each of the following XXXXXXXXXX commercial real estate properties as a tenant-in-common (the "Commercial Properties"):

XXXXXXXXXX; and

(b) limited partnership units in XXXXXXXXXX Partnership, a limited partnership formed under The Partnerships Act (XXXXXXXXXX) and governed by the laws of XXXXXXXXXX, which owns XXXXXXXXXX. DC does not exercise significant influence over the limited partnership.

DC's assets also include cash, short-term investments, interest receivable, prepaid expenses and deposits, amounts due from related corporations (including the Sibling1 Receivable and the Sibling2 Receivable) and equipment.

8. DC's liabilities primarily consist of accounts payable and accrued liabilities and income taxes payable. DC is also liable for its pro rata share of mortgages on the Commercial Properties.

PROPOSED TRANSACTIONS

Incorporation of TC and Subscription by Sibling2

9. Prior to the implementation of the steps described in Paragraphs 11 to 21, Sibling2 will form a new corporation under the BCA, TC. TC will be a private corporation, a TCC and a CCPC. The authorized capital of TC will consist of:

(a) an unlimited number of non-voting Class A Special Shares. Each Class A Special Share will be redeemable and retractable at an amount equal to the FMV of the property acquired in exchange for the share less the non-share consideration given (plus any declared but unpaid dividends thereon), subject to a price adjustment clause. The holders of Class A Special Shares are entitled to an annual, non-cumulative dividend at a rate XXXXXXXXXX% of the redemption amount per share, in preference to the holders of the TC Common Shares. In the event of liquidation, dissolution or winding-up, the holders of Class A Special Shares are entitled to be paid the redemption amount per share and no more;

(b) an unlimited number of Class B Special Shares, which will entitle the holders to one vote per share and which may be purchased for cancellation at a price of $XXXXXXXXXX per share. In the event of liquidation, dissolution or winding-up, the holders of Class B Special Shares are entitled to be paid, subject to the rights of holders of Class A Special Shares, the sum of $XXXXXXXXXX per share and no more; and

(c) an unlimited number of Common Shares (the “TC Common Shares”), which will entitle the holders to one vote per share.

10. At the time of incorporation of TC, Sibling2 will subscribe for XXXXXXXXXX Class B Special Shares of TC at a price of $XXXXXXXXXX per share, for an aggregate subscription price of $XXXXXXXXXX.

Rollover of Sibling2's Common Shares and Class "C" Preference Shares of DC to TC

11. Following the incorporation of TC, Sibling2 will transfer his XXXXXXXXXX Common Shares and XXXXXXXXXX Class "C" Preference Shares of DC to TC and, as consideration therefor, Sibling2 will receive XXXXXXXXXX TC Common Shares, with an aggregate fair market value, at the time of the transfer, equal to the XXXXXXXXXX Common Shares and XXXXXXXXXX Class "C" Preference Shares of DC transferred by Sibling2 to TC. A price adjustment clause will be included in the purchase and sale agreement. Sibling2 and TC will file a joint election in the prescribed form and within the time allowed by subsection 85(6) to have the provisions of subsection 85(1) apply to the transfer. The agreed amount for purposes of such election will not be less than the lesser of the two amounts specified in subparagraphs 85(1)(c.1)(i) and (ii), nor will such amount exceed the aggregate fair market value of the XXXXXXXXXX Common Shares and XXXXXXXXXX Class "C" Preference Shares of DC that are transferred by Sibling2 to TC.

The increase to the PUC of the TC Common Shares will not exceed the aggregate PUC attributable to the Common Shares and Class "C" Preference Shares of DC for which such TC Common Shares were issued. For greater certainty, the increase to the PUC of the TC Common Shares will not exceed the maximum amount that could be added to the PUC of such shares, having regard to subsection 84.1(1).

Single-Wing Split-Up Butterfly

12. Immediately before the transfer of property described in Paragraph 14, the property owned by DC will be classified into the following three types of property:

(a) cash or near-cash property, comprising of all the current assets for financial statement purposes of DC, including cash, deposits, short-term investments, accounts receivable, interest receivable and rights arising from prepaid expenses and which cash or near-cash property shall include the Sibling1 Receivable and the Sibling2 Receivable;

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

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

For greater certainty:

(d) any tax accounts, such as future income tax assets or liabilities or balances of any non-capital losses, net capital losses, ERDTOH/NERDTOH, GRIP, or CDA of DC will not be considered to be a property or liability, as the case may be;

(e) advances that are payable on demand or that are due within the next 12 months will be considered cash or near-cash property, including amounts due from related corporations;

(f) no amount will be considered a liability unless it represents a true legal liability which is capable of quantification; and

(g) 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.

13. In determining the net FMV of each type of property of DC immediately before the transfers described in Paragraph 14, 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) current liabilities of DC (comprised of its accounts payable, accrued liabilities and income taxes payable) will be allocated to cash or near-cash property in the proportion that the FMV of such property is of the FMV of all cash or near-cash property. The total amount of DC’s current liabilities to be allocated to DC’s cash or near-cash property herein will not exceed the aggregate FMV of all the cash or near cash property of DC;

(b) liabilities of DC, other than current liabilities, that relate to a particular property, will be allocated to that particular property (and effectively to the type of property to which the particular property belongs) to the extent of its FMV. Liabilities that pertain to a type of property, but not to a particular property, will then 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. Such non-current liabilities shall include the mortgages that the Commercial Properties are subject to; and

(c) any liabilities that remain after the allocations described in (a) and (b) are made will then be allocated among all types of property on the basis of the relative net FMV of each type of property immediately prior to the allocation of such excess, but after the allocation of liabilities as described in (a) and (b).

14. Immediately following the classification of the types of property and determination of the net FMV of each type of property described in Paragraphs 12 and 13, respectively, DC will transfer to TC:

(a) the Sibling2 Receivable and such other amount of DC's other cash or near cash property (other than the Sibling1 Receivable) such that TC receives, in aggregate, its pro rata portion of all of DC's cash or near cash property. Any adjustment to the amount of cash consideration transferred that is necessary to ensure that a pro rata portion is transferred shall be made within 45 days of the transfer,

(b) its pro rata portion of all of DC's limited partnership units, rounded to the nearest whole unit, and

(c) a pro rata undivided co-ownership interest in each of DC's properties, other than such property listed in Paragraphs 14(a) and 14(b), including, but not limited to, the Commercial Properties (including any land, buildings and equipment associated with such Commercial Properties),

such that immediately following such property transfer, the aggregate net FMV of each type of property of DC transferred to TC will be equal to or approximate the proportion determined by the formula:

A x B / C

where:

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

B. is the FMV, immediately before the transfer, of all the shares of the capital stock of DC owned, at that time, by TC; and

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

For the purposes of this Paragraph, the expression "approximate the proportion" above means that the discrepancy of 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 has received on such transfer as compared to what TC would have received had it received its exact pro rata share of the net FMV of each type of property.

As consideration for the property transferred by DC to TC, TC will:

(d) assume a pro rata portion of DC's existing liabilities, as appropriate, such that TC will receive a proportionate share of the net FMV of each type of property owned by DC; and

(e) issue XXXXXXXXXX Class A Special Shares to DC which will have an aggregate redemption amount and FMV equal to the amount by which the aggregate FMV of such transferred property received by TC exceeds the amount of liabilities assumed by TC.

A price adjustment clause will be included in the purchase and sale agreement.

15. In respect of the transfer described in Paragraph 14, DC will jointly elect with TC, in the prescribed form and within the time allowed by subsection 85(6) to have the provisions of subsection 85(1) apply to the transfer of each eligible property transferred by DC to TC. The agreed amount in respect of each eligible property so transferred will be as follows:

(a) in the case of capital property (other than depreciable property of a prescribed class), an amount not less than the lesser of the amounts described in subparagraphs 85(1)(c.1)(i) and (ii); and

(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).

In each case, the agreed amount will not exceed the FMV of the respective property, nor will it be less than the amount permitted under paragraph 85(1)(b). The amount of liabilities to be allocated to the property that is the subject of an election under subsection 85(1) will not exceed the total of the agreed amounts elected for that property. For greater certainty, to the extent that one or more of the properties subject of a subsection 85(1) election are subject to one or more liabilities such that the aggregate of such liabilities exceeds the agreed amount of such property, such excess shall be allocated to one or more other properties transferred, provided that the aggregate amount allocated to each property transferred is not greater than the amount agreed on in respect of each such property transferred. The amount of liabilities to be allocated to the property that is not the subject of an election under subsection 85(1) will not exceed the FMV of any such property.

16. TC will add to its stated capital account for the Class A Special Shares an amount equal to the aggregate of (a) the agreed amounts, in the case of each eligible property transferred to TC; and (b) the aggregate FMV, in the case of each property transferred to TC that is not an eligible property, less (c) the aggregate amount of DC’s liabilities assumed by TC as described in Paragraph 14 hereof. For greater certainty, the amount to be added to the stated capital account for TC’s Class A Special Shares issued as partial consideration for the property transferred to it on the distribution 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).

17. Immediately after the distribution, TC will redeem its Class A Special Shares held by DC for their aggregate redemption amount. As consideration, TC will issue the TC Redemption Note having a principal amount and FMV equal to the aggregate redemption amount and FMV of the Class A Special Shares so redeemed by it. DC will accept the TC Redemption Note as payment in full for the redemption of such shares.

18. TC will select as its taxation year end the date on which the share redemption described in Paragraph 17 hereof occurs.

19. On the day immediately following the day on which the share redemption described in Paragraph 17 occurs, DC will purchase for cancellation a portion of the XXXXXXXXXX Common Shares held by TC having an aggregate FMV equal to XXXXXXXXXX% of the CDA of DC at that time. DC will elect pursuant to the provisions of subsection 83(2) such that the dividend deemed to be paid to TC as a result of such purchase for cancellation of such number of Common Shares of DC shall be deemed to be a dividend paid out of the CDA of DC and, in consideration therefor, DC will issue to TC the DC CDA Purchase Note having a principal amount and FMV equal to the aggregate FMV of such Common Shares purchased for cancellation. TC will accept the DC CDA Purchase Note as payment in full for the aggregate FMV of the Common Shares of DC so purchased for cancellation.

20. Immediately subsequent to the transaction described in Paragraph 19, DC will purchase for cancellation all of the then remaining Common Shares and all of the XXXXXXXXXX Class "C" Preference Shares held by TC for an amount equal to the aggregate FMV of such shares. As consideration, DC will issue to TC the DC Non-CDA Purchase Note having a principal amount and FMV equal to the aggregate FMV of such Common Shares and Class "C" Preference Shares purchased for cancellation. TC will accept the DC Non-CDA Purchase Note as payment in full for the aggregate FMV of the shares of DC so purchased for cancellation.

21. The DC CDA Purchase Note and DC Non-CDA Purchase Note will be set-off in full against the corresponding TC Redemption Note and such notes will be cancelled without payment.

ADDITIONAL INFORMATION

22. 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)-(iv).

23. 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).

24. None of the property received by TC on the distribution described above in Paragraph 14 will be acquired by a person unrelated to TC, or by a partnership, as part of a series of transactions or events that includes the Proposed Transactions, in the circumstances described in paragraph 55(3.1)(c).

25. None of the property retained by DC after the distribution described above in Paragraph 14 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).

26. None of the shares of any corporation described herein will be at any time during a series of transactions or events that includes the Proposed Transactions:

(a) the subject of a guarantee agreement within the meaning of subsection 112(2.2);

(b) the subject of a dividend rental agreement within the meaning of subsection 112(2.3);

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

(d) 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

(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).

27. None of the corporations described herein is or will be at any time during the series of transactions or events that includes the Proposed Transactions a corporation described in any of paragraphs (a) to (f) of the definition of "financial intermediary corporation" in subsection 191(1) or a specified financial institution as defined in subsection 248(1).

PURPOSE OF THE PROPOSED TRANSACTIONS

28. The purpose of the Proposed Transactions is to permit Sibling1 and Sibling2 to hold indirect ownership of their respective pro rata share of the property of DC separately so as to enable each of them to own, manage and administer such interests independent of each other through DC and TC, respectively.

RULINGS

Provided that the preceding statements constitute a complete and accurate disclosure of all relevant facts, proposed transactions, additional information, and purpose of the Proposed Transactions, and provided that the Proposed Transactions are completed in the manner described above, and there are no other transactions which may be relevant, we confirm the following:

A. The provisions of subsection 85(1) will apply to:

(a) the transfer of the XXXXXXXXXX Common Shares and XXXXXXXXXX Class "C" Preference Shares of DC by Sibling2 to TC as described in Paragraph 11; and

(b) the transfers of each eligible property by DC to TC as described in Paragraph 14;

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

(c) paragraph 85(1)(b) will not be applicable in respect of any transfer of a Commercial Property where the portion of a mortgage or other liability of DC that relates to that particular Commercial Property, that exceeds the agreed amount with respect to such particular Commercial Property, is not assumed by TC as consideration for the transfer of that particular Commercial Property but is assumed by TC as consideration for the transfer of another property or properties as described in Paragraph 15; and

(d) paragraph 85(1)(e.2) will not apply to the transfers referred to in Paragraphs 11 and 14.

B. By virtue of subsection 1102(14) of the Regulations, each property which, immediately before the transfer of property described in Paragraph 14 is depreciable property of a prescribed class or separate prescribed class of DC and which is acquired by TC on the transfer described in Paragraph 14 will be depreciable property of the same class or separate prescribed class, as the case may be, of TC.

C. Provided that the conditions specified in either paragraph 1100(2.2)(f) or (g) of the Regulations are satisfied, paragraph 1100(2.2)(h) of the Regulations will apply so that no amount will be included by TC in determining an amount for F in subsection 1100(2) of the Regulations in respect of property of a class in Schedule II of the Regulations that is property acquired by TC from DC on the transfer described in Paragraph 14.

D. As a result of the redemption by TC of its Class A Special Shares as described in Paragraph 17 and the purchase for cancellation by DC of, in aggregate, the XXXXXXXXXX Common Shares and XXXXXXXXXX Class "C" Preference Shares of DC described in Paragraphs 19 and 20, by virtue of subsection 84(3):

(a) TC will be deemed to have paid, and DC will be deemed to have received, a taxable dividend equal to the amount by which the amount paid by TC in respect of its redemption of the Class A Special Shares of TC owned by DC exceeds the paid-up capital of such class of shares immediately before the redemption;

(b) DC will be deemed to have paid, and TC will be deemed to have received, a capital dividend equal to the amount by which the amount paid by DC in respect of its purchase for cancellation of such number of the Common Shares of DC owned by TC, as described in Paragraph 19, exceeds the paid-up capital of such shares immediately before such purchase for cancellation;

(c) DC will be deemed to have paid, and TC will be deemed to have received, a taxable dividend equal to the amount by which the amount paid by DC in respect of its purchase for cancellation of such number of the then remaining Common Shares and all of the XXXXXXXXXX Class "C" Preference Shares of DC owned by TC, as described in Paragraph 20, exceeds the paid-up capital of such shares immediately before such purchase for cancellation;

(d) Each of the taxable dividends described in (a) and (c):

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

(ii) will be deductible by the recipient 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);

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

(iv) 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;

(v) will not give rise to tax under Part IV except, as provided in paragraph 186(1)(b), to the extent the payer corporation is entitled to a dividend refund for its taxation year in which it paid such dividend; and

(vi) will not be subject to tax under Part IV.1 or VI.1 on the basis that such dividend will be an excepted dividend by virtue of paragraph (b) of the definition of "excepted dividend" in section 187.1 and an excluded dividend by virtue of paragraph (a) of the definition of "excluded dividend" in subsection 191(1) of the Act, as each of the recipients will have a substantial interest, within the meaning assigned by paragraph 191(2)(a) of the Act, in the payer corporation at the time such taxable dividend is paid; and

(e) the capital dividend described in (b):

(i) will be deemed by subsection 83(2) to be a capital dividend to the extent of DC's CDA immediately before the purchase for cancellation and will not be included in computing the income of TC, in accordance with paragraphs 83(2)(a) and (b), provided that DC elects in respect of the full amount of such deemed dividend in the prescribed manner and prescribed form within the time required by subsection 83(2);

(ii) will be added to the CDA of TC in accordance with paragraph (b) of the definition of "capital dividend account" in subsection 89(1); and

(iii) will not be subject to subsection 55(2).

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

(a) an acquisition of property in 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 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 Ruling D, above, and, for greater certainty, subsection 55(3.1) will not apply to deny the exemption under paragraph 55(3)(b) in respect of those dividends.

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

G. The set-off and cancellation of the DC CDA Purchase Note and DC Non-CDA Purchase Note against the TC Redemption Note, as described in Paragraph 21, will not, in and of itself, give rise to a "forgiven amount" within the meaning of subsection 80(1) and 80.01(1) and neither DC nor TC will realize a gain or incur a loss as a result of such set-off and cancellation.

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

The above Rulings are given subject to the general limitations and qualifications set out in Information Circular 70-6R12 dated April 1, 2022, and are binding on the CRA provided that the Proposed Transactions are completed no later than six (6) months after the date of this letter. The above Rulings are based on the law as it presently reads and do not take into account any proposed amendments to the Act and the Regulations which, if enacted, could have an effect on the Rulings provided herein.

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 fair market value or adjusted cost base of any property or the paid-up capital of any shares referred to herein;

b) the balances of the ERDTOH, NERDTOH, GRIP, CDA or any other tax account for any corporation described herein;

c) whether any person described herein deals, or does not deal, with any other person at arm’s length;

d) whether any transactions would be considered part of the same series of transactions or events that include the Proposed Transactions; and

e) any tax consequences relating to the Facts and Proposed Transactions described herein other than those specifically described in the Rulings given above.

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 will be forwarded to you under separate cover.

Yours truly,

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