2023 Ruling 2023-0969111R3 - Multi-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 exception to the application of subsection 55(2) provided in paragraph 55(3)(b) will apply to the proposed transactions

Position: Yes.

Reasons: Conditions for application have been met and the "butterfly denial rules" in subsection 55(3.1) do not apply.

XXXXXXXXXX 		2023-096911

XXXXXXXXXX, 2023

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 on behalf of the Taxpayers described herein.

This letter is based solely on the facts, proposed transactions, additional information and purposes of the proposed transactions described below. Any documentation submitted in respect of your request does not form part of the facts, proposed transactions or additional information unless specifically reproduced therein and any references to documentation are provided solely for the convenience of the reader.

We understand that to the best of your knowledge and that of 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:

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

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

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

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

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

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

XXXXXXXXXX

Unless otherwise stated:

(a) 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.) (the “Act”), as amended to the date of this letter;

(b) all terms and conditions used in this letter that are defined in the Act 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 (as defined below) will be referred to as follows:

“Act 1” means the XXXXXXXXXX;

“adjusted cost base” or “ACB” means “adjusted cost base” as defined in section 54;

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

“Amalgamation” refers to the amalgamation of Corporation 1 and Corporation 2 to form DC as described in Paragraph 23;

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

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

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

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

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

“Corporation 1” means XXXXXXXXXX, a corporation incorporated under Act 1;

“Corporation 2” means XXXXXXXXXX, a corporation incorporated under Act 1;

“Corporation A” means XXXXXXXXXX, a corporation incorporated under Act 1;

“Corporation B” means XXXXXXXXXX, a corporation incorporated under Act 1;

“CRA” means Canada Revenue Agency;

“DC” means the corporation to be formed as a result of the Amalgamation, as described in Paragraph 23;

“DC common shares” means the common shares of DC, as described in Paragraph 24;

“DC Transfer” refers to the transfer of property by DC to Newco 1 and Newco 2 as described in Paragraph 37;

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

“dividend refund” has the meaning assigned by subsection 129(1);

“dividend rental arrangement” has the meaning assigned by subsection 248(1);

“Effective Date” means the effective date of the Proposed Transactions;

“eligible dividend” has the meaning assigned by subsection 89(14);

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

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

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

“financial intermediary corporation” has the meaning assigned by subsection 191(1);

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

“Liability Assumption” means the assumption of a proportionate share of DC’s liabilities by each of Newco 1 and Newco 2 on the DC Transfer as further described in Paragraph 38(a);

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

“Newco 1” means a corporation to be incorporated under Act 1, as provided in Paragraph 27;

“Newco 2” means a corporation to be incorporated under Act 1, as provided in Paragraph 29;

“Newco 1 preferred shares” means the preferred shares of Newco 1, as described in Paragraph 28(b);

“Newco 2 preferred shares” means the preferred shares of Newco 2, as described in Paragraph 30(b);

“Note 1” means the non-interest bearing demand promissory note to be issued by Newco 1 to DC on the redemption of its preferred shares held by DC, as described in Paragraph 40;

“Note 2” means the non-interest bearing demand promissory note to be issued by Newco 2 to DC on the redemption of its preferred shares held by DC, as described in Paragraph 40;

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

“Paragraph” means a numbered paragraph in this letter;

“Predecessor Corporations” means Corporation 1 and Corporation 2 collectively;

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

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

“proceeds of disposition” or “POD” means “proceeds of disposition” as defined in section 54;

“Proposed Transactions” means the proposed transactions described in Paragraphs 23 to 51;

“related person” has the meaning assigned by subsection 251(2);

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

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

“Sibling 1” means XXXXXXXXXX, an individual who is resident in Canada for purposes of the Act. Sibling 1 is the sibling of Sibling 2;

“Sibling 2” means XXXXXXXXXX, an individual who is resident in Canada for purposes of the Act. Sibling 2 is the sibling of Sibling 1;

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

“taxable Canadian corporation” has the meaning assigned in subsection 89(1);

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

“taxation year” has the meaning assigned by subsection 249(1);

“TC1” means XXXXXXXXXX, a corporation incorporated under Act 1; and

“TC2” means XXXXXXXXXX, a corporation incorporated under Act 1.

FACTS

TC1

1. TC1 is a taxable Canadian corporation and a CCPC that was incorporated on XXXXXXXXXX, under Act 1. TC1 has a taxation year and fiscal period end on XXXXXXXXXX.

2. Sibling 1 owns all of the issued and outstanding shares of TC1. The PUC and ACB of the XXXXXXXXXX common shares of TC1, owned by Sibling 1, is $XXXXXXXXXX.

3. TC1 is a holding corporation and Sibling 1 holds the shares of TC1 as capital property. TC1 does not carry on any commercial activities other than those relating to the holding of marketable securities and the common shares of Corporation 1.

4. As at XXXXXXXXXX, TC1 had the following tax balances:

a. ERDTOH – XXXXXXXXXX;
b. NERDTOH – $XXXXXXXXXX;
c. GRIP – $XXXXXXXXXX; and
d. CDA – $XXXXXXXXXX.

TC2

5. TC2 is a taxable Canadian corporation and a CCPC that was incorporated on XXXXXXXXXX, under Act 1. TC2 has a taxation year and fiscal period end on XXXXXXXXXX.

6. Sibling 2 owns all of the issued and outstanding shares of TC2. The PUC and ACB of the XXXXXXXXXX common shares of TC2, owned by Sibling 2, is $XXXXXXXXXX.

7. TC2 is a holding corporation and Sibling 2 holds their shares of TC2 as capital property. TC2 does not carry on any commercial activities other than those relating the holding the common shares of Corporation 1 and the holding of XXXXXXXXXX property that is leased to Sibling 2.

8. As at XXXXXXXXXX, TC1 had the following tax balances:

a. ERDTOH – XXXXXXXXXX;
b. NERDTOH – XXXXXXXXXX;
c. GRIP – $XXXXXXXXXX; and
d. CDA – $XXXXXXXXXX.

Corporation 1

9. Corporation 1 is a taxable Canadian corporation and a CCPC that was incorporated on XXXXXXXXXX under Act 1. Corporation 1 has a taxation year and fiscal period end on XXXXXXXXXX.

10. TC1 and TC2 each own XXXXXXXXXX voting common shares of Corporation 1. The PUC and ACB of the XXXXXXXXXX common shares owned by each of TC1 and TC2 is $XXXXXXXXXX respectively.

11. Corporation 1 is a holding corporation and TC1 and TC2 hold their shares of Corporation 1 as capital property.

12. According to its balance sheet for the period ended XXXXXXXXXX, Corporation 1’s principal assets and liabilities consist of:

Assets

(a) advances that are receivable from Corporation 2 all due on demand with no repayment terms; and

(b) investments including all of the common shares of Corporation 2 and approximately XXXXXXXXXX% of the common shares of Corporation A.

Liabilities

(a) advances payable to TC1 and TC2.

There have not been any material change in the composition of Corporation 1’s assets and liabilities since XXXXXXXXXX.

13. The authorized share capital of Corporation 1 consists of an unlimited number of:

(a) voting and participating common shares without par value; and

(b) Class A, Class B and Class C special shares.

The only issued and outstanding shares of Corporation 1 are the common shares held by TC1 and TC2, as described in Paragraph 10.

14. As at XXXXXXXXXX, Corporation 1 had the following tax balances:

a. ERDTOH – XXXXXXXXXX;
b. NERDTOH – $XXXXXXXXXX;
c. GRIP – XXXXXXXXXX; and
d. CDA – $XXXXXXXXXX.

Corporation A

15. Corporation A is a taxable Canadian corporation and a CCPC. Corporation A is a holding corporation with assets consisting of non-interest bearing loans receivable from other Canadian private corporations, including Corporation 2. Corporation 1 owns XXXXXXXXXX common shares of Corporation A which comprises approximately XXXXXXXXXX% of the issued and outstanding common shares of Corporation A. The remaining shareholders of Corporation A deal at arm’s length with each other and with Corporation 1.

16. Corporation 1 holds its shares of Corporation A as capital property.

Corporation 2

17. Corporation 2 is a taxable Canadian corporation and a CCPC that was incorporated on XXXXXXXXXX under Act 1. Corporation 2 has a taxation year and fiscal period end on XXXXXXXXXX.

18. Corporation 1 owns XXXXXXXXXX common shares of Corporation 2 which comprises all of the issued and outstanding shares of Corporation 2. Corporation 1 holds its shares of Corporation 2 as capital property.

19. According to its balance sheet for the period ended XXXXXXXXXX, Corporation 2’s principal assets and liabilities consist of:

Assets

(a) cash;

(b) advances receivable from related parties including TC1 and TC2 due on demand with no repayment terms; and

(c) XXXXXXXXXX% of the common shares of Corporation B.

Liabilities

(a) accrued liabilities; and

(b) advances payable to directors, Corporation 1 and Corporation A all due on demand with no repayment terms.

There have not been any material change in the composition of Corporation 2’s assets and liabilities since XXXXXXXXXX.

20. As at XXXXXXXXXX, Corporation 2 had the following tax balances:

a. ERDTOH – $XXXXXXXXXX;
b. NERDTOH – $XXXXXXXXXX;
c. GRIP – XXXXXXXXXX; and
d. CDA – $XXXXXXXXXX.

Corporation B

21. Corporation B is a taxable Canadian corporation and a CCPC. Corporation B is a XXXXXXXXXX holding company that also owns and operates XXXXXXXXXX.

22. Corporation 2 owns XXXXXXXXXX Class E Common voting shares of Corporation B, which comprises approximately XXXXXXXXXX% of the issued and outstanding shares of Corporation B. Corporation 2 holds its shares of Corporation B as capital property. The remaining shareholders of Corporation B are Canadian residents who deal at arm’s length with each other and with all other entities in the corporate group.

PROPOSED TRANSACTIONS

The Proposed Transactions will occur in the order presented unless otherwise indicated, with the exception of filing the applicable election forms, which will be filed within the applicable due dates following the completion of the Proposed Transactions.

Amalgamation of Predecessor Corporations

23. The Predecessor Corporations will amalgamate in a short-form amalgamation in accordance with the provisions of Act 1, to form DC, which will be a taxable Canadian corporation and a CCPC.

Upon the Amalgamation:

(a) all of the property (except amounts receivable from any Predecessor Corporation or shares of the capital stock of any Predecessor Corporation) of the Predecessor Corporations immediately before the Amalgamation will become property of DC by virtue of the Amalgamation;

(b) all of the liabilities (except amounts payable to any Predecessor Corporation) of the Predecessor Corporations immediately before the Amalgamation will become liabilities of DC by virtue of the Amalgamation; and

(c) all the shareholders (except any Predecessor Corporation) who owned shares of the capital stock of any Predecessor Corporation immediately before the Amalgamation will receive shares of DC because of the Amalgamation.

For greater certainty, any shares of the capital stock of a Predecessor Corporation owned by a shareholder (except any Predecessor Corporation) immediately before the Amalgamation that were not cancelled on the Amalgamation shall be deemed to be shares of DC received by the shareholders of Corporation 1 by virtue of the Amalgamation as consideration for the disposition of the shares of Corporation 1.

24. DC’s authorized share capital will consist of an unlimited number of voting and participating common shares without par value.

25. Immediately after the Amalgamation, TC1 and TC2 will each own XXXXXXXXXX common shares of DC with an ACB and PUC of $XXXXXXXXXX, respectively.

26. Immediately after the Amalgamation, DC will have the following tax account balances:

(a) CDA – $XXXXXXXXXX;
(b) GRIP – $XXXXXXXXXX;
(c) NERDTOH – $XXXXXXXXXX; and
(d) ERDTOH – $XXXXXXXXXX.

Incorporation of Newco 1 and Newco 2

27. TC1 will incorporate Newco 1 under Act 1. Newco 1 will be a taxable Canadian corporation and a CCPC.

28. Newco 1’s authorized share capital will consist of an unlimited number of:

(a) voting and participating common shares without par value, and

(b) voting preferred shares ranking in priority to the common shares and carrying a: (i) non-cumulative and discretionary dividend entitlement not exceeding XXXXXXXXXX% of the FMV of the consideration for which they were issued; (ii) redemption/retraction feature for an amount equal to the FMV of the consideration received upon issuance (“Redemption Amount”), subject to a price adjustment clause; and (iii) liquidation entitlement in an amount equal to the Redemption Amount in the event of a liquidation, dissolution or winding up of Newco 1.

29. TC2 will incorporate Newco 2 under Act 1. Newco 2 will be a taxable Canadian corporation and a CCPC.

30. Newco 2’s authorized share capital will consist of an unlimited number of:

(a) voting and participating common shares without par value, and

(b) voting preferred shares ranking in priority to the common shares and carrying a: (i) non-cumulative and discretionary dividend entitlement not exceeding XXXXXXXXXX% of the FMV of the consideration for which they were issued; (ii) redemption/retraction feature for an amount equal to the FMV of the consideration received upon issuance (“Redemption Amount”), subject to a price adjustment clause; and (iii) liquidation entitlement in an amount equal to the Redemption Amount in the event of a liquidation, dissolution or winding up of Newco 2.

31. TC1 will subscribe for XXXXXXXXXX common shares of Newco 1 for a nominal amount. Newco 1 will be a wholly-owned subsidiary of TC1.

32. TC2 will subscribe for XXXXXXXXXX common shares of Newco 2 for a nominal amount. Newco 2 will be a wholly-owned subsidiary of TC2.

Distribution

The classification of DC’s property

33. DC has significant influence over Corporation A and Corporation B. Consequently, DC would normally be required to use the consolidated look-through method for determining the appropriate proportion of each of the three types of property that the shares of, or amounts receivable from Corporation A and Corporation B represent. However, since DC will indirectly transfer to each of TC1 and TC2 that corporation’s proportion of the shares of, and any amounts receivable from, each of Corporation A and Corporation B, as described in Paragraph 37, the determination using the consolidated look-through method will not actually be undertaken.

34. Immediately before the DC Transfer of property described in Paragraph 37, the property of DC will be classified into the following types of property for purposes of the definition of distribution, provided in subsection 55(1), as follows:

(a) cash or near-cash property, comprising of all the current assets of DC including, cash and advances receivable from related parties due within twelve months or with no specific terms of repayment; and

(b) investment property, comprising the shares of Corporation A and Corporation B.

For greater certainty, for the purposes of the distribution:

(c) tax accounts or other tax related amounts of DC, such as CDA, GRIP, NERDTOH or ERDTOH, if any, will not be considered property;

(d) the amount of any deferred tax will not be considered to be a property or a liability, as the case may be, for the purposes of the Proposed Transactions;

(e) advances that are due on demand or that have a term of less than 12 months will be considered cash or near-cash property; and

(f) any amount in respect of a refund of taxes, and interest thereon, actually receivable will be treated as cash or near-cash property.

35. As a result of DC’s classification of property described in Paragraph 34, DC will have no business property immediately prior to the DC Transfer described in Paragraph 37.

The allocation of DC’s liabilities

36. In determining the net FMV of each type of property of DC immediately before the DC Transfer described in Paragraph 37, the liabilities of DC will be allocated to, and deducted in the calculation of, the net FMV of each such type of property to DC in the following manner:

(a) all current liabilities, shareholder loans and advances payable to related parties will be allocated to each cash or near-cash property of DC in the proportion that the FMV of each such property is of the aggregate FMV of all cash or near-cash property of DC. The total amount of DC’s current liabilities to be allocated to DC’s cash or near cash property will not exceed the aggregate FMV of all of DC’s cash or near-cash property; and

(b) any liabilities that remain after the allocations described in Paragraph 36(a) are made, will then be allocated to 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 excess, but after the allocation of liabilities described in Paragraph 36(a).

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

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

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

(c) current liabilities include amounts normally classified as current liabilities, including accounts payable, accrued liabilities and taxes payable; and

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

The indirect transfer of each type of DC’s property to TC1 and TC2

37. Immediately following the determination of the net FMV of each type of property that it owns, as described in Paragraphs 34 to 36, DC will transfer to each of Newco 1 and Newco 2 a proportionate (XXXXXXXXXX%) of each type of property owned by DC such that immediately after the DC Transfer and the Liability Assumption, the net aggregate FMV of each type of property transferred to each of Newco 1 and Newco 2 will be equal to, or approximate, that proportion of each type of property determined by the formula:

A x B/C

where:

A is the net FMV, immediately before the distribution, of all property of that type of property owned by DC at that time;

B is the aggregate FMV, immediately before the distribution, of all the shares of the capital stock of DC owned, as the case may be, by TC1 or TC2 at that time; and

C is the aggregate FMV, immediately before the distribution, of all the issued and outstanding shares of the capital stock of DC at that time.

For the purpose of this Paragraph, the expression “approximate that proportion” means that the discrepancy from that proportion of XXXXXXXXXX%, if any, will not exceed 1%, determined as a percentage of the net FMV of each type of property that each of Newco 1 and Newco 2 will receive as compared to what they would have received had they received TC1’s and TC2’s appropriate pro rata (XXXXXXXXXX%) share of the net FMV of that type of property of DC.

38. As consideration for the transfer of property by DC to Newco 1 and Newco 2 on the DC Transfer, Newco 1 and Newco 2 will each:

(a) assume an appropriate amount of liabilities of DC so that each of Newco 1 and Newco 2 respectively receive a proportionate share of the net FMV of each type of property owned by DC; and

(b) issue the Newco 1 preferred shares and Newco 2 preferred shares, as the case may be, to DC having an aggregate FMV and redemption value equal to the aggregate FMV of the distribution property that each of them received on the DC Transfer less the amount of liabilities that each of them respectively assumed on the Liability Assumption.

For greater certainty, the Newco 1 preferred shares and the Newco 2 preferred shares will be taxable preferred shares and short-term preferred shares, which will be held by DC as capital property.

39. In respect of the distribution of property under the DC Transfer, DC will jointly elect with each of Newco 1 and Newco 2, as the case may be, in prescribed form and within the time allowed by subsection 85(6), but prior to the wind-up of Newco 1 and Newco 2 described in Paragraph 41 and the winding-up of DC described in Paragraph 43, to have the provisions of subsection 85(1) apply to the transfers of each eligible property of DC that is transferred to each of Newco 1 and Newco 2, as the case may be. The agreed amount in respect of each such capital property will be an amount equal to the lesser of the amounts described in subparagraphs 85(1)(c.1)(i) and (ii).

For greater certainty, the amount of liabilities that are allocated by DC to a particular eligible property that is subject to an election under subsection 85(1), and that are assumed by Newco 1 and Newco 2, as the case may be, which, will not exceed the agreed amount for that particular property in accordance with paragraph 85(1)(b). The amount of liabilities assumed by Newco 1 and Newco 2, as the case may be, which are allocated by DC to a particular property that is not subject to an election under subsection 85(1), will not exceed the FMV of any such property.

Newco 1 and Newco 2 will add to the stated capital account maintained for the Newco 1 preferred shares and the Newco 2 preferred shares, as the case may be, an amount equal to the amount by which the aggregate of the agreed amounts, in the case of each eligible property, and the aggregate FMV, in the case of other properties respectively transferred to Newco 1 and Newco 2 exceeds the DC liabilities respectively assumed by Newco 1 and Newco 2.

For greater certainty, the amount added to the stated capital account for the Newco 1 preferred shares and the Newco 2 preferred shares issued by Newco 1 and Newco 2 as partial consideration for the distribution property under the DC Transfer, will not exceed the maximum amount that could be added to the aggregate PUC of the Newco 1 preferred shares and Newco 2 preferred shares without a reduction taking place pursuant to subsection 85(2.1).

The redemption of the Newco 1 preferred shares and the Newco 2 preferred shares held by DC

40. Each of Newco 1 and Newco 2 will redeem the Newco 1 preferred shares and Newco 2 preferred shares held by DC at the Redemption Amount of such shares. As consideration therefor, Newco 1 will issue Note 1 to DC and Newco 2 will issue Note 2 to DC which will each have a principal amount and FMV equal to the Redemption Amount of the Newco 1 preferred shares owed by DC and the Newco 2 preferred shares owned by DC, as the case may be, immediately before each such redemption. DC will accept Note 1 and Note 2 as payment in full for the Newco 1 preferred shares and the Newco 2 preferred shares redeemed, respectively.

The wind-up of Newco 1 and Newco 2 into TC1 and TC2

41. Following the transactions described in Paragraph 40, each of TC1 and TC2 will resolve to wind-up and dissolve Newco 1 and Newco 2, as the case may be, in accordance with the provisions of Act 1.

42. In the course of their winding-up, each of Newco 1 and Newco 2 will respectively distribute their assets including their proportionate share of each type of DC’s property to TC1 and TC2, and TC1 and TC2 will assume their liabilities including their proportionate share of DC’s liabilities and Note 1 and Note 2, as the case may be.

Winding-up of DC

43. Further to the respective winding-up of Newco 1 and Newco 2, TC1 and TC2 will resolve to wind-up and dissolve DC in accordance with the provisions of Act 1.

44. In the course of the winding-up of DC, DC will:

(a) assign and distribute Note 1 to TC1; and

(b) assign and distribute Note 2 to TC2

which will represent all or substantially all of the property owned by DC immediately before the winding-up of DC.

45. To the extent that there is a positive balance in the CDA of DC immediately prior to the distribution of Note 1 and Note 2, DC will elect, in the manner and form required under subsection 83(2), to treat the portion of the winding-up dividend referred to in subparagraph 88(2)(b)(i) as a separate capital dividend paid on the DC common shares.

46. To the extent that there is a positive GRIP balance in DC at the time of the winding-up of DC, DC will designate, pursuant to subsection 89(14), to treat a portion of the dividend referred to in subparagraph 88(2)(b)(iii) arising on the winding up of DC, which is deemed to be a separate taxable dividend, to be an eligible dividend by notifying each of TC1 and TC2 in writing, in a timely manner, that the dividend is an eligible dividend.

47. As a result of the assignment and distribution of Note 1 and Note 2 described in Paragraph 44, the obligation of each of Newco 1 and Newco 2 under Note 1 and Note 2, as the case may be, will be extinguished and cancelled.

48. Immediately after the distribution of Note 1 and Note 2 described in Paragraph 44, but before the formal dissolution of DC, DC will not own or acquire any property of carry on any activity or undertaking.

49. Immediately after the transaction steps described in Paragraphs 44 to 46, DC will select its first taxation year end and file its first T2 Corporation Income Tax Return.

50. Upon receipt of any dividend refund to which DC may become entitled as a result of the Proposed Transactions, DC will immediately transfer the cash received in the form of a dividend refund (under the terms of the agreement governing the winding-up of DC) to each of TC1 and TC2 in the same proportion as described in Paragraph 37.

51. Within a reasonable time following the distribution of such dividend refund, 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

52. Except as described in the Facts and the Proposed Transactions, no property has been or will be acquired 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).

53. There has not, and will not be, as part of the series of transactions or events that includes the Proposed Transactions, any disposition or acquisition of property in circumstances described in subparagraphs 55(3.1)(b)(i) or (iii), or an acquisition of control in the circumstances described in subparagraph 55(3.1)(b)(ii).

54. None of the property received by TC1 and TC2 as part of the series of transactions or events that includes the distribution of property under the DC Transfer, will be acquired by a person unrelated to TC1 or TC2, or by a partnership, in the circumstances described in paragraph 55(3.1)(c).

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

56. During the implementation of the Proposed Transactions, none of the shares of the corporations referred to herein 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).

57. Each of Newco 1 and Newco 2 will have the financial capacity to honour, upon presentation for payment, the amount payable under Note 1 and Note 2 that they respectively issued as part of the series of transactions or events that includes the Proposed Transactions.

58. Immediately before the redemption of the Newco 1 preferred shares and the Newco 2 preferred shares described in Paragraph 40, each of Newco 1 and Newco 2 will be connected to DC pursuant to paragraph 186(4)(a) and subsection 186(2). DC will also have a substantial interest in each of Newco 1 and Newco 2 as that term is defined in subsection 191(2) at that time.

59. Immediately before the distributions of property by DC to each of TC1 and TC2 on the winding-up of DC described in Paragraph 44, DC will be connected to each of TC1 and TC2 pursuant to paragraph 186(4)(b).

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

PURPOSE OF THE PROPOSED TRANSACTIONS

61. The primary purpose of the Proposed Transactions is to separate, on a tax-deferred basis, the assets owned by DC equally between the holding companies owned by Sibling 1 and Sibling 2, respectively, to allow them to carry out their business and estate planning objectives independently.

RULINGS

Provided that the above statements of Facts, Proposed Transactions, Additional Information and Purpose of the Proposed Transactions are accurate and constitute a complete disclosure of all relevant information and provided that the Proposed Transactions are completed in the manner described above, our rulings are as follows:

A. Subject to the application of subsection 69(11), provided that the requisite joint elections are filed in prescribed form and manner within the prescribed time specified in subsection 85(6) and provided that 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 the transfer of each eligible property owned by DC to Newco 1 and Newco 2 as part of the DC Transfer and described in Paragraphs 37 to 39, such that the agreed amount in respect of each such transfer of eligible property will be deemed to be the transferor’s proceeds of disposition of the particular property and the transferee’s cost thereof.

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

B. On the redemption of all of the Newco 1 preferred shares and the Newco 2 preferred shares held by DC as described in Paragraph 40, by virtue of paragraphs 84(3)(a) and 84(3)(b), each of Newco 1 and Newco 2 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 Redemption Amount in respect of the Newco 1 preferred shares and the Newco 2 preferred shares, as the case may be, exceeds the PUC of the Newco 1 preferred shares and the Newco 2 preferred shares to be redeemed.

C. Subsection 84(2) and paragraph 88(2)(b) will apply to the dividend resulting on the winding-up of DC such that:

(a) subject to (b), (c) and (d) herein, DC will be deemed to have paid a taxable dividend on the XXXXXXXXXX DC common shares held by each of TC1 and TC2 equal to the amount by which:

(i) the amount or value of the funds or property to be distributed, as the case may be, to each of TC1 and TC2,

exceeds

(ii) the amount, if any, by which the aggregate PUC in respect of the DC common shares held by TC1 and TC2 is reduced on the distribution of DC’s property, and

each of TC1 and TC2 will be deemed to have received a taxable dividend equal to the proportion of the amount of the aforementioned excess that the number of the DC common shares respectively held by TC1 and TC2 immediately before the distribution of DC’s property is of the number of DC common shares outstanding immediately before the distribution of DC’s property;

(b) pursuant to subparagraph 88(2)(b)(i), the portion of the dividend described in (a) herein (the “winding-up dividend”), that does not exceed the outstanding balance of DC’s CDA, as determined immediately before the payment of the winding-up dividend, will be deemed, for the purposes of the subsection 83(2) election referred to in Paragraph 45, to be the full amount of a separate capital dividend;

(c) pursuant to subparagraph 88(2)(b)(iii), the portion of the winding-up dividend that exceeds the amount of the separate capital dividend referred to in Ruling C(b) will be deemed to be a separate dividend that is a taxable dividend; and

(d) pursuant to subparagraph 88(2)(b)(iv), each of TC1 and TC2 will be deemed to have received their proportional share of the separate capital dividend and taxable dividend described in Rulings C(b) and (c).

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

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

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

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

(e) will not be subject to tax under Part IV except, as provided in paragraph 186(1)(b), to the extent that the payer corporation is entitled to a dividend refund for its taxation year in which it paid such dividend, which, for greater certainty, will include the taxable dividends described in Rulings B and C above.

E. The taxable dividends described in Ruling B:

(a) will not be subject to Part IV.1 by virtue of paragraphs (b) and (c) of the definition of excepted dividend in section 187.1; and

(b) will not be subject to Part VI.1 by virtue of paragraph (a) of the definition of excluded dividend in subsection 191(1).

F. 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 property in the circumstances described in subparagraph 55(3.1)(b)(iii); or

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

which has not been described in this letter, then by virtue of paragraph 55(3)(b), subsection 55(2) will not apply to the taxable dividends referred to in Rulings B and C above, and, for greater certainty, subsection 55(3.1) will not apply to deny the exemption under paragraph 55(3)(b).

G. The extinguishment of Note 1 and Note 2, as described in Paragraph 47, will not, in and of itself, give rise to a forgiven amount. In addition, neither DC, Newco 1, Newco 2, TC1 or TC2 will otherwise realize a gain or incur any loss as a result of such extinguishment.

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

I. The provisions of subsection 245(2) will not be applied to the Proposed Transactions, in and by themselves, to re-determine the tax consequences confirmed in the rulings given above.

The above rulings are given subject to the limitations and qualifications set 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, unless otherwise specified.

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 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; and

(c) any other tax consequence 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 purposes of any of the rulings given above, any adjustment to the FMV of the properties transferred or the redemption amount of the shares issued as consideration, whether pursuant to a price adjustment clause or otherwise, will be effective retroactively to the time of the transfer and issuance of shares. Furthermore, the operation of a price adjustment clause may invalidate one or more rulings provided. 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, Reorganizations Section II
For Division Director
Reorganizations Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch