2024 Ruling 2024-1011741R3 - Single-wing 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: Does the paragraph 55(3)(b) exception apply to the proposed transactions, such that the dividends resulting in the proposed transactions are not re-characterized under subsection 55(2)?

Position: Yes, favourable rulings given.

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

XXXXXXXXXX									2024-101174

XXXXXXXXXX, 2024

Dear XXXXXXXXXX:

Re: Advance Income Tax Ruling
XXXXXXXXXX

We are writing in response to your letter of XXXXXXXXXX, in which you requested an advance income tax ruling on behalf of the above-noted taxpayers (the “Taxpayers”). We also acknowledge the information provided in subsequent correspondence.

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 any such tax 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 Ruling Directorate in relation to the Taxpayers or a related person.

The tax account number, address, Tax Services Office and the Tax Centre of the Taxpayers are as follows:

XXXXXXXXXX

This document is based solely on the facts and proposed transactions described below. The documentation submitted with the request does not form part of the facts and proposed transactions, and any references thereto are provided solely for the convenience of the reader.

Definitions

Unless otherwise stated:

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

ii. all terms and conditions used herein that are defined in the Act have the meaning given in such definition;

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

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

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:

“ACB” means “adjusted cost base” and has the meaning assigned by section 54;

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

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

XXXXXXXXXX;

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

“CCPC” means “Canadian-controlled private corporation” and has the meaning assigned by subsection 125(7);

“CDA” means “capital dividend account” and has the meaning assigned by subsection 89(1);

“Child 1” means XXXXXXXXXX;

“Child 2” means XXXXXXXXXX;

“Child 3” means XXXXXXXXXX;

“Child 4” means XXXXXXXXXX;

“CRA” means the Canada Revenue Agency;

“DC” means XXXXXXXXXX, as described in Paragraphs 2 to 7;

“DC Class A Common Shares” means the Class A Voting Common Shares of the capital stock of DC described in Paragraph 3 a);

“DC Class AA Preferred Shares” means the Class AA Non-Voting Preferred Shares of the capital stock of DC described in Paragraph 3 c);

“DC Class B Common Shares” means the Class B Voting Common Shares of the capital stock of DC described in Paragraph 3 b);

“DC Class BB Preferred Shares” means the Class BB Non-Voting Preferred Shares of the capital stock of DC described in Paragraph 3 d);

“DC Common Shares” means, collectively, the DC Class A Common Shares and the DC Class B Common Shares;

“DC New Class A Preferred Shares” means the preferred shares of the capital stock of DC described in Paragraph 18 a);

“DC New Class B Preferred Shares” means the preferred shares of the capital stock of DC described in Paragraph 18 b);

“DC Notes” means, collectively, the DC Redemption Note and the DC Purchase Note;

“DC Preferred Shares” means, collectively, the DC Class AA Preferred Shares and the DC Class BB Preferred Shares;

“DC Purchase Note” means the non-interest bearing demand promissory note to be issued by DC to TC, as described in Paragraph 30 b);

“DC Redemption Note” means the non-interest bearing demand promissory note to be issued by DC to TC, as described in Paragraph 30 a);

“depreciable property” has the meaning assigned by subsection 13(21);

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

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

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

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

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

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

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

“GRIP” means “general rate income pool” and has the meaning assigned by subsection 89(1);

“Holdco 1” means XXXXXXXXXX, as described in Paragraphs 11 to 13;

“Holdco 2” means XXXXXXXXXX, as described in Paragraphs 14 to 16;

“Holdco 3” means XXXXXXXXXX;

“Mr. A” means XXXXXXXXXX;

“Mr. A’s Children” means the children of Mr. A, being Child 1, Child 2, Child 3 and Child 4, collectively;

“Mr. B” means XXXXXXXXXX;

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

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

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

“Property A” means a commercial, revenue-producing rental property located at XXXXXXXXXX;

“Property B” means a commercial, revenue-producing rental property located at XXXXXXXXXX;

“Property C” means a commercial, revenue-producing rental property located at XXXXXXXXXX;

“Property D” means a commercial, revenue-producing rental property located at XXXXXXXXXX;

“Property E” means a commercial, revenue-producing rental property located at XXXXXXXXXX;

“Property F” means a commercial, revenue-producing rental property located at XXXXXXXXXX;

“Property G” means a commercial, revenue-producing rental property located at XXXXXXXXXX;

“Property H” means a commercial, revenue-producing rental property located at XXXXXXXXXX;

“Proposed Transactions” means the transactions described in Paragraphs 17 to 31;

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

“related person” means, in relation to a particular person, another person who is related to the particular person by virtue of subsection 251(2), as modified for the purposes of section 55 by paragraph 55(5)(e);

“Rental Properties” means, collectively, Property A, Property B, Property C, Property D, Property E, Property F and Property G;

“resident of Canada” means resident of Canada for the purposes of the Act;

“Rulings” means the advance income tax rulings labelled “A” to “F” in this letter;

“safe income” means, with respect to a taxable dividend described in paragraph 55(2.1)(a) that is received by a dividend recipient from a dividend payor, the amount of the income earned or realized by any corporation — after 1971 and before the safe-income determination time for the transaction, event or series — that could reasonably be considered to contribute to the capital gain that could be realized on a disposition at fair market value, immediately before the dividend, of the share on which the dividend is received;

“safe income determination time” has the meaning assigned by subsection 55(1);

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

“significant influence” has the meaning assigned by section 3051.05 of the Accounting Standards for Private Enterprises;

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

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

“stated capital” means the amount included in the stated capital account attributable to a share of the capital stock of a corporation in accordance with the governing legislation of the corporation;

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

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

“TC” means XXXXXXXXXX, as described in Paragraphs 8 to 10;

“TCC” means “taxable Canadian corporation” and has the meaning assigned by subsection 89(1);

“TC Sub” means a corporation incorporated by TC, as described in Paragraph 17;

“TC Sub Common Shares” means the common shares of the capital stock of TC Sub, as described in Paragraph 17 a);

“TC Sub Preferred Shares” means the preferred shares of the capital stock of TC Sub described in Paragraph 17 b);

“TC Sub Redemption Note” means the non-interest bearing demand promissory note to be issued by TC Sub to DC, as described in Paragraph 28;

“UCC” means “undepreciated capital cost” and has the meaning assigned by subsection 13(21).

Facts

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

Individuals

1. Mr. A, Mr. B and Mr. A’s Children are resident of Canada. Mr. B deals at arm’s length with each of Mr. A and Mr. A’s Children.

DC

2. DC is a CPCC and a TCC. DC is governed by the XXXXXXXXXX and is a resident of Canada. DC has a XXXXXXXXXX taxation year end.

3. The authorized share capital of DC consists of:

a) an unlimited number of Class A Voting Common Shares, which are voting, entitle the holder to receive dividends at the discretion of the directors to the exclusion of any or all of the other classes of shares and, in the event of the liquidation or dissolution of the corporation, entitle the holder to participate equally with the other holders of DC Common Shares in the remaining assets of the corporation (the “DC Class A Common Shares”);

b) XXXXXXXXXX Class B Voting Common Shares, which are voting, entitle the holder to receive dividends at the discretion of the directors to the exclusion of any or all of the other classes of shares and, in the event of the liquidation or dissolution of the corporation, entitle the holder to participate equally with the other holders of DC Common Shares in the remaining assets of the corporation (the “DC Class B Common Shares”);

c) XXXXXXXXXX Class AA Non-Voting Preferred Shares, which are non-voting, redeemable for a redemption amount determined by the directors at the time of issuance and entitle the holder to receive dividends at the discretion of the directors to the exclusion of any or all of the other classes of shares (the “DC Class AA Preferred Shares”); and

d) XXXXXXXXXX Class BB Non-Voting Preferred Shares, which are non-voting, redeemable for a redemption amount determined by the directors at the time of issuance and entitle the holder to receive dividends at the discretion of the directors to the exclusion of any or all of the other classes of shares (the “DC Class BB Preferred Shares”).

The issued and outstanding share capital of DC and the tax attributes are as follows:

Shareholder Number of shares Class of shares ACB($) PUC($) FMV($)
Holdco 1 XXXXX DC Class A Common Shares XXXXX XXXXX XXXXX
XXXXX DC Class AA Preferred Shares XXXXX XXXXX XXXXX
TC XXXXX DC Class B Common Shares XXXXX XXXXX XXXXX
XXXXX DC Class BB Preferred Shares XXXXX XXXXX XXXXX

Holdco 1 has de jure control over DC.

DC has never paid dividends on the DC Common Shares and the DC Preferred Shares.

Each DC Class A Common Share and DC Class B Common Share has an equal FMV.

The FMV of the DC Class AA Preferred Shares and the DC Class BB Preferred Shares corresponds to the redemption amount of such shares.

4. Holdco 1 and TC hold their shares of the capital stock of DC as capital property. Holdco 1 and TC are not related persons and deal with each other at arm’s length.

5. DC operates as a real estate investment corporation. For income tax purposes, DC consistently reports the income it earns each year from its real estate investment business as income from an active business, on the basis that it has carried on an active business during the relevant period of time.

6. As at XXXXXXXXXX, DC’s primary assets consisted of:

a) the Rental Properties;

b) XXXXXXXXXX Class A common shares of the capital stock of Holdco 2, which represent XXXXXXXXXX% of the issued and outstanding shares of the capital stock of Holdco 2; and

c) amounts receivable from Holdco 2.

DC’s assets also included cash, accounts receivable, prepaid expenses and a loan receivable from a third party.

DC’s liabilities primarily consisted of loans payable to related parties, bank indebtedness, accounts payable and accrued liabilities.

Since XXXXXXXXXX, there has not been a material change in the composition of DC’s assets and liabilities that would have an impact on the Proposed Transactions, except for the partial repayment of a loan payable to Holdco 1. Moreover, there will not be any significant change in the composition of DC’s assets or liabilities (except as contemplated in the Proposed Transactions) from the date of this letter until the date that the Proposed Transactions are completed.

7. 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.

TC

8. TC is a CPCC and a TCC. TC is governed by the XXXXXXXXXX and is a resident of Canada. TC has a XXXXXXXXXX taxation year end.

9. The issued and outstanding share capital of TC and the tax attributes are as follows:

	Shareholder		Number of shares		Class of shares		ACB($)	PUC($)	FMV($)
      Mr. A			XXXXX				Class A preferred		XXXXX		XXXXX		XXXXX
				XXXXX				Class C preferred		XXXXX		XXXXX		XXXXX
				XXXXX				Class F common		XXXXX		XXXXX		XXXXX
	Child 1		XXXXX				Class B common		XXXXX		XXXXX		XXXXX
	Child 2		XXXXX				Class C common		XXXXX		XXXXX		XXXXX
	Child 3		XXXXX				Class D common		XXXXX		XXXXX		XXXXX
	Child	4		XXXXX				Class E common		XXXXX		XXXXX		XXXXX

10. TC operates as an investment corporation. TC’s primary assets consist of XXXXXXXXXX DC Class B Common Shares, XXXXXXXXXX DC Class BB Preferred Shares, amounts receivable from DC and cash. TC’s liabilities primarily consist of amounts due to shareholders.

Holdco 1

11. Holdco 1 is a CPCC and a TCC. Holdco 1 is governed by the XXXXXXXXXX and is a resident of Canada. Holdco 1 has an XXXXXXXXXX taxation year end.

12. The issued and outstanding share capital of Holdco 1 and the tax attributes are as follows:

	Shareholder		Number of shares		Class of shares		ACB($)	PUC($)	FMV($)
      Mr. B			XXXXX				common			XXXXX		XXXXX		XXXXX
				XXXXX				Class A preferred		XXXXX		XXXXX		XXXXX

13. Holdco 1 operates as an investment corporation. Holdco 1’s primary assets consist of XXXXXXXXXXDC Class A Common Shares, XXXXXXXXXXDC Class AA Preferred Shares, XXXXXXXXXX Class A common shares of the capital stock of Holdco 2, amounts receivable from related parties (including DC and Holdco 2), other investments (shares and loans receivable) and cash. Holdco 1’s liabilities primarily consist of amounts due to shareholders.

Holdco 2

14. Holdco 2 is a CPCC and a TCC. Holdco 2 is governed by the XXXXXXXXXX and is a resident of Canada. Holdco 2 has a XXXXXXXXXX taxation year end.

15. The issued and outstanding share capital of Holdco 2 and the tax attributes are as follows:

	Shareholder		Number of shares		Class of shares		ACB($)	PUC($)	FMV($)
	DC			XXXXX				Class A common		XXXXX		XXXXX		XXXXX
	Holdco 1		XXXXX				Class A common		XXXXX		XXXXX		XXXXX
	Holdco 3TC		XXXXX				Class A common		XXXXX		XXXXX		XXXXX

16. Holdco 2 operates as an investment corporation and carries on a specified investment business. As at XXXXXXXXXX, Holdco 2’s primary assets consisted of Property H, cash and prepaid expenses. Holdco 2’s liabilities primarily consisted of long-term debt and amounts payable to related parties.

Since XXXXXXXXXX, there has not been a material change in the composition of Holdco 2’s assets and liabilities that would have an impact on the Proposed Transactions. Moreover, there will not be any significant change in the composition of Holdco 2’s assets or liabilities from the date of this letter until the date that the Proposed Transactions are completed.

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, unless otherwise indicated, following the completion of the Proposed Transactions.

17. TC will incorporate TC Sub under the XXXXXXXXXX. TC Sub will be a TCC and a CCPC.

The authorized share capital of TC Sub will consist of an unlimited number of:

a) TC Sub Common Shares, which will be voting (one vote per share), participating and without par value; and

b) TC Sub Preferred Shares, which will be voting (one vote per share), non-participating, and redeemable and retractable at any time (subject to applicable law) for an amount equal to the aggregate FMV of the consideration received by TC Sub on the issuance thereof (excluding the amount of any liabilities assumed), and, in the event of the dissolution, liquidation or winding-up of TC Sub, will have priority over any other share of the capital stock of TC Sub.

TC Sub will issue XXXXXXXXXX TC Sub Common Shares to TC for a consideration of $XXXXXXXXXX.

18. DC will amend its articles of incorporation to create two new classes of preferred shares:

a) the DC New Class A Preferred Shares, which will be non-voting, non-participating, redeemable and retractable for a redemption amount equal to the FMV of the property received by the corporation in exchange for their issuance and entitle the holder to non-cumulative dividends at the discretion of the directors at a rate not to exceed XXXXXXXXXX% per annum of the redemption amount; and

b) the DC New Class B Preferred Shares, which will be non-voting, non-participating, redeemable and retractable for a redemption amount equal to the FMV of the property received by the corporation in exchange for their issuance and entitle the holder to non-cumulative dividends at the discretion of the directors at a rate not to exceed XXXXXXXXXX% per annum of the redemption amount.

19. TC will exchange all of its DC Class B Common Shares for a number of newly issued DC Class A Common Shares having an aggregate FMV equal to the FMV of the DC Class B Common Shares so exchanged. The DC Class B Common Shares so exchanged will be cancelled.

The aggregate addition to the stated capital in respect of the DC Class A Common Shares issued by DC will be equal to the aggregate PUC of the DC Class B Common Shares held by TC immediately before the exchange.

No election under subsection 85(1) will be filed with respect to the exchange.

20. TC will exchange all of its DC Class BB Preferred Shares for a number of newly issued DC New Class B Preferred Shares having an aggregate FMV equal to the FMV of the DC Class BB Preferred Shares so exchanged. The DC Class BB Preferred Shares so exchanged will be cancelled.

The aggregate addition to the stated capital in respect of the DC New Class B Preferred Shares issued by DC will be equal to the aggregate PUC of the DC Class BB Preferred Shares held by TC immediately before the exchange.

Simultaneously, Holdco 1 will exchange all of its DC Class AA Preferred Shares for a number of newly issued DC New Class A Preferred Shares having an aggregate FMV equal to the FMV of the DC Class AA Preferred Shares so exchanged. The DC Class AA Preferred Shares so exchanged will be cancelled.

The aggregate addition to the stated capital in respect of the DC New Class A Preferred Shares issued by DC will be equal to the aggregate PUC of the DC Class AA Preferred Shares held by Holdco 1 immediately before the exchange.

No election under subsection 85(1) will be filed with respect to the exchanges.

21. On the last day of its taxation year, DC will resolve to increase the PUC of the DC Class A Common Shares held by TC and Holdco 1 by way of an increase in the legal stated capital of such shares in accordance with the XXXXXXXXXX. The PUC will be increased by an aggregate amount sufficient to trigger a full refund of DC’s NERDTOH and ERDTOH, if any, at that time. For greater certainty, the amount of the increase to the PUC of the DC Class A Common Shares will not exceed the amount of safe income, determined immediately before the safe income determination time for the dividend, that is attributable to the DC Class A Common Shares, immediately before the dividend.

Types of Property Analysis

22. DC has significant influence over Holdco 2. 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, Holdco 2 represent. However, since DC will indirectly transfer to TC that corporation’s proportion of the shares of, and any amounts receivable from, Holdco 2, as described in Paragraph 25, the determination using the consolidated look-through method will not actually be undertaken for the purposes of the Proposed Transactions.

23. Immediately before the transfer of property described in Paragraph 25, 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 of DC, including cash, tenant security deposits, prepaid expenses, accounts receivable, and taxes receivable, if any;

b) business 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 an active business (other than a specified investment business); and

c) 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 from a specified investment business.

For greater certainty, for purposes of these determinations:

d) DC will not have significant influence over any corporations, partnerships, or trusts other than Holdco 2;

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

f) advances that are payable on demand or that are due within the next 12 months will be considered cash or near-cash property;

g) the Rental Properties will be characterized as business property;

h) deferred tax assets or deferred expense (which are capitalized and amortized for accounting purposes but deducted for income tax purposes), if any, will not be considered property; and

i) 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.

24. In determining the net FMV of each type of property of DC immediately before the transfer of property described in Paragraph 25, 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, which include amounts owing by DC that have a term of less than 12 months, that are due on demand or that are otherwise normally classified as current liabilities (including accounts payable, shareholder advances, bonuses payable, and the current portion of any long-term debt), will be allocated to the 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;

b) liabilities, other than current liabilities, of DC 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. 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 after the allocation to a particular property as described in this Paragraph; and

c) any liabilities that remain after the allocations described in Paragraphs 24 a) and b) are made (“excess DC unallocated liabilities”), will then be allocated to the cash or near-cash property, business property and investment property, if any, of DC, based on the relative net FMV of each type of property prior to the allocation of such excess DC unallocated liabilities but after the allocations described in Paragraphs 24 a) and b). However, where DC is considered to have a negative amount of a type of property because of Paragraph 24 a) or b), for the purposes of allocating such excess DC unallocated liabilities, the net FMV of that type of property will be deemed to be nil resulting in none of such excess DC unallocated liabilities being allocated to that type of property.

Single-Wing Split-Up Butterfly

25. Immediately following the classification of the types of property and determination of the net FMV of each type of property described in Paragraphs 23 and 24, respectively, DC will transfer to TC Sub a proportionate share of its:

a) cash or near-cash property;

b) business property; and

c) investment property, if any,

such that immediately following such property transfer, the aggregate net FMV of each type of property of DC transferred to TC Sub 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 greater certainty, the portion of the net FMV of each type of DC’s property that is transferred to TC Sub, as described in this Paragraph, will represent TC’s pro rata share of the net FMV of that type of property of DC.

For greater certainty, DC will transfer to TC Sub its pro rata share of the shares of the capital stock of Holdco 2, and any amounts receivable from Holdco 2.

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 of DC that TC Sub has received (or DC has retained) as compared to what TC Sub would have received (or DC would have retained) had it received (or retained) its appropriate pro rata share of the net FMV of that type of property of DC.

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

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

b) issue XXXXXXXXXX TC Sub Preferred 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 Sub exceeds the amount of liabilities assumed by TC Sub.

For greater certainty, for the purposes of subsection 191(4), the amount specified in respect of the TC Sub Preferred Shares, will be pursuant to a resolution of TC Sub’s board of directors, that is effective concurrently with the issuance of such shares. The amount to be specified in respect of each of such share will be expressed as a dollar amount (and not determined by a formula), will not exceed the FMV of the consideration for which each TC Sub Preferred Share is issued and will not be subject to change thereafter.

26. DC and TC Sub will jointly elect, 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 transfer of each eligible property so transferred by DC to TC Sub.

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).

The agreed amount in respect of each eligible property so transferred will not exceed the FMV of the respective property, nor will it be less than the amount permitted under paragraph 85(1)(b).

For greater certainty, the amount of the liabilities assumed by TC Sub, which are allocated to a particular eligible property that is subject to an election under subsection 85(1), will not exceed the agreed amount for that particular property. The amount of liabilities assumed by TC Sub which are allocated to a particular property that is not subject to an election under subsection 85(1), will not exceed the FMV of any such property.

27. TC Sub will add to its stated capital account for the TC Sub Preferred Shares an amount equal to the aggregate of (a) the agreed amounts, in the case of each eligible property transferred to TC Sub; and (b) the aggregate FMV, in the case of each property transferred to TC Sub that is not an eligible property, less (c) the aggregate amount of DC’s liabilities assumed by TC Sub as described in Paragraph 25 hereof. For greater certainty, the amount to be added to the stated capital account for the TC Sub Preferred 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).

28. TC Sub will redeem its TC Sub Preferred Shares held by DC for their aggregate redemption amount. As consideration, TC Sub will issue to DC a non-interest bearing promissory note, payable on demand (the “TC Sub Redemption Note”) having a principal amount and FMV equal to the aggregate redemption amount and FMV of the TC Sub Preferred Shares so redeemed. DC will accept the TC Sub Redemption Note as payment in full for the redemption of such shares.

29. TC will resolve to wind-up and dissolve TC Sub in accordance with the provisions of the XXXXXXXXXX.

All properties of TC Sub will be distributed to TC and all liabilities of TC Sub will be assumed by TC. For greater certainty, the TC Sub Redemption Note will be assumed by TC.

Articles of dissolution for TC Sub will be filed with the appropriate corporate registry office and, upon receipt of a certificate of dissolution, TC Sub will cease to exist as of the date specified therein.

30. DC will simultaneously:

a) redeem the DC New Class B Preferred Shares held by TC for their aggregate redemption amount. As consideration, DC will issue to TC a non-interest bearing promissory note, payable on demand (the “DC Redemption Note”) having a principal amount and FMV equal to the aggregate redemption amount and FMV of the DC New Class B Preferred Shares so redeemed. TC will accept the DC Redemption Note as payment in full for the redemption of such shares.

b) purchase for cancellation the DC Class A Common Shares held by TC. As consideration, DC will issue to TC a non-interest bearing promissory note, payable on demand (the “DC Purchase Note”) having a principal amount and FMV equal to the aggregate FMV at that time of the DC Class A Common Shares so purchased for cancellation. TC will accept the DC Purchase Note as payment in full for the purchase of such shares.

31. DC and TC will enter into an agreement under which the DC Notes will be set-off in full and cancelled against the TC Sub Redemption Note.

Additional information

32. 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).

33. 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).

34. None of the property received by TC on the distribution 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).

35. None of the property retained by DC after the distribution 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).

36. 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 any undertaking or agreement that is referred to in subsection 112(2.2) as a “guarantee agreement”;

b) the subject of a “dividend rental arrangement” as contemplated in 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 or event or a series of transactions or events of the type described in subsection 112(2.5);

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).

37. 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 specified financial institution or a financial intermediary corporation.

Purposes of the Proposed Transactions

38. The purpose of the Proposed Transactions is to allow Holdco 1 and TC to have separate ownership and control over their respective share of DC’s property so as to enable each of them to own, manage and administer such interests independently from each other through DC and TC, respectively.

Rulings

Provided that the preceding statements constitute a complete and accurate disclosure of all relevant facts, additional information, completed and proposed transactions and purpose of the proposed transactions, and provided that the Proposed Transactions are completed in the manner described above, we confirm the following:

A. Subject to the application of subsection 69(11), provided that the requisite joint elections are filed in prescribed form and manner within the prescribed time specified in subsection 85(6), the provisions of subsection 85(1) will apply to the transfer of each eligible property owned by DC to TC Sub, as described in Paragraph 25, such that the agreed amount in respect of each such transfer will be deemed to be DC’s proceeds of disposition and TC Sub’s cost of such property pursuant to paragraph 85(1)(a).

For the purposes of the joint elections, the reference in subparagraph 85(1)(e)(i) to “the undepreciated capital cost to the taxpayer of all of the property of that class immediately before the disposition” shall be interpreted to mean that proportion of the UCC to DC of all the property of that class immediately before the disposition that the FMV of the property at that time that is transferred, is of the aggregate FMV at that time of all the property of that class.

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

B. Subsection 84(3) will apply to:

a) the redemption of the TC Sub Preferred Shares held by DC, as described in Paragraph 28, such that TC Sub will be deemed to have paid and DC will be deemed to have received;

b) the redemption of the DC New Class B Preferred Shares held by TC, as described in Paragraph 30 a), such that DC will be deemed to have paid and TC will be deemed to have received; and

c) the purchase for cancellation of the DC Class A Common Shares held by TC, as described in Paragraph 30 b), such that DC will be deemed to have paid and TC will be deemed to have received;

a dividend on such shares equal to the amount, if any, by which the aggregate amount paid upon such redemption or purchase for cancellation exceeds the aggregate PUC in respect of such shares immediately before such redemption or purchase for cancellation and any such dividend:

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

e) will be deductible by the recipient pursuant to subsection 112(1) in computing its taxable income for the year in which such 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);

f) 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;

g) 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;

h) will not be subject to tax under Part IV, except as provided in paragraph 186(1)(b);

i) will not be subject to tax under Part IV.1; and

j) provided the amount paid by TC Sub to DC on the redemption of each TC Sub Preferred Share is equal to the amount specified in respect of such share for the purpose of subsection 191(4), will not be subject to tax under Part VI.1.

C. 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 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 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 B, 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.

D. The set-off and cancellation of the DC Notes against the TC Sub Redemption Note, as described in Paragraph 31, will not give rise to a “forgiven amount” within the meaning of subsections 80(1) or 80.01(1). In addition, no gain or loss will be realized as a result of such off-set and cancellation.

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

F. Subsection 245(2) will not apply to the Proposed Transaction, in and of themselves, to redetermine the tax consequences confirmed in the Rulings given above.

These 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 no later than six (6) months after the date of this letter.

The above rulings are based on the law as it reads at the date of this letter and do not take into account any proposed amendments to the Act and the Regulations, which if enacted, could have an effect on the rulings provided herein.

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 stated capital or PUC in respect of any share referred to herein;

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

c. the characterization of any property described herein to the holder thereof; or

d. any provincial tax consequences of the Proposed Transactions or any other tax consequence relating to the facts, Proposed Transactions, additional information or any transaction or event taking place either prior to the Proposed Transactions or subsequent to the Proposed Transactions, whether described in this letter or not, other than those specifically described in the Rulings, 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 and the redemption amount of the shares issued as consideration, whether pursuant to a price adjustment clause or otherwise, will be effective retroactively to the time of the transfer and issuance of shares. Furthermore, none of the Rulings given in this letter are intended to apply to, or in the event of, the operation of a price adjustment clause, since such adjustment will be due to circumstances that do not constitute proposed transactions that are seriously contemplated. The general position of the CRA with respect to price adjustment clauses is stated in Income Tax Folio S4-F3-C1, Price Adjustment Clauses.

An invoice for our fees in connection with this ruling request will be forwarded to you under separate cover.

Yours truly,

XXXXXXXXXX
for the Director
Reorganizations and Resources Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch