2025 Ruling 2024-1047551R3 - 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 butterfly dividend is exempt from 55(2) as a result of qualifying under 55(3)(b)?

Position: Yes.

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

XXXXXXXXXX									2024-104755

XXXXXXXXXX, 2025

Dear XXXXXXXXXX;

Re: Advance Income Tax Ruling

XXXXXXXXXX.

We are writing in response to your request dated XXXXXXXXXX for an advance income tax ruling on behalf of the taxpayers described below (Taxpayers). We also acknowledge the additional information provided in your various email correspondence (XXXXXXXXXX).

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 return of the Taxpayers or a related person and;

i. being considered by the Canada Revenue Agency in connection with such return;

ii. under objection by the Taxpayers or a related person; or

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

b. the subject of a ruling previously considered by the Income Tax Rulings Directorate.

The tax account number, Tax Services Office and the Tax Centre of XXXXXXXXXX. is as follows:

XXXXXXXXXX

Unless otherwise stated:

i. all statutory references herein are to the relevant provisions of the Income Tax Act (Canada)(the “Act”), or, where appropriate, the Income Tax Regulations (the “Regulations);

ii. all terms used in this Ruling request that are defined in the Act (or in the Regulations) have the meaning given in such definitions;

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

iv. 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:

(a) “ACB” means “adjusted cost base” as defined in section 54 of the Act;

(b) “Act1” means the XXXXXXXXXX, as amended;

(c) “Advisory Firm A” means XXXXXXXXXX, with XXXXXXXXXX;

(d) “Advisory Firm B” means XXXXXXXXXX;

(e) “CCPC” means “Canadian-controlled private corporation” as defined in subsection 125(7) of the Act;

(f) “CDA” means “capital dividend account” as defined in subsection 89(1) of the Act;

(g) “CRA” means Canada Revenue Agency;

(h) “DC” means XXXXXXXXXX;

(i) “DC Assets” means all of the assets owned by DC on the Effective Date;

(j) “DC Liabilities” means all of the liabilities of DC, if any, on the Effective Date (including, for greater certainty, Shareholder Loan credit balances);

(k) “DC Note 1” means a non-interest bearing demand promissory note issued by DC to TC1 as further described under Proposed Transactions below;

(l) “DC Note 2” means a non-interest bearing demand promissory note issued by DC to TC2 as further described under Proposed Transactions below;

(m) “DC Note 3” means a non-interest bearing demand promissory note issued by DC to TC3 as further described under Proposed Transactions below;

(n) "Effective Date" means a date chosen by the relevant parties to implement certain Proposed Transactions in sequential order, beginning with the transfer of DC Shares to TC1, TC2 and TC3;

(o) “ERDTOH” means “eligible refundable dividend tax on hand” within the meaning of subsection 129(4) of the Act;

(p) “FMV” means fair market value;

(q) “GRIP” means “general rate income pool” within the meaning of subsection 89(1) of the Act;

(r) “NERDTOH” means “non-eligible refundable dividend tax on hand” within the meaning of subsection 129(4) of the Act;

(s) “Portfolio Investments” means DC’s long term investments in publicly traded securities as described in this letter;

(t) “PUC” means paid-up capital within the meaning of subsection 89(1) the Act;

(u) “Shareholder Loans” means the total amounts owed by DC to its shareholders, as further described in this letter;

(v) “Sibling 1” means XXXXXXXXXX, a brother of Sibling 2 and Sibling 3;

(w) “Sibling 2” means XXXXXXXXXX; a sister of Sibling 1 and Sibling 3

(x) “Sibling 3” means XXXXXXXXXX, a brother of Sibling 1 and Sibling 2;

(y) “Significant Influence” has the meaning assigned by XXXXXXXXXX;

(z) “specified shareholder” has the meaning assigned by subsection 248(1), as modified for certain purposes, by subsections 55(3.3) and 55(3.4);

(aa) “TC1” means a corporation to be incorporated by and controlled by Sibling 1, as further described under Proposed Transactions below;

(bb) “TC1 Class E Shares” means Class E non-voting preferred shares of TC1, as further described under Proposed Transactions below;

(cc) “TC1 Redemption Note” means a non-interest bearing demand promissory note issued by TC1 to DC as further described under Proposed Transactions below;

(dd) “TC2” means a corporation to be incorporated and controlled by Sibling 2, as further described under Proposed Transactions below;

(ee) “TC2 Class E Shares” means Class E non-voting preferred shares of TC2, as further described under Proposed Transactions below;

(ff) “TC2 Redemption Note” means a non-interest bearing demand promissory note issued by TC2 to DC as further described under Proposed Transactions below;

(gg) “TC3” means a corporation to be incorporated and controlled by Sibling 3, as further described under Proposed Transactions below;

(hh) “TC3 Class E Shares” means Class E non-voting preferred shares of TC3, as further described under Proposed Transactions below;

(ii) “TC3 Redemption Note” means a non-interest bearing demand promissory note issued by TC3 to DC as further described under Proposed Transactions below; and

(jj) “TCC” means “taxable Canadian corporation” as defined in subsection 89(1) of the Act.

Facts

The relevant facts are as follows:

1. Sibling 1, Sibling 2, and Sibling 3 are all resident in Canada for purposes of the Act.

2. DC was incorporated on XXXXXXXXXX under the laws of the Province of XXXXXXXXXX and is a CCPC.

3. The sole director of DC is Sibling 1.

4. The President and Secretary-Treasurer of DC is Sibling 1.

5. The authorized share capital of DC includes the following:

(a) Class A Common shares (“DC Class A Common Shares”) – voting, fully participating, non-cumulative discretionary dividends, and having no par value;

(b) Class B Preferred Shares (“DC Class B Preferred Shares”) – voting, redeemable and retractable at the FMV of the consideration received for the issuance of shares;

(c) Class C Preferred Shares (“DC Class C Preferred Shares”) – voting, redeemable and retractable at $XXXXXXXXXX per share;

(d) Class D Preferred Shares (“DC Class D Preferred Shares”) – voting, redeemable and retractable at $XXXXXXXXXX per share;

6. DC's issued and outstanding shares are held as follows:

	Shareholder		Shares					PUC		ACB
	Sibling 1		XXXXX DC Class A Common Shares	XXXXX		XXXXX
	Sibling 1		XXXXX DC Class C Preferred Shares 	XXXXX		XXXXX
	Sibling 2		XXXXX DC Class A Common Shares	XXXXX		XXXXX
	Sibling 2		XXXXX DC Class C Preferred Shares 	XXXXX		XXXXX
	Sibling 3		XXXXX DC Class A Common Shares	XXXXX		XXXXX
	Sibling 3		XXXXX DC Class C Preferred Shares 	XXXXX		XXXXX

7. DC has a taxation year end of XXXXXXXXXX.

8. As of XXXXXXXXXX, DC’s balance sheet consisted of the following:

(a) cash;

(b) marketable securities (which includes Portfolio Investments) managed by Advisory Firm A and Advisory Firm B;

(c) Shareholder Loans, of an equal amount, owing to Sibling 1, Sibling 2, and Sibling 3; and

(d) liabilities owing to third parties.

9. DC holds the Portfolio Investments as capital property. DC does not exercise any Significant Influence over any issuer of the Portfolio Investments. The Portfolio Investments are held in independent investment accounts that are managed solely by Advisory Firm B.

10. As of XXXXXXXXXX, DC had the following tax account balances:

(a) CDA of $XXXXXXXXXX;

(b) ERDTOH of XXXXXXXXXX;

(c) NERDTOH of $XXXXXXXXXX; and

(d) GRIP of $XXXXXXXXXX.

Completed transaction

11. On XXXXXXXXXX, DC declared a non-eligible dividend of $XXXXXXXXXX on the DC Class A common shares. The dividend was paid by crediting the amount of the dividend payable to each Sibling to their respective shareholder loan account.

Proposed transactions

Incorporation of TCs

12. Sibling 1 will incorporate a new corporation, TC1, under the Act1. TC1 will be a TCC and a CCPC.

13. The authorized share capital of TC1 will include an unlimited number of the following classes of shares:

(a) Class A voting common shares without nominal or par value (the "TC1 Class A Common Shares");

(b) Class B voting common shares without nominal or par value (the " TC1 Class B Common Shares");

(c) Class C non-voting common shares without nominal or par value (the " TC1 Class C Common Shares");

(d) Class D non-voting preferred shares with a discretionary dividend entitlement not to exceed XXXXXXXXXX percent per annum of the redemption amount, will be redeemable and retractable at any time (subject to applicable law) for an aggregate amount equal to the aggregate FMV of the consideration received by TC1 on the issuance thereof (less the FMV of any non-share consideration paid by TC1 in respect of the transfer of the property), divided by the number of TC1 Class D Shares issued as consideration for the property, subject to a price adjustment clause, and in the event of liquidation, dissolution, or winding-up, each holder of TC1 Class D Shares is entitled to receive, before distribution of any part of the assets of the TC1 among the holders of TC1 Class A Shares, TC1 Class B Shares, or TC1 Class C Shares, an amount for each TC1 Class D Share then equal to the aggregate redemption amount of such TC1 Class D Share. No dividends or other distribution will be paid on the TC1 Class D Shares if the effect of such dividend or other distribution would result in a violation of any provision of applicable law or in the TC1 having insufficient net assets to redeem or repurchase any class of preferred shares; and

(e) Class E non-voting preferred shares with a discretionary dividend entitlement not to exceed XXXXXXXXXX percent per annum of the redemption amount, will be redeemable and retractable at any time (subject to applicable law) for an aggregate amount equal to the aggregate FMV of the issued and outstanding shares of TC1, as confirmed by the board of directors at the time of issuance of the TC1 Class E Shares (less the redemption amount applicable to all other issued and outstanding preferred shares), divided by the number of TC1 Class E Shares issued at the time, subject to a price adjustment clause, and in the event of liquidation, dissolution, or winding-up, each holder of TC1 Class E Shares is entitled to receive, before distribution of any part of the assets of the TC1 among the holders of TC1 Class A Shares, TC1 Class B Shares, or TC1 Class C Shares, an amount for each TC1 Class E Share then equal to the aggregate redemption amount of such TC1 Class E Share. No dividends or other distribution will be paid on the TC1 Class E Shares if the effect of such dividend or other distribution would result in a violation of any provision of applicable law or in the TC1 having insufficient net assets to redeem or repurchase any class of preferred shares (the " TC1 Class E Preferred Shares").

14. Sibling 1 will subscribe for XXXXXXXXXX TC1 Class A Common Shares for $XXXXXXXXXX.

15. Sibling 2 will incorporate a new corporation, TC2, under the Act1. TC2 will be a TCC and a CCPC.

16. The authorized share capital of TC2 will include an unlimited number of the following classes of shares:

(a) Class A voting common shares without nominal or par value (the "TC2 Class A Common Shares");

(b) Class B voting common shares without nominal or par value (the "TC2 Class B Common Shares");

(c) Class C non-voting common shares without nominal or par value (the "TC2 Class C Common Shares");

(d) Class D non-voting preferred shares with a discretionary dividend entitlement not to exceed XXXXXXXXXX percent per annum of the redemption amount, will be redeemable and retractable at any time (subject to applicable law) for an aggregate amount equal to the aggregate FMV of the consideration received by TC2 on the issuance thereof (less the FMV of any non-share consideration paid by TC2 in respect of the transfer of the property), divided by the number of TC2 Class D Shares issued as consideration for the property, subject to a price adjustment clause, and in the event of liquidation, dissolution, or winding-up, each holder of TC2 Class D Shares is entitled to receive, before distribution of any part of the assets of the TC2 among the holders of TC2 Class A Shares, TC2 Class B Shares, or TC2 Class C Shares, an amount for each TC2 Class D Share then equal to the aggregate redemption amount of such TC2 Class D Share. No dividends or other distribution will be paid on the TC2 Class D Shares if the effect of such dividend or other distribution would result in a violation of any provision of applicable law or in the TC2 having insufficient net assets to redeem or repurchase any class of preferred shares; and

(e) Class E non-voting preferred shares with a discretionary dividend entitlement not to exceed XXXXXXXXXX percent per annum of the redemption amount, will be redeemable and retractable at any time (subject to applicable law) for an aggregate amount equal to the aggregate FMV of the issued and outstanding shares of TC2, as confirmed by the board of directors at the time of issuance of the TC2 Class E Shares (less the redemption amount applicable to all other issued and outstanding preferred shares), divided by the number of TC2 Class E Shares issued at the time, subject to a price adjustment clause, and in the event of liquidation, dissolution, or winding-up, each holder of TC2 Class E Shares is entitled to receive, before distribution of any part of the assets of the TC2 among the holders of TC2 Class A Shares, TC2 Class B Shares, or TC2 Class C Shares, an amount for each TC2 Class E Share then equal to the aggregate redemption amount of such TC2 Class E Share. No dividends or other distribution will be paid on the TC2 Class E Shares if the effect of such dividend or other distribution would result in a violation of any provision of applicable law or in the TC2 having insufficient net assets to redeem or repurchase any class of preferred shares (the " TC2 Class E Preferred Shares").

17. Sibling 2 will subscribe for XXXXXXXXXX TC2 Class A Common Shares for $XXXXXXXXXX.

18. Sibling 3 will incorporate a new corporation, TC3, under the Act1. TC3 will be a TCC and a CCPC.

19. The authorized share capital of TC3 will include an unlimited number of the following classes of shares:

(a) Class A voting common shares without nominal or par value (the "TC3 Class A Common Shares");

(b) Class B voting common shares without nominal or par value (the "TC3 Class B Common Shares");

(c) Class C non-voting common shares without nominal or par value (the "TC3 Class C Common Shares");

(d) Class D non-voting preferred shares with a discretionary dividend entitlement not to exceed XXXXXXXXXX percent per annum of the redemption amount, will be redeemable and retractable at any time (subject to applicable law) for an aggregate amount equal to the aggregate FMV of the consideration received by TC3 on the issuance thereof (less the FMV of any non-share consideration paid by TC3 in respect of the transfer of the property), divided by the number of TC3 Class D Shares issued as consideration for the property, subject to a price adjustment clause, and in the event of liquidation, dissolution, or winding-up, each holder of TC3 Class D Shares is entitled to receive, before distribution of any part of the assets of the TC3 among the holders of TC3 Class A Shares, TC3 Class B Shares, or TC3 Class C Shares, an amount for each TC3 Class D Share then equal to the aggregate redemption amount of such TC3 Class D Share. No dividends or other distribution will be paid on the TC3 Class D Shares if the effect of such dividend or other distribution would result in a violation of any provision of applicable law or in the TC3 having insufficient net assets to redeem or repurchase any class of preferred shares; and

(e) Class E non-voting preferred shares with a discretionary dividend entitlement not to exceed XXXXXXXXXX percent per annum of the redemption amount, will be redeemable and retractable at any time (subject to applicable law) for an aggregate amount equal to the aggregate FMV of the issued and outstanding shares of TC3, as confirmed by the board of directors at the time of issuance of the TC3 Class E Shares (less the redemption amount applicable to all other issued and outstanding preferred shares), divided by the number of TC3 Class E Shares issued at the time, subject to a price adjustment clause, and in the event of liquidation, dissolution, or winding-up, each holder of TC3 Class E Shares is entitled to receive, before distribution of any part of the assets of the TC3 among the holders of TC3 Class A Shares, TC3 Class B Shares, or TC3 Class C Shares, an amount for each TC3 Class E Share then equal to the aggregate redemption amount of such TC3 Class E Share. No dividends or other distribution will be paid on the TC3 Class E Shares if the effect of such dividend or other distribution would result in a violation of any provision of applicable law or in the TC3 having insufficient net assets to redeem or repurchase any class of preferred shares (the " TC3 Class E Preferred Shares").

20. Sibling 3 will subscribe for XXXXXXXXXX TC3 Class A Common Shares for $XXXXXXXXXX.

Permitted Exchanges

21. On a contemporaneous basis, each of Sibling 1, Sibling 2 and Sibling 3 will transfer all of their DC Class A Common Shares and DC Class C Preferred Shares to their respective TC on the Effective Date.

22. Sibling 1 will transfer XXXXXXXXXX DC Class A Common Shares and XXXXXXXXXX DC Class C Preferred Shares to TC1 in exchange for TC1 issuing XXXXXXXXXXTC1 Class D Shares as sole consideration therefore having an aggregate redemption amount and FMV equal to the aggregate FMV of the XXXXXXXXXX DC Class A Preferred Shares and XXXXXXXXXX DC Class C Preferred Shares transferred.

23. Sibling 2 will transfer XXXXXXXXXX DC Class A Common Shares and XXXXXXXXXX DC Class C Preferred Shares to TC2 in exchange for TC2 issuing XXXXXXXXXXTC2 Class D Shares as sole consideration therefore having an aggregate redemption amount and FMV equal to the aggregate FMV of the XXXXXXXXXX DC Class A Preferred Shares and XXXXXXXXXX DC Class C Preferred Shares transferred.

24. Sibling 3 will transfer XXXXXXXXXX DC Class A Common Shares and XXXXXXXXXX DC Class C Preferred Shares to TC3 in exchange for TC3 issuing XXXXXXXXXX,XXXXXXXXXX TC1 Class D Shares as sole consideration therefore having an aggregate redemption amount and FMV equal to the aggregate FMV of the XXXXXXXXXX DC Class A Preferred Shares and XXXXXXXXXX DC Class C Preferred Shares transferred.

25. Sibling 1, Sibling 2 and Sibling 3, as the case may be, will jointly elect with their respective TC in the prescribed form and within the time limit referred to in subsection 85(6) to have the provisions of subsection 85(1) apply to the transfers. The agreed amount in respect of the shares of DC so transferred will not be greater than their FMV nor will such agreed amounts be less than the lesser of the amounts described in subparagraphs 85(1)(c.1)(i) and (ii).

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

27. The amount to be added to the corporate stated capital account maintained for the TC2 Class D Shares in the capital of TC2 as a result of the aforesaid transfer will not exceed the maximum amount that could be added to the PUC of the shares, without being subject to adjustment under paragraph 84.1(1)(a).

28. The amount to be added to the corporate stated capital account maintained for the TC3 Class D Shares in the capital of TC3 as a result of the aforesaid transfer will not exceed the maximum amount that could be added to the PUC of the shares, without being subject to adjustment under paragraph 84.1(1)(a).

Capital Dividend

29. The directors of DC will pass a resolution to increase the stated capital (and consequently the paid-up capital) of the issued and outstanding Class A common shares of DC by an amount that will not exceed the amount of DC's CDA immediately before such paid-up capital increase. DC will file an election, pursuant to subsection 83(2), in prescribed manner and prescribed form, in respect of the entire amount of the dividend deemed to be paid by DC to (and deemed to be received by) the holders of its common shares under subsection 84(1).

Types of Property

30. The property of DC will be classified into the following types of property in anticipation of the DC Transfer:

(a) cash or near-cash property, including DC’s cash, accounts receivable, marketable securities (excluding the Portfolio Investments) and prepaid expenses;

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

(c) business property, consisting of all of the assets of DC, other than cash or near-cash property and investment property.

For purposes of the property classification above:

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

(ii) any tax accounts of DC, such as any non-capital loss, net capital loss, the balance of any ERDTOH, NERDTOH or CDA, will not be considered property, as the case may be, for purposes of the Proposed Transactions;

(iii) deferred expenses, if any, which are expenses that are deferred and amortized for accounting purposes, will not be considered property;

(iv) any amount owing to DC that is due in less than 12 months or that is due on demand, will be considered cash or near-cash property; and

(v) taxes receivable (i.e. amounts owing as a refund of taxes to DC immediately before the DC Transfer) will be treated as cash or near cash property.

31. In determining the net FMV of each type of property of DC immediately before the DC Transfer:

(a) all current liabilities, will be allocated to each cash or near-cash property in the proportion that the FMV of each such property is of the aggregate FMV of all cash or near-cash property. The total amount of current liabilities to be allocated to cash or near cash property will not exceed the aggregate fair market value of cash or near-cash property;

(b) liabilities of DC, other than those described in Paragraph 31(a), that relate to a particular property will then be allocated to the particular property (and effectively to the type of property to which the particular property belongs) to the extent of its FMV. The liabilities that pertain to a type of property but not to a particular property will be allocated to that type of property, but not in excess of the net FMV of such type of property after the allocation of liabilities to a particular property, as described herein; and

(c) if any liabilities remain after the allocations described in Paragraphs 31(a) and 31(b) are made, such remaining liabilities will then be allocated to the cash or near-cash property and investment property of DC, on the basis of the relative net FMV of each type of property immediately prior to the allocation of such remaining liabilities, but after the allocation of the liabilities as described in Paragraphs 31(a) and 31(b).

For the purposes of determining the net FMV of the types of property above:

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

(ii) no amount will be considered a liability unless it represents a true legal liability capable of quantification. For greater certainty, the amount of any deferred income tax liability or future income taxes owing, if any, will not be considered a liability because such amount will not represent a legal obligation of DC at the time of the Proposed Transactions.

DC Transfer

32. Immediately following the determination of the net FMV of each type of property of DC, as described in Paragraphs 30 and 31, DC will contemporaneously transfer to each of TC1, TC2 and TC3, a pro rata portion of the net FMV of each type of property owned by it at that time, such that immediately following the transfer of the properties and the assumption of DC’s liabilities as described in Paragraph 33, the aggregate net FMV of each type of property transferred by DC to TC1, TC2 or TC3, as the case may be, will be equal to or approximate that proportion of each type of property determined by the formula: A × B/C, where:

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

(B) is the FMV, immediately before the DC Transfer, of all the issued and outstanding shares of the capital stock of DC owned, at that time, by TC1, TC2 or TC3, as the case may be; and

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

For the purposes of this Paragraph, the expression “approximate that proportion” means that the discrepancy from that proportion, if any, will not exceed XXXXXXXXXX, determined as a percentage of the net FMV of each type of property that TC1, TC2 and TC3 will receive on the DC Transfer as compared to what it would have received had it received its exact pro rata share of the net FMV of that type of property.

33. As consideration for the property transferred by DC to TC1, TC2 and TC3, each of TC1, TC2 and TC3, as the case may be, will:

(a) assume such liabilities of DC, as appropriate, so that each of TC1, TC2 and TC3 will receive its pro rata share of the net FMV of each type of property owned by DC; and

(b) issue Class E Preferred Shares to DC with an aggregate redemption amount and aggregate FMV equal to the amount by which the aggregate FMV, at the time of the DC Transfer, of the property received by such TC, exceeds the aggregate amount of the liabilities of DC assumed by such TC, as described in Paragraph 33(a).

34. DC will jointly elect with TC1, TC2 and TC3, as the case may be, in prescribed form within the time limit referred to in subsection 85(6), to have the provisions of subsection 85(1) apply to the transfer of each eligible property that is transferred by DC to TC1, TC2 or TC3. The agreed amount in respect of each eligible property so transferred will not be greater than the FMV of such property nor will it be less than the FMV, at the time of disposition, of the consideration therefor other than shares of the capital stock of TC1, TC2 or TC3, as the case may be, or a right to receive such shares. In addition, the amount of the liabilities of DC assumed by TC1, TC2 or TC3, as the case may be, that will be 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.

For greater certainty, the agreed amount with respect to any particular eligible property (other than depreciable property of a prescribed class), will not be less than the lesser of the amounts described in subparagraphs 85(1)(c.1)(i) and (ii).

35. Each of TC1, TC2 and TC3, as the case may be, will add to its respective stated capital account for the Class E Preferred Shares, an amount equal to the aggregate of (a) the agreed amounts, in the case of each eligible property transferred to such TC, less (b) the aggregate amount of DCs liabilities assumed by such TC as described in Paragraph 33(a). For greater certainty, the amount to be added to the stated capital account of each of TC1, TC2 and TC3 for the Class E Preferred Shares issued as partial consideration for the property transferred to it on the DC Transfer will not exceed the maximum amount that could be added to the PUC of such shares without a reduction taking place pursuant to subsection 85(2.1).

Redemption of TC1, TC2 and TC3 Class E Preferred Shares

36. Immediately after the transfer of the property to TC1, TC2 and TC3 on the DC Transfer, each of TC1, TC2 and TC3 will redeem its Class E Preferred Shares owned by DC for an amount equal to the aggregate redemption amount of such shares. As consideration therefore, TC1, TC2 and TC3, as the case may be, will issue to DC the TC1 Redemption Note in respect of TC1’s share redemption, TC2 Redemption Note in respect of TC2’s share redemption and the TC3 Redemption Note in respect of TC3’s share redemption, each having a principal amount and FMV equal to the redemption amount of such TC’s Class E Preferred Shares. DC will accept the TC1 Redemption Note, TC2 Redemption and TC3 Redemption Note respectively, as payment in full for the redemption of that particular TC’s Class E Preferred Shares.

37. Immediately after the redemption of the TC1 Class E Preferred Shares, TC2 Class E Preferred Shares and the TC3 Class E Preferred Shares, the first taxation year of TC1, TC2 and TC3, as the case may be, will end.

Winding Up of DC

38. On the day that follows the Effective Date, and after the first taxation year-ends of each of TC1, TC2 and TC3, DC will be wound up under the applicable provisions of Act. In connection with the winding-up of DC:

(i) the TC1 Redemption Note, TC2 Redemption Note and TC3 Redemption Note will be assigned and distributed to TC1, TC2 and TC3 respectively. As a result of the assignment and distribution of the TC1 Redemption Note, TC2 Redemption Note and TC3 Redemption Note, the obligation of TC1, TC2 and TC3 under the respective notes will be extinguished and the notes will be cancelled;

(ii) any residual assets of DC, including the rights to any tax refunds, will be distributed pro rata to each of TC1, TC2 and TC3; and

(iii) any residual liabilities of DC will be assumed pro rata by each of TC1, TC2 and TC3.

Upon the receipt of a dividend refund, or any other receipt or repayment to which DC will become entitled as a result of the Proposed Transactions, DC will transfer the amount thereof pro rata to each of TC1, TC2 and TC3.

Following the final distribution of its assets and the settlement of any existing liabilities, DC will be dissolved in accordance with the provisions of Act1.

39. To the extent that DC has GRIP at the time of its winding-up and immediately prior to the distributions of the TC1 Redemption Note, TC2 Redemption Note and the TC3 Redemption Note described in Paragraph 38, DC will designate a portion of the DC Winding-Up Dividend referred to in subparagraph 88(2)(b)(iii) to be an eligible dividend by notifying each of TC1, TC2 and TC3 in writing within the time prescribed in subsection 89(14) that the portion of such dividend is an eligible dividend.

Additional information

40. There has not been an acquisition or disposition of shares of DC or the TCs by a specified shareholder (other than as described herein) as part of the series of transactions or events, a part of which includes the dividends that will be deemed to be paid and received as a result of the implementation of the Proposed Transactions.

41. DC does not exercise Significant Influence over any other corporation or entity.

42. Prior to the Proposed Transactions, DC may dispose of marketable securities, including portfolio investments, for consideration that consists only of money.

43. Subsequent to the Proposed Transactions, TC1, TC2 and TC3 do not intend to transfer or sell any of the assets that it will receive as a consequence of the Proposed Transactions except in the ordinary course of its business. TC1, TC2 and TC3 will carry on investment activities, which include the sale of property and reinvestment of proceeds from the sale of such property, in a manner similar to the investment activities carried on by DC prior to the Proposed Transactions.

44. 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).

45. 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).

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

47. At any time before and during the series of transactions and events that include the Proposed Transactions, none of the shares of DC, TC1, TC2 or TC3, as the case may be, will be:

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

(b) issued or acquired as part of a transaction, event or series of transactions or events of the type described in subsection 112(2.5);

(c) the subject of a dividend rental arrangement within the meaning of subsection 112(2.3);

(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).

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

49. None of the corporations referred to herein will be a corporation described in any of paragraphs (a) to (f) of the definition of “financial intermediary corporation” in subsection 191(1).

50. Each of TC1, TC2 and TC3 will have the financial capacity to honour, upon presentation for payment, the amount payable under the promissory note issued by it as part of the Proposed Transactions.

51. Immediately before the redemption of the TC1 Class E Preferred Shares, TC2 Class E Preferred and the TC3 Class E Preferred Shares held by DC as described in Paragraph 36, TC1, TC2 and TC3 will each be connected with DC pursuant to paragraph 186(4)(b).

52. The dividends resulting from the redemption of the TC1 Class E Preferred Shares, TC2 Class E Preferred and the TC3 Class E Preferred Shares held by DC, as the case may be, will be excluded dividends for the purposes of Part VI.1.

53. Immediately before the commencement of the winding-up of DC, as described in Paragraph 38, DC will be connected with each of TC1, TC2 and TC3, as the case may be, within the meaning of subsection 186(4).

54. Each of TC1, TC2 and TC3 will have a substantial interest in DC immediately before the winding-up of DC, such that the dividends resulting from the winding-up of DC that are deemed to be received by TC1, TC2 and TC3, as the case may be, will be excluded dividends for the purposes of Part VI.1.

55. DC does not have any outstanding tax liabilities that could be affected by the Proposed Transactions and no transactions are contemplated involving TC1, TC2 or TC3 aside from holding the assets each will acquire as a result of the Proposed Transactions and there is no intention to transfer any other assets into TC1, TC2 or TC3 or to wind-up or amalgamate these corporations.

Purposes of the proposed transactions

56. The overall purpose of the Proposed Transactions is to allow Sibling 1, Sibling 2 and Sibling 3 to separate their interest in DC in a tax-efficient manner and to allow the shareholders to carry on business separately and to facilitate the making of future investment and estate planning decisions independent from one another.

57. The purpose for each of TC1, TC2 and TC3 choosing to end its respective first taxation year in the manner described in Paragraph 37, and prior to the commencement of the winding-up of DC, as described in Paragraph 38, is to cause the taxable dividends resulting from the redemption of the Class E Preferred Shares to be paid in a taxation year that ends before any taxable dividends are received on the winding-up of DC, thus avoiding a possible Part IV tax "circularity" issue.

Rulings

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

A. Subject to the application of subsection 69(11), provided the appropriate joint elections are filed in the prescribed form and manner within the prescribed time specified in subsection 85(6) and provided each particular property so transferred is an eligible property in respect of which shares have been issued as full or partial consideration therefor, the provisions of subsection 85(1) will apply to:

(a) the transfer of the DC Class A Common Shares and DC Class C Preferred Shares held by Sibling 1, Sibling 2 and Sibling 3 to their respective TC as described in Paragraphs 22, 23, and 24; and

(b) the transfer of each eligible property owned by DC to TC1, TC2 and TC3, as the case may be, on the DC Transfer described in Paragraphs 32 to 35;

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

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

B. Subsection 84(3) will apply on the redemption of:

(a) the TC1 Class E Preferred Shares held by DC, as described in Paragraph 36, to deem TC1 to have paid, and DC to have received, a dividend on such shares equal to the amount, if any, by which the amount paid by TC1 on the redemption of all of the TC1 Class E Preferred Shares, exceeds the aggregate PUC in respect of such shares immediately before the redemption;

(b) the TC2 Class E Preferred Shares held by DC, as described in Paragraph 36, to deem TC2 to have paid, and DC to have received, a dividend on such shares equal to the amount, if any, by which the amount paid by TC2 on the redemption of all of the TC2 Class E Preferred Shares, exceeds the aggregate PUC in respect of such shares immediately before the redemption; and

(c) the TC3 Class E Preferred Shares held by DC, as described in Paragraph 36, to deem TC3 to have paid, and DC to have received, a dividend on such shares equal to the amount, if any, by which the amount paid by TC3 on the redemption of all of the TC3 Class E Preferred Shares, exceeds the aggregate PUC in respect of such shares immediately before the redemption;

C. Subsection 84(2) and paragraph 88(2)(b) will apply to the distributions by DC described in Paragraph 38 such that:

(a) subject to Rulings C(b) and (c) below, DC will be deemed to have paid a dividend (the "DC Winding Up Dividend") on the particular class of shares held by each of TC1, TC2 and TC3, as the case may be, equal to the amount, if any, by which:

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

exceed

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

and each of TC1, TC2 and TC3 will be deemed to have received a dividend on such class equal to that proportion of the amount of the excess that the number of shares of that class held by each of TC1, TC2 and TC3, as the case may be, immediately before the distribution is of the number of shares of that class outstanding immediately before the distributions;

(b) to the extent that the CDA of DC has a positive balance immediately prior to its winding up, pursuant to subparagraph 88(2)(b)(i), such portion of any winding-up dividend referred to in (a) above as does not, in aggregate, exceed DC’s CDA (if any) immediately before the payment of such winding-up dividend will be deemed, for purposes of the election under subsection 83(2), to be the full amount of a separate dividend;

(c) pursuant to subparagraph 88(2)(b)(iii), the winding up dividend arising from the distributions, to the extent that it exceeds the amount referred to in (b) above, will be deemed to be a separate dividend that is a taxable dividend; and

(d) each of TC1, TC2 and TC3 will be deemed to have received that proportion of any separate dividend, as described in (b) and (c) above, as determined pursuant to subparagraph 88(2)(b)(iv).

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

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

(b) will be deductible by the recipient corporation pursuant to subsection 112(1) in computing its taxable income in the year in which such a dividend is deemed to have been received, and, for greater certainty, 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 proceeds of disposition of the shares so redeemed, purchased or cancelled pursuant to paragraph (j) of the definition of “proceeds of disposition” in section 54;

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

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

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

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

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

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

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

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

(e) an acquisition of property in the circumstances described in paragraph 55(3.1)(c); or

(f) an acquisition of property in the circumstances described in paragraph 55(3.1)(d),

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.

F. The extinguishment of the TC1 Redemption Note, TC2 Redemption Note and the TC3 Redemption Note, as described in Paragraph 38 will not, in and of itself, give rise to a “forgiven amount” within the meaning of either subsection 80(1) or section 80.01. In addition, none of DC, TC1, TC2, or TC3, as the case may be, will realize any gain or incur a loss as a result of such extinguishment.

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

H. Subsection 245(2) will not be applied, as a result of the Proposed Transactions, to re-determine 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, 2021, 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.

Other comments

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

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

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

(c) the allocation of safe income attributable to any share of any corporation referred to herein (see generally, CRA documents 2020-0861031C6 and 2021-0889611E5 and the paper titled “CRA Update on Subsection 55(2) and Safe Income – Where Are We Now” delivered to the Canadian Tax Foundation on December 22, 2023, for guidance on the allocation of safe income on a corporate reorganization);
(d) any other tax consequence relating to the facts, the transactions described in this letter, additional information, or any transaction or event taking place either prior to the transactions described in this letter or subsequent thereto;

(e) whether any of the transactions described in this letter 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. Furthermore, the operation of a price adjustment clause may invalidate one or more of the 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
For Division Director
Reorganizations Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch