2025 Ruling 2025-1055441R3 - Internal Reorganization

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CRA.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ARC.

Principal Issues: 1. Does paragraph 55(3)(a) apply in the context of this internal reorganization? 2. Does subsection 245(2) apply with respect to this internal reorganization?

Position: 1. Yes. 2. No.

Reasons: 1. There is no transaction described in subparagraphs 55(3)(a)(i) to (v) that forms a part of the same series of transactions or events that include the deemed dividend; 2. The Proposed Transactions do not include an avoidance transaction.

XXXXXXXXXX 2025-105544

XXXXXXXXXX, 2025

Dear XXXXXXXXXX:

Re: Advance Income Tax Ruling Request
XXXXXXXXXX

We are writing in response to your letter of XXXXXXXXXX, wherein you requested an advance income tax ruling (the “Ruling request”) on behalf of the above-referenced taxpayers (the “Taxpayers”).

To the best of your knowledge and that of the Taxpayers, none of the proposed transactions or issues involved in this Ruling request are the same as or substantially similar to transactions or issues that are:

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

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

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

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

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

Unless specified otherwise, all statutory references herein are to provisions or parts of the Income Tax Act (Canada), R.S.C. 1985 (5th Supp.) c. 1, as amended to the date hereof (the “Act”), and all references to monetary amounts are in Canadian dollars.

This document is based solely on the facts described below. Any documentation submitted with your request does not form part of the facts except as expressly referred to herein, and any references thereto are otherwise provided solely for the convenience of the reader.

Definitions

In this letter, the following terms or expressions have the meaning specified:

XXXXXXXXXX, as amended;

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

“Acquisico” means XXXXXXXXXX;

“Agreed Amount” means the amount that a taxpayer and a corporation have agreed on in their joint election in accordance with subsection 85(1);

“Amalco” means the resulting entity of the amalgamation between Target and Acquisico, as described in Paragraph 14;

“Amalco 2” means the resulting entity of the amalgamation between Amalco, G1, and G2, as described in Paragraph 15;

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

“CanSub1” means XXXXXXXXXX;

“CanSub1 Dividend” means the deemed dividend received by CanSub3 and paid by CanSub1 as described in Paragraph 43;

“CanSub3 Dividend” means the deemed dividend received by CanSub1 and paid by CanSub3 as described in Paragraph 34;

“CanSub1 New CS” means the new common shares of CanSub1 as described in Paragraph 33.a.;

“CanSub1 New PS” means the new preferred shares of CanSub1 as described in Paragraph 33.c;

“CanSub1 PS” means the preferred shares of CanSub1 as described in Paragraph 25.b;

“CanSub1 RS” means the new preferred shares of CanSub1 as described in Paragraph 33.d;

“CanSub1 SV” means the new supervoting shares of CanSub1 as described in Paragraph 33.b;

“CanSub2” means XXXXXXXXXX;

“CanSub2 New CS” means the new common shares of CanSub2 as described in Paragraph 32.a;

“CanSub2 New PS” means the new preferred shares of CanSub2 as described in Paragraph 32.c;

“CanSub2 RS” means the new preferred shares of CanSub2 as described in Paragraph 32.d;

“CanSub2 SV” means the new supervoting shares of CanSub2 as described in Paragraph 32.b;

“CanSub2 PS” means the class A preferred share, class B preferred share, class C preferred share, class D preferred share, class E preferred share, class F preferred share, class G preferred share, class H preferred share, class I preferred share, and class J preferred share of CanSub2 as described in Paragraph 5;

“CanSub3” means XXXXXXXXXX;

“CanSub3 New CS” means the new common shares of CanSub3 as described in Paragraph 31.b;

“CanSub3 New PS” means the new preferred shares of CanSub3 as described in Paragraph 31.a;

“CanSub3 SV” means the new supervoting shares of CanSub3 as described in Paragraph 31.c;

“CanSub3 PS A” means the class A preferred shares of CanSub3 as described in Paragraph 7.b;

“CBCA” means the Canada Business Corporations Act, R.C.S. 1985, c. C-44, as amended;

“Company” means XXXXXXXXXX;

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

“CRA” means the Canada Revenue Agency;

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

“FMV” means fair market value;

“G1” means XXXXXXXXXX;

“G2” means XXXXXXXXXX;

“IFL 2” means the interest free loan as described in Paragraph 25.a;

“IFL 3” means the non-interest-bearing demand promissory note as described in Paragraph 34;

“IFL 4” means the non-interest-bearing demand promissory note as described in Paragraph 42;

“IFL 5” means the non-interest-bearing demand promissory note as described in Paragraph 43;

“IFL 6” means the non-interest-bearing demand promissory note as described in Paragraph 47;

“IFL 7” means the non-interest-bearing demand promissory note as described in Paragraph 48;

“Low rate income pool” has the meaning assigned by subsection 89(1);

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

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

“Parentco” means XXXXXXXXXX;

“Parentco Investment” means the acquisition of shares of Parentco by Third Parties, as described in Paragraph 11;

“Parentco Issuance” means the issuance of common shares as part of a bought deal public offering and of a private placement for approximately $XXXXXXXXXX, as described in Paragraph 19;

“Parentco Group” means the corporate group of XXXXXXXXXX;

“XXXXXXXXXX” means the $XXXXXXXXXX proceeds from the issuance of common shares of Parentco XXXXXXXXXX;

“Proposed Transactions” means the transactions described in Paragraphs 31 to 49;

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

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

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

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

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

“Term Loans” means to term loans as described in Paragraph 21;

“Unrelated Person” means a person that is not related to a dividend recipient pursuant to section 251;

“US$” means the United States dollars;

“Target” means XXXXXXXXXX;

“Third Parties” means XXXXXXXXXX.

Facts

1. Parentco is a Taxable Canadian corporation and is governed by the CBCA. As the shares of Parentco are traded on the XXXXXXXXXX, it qualifies as a Public corporation.

2. Parentco has a XXXXXXXXXX fiscal year-end, acts as the holding corporation of the Parentco Group and provides XXXXXXXXXX to the Parentco Group.

3. CanSub1 is a Taxable Canadian corporation and is governed by the CBCA. The share capital of CanSub1 is currently composed of the following issued and outstanding shares:

a. XXXXXXXXXX common shares held by Parentco with a PUC of $XXXXXXXXXX and an ACB of $XXXXXXXXXX; and

b. XXXXXXXXXX preferred shares held by CanSub3 with a PUC of $XXXXXXXXXX, an ACB of $XXXXXXXXXX, and a redemption value of $XXXXXXXXXX, being the CanSub1 PS as further described in Paragraph 25.b.

4. CanSub1 has a XXXXXXXXXX fiscal year-end and its main activity is providing XXXXXXXXXX.

5. CanSub2 is a Taxable Canadian corporation and is governed by the CBCA. The share capital of CanSub2 is currently composed of the following issued and outstanding shares:

a. XXXXXXXXXX common shares held by Parentco with a PUC of $XXXXXXXXXX and an ACB of $XXXXXXXXXX;

b. XXXXXXXXXX class A preferred share held by CanSub1 with a PUC of $XXXXXXXXXX, an ACB of $XXXXXXXXXX, and a redemption value of $XXXXXXXXXX;

c. XXXXXXXXXX class B preferred share held by CanSub1 with a PUC of $XXXXXXXXXX, an ACB of $XXXXXXXXXX, and a redemption value of $XXXXXXXXXX;

d. XXXXXXXXXX class C preferred share held by CanSub1 with a PUC of $XXXXXXXXXX, an ACB of $XXXXXXXXXX, and a redemption value of $XXXXXXXXXX;

e. XXXXXXXXXX class D preferred share held by CanSub1 with a PUC of $XXXXXXXXXX, an ACB of $XXXXXXXXXX, and a redemption value of $XXXXXXXXXX;

f. XXXXXXXXXX class E preferred share held by CanSub1 with a PUC of $XXXXXXXXXX, an ACB of $XXXXXXXXXX, and a redemption value of $XXXXXXXXXX;

g. XXXXXXXXXX class F preferred share held by CanSub1 with a PUC of $XXXXXXXXXX, an ACB of $XXXXXXXXXX, and a redemption value of $XXXXXXXXXX;

h. XXXXXXXXXX class G preferred share held by CanSub1 with a PUC of $XXXXXXXXXX, an ACB of $XXXXXXXXXX, and a redemption value of $XXXXXXXXXX;

i. XXXXXXXXXX class H preferred share held by CanSub1 with a PUC of $XXXXXXXXXX, an ACB of $XXXXXXXXXX, and a redemption value of $XXXXXXXXXX;

j. XXXXXXXXXX class I preferred share held by CanSub1 with a PUC of $XXXXXXXXXX, an ACB of $XXXXXXXXXX, and a redemption value of $XXXXXXXXXX; and

k. XXXXXXXXXX class J preferred share held by CanSub1 with a PUC of $XXXXXXXXXX, an ACB of $XXXXXXXXXX, and a redemption value of $XXXXXXXXXX (together with the class A preferred share, class B preferred share, class C preferred share, class D preferred share, class E preferred share, class F preferred share, class G preferred share, class H preferred share, class I preferred share, the “CanSub2 PS”).

6. CanSub2 has a XXXXXXXXXX fiscal year-end and is a holding corporation. CanSub2 mainly holds the Parentco Group’s foreign affiliates.

7. CanSub3 is a taxable XXXXXXXXXX and is governed by the XXXXXXXXXX. The share capital of CanSub3 is currently composed of the following issued and outstanding shares:

a. XXXXXXXXXX class A common shares held by CanSub2 with a PUC of $XXXXXXXXXX and an ACB of $XXXXXXXXXX; and

b. XXXXXXXXXX class A preferred shares held by CanSub1 with a PUC of $XXXXXXXXXX, an ACB of $XXXXXXXXXX, and a redemption value of $XXXXXXXXXX (“CanSub3 PS A”).

8. CanSub3 has a XXXXXXXXXX fiscal year-end and its main activity is providing XXXXXXXXXX.

9. CanSub1 and CanSub3 do not have a balance of Low rate income pool.

10. The FMV of the shares of the share capital of CanSub1 represent more than 10% of the FMV of the shares of Parentco.

Acquisition of Target

11. On XXXXXXXXXX, Parentco, through its wholly owned subsidiary Acquisico, acquired all issued and outstanding shares of Target from third parties for a cash consideration of $XXXXXXXXXX. In connection with this transaction, Parentco issued shares to Third Parties as part of a private placement of subscription receipts for approximately $XXXXXXXXXX to finance the purchase of the shares of Target (the “Parentco Investment”).

12. Parentco also borrowed US$XXXXXXXXXX from a third-party to finance the above transaction.

13. The head office of Target prior to the acquisition by Parentco was located in Canada and the main business activity of its group was providing XXXXXXXXXX.

14. On XXXXXXXXXX, Target amalgamated with Acquisico, and the resulting entity was Amalco.

15. On XXXXXXXXXX, Amalco amalgamated with G1 and G2, and the resulting entity was Amalco 2.

16. Following the above-mentioned amalgamations, Amalco 2 performed the following transfers of certain of the shares of its foreign affiliates to CanSub2 in consideration for shares of CanSub2:

a. On XXXXXXXXXX, Amalco 2 sold:

i. all of its shares of XXXXXXXXXX at FMV for XXXXXXXXXX class B preferred share of CanSub2;

ii. all of its shares of XXXXXXXXXX at FMV for XXXXXXXXXX class C preferred share of CanSub2; and

iii. all of its shares of XXXXXXXXXX at FMV for XXXXXXXXXX class D preferred share of CanSub2 and the assumption by CanSub2 of Amalco 2’s obligations under the Amended and Restated Revolving Loan Agreement dated as of XXXXXXXXXX between Amalco 2’s predecessor and XXXXXXXXXX, and pursuant to which Amalco 2 owed an amount equal to US$XXXXXXXXXX.

b. On XXXXXXXXXX, Amalco 2 transferred:

i. all of its shares of XXXXXXXXXX at FMV for XXXXXXXXXX class E preferred share of CanSub2;

ii. all of its shares of XXXXXXXXXX at FMV for XXXXXXXXXX class J preferred share of CanSub2;

iii. all of its shares of XXXXXXXXXX at FMV for XXXXXXXXXX class G preferred share of CanSub2;

iv. all of its shares of XXXXXXXXXX at FMV for XXXXXXXXXX class F preferred share of CanSub2;

v. all of its shares of XXXXXXXXXX at FMV for XXXXXXXXXX class I preferred share of CanSub2; and

vi. all of its shares of XXXXXXXXXX at FMV for XXXXXXXXXX class H preferred share of CanSub2.

c. On XXXXXXXXXX, Amalco 2 transferred:

i. all of its shares of XXXXXXXXXX at FMV for XXXXXXXXXX class A preferred share of CanSub2 and the entry into of a Canadian dollar denominated interest bearing intercompany loan agreement of US$XXXXXXXXXX;

before these transfers, the cost basis of the shares of the foreign affiliates were “bumped” under paragraphs 88(1)(c) and (d).

17. On XXXXXXXXXX, Amalco 2 amalgamated with XXXXXXXXXX, with the latter being the surviving entity.

18. On XXXXXXXXXX was amalgamated with CanSub1, with the latter being the surviving entity. All corporations implicated in the amalgamations described in paragraphs 15, 17 and 18 were all wholly owned corporations of the Parentco Group.

Acquisition of CanSub3

19. On XXXXXXXXXX, Parentco issued common shares XXXXXXXXXX for approximately $XXXXXXXXXX (the “Parentco Issuance”), with the intention to use the proceeds to fund in part its previously announced offer to acquire XXXXXXXXXX (“Proceeds for the Abandoned Acquisition”).

20. On XXXXXXXXXX, CanSub1 acquired all issued and outstanding shares of CanSub3 (formerly known as XXXXXXXXXX) from a third party for a cash consideration of $XXXXXXXXXX, using funds from an interest free loan from Parentco to CanSub1.

21. Proceeds from term loans under Parentco’s credit agreement (“Term Loans”) were used to finance the interest free loan from Parentco to CanSub1 for the acquisition of the shares of CanSub3.

XXXXXXXXXX.

22. CanSub3’s main business activity was XXXXXXXXXX. At the time of its acquisition, CanSub3 was not a Canadian-controlled private corporation.

23. On XXXXXXXXXX, CanSub1 transferred all of its shares of CanSub3 to CanSub2 in consideration for an interest-free note of $XXXXXXXXXX, being the equivalent value of the FMV of the shares of CanSub3 transferred.

24. On XXXXXXXXXX, CanSub1 transferred its XXXXXXXXXX (except all existing contracts with third party clients) and XXXXXXXXXX employees to CanSub3 in consideration for the CanSub3 PS A.

25. Still on XXXXXXXXXX, CanSub3 transferred its XXXXXXXXXX (except all existing contracts with third party clients) and XXXXXXXXXX employees (including related goodwill) to CanSub1. In consideration, CanSub1 issued:

a. An interest free loan of $XXXXXXXXXX, being the equivalent value of the ACB of the assets and goodwill transferred by CanSub3 (“IFL 2”); and

b. XXXXXXXXXX preferred shares having an ACB of $XXXXXXXXXX and FMV of $XXXXXXXXXX, being the equivalent of the FMV of the CanSub3 fixed assets, business, and employees (including goodwill) less the FMV of the IFL 2 (the “CanSub1 PS”).

26. The FMV of the IFL 2 is equal to its principal.

27. The acquisition of all issued and outstanding shares of CanSub3 on XXXXXXXXXX, is not part of the same Series of transactions or events as the acquisition of all issued and outstanding shares of Target, which was completed on XXXXXXXXXX. Indeed, the acquisition of Target was not completed in contemplation of the acquisition of CanSub3. The acquisition of the shares of CanSub3 was independent of the acquisition of the shares of Target with the sellers of Target and CanSub3 being different parties, XXXXXXXXXX and the second being a carve-out from XXXXXXXXXX. Furthermore, the acquisition of Target was the result of a XXXXXXXXXX while the acquisition of CanSub3 was done as part of a bidding process.

Other

28. Since XXXXXXXXXX, other than the acquisitions of Target and CanSub3, the Parentco Group engaged in XXXXXXXXXX other transactions out of the ordinary course of business. These other transactions are not part of the same Series of transactions or events as the acquisition of all issued and outstanding shares of Target, the acquisition of all issued and outstanding shares of CanSub3, and the Proposed Transactions.

29. Company is a captive insurance company and it is a SFI.

30. CanSub1, CanSub2, CanSub3 and Parentco are related to Company and are therefore SFI.

Proposed transactions

Amendment to share capital

31. The share capital of CanSub3 is amended to include XXXXXXXXXX classes of shares:

a. preferred shares that are non-voting, giving rise to non-cumulative dividend of XXXXXXXXXX% of their redemption value and priority in a distribution upon liquidation for their redemption value, redeemable at the option of the corporation or the holder at a price equal to the aggregate FMV of the CanSub1 PS and of the IFL 2 at the time of issuance, divided by the number of CanSub3 New PS issued, and having an adjustment clause in respect of the redemption price providing that if the preferred shares are redeemed before an upward adjustment to the redemption value, the corporation would pay the additional amount to the holder (“CanSub3 New PS”);

b. common shares (“CanSub3 New CS”) that are non-voting; and

c. supervoting shares redeemable for the price of $XXXXXXXXXX per share and having XXXXXXXXXX votes per share (“CanSub3 SV”). The CanSub3 SV should be non-participating, should not give rights to any dividends, should not give rights to an amount upon liquidation, dissolution or winding-up, except for the stated capital of the share, and should be redeemable at the option of the shareholder.

32. The share capital of CanSub2 is amended to include XXXXXXXXXX classes of shares:

a. common shares (“CanSub2 New CS”) that are non-voting;

b. supervoting shares redeemable for the price of $XXXXXXXXXX per share and having XXXXXXXXXX vote per share (“CanSub2 SV”). The CanSub2 SV should be non-participating, should not give rights to any dividends, should not give rights to an amount upon liquidation, dissolution or winding-up, except for the stated capital of the share, and should be redeemable at the option of the shareholder;

c. preferred shares that are non-voting, giving rise to non-cumulative dividend of XXXXXXXXXX% of their redemption value, priority in a distribution upon liquidation for their redemption value and redeemable at an amount price equal to FMV of the CanSub1 RS at the time of issuance, dividend by the number of CanSub2 New PS issued and having an adjustment clause in respect of the redemption price providing that if the preferred shares are redeemed before an upward adjustment of the redemption value, the corporation would pay the additional amount to the holder (“CanSub2 New PS”); and

d. preferred shares that are non-voting, giving rise to non-cumulative dividend of XXXXXXXXXX% of their redemption value, priority in a distribution upon liquidation for their redemption value and redeemable at an amount corresponding to the consideration received at their issuance, with a price adjustment clause (“CanSub2 RS”).

33. The share capital of CanSub1 is amended to include XXXXXXXXXX classes of shares:

a. common shares (“CanSub1 New CS”) that are non-voting;

b. supervoting shares redeemable for the price of $XXXXXXXXXX per share and having XXXXXXXXXX votes per share (“CanSub1 SV”). The CanSub1 SV should be non-participating, should not give rights to any dividends, should not give rights to an amount upon liquidation, dissolution or winding-up, except for the stated capital of the share, and should be redeemable at the option of the shareholder;

c. preferred shares that are non-voting, giving rise to non-cumulative dividend of XXXXXXXXXX% of their redemption value and priority in a distribution upon liquidation for their redemption value, redeemable at the option of the corporation or the holder at a price equal to the aggregate FMV of the CanSub2 PS at the time of issuance, divided by the number of CanSub1 New PS issued and having an adjustment clause in respect of the redemption price providing that if the preferred shares are redeemed before an upward adjustment to the redemption value, the corporation would pay the additional amount to the holder (“CanSub1 New PS”); and

d. preferred shares that are non-voting, giving rise to non-cumulative dividend of XXXXXXXXXX% of their redemption value, priority in a distribution upon liquidation for their redemption value and redeemable at an amount corresponding to the consideration received at their issuance, with a price adjustment clause (“CanSub1 RS”).

Redemption of the CanSub3 PS A

34. CanSub3 redeems the CanSub3 PS A held by CanSub1. In consideration, CanSub3 issues a non-interest-bearing demand promissory note having a FMV equal to the value of the CanSub3 PS A (the “IFL 3”). CanSub1 will accept the IFL 3 in full payment of the redemption price of the CanSub3 PS A. CanSub3 designates, pursuant to subsection 89(14), the deemed dividend pursuant to subsection 84(3) as an eligible dividend (the “CanSub3 Dividend”).

35. CanSub1 pays a dividend in kind of an amount equal to the FMV of the IFL 3 and distributes the IFL 3 to Parentco. CanSub1 designates such dividend as an eligible dividend pursuant to subsection 89(14). The amount of such dividend will not exceed the safe income that is attributable to the common shares of the capital stock of CanSub1 owned by Parentco.

36. Parentco contributes the IFL 3 to the common shares of CanSub2. An amount corresponding to the FMV of the IFL 3 will be added to the stated capital of the common shares of CanSub2.

37. CanSub2 contributes the IFL 3 to the common shares of CanSub3. An amount corresponding to the FMV of the IFL 3 will be added to the stated capital of the common shares of CanSub3.

As a result of that transaction, the IFL 3 is extinguished since CanSub3 is both the payer and the recipient of the IFL 3.

Redemption of the CanSub2 New PS, of the CanSub3 New PS and of the CanSub1 PS

38. CanSub2 exchanges all its common shares of CanSub3 in consideration for: (i) XXXXXXXXXX CanSub3 New PS, (ii) XXXXXXXXXX CanSub3 New CS, and (iii) XXXXXXXXXX CanSub3 SV. An election pursuant to subsection 85(1) will be filed and the Agreed Amount will correspond to the ACB of the shares disposed. The following amount will be added to the stated capital of the XXXXXXXXXX CanSub3 New PS, XXXXXXXXXX CanSub3 New CS and XXXXXXXXXX CanSub3 SV: $XXXXXXXXXX. For greater certainty, the amount that will be added to the stated capital of (i) XXXXXXXXXXCanSub3 New PS, (ii) XXXXXXXXXX CanSub3 New CS, and (iii) XXXXXXXXXX CanSub3 SV will not exceed the amount that could be added to the PUC of such shares having regard to subsection 85(2.1).

39. CanSub2 transfers its CanSub3 New PS to CanSub1. In consideration, CanSub1 issues XXXXXXXXXX CanSub1 RS. An election pursuant to subsection 85(1) will be filed and the Agreed Amount should correspond to the ACB. An amount of $XXXXXXXXXX will be added to the stated capital of the XXXXXXXXXX CanSub1 RS.

40. Parentco exchanges all its common shares of CanSub2 in consideration for: (i) XXXXXXXXXXCanSub2 New PS, (ii) XXXXXXXXXX CanSub2 New CS, and (iii) XXXXXXXXXX CanSub2 SV. An election pursuant to subsection 85(1) will be filed and the Agreed Amount will correspond to the ACB of the shares disposed for the exchange to occur on a rollover basis. The following amount will be added to the stated capital of the XXXXXXXXXXCanSub2 New PS, XXXXXXXXXX CanSub2 New CS and XXXXXXXXXX CanSub2 SV: $XXXXXXXXXX. For greater certainty, the amount that will be added to the stated capital of (i) XXXXXXXXXX CanSub2 New PS, (ii) XXXXXXXXXX CanSub2 New CS, and (iii) XXXXXXXXXX CanSub2 SV will not exceed the amount that could be added to the PUC of such shares having regard to subsection 85(2.1).

41. CanSub2 redeems the XXXXXXXXXX CanSub2 New PS held by Parentco. In consideration, CanSub2 transfers the XXXXXXXXXX CanSub1 RS to Parentco. No deemed dividend will result from this redemption, the PUC of CanSub2 New PS being equal to their redemption value.

42. CanSub3 redeems the XXXXXXXXXX CanSub3 New PS held by CanSub1. In consideration, CanSub3 issues a non-interest-bearing demand promissory note having a FMV equal to the value of the CanSub3 New PS (the “IFL 4”). CanSub1 will accept the IFL 4 in full payment of the redemption price of the CanSub3 New PS. No deemed dividend will result from this redemption, the PUC of the CanSub3 New PS being equal to their redemption value.

43. CanSub1 redeems the CanSub1 PS held by CanSub3. In consideration, CanSub1 issues a non-interest-bearing demand promissory note having a FMV equal to the value of the CanSub1 PS (the “IFL 5”). CanSub3 will accept the IFL 5 in full payment of the redemption price of the CanSub1 PS.

CanSub1 will designate, pursuant to subsection 89(14), the dividend it deemed to have paid pursuant to subsection 84(3) as an eligible dividend (the “CanSub1 Dividend”).

44. CanSub1 and CanSub3 enter into a compensation agreement to settle the IFL 2 and the IFL 5 with the IFL 4.

Redemption of the CanSub2 PS and of the CanSub1 New PS

45. Parentco exchanges all its common shares of CanSub1 in consideration for: (i) XXXXXXXXXX CanSub1 New PS, (ii) XXXXXXXXXX CanSub1 New CS, and (iii) XXXXXXXXXX CanSub1 SV. An election pursuant to subsection 85(1) should be filed and the Agreed Amount should correspond to the ACB of the shares disposed for the exchange to occur on a rollover basis. The following amount should be added to the stated capital of the XXXXXXXXXXCanSub1 New PS, XXXXXXXXXX CanSub1 New CS and XXXXXXXXXX CanSub1 SV: $XXXXXXXXXX. By virtue of paragraph 85(1)(g), the ACB of CanSub1 New PS will be $XXXXXXXXXX. For greater certainty, the amount that will be added to the stated capital of (i) XXXXXXXXXXCanSub1 New PS, (ii) XXXXXXXXXX CanSub1 New CS, and (iii) XXXXXXXXXX CanSub1 SV will not exceed the amount that could be added to the PUC of such shares having regard to subsection 85(2.1).

46. Parentco transfers its XXXXXXXXXX CanSub1 New PS to CanSub2. In consideration, CanSub2 issues XXXXXXXXXX CanSub2 RS. An election pursuant to subsection 85(1) will be filed and the Agreed Amount will correspond to the ACB of the CanSub1 New PS. An amount of $XXXXXXXXXX will be added to the stated capital of the XXXXXXXXXX CanSub2 RS. Such amount will not exceed the amount that could be added to the PUC of such shares having regard to subsection 85(2.1).

47. CanSub2 redeems the CanSub2 PS held by CanSub1. In consideration, CanSub2 issues a non-interest-bearing demand promissory note having a FMV equal to the value of the CanSub2 PS (the “IFL 6”). CanSub1 will accept the IFL 6 in full payment of the redemption price of the CanSub2 PS.

48. CanSub1 redeems the XXXXXXXXXX CanSub1 New PS held by CanSub2. In consideration, CanSub1 issues a non-interest-bearing demand promissory note having a FMV equal to the value of the CanSub1 New PS (the “IFL 7”). CanSub2 will accept the IFL 7 in full payment of the redemption price of the CanSub1 New PS.

49. CanSub2 and CanSub1 enter into a compensation agreement to settle the IFL 6 with the IFL 7.

Additional Information

50. All corporations involved in the Proposed Transactions are related persons and affiliated persons.

51. CanSub1, CanSub3 and Parentco are not restricted financial institutions.

52. None of the shares on which the CanSub1 Dividend, CanSub3 Dividend and dividend described in Paragraph 35 are paid were acquired in the ordinary course of their respective business.

53. None of the corporations involved in the Proposed Transactions has or will have entered into a Dividend rental arrangement, with respect of any of the shares discussed in the Proposed Transactions.

54. The issued shares of the share capital of CanSub1 and CanSub3, will not be, at any time during the course of the same Series of transactions or events as the Proposed Transactions:

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

b. the subject of a “Dividend rental arrangement” (as defined in subsection 248(1));

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

d. 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, immediately before the issuance, related (otherwise than by reason of a right referred to in paragraph 251(5)(b)) to CanSub1 or CanSub3, as the case may be; or

ii. any right of the type described in subparagraph 112(2.4)(b)(ii); or

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

55. The Proposed Transactions will not be subject to any specific contemporaneous public disclosure. It is not anticipated that the Proposed Transactions will have any material impact on Parentco’s share price. The public trading of the shares of Parentco will not be in any way facilitated or motivated by the Proposed Transactions.

56. Except as outlined herein, none of the parties involved in the above Proposed Transactions intend, as part of the same Series of transactions or events which includes the redemption of CanSub3 PS A described in Paragraph 34 and the redemption of the CanSub1 PS described in Paragraph 43 above, to dispose of any property to, or to increase any interest in any corporation of any person or partnership that is an Unrelated Person to CanSub1 or CanSub3 immediately prior to the redemption of such shares, in any of the ways described in subparagraphs 55(3)(a)(i) to (v).

Purposes of the Proposed Transactions

57. The purpose of the Proposed Transactions is to simplify the corporate structure of the Parentco Group. As a result of historical transfers in the Parentco Group based on each entity’s business activities, some subsidiaries of Parentco have loans or preferred shares in other subsidiaries of Parentco. The purpose of the Proposed Transactions is to remove these loans and preferred shares on a tax-free basis.

Rulings Given

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

A. Subject to the application of subsection 69(11), provided that the appropriate elections are filed in the prescribed form and manner within the time limits specified in subsection 85(6) and provided that each particular property described below 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:

a. all issued and outstanding common shares of CanSub3 owned by CanSub2, as described in Paragraph 38;

b. all issued and outstanding common shares of CanSub2 owned by Parentco as described in Paragraph 40;

c. all issued and outstanding common shares of CanSub1 owned by Parentco as described in Paragraph 45; and

such that the Agreed Amount in respect of each such transfer will be deemed to be the proceeds of disposition of the particular property and the transferee’s cost amount thereof pursuant to paragraph 85(1)(a). The cost of the issued preferred shares will be determined pursuant to paragraph 85(1)(g).

B. On the redemption of the CanSub3 PS A held by CanSub1 as described in Paragraph 34 and the redemption of the CanSub1 PS held by CanSub3 as described in Paragraph 43, CanSub3 and CanSub1 will, respectively, be deemed by paragraph 84(3)(a) to have paid, and CanSub1 and CanSub3 will, respectively, be deemed by paragraph 84(3)(b) to have received, dividends equal to the amount, if any, by which the amount paid to redeem those shares exceeds the PUC of those shares immediately before the redemption, and such dividends:

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

b. will be deductible, pursuant to subsection 112(1), by the corporation deemed to have received such dividend;

c. will not be a dividend to which any of subsections 112(2.1), (2.2), (2.3) or (2.4) apply to deny the subsection 112(1) deduction described above;

d. will be excluded, pursuant to paragraph (j) of the definition of “proceeds of disposition” in section 54, in determining the proceeds of disposition to the recipient corporation of the shares which are redeemed; and

e. will reduce any loss that would otherwise be realized as a result of the disposition of the shares in respect of which the dividends are deemed to be received pursuant to subsection 112(3).

C. By virtue of paragraph 55(3)(a), the provisions of subsection 55(2) will not apply to the CanSub1 Dividend and the CanSub3 Dividend provided there is not a disposition of property or an increase in interest described in any of subparagraphs 55(3)(a)(i) to (v) which is part of the Series of transactions or events that include the Proposed Transactions. For greater certainty, the Proposed Transactions, in and by themselves, will not be considered to result in any disposition to, or increase in interest by an Unrelated Person described in subparagraphs 55(3)(a)(i) to (v).

D. The set-off and cancellation of:

a. IFL 2 and IFL 5 with the IFL 4, as described in Paragraph 44; and

b. IFL 6 with the IFL 7, as described in Paragraph 49;

will not give rise to a “forgiven amount” within the meaning of subsection 80(1) and neither CanSub1, CanSub2 nor CanSub3 will realize any gain or incur any loss.

E. The provisions of subsection 245(2) will not be applied as a result of the Proposed Transactions, in and of themselves, 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 dated April 1, 2022. They are binding on the CRA, provided that the Proposed Transactions are completed no later than six months after the date of this letter.

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

Comments

Unless otherwise expressively confirmed, nothing in this ruling 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, 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 Low rate income pool, or any other tax account of any corporation referred to herein;

c) the amount of safe income attributable to any share of any corporation referred to herein;

d) 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.

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

Yours truly,

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