Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CRA.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ARC.
Principal Issues: Whether the butterfly dividends are exempt from subsection 55(2) by virtue of satisfying the requirements of paragraph 55(3)(b).
Position: Yes.
Reasons: Proposed transactions satisfy the requirements of paragraph 55(3)(b).
XXXXXXXXXX 2025-107206
XXXXXXXXXX, 2025
Dear XXXXXXXXXX
Re: Advance Income Tax Ruling
XXXXXXXXXX
This is in reply to your letter dated XXXXXXXXXX, in which you requested an advance income tax ruling on behalf of the above-named taxpayers (the “Taxpayers”). We understand that to the best of your knowledge and that of the Taxpayers, none of the Proposed Transactions or issues involved in this letter are the same as or substantially similar to transactions or issues that are:
i. in a previously filed tax return of any of the Taxpayers or a related person and:
A. being considered by the Canada Revenue Agency (the “CRA”) in connection with such return;
B. under objection by any of the Taxpayers or a related person; or
C. the subject of a current or completed court process involving any of the Taxpayers or a related person; or
ii. the subject of a ruling request previously considered by the Income Tax Rulings Directorate.
In this letter, unless otherwise indicated:
i. all references to a statute are to the relevant provisions of the Income Tax Act, R.S.C. 1985 (5th Supp.), c.1, as amended, (the “Act”), or, where appropriate, the Income Tax Regulations, C.R.C., c.945, as amended, (the “Regulations”);
ii. all terms and conditions used in this letter that are defined in the Act (or in the Regulations) 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.
DEFINITIONS
In this letter, unless otherwise specified, the following abbreviations, terms and expressions have the meanings specified, and the relevant parties to the Proposed Transactions will be referred to as follows:
“ACB” means “adjusted cost base” and has the meaning assigned by section 54 and subsection 248(1);
“agreed amount” means the amount that a transferor and transferee have agreed on in a joint election under subsection 85(1) in respect of the transfer of an eligible property;
“XXXXXXXXXX Account” means the balance in a bank account that is a self-managed savings account and that falls under the XXXXXXXXXX program of the XXXXXXXXXX;
“Amalgamation” refers to the amalgamation of the Predecessor Corporations to form DC as described in Paragraphs 49 and 50;
“arm’s length” has the meaning assigned by section 251;
“BCA1” means the XXXXXXXXXX;
“BCA2” means the XXXXXXXXXX;
“capital property” has the meaning assigned by section 54 and subsection 248(1);
“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);
“cost amount” has the meaning assigned by subsection 248(1);
“DC” means the corporation to be formed on the Amalgamation;
“DC Class A Common Shares” means the Class A common shares in the capital stock of DC with the terms and conditions described in Paragraph 50;
“DC Class B Common Shares” means the Class B common shares in the capital stock of DC with the terms and conditions described in Paragraph 50;
“DC Class C Common Shares” means the Class C common shares in the capital stock of DC with the terms and conditions described in Paragraph 50;
“DC Class J Preferred Shares” means the Class J preferred shares in the capital stock of DC with the terms and conditions described in Paragraph 50;
“DC Class K Preferred Shares” means the Class K preferred shares in the capital stock of DC with the terms and conditions described in Paragraph 50;
“DC Class L Preferred Shares” means the Class L preferred shares in the capital stock of DC with the terms and conditions described in Paragraph 50;
“DC Class M Preferred Shares” means the Class M preferred shares in the capital stock of DC with the terms and conditions described in Paragraph 50;
“DC Redemption Note” means the non-interest bearing demand promissory note issued by DC to TC as consideration for the purchase for cancellation of its DC Class A Common Shares owned by TC and the redemptions of its DC Class J Preferred Shares and DC Class K Preferred Shares owned by TC, as described in Paragraph 64;
“DC Transfer” refers to the transfer of property by DC to TC Sub, as described in Paragraph 60;
“depreciable property” has the meaning assigned by subsection 13(21);
“disposition” has the meaning assigned by subsection 248(1);
“dividend refund” has the meaning assigned by subsection 129(1);
“dividend rental arrangement” has the meaning assigned by subsection 248(1);
“Dividend1” means the dividend described in Paragraph 47;
“Dividend2” means the deemed dividends described in Paragraph 48;
“eligible dividend” has the meaning assigned by subsection 89(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);
“XXXXXXXXXXCo1” means XXXXXXXXXX;
“XXXXXXXXXXCo1 Common Shares” means the common shares in the capital stock of XXXXXXXXXXCo1 with the terms and conditions described in Paragraph 9;
“XXXXXXXXXXCo2” means XXXXXXXXXX;
“XXXXXXXXXXCo2 Receivable” means the amount owing by XXXXXXXXXXCo2 to XXXXXXXXXXCo1, as described in Paragraph 44.
“XXXXXXXXXXCo3” means XXXXXXXXXX;
“XXXXXXXXXXCo3 Class A Common Shares” means the Class A common shares in the capital stock of XXXXXXXXXXCo3 with the terms and conditions described in Paragraph 28;
“XXXXXXXXXXCo3 Class B Common Shares” means the Class B common shares in the capital stock of XXXXXXXXXXCo3 with the terms and conditions described in Paragraph 28;
“XXXXXXXXXXCo3 Class M Preferred Shares” means the Class M preferred shares in the capital stock of XXXXXXXXXXCo3 with the terms and conditions described in Paragraph 28;
“XXXXXXXXXXCo3 Class N Preferred Shares” means the Class N preferred shares in the capital stock of XXXXXXXXXXCo3 with the terms and conditions described in Paragraph 28;
“XXXXXXXXXXCo3 Class O Preferred Shares” means the Class O preferred shares in the capital stock of XXXXXXXXXXCo3 with the terms and conditions described in Paragraph 28;
“financial institution” has the meaning assigned by subsection 142.2(1);
“financial intermediary corporation” has the meaning assigned by subsection 191(1);
“FMV” means “fair market value”, being the highest price available in an open and unrestricted market, between informed prudent parties, acting at arm’s length and with no compulsion to act, expressed in terms of money or money’s worth;
“forgiven amount” has the meaning assigned by subsections 80(1) and 80.01(1);
“guarantee agreement” has the meaning assigned by subsection 112(2.2);
“GRIP” means “general rate income pool” and has the meaning assigned by subsection 89(1);
“GST” refers to the Goods and Services Tax imposed under the Excise Tax Act, R.S.C. 1985, c. E-15;
“HoldCo1” means XXXXXXXXXX;
“HoldCo1 Class A Common Shares” means the Class A common shares in the capital stock of HoldCo1 with the terms and conditions described in Paragraph 16;
“HoldCo1 Class B Common Shares” means the Class B common shares in the capital stock of HoldCo1 with the terms and conditions described in Paragraph 16;
“HoldCo1 Class C Common Shares” means the Class C common shares in the capital stock of HoldCo1 with the terms and conditions described in Paragraph 16;
“HoldCo1 Class H Preferred Shares” means the Class H preferred shares in the capital stock of HoldCo1 with the terms and conditions described in Paragraph 16;
“HoldCo1 Class I Preferred Shares” means the Class I preferred shares in the capital stock of HoldCo1 with the terms and conditions described in Paragraph 16;
“HoldCo2” means XXXXXXXXXX;
“HoldCo3” means XXXXXXXXXX;
“HoldCo4” means XXXXXXXXXX;
“NERDTOH” means “non-eligible refundable dividend tax on hand” and has the meaning assigned by subsection 129(4);
“net capital loss” has the meaning assigned by subsection 111(8);
“non-capital loss” has the meaning assigned by subsection 111(8);
“Paragraph” refers to a numbered paragraph in this letter;
“Predecessor Corporations” means XXXXXXXXXXCo3, XXXXXXXXXXCo1, and HoldCo1 collectively, and “Predecessor Corporation” means any one of the Predecessor Corporations;
“principal amount” has the meaning assigned by subsection 248(1);
“proceeds of disposition” has the meaning assigned by section 54;
“property” has the meaning assigned by subsection 248(1);
“Proposed Transactions” means the transactions described in Paragraphs 45 to 66;
“PUC” means “paid-up capital” and has the meaning assigned by subsection 89(1);
“related” means, in relation to a particular person, another person who is related to the particular person by virtue of subsection 251(2), modified for the purposes of section 55 by paragraph 55(5)(e) where applicable;
“Rulings” means, collectively, the advance income tax rulings labelled A to H in this letter and “Ruling” means any one of the Rulings;
“safe income” in respect of a particular dividend received (as part of a transaction or event or a series of transactions or events) on a particular share means the income earned or realized (as determined for purposes of section 55) by any corporation after 1971 and before the safe-income determination time for the transaction, event or series of transactions or events that could reasonably be considered to contribute to the capital gain that could be realized on a disposition at FMV, immediately before the dividend, of the particular share;
“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);
“Sibling1” means XXXXXXXXXX, the sibling of Sibling2 and Sibling3;
“Sibling2” means XXXXXXXXXX, the sibling of Sibling1 and Sibling3;
“Sibling3” means XXXXXXXXXX, the sibling of Sibling1 and Sibling2;
“Siblings” means, collectively, Sibling 1, Sibling 2, and Sibling 3;
“significant influence” has the meaning assigned by section 3051.05 of the Accounting Standards for Private Enterprises or by IAS 28 of the International Financial Reporting Standards;
“Son1” means XXXXXXXXXX, the child of Sibling2;
“Son2” means XXXXXXXXXX, the child of Sibling2;
“Sons” means, collectively, Son1 and Son2;
“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;
“TC Class A Common Shares” means the Class A common shares in the capital stock of TC with the terms and conditions described in Paragraph 34;
“TC Class I Preferred Shares” means the Class I preferred shares in the capital stock of TC with the terms and conditions described in Paragraph 34;
“TC Class M Preferred Shares” means the Class M preferred shares in the capital stock of TC with the terms and conditions described in Paragraph 34;
“TC Class N Preferred Shares” means the Class N preferred shares in the capital stock of TC with the terms and conditions described in Paragraph 34;
“TC Class O Preferred Shares” means the Class O preferred shares in the capital stock of TC with the terms and conditions described in Paragraph 34;
“TC Sub” means the corporation to be incorporated by TC, as described in Paragraph 45;
“TC Sub Common Shares” means the common shares in the capital stock of TC Sub with the terms and conditions described in Paragraph 45;
“TC Sub Redemption Note” means the non-interest bearing demand promissory note issued by TC Sub to DC on the redemption of the TC Sub Special Shares, as described in Paragraph 62;
“TC Sub Special Shares” means the preferred shares in the capital stock of TC Sub with the terms and conditions described in Paragraph 45;
“TCC” means “taxable Canadian corporation” and has the meaning assigned by subsection 89(1);
“Trust” means the XXXXXXXXXX; and
“UCC” means “undepreciated capital cost” and has the meaning assigned by subsection 13(21).
FACTS
Siblings and Sons
1. Each of the Siblings is, and will be, at all relevant times, a resident of Canada for purposes of the Act.
2. Each of the Sons is, and will be, at all relevant times, a resident of Canada for purposes of the Act.
XXXXXXXXXXCo1
3. XXXXXXXXXXCo1 was incorporated under the BCA1 on XXXXXXXXXX and was continued under the BCA2 on XXXXXXXXXX. XXXXXXXXXXCo1 is, and will be, at all relevant times, a TCC and a CCPC.
4. XXXXXXXXXXCo1 carries on a XXXXXXXXXX, which consists of XXXXXXXXXX.
5. As at XXXXXXXXXX, the significant assets of XXXXXXXXXXCo1 are cash, accounts receivable, an XXXXXXXXXX Account, prepaid expenses, equipment, XXXXXXXXXX, investments in other entities (none of which XXXXXXXXXXCo1 exercises significant influence over), life insurance policies, and amounts receivable from related parties. XXXXXXXXXXCo1 has no goodwill as no value is attributable to goodwill in connection with XXXXXXXXXXCo1’s XXXXXXXXXX business.
6. As at XXXXXXXXXX, XXXXXXXXXXCo1’s liabilities consist of current liabilities, including accounts payable, accrued liabilities, income taxes payable, current portions of long-term debt, amounts due to shareholders, and amounts due to related parties, as well as long-term debt.
7. XXXXXXXXXXCo1 rents and leases substantially all of its XXXXXXXXXX and equipment to XXXXXXXXXXCo2, a corporation that is associated with XXXXXXXXXXCo1 pursuant to subsection 256(1). The lease for the XXXXXXXXXX was entered into in XXXXXXXXXX and the lease for the equipment was entered into in XXXXXXXXXX.
8. XXXXXXXXXXCo1’s taxation year ends on XXXXXXXXXX of each year.
9. XXXXXXXXXXCo1’s authorized share capital consists of XXXXXXXXXX non-par value, voting, fully participating common shares, entitling the holder to receive dividends as declared by the board of directors (the “XXXXXXXXXXCo1 Common Shares”).
10. There are XXXXXXXXXX, XXXXXXXXXXCo1 Common Shares issued and outstanding, all of which are held by HoldCo1. The XXXXXXXXXX, XXXXXXXXXXCo1 Common Shares have an ACB and PUC of $XXXXXXXXXX.
11. The XXXXXXXXXXCo1 Common Shares held by HoldCo1 are, and will be, at all relevant times, capital property to HoldCo1.
12. As at XXXXXXXXXX, XXXXXXXXXXCo1 had a GRIP of $XXXXXXXXXX, a CDA of $XXXXXXXXXX, a NERDTOH of $XXXXXXXXXX and an ERDTOH of XXXXXXXXXX. It is not anticipated that these tax accounts of XXXXXXXXXXCo1 will change significantly before the commencement of the Proposed Transactions.
HoldCo1
13. HoldCo1 was incorporated under the BCA2 on XXXXXXXXXX. HoldCo1 is, and will be, at all relevant times, a TCC and a CCPC.
14. HoldCo1 does not carry on an active business and owns all of the issued and outstanding shares of XXXXXXXXXXCo1.
15. HoldCo1’s taxation year ends on XXXXXXXXXX of each year.
16. HoldCo1’s authorized share capital consists of:
a) an unlimited number of Class A common shares (the “HoldCo1 Class A Common Shares”), Class B common shares (the “HoldCo1 Class B Common Shares”), and Class C common shares (the “HoldCo1 Class C Common Shares”), which are non-par value, voting, and fully participating. The holders of these shares are entitled to receive dividends (each to the exclusion of each other and all other classes of shares) as and when declared by the board of directors and to share equally, along with the holders of Class D and E common shares, in the remaining property of the corporation upon the liquidation, dissolution, or winding-up of the corporation;
b) an unlimited number of Class H preferred shares (the “HoldCo1 Class H Preferred Shares”) and Class I preferred shares (the “HoldCo1 Class I Preferred Shares”), which are non-par value, non-voting, non-participating shares, entitling the holders to discretionary non-cumulative dividends (each to the exclusion of each other and all other classes of shares) at a rate or amount determined by the board of directors, not to exceed XXXXXXXXXX% of the redemption amount per annum. These shares are redeemable and retractable for their redemption amount, which is equal to the aggregate FMV of the consideration received upon issuance, together with all declared and unpaid dividends thereon, and rank in priority to all classes of common shares with respect to the payment of dividends and the return of capital on the liquidation, dissolution, or winding-up of the corporation; and
c) an unlimited number of Class D and E common shares and an unlimited number of Class F and G preferred shares, none of which are currently issued and outstanding.
17. The issued and outstanding share capital of HoldCo1 (along with their respective share attributes) is as follows:
Shareholder Shares PUC ACB Redemption Amount
TC XXXXX HoldCo1 Class A Common Shares XXXXX XXXXX XXXXX
TC XXXXX HoldCo1 Class H Preferred Shares XXXXX XXXXX XXXXX
TC XXXXX HoldCo1 Class I Preferred Shares XXXXX XXXXX XXXXX
HoldCo2 XXXXX HoldCo1 Class B Common Shares XXXXX XXXXX XXXXX
HoldCo2 XXXXX HoldCo1 Class H Preferred Shares XXXXX XXXXX XXXXX
HoldCo2 XXXXX HoldCo1 Class I Preferred Shares XXXXX XXXXX XXXXX
Sibling3 XXXXX HoldCo1 Class H Preferred Shares XXXXX XXXXX XXXXX
Sibling3 XXXXX HoldCo1 Class I Preferred Shares XXXXX XXXXX XXXXX
HoldCo3 XXXXX HoldCo1 Class C Common Shares XXXXX XXXXX XXXXX
HoldCo3 XXXXX HoldCo1 Class I Preferred Shares XXXXX XXXXX XXXXX
HoldCo4 XXXXX HoldCo1 Class C Common Shares XXXXX XXXXX XXXXX
18. All of the issued and outstanding shares of HoldCo1 are, and will be, at all relevant times, capital property to each of its shareholders.
19. Since Sibling3 exchanged all of their common shares of HoldCo1 for HoldCo1 Class H Preferred Shares and HoldCo1 Class I Preferred Shares (which are both non-voting) in XXXXXXXXXX, Sibling1 and Sibling2 have always acted jointly and in concert with each other in respect of all important business and financial decisions regarding HoldCo1 and XXXXXXXXXXCo1, without needing the approval or consent of Sibling3 or the Sons for any such decisions. Sibling1 and Sibling2 have been the only directors and officers of HoldCo1 and XXXXXXXXXXCo1 since XXXXXXXXXX.
20. As at XXXXXXXXXX, HoldCo1 had a GRIP of $XXXXXXXXXX, a CDA of $XXXXXXXXXX, a NERDTOH, and an ERDTOH of XXXXXXXXXX. It is not anticipated that these tax accounts of HoldCo1 will change significantly before the commencement of the Proposed Transactions.
21. As at XXXXXXXXXX, the significant assets of HoldCo1 are the XXXXXXXXXXCo1 Common Shares, amounts due from XXXXXXXXXXCo1, and amounts due from TC, HoldCo2, HoldCo3 and HoldCo4. HoldCo1’s liabilities are nominal.
XXXXXXXXXXCo3
22. XXXXXXXXXXCo3 was incorporated under the BCA1 on XXXXXXXXXXand was continued under the BCA2 in XXXXXXXXXX. XXXXXXXXXXCo3 is, and will be, at all relevant times, a TCC and a CCPC.
23. XXXXXXXXXXCo3 carries on a XXXXXXXXXX, which consists of XXXXXXXXXX.
24. As at XXXXXXXXXX, the significant assets of XXXXXXXXXXCo3 are cash, equipment, XXXXXXXXXX, investments in other entities (none of which XXXXXXXXXXCo3 exercises significant influence over), life insurance policies, marketable securities, and amounts receivable from related parties. XXXXXXXXXXCo3 has no goodwill as no value is attributable to goodwill in connection with XXXXXXXXXXCo3’s XXXXXXXXXX business.
25. As at XXXXXXXXXX, XXXXXXXXXXCo3’s liabilities consist of current liabilities, including accounts payable, accrued liabilities, income taxes payable, amounts due to shareholders and amounts due to related parties.
26. XXXXXXXXXXCo3 rents and leases substantially all of its XXXXXXXXXX and equipment to XXXXXXXXXXCo2, a corporation that is associated with XXXXXXXXXXCo3 pursuant to subsection 256(2). The lease for the XXXXXXXXXX was entered into in XXXXXXXXXX and the lease for the equipment was entered into in XXXXXXXXXX.
27. XXXXXXXXXXCo3’s taxation year ends on XXXXXXXXXX of each year.
28. XXXXXXXXXXCo3’s authorized share capital consists of:
d) an unlimited number of Class A common shares (the “XXXXXXXXXXCo3 Class A Common Shares”) and Class B common shares (the “XXXXXXXXXXCo3 Class B Common Shares”), which are non-par value, voting, and fully participating. The holders of these shares are entitled to receive dividends (each to the exclusion of each other and all other classes of shares) as and when declared by the board of directors and to share equally, along with the holders of Class C, D, E, F, G and H common shares, in the remaining property of the corporation upon the liquidation, dissolution, or winding-up of the corporation;
e) an unlimited number of Class M preferred shares (the “XXXXXXXXXXCo3 Class M Preferred Shares”), Class N preferred shares (the “XXXXXXXXXXCo3 Class N Preferred Shares”), and Class O preferred shares (the “XXXXXXXXXXCo3 Class O Preferred Shares”), which are non-par value, non-voting, non-participating shares, entitling the holders to discretionary non-cumulative dividends (each to the exclusion of each other and all other classes of shares) at a rate or amount determined by the board of directors, not to exceed XXXXXXXXXX% of the redemption amount per annum. These shares are redeemable and retractable for their redemption amount, which is equal to the aggregate FMV of the consideration received upon issuance, together with all declared and unpaid dividends thereon, and rank in priority to all classes of common shares with respect to the payment of dividends and the return of capital on the liquidation, dissolution, or winding-up of the corporation; and
f) an unlimited number of Class C, D, E, F, G and H common shares and an unlimited number of Class I, J, K, L, and P preferred shares, none of which are currently issued and outstanding.
29. The issued and outstanding share capital of XXXXXXXXXXCo3 (along with their respective share attributes) is as follows:
Shareholder Shares PUC ACB Redemption Amount
Sibling1 XXXXXCo3 Class B Common Shares XXXXX XXXXX XXXXX
Sibling1 XXXXXCo3 Class M Preferred Shares XXXXX XXXXX XXXXX
Sibling2 XXXXXCo3 Class A Common Shares XXXXX XXXXX XXXXX
Sibling2 XXXXXCo3 Class N Preferred Shares XXXXX XXXXX XXXXX
Sibling3 XXXXXCo3 Class O Preferred Shares XXXXX XXXXX XXXXX
30. All of the issued and outstanding shares of XXXXXXXXXXCo3 are, and will be, at all relevant times, capital property to each of its shareholders.
31. Since Sibling3 exchanged all of their common shares of XXXXXXXXXXCo3 for XXXXXXXXXXCo3 Class O Preferred Shares (which are non-voting) in XXXXXXXXXX, Sibling1 and Sibling2 have always acted jointly and in concert with each other in respect of all important business and financial decisions regarding XXXXXXXXXXCo3 without obtaining the approval or consent of Sibling3 for any such decisions. Sibling1 and Sibling2 have been the only directors and officers of XXXXXXXXXXCo3 since XXXXXXXXXX.
32. As at XXXXXXXXXX, XXXXXXXXXXCo3 had a GRIP of $XXXXXXXXXX, a CDA of $XXXXXXXXXX, a NERDTOH of $XXXXXXXXXX, and an ERDTOH of XXXXXXXXXX. It is not anticipated that these tax accounts of XXXXXXXXXXCo3 will change significantly before the commencement of the Proposed Transactions.
TC
33. TC was incorporated under the BCA2 on XXXXXXXXXX. TC is, and will be, at all relevant times, a TCC and a CCPC. TC does not carry on an active business and holds shares of HoldCo1 as described in Paragraph 17.
34. TC’s authorized share capital consists of:
a) an unlimited number of Class A common shares (the “TC Class A Common Shares”), which are non-par value, voting, fully participating, and entitled to dividends (to the exclusion of all other classes of shares) as declared by the board of directors;
b) an unlimited number of Class I preferred shares (the “TC Class I Preferred Shares”), which are non-par value, voting, non-participating, redeemable and retractable for their redemption amount, which is equal to the aggregate FMV of the consideration received upon issuance (together with all declared and unpaid dividends), and entitled to non-cumulative dividends (to the exclusion of all other classes of shares) as declared by the board of directors;
c) an unlimited number of Class M preferred shares (the “TC Class M Preferred Shares”), which are non-par value, non-voting, non-participating, redeemable and retractable for their redemption amount, which is equal to the aggregate FMV of the consideration received upon issuance (together with all declared and unpaid dividends), and entitled to non-cumulative dividends (to the exclusion of all other classes of shares) as declared by the board of directors;
d) an unlimited number of Class N preferred shares (the “TC Class N Preferred Shares”), which are non-par value, non-voting, non-participating, redeemable and retractable for their redemption amount, which is equal to the aggregate FMV of the consideration received upon issuance (together with all declared and unpaid dividends), and entitled to non-cumulative dividends (to the exclusion of all other classes of shares) as declared by the board of directors;
e) an unlimited number of Class O preferred shares (the “TC Class O Preferred Shares”), which are non-par value, non-voting, non-participating, redeemable and retractable for their redemption amount, which is equal to the aggregate FMV of the consideration received upon issuance (together with all declared and unpaid dividends), and entitled to non-cumulative dividends (to the exclusion of all other classes of shares) as declared by the board of directors; and
f) an unlimited number of Class B, C, D, E, F, G, and H common shares and an unlimited number of Class J, K, L, and P preferred shares, none of which have ever been issued and outstanding.
35. The issued and outstanding share capital of TC (along with their respective share attributes) is as follows:
Shareholder Shares PUC ACB Redemption Amount
Sibling1 XXXXX TC Class A Common Shares XXXXX XXXXX XXXXX
Sibling1 XXXXX TC Class M Preferred Shares XXXXX XXXXX XXXXX
The TC Class A Common Shares held by Sibling1 are, and will be, at all relevant times, capital property to Sibling1.
XXXXXXXXXXCo2
36. XXXXXXXXXXCo2 was incorporated under the BCA2 on XXXXXXXXXX. XXXXXXXXXXCo2 is, and will be, at all relevant times, a TCC and a CCPC. XXXXXXXXXXCo2 carries on an active XXXXXXXXXX. All of the issued and outstanding shares of XXXXXXXXXXCo2 are owned by HoldCo3 and HoldCo4.
HoldCo2
37. HoldCo2 was incorporated under the BCA2 on XXXXXXXXXX. HoldCo2 is a TCC and a CCPC. HoldCo2 does not carry on an active business and owns shares of HoldCo1 as described in Paragraph 17. All of the issued and outstanding shares of HoldCo2 are owned by Sibling2.
HoldCo3
38. HoldCo3 was incorporated under the BCA2 on XXXXXXXXXX. HoldCo3 is a TCC and a CCPC. HoldCo3 does not carry on an active business and owns shares of HoldCo1 as described in Paragraph 17. All of the issued and outstanding shares of HoldCo3 are owned by Son1.
HoldCo4
39. HoldCo4 was incorporated under the BCA2 on XXXXXXXXXX. HoldCo4 is a TCC and a CCPC. HoldCo4 does not carry on an active business and owns shares of HoldCo1 as described in Paragraph 17. All of the issued and outstanding shares of HoldCo4 are owned by Son2.
Trust
40. Trust was settled on XXXXXXXXXX by a person who dealt at arm’s length with the trustee and the beneficiaries of Trust at the time of settlement. The trustee of Trust is Sibling1, and the beneficiaries of Trust are Sibling1, the spouse of Sibling1, the children of Sibling1, and any corporation solely owned by Sibling1, the spouse of Sibling1, and/or the children of Sibling1. Trust is a resident of Canada for purposes of the Act and is governed by the XXXXXXXXXX.
Other relevant facts
41. On XXXXXXXXXX, all of Sibling1’s shares of HoldCo1 (being the XXXXXXXXXX HoldCo1 Class A Common Shares, XXXXXXXXXX HoldCo1 Class H Preferred Shares, and XXXXXXXXXX HoldCo1 Class I Preferred Shares) were transferred to TC for TC Class M Preferred Shares pursuant to subsection 85(1) on a tax-deferred basis. This transfer was undertaken so that future dividends (other than Dividend2 and the deemed dividend that will result from the transactions described in Paragraph 64, which were not contemplated) could be paid to TC rather than Sibling1.
This transaction would have occurred regardless of the Proposed Transactions and the divisive reorganization described in this letter would have occurred regardless of this transaction.
42. HoldCo1 has been redeeming a portion of the HoldCo1 Class H Preferred Shares held by Sibling3 since XXXXXXXXXX as part of a buy out plan with a set redemption schedule. This redemption schedule involves the redemption of XXXXXXXXXX of Sibling3’s HoldCo1 Class H Preferred Shares per year, and, once all of Sibling3’s HoldCo1 Class H Preferred Shares have been redeemed, the redemption of XXXXXXXXXX of Sibling3’s HoldCo1 Class I Preferred shares per year, until all of these shares of Sibling3 have been fully redeemed. These redemptions occur on a monthly basis. HoldCo1 has, pursuant to this redemption schedule, redeemed XXXXXXXXXX of Sibling3’s HoldCo1 Class H Preferred Shares, per year, since XXXXXXXXXX. HoldCo1 will, pursuant to this redemption schedule, continue to redeem Sibling3’s HoldCo1 Class H Preferred Shares and HoldCo1 Class I Preferred Shares, and after the Amalgamation, DC, will redeem Sibling3’s DC Class L Preferred Shares until all of these shares of Sibling3 have been fully redeemed.
This buy out plan and redemption schedule would have been implemented (and the redemptions would have occurred) regardless of the Proposed Transactions and the Proposed Transactions would have occurred regardless of this buy out plan or these redemptions.
43. XXXXXXXXXXCo3 has been redeeming a portion of the XXXXXXXXXXCo3 Class O Preferred Shares held by Sibling3 since XXXXXXXXXX as part of a buy out plan. This involves the redemption of XXXXXXXXXX of Sibling3’s XXXXXXXXXXCo3 Class O Preferred Shares per year. These redemptions occur on a monthly basis. XXXXXXXXXXCo3 has redeemed XXXXXXXXXX of Sibling3’s XXXXXXXXXXCo3 Class O Preferred Shares, per year, since XXXXXXXXXX. XXXXXXXXXXCo3 will continue to redeem Sibling3’s XXXXXXXXXXCo3 Class O Preferred Shares, and after the Amalgamation, DC, will redeem Sibling3’s DC Class L Preferred Shares until all of these shares of Sibling3 have been fully redeemed.
This buy out plan and redemption schedule would have been implemented (and the redemptions would have occurred) regardless of the Proposed Transactions and the Proposed Transactions would have occurred regardless of this buy out plan or these redemptions.
44. In XXXXXXXXXX, XXXXXXXXXXCo1 sold XXXXXXXXXX with an FMV of $XXXXXXXXXX to XXXXXXXXXXCo2 for cash and a loan receivable from XXXXXXXXXXCo2 (that is not convertible into other property), and which is repayable at $XXXXXXXXXX monthly and bears interest at XXXXXXXXXX% (the “XXXXXXXXXXCo2 Receivable”). As of XXXXXXXXXX, the XXXXXXXXXXCo2 Receivable is expected to be approximately $XXXXXXXXXX.
This transaction occurred before Sibling1 and Sibling2 contemplated the Proposed Transactions and had the Proposed Transactions been contemplated at that time, this transaction may not have occurred. As such, this transaction did not occur in contemplation of the Proposed Transactions and the decision to undertake the Proposed Transactions was not impacted by or made in contemplation of this transaction.
PROPOSED TRANSACTIONS
The Proposed Transactions will occur in the order presented unless otherwise indicated, with the exception of filing the applicable election forms, which will be filed within the applicable due dates following the completion of the Proposed Transactions.
Incorporation of TC Sub
45. TC will incorporate TC Sub under the BCA2. TC Sub will be, at all relevant times, a TCC and a CCPC. The authorized share capital of TC Sub will consist of an unlimited number of:
a) common shares (the “TC Sub Common Shares”), which will be non-par value, voting, fully participating, and entitled to dividends as declared by the board of directors; and
b) preferred shares (the “TC Sub Special Shares”), which will be non-par value, non-voting, non-participating, redeemable and retractable for their redemption amount, which will be equal to the aggregate FMV of the consideration received upon issuance (together with all declared and unpaid dividends), and entitled to non-cumulative dividends as declared by the board of directors.
46. TC will subscribe for XXXXXXXXXX TC Sub Common Shares for a consideration of $XXXXXXXXXX on incorporation.
Pre-DC Transfer dividends
47. XXXXXXXXXXCo1 will declare a dividend (“Dividend1”) on the XXXXXXXXXXCo1 Common Shares in an amount sufficient to receive a dividend refund equal to XXXXXXXXXXCo1’s NERDTOH at the end of its taxation year that will end immediately before the Amalgamation. To satisfy the payment of Dividend1, XXXXXXXXXXCo1 will credit the amount of the shareholder loan that XXXXXXXXXXCo1 currently owes HoldCo1 by an amount equal to the amount of Dividend1. XXXXXXXXXXCo1 will not designate under subsection 89(14) any portion of Dividend1 to be an eligible dividend.
48. The directors of HoldCo1 will pass a resolution to increase the stated capital (and consequently PUC) of each of the HoldCo1 Class A Common Shares, the HoldCo1 Class B Common Shares, and the HoldCo1 Class C Common Shares by an amount that, in the aggregate, is sufficient for HoldCo1 to receive a dividend refund equal to HoldCo1’s NERDTOH at the end of its taxation year that will end immediately before the Amalgamation.
The amount of each deemed dividend (collectively, “Dividend2”) that results, pursuant to subsection 84(1), from the increases in stated capital (and consequently PUC) of each class of common shares of HoldCo1, will not exceed the amount of safe income, determined immediately before the safe income determination time, that could reasonably be considered to contribute to the capital gain that could be realized on a disposition at FMV, immediately before Dividend2, of each particular class of common shares of HoldCo1.
Amalgamation
49. On the day following the increases in stated capital described in Paragraph 48, the Predecessor Corporations will amalgamate under the BCA2 to form DC. Upon the Amalgamation:
a) all of the property (except amounts receivable from any Predecessor Corporation or shares of the capital stock of any Predecessor Corporation) of the Predecessor Corporations immediately before the Amalgamation will become property of DC by virtue of the Amalgamation;
b) all of the liabilities (except amounts payable to any Predecessor Corporation) of the Predecessor Corporations immediately before the Amalgamation will become liabilities of DC by virtue of the Amalgamation; and
c) all of the shareholders (except any Predecessor Corporation) who owned shares of the capital stock of any Predecessor Corporation immediately before the Amalgamation will receive shares of the capital stock of DC because of the Amalgamation.
50. The amalgamation agreement will provide the following:
a) the shares of the capital stock of XXXXXXXXXXCo1 that were issued and outstanding immediately before the Amalgamation and held by HoldCo1 will be cancelled without payment, at the time of the Amalgamation;
b) the share capital of DC will consist of:
i. an unlimited number of Class A common shares (the “DC Class A Common Shares”), Class B common shares (the “DC Class B Common Shares”), Class C common shares (the “DC Class C Common Shares”), which are non-par value, voting, and fully participating. The holders of these shares are entitled to receive dividends (each to the exclusion of each other and all other classes of shares) as and when declared by the board of directors and to share equally in the remaining property of the corporation upon the liquidation, dissolution, or winding-up of the corporation; and
ii. an unlimited number of Class J preferred shares (the “DC Class J Preferred Shares”), Class K preferred shares (the “DC Class K Preferred Shares”), Class L preferred shares (the “DC Class L Preferred Shares”), and Class M preferred shares (the “DC Class M Preferred Shares”), which are non-par value, non-voting, non-participating shares, entitling the holders to discretionary non-cumulative dividends (each to the exclusion of each other and all other classes of shares) at a rate or amount determined by the board of directors, not to exceed XXXXXXXXXX% of the redemption amount per annum. These shares are redeemable and retractable for their redemption amount, which is equal to the aggregate FMV of the consideration received upon issuance, together with all declared and unpaid dividends thereon, and rank in priority to all classes of common shares with respect to the payment of dividends and the return of capital on the liquidation, dissolution, or winding-up of the corporation;
c) the shareholders who owned shares of the capital stock of any Predecessor Corporation immediately before the Amalgamation, with the exception of Holdco1, will receive shares of the capital stock of DC as follows:
i. in respect of the HoldCo1 Class A Common Shares, TC will receive a number of DC Class A Common Shares with an FMV equal to the FMV of the HoldCo1 Class A Common Shares immediately before the Amalgamation;
ii. in respect of the HoldCo1 Class H Preferred Shares and HoldCo1 Class I Preferred Shares owned by TC, TC will receive a number of DC Class J Preferred Shares with an aggregate redemption amount and FMV equal to the aggregate FMV of the HoldCo1 Class H Preferred Shares and HoldCo1 Class I Preferred Shares owned by TC immediately before the Amalgamation;
iii. in respect of the HoldCo1 Class B Common Shares, HoldCo2 will receive a number of DC Class B Common Shares with an FMV equal to the FMV of the HoldCo1 Class B Common Shares immediately before the Amalgamation;
iv. in respect of the HoldCo1 Class H Preferred Shares and HoldCo1 Class I Preferred Shares owned by HoldCo2, HoldCo2 will receive a number of DC Class J Preferred Shares with an aggregate redemption amount and FMV equal to the aggregate FMV of the HoldCo1 Class H Preferred Shares and HoldCo1 Class I Preferred Shares owned by HoldCo2 immediately before the Amalgamation;
v. in respect of the HoldCo1 Class C Common Shares owned by HoldCo3, HoldCo3 will receive a number of DC Class C Common Shares with an FMV equal to the FMV of the HoldCo1 Class C Common Shares owned by HoldCo3 immediately before the Amalgamation;
vi. in respect of the HoldCo1 Class I Preferred Shares owned by HoldCo3, HoldCo3 will receive a number of DC Class M Preferred Shares with an aggregate redemption amount and FMV equal to the FMV of the HoldCo1 Class I Preferred Shares owned by HoldCo3 immediately before the Amalgamation;
vii. in respect of the HoldCo1 Class C Common Shares owned by HoldCo4, HoldCo4 will receive a number of DC Class C Common Shares with an FMV equal to the FMV of the HoldCo1 Class C Common Shares owned by HoldCo4 immediately before the Amalgamation;
viii. in respect of the HoldCo1 Class H Preferred Shares, HoldCo1 Class I Preferred Shares, and XXXXXXXXXXCo3 Class O Preferred Shares owned by Sibling3, Sibling3 will receive a number of DC Class L Preferred Shares with an aggregate redemption amount and FMV equal to the aggregate FMV of the HoldCo1 Class H Preferred Shares, HoldCo1 Class I Preferred Shares, and XXXXXXXXXXCo3 Class O Preferred Shares owned by Sibling3 immediately before the Amalgamation;
ix. in respect of the XXXXXXXXXXCo3 Class A Common Shares and XXXXXXXXXXCo3 Class N Preferred Shares owned by Sibling2, Sibling2 will receive a number of DC Class K Preferred Shares with an aggregate redemption amount and FMV equal to the aggregate FMV of the XXXXXXXXXXCo3 Class A Common Shares and XXXXXXXXXXCo3 Class N Preferred Shares owned by Sibling2 immediately before the Amalgamation;
x. in respect of the XXXXXXXXXXCo3 Class B Common Shares and XXXXXXXXXXCo3 Class M Preferred Shares, Sibling1 will receive a number of DC Class K Preferred Shares with an aggregate redemption amount and FMV equal to the aggregate FMV of the XXXXXXXXXXCo3 Class B Common Shares and XXXXXXXXXXCo3 Class M Preferred Shares immediately before the Amalgamation;
d) the aggregate stated capital of all of the issued and outstanding shares of DC will be equal to the aggregate stated capital and PUC of all of the issued and outstanding shares of HoldCo1 and XXXXXXXXXXCo3 immediately before the Amalgamation, as follows:
i. the stated capital of the DC Class A Common Shares, DC Class B Common Shares, and DC Class C Common Shares will be an amount equal to the stated capital and PUC of the HoldCo1 Class A Common Shares, Holdco1 Class B Common Shares, and Holdco1 Class C Common Shares immediately before the Amalgamation, respectively;
ii. the stated capital of the DC Class J Preferred Shares will be an amount equal to the aggregate stated capital and PUC of the HoldCo1 Class H Preferred Shares and HoldCo1 Class I Preferred Shares owned by TC and HoldCo2 immediately before the Amalgamation;
iii. the stated capital of the DC Class K Preferred Shares will be an amount equal to the aggregate stated capital and PUC of the XXXXXXXXXXCo3 Class A Common Shares, XXXXXXXXXXCo3 Class B Common Shares, XXXXXXXXXXCo3 Class M Preferred Shares, and XXXXXXXXXXCo3 Class N Preferred Shares immediately before the Amalgamation;
iv. the stated capital of the DC Class L Preferred Shares will be an amount equal to the aggregate stated capital and PUC of the HoldCo1 Class H Preferred Shares, the HoldCo1 Class I Preferred Shares, and the XXXXXXXXXXCo3 Class O Preferred Shares owned by Sibling3 immediately before the Amalgamation; and
v. the stated capital of the DC Class M Preferred Shares will be an amount equal to the stated capital and PUC of the Class I Preferred Shares owned by HoldCo3 immediately before the Amalgamation.
51. DC will be, at all relevant times, a CCPC and a TCC, will be governed by the provisions of the BCA2, and will have a taxation year ending on XXXXXXXXXX.
Immediately after the Amalgamation, Sibling1 and Sibling2 will act jointly and in concert with each other in respect of all important business and financial decisions regarding DC, without needing the approval or consent of Sibling3 or the Sons for any such decisions. Sibling1 and Sibling2 will be the only directors and officers of DC immediately after the Amalgamation.
52. Immediately after the Amalgamation, DC will carry on the XXXXXXXXXX previously carried on by the Predecessor Corporations. The shares of DC will be, at all relevant times, capital property to each of its shareholders.
Sibling1 exchange
53. Sibling1 will transfer all of their DC Class K Preferred Shares to TC in consideration for a number of TC Class O Preferred Shares having an aggregate redemption amount and FMV equal to the FMV of the DC Class K Preferred Shares so transferred.
The DC Class K Preferred Shares will be, at all relevant times, capital property to TC.
54. Sibling1 and TC will jointly elect, in prescribed form and within the time referred to in subsection 85(6), to have the provisions of subsection 85(1) apply to the transfer of the DC Class K Preferred Shares to TC described in Paragraph 53. The agreed amount in respect of the election will be not less than the lesser of the amounts specified in subparagraphs 85(1)(c.1)(i) and (ii) and will not exceed the FMV of the DC Class K Preferred Shares transferred to TC.
55. TC will resolve to add to the stated capital maintained for the TC Class O Preferred Shares issued to Sibling1 an amount equal to the greater of i) the PUC of the DC Class K Preferred Shares transferred in exchange therefor and ii) the ACB to Sibling1, as modified by paragraphs 84.1(2)(a) and (a.1), of the DC Class K Preferred Shares transferred in exchange therefor.
DC Transfer
Classification of DC’s property
56. Immediately before the DC Transfer, 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, term deposits, accounts receivable, prepaid expenses, the XXXXXXXXXX Account, and the cash surrender value of the life insurance policies;
b) business property, comprising of all the assets of DC, other than cash or near-cash property, any income from which would, for the purposes of the Act, be income from a business (other than a specified investment business); and
c) investment property, comprising of all the assets of DC, other than cash or near-cash property, any income from which would, for the purposes of the Act, be income from property or from a specified investment business.
57. For the purposes of determining the types of property owned by DC immediately before the DC Transfer:
a) DC will not have significant influence over any corporation, partnership, or trust;
b) tax accounts or other related amounts of DC, such as ERDTOH, NERDTOH, GRIP, or CDA, and the balance of any non-capital loss or net capital loss, if any, will not be considered property;
c) loans receivable or advances made by DC, that: (i) are due within the next 12 months; (ii) are due on demand; or (iii) have no fixed terms of repayment will be considered cash or near-cash property;
d) the amount of any deferred tax, future income tax asset and deferred expenses (which are capitalized and amortized for accounting purposes but deducted for tax purposes), will not be considered property;
e) 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, due to their contingent nature, will not be considered property;
f) any amount recorded as an asset for accounting purposes in relation to the leasing of XXXXXXXXXX and equipment by DC to XXXXXXXXXXCo2, other than amounts legally receivable under the relevant leasing agreements, if any, will not be considered property. For greater certainty, the XXXXXXXXXX (and attached water rights) and XXXXXXXXXX leased by DC to XXXXXXXXXXCo2 will be considered business property;
g) the XXXXXXXXXXCo2 Receivable (other than the portion due within 12 months) will be considered business property; and
h) the FMV of life insurance policies in excess of their cash surrender value will be considered investment property.
Allocation of DC’s liabilities
58. In determining the net FMV of each type of property of DC immediately before the DC Transfer, 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) all current liabilities will be allocated to each cash or near-cash property of DC in the proportion that the FMV of each such property is of the aggregate FMV of all cash or near-cash property of DC. The total amount of DC’s current liabilities to be allocated to DC’s cash or near-cash property will not exceed the aggregate FMV of all of DC’s cash or near-cash property;
b) following the allocation of the current liabilities described in Paragraph 58(a), any remaining net FMV of accounts receivable and prepaid expenses will be reclassified as business property and excluded from the aggregate net FMV of DC’s cash or near-cash property, to the extent that such property will be collected, sold or consumed by DC or TC, as the case may be, in the ordinary course of the business to which they relate;
c) liabilities of DC, other than those described in Paragraph 58(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. 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
d) any liabilities that remain after the allocations described in Paragraphs 58(a) and (c) are made will then be allocated among all types of property on the basis of the relative net FMV of each type of property immediately prior to the allocation of such excess, but after the allocation of liabilities as described in Paragraphs 58(a) and (c).
59. For the purposes of determining the net FMV of each type of property of DC immediately before the DC Transfer:
a) no amount will be considered a liability unless it represents a true legal liability which is capable of quantification;
b) amounts owing by DC that: (i) are payable within the next 12 months; (ii) are payable on demand; or (iii) that have no fixed terms of repayment, will be considered current liabilities; and
c) the amount of deferred income tax liability or future income taxes owing, if any, will not be considered a liability because such amount does not represent a legal obligation.
DC Transfer
60. Immediately after the determination of the net FMV of each type of property of DC as described in Paragraphs 56 to 59, DC will transfer to TC Sub a proportion of each type of property owned by DC such that immediately after the DC Transfer, the aggregate net FMV of each type of property transferred by DC to TC Sub will be equal to or approximate that proportion of each type of property determined by the formula: A x B/C,
Where:
A is the net FMV, immediately before the DC Transfer, of all property of that type owned at that time by DC;
B is the aggregate FMV, immediately before the DC Transfer, of all the shares of the capital stock of DC owned, at that time, by TC; and
C is the aggregate 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 60, 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 that TC Sub has received on such transfer as compared to what TC Sub would have received had it received TC’s exact pro rata share of the net FMV of that type of property of DC.
As consideration for the transfer of property described in this Paragraph 60, TC Sub will:
a) assume such liabilities of DC, as appropriate, such that TC Sub will receive a proportionate share of the net FMV of each type of property owned by DC immediately before the DC Transfer; and
b) issue a number of TC Sub Special Shares, which will have an aggregate redemption amount and FMV equal to the amount by which the aggregate FMV, at the time of the DC Transfer, of all the properties received by TC Sub exceeds the aggregate amount of all the liabilities of DC assumed by TC Sub, as described in Paragraph 60(a). The TC Sub Special Shares will be, at all relevant times, capital property to DC.
61. In respect of the transfer of property under the DC Transfer, DC and TC Sub will jointly elect, in prescribed form and within the time limits 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 TC Sub. The agreed amount in respect of each eligible property so transferred will be as follows:
a) in the case of property described in paragraph 85(1)(c.1), an amount equal to the lesser of the amounts specified in subparagraphs 85(1)(c.1)(i) and (ii); and
b) in the case of depreciable property of a prescribed class, an amount equal to the least of the amounts specified in subparagraphs 85(1)(e)(i), (ii) and (iii);
and, in each case, the agreed amount in respect of each eligible property so transferred will not exceed the FMV of such 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.
61.1 In respect of the transfer of property under the DC Transfer, TC Sub will add to its stated capital maintained for the TC Sub Special Shares an amount equal to:
a) the aggregate of:
i. the aggregate of the agreed amounts, in the case of each eligible property transferred to TC Sub; and
ii. the aggregate FMV, in the case of each property transferred to TC Sub that is not an eligible property, less
b) the aggregate amount of DC’s liabilities assumed by TC Sub as described in Paragraph 60(a).
For greater certainty, the amount to be added to the stated capital maintained for the TC Sub Special Shares will not exceed the maximum amount that could be added to the PUC of such TC Sub Special Shares without a reduction taking place pursuant to subsection 85(2.1).
Cross-redemption/repurchase
62. Immediately after the DC Transfer, TC Sub will redeem the TC Sub Special Shares for their aggregate redemption amount. As consideration therefor, TC will issue to DC a non-interest-bearing demand promissory note (the “TC Sub Redemption Note”) having a principal amount and FMV equal to the aggregate redemption amount and FMV of the TC Sub Special Shares so redeemed. DC will accept the TC Sub Redemption Note as payment in full for the redemption of such shares.
63. On the day immediately after TC Sub’s redemption of its TC Sub Special shares described in Paragraph 62, TC will resolve to wind-up and dissolve TC Sub in accordance with the provisions of the BCA2. On the winding-up of TC Sub, all properties of TC Sub will be distributed to TC and all liabilities of TC Sub (including, 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.
64. Contemporaneously with TC Sub’s redemption of its TC Sub Special Shares described in Paragraph 62 and, for greater certainty, before the end of DC’s first taxation year, DC will purchase for cancellation its DC Class A Common Shares owned by TC and redeem its DC Class J Preferred Shares and DC Class K Preferred Shares owned by TC for an aggregate amount equal to the FMV of the DC Class A Common Shares so purchased for cancellation and the aggregate redemption amount and FMV of the DC Class J Preferred Shares and DC Class K Preferred Shares so redeemed, at the time of their purchase for cancellation or redemption, as the case may be. As consideration therefor, DC will issue to TC a non-interest-bearing demand promissory note (the “DC Redemption Note”) having a principal amount and FMV equal to the aggregate of the FMV of the DC Class A Common Shares so purchased for cancellation and the aggregate redemption amount and FMV of the DC Class J Preferred Shares and DC Class K Preferred Shares so redeemed, at the time of their purchase for cancellation or redemption, as the case may be. TC will accept the DC Redemption Note as payment in full for the purchase for cancellation and redemption of such shares. For greater certainty, the purchase for cancellation and the redemptions described in this Paragraph 64 will occur contemporaneously.
To the extent that DC has a GRIP immediately before the purchase for cancellation and the redemptions described in this Paragraph 64, DC will designate, pursuant to subsection 89(14), a portion, equal to XXXXXXXXXX% of DC’s GRIP immediately before such purchase for cancellation and redemptions, of the aggregate deemed dividends resulting from such purchase for cancellation and redemptions, to be an eligible dividend by notifying TC in writing, within the time limit prescribed in subsection 89(14), that the portion of such dividend is an eligible dividend.
65. Immediately after the wind-up of TC Sub described in Paragraph 63 (and for greater certainty, TC’s assumption of the liabilities of TC Sub), DC and TC will enter into an agreement under which the DC Redemption Note will be set-off in full against the TC Sub Redemption Note and the notes will be cancelled without payment.
TC freeze
66. Immediately after the set-off and cancellation of notes described in Paragraph 65, Sibling1, TC, and Trust, as the case may be, will undertake the following transactions in the following order:
a) all of the TC Class A Common Shares owned by Sibling1 will be exchanged for a number of TC Class N Preferred Shares having an aggregate redemption amount and FMV equal to the FMV of the TC Class A Common Shares so exchanged. The TC Class A Common Shares so exchanged will be cancelled. The aggregate addition to the stated capital of the TC Class N Preferred Shares issued by TC to Sibling1 will be equal to the aggregate PUC of the TC Class A Common Shares owned by Sibling1 immediately before the exchange. No election under subsection 85(1) will be filed with respect to the exchange;
b) Sibling1 will subscribe for XXXXXXXXXX TC Class I Preferred Shares for a nominal amount; and
c) Trust will subscribe for XXXXXXXXXX TC Class A Common Shares for a nominal amount.
For greater certainty, Sibling1 will continue to act as the sole director and officer of TC and retain control of TC.
67. 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 or a Predecessor Corporation in contemplation of and before the Proposed Transactions, other than in a transaction described in subparagraphs 55(3.1)(a)(i) to (iv).
68. 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).
69. None of the property received by TC Sub on the DC Transfer will be acquired by a person who is not related 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).
70. None of the property retained by DC after the DC Transfer will be acquired by a person who is not related 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).
71. No share of TC Sub or DC is, or will be, at any time throughout the series of transactions or events that includes 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;
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 related (otherwise than by reason of a right referred to in paragraph 251(5)(b));
(ii) any right of the type described in subparagraph 112(2.4)(b)(ii); or
e) issued or acquired as part of a transaction, event or series of transactions or events of the type described in subsection 112(2.5).
72. None of TC, TC Sub, or DC is, or will be, prior to the completion of the Proposed Transactions, a financial institution, a specified financial institution, or a corporation described in any of paragraphs (a) to (f) of the definition of financial intermediary corporation.
73. Each of DC, TC Sub, and TC will have the financial capacity to honour, upon presentation for payment, the amount payable under the promissory note issued or assumed by it as part of the Proposed Transactions.
74. The Proposed Transactions will not result in any of the Taxpayers being unable to pay its existing tax liabilities.
75. XXXXXXXXXXCo1’s NERDTOH described in Paragraph 12 arose in XXXXXXXXXX as a result of its sale of XXXXXXXXXX to XXXXXXXXXXCo2, as described in Paragraph 44.
PURPOSES OF THE PROPOSED TRANSACTIONS
76. The purpose of the divisive reorganization is to allow Sibling1 (via TC) to have direct and separate control of their proportionate share of DC’s property, which will enable Sibling1 (via TC) to operate the faming business associated with this property, and undertake estate planning, independently of Sibling2, Sibling3, and Sons.
77. The purpose of Dividend1 and Dividend2 is to (i) enable XXXXXXXXXXCo1 and HoldCo1, as the case may be, to receive a dividend refund equal to their respective NERDTOH at the end of their taxation year that will end immediately before the Amalgamation; (ii) facilitate the transfer of such dividend refunds as cash and near-cash property on the DC Transfer; and (iii) allow for the proper streaming of HoldCo1’s dividend refund and resulting Part IV tax liability to TC as a result of Dividend2.
78. The purpose of the Amalgamation is to simplify the corporate structure, reduce administrative complexity, and simplify the implementation of the Proposed Transactions.
79. The purpose of the incorporation of TC Sub as described in Paragraph 45 and the transfer of property of DC on the DC Transfer to TC Sub (rather than directly to TC) is to ensure that DC does not pay Part IV tax on the redemption of shares of TC it would have otherwise acquired as part of the divisive reorganization.
80. The purpose for DC’s purchase for cancellation and redemptions described in Paragraph 64 to occur before the end of DC’s first taxation year is to ensure that DC’s NERDTOH and ERDTOH and TC’s resulting Part IV tax liability will be known and will not be subject to change due to the payment of dividends or the earning of passive income by DC in DC’s taxation year that begins after the end of its first taxation year.
81. The purpose of the winding-up of TC Sub as described in Paragraph 63 is to enable TC to receive an indirect transfer of property from DC, as stipulated in the definition of “distribution” in subsection 55(1).
82. The purpose of the transactions described in Paragraph 66 is to implement an estate freeze in respect of the FMV of the TC Class A Common Shares owned by Sibling1 so that the future increase in the FMV of TC will accrue to the TC Class A Common Shares owned by Trust.
RULINGS
Provided that the preceding statements constitute a complete and accurate disclosure of all 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, we confirm the following:
A. The provisions of subsections 87(1) will apply to the Amalgamation and, provided that all of the shares of XXXXXXXXXXCo3 and HoldCo1 constitute capital property to each of the shareholders of XXXXXXXXXXCo3 and HoldCo1 immediately before the Amalgamation, the provisions of subsection 87(4), other than paragraphs (c), (d) and (e) thereof, will apply, so that:
a. each such shareholder of XXXXXXXXXXCo3 and HoldCo1 will be deemed by paragraph 87(4)(a) to have disposed of such shareholder’s shares of XXXXXXXXXXCo3 or HoldCo1, as the case may be, for proceeds equal to the shareholder’s ACB of such shares immediately before the Amalgamation; and
b. each such shareholder of XXXXXXXXXXCo3 and HoldCo1 will be deemed by paragraph 87(4)(b) to have acquired the particular class of DC shares described in Paragraph 50 at a cost equal to the proportion of the proceeds described in paragraph 87(4)(a) that the FMV, immediately after the Amalgamation, of all the DC shares of that particular class so acquired by the shareholder is of the FMV, immediately after the Amalgamation, of all DC shares so acquired by the shareholder.
B. Subject to the application of subsection 69(11), provided the appropriate joint elections are filed in the prescribed form and manner within the time limits 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 the transfer of each eligible property owned by DC to TC Sub, as described in Paragraph 60 such that the agreed amount in respect of each such transfer of eligible property will be deemed to be the transferor’s proceeds of disposition of the particular property and the transferee’s cost thereof pursuant to paragraph 85(1)(a).
In respect of depreciable property, to the extent that the transferor’s capital cost exceeds the transferor’s proceeds of disposition of the property, the transferee’s capital cost of each such property will be determined in accordance with subsection 85(5).
For purposes of the joint election referred to in this Ruling B, when determining the agreed amount of depreciable property in the course of the DC Transfer, the reference in subparagraph 85(1)(e)(i) to “the undepreciated capital cost to the taxpayer of all 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 DC Transfer that the FMV at that time of the property 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 the transfers referred to in this Ruling B.
C. Subsection 84(3) will apply to:
a. the redemption of the TC Sub Special Shares, as described in Paragraph 62, such that TC Sub will be deemed to have paid and DC will be deemed to have received a dividend on the TC Sub Special Shares equal to the amount, if any, by which the amount paid by TC Sub on the redemption of the TC Sub Special Shares exceeds the aggregate PUC in respect of such shares immediately before such redemption;
b. the purchase for cancellation of the DC Class A Common Shares owned by TC, as described in Paragraph 64, such that DC will be deemed to have paid and TC will be deemed to have received a dividend on the DC Class A Common Shares equal to the amount, if any, by which the amount paid by DC on the purchase for cancellation of the DC Class A Common Shares exceeds the aggregate PUC in respect of such shares immediately before such purchase for cancellation;
c. the redemption of the DC Class J Preferred Shares owned by TC, as described in Paragraph 64, such that DC will be deemed to have paid and TC will be deemed to have received a dividend on the DC Class J Preferred Shares equal to the amount, if any, by which the amount paid by DC on the redemption of the DC Class J Preferred Shares exceeds the aggregate PUC in respect of such shares immediately before such redemption; and
d. the redemption of the DC Class K Preferred Shares owned by TC, as described in Paragraph 64, such that DC will be deemed to have paid and TC will be deemed to have received a dividend on the DC Class K Preferred Shares equal to the amount, if any, by which the amount paid by DC on the redemption of the DC Class K Preferred Shares exceeds the aggregate PUC in respect of such shares immediately before such redemption.
D. The taxable dividends described in Ruling C:
a. will, pursuant to subsection 82(1) and paragraph 12(1)(j), be included in computing the income of the person deemed to have received such dividend;
b. will, pursuant to subsection 112(1), be deductible by the recipient corporation 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 any of subsections 112(2.1), (2.2), (2.3) or (2.4);
c. will, pursuant to paragraph (j) of the definition of “proceeds of disposition” in section 54, be excluded in determining the proceeds of disposition to the recipient corporation of the shares so redeemed, purchased or cancelled;
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 have been received;
e. will not be subject to tax under Part IV, except to the extent provided in paragraph 186(1)(b);
f. will not be subject to tax under Part IV.1; and
g. will not be subject to tax under Part 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); or
e. an acquisition of property in the circumstances described in paragraphs 55(3.1)(c) or 55(3.1)(d),
which has not been described in this letter, by virtue of paragraph 55(3)(b), subsection 55(2) will not apply to the taxable dividends referred to in Ruling C, and, for greater certainty, subsection 55(3.1) will not apply to deny the exemption under paragraph 55(3)(b).
F. The set-off of the TC Sub Redemption Note against the DC Redemption Note, as described in Paragraph 65, will not, in and by itself, result in a forgiven amount and neither DC nor TC will realize a gain or incur a loss as a result of such set-off and cancellation.
G. The provisions of subsections 56(2), 56(4), 69(1), 69(4) and 246(1) will not apply to the Proposed Transactions, in and by themselves.
H. The provisions of subsection 245(2) will not apply as a result of the Proposed Transactions, in and by themselves, to re-determine the tax consequences confirmed in Rulings A to G.
The Rulings are subject to the limitations and qualifications set out in Information Circular IC 70-6R12 dated April 1, 2022, and are binding on the CRA provided that the Proposed Transactions are completed no later than six months after the date of this letter.
The 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 into law, could have an effect on the Rulings.
Unless otherwise confirmed in the 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, NERDTOH or any other tax accounts of any corporation;
c) the allocation of safe income attributable to any share of any corporation referred to herein (see 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); or
d) any other tax consequence relating to the facts, additional information, 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, 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, any adjustment to the FMV of the properties transferred or the redemption amount of the shares issued as consideration, whether pursuant to a price adjustment clause or otherwise, will be effective retroactively to the time of the transfer and issuance of shares. Furthermore, the operation of a price adjustment clause may invalidate one or more 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
Manager
for Division Director
Reorganizations Division I
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch
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