2025 Ruling 2025-1075141R3 - Internal reorganization under paragraph 55(3)(a)

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 deemed dividends received in the course of the proposed corporate reorganization are exempt from subsection 55(2) because of paragraph 55(3)(a)?

Position: Yes.

Reasons: In accordance with the provisions of the Act.

XXXXXXXXXX 2025-107514

XXXXXXXXXX, 2025

Dear XXXXXXXXXX:

Re: Advance Income Tax Ruling Request
XXXXXXXXXX

We are writing in response to your letter dated XXXXXXXXXX in which you requested an advance income tax ruling (“Ruling”) on behalf of the above-named taxpayer (the “Taxpayer”). We also acknowledge the information provided in subsequent correspondence.

We understand that, to the best of your knowledge and that of the Taxpayer, none of the Proposed Transactions or issues involved in this Ruling are the same as, or substantially similar to, transactions or issues that are:

i. in a previously filed return of the Taxpayer or a related person and;

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

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

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

ii. the subject of a ruling previously considered by the Income Tax Rulings Directorate in relation to the Taxpayer or a related person.

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

XXXXXXXXXX

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

Unless otherwise stated:

i. all references herein to a part, section, subsection, paragraph or subparagraph is a reference to the relevant provision of the Income Tax Act, R.S.C. 1985, c.1 (5th Supp.), as amended, (the “Act”), or, where appropriate, the Income Tax Regulations, C.R.C., c.945, as amended, (the “Regulations”);

ii. all terms used in this letter that are defined in the Act have the meaning given in such definition;

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

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

Definitions

The following abbreviations, terms and expressions have the meanings specified, and the relevant parties to the Completed and Proposed Transactions (as defined below) will be referred to as follows:

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

“Aco” means XXXXXXXXXX, as described in Paragraph 8;

“Aco Common Shares” means the common shares of the capital stock of Aco as described in Paragraph 9;

“Aco New Common Shares” means the new common shares of the capital stock of Aco as described in Paragraph 20;

“Aco Note” means the non-interest-bearing demand promissory note to be issued by Aco to Bco, as described in Paragraph 24;

“Aco Preferred Shares” means the preferred shares of the capital stock of Aco as described in Paragraph 20;

“Aco Redemption Amount” means the redemption amount of a Aco Preferred Share as described in Paragraph 20;

“Aco Share Exchange” ” refers to the exchange by Forco4 of its Aco Common Shares for Aco New Common Shares and Aco Preferred Shares, as described in Paragraph 21;

“Act 1” means the XXXXXXXXXX, as amended;

“Act 2” means the XXXXXXXXXX, as amended;

“agreed amount” means the amount that the transferor and the transferee of an eligible property have agreed on in their joint election in accordance with subsection 85(1);

“Bco” means XXXXXXXXXX, as described in Paragraph 18;

“Bco Common Shares” means the common shares of the capital stock of Bco as described in Paragraph 18;

“Bco Note” means the non-interest-bearing demand promissory note to be issued by Bco to Aco, as described in Paragraph 25;

“Bco Preferred Shares” means the preferred shares of the capital stock of Bco as described in Paragraph 18;

“Bco Redemption Amount” means the redemption amount of a Bco Preferred Share as described in Paragraph 18;

“Business A” means the XXXXXXXXXX business unit as described in Paragraph 14;

“Business B” means the XXXXXXXXXX business unit as described in Paragraph 14;

“Business B Assets” refers to the assets of Aco that are attributable to Business B as described in Paragraph 15;

“Business B Liabilities” refers to the liabilities of Aco that are attributable to Business B as described in Paragraph 15;

“capital property” has the meaning assigned by section 54 and subsection 248(1);

“Cco” means XXXXXXXXXX, as described in Paragraph 12;

“Completed Transactions” means the transactions described in Paragraphs 17 to 19;

“CRA” means the Canada Revenue Agency;

“Dco” means XXXXXXXXXX, as described in Paragraph 17;

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

“Eco” means XXXXXXXXXX, as described in Paragraph 13;

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

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

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

“Forco1” means XXXXXXXXXX, a corporation resident in XXXXXXXXXX;

“Forco2” means XXXXXXXXXX, a corporation resident in XXXXXXXXXX;

“Forco3” means XXXXXXXXXX, a corporation resident in XXXXXXXXXX;

“Forco4” means XXXXXXXXXX, a corporation resident in XXXXXXXXXX;

“Foreign Pubco” means XXXXXXXXXX, a corporation resident in XXXXXXXXXX;

“Foreign Pubco Group” means Foreign Pubco, together with its direct and indirect subsidiaries;

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

“Paragraph” means a numbered or lettered paragraph of this letter;

“Proposed Transactions” means the transactions described in Paragraphs 20 to 26;

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

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

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

“series of transactions or events” has the meaning assigned by subsection 248(10);

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

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

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

“taxable Canadian property” has the meaning assigned by subsection 248(1);

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

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

Facts

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

1. Foreign Pubco is the parent company of the Foreign Pubco Group. Foreign Pubco is a non-resident corporation. The issued and outstanding shares of the capital stock of Foreign Pubco are widely held and publicly traded on XXXXXXXXXX stock exchanges. As of XXXXXXXXXX, the market capitalization of Foreign Pubco was approximately XXXXXXXXXX.

2. Foreign Pubco directly owns all the issued and outstanding shares of the capital stock of Forco1.

3. Forco1 directly owns all the issued and outstanding shares of the capital stock of Forco2.

4. Prior to XXXXXXXXXX, Forco2 directly owned: (i) all the issued and outstanding shares of the capital stock of Forco3; and (ii) XXXXXXXXXX percent of all the issued and outstanding shares of the capital stock of Aco.

5. Prior to XXXXXXXXXX, Forco3 directly owned: (i) all of the issued and outstanding shares of the capital stock of Forco4; and (ii) XXXXXXXXXX percent of all the issued and outstanding shares of the capital stock of Aco.

6. On XXXXXXXXXX, Forco3 merged into Forco4 with Forco4 as the surviving entity of the merger.

7. On XXXXXXXXXX, Forco2 transferred all of its shares of the capital stock of Aco to Forco4. As a result, Forco4 owns all the issued and outstanding shares of the capital stock of Aco.

8. Aco is a TCC governed by the Act 1 and has a taxation year-end of XXXXXXXXXX.

9. The issued and outstanding shares of the capital stock of Aco consist of XXXXXXXXXX common shares held by Forco4 with a PUC and ACB of $XXXXXXXXXX (the “Aco Common Shares”).

10. The Aco Common Shares are capital property to Forco4 and are not taxable Canadian property.

11. On XXXXXXXXXX, Aco acquired all the issued and outstanding shares of the capital stock of Cco for a purchase price of $XXXXXXXXXX paid in cash, representing their FMV. No shares of any entity within the Foreign Pubco Group were issued in connection with the acquisition of Cco.

12. Cco is a TCC governed by the Act 2. Cco XXXXXXXXXX.

13. Aco also owns all the issued and outstanding shares of the capital stock of Eco, a dormant entity that has filed for bankruptcy and will be dissolved upon approval of bankruptcy filings.

14. Aco has two primary business units:

(i) the XXXXXXXXXX business unit that offers XXXXXXXXXX (the “Business A”); and

(ii) the XXXXXXXXXX business unit that specializes in XXXXXXXXXX (the “Business B”).

15. Aco’s assets that are attributable to Business B consist of accounts and other receivables, depreciable assets and goodwill (collectively, the “Business B Assets”). Aco’s liabilities that are attributable to Business B consist of accounts payables, accrued liabilities and due to related parties (collectively, the “Business B Liabilities”).

16. Aco is under audit for its XXXXXXXXXX taxation year-end and is currently answering the auditor’s queries. The audit primarily focuses on XXXXXXXXXX.

Completed Transactions

17. On XXXXXXXXXX, Dco was incorporated under the Act 1 by Cco. Dco is a TCC and has a taxation year-end of XXXXXXXXXX. On the same day, Cco subscribed for XXXXXXXXXX common shares of the capital stock of Dco for cash consideration. Cco owns all the issued and outstanding shares of the capital stock of Dco.

18. On XXXXXXXXXX, Bco was incorporated under the Act 1 by Forco4. Bco is a TCC and has a taxation year-end of XXXXXXXXXX. The authorized share capital of Bco consists of an unlimited number of the following classes of shares:

a) voting, fully participating common shares (the “Bco Common Shares”); and

b) preferred shares having the following terms and conditions (the “Bco Preferred Shares”):

(i) each Bco Preferred Share is redeemable, subject to applicable law, at any time at the option of Bco at a redemption amount equal to (i) the cash consideration paid to Bco upon the issuance thereof (denominated in the currency in which such cash consideration was paid) where cash was received by Bco,; or (ii) the aggregate FMV of the consideration paid to Bco on issuance thereof, divided by the number of the Bco Preferred Shares issued as consideration therefor less any amount distributed in respect of such share on a reduction of the stated capital account, plus any declared but unpaid dividends thereon (the “Bco Redemption Amount”);

(ii) each Bco Preferred Share is retractable, subject to applicable law, at any time at the option of the holder for an amount equal to the Bco Redemption Amount, less any tax required to be deducted and withheld by Bco;

(iii) the holder of each Bco Preferred Share is entitled to non-cumulative dividends at a rate between XXXXXXXXXX% of the Bco Redemption Amount, as and when declared by the board of directors of Bco from time to time, which dividend need not also be declared on any other class of shares of Bco;

(iv) the holder of each Bco Preferred Share is entitled, upon the liquidation, dissolution or winding-up of Bco to a payment in priority to all other classes of shares of Bco of an amount equal to the Bco Redemption Amount to the extent of the value of property available under applicable law for payment to the shareholders upon liquidation, dissolution or winding-up, but is entitled to no more than the amount of that payment; and

(v) the holder of each Bco Preferred Share is not entitled to vote at meetings of shareholders of Bco, other than as provided under applicable law.

19. On XXXXXXXXXX, Forco4 subscribed for XXXXXXXXXX Bco Common Shares for cash consideration. Forco4 owns all the issued and outstanding shares of the capital stock of Bco.

Proposed Transactions

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

20. Aco will reorganize its share capital by filing articles of amendment under the Act 1 to create and authorize the issuance of the following new classes of shares:

a) an unlimited number of fully participating new common shares (the “Aco New Common Shares”) with the holder thereof entitled to XXXXXXXXXX votes per share at each meeting of the shareholders of Aco; and

b) an unlimited number of preferred shares with the following terms and conditions (the “Aco Preferred Shares”):

(i) each Aco Preferred Share is redeemable, subject to applicable law, at any time at the option of Aco for an amount equal to the aggregate FMV of Business B Assets, net of any Business B Liabilities, divided by the number of the Aco Preferred Shares issued and outstanding, plus any declared but unpaid dividends thereon (the “Aco Redemption Amount”);

(ii) each Aco Preferred Share is retractable, subject to applicable law, at any time at the option of the holder thereof for an amount equal to the Aco Redemption Amount, less any tax required to be deducted and withheld by Aco;

(iii) the holder of each Aco Preferred Share is entitled to non-cumulative dividends at a rate between XXXXXXXXXX% of the Aco Redemption Amount, as and when declared by the directors of Aco from time to time, which dividends need not also be declared on any other class of shares of Aco;

(iv) there is a provision restricting the payment of dividends on other classes of shares of Aco such that no such dividends may be paid on any other class of shares of Aco if the resulting realizable value of the net assets of Aco after payment of the dividends would be less than the aggregate Aco Redemption Amount of all of the Aco Preferred Shares then outstanding;

(v) the holder of each Aco Preferred Share is entitled, upon the liquidation, dissolution or winding-up of Aco, to a payment in priority to all other classes of shares of Aco of an amount equal to the Aco Redemption Amount to the extent of the value of property available under applicable law for payment to the shareholders upon liquidation, dissolution or winding-up, but is entitled to no more than the amount of that payment; and

(vi) the holder of each Aco Preferred Share is not entitled to vote at any meeting of the shareholders of Aco, other than as provided under applicable law.

21. Forco4 will exchange all of its Aco Common Shares in consideration for:

a) XXXXXXXXXX Aco New Common Shares having a FMV equal to the difference between the aggregate FMV of the Aco Common Shares and the aggregate FMV of the Aco Preferred Shares; and

b) XXXXXXXXXX Aco Preferred Shares having a FMV equal to the FMV of the Business B Assets, net of any Business B Liabilities, at the time of their issuance.

(the “Aco Share Exchange”)

The Aco Common Shares so exchanged will be cancelled.

Forco4 and Aco will not make a joint election under the provisions of subsection 85(1) with respect to the Aco Share Exchange.

The aggregate addition to the stated capital in respect of the Aco New Common Shares and the Aco Preferred Shares issued by Aco on the Aco Share Exchange will be equal to the aggregate PUC of the Aco Common Shares, immediately before the Aco Share Exchange. Such aggregate stated capital will be apportioned between the Aco New Common Shares and the Aco Preferred Shares in proportion to the relative aggregate FMV of such shares.

For greater certainty, the aggregate PUC of the Aco New Common Shares and the Aco Preferred Shares will be subject to the application of subsection 86(2.1).

The aggregate cost to Forco4 of the Aco New Common Shares and the Aco Preferred Shares issued by Aco on the Aco Share Exchange will be determined pursuant to paragraph 86(1)(b).

22. Forco4 will transfer all of its Aco Preferred Shares to Bco at a purchase price equal to the aggregate FMV of such shares at the time of the transfer. As consideration for the shares, Bco will issue to Forco4 XXXXXXXXXX Bco Common Shares having an aggregate FMV equal to the aggregate FMV of the Aco Preferred Shares at the time of the transfer.

For greater certainty, the purchase price paid by Bco for the Aco Preferred Shares, which is equal to the aggregate FMV of those shares at the time of the transfer, will be an amount that an arm’s length purchaser would pay for those shares.

Forco4 and Bco will not make a joint election under the provisions of subsection 85(1) with respect to the transfer.

The amount added to the stated capital of the Bco common shares will be equal to the aggregate PUC of the Aco Preferred Shares so transferred by Forco4 to Bco.

For greater certainty, the aggregate PUC of the Bco Common Shares will be subject to the application of paragraph 212.1(1.1)(b).

The aggregate cost to Forco4 of the XXXXXXXXXX Bco Common Shares acquired on the transfer will be equal to the aggregate FMV at that time of the Aco Preferred Shares so transferred by Forco4 to Bco.

23. Aco will transfer the Business B Assets to Bco. As consideration for the transfer, Bco will:

a) assume certain Business B Liabilities; and

b) issue Bco Preferred Shares having an aggregate FMV equal to the amount by which the aggregate FMV of the Business B Assets transferred to Bco exceeds the aggregate amount of the Business B Liabilities assumed by Bco.

Aco and Bco will respectively jointly elect in prescribed form and within the time referred to in subsection 85(6) to have the provisions of subsection 85(1) apply in respect of the transfer of each eligible property transferred to Bco and in respect of which Bco Preferred Shares have been issued as full or partial consideration.

The agreed amount in respect of each eligible property so transferred will be as follows:

a) in the case of capital property (other than depreciable property of a prescribed class), an amount equal to the lesser of the amounts described in subparagraphs 85(1)(c.1)(i) and (ii); and

b) in the case of depreciable property of a prescribed class, an amount equal to the least of the amounts described 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 be greater than the FMV of such property.

The amount of the Business B Liabilities assumed by the Bco, 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 in accordance with paragraph 85(1)(b). The amount of the Business B Liabilities assumed by the Bco, which are allocated to a particular property that is not subject to an election under subsection 85(1), will not exceed the FMV of such particular property.

The amount added to the stated capital account for the Bco Preferred Shares will be equal to the aggregate of: (a) the agreed amounts, in the case of each eligible property transferred to Bco; and (b) the FMV, in the case of each property transferred to Bco that is not an eligible property; less (c) the aggregate amount of the Business B Liabilities assumed by Bco. For greater certainty, the amount that will be added to the stated capital of the Bco Preferred Shares will not exceed the amount that could have been added, having regard to subsection 85(2.1).

24. Aco will redeem all of the Aco Preferred Shares held by Bco for an amount equal to the aggregate Aco Redemption Amount of such shares. As consideration therefor, Aco will issue a non-interest-bearing demand promissory note having a principal amount and FMV equal to the aggregate Aco Redemption Amount of the shares so redeemed (the “Aco Note”). Bco will accept the Aco Note in full payment of the Aco Redemption Amount in relation to the Aco Preferred Shares redeemed.

No designation will be made under subsection 89(14) with respect to the dividend deemed to arise under subsection 84(3) on the redemption of the Aco Preferred Shares.

25. Bco will redeem all of the Bco Preferred Shares held by Aco for an amount equal to the aggregate Bco Redemption Amount of such shares. As consideration therefor, Bco will issue a non-interest-bearing demand promissory note having a principal amount and FMV equal to the aggregate Bco Redemption Amount of the shares so redeemed (the “Bco Note”). Aco will accept the Bco Note in full payment of the Bco Redemption Amount in relation to the Bco Preferred Shares redeemed.

No designation will be made under subsection 89(14) with respect to the dividend deemed to arise under subsection 84(3) on the redemption of the Bco Preferred Shares.

26. Aco and Bco will enter into a set-off agreement, pursuant to which the principal amount owing by Aco to Bco under the Aco Note and the principal amount owing by Bco to Aco under the Bco Note will be set-off in full against each other. Following the set-off, each such note will be considered to be paid in full and will be cancelled.

Additional Information

27. Other than as described herein, there are no transactions that have been completed prior to the date of this letter nor are there any other transactions that are currently being contemplated that would form part of the series of transactions or events that includes the Proposed Transactions.

28. As part of the series of transactions or events that includes any of the Proposed Transactions, other than as described herein, there will not be:

a) a disposition of property described in subparagraphs 55(3)(a)(i), (iii) or (iv); or

b) a significant increase described in subparagraphs 55(3)(a)(ii) or (v).

29. None of the shares described in this letter will be at any time during the series of events or transactions that includes the Proposed Transactions:

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

b) the subject of a “dividend rental arrangement” referred to in subsection 112(2.3);

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 an obligation of the type described in subparagraph 112(2.4)(b)(i), other than an obligation of a corporation that is related (otherwise than by reason of a right referred to in paragraph 251(5)(b)) or 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).

30. None of the corporations described in this letter will be at any time during the series of events or transactions that includes the Proposed Transactions, a restricted financial institution, a specified financial institution, or a corporation described in any of paragraphs (a) to (f) of the definition of “financial intermediary corporation” in subsection 191(1).

31. The Aco Preferred Shares will not constitute taxable Canadian property at the time these shares are transferred by Forco4 to Bco, as described in Paragraph 22.

32. Following the transfer described in Paragraph 22, the Aco Preferred Shares will be capital property to Bco.

33. Following the Proposed Transactions, the Bco Common Shares will not constitute taxable Canadian property.

34. Aco and Bco will not have any balance in their ERDTOH or NERDTOH account at any time during the course of the Proposed Transactions.

35. 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 the trading price of the shares of the capital stock of Foreign Pubco. The public trading of the shares of the capital stock of Foreign Pubco will not be in any way facilitated or motivated by the Proposed Transactions. It is possible that the Proposed Transactions may be disclosed in Foreign Pubco’s regular disclosure documents.

36. The Foreign Pubco Group regularly engages in acquisitions and divestments and may, from time to time, pursue new acquisitions or divestments. These acquisitions or divestments, whether past or future, occur independently of the Proposed Transactions and are not undertaken in contemplation of the Proposed Transactions. For greater certainty, there is no intention to dispose of the shares of the capital stock of Aco, Bco or Forco4 to a person or partnership that was not a related person to Aco or Bco, as the case may be, immediately prior to such disposition.

37. The following transactions may occur before or after the Proposed Transactions. These transactions are independent of, and not contemplated in connection with, the Proposed Transactions:

a) Cco may contribute its XXXXXXXXXX assets and related liabilities to Dco in consideration for one common share of the capital stock of Dco. Employees, assets and liabilities related to XXXXXXXXXX may remain with Cco. This contribution may be completed on a tax-deferred basis.

b) Cco may be continued under the Act 1 and thereafter amalgamated with Aco.

c) Aco may contribute its XXXXXXXXXX assets, liabilities and employees associated with Business A to Dco in consideration for one common share of the capital stock of Dco. Employees, assets and liabilities related to XXXXXXXXXX may remain with Aco. This contribution may be completed on a tax-deferred basis.

d) Forco2 is contemplating the acquisition of a XXXXXXXXXX entity specializing in XXXXXXXXXX business. The acquisition is not expected to occur in XXXXXXXXXX as it is under review by the XXXXXXXXXX. If the acquisition is approved, the XXXXXXXXXX entity’s Canadian operations may be combined with Aco although specific integration steps have not yet been determined.

38. The purpose of the transactions described in paragraphs 37(a) to (c) is to position Aco as the Canadian XXXXXXXXXX entity for Business A while transferring the XXXXXXXXXX activities of Business A to Dco, thereby aligning with the Foreign Pubco Group’s operating model.

Purpose of the Proposed Transactions

39. The purpose of the Proposed Transactions is to separate Aco’s Business B from Business A so each business can better focus on its respective markets and improve growth and profitability.

Rulings given

Provided that the preceding statements constitute a complete and accurate disclosure of all relevant facts, completed and proposed transactions, additional information, and purposes of the proposed transactions, and provided that the Proposed Transactions are completed in the manner described above, and there are no other transactions which may be relevant, we confirm the following:

A. Subject to the application of subsection 69(11), provided that the appropriate joint elections are filed in the prescribed form and manner within the time limits specified in subsection 85(6), the provisions of subsection 85(1) will apply to the transfer of eligible property held by Aco to Bco as described in Paragraph 23, such that the agreed amount in respect of each transfer of eligible property will be deemed to be Aco’s proceeds of disposition and Bco’s cost of such property pursuant to paragraph 85(1)(a).

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

B. By virtue of paragraph 1102(14)(d) of the Regulations, each property which, immediately before the transfer described in Paragraph 23, is depreciable property of a prescribed class or separate prescribed class of Aco, and which is acquired by Bco on the transfer described in Paragraph 23, will be depreciable property of the same prescribed class or separate prescribed class, as the case may be, of Bco.

C. Provided that the condition specified in paragraph 1100(2.2)(f) or (g) of the Regulations is satisfied, paragraph 1100(2.2)(h) of the Regulations will apply such that no amount will be included by Bco in determining an amount for F in subsection 1100(2) of the Regulations in respect of property of a class in Schedule II of the Regulations that is property acquired by Bco from Aco, on the transfer described in Paragraph 23.

D. Subsection 84(3) will apply to:

a) the redemption of the Aco Preferred Shares held by Bco, as described in Paragraph 24, such that Aco will be deemed to have paid and Bco will be deemed to have received a dividend on the Aco Preferred Shares equal to the amount, if any, by which the amount paid by Aco on the redemption of the Aco Preferred Shares exceeds the aggregate PUC in respect of such shares immediately before such redemption; and

b) the redemption of the Bco Preferred Shares held by Aco, as described in Paragraph 25, such that Bco will be deemed to have paid and Aco will be deemed to have received a dividend on the Bco Preferred Shares equal to the amount, if any, by which the amount paid by Bco on the redemption of the Bco Preferred Shares exceeds the aggregate PUC in respect of such shares immediately before such redemption.

Any such dividend:

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

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

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

f) 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;

g) will not be subject to tax under Part IV, except to the extent provided in paragraph 186(1)(b); and

h) will not be subject to tax under Parts IV.1 and VI.1.

E. Subsection 55(2) will not apply to the taxable dividend described in Ruling D(a), provided that the result of the dividend is not to effect a significant reduction in the portion of the capital gain that, but for the dividend, would have been realized on a disposition at FMV of any share of capital stock immediately before the dividend.

F. By virtue of paragraph 55(3)(a), subsection 55(2) will not apply to the taxable dividend described in Ruling D(b), provided that as part of a series of transactions or events that includes any of the Proposed Transactions, there is no disposition or significant increase in interest that is described in any of subparagraphs 55(3)(a)(i) to (v). For greater certainty, the Proposed Transactions described herein, in and of themselves, will not be considered to result in any disposition or significant increase in interest described in subparagraphs 55(3)(a)(i) to (v).

G. The set-off and cancellation of the Aco Note held by Bco and the Bco Note held by Aco, as described in Paragraph 26, will not give rise to a “forgiven amount” within the meaning of subsections 80(1) or 80.01(1). Neither Aco nor Bco will realize any gain or incur any loss as a result of the set-off and resultant cancellation of the Aco Note or the Bco Note.

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

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

The above rulings are given subject to the limitations and qualifications set forth in Information Circular 70-6R12 issued on April 1, 2022, and are binding on the CRA provided that the Proposed Transactions described in Paragraphs 20 to 26 are completed within six months of the date of this letter, unless otherwise specified.

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

Other comments

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

a) the FMV or ACB of any property referred to herein or the stated capital or PUC in respect of any share referred to herein;

b) the balance of the GRIP, ERDTOH, NERDTOH or any other tax account of any corporation referred to herein;

c) whether any property is taxable Canadian property;

d) 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);

e) any other tax consequence relating to the facts, Completed and Proposed Transactions, additional information, or any transaction or event taking place either prior to the Completed and Proposed Transactions or subsequent to the Completed and Proposed Transactions; and

f) whether any of the Completed and 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.

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

Yours Truly,

XXXXXXXXXX.

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