2096 Ruling 9600253 - GROSS BASIS BUTTERFLY, FARM RESIDENCE, NISA

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.

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the Department.

Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle du ministère.

Principal Issues:

full butterfly-whether farm residences and rental properties are business-type assets; how to treat a NISA for purposes of the butterfly

Position:

all are business type property; XXXXXXXXXX

Reasons:

rental income had been reported as active

XXXXXXXXXX 960025

Attention: XXXXXXXXXX

XXXXXXXXXX, 1996

Dear Sirs:

Re: XXXXXXXXXX

This is in reply to your letter of XXXXXXXXXX in which you requested advance income tax rulings on behalf of the above-noted taxpayers. In your letters of XXXXXXXXXX you informed us of additional information in respect of, and amendments to, the facts and proposed transactions described in your original letter. We also acknowledge the information provided in our various telephone conversations (XXXXXXXXXX).

To the best of your knowledge and that of the taxpayers involved, none of the issues involved in this advance ruling request is being considered by a Tax Services Office or a Taxation Centre in connection with a tax return already filed and none of the issues is under objection.

Definitions

In this letter, the following terms have the meanings specified:

Unless otherwise indicated, all references to statute are to the Income Tax Act (the "Act");

"adjusted cost base", "capital property", and "proceeds of disposition" have the meanings assigned by section 54 of the Act;

"Canadian-controlled private corporation", "income of the corporation for the year from an active business" and "specified investment business" have the meanings assigned by subsection 125(7) of the Act;

"cost amount", "dividend rental arrangement", "net income stabilization account ("NISA")" and "specified financial institution" have the meanings assigned by subsection 248(1) of the Act;

"dividend refund" has the meaning assigned by subsection 129(1) of the Act;

"eligible property" has the meaning assigned by subsection 85(1.1) of the Act;

"ITAR" refers to the Income Tax Application Rules;

XXXXXXXXXX

"paid-up capital", "taxable Canadian corporation" and "taxable dividend" have the meanings assigned by subsection 89(1) of the Act;

"pre-1972 capital surplus on hand" has the meaning assigned by subsection 88(2.1) of the Act;

"refundable dividend tax on hand" has the meaning assigned by subsection 129(3) of the Act;

"related person" has the meaning assigned by subsection 251(2) of the Act; and

"valuation day" has the meaning assigned by section 24 of the ITAR.

Facts

XXXXXXXXXX is a Canadian-controlled private corporation and a taxable Canadian corporation. It was incorporated XXXXXXXXXX under the laws of XXXXXXXXXX and its fiscal year ends on XXXXXXXXXX.

The authorized share capital of XXXXXXXXXX consists of XXXXXXXXXX special non-voting preference shares and an unlimited number of common shares. The special preference shares of XXXXXXXXXX are redeemable at an amount of $XXXXXXXXXX per share and have a non-cumulative dividend rate of $XXXXXXXXXX per share per annum and rank as regards to dividend and repayment of capital in priority to all other shares of XXXXXXXXXX

The aggregate paid-up capital of the special shares and common shares is $XXXXXXXXXX and $XXXXXXXXXX respectively. The issued share capital of XXXXXXXXXX is held as follows:

Shareholder # common # special
Name shares shares

XXXXXXXXXX

All of the shares of XXXXXXXXXX represent capital property to the shareholders.

None of the shareholders has made an election under subsection 26(7) of the ITAR to deem the cost of capital property owned on December 31, 1971 to be an amount equal to its fair market value on valuation day.

None of the shareholders made an election for property owned on February 22, 1994 as allowed under subsection 110.6(19) of the Act in respect of their shares in the capital stock of XXXXXXXXXX

XXXXXXXXXX

XXXXXXXXXX interest in the shares registered in XXXXXXXXXX name passed to XXXXXXXXXX spouse, XXXXXXXXXX under XXXXXXXXXX will. No election was made under subsection 70(6.2) of the Act. Therefore, under subsection 70(6) of the Act, XXXXXXXXXX was deemed to have acquired XXXXXXXXXX shares of XXXXXXXXXX for an amount equal to XXXXXXXXXX adjusted cost base thereof.

The assets of XXXXXXXXXX consist of the following:

(i) current assets - cash, accounts receivable and inventory;
(ii) land and buildings;
(iii) equipment; and
(iv) a NISA.

The land and buildings, which represent capital property to XXXXXXXXXX include the personal residences of each of the XXXXXXXXXX The income realized from the rented dwellings has been reported as income from an active business for tax purposes. With respect to the dwelling occupied by XXXXXXXXXX a taxable benefit has been included in XXXXXXXXXX income under paragraph 6(1)(a) with respect to the value of these accommodations.

The fair market value of the land and buildings is approximately $XXXXXXXXXX The equipment has a fair market value of approximately $XXXXXXXXXX No significant change in value or types of assets is expected prior to the proposed transactions outlined below.

As of XXXXXXXXXX the balance in NISA Fund #1 was $XXXXXXXXXX and in NISA Fund #2 was $XXXXXXXXXX The NISA Administration has advised that it is technically unable to transfer XXXXXXXXXX Therefore, once all matchable entitlements have been processed to the account, XXXXXXXXXX will opt out of NISA in order to liquidate the account prior to implementing the proposed transactions described below.

The liabilities of XXXXXXXXXX consist of a bank operating loan, trade accounts and income tax payable, and XXXXXXXXXX small mortgages.

XXXXXXXXXX are all persons resident in Canada for purposes of the Act.

XXXXXXXXXX does not have any refundable dividend tax on hand and will not have any such amount at the end of the taxation year in which the proposed transactions described herein are completed.

Proposed Transactions

XXXXXXXXXX will sell its equipment to XXXXXXXXXX for an amount equal to the fair market value of the equipment. The consideration received will be cash or a promissory note payable on demand. Such promissory note will not be convertible into other property. XXXXXXXXXX will not sell the equipment so acquired to any corporation as part of the series of transactions described herein.

The inventory and accounts receivable of XXXXXXXXXX will be sold to one or more of the individual shareholders for cash or a promissory note payable on demand. Such promissory note will not be convertible into other property. These assets will not be transferred, directly or indirectly, to any corporation as part of the series of transactions described herein.

XXXXXXXXXX will incorporate a new company ("XXXXXXXXXX") under the XXXXXXXXXX will be a Canadian-controlled private corporation and a taxable Canadian corporation.

XXXXXXXXXX will incorporate a new company ("XXXXXXXXXX") under the XXXXXXXXXX will be a Canadian-controlled private corporation and a taxable Canadian corporation.

XXXXXXXXXX will incorporate a new company ("XXXXXXXXXX") under the XXXXXXXXXX will be a Canadian-controlled private corporation and a taxable Canadian corporation.

The authorized capital of each of XXXXXXXXXX will include the following classes of shares:

Class XXXXXXXXXX special shares- unlimited number, rank in priority to all other classes of shares of the company, entitled to one vote per share, non-cumulative dividends, maximum annual dividend rate of $XXXXXXXXXX per share, redeemable at the option of the corporation for $XXXXXXXXXX per share plus declared but unpaid dividends, retractable at the option of the holder for $XXXXXXXXXX per share plus declared but unpaid dividends provided that the company has the option to defer the redemption of the shares retracted evenly over a period of not more than XXXXXXXXXX.

Class XXXXXXXXXX special shares- unlimited number, rank in priority to all other shares of the company except the class XXXXXXXXXX shares, entitled to one vote per share, non-cumulative dividends, annual maximum dividend rate of $XXXXXXXXXX per share, redeemable and retractable for $XXXXXXXXXX per share plus declared but unpaid dividends.

Common shares- unlimited number, entitled to one vote per share, entitled to receive the assets of the company on liquidation, dissolution or winding-up subject to the priority of other classes of shares.

For the purposes of subsection 191(4) of the Act, the terms and conditions of the class XXXXXXXXXX special shares of XXXXXXXXXX to be issued to XXXXXXXXXX as described in paragraph 16 below will specify an amount of $XXXXXXXXXX in respect of each share. The amount to be specified in respect of each of the class XXXXXXXXXX special shares will be equal to the fair market value of the property received by XXXXXXXXXX as consideration for such share. The agreement between XXXXXXXXXX pursuant to which the Class XXXXXXXXXX special shares will be issued will also refer to the redemption price as a XXXXXXXXXX amount.

XXXXXXXXXX will sell to XXXXXXXXXX his XXXXXXXXXX common shares and XXXXXXXXXX special shares of XXXXXXXXXX which represent all of his shareholdings in XXXXXXXXXX for consideration consisting solely of XXXXXXXXXX common shares and XXXXXXXXXX class XXXXXXXXXX special shares of XXXXXXXXXX, such that the aggregate fair market value of the common and class XXXXXXXXXX special shares so issued is equal to the aggregate fair market value of the shares of XXXXXXXXXX so acquired by XXXXXXXXXX The aggregate paid-up capital of the common and class XXXXXXXXXX special shares issued by XXXXXXXXXX will be $XXXXXXXXXX and $XXXXXXXXXX respectively, which will be equal to the aggregate paid-up capital of the common and special shares, respectively, of XXXXXXXXXX being sold by XXXXXXXXXX.

XXXXXXXXXX will jointly elect, in prescribed form and within the time referred to in subsection 85(6) of the Act, to have the rules in subsection 85(1) of the Act apply to such transfer. The agreed amount will be equal to the adjusted cost base of the common shares and the class XXXXXXXXXX special shares of XXXXXXXXXX which amount will not exceed their fair market value as of the date of the sale.

XXXXXXXXXX will sell to XXXXXXXXXX her XXXXXXXXXX common shares and XXXXXXXXXX special shares of XXXXXXXXXX which represent all of her shareholdings in XXXXXXXXXX for consideration consisting solely of XXXXXXXXXX common shares and XXXXXXXXXX class XXXXXXXXXX special shares of XXXXXXXXXX such that the aggregate fair market value of the common and class XXXXXXXXXX special shares so issued is equal to the aggregate fair market value of the shares of XXXXXXXXXX so acquired by XXXXXXXXXX The aggregate paid-up capital of the common and class XXXXXXXXXX special shares of XXXXXXXXXX will be $XXXXXXXXXX and $XXXXXXXXXX respectively, which will be equal to the aggregate paid-up capital of the common and special shares, respectively, of XXXXXXXXXX being sold by XXXXXXXXXX.

XXXXXXXXXX will jointly elect, in prescribed form and within the time referred to in subsection 85(6) of the Act, to have the rules in subsection 85(1) of the Act apply to such transfer. The agreed amount will be equal to the adjusted cost base of the common shares and the class XXXXXXXXXX special shares of XXXXXXXXXX which amount will not exceed their fair market value as of the date of the sale.

XXXXXXXXXX will sell to XXXXXXXXXX their XXXXXXXXXX common shares and XXXXXXXXXX special shares of XXXXXXXXXX which represent all of their joint shareholdings in XXXXXXXXXX for consideration consisting solely of XXXXXXXXXX common shares and XXXXXXXXXX class XXXXXXXXXX special shares of XXXXXXXXXX such that the aggregate fair market value of the common and class XXXXXXXXXX special shares so issued is equal to the aggregate fair market value of the shares of XXXXXXXXXX so acquired by XXXXXXXXXX The aggregate paid-up capital of the common and class XXXXXXXXXX special shares of XXXXXXXXXX will be $XXXXXXXXXX and $XXXXXXXXXX respectively, which will be equal to the aggregate paid-up capital of the common and special shares, respectively, of XXXXXXXXXX being sold by XXXXXXXXXX.

XXXXXXXXXX will jointly elect, in prescribed form and within the time referred to in subsection 85(6) of the Act, to have the rules in subsection 85(1) of the Act apply to such transfer. The agreed amount will be equal to the adjusted cost base of the common shares and the special shares of XXXXXXXXXX which amount will not exceed their fair market value as of the date of the sale.

XXXXXXXXXX will sell to XXXXXXXXXX his XXXXXXXXXX common share and XXXXXXXXXX special shares of XXXXXXXXXX which represent all of his shareholdings in XXXXXXXXXX for consideration consisting solely of XXXXXXXXXX common share and XXXXXXXXXX class XXXXXXXXXX special shares of XXXXXXXXXX such that the aggregate fair market value of the common and class XXXXXXXXXX special shares so issued is equal to the aggregate fair market value of the shares of XXXXXXXXXX so acquired by XXXXXXXXXX The aggregate paid-up capital of the common and class XXXXXXXXXX special shares of XXXXXXXXXX will be $XXXXXXXXXX and $XXXXXXXXXX respectively, which will be equal to the aggregate paid-up capital of the common and special shares, respectively, of XXXXXXXXXX being sold by XXXXXXXXXX

XXXXXXXXXX will jointly elect, in prescribed form and within the time referred to in subsection 85(6) of the Act, to have the rules in subsection 85(1) of the Act apply to such transfer. The agreed amount will be equal to the adjusted cost base of the common shares and the special shares of XXXXXXXXXX to XXXXXXXXXX which amount will not exceed their fair market value as of the date of the sale.

The land and buildings owned by XXXXXXXXXX will be allocated into XXXXXXXXXX parcels, as follows:

XXXXXXXXXX

Immediately before the transfers of property described in paragraph 16 below, the property of XXXXXXXXXX will be classified into three types of property for the purposes of the definition of distribution in subsection 55(1) of the Act, as follows:

cash or near cash property, comprising all of the current assets of XXXXXXXXXX including any cash or demand promissory notes;

investment property, comprising all of the assets of XXXXXXXXXX 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; and

business property, comprising all of the assets of XXXXXXXXXX other than cash or near cash property, any income from which would be income from a business (other than a specified investment business), including the personal residences and the rental properties.

For greater certainty, any tax accounts, such as the balance of any refundable dividend tax on hand or capital dividend account of XXXXXXXXXX will not be considered to be property of XXXXXXXXXX for purposes hereof. Also, immediately before the transfers described in paragraph 16 below, XXXXXXXXXX will not own any property which will be considered to be investment property.

Immediately following the determination of the fair market value of the properties as described in paragraph 15 above:

XXXXXXXXXX

such that the fair market value of each such type of property of XXXXXXXXXX to be transferred to each such transferee will be equal to that proportion of the fair market value of all that type of property of XXXXXXXXXX determined immediately before the transfers referred to herein, that:

d)the fair market value, immediately before the transfer, of all shares of the capital stock of XXXXXXXXXX owned by XXXXXXXXXX as the case may be,

is of

e) the fair market value, immediately before the transfer, of all the issued shares of the capital stock of XXXXXXXXXX

As consideration therefor, each of XXXXXXXXXX will assume liabilities of XXXXXXXXXX and will issue such number of its class XXXXXXXXXX special shares to XXXXXXXXXX that will have an aggregate redemption amount, retraction value and fair market value equal to the amount by which the aggregate fair market value of the properties transferred to XXXXXXXXXX as the case may be, exceeds the aggregate of the liabilities of XXXXXXXXXX assumed by XXXXXXXXXX as the case may be. The stated capital of the class XXXXXXXXXX special shares so issued by each of XXXXXXXXXX will be equal to the cost amount of the properties transferred, less any liabilities assumed by it. The class XXXXXXXXXX special shares of XXXXXXXXXX so issued to XXXXXXXXXX will represent more than XXXXXXXXXX% of the issued share capital of XXXXXXXXXX (having full voting rights under all circumstances) and will have a fair market value of more than XXXXXXXXXX% of the fair market value of all of the issued shares of the capital stock of XXXXXXXXXX.

In respect of the property so transferred, XXXXXXXXXX as the case may be, will jointly elect in prescribed form and within the time limits referred to in subsection 85(6), to have the rules in subsection 85(1) apply to the transfer of any property that is eligible property. The amount agreed upon in such elections in respect of each of the eligible properties so transferred will be equal to:

f)in the case of capital property (other than depreciable property of a prescribed class), an amount not greater than the fair market value of such property and not less than the lesser of the amounts described in subparagraphs 85(1)(c.1)(i) and (ii); and

g)in the case of depreciable property of a prescribed class, an amount not greater than the fair market value of such property and not less than the least of the amounts described in subparagraphs 85(1)(e)(i), (ii) and (iii).

XXXXXXXXXX will each redeem the shares of its capital stock that were issued to XXXXXXXXXX as described in paragraph 16 above. Each company will issue a promissory note to XXXXXXXXXX in payment of the redemption price. Each such promissory note will be payable on demand by the holder thereof, will be non-interest bearing, will have a face value and fair market value equal to the aggregate redemption amount and fair market value of such redeemed shares, and will be assignable by the holder thereof. XXXXXXXXXX will accept such promissory note in full satisfaction of the redemption amount of such shares.

The shareholders of XXXXXXXXXX will, by special resolution, resolve to wind up and dissolve XXXXXXXXXX pursuant to the relevant section of the XXXXXXXXXX In the course of the winding-up, the promissory notes issued by XXXXXXXXXX as described in paragraph 17 above, will be distributed to the issuing company and cancelled.

In the event that XXXXXXXXXX has a balance in its capital dividend account at such time, XXXXXXXXXX will, prior to the distribution of such notes, elect pursuant to subsection 83(2) of the Act, in prescribed manner and prescribed form, in respect of an amount not exceeding the balance in its capital dividend account.

As a result of the assignment and distribution of the above notes, the obligations under the notes will be extinguished.

All property of XXXXXXXXXX will be distributed and all liabilities of XXXXXXXXXX will be discharged. Articles of Dissolution will then be executed and will be filed pursuant to the XXXXXXXXXX. The shares of XXXXXXXXXX will be cancelled and XXXXXXXXXX will be dissolved.

Additional Information

None of XXXXXXXXXX is or will be, at the time the proposed transactions described above are implemented, a specified financial institution;

none of the shares of XXXXXXXXXX has been or will be subject to a guarantee agreement that is given by a specified financial institution, for any of the purposes described in subsection 112(2.2);

none of the shares of XXXXXXXXXX is subject to an "undertaking" (as that term is described in subsection 112(2.4) of the Act) that has been secured, in whole or in part, either directly or indirectly in any manner whatever, by any property, and none of the XXXXXXXXXX shares has been or will be acquired as part of a transaction or event or series of transactions or events of the type described in subsection 112(2.5) of the Act; and

none of the shares of XXXXXXXXXX will be the subject of a dividend rental arrangement.

Except as described in this letter, or in the ordinary course of business, no property has been or will be acquired by XXXXXXXXXX and no liabilities have been or will be incurred by XXXXXXXXXX in contemplation of the proposed transactions described above.

Other than as described herein, no significant transactions have been completed in contemplation of the proposed transactions described herein and none are contemplated after the proposed transactions are completed.

Purpose of the Proposed Transactions

The purpose of the proposed transactions is to distribute the farm land and buildings of XXXXXXXXXX on a pro rata basis to XXXXXXXXXX in order to permit XXXXXXXXXX to separate their respective business interests. XXXXXXXXXX.

Rulings

Provided that the preceding statements constitute a complete and accurate disclosure of all the relevant facts, proposed transactions, additional information and the purpose of the proposed transactions, and provided that the proposed transactions are completed in the manner described above, our rulings are as follows:

Subject to the application of the provisions of subsections 20(1.2) and 26(5) of the ITAR and to the application of paragraph 88(2.2)(b) of the Act, which applies for the purposes stated in the preamble to subsection 88(2.2) of the Act, and subject also to the application of subsection 85(5.1) of the Act as it may apply to the transfers referred to in (e), (f) and (g) herein, the provisions of subsection 85(1) will apply to:

the sale of the XXXXXXXXXX shares in XXXXXXXXXX by XXXXXXXXXX as described in paragraph 10 above;

the sale of the XXXXXXXXXX shares in XXXXXXXXXX by XXXXXXXXXX as described in paragraph 11 above;

the sale of the XXXXXXXXXX shares in XXXXXXXXXX by XXXXXXXXXX as described in paragraph 12 above;

the sale of the XXXXXXXXXX shares in XXXXXXXXXX by XXXXXXXXXX as described in paragraph 13 above;

the transfer of each eligible property by XXXXXXXXXX to XXXXXXXXXX which is the object of the election as described in paragraph 16 above;

the transfer of each eligible property by XXXXXXXXXX to XXXXXXXXXX which is the object of the election as described in paragraph 16 above;

the transfer of each eligible property by XXXXXXXXXX to XXXXXXXXXX which is the object of the election as described in paragraph 16 above;

such that the agreed amounts in respect of each such transfer shall be deemed to be the transferor's proceeds of disposition and the transferee's cost thereof pursuant to paragraph 85(1)(a) of the Act.

For the purposes of each joint election described in paragraph 16 above, the reference to "the undepreciated capital cost to the taxpayer of all the property of that class immediately before the disposition ..." in subparagraph 85(1)(e)(i) will be read to mean the proportion of the undepreciated capital cost to the taxpayer of all the property of that class that the fair market value of the asset immediately before the disposition is of the fair market value of all property of that class immediately before the disposition.

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

The application of paragraph 84.1(1)(a) of the Act to the issue of:

the common and class XXXXXXXXXX special shares of XXXXXXXXXX as described in paragraph 10 above;

the common and class XXXXXXXXXX special shares of XXXXXXXXXX as described in paragraph 11 above;

the common and class XXXXXXXXXX special shares of XXXXXXXXXX as described in paragraph 12 above;

the common and class XXXXXXXXXX special shares of XXXXXXXXXX as described in paragraph 13 above;

will not result in a reduction of the paid-up capital of the common and class XXXXXXXXXX special shares of XXXXXXXXXX as the case may be, so issued.

As a result of the redemption by XXXXXXXXXX of their class XXXXXXXXXX special shares held by XXXXXXXXXX and as a result of the distributions by XXXXXXXXXX in the course of its winding-up, as described in paragraphs 17 and 18 above:

By virtue of paragraph 84(3)(a) and paragraph 84(3)(b), each of XXXXXXXXXX will be deemed to have paid and XXXXXXXXXX will be deemed to have received a taxable dividend equal to the amount by which the amount paid in respect of the redemption of the XXXXXXXXXX class XXXXXXXXXX special shares, as the case may be, exceeds the paid-up capital thereof.

Pursuant to paragraph 88(2)(b) and subsection 84(2), but subject to (ii) to (iv) herein, each of XXXXXXXXXX will be deemed to have received a dividend (the "winding-up dividend") on its common shares of XXXXXXXXXX equal to the proportion of the amount by which the aggregate fair market value of the property of XXXXXXXXXX distributed by XXXXXXXXXX as the case may be, on its winding-up as consideration for the cancellation of its common shares, exceeds the paid-up capital of such shares, that the number of shares held by each of XXXXXXXXXX is of the number of shares of that class that are cancelled.

Pursuant to subparagraph 88(2)(b)(i), such portion of the winding-up dividend referred to in (b)(i) as does not exceed XXXXXXXXXX capital dividend account determined immediately before the payment of the winding-up dividend shall be deemed, for the purposes of the subsection 83(2) election referred to in paragraph 18, to be the full amount of a separate dividend.

Pursuant to subparagraph 88(2)(b)(ii), the portion of the winding-up dividend that is equal to the lesser of:

XXXXXXXXXX pre-1972 capital surplus on hand as determined immediately before the payment of the winding-up dividend, and

the amount by which the winding-up dividend exceeds the portion thereof in respect of which XXXXXXXXXX will elect under subsection 83(2)

shall be deemed not to be a dividend.

Pursuant to subparagraph 88(2)(b)(iii), the winding-up dividend, to the extent that it exceeds the portion thereof referred to in (ii) herein that is deemed to be a separate dividend and the portion referred to in (iii) herein that is deemed not to be a dividend, shall be deemed to be a separate dividend that is a taxable dividend.

By virtue of subsection 186(4), each of XXXXXXXXXX will be connected with XXXXXXXXXX Provided that each of XXXXXXXXXX as the case may be, is not entitled to a dividend refund in respect of its taxation year in which each of XXXXXXXXXX as the case may be, is deemed to pay the dividend referred to in (a) above, XXXXXXXXXX will not be subject to Part IV tax under subsection 186(1) in respect of such dividend;

By virtue of subsection 186(4), XXXXXXXXXX will be connected with each of XXXXXXXXXX Provided that XXXXXXXXXX is not entitled to a dividend refund in respect of its taxation year in which it is deemed to pay the dividend referred to in (b)(iv) above, XXXXXXXXXX will not be subject to Part IV tax under subsection 186(1) in respect of such dividend.

The taxable dividends deemed to have been received by XXXXXXXXXX on the redemption of the class XXXXXXXXXX special shares of XXXXXXXXXX and by each of XXXXXXXXXX as a result of the winding-up of XXXXXXXXXX respectively, which are described in paragraphs C(a) and C(b)(iv) above will:

be deductible by the recipient pursuant to subsection 112(1) of the Act 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(2.2), (2.3) or (2.4) of the Act; and

be excluded in computing the proceeds of disposition of the shares so redeemed or purchased for cancellation by virtue of paragraph (j) of the definition of "proceeds of disposition".

By virtue of the definition of "substantial interest" as set out under paragraph 191(2)(a) of the Act, XXXXXXXXXX will have a substantial interest in each of XXXXXXXXXX immediately before the redemption of the XXXXXXXXXX class XXXXXXXXXX special shares and the XXXXXXXXXX class XXXXXXXXXX special shares as described in paragraph 17 above. Consequently, no tax will be payable under either section 187.2 or section 191.1 in respect of the dividend deemed to have been paid by each of XXXXXXXXXX to XXXXXXXXXX upon the redemption of its class XXXXXXXXXX special shares since each such dividend will be an "excepted dividend" within the meaning of paragraph (b) of the definition of "excepted dividend" in section 187.1 in the capacity of XXXXXXXXXX as the recipient of the particular dividend, and shall be an "excluded dividend" in subsection 191(1) in the capacity of each of XXXXXXXXXX as the payer of the particular dividend.

Provided that the amount paid on the redemption of the class XXXXXXXXXX special shares of XXXXXXXXXX is equal to the amount specified in respect of such shares as described in paragraph 9 above, by virtue of subsection 191(4) no tax will be payable under either section 187.2 or section 191.1 in respect of the dividend deemed to have been paid by XXXXXXXXXX to XXXXXXXXXX upon the redemption of its class XXXXXXXXXX special shares as described in paragraph 17 above since each such dividend will be an "excepted dividend" within the meaning of paragraph (b) of the definition of "excepted dividend" in section 187.1 in the capacity of XXXXXXXXXX as the recipient of the particular dividend, and shall be an "excluded dividend" in subsection 191(1) in the capacity of XXXXXXXXXX as the payer of the particular dividend.

By virtue of the definition of "substantial interest" as set out under paragraph 191(2)(a) of the Act, each of XXXXXXXXXX will have a substantial interest in XXXXXXXXXX immediately before the distribution of their notes as described in paragraph 18 above. Consequently, no tax will be payable under either section 187.2 or section 191.1 in respect of the dividend deemed to have been paid by XXXXXXXXXX to each of XXXXXXXXXX upon the distribution of such notes since each such dividend will be an "excepted dividend" within the meaning of paragraph (b) of the definition of "excepted dividend" in section 187.1 in the capacity of XXXXXXXXXX as the recipient of the particular dividend, and shall be an "excluded dividend" in subsection 191(1) in the capacity of each of XXXXXXXXXX as the payer of the particular dividend.

Provided that as part of the series of transactions or events that includes the proposed transactions described herein, there is not:

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

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

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

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

which has not been described herein, then by virtue of paragraph 55(3)(b) of the Act, subsection 55(2) of the Act will not apply to the taxable dividends referred to in the rulings given in C above and, for greater certainty, subsection 55(3.1) of the Act will not apply to deny the exemption under paragraph 55(3)(b) of the Act.

The assignment and cancellation of the promissory notes, as described in paragraph 18 above, will not give rise to a "forgiven amount" within the meaning of subsections 80(1) or 80.01(1) of the Act.

The provisions of subsections 15(1), 56(2), 56(4) and 246(1) of the Act will not apply to any of the proposed transactions described in paragraphs 7 through 18 above, in and of themselves.

As a result of the proposed transactions, in and of themselves, subsection 245(2) of the Act will not be applied to redetermine the tax consequences as described in the rulings given.

These rulings are given subject to the limitations and qualifications set out in Information Circular 70-6R2 issued by Revenue Canada, Taxation on September 28, 1990 and are binding provided that the proposed transactions are completed by XXXXXXXXXX.

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

Comments

Nothing in this ruling should be construed as implying that Revenue Canada, Customs, Excise and Taxation has agreed to or reviewed:

(a)the determination of the fair market value, adjusted cost base or valuation day value of any particular asset, or the paid-up capital of any shares referred to herein; or

(b)any tax consequences relating to the facts and proposed transactions described herein other than those specifically described in the rulings given above.

Yours truly,

for Director
Reorganizations and International Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch