30 November 1995 Ruling 9620343 - XXXXXXXXXX BUTERFLY RULING (NO NEW ISSUES)

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:

Standard Double-Wing Butterfly. No new issues.

Position:N/A

Reasons:N/A

XXXXXXXXXX 962034

Attention: XXXXXXXXXX

XXXXXXXXXX, 1996

Dear Sirs:

Re: XXXXXXXXXX
Advance Income Tax Ruling

We are writing in response to your letter of XXXXXXXXXX wherein you requested an advance income tax ruling on behalf of the above-referenced taxpayers. In your letters of XXXXXXXXXX you provided additional information in respect of the facts and proposed transactions described in your original letter. We also acknowledge the information provided during our various telephone conversations (XXXXXXXXXX).

To the best of your knowledge and that of the taxpayers involved:

(i)none of the issues involved in the requested rulings is being considered by a Tax Services Office or a Taxation Centre in connection with a tax return already filed, and

(ii)none of the issues involved in the requested rulings is the subject of any notice of objection or is under appeal.

Unless otherwise stated all references to a statute are to the Income Tax Act (Canada), R.S.C. 1985 (5th Supp.), c.1, as amended, (the "Act").

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

"adjusted cost base" ("ACB") has the meaning assigned to that term in section 54 of the Act;

(b)"Butterfly Transfer" means the pro-rata transfer of properties described in paragraph 20 below;

(c)"Canadian-controlled private corporation" ("CCPC") has the meaning assigned by subsection 125(7) of the Act;

(d)"capital dividend account" ("CDA") has the meaning assigned by subsection 89(1) of the Act;

(e)"capital property" has the meaning assigned to that term in section 54 of the Act;

(f)"depreciable property" has the meaning assigned by subsection 13(21) of the Act;

(g)"dividend refund" has the meaning assigned to that term in subsection 129(1) of the Act;

(h)"eligible property" has the meaning assigned to that term in subsection 85(1.1) of the Act;

(i)"paid-up capital" ("PUC") has the meaning assigned to that term by subsection 89(1) of the Act;

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

(k)"specified financial institution" ("SFI") has the meaning assigned to that term by subsection 248(1) of the Act;

(l)"taxable Canadian corporation" ("TCC") has the meaning assigned to that term by subsection 89(1) of the Act;

(m)"taxable dividend" has the meaning assigned to that term by subsection 89(1) of the Act; and

(n)"valuation day" ("V-Day") has the meaning assigned by section 24 of the Income Tax Application Rules.

Our understanding of the facts, proposed transactions and purpose of the proposed transactions is as follows:

FACTS

1. XXXXXXXXXX are the adult children of the late XXXXXXXXXX who died XXXXXXXXXX. XXXXXXXXXX are all residents of Canada. XXXXXXXXXX was also a resident of Canada at his date of death.

2.XXXXXXXXXX is a CCPC and a TCC. XXXXXXXXXX was incorporated under the Canada Corporations Act on XXXXXXXXXX and continued under the Canada Business Corporations Act ("CBCA") in XXXXXXXXXX. It has a XXXXXXXXXX year end and files its T2 returns at the XXXXXXXXXX Taxation Centre.

XXXXXXXXXX had been used as an estate freeze vehicle by XXXXXXXXXX in favour of his XXXXXXXXXX children. At XXXXXXXXXX its assets consisted mainly of cash or near cash property, marketable securities and XXXXXXXXXX Class XXXXXXXXXX common shares of XXXXXXXXXX, representing XXXXXXXXXX% of the common share equity and XXXXXXXXXX% of the votes of that corporation. XXXXXXXXXX major liability is a $XXXXXXXXXX demand note payable to its sister corporation XXXXXXXXXX

At XXXXXXXXXX had RDTOH of $XXXXXXXXXX (after taking into account dividend refunds for the year then ended) and a CDA estimated at $XXXXXXXXXX

Traditionally, annual dividends received from XXXXXXXXXX have been used to redeem XXXXXXXXXX preferred shares of XXXXXXXXXX held by XXXXXXXXXX. The last such redemption occurred in XXXXXXXXXX

3.The authorized share capital of XXXXXXXXXX is as follows:

1st preferred shares -XXXXXXXXXX authorized
-redeemable at $XXXXXXXXXX each, with non-cumulative dividends equal to XXXXXXXXXX% per share
-one vote per share

2nd preferred share -XXXXXXXXXX authorized
-redeemable at $XXXXXXXXXX per share, non-participating
-one vote per share

3rd preferred shares -unlimited number authorized
-redeemable at $XXXXXXXXXX per share, with non-cumulative dividends equal to $XXXXXXXXXX per share
-non-voting

common shares
-unlimited number authorized
-one vote per share

4.At the present time the issued and outstanding shares of XXXXXXXXXX are as follows and are held equally by XXXXXXXXXX:

Class of Shares		# Issued		PUC

XXXXXXXXXX

The 1st and 2nd preferred shares have an ACB and fair market value equal to their PUC. The common shares were acquired by the shareholders in XXXXXXXXXX and have an ACB (based upon V-Day) of $XXXXXXXXXX ($XXXXXXXXXX for each shareholder). The fair market value of the common shares is considerably in excess of ACB.

The issued and outstanding share capital of XXXXXXXXXX represents capital property to each of its shareholders. None of the issued and outstanding shares of XXXXXXXXXX was acquired by its current holders in contemplation of the proposed transactions described in paragraphs 11 to 23 below.

5.XXXXXXXXXX is a CCPC and a TCC. It was incorporated under the CBCA on XXXXXXXXXX. It has a XXXXXXXXXX year end and files its T2 returns at the XXXXXXXXXX Taxation Centre.

XXXXXXXXXX was formed as an estate freeze vehicle by XXXXXXXXXX in favour of his XXXXXXXXXX children and served as his investment holding company until his death. Its assets consist of mainly cash and near cash property, portfolio investments and a $XXXXXXXXXX receivable from XXXXXXXXXX. XXXXXXXXXX also owns XXXXXXXXXX Class XXXXXXXXXX and XXXXXXXXXX Class XXXXXXXXXX common shares of XXXXXXXXXX representing XXXXXXXXXX% of the outstanding common share capital and XXXXXXXXXX% of the votes of XXXXXXXXXX. Its major liability is the balance of a note payable to XXXXXXXXXX estate in the amount of $XXXXXXXXXX as described in paragraph 9 below.

Dividends were regularly paid to XXXXXXXXXX up to his death. At its year end on XXXXXXXXXX had a RDTOH balance of approximately $XXXXXXXXXX and an estimated CDA of $XXXXXXXXXX

6.The authorized share capital of XXXXXXXXXX is as follows:

first preferred shares -XXXXXXXXXX authorized
-$XXXXXXXXXX fixed cumulative cash dividend
-non-participating, redeemable at the amount paid thereon
-non-voting

second preferred shares-unlimited number authorized
-XXXXXXXXXX% non-cumulative dividend
-non-participating, redeemable at the amount paid thereon
-entitled to one vote per share

third preferred shares-unlimited number authorized
-XXXXXXXXXX% non-cumulative dividend
-non-participating, redeemable at the amount paid thereon
-entitled to XXXXXXXXXX votes per share

fourth preferred shares-unlimited number authorized
-XXXXXXXXXX non-cumulative dividend
-non-participating, redeemable at the amount paid thereon
-non-voting

fifth preferred shares-unlimited number authorized
- XXXXXXXXXX% non-cumulative dividend
-non-participating, redeemable at the amount paid thereon
-entitled to one vote per share

common shares -unlimited number authorized
-participating
-entitled to one vote per share

7.At the present time the issued and outstanding shares of XXXXXXXXXX are as follows and are held equally by XXXXXXXXXX:

Class of Shares			# Issued		    	 	PUC

XXXXXXXXXX

The third preferred shares and the fourth preferred shares have a PUC, ACB and fair market value of $XXXXXXXXXX and $XXXXXXXXXX, respectively. The common shares have a PUC and an ACB of $XXXXXXXXXX. The fair market value of the common shares is considerably in excess of their ACB.

The issued and outstanding share capital of XXXXXXXXXX represents capital property to each of its shareholders. None of the issued and outstanding shares of XXXXXXXXXX was acquired by its current holders in contemplation of the proposed transactions described in paragraphs 11 to 23 below.

8.XXXXXXXXXX is a TCC and a CCPC and has carried on an active business in Canada since XXXXXXXXXX. XXXXXXXXXX carries on XXXXXXXXXX operations in Canada and outside Canada through subsidiaries. Its head office is in XXXXXXXXXX. Its common share capital, other than that owned by XXXXXXXXXX, is primarily held, either directly or indirectly, by XXXXXXXXXX together with other of their relatives. The largest shareholder outside the "family" is XXXXXXXXXX which owns approximately XXXXXXXXXX% of the common share equity representing approximately XXXXXXXXXX% of the votes. XXXXXXXXXX has a year end at XXXXXXXXXX and files its T2 returns at the XXXXXXXXXX Taxation Centre under corporate account # XXXXXXXXXX.

With respect to Part IV of the Act and more particularly dividends paid by XXXXXXXXXX is connected to both XXXXXXXXXX, as that term is defined in subsection 186(4) of the Act.

XXXXXXXXXX authorized share capital as at XXXXXXXXXX includes an unlimited number of Class XXXXXXXXXX and Class XXXXXXXXXX common shares entitled to XXXXXXXXXX votes per share and one vote per share, respectively. At the present time XXXXXXXXXX issued and outstanding share capital consists of XXXXXXXXXX Class XXXXXXXXXX common shares and XXXXXXXXXX Class XXXXXXXXXX common shares with a PUC of XXXXXXXXXX, respectively.

XXXXXXXXXX has consistently paid dividends over the years on its common shares and/or has supplemented these dividends with redemptions of preferred shares which have now all been redeemed. On XXXXXXXXXX, an offer was made to the Class XXXXXXXXXX common shareholders to purchase XXXXXXXXXX Class XXXXXXXXXX common shares at a price of $XXXXXXXXXX per share. The offer was taken up by shareholders (other than XXXXXXXXXX) and the XXXXXXXXXX shares were purchased for cancellation on XXXXXXXXXX. XXXXXXXXXX has paid its annual dividend in XXXXXXXXXX. It is planned that annual dividends, supplemented with the purchase for cancellation of Class XXXXXXXXXX common shares, will continue in the future. This will depend of course upon business conditions, the resources and obligations of the company and the approval of the Board of Directors.

9.At the time of his death, XXXXXXXXXX owned XXXXXXXXXX 3rd preferred shares of XXXXXXXXXX and XXXXXXXXXX second preferred shares, XXXXXXXXXX third preferred shares and XXXXXXXXXX fifth preferred shares of XXXXXXXXXX.

Under the terms of XXXXXXXXXX will dated XXXXXXXXXX were appointed Executors/Administrator ("trustees") of XXXXXXXXXX estate. His will provided that:

XXXXXXXXXX

In the case of the fifth preferred shares of XXXXXXXXXX, a significant capital gain arose on XXXXXXXXXX final tax return. As a result, the executors acted within the first year of the estate, as described above, to create a capital loss on the shares so that the capital loss could be carried back to XXXXXXXXXX final tax return in accordance with subsection 164(6) of the Act.

In the case of the second preferred shares of XXXXXXXXXX of these shares were originally issued to XXXXXXXXXX on the formation of XXXXXXXXXX. The PUC of the XXXXXXXXXX second preferred shares was $XXXXXXXXXX which was equal to the fair market value of the investment portfolio transferred to XXXXXXXXXX at that time. On XXXXXXXXXX transferred XXXXXXXXXX of his second preferred shares of XXXXXXXXXX to his spouse. On XXXXXXXXXX a capital dividend was declared payable by XXXXXXXXXX on its preferred shares in the amount of $XXXXXXXXXX. This liability was extinguished by XXXXXXXXXX by the issuance of XXXXXXXXXX second preferred shares having a PUC of $XXXXXXXXXX. Accordingly, at XXXXXXXXXX death, the issued and outstanding second preferred shares numbered XXXXXXXXXX and had a PUC and fair market value of $XXXXXXXXXX. The executors acted in accordance with the wishes of the residual beneficiaries to redeem such shares and distribute the proceeds to them as quickly as possible.

The redemption of the second preferred shares and the fifth preferred shares of XXXXXXXXXX held by XXXXXXXXXX estate, as described herein, did not occur in contemplation of nor do they form part of the same series of transactions or events in which the dividends described in paragraphs 22 and 23 above were received. These redemptions occurred as a result of the death of XXXXXXXXXX and would have occurred regardless of the Butterfly Transfer.

These redemptions were part of a separate series of transactions or events dealing with the wind up of the estate of XXXXXXXXXX as it related to the shares of XXXXXXXXXX which were owned by XXXXXXXXXX at the time of his death. The transfer from the estate on XXXXXXXXXX of the third preferred shares and the redemption of the second preferred shares for a note payable on the same date, as described herein, completed the involvement of the estate with the shares of XXXXXXXXXX.

There was never any intention on the part of the executors, XXXXXXXXXX, to have XXXXXXXXXX as continuing shareholders of their holding company, XXXXXXXXXX, which XXXXXXXXXX.

The decision was made to redeem the shares for a note payable rather than redeeming the shares periodically as funds became available, so as to avoid having to repeat all of the corporate steps and resolutions necessary every time a portion of the outstanding shares were called for redemption.

Furthermore, should XXXXXXXXXX wish to pay themselves dividends on their third preferred shares or common shares they would have had to pay a XXXXXXXXXX% dividend first on the second preferred shares (approximately $XXXXXXXXXX). This dividend would have accrued to the residual beneficiaries, XXXXXXXXXX.

10.With respect to XXXXXXXXXX have had equal ownership and control of this company since XXXXXXXXXX However, they have always agreed upon dividend policy, redemption policy and investment policy.

XXXXXXXXXX major asset has always been a significant share interest in XXXXXXXXXX. XXXXXXXXXX have always acted together with respect to this investment and have voted the shares to elect a Board of Directors of XXXXXXXXXX, which has a majority of non-family members ( XXXXXXXXXX ).

With respect to XXXXXXXXXX have been equal shareholders since its incorporation in XXXXXXXXXX. However, through the third preferred shares (each share has XXXXXXXXXX votes) XXXXXXXXXX controlled the company until his death in XXXXXXXXXX. Under the terms of XXXXXXXXXX will, these voting shares were bequeathed equally to XXXXXXXXXX. Furthermore, XXXXXXXXXX were appointed the executors under XXXXXXXXXX will (XXXXXXXXXX was also named an executor but only with respect to XXXXXXXXXX dealing with the disposition of XXXXXXXXXX 3rd preference shares to XXXXXXXXXX). The third preferred shares were actually transferred from the estate to XXXXXXXXXX. Accordingly, indirectly as executors of the estate for their own benefit and subsequently from XXXXXXXXXX have controlled XXXXXXXXXX.

Again, XXXXXXXXXX have acted together as a group without dissention to control XXXXXXXXXX and to redeem its second and third preference shares so as to wind up XXXXXXXXXX estate. Apart from marketable securities, XXXXXXXXXX major asset is shares in XXXXXXXXXX. Again XXXXXXXXXX have acted together since XXXXXXXXXX death to vote the investment in XXXXXXXXXX in the same manner as with XXXXXXXXXX.

In summary, for purposes of subsection 55(3.1)(a)(i) of the Act, regardless of paragraph 55(5)(e) of the Act, XXXXXXXXXX are related corporations since each corporation is controlled by the same group of persons, being XXXXXXXXXX In this regard, since XXXXXXXXXX death, the group that controls XXXXXXXXXX have always acted in concert to control these two corporations and it is fully intended that the same group will act in concert to control Amalco for its short period of existence. Accordingly, in accordance with subsection 251(3.1) of the Act, Amalco is deemed to be related to both XXXXXXXXXX. The amalgamation of XXXXXXXXXX will therefore be an amalgamation described in subparagraph 55(3.1)(a)(i) of the Act.

PROPOSED TRANSACTIONS

11.XXXXXXXXXX (hereinafter, at times, referred to as the "predecessor corporations") will amalgamate under the provisions of the CBCA to form a new corporation, Amalco, in such a manner that

a)all the property (except amounts receivable from any predecessor corporation) of the predecessor corporations immediately before the merger will become property of Amalco by virtue of the merger;

b)all the liabilities (except amounts payable to any predecessor corporation) of the predecessor corporations immediately before the merger will become liabilities of Amalco by virtue of the merger; and

c)all the shareholders of the predecessor corporations immediately before the merger will receive shares of the capital stock of Amalco by virtue of the merger.

As a result of the amalgamation, all debts owing between the predecessor corporations, including the $XXXXXXXXXX debt owing by XXXXXXXXXX, will be cancelled and Amalco will assume all debts of the predecessor corporations owing to third parties. Amalco's authorized share capital will consist of an unlimited number of voting common shares, and an unlimited number of special shares. The special shares will be redeemable and retractible at $XXXXXXXXXX per share.

XXXXXXXXXX will each receive XXXXXXXXXX voting common shares of Amalco for each of their XXXXXXXXXX common shares of XXXXXXXXXX and XXXXXXXXXX common shares of XXXXXXXXXX. Amalco will add to the stated capital account maintained for its voting common shares an amount equal to the aggregate PUC of XXXXXXXXXX common share capital. In addition, XXXXXXXXXX will each receive XXXXXXXXXX special shares for their preferred shares of XXXXXXXXXX as follows:

XXXXXXXXXX

The amount added to the stated capital account maintained for the special shares of Amalco will not exceed the aggregate of the PUC of the preferred shares of the predecessor corporations immediately before the amalgamation.

Other than the share consideration described above, no other consideration will be received by XXXXXXXXXX as a consequence of the amalgamation. The issued and outstanding share capital of Amalco will represent capital property to each of its shareholders.

12.Each of XXXXXXXXXX will incorporate a new corporation, XXXXXXXXXX, under the CBCA. Each new corporation will be a CCPC and a TCC.

13.The authorized share capital of XXXXXXXXXX will consist of:

a)an unlimited number of common shares, one vote per share;

b)an unlimited number of Class XXXXXXXXXX preferred shares, one vote per share, redeemable and retractable, bearing a non-cumulative dividend rate of XXXXXXXXXX% per annum on the redemption price, and a redemption price equal to the consideration for which they are issued; and

c)XXXXXXXXXX Class XXXXXXXXXX preferred shares, one vote per share, redeemable and retractable, bearing a non-cumulative dividend rate of XXXXXXXXXX% per annum on the redemption price, and an aggregate redemption price equal to the fair market value of the property transferred to XXXXXXXXXX from Amalco less the amount of liabilities assumed in the Butterfly Transfer.

14.XXXXXXXXXX will transfer the XXXXXXXXXX common shares and the XXXXXXXXXX special shares of Amalco that he owns to XXXXXXXXXX. As sole consideration for each such transfer, XXXXXXXXXX will issue to XXXXXXXXXX, respectively, XXXXXXXXXX common shares and XXXXXXXXXX Class XXXXXXXXXX preferred shares that are redeemable and retractable in aggregate at an amount equal to the fair market value of the special shares of Amalco transferred therefor. XXXXXXXXXX will add to the stated capital account maintained for its Class XXXXXXXXXX preferred shares an amount equal to the PUC of the Amalco special shares transferred and will add to the stated capital account maintained for its common shares an amount equal to the PUC of the common shares of Amalco transferred.

XXXXXXXXXX will elect, jointly and in prescribed form and within the time limits referred to in subsection 85(6) of the Act, to have the rules in subsection 85(1) of the Act apply to the transfer of the common shares of Amalco as described herein to XXXXXXXXXX. The agreed amount in respect of the shares so transferred will be equal to the lesser of the amounts described in subparagraph 85(1)(c.1)(i) and (ii) of the Act.

15.The authorized share capital of XXXXXXXXXX will consist of:

a)an unlimited number of common shares, one vote per share;

b)an unlimited number of Class XXXXXXXXXX preferred shares, one vote per share, redeemable and retractable, bearing a non-cumulative dividend rate of XXXXXXXXXX% per annum on the redemption price, and a redemption price equal to the consideration for which they are issued; and

c)XXXXXXXXXX Class XXXXXXXXXX preferred shares, one vote per share, redeemable and retractable, bearing a non-cumulative dividend rate of XXXXXXXXXX% per annum on the redemption price, and an aggregate redemption price equal to the fair market value of the property transferred to XXXXXXXXXX from Amalco less the amount of liabilities assumed in the Butterfly Transfer.

16.XXXXXXXXXX will transfer the XXXXXXXXXX common shares and the XXXXXXXXXX special shares of Amalco that he owns to XXXXXXXXXX. As sole consideration for each such transfer, XXXXXXXXXX will issue to XXXXXXXXXX, respectively, XXXXXXXXXX common shares and XXXXXXXXXX Class XXXXXXXXXX preferred shares that are redeemable and retractable in aggregate at an amount equal to the fair market value of the special shares of Amalco transferred therefor. XXXXXXXXXX will add to the stated capital account maintained for its Class XXXXXXXXXX preferred shares an amount equal to the PUC of the Amalco special shares transferred and will add to the stated capital account maintained for its common shares an amount equal to the PUC of the common shares of Amalco transferred.

XXXXXXXXXX will elect, jointly and in prescribed form and within the time limits referred to in subsection 85(6) of the Act, to have the rules in subsection 85(1) of the Act apply to the transfer of the common shares of Amalco as described herein to XXXXXXXXXX. The agreed amount in respect of the shares so transferred will be equal to the lesser of the amounts described in subparagraph 85(1)(c.1)(i) and (ii) of the Act.

17.The authorized share capital of XXXXXXXXXX will consist of:

a)an unlimited number of common shares, one vote per share;

b)an unlimited number of Class XXXXXXXXXX preferred shares, one vote per share, redeemable and retractable, bearing a non-cumulative dividend rate of XXXXXXXXXX% per annum on the redemption price, and a redemption price equal to the consideration for which they are issued; and

c)XXXXXXXXXX Class XXXXXXXXXX preferred shares, one vote per share, redeemable and retractable, bearing a non-cumulative dividend rate of XXXXXXXXXX% per annum on the redemption price, and an aggregate redemption price equal to the fair market value of the property transferred to XXXXXXXXXX from Amalco less the amount of liabilities assumed in the Butterfly Transfer.

18.XXXXXXXXXX will transfer the XXXXXXXXXX common shares and the XXXXXXXXXX special shares of Amalco that she owns to XXXXXXXXXX. As sole consideration for each such transfer, XXXXXXXXXX will issue to XXXXXXXXXX, respectively, XXXXXXXXXX common shares and XXXXXXXXXX Class XXXXXXXXXX preferred shares that are redeemable and retractable in aggregate at an amount equal to the fair market value of the special shares of Amalco transferred therefor. XXXXXXXXXX will add to the stated capital account maintained for its Class XXXXXXXXXX preferred shares an amount equal to the PUC of the Amalco special shares transferred and will add to the stated capital account maintained for its common shares an amount equal to the PUC of the common shares of Amalco transferred.

XXXXXXXXXX will elect, jointly and in prescribed form and within the time limits referred to in subsection 85(6) of the Act, to have the rules in subsection 85(1) of the Act apply to the transfer of the common shares of Amalco as described herein to XXXXXXXXXX. The agreed amount in respect of the shares so transferred will be equal to the lesser of the amounts described in subparagraph 85(1)(c.1)(i) and (ii) of the Act.

19.Immediately before the transfer of properties described in paragraph 20 below, the assets of Amalco, excluding its shares in XXXXXXXXXX, will be classified into three types of property for the purpose of the definition of "distribution" in subsection 55(1) of the Act, as follows:

(a)cash or near cash property, comprising all of the current assets of Amalco including, in particular, cash, bank deposits, term deposits, marketable securities (other than portfolio investments) and similar instruments,

(b) investment property, comprising all of the assets of Amalco, other than any cash or near cash property, any income from which would, for the purposes of the Act, be income from property, including marketable securities and similar instruments held as portfolio investments, and

(c) business property, comprising all of the assets of Amalco other than cash or near cash property, any income from which would, for purposes of the Act, be income from an active business carried on by Amalco.

For these purposes, excluding its shares in XXXXXXXXXX, Amalco will only own cash or near cash property and investment property.

20.Amalco will transfer at fair value to each of XXXXXXXXXX each of:

a)its cash or near cash properties (excluding its shares in XXXXXXXXXX);

b)its investment properties (excluding its shares in XXXXXXXXXX);

c)its Class XXXXXXXXXX common shares in XXXXXXXXXX; and

d)its Class XXXXXXXXXX common shares in XXXXXXXXXX.

It is anticipated that the properties owned by Amalco immediately before the transfer will consist solely of those properties described above.

In consideration for such transfers, XXXXXXXXXX will each assume XXXXXXXXXX the liabilities of Amalco which will all be current liabilities and will each issue to Amalco XXXXXXXXXX Class XXXXXXXXXX preferred shares of its capital stock having an aggregate redemption value and fair market value equal to the amount by which the fair market value of the properties transferred to XXXXXXXXXX, as the case may be, as described herein exceeds the amount of the liabilities assumed by XXXXXXXXXX, as the case may be, as described herein.

21.Amalco and each of XXXXXXXXXX will elect, jointly and in prescribed form and within the time limits referred to in subsection 85(6) of the Act, to have the provisions of subsection 85(1) of the Act apply to the transfer of each property of Amalco that is an eligible property and is transferred to each of XXXXXXXXXX. The amount agreed upon in such elections in respect of each of the eligible properties so transferred will be equal to in the case of inventory or capital property (other than depreciable property of a prescribed class), an amount equal to the least of the amounts described in subparagraphs 85(1)(c.1)(i) and (ii) of the Act.

For greater certainty the agreed amount for any eligible property included in the subsection 85(1) elections referred to herein will not be less than the amount of any liabilities assumed by XXXXXXXXXX, as the case may be, as consideration for the transfer of such property and will not exceed the fair market value of each such property.

Each of XXXXXXXXXX will add to the stated capital account maintained for its Class XXXXXXXXXX preferred shares an amount equal to the amount by which the aggregate of the cost of the properties transferred to that transferee (determined pursuant to subsection 85(1) of the Act where relevant) exceeds the amount of liabilities assumed by that transferee as consideration therefor.

22.XXXXXXXXXX will each redeem the XXXXXXXXXX Class XXXXXXXXXX preferred shares issued to Amalco in the Butterfly Transfer, by the issuance by each of XXXXXXXXXX of a non-interest bearing demand note (the "XXXXXXXXXX") having a principal amount and fair market value equal to the redemption amount of the Class XXXXXXXXXX preferred shares of XXXXXXXXXX so redeemed. Amalco will accept the XXXXXXXXXX, as the case may be, as full payment for the redemption amount of the Class XXXXXXXXXX preferred shares of XXXXXXXXXX so redeemed.

At the end of the day on which the XXXXXXXXXX Class XXXXXXXXXX preferred shares of each of XXXXXXXXXX are redeemed, each of XXXXXXXXXX will cause its first taxation year to end.

23.On the day following the redemption of the Class XXXXXXXXXX preferred shares of XXXXXXXXXX as described in paragraph 22 above, the shareholders of Amalco, will, by special resolution, resolve to wind up and dissolve Amalco under the applicable provisions of the CBCA. In connection with the winding-up, Amalco will distribute to XXXXXXXXXX, respectively, the XXXXXXXXXX

Prior to the distribution of such notes, Amalco will elect, pursuant to subsection 83(2) of the Act, in prescribed manner and prescribed form that the full amount of any resulting dividend referred to in subparagraph 88(2)(b)(i) of the Act be deemed to be a capital dividend.

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

Following receipt of the dividend refund to which Amalco will become entitled as a result of the proposed transactions described herein, Amalco will distribute XXXXXXXXXX amount to XXXXXXXXXX. The refund will not arise until after the end of the fiscal period in which the dividend was paid (or deemed paid).

All properties and liabilities of Amalco will now have been distributed or discharged, as the case may be. Articles of Dissolution will then be executed and filed accordingly. The common shares and special shares of Amalco will be cancelled and Amalco will be dissolved.

ADDITIONAL INFORMATION

24.XXXXXXXXXX do not contemplate the sale of any property acquired in the Butterfly Transfer, other than:

i)securities sold in the normal course of carrying on an investment business;

ii)possibly the sale of Class XXXXXXXXXX common shares to XXXXXXXXXX should that company make annual offers to purchase Class XXXXXXXXXX shares similar to the transactions undertaken by XXXXXXXXXX in the past as described in paragraph 8 above; and

iii)in the case of XXXXXXXXXX, the sale, utilizing the provisions of subsection 85(1) of the Act, of the XXXXXXXXXX Class XXXXXXXXXX common shares received on the Butterfly Transfer to XXXXXXXXXX, a corporation related to XXXXXXXXXX by reason of XXXXXXXXXX controlling both corporations.

In regard to subparagraph ii) herein, any purchase for cancellation of the Class XXXXXXXXXX common shares of XXXXXXXXXX would not form part of the same series of transactions and events referred to in subparagraph 55(3.1)(c)(i) of the Act.

25.Except as described in this letter, no liabilities have been or will be incurred by, and no assets have been or will be acquired by or disposed of by XXXXXXXXXX or Amalco in contemplation of and before the Butterfly Transfer.

26.None of Amalco, XXXXXXXXXX is, or will be at the time of the proposed transactions, an SFI. In this regard, even though it is intended that from time to time XXXXXXXXXX may acquire arm's length debt obligations as part of their investment portfolio, the principal business will not be the lending of money to persons with whom the corporation is dealing at arm's length or the purchasing of debt obligations issued by such persons or a combination thereof.

27.None of the shares of Amalco, XXXXXXXXXX has been or will be, at any time during the implementation of the proposed transactions described herein:

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

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

(c) the subject of a dividend rental arrangement as that term is defined in subsection 248(1) of the Act.

PURPOSE OF THE PROPOSED TRANSACTIONS

28.XXXXXXXXXX are each investment holding companies owned equally by XXXXXXXXXX. The Butterfly Transfer is planned in order to place the net assets of XXXXXXXXXX equally and pro rata into separate new holding companies to be owned by XXXXXXXXXX so that they can pursue their own separate investment strategies and estate planning. It is planned that as a preliminary step XXXXXXXXXX would amalgamate so that only one butterfly reorganization is necessary rather than two separate butterflies.

RULINGS GIVEN

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

A.The amalgamation of XXXXXXXXXX, as described in paragraph 10 above, will be an amalgamation described in subsection 87(1) of the Act.

B.Subject to the application of subsection 26(5) of the Income Tax Application Rules 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, the provisions of subsection 85(1) of the Act will apply to:

(i)the transfer of the common shares and special shares of Amalco by XXXXXXXXXX to XXXXXXXXXX as described in paragraphs 13 and 14 above,

(ii)the transfer of the common shares and special shares of Amalco by XXXXXXXXXX to XXXXXXXXXX as described in paragraphs 15 and 16 above,

(iii)the transfer of the common shares and special shares of Amalco by XXXXXXXXXX to XXXXXXXXXX as described in paragraphs 17 and 18 above, and

(iv)the transfer of each eligible property which is the subject of an election under subsection 85(1) as described in paragraphs 20 and 21 above by Amalco to each of XXXXXXXXXX,

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

C.As a result of the redemption by XXXXXXXXXX of their Class XXXXXXXXXX preferred shares held by Amalco, as described in paragraph 22 above, and as a result of the distributions by Amalco in the course of its winding-up, as described in paragraph 23 above:

(a) By virtue of paragraphs 84(3)(a) and 84(3)(b) of the Act, each of XXXXXXXXXX will be deemed to have paid, and Amalco will be deemed to have received, a taxable dividend equal to the amount by which the amount paid in respect of the redemption by XXXXXXXXXX of their Class XXXXXXXXXX preferred shares exceeds the PUC of such shares; and

(a.1)By virtue of subsection 84(2) of the Act and subject to the aggregate fair market value of the property of Amalco distributed by Amalco to XXXXXXXXXX on its winding-up as consideration for the cancellation of its special shares not exceeding the PUC thereof, no deemed dividend will arise upon the winding-up of Amalco with respect to the special shares of Amalco held by XXXXXXXXXX.

(b)(i)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 Amalco equal to the proportion of the amount by which the aggregate fair market value of the property of Amalco distributed by Amalco to XXXXXXXXXX on its winding-up as consideration for the cancellation of its common shares exceeds the PUC thereof, that the number of shares of such class held by XXXXXXXXXX, as the case may be, is of the number of all such shares that are cancelled.

(ii)Pursuant to subparagraph 88(2)(b)(i), such portion of the winding-up dividend referred to in (b)(i) as does not exceed Amalco's CDA 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 23 above, to be the full amount of a separate dividend.

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

(A)Amalco's pre-1972 capital surplus on hand as determined immediately before the payment of the winding-up dividend, and

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

shall be deemed not to be a dividend.

(iv)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.

(c)(i)By virtue of subsection 186(2) and paragraph 186(4)(a) of the Act, each of XXXXXXXXXX will be connected with Amalco. Provided that each of 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 (a) above, Amalco will not be subject to Part IV tax under subsection 186(1) in respect of such dividend; and

(ii)By virtue of subsection 186(2) and paragraph 186(4)(a) of the Act, Amalco will be connected with each of XXXXXXXXXX. Consequently, each of XXXXXXXXXX shall, pursuant to paragraph 186(1)(b), be subject to Part IV tax in an amount equal to that proportion of the dividend refund to which Amalco will become entitled as a result of the payment of the dividend referred to in (b)(iv) above, that the amount of such dividend received by XXXXXXXXXX, as the case may be, is of the aggregate of all taxable dividends paid by Amalco in its taxation year in which such dividend is paid.

(d)The taxable dividends deemed to have been received by Amalco and each of XXXXXXXXXX as a result of the redemption of Class XXXXXXXXXX preference shares of XXXXXXXXXX, as the case may be, and winding-up of Amalco described in paragraph (a) and subparagraph (b)(iv) herein will be deductible by each of them in computing its respective taxable income pursuant to subsection 112(1). For greater certainty, the provisions of subsections 112(2.2) and (2.4) will not apply to deny the subsection 112(1) deduction in respect of such dividends.

(e)The taxable dividends deemed to have been received by Amalco and each of XXXXXXXXXX as a result of the redemption of Class XXXXXXXXXX preference shares of XXXXXXXXXX, as the case may be, and winding-up of Amalco described in paragraph (a) and subparagraph (b)(iv) herein will be excluded from the proceeds of disposition of the shares by virtue of paragraph (j) of the definition of "proceeds of disposition" in section 54 of the Act.

D.By virtue of the definition of "substantial interest" as set out under paragraph 191(2)(a), Amalco will have a substantial interest in each of XXXXXXXXXX immediately before the redemption of their Class XXXXXXXXXX preferred shares as described in paragraph 22 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, as the case may be, to Amalco upon the redemption of the Class XXXXXXXXXX preferred shares of each such corporation since each such dividend will be an "excepted dividend" within the meaning assigned by paragraph (b) of the definition of "excepted dividend" in section 187.1 in the capacity of Amalco as the recipient of the particular dividend, and shall be an "excluded dividend" within the meaning of paragraph (a) of the definition of "excluded dividend" in subsection 191(1) in the capacity of XXXXXXXXXX, as the case may be, as the payer of the particular dividend.

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

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

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

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

(d) 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 subparagraphs C(a) and (b) 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.

F.The extinguishment of the debt obligations as a result of the cancellation of the XXXXXXXXXX, as described in paragraph 23 above, will not give rise to a "forgiven amount" within the meaning of subsection 80(1) or 80.01(1) of the Act.

G.The provisions of subsection 15(1), 56(2), 56(4), 69(4) and 246(1) of the Act will not apply to the proposed transactions described herein, in and by themselves.

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

The above rulings are given subject to the general limitations and qualifications set out in Information Circular 70-6R2 dated September 28, 1990, and the Special Release thereto dated September 30, 1992, and are binding on Revenue Canada, Customs, Excise and Taxation provided that the proposed transactions are completed by XXXXXXXXXX.

These 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 into law, 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 or ACB of any particular asset or the PUC 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. For greater certainty, none of the rulings issued above relate to the possible transfer of Class XXXXXXXXXX common shares of XXXXXXXXXX by XXXXXXXXXX to XXXXXXXXXX as described in paragraph 24(iii) above.

Yours truly,

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