30 November 1996 Ruling 9628583 - BUTTERFLY - PART V.1

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: •

butterfly ruling - similar to other given in past

Position:

- favorable ruling given

Reasons:

no new issues

XXXXXXXXXX							962858
XXXXXXXXXX

Attention: XXXXXXXXXX

XXXXXXXXXX, 1997

Dear Sir/Madam:

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 dated 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).

All of the above-referenced taxpayers file their returns with the XXXXXXXXXX Taxation Centre.

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

a)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

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

Definitions and Abbreviations

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

(a)"Act" means the Income Tax Act, R.S.C. 1985 (5th Supp.) c.1, as amended to the date hereof, and unless otherwise stated, every reference herein to a Part, section, subsection, paragraph or subparagraph is a reference to the relevant provision of the Act;

(b)"adjusted cost base" ("ACB") has the meaning assigned by section 54;

(c)"CBCA" means Canada Business Corporations Act;

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

(e)"capital dividend account" has the meaning assigned by subsection 89(1);

(f)"capital property" has the meaning assigned by section 54;

(g)"cost amount" has the meaning assigned under subsection 248(1);

(h)"depreciable property" has the meaning assigned by subsection 13(21);

(i)"dividend rental arrangement" has the meaning assigned by subsection 248(1);

(j)"eligible capital property" has the meaning assigned by section 54;

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

(l)"guarantee agreement" has the meaning assigned by subsection 112(2.2);

(m)"paid-up capital" ("PUC") has the meaning assigned by subsection 89(1);

(n)"RDTOH" means the expression "refundable dividend tax on hand" as defined in subsection 129(3);

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

(p)"short-term preferred share" has the meaning assigned by subsection 248(1);

(q)"specified financial institution" ("SFI") has the meaning assigned under subsection 248(1);

(r)"specified investment business" ("SIB") has the meaning assigned by subsection 125(7);

(s)"stated capital account" has the meaning assigned by section 26 of the CBCA;

(t)"taxable Canadian corporation" ("TCC") has the meaning assigned by subsection 89(1);

(u)"taxable dividend" has the meaning assigned by subsection 89(1); and

(v)"taxable preferred share" has the meaning assigned by subsection 248(1).

In this letter, the names of various persons or entities referred to herein are abbreviated as follows:

Abbreviated Name Full Name

DC XXXXXXXXXX

Holdco 1 XXXXXXXXXX

Holdco 2 XXXXXXXXXX

Holdco 3 XXXXXXXXXX

Holdco 4 XXXXXXXXXX

Family X XXXXXXXXXX

Family Y XXXXXXXXXX

Mr. A XXXXXXXXXX

Mr. B XXXXXXXXXX

Mr. C XXXXXXXXXX

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

Facts

1.DC is a corporation incorporated on XXXXXXXXXX. It is a Canadian-controlled private corporation and a taxable Canadian corporation.

2. The authorized share capital of DC is comprised of the following classes of shares:

i.An unlimited number of voting Class "XXXXXXXXXX" common shares, convertible on a one for one basis into Class "XXXXXXXXXX" preferred shares.

ii.An unlimited number of non-voting Class "XXXXXXXXXX" preferred shares, entitled to a non-cumulative annual dividend equal to the issue price of the shares multiplied by the prime rate of the Bank of Canada, convertible into Class "XXXXXXXXXX" preferred shares on a one for one basis, redeemable and retractable at the issue price plus declared and unpaid dividends.

iii.An unlimited number of Class "XXXXXXXXXX" preferred shares, non-voting except in certain circumstances, entitled to a cumulative, annual dividend equal to the issue price multiplied by the prime rate of the Bank of Canada plus XXXXXXXXXX%, convertible into Class "XXXXXXXXXX" common shares on a one for one basis, redeemable and retractable for the issue price plus declared and unpaid dividends.

3. The issued and outstanding shares of DC are as follows:

Class & Number
Shareholder of Shares PUC ACB

XXXXXXXXXX

The shares of DC represent capital property to each of the shareholders referred to above.

The conversion feature of the Class "XXXXXXXXXX" shares was added at the time of the company's continuance under XXXXXXXXXX. As a result, the Class "XXXXXXXXXX" shares are "taxable preferred shares" and "short-term preferred shares".

4.Holdco 1, Holdco 2, Holdco 3 and Holdco 4 are all TCC's and CCPC's.

5.Holdco 1 was incorporated on XXXXXXXXXX under the CBCA and its issued and outstanding shares consist of XXXXXXXXXX preferred shares and XXXXXXXXXX common shares. All shares of Holdco 1 are owned by members of Family X and none of these shares was acquired by its current holder in contemplation of the proposed transactions described herein.

6.Holdco 2 was incorporated on XXXXXXXXXX under the CBCA and its issued and outstanding shares consist of XXXXXXXXXX. Holdco 2 is controlled, directly or indirectly by members of Family Y. None of the issued shares of Holdco 2 was acquired by its current holder in contemplation of the proposed transactions described herein.

7.Holdco 3 was incorporated on XXXXXXXXXX and Mr. B owns XXXXXXXXXX% of the issued share capital.

8.Holdco 4 was incorporated on XXXXXXXXXX and Mr. A owns XXXXXXXXXX% of the issued share capital.

9.Both Holdco 1 and Holdco 3 deal at arm's length with Holdco 4 and Holdco 2. Holdco 4 and Holdco 2 are related as Mr. A is related to each member of the group that controls Holdco 2. Holdco 1 and Holdco 3 deal at arm's length.

10.Each of Holdco 1 and Holdco 2 acquired its shares of DC from Mr. C by way of an arm's length transfer on XXXXXXXXXX.

11.Each of Mr. B and Mr. A originally acquired the shares of DC from Mr. C, again by way of an arm's length transfer on XXXXXXXXXX. The shares held by Mr. B in DC were transferred to Holdco 3 pursuant to a tax-free rollover under subsection 85(1) on XXXXXXXXXX. The shares owned by Mr. A in DC were transferred to Holdco 4 by way of a tax-free rollover pursuant to subsection 85(1) on XXXXXXXXXX.

12. XXXXXXXXXX.

13.DC also has certain loans receivable from its shareholders, the details of which as at that XXXXXXXXXX were as follows:

Borrower Loan Amount

XXXXXXXXXX

These loans receivable bear interest at the rate of XXXXXXXXXX% above the bank's prime rate and have no specific terms of repayment. The cost amount (read without reference to paragraph (e) of that definition) to DC of each of these loans is equal to its "principal amount" within the meaning assigned in subsection 248(1).

14. DC normally pays annual dividends to its shareholders.

15.The only material liability of DC is a mortgage payable. As at XXXXXXXXXX the balance of the mortgage was $XXXXXXXXXX. The mortgage charges interest at XXXXXXXXXX% and matures XXXXXXXXXX.

16.DC had RDTOH as of XXXXXXXXXX of approximately $XXXXXXXXXX. Immediately prior to the proposed transactions DC has a capital dividend account ("CDA") of approximately $XXXXXXXXXX.

17. DC has no losses carried forward for tax purposes.

Proposed Transactions

18.Each of Holdco 1, Holdco 2, Holdco 3 and Holdco 4 will incorporate a corporation under the CBCA (hereinafter referred to as "Newco1", "Newco2", "Newco3" and "Newco4", respectively and collectively the "Newcos"). Each of the Newcos will be a CCPC and a TCC.

19.The authorized capital of each of the Newcos will include, inter alia, the following:

a) an unlimited number of Class "XXXXXXXXXX" voting common shares; each Class "XXXXXXXXXX" share will be entitled to one vote per share;

b) an unlimited number of Class "XXXXXXXXXX" redeemable, retractable voting preferred shares; redeemable and retractable at any time at a redemption amount equal to $XXXXXXXXXX per share; entitled to a monthly non-cumulative dividend equal to XXXXXXXXXX% of the redemption amount and entitled to one vote per share;

c) an unlimited number of Class "XXXXXXXXXX" redeemable, retractable non-voting preferred shares; redeemable and retractable at any time at a redemption amount equal to the fair market value of the consideration for which such shares were issued and entitled to a monthly non-cumulative dividend equal to XXXXXXXXXX% of the redemption amount.

20.Holdco 1 will subscribe for XXXXXXXXXX Class "XXXXXXXXXX" shares of Newco1. Holdco 2 will subscribe for XXXXXXXXXX Class "XXXXXXXXXX" shares of Newco2. Holdco 3 will subscribe for XXXXXXXXXX Class "XXXXXXXXXX" shares of Newco3 and Holdco 4 will subscribe for XXXXXXXXXX Class "XXXXXXXXXX" shares of Newco4. In each case, the aggregate subscription price will be $XXXXXXXXXX.

21.Immediately before the transfers of property described in paragraph 22 and 23 below, the property of DC will be classified into three types of property for the purposes of the definition of "distribution" in subsection 55(1), as follows:

(a) cash or near cash property, comprising all of the current assets of DC, including any cash, prepaid expenses, income taxes recoverable and loans receivable from shareholders;

(b) investment property, comprising all of the assets of DC, other than cash or near cash property, any income from which would, for purposes of the Act, be income from property or from a SIB (for these purposes the land, building and goodwill, if any, will be considered investment property); and

(c) business property, comprising all of the assets of DC, other than cash or near cash property, any income from which would, for the purposes of the Act, be income from a business (other than a SIB).

DC will not have any business property at the time of the transfers described in paragraph 23 below. For greater certainty, any tax accounts, such as the balance of any RDTOH or CDA of DC, as well as any tenant inducements, will not be considered property for purposes of the proposed transactions described herein.

22.Prior to the transfers described in paragraph 23 below, DC will declare and pay a dividend on its Class "XXXXXXXXXX" common shares and elect pursuant to subsection 83(2) that the full amount of such dividend be deemed to be a capital dividend. The amount of the dividend will be equal to the amount of the CDA of DC at the time of the declaration of the dividend. Payment of the dividend will be satisfied by transferring to each shareholder cash or near cash property of DC with a fair market value equal to the shareholder's dividend entitlement. Payment of such dividend will satisfy all relevant corporate solvency requirements of the XXXXXXXXXX.

23.Following the determination of the fair market value of its properties as described in paragraph 21 above, and the payment of the capital dividend as described in paragraph 22 above, DC will transfer a pro rata share of all of its remaining cash or near cash property and a pro rata undivided interest in each property other than its cash or near cash property to each of Newco1, Newco2, Newco3 and Newco4 in such a manner that the fair market value of the cash or near cash property and other property so transferred to each of Newco1, Newco2, Newco3 and Newco4 respectively, will be equal to the proportion of all cash or near cash property and other property owned by DC that the fair market value of the shares of DC owned by each of Holdco1, Holdco2, Holdco3 and Holdco4, respectively, is of all of the issued shares of DC (such share or proportion hereinafter referred to as a "prorata share" or "prorata interest").

For greater certainty, the above transfers will be made on a gross fair market value basis rather than a net equity basis. Thus, each of the Newcos will have received a pro rata interest in each type of property, as described above. Similarly, the Newcos will assume the same pro rata interest of each liability of DC. To the greatest extent possible you will cause each Newco to receive the loan receivable owing to DC from that particular Newco's shareholder.

24.As consideration for the properties so transferred pursuant to paragraph 23 hereof, each of the Newcos will:

a) for the cash or near cash property received from DC, issue to DC XXXXXXXXXX Class "XXXXXXXXXX" shares of its capital stock having an aggregate redemption amount, fair market value and PUC of $XXXXXXXXXX and Class "XXXXXXXXXX" shares of its capital stock having an aggregate redemption amount and fair market value equal to the amount by which the amount of the cash or near cash assets received from DC exceeds $XXXXXXXXXX; and

b) for the transfer of an undivided co-ownership interest in every other property of DC, each of the Newcos shall:

i. assume the pro rata interest described in paragraph 23 above of each of the liabilities of DC, provided however, that the liabilities to be assumed as described herein will not exceed the aggregate of the agreed amounts as described in paragraph 26 below in respect of any such properties; and

ii. issue Class "XXXXXXXXXX" shares of its capital stock to DC having an aggregate redemption amount and fair market value equal to the difference between the fair market value of the beneficial interest in such assets and the fair market value of the liabilities of DC assumed by it.

To the extent that any liabilities of DC have not been assumed as described in paragraph (b)(i) above, each of Newco1, Newco2, Newco3 and Newco4 will also assume a prorata share as set out in paragraph 23 hereof, of the balance of such indebtedness of DC. As consideration for the assumption of such excess liabilities, DC will issue to each of the Newcos a non-interest bearing demand promissory note (the "DC Excess Note") having a principal amount and a fair market value equal to the excess liabilities so assumed by that Newco.

25.For greater certainty, DC's acquisition of XXXXXXXXXX Class "XXXXXXXXXX" shares and the Class "XXXXXXXXXX" shares of each of the Newcos will ensure that it owns more than XXXXXXXXXX% of the issued share capital of each of the Newcos, having full voting rights under all circumstances and having a fair market value of more than XXXXXXXXXX% of the fair market value of all the issued and outstanding shares in the capital stock of each of the Newcos. Consequently, DC will be connected, within the meaning of paragraph 186(4)(b), with each of the Newcos.

26.With respect to the transfers described in paragraph 23 above, DC and each of Newco1, Newco2, Newco3 and Newco4, as the case may be, will file a joint election under subsection 85(1) and within the time referred to in subsection 85(6) with respect to any eligible property of DC that has a fair market value in excess of its cost amount. The agreed amount in respect of such eligible property included in the subsection 85(1) election shall, in the case of capital property (other than depreciable property), be equal to the lesser of the cost amount to DC of such property and the fair market value thereof; in the case of depreciable property of a prescribed class, be equal to the least of the cost amount of such property to DC, the cost of such property to DC and the fair market value of such property and in the case of eligible capital property, be equal to the least of 4/3rds of the cost amount to DC of the property, the cost to DC of the property and the fair market value thereof.

27.DC and each of Newco1, Newco2, Newco3 and Newco4, will allocate the liabilities assumed by Newco1, Newco2, Newco3 and Newco4, as the case may be, to specific property acquired in such a manner that the amount of such non-share consideration allocated to a particular property will not exceed the amount agreed upon pursuant to paragraph 85(1)(a) in respect of that property.

28.The amount to be added to the stated capital account of the Class "XXXXXXXXXX" shares to be issued by each of the Newcos will be $XXXXXXXXXX. The amount to be added to the stated capital account of the Class "XXXXXXXXXX" shares to be issued by each of the Newcos will, in the case of the Class "XXXXXXXXXX" shares to be issued for the cash consideration as described in paragraph 24(a) above, be equal to the cash subscription price and, in the case of the Class "XXXXXXXXXX" shares to be issued as a result of the transfers described in paragraph 24(b) above, be equal to the fair market value of the property transferred to each of Newco1, Newco2, Newco3 and Newco4, as the case may be, less the fair market value of the liabilities to be assumed by each of Newco1, Newco2, Newco3 and Newco4, respectively in respect of such property.

29.For the purposes of subsection 191(4), an agreement will be entered into in respect of the Class "XXXXXXXXXX" shares to be issued by each Newco as described in paragraph 24 above, to specify an amount in respect of such shares, including an amount for which such shares are to be redeemed, acquired or cancelled. The amount to be specified in respect of each such share will not exceed the fair market value of the property received by that Newco as consideration for such share less the fair market value of the liabilities assumed by that Newco, as described in paragraph 24 above, in respect of such property.

30.Each of the Newcos will redeem, at fair market value, all of its Class "XXXXXXXXXX" and Class "XXXXXXXXXX" shares held by DC and each will pay the respective redemption amounts by returning its DC Excess Note to DC, if any, and by issuing a non-interest bearing demand promissory note (a "Newco1 Note", "Newco2 Note", "Newco3 Note" and "Newco4 Note", respectively) that will have a fair market value and principal amount equal to the amount that the aggregate of the redemption amounts of its shares so redeemed exceeds the amount of the DC Excess Note, if any, so returned. DC will accept each such demand note as full payment of such redemption amount.

31.Simultaneously, DC will purchase for cancellation, all of its Class "XXXXXXXXXX" common shares held by each of Holdco 1, Holdco 2, Holdco 3 and Holdco 4, respectively, for an amount equal to the aggregate fair market value of such shares. DC will pay the purchase price for such shares by delivering and assigning the Newco1 Note to Holdco 1, by delivering and assigning the Newco2 Note to Holdco 2, by delivering and assigning the Newco3 Note to Holdco 3 and by delivering and assigning the Newco4 Note to Holdco 4. Each of Holdco 1, Holdco 2, Holdco 3 and Holdco 4 will accept such notes in full payment of the purchase price of the DC common shares. The repurchase from Holdco 1, Holdco 2, Holdco 3 and Holdco 4 will occur simultaneously.

A portion of the loans receivable formerly owing by Holdco 1 to DC will have been transferred to Newco1 (see paragraph 23 above). Upon the transfer by DC of the Newco1 Note to Holdco 1, the loan or the note will be extinguished by way of "confusion of debts". The same will be true with respect to the debts between Newco2 and Holdco 2, Newco3 and Holdco 3 and Newco4 and Holdco 4.

32.Holdco 1, Holdco 2, Holdco 3 and Holdco 4 will then take steps to authorize and complete the winding up and voluntary dissolution of Newco1, Newco2, Newco3 and Newco4, as the case may be, under the applicable provisions of the CBCA. All of the property of Newco1 which will consist of cash and its undivided beneficial interest in the other assets transferred from DC as described in paragraph 23 above, will be distributed to Holdco 1, all of the property of Newco2 which will consist of cash and its undivided beneficial interest in the other assets transferred from DC as described in paragraph 23 above, will be distributed to Holdco 2, all of the property of Newco3 which will consist of cash and its undivided beneficial interest in the other assets transferred from DC as described in paragraph 23 above, will be distributed to Holdco 3 and all of the property of Newco4 which will consist of cash and its undivided beneficial interest in the other assets transferred from DC as described in paragraph 23 above, will be distributed to Holdco 4.

33.Any intercorporate debt between Newco1 and Holdco 1 will be extinguished on the wind-up of Newco1. As well, any intercorporate debt between Newco2 and Holdco 2 will be extinguished on the wind-up of Newco2. Any intercorporate debt between Newco3 and Holdco 3 will be extinguished on the wind-up of Newco3. Any intercorporate debt between Newco4 and Holdco 4 will be extinguished on the wind-up of Newco4. Each of Holdco 1, Holdco 2, Holdco 3 and Holdco 4 will elect in prescribed form under subsection 80.01(4) on or before the date on which each of them is required to file a return of income pursuant to section 150 for the taxation year in which the obligations will be settled or extinguished.

34.On the winding up of Newco1, Newco2, Newco3 and Newco4 referred to herein, Holdco 1 will assume any other liabilities of Newco1, Holdco 2 will assume any other liabilities of Newco2, Holdco 3 will assume any other liabilities of Newco3 and Holdco 4 will assume any other liabilities of Newco4.

35.The fair market value of the assets acquired by each of Holdco 1, Holdco 2, Holdco 3 and Holdco 4 on the respective wind-ups will not be less than the amount of the liabilities assumed.

36.DC will issue XXXXXXXXXX. These shares are being issued in order to ensure that DC maintains its corporate existence so that registered title of the real estate currently owned by DC can remain in DC.

Additional Information

37.No liabilities will be incurred and no assets will be acquired or disposed of, by DC in contemplation of and before the proposed transactions, except in the ordinary course of the business of the corporation.

38.None of DC, Holdco 1, Holdco 2, Holdco 3 or Holdco 4 is, or will be at the time of the proposed transactions, an SFI.

39.None of the shares of DC, Holdco 1, Holdco 2, Holdco 3 or Holdco 4 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) 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); or

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

40.None of the shareholders intends, as part of the same series of transactions, to directly or indirectly dispose of any of the shares of DC, Holdco 1, Holdco 2, Holdco 3 and Holdco 4 otherwise than as described herein.

Purpose of the Proposed Transactions

The purpose of the proposed transactions is to allow all of Holdco 1, Holdco 2, Holdco 3 and Holdco 4 to separate their interests in DC thereby providing each of them with the greatest degree of flexibility in dealing with their interests in the leased property and in their future tax planning.

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 provisions of subsection 85(1), other than paragraph 85(1)(e.2) thereof, will apply to the transfer of each eligible property by DC to each of Newco1, Newco2, Newco3 and Newco4, as the case may be, as described in paragraphs 23, 24 and 26 above, such that the agreed amount 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).

B.The provisions of subsection 85(2.1) will apply in determining the PUC of the Class "XXXXXXXXXX" shares to be issued by each of the Newcos as described in paragraphs 24 and 28 above.

C.The provisions of subsection 84(3) will apply to deem each of Newco1, Newco2, Newco3 and Newco4 to have paid a dividend to DC on the redemption of its Class "XXXXXXXXXX" shares as described in paragraph 30 above. The amount of the deemed dividend relating to the redemption of the Class "XXXXXXXXXX" shares of Newco1, Newco2, Newco3 and Newco4 will be equal to the amount, if any, by which the redemption amount paid exceeds the PUC of the Class "XXXXXXXXXX" shares of each of Newco1, Newco2, Newco3 and Newco4, as the case may be.

D.The provisions of subsection 84(2) will apply to deem DC to have paid a dividend to each of Holdco 1, Holdco 2, Holdco 3 and Holdco 4 on the purchase for cancellation of its Class "XXXXXXXXXX" common shares, as described in paragraph 31 above. The amount of the deemed dividend relating to such purchase will be equal to the proportion of the amount by which the aggregate fair market value of the Newco1 Note, the Newco2 Note, the Newco3 Note and the Newco4 Note distributed by DC to Holdco 1, Holdco 2, Holdco 3 and Holdco 4, respectively, as consideration for the purchase for cancellation of such common shares as described in paragraph 31 above exceeds the PUC thereof, that the number of Class "XXXXXXXXXX" common shares of DC held by each of Holdco 1, Holdco 2, Holdco 3 and Holdco 4 immediately before such purchase for cancellation is of the number of issued Class "XXXXXXXXXX" common shares of DC immediately before such purchase for cancellation.

E.The deemed dividends referred to in rulings C. and D. above will:

i. to the extent they are taxable dividends, be deductible by each recipient in calculating its taxable income pursuant to subsection 112(1); and

ii. be excluded from the proceeds of disposition of the shares so redeemed or repurchased by virtue of paragraph (j) of the definition of "proceeds of disposition" in section 54.

F.i.Provided that none of Newco1, Newco2, Newco3 or Newco4 is entitled to a dividend refund (within the meaning of subsection 129(1)) in respect of its taxation year in which it is deemed to pay the dividend referred to in ruling C. above, DC will not be subject to Part IV tax under subsection 186(1) in respect of the dividends referred to in ruling C. above; and

ii. by virtue of paragraph 186(4)(b), DC will be connected with each of Holdco 1, Holdco 2 and Holdco 3. Consequently, each of Holdco 1, Holdco 2 and Holdco 3, respectively, 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 DC will become entitled as a result of the payment of the dividends referred to in ruling D. above, that the amount of such dividend received by Holdco 1, Holdco 2 or Holdco 3, respectively, is of the aggregate of all taxable dividends paid by DC in its taxation year in which such dividends are paid.

G.Provided that the specified amount in respect of the Class "XXXXXXXXXX" shares of each of Newco1, Newco2, Newco3 and Newco4, as the case may be, which are to be redeemed, as described in paragraph 30 above, is equal to their redemption amount, Parts IV.1 and VI.1 of the Act will not apply to the dividends deemed to have been paid by each of Newco1, Newco2, Newco3 and Newco4 as described in ruling C. above, as the dividends will, pursuant to subsection 191(4), be excepted dividends for the purposes of section 187.2 and excluded dividends for the purposes of section 191.1.

H.Part IV.1 will not apply to the dividends deemed to have been paid by DC to each of Holdco 1, Holdco 2, Holdco 3 and Holdco 4 upon the repurchase of those shares as described in paragraph 31 above, as the dividends will be excepted dividends for purposes of section 187.2, pursuant to section 187.1.

I.For purposes of Part VI.1, Holdco 1, Holdco 2 and Holdco 4 have a substantial interest in DC, as a result of paragraph 191(2)(b). Therefore, Part VI.1 will not apply to the dividends deemed to have been paid by DC to each of Holdco 1, Holdco 2 and Holdco 4, as the dividends will be excluded dividends for purposes of subsection 191.1(1).

J.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), subsection 55(2) will not apply to the taxable dividends referred to in the ruling given in D. above and, for greater certainty, subsection 55(3.1) will not apply to deny the exemption under paragraph 55(3)(b).

K.Provided that a liability of DC to be assumed by each of Holdco 1, Holdco 2, Holdco 3 and Holdco 4 as described in paragraph 24 above represented

(i)borrowed money that was used by DC for the purpose of earning income from a business or property (other than borrowed money used to acquire property the income from which would be exempt or to acquire a life insurance policy), or

(ii)an amount payable for property acquired by DC for the purpose of gaining or producing income from a business (other than property the income from which would be exempt or for property that is an interest in a life insurance policy)

then an amount paid in the year or payable in respect of the year (depending upon the method regularly followed by each of Holdco 1, Holdco 2, Holdco 3 and Holdco 4 in computing its income) pursuant to a legal obligation to pay interest on such a liability of DC so assumed by each of Holdco 1, Holdco 2, Holdco 3 and Holdco 4 will, subject to the possible application of subsection 18(2), be deductible by each of Holdco 1, Holdco 2, Holdco 3 and Holdco 4 pursuant to the provisions of paragraph 20(1)(c) provided that each of Holdco 1, Holdco 2, Holdco 3 and Holdco 4 continues to use the borrowed money for the purpose described in (i) herein or continues to use the property for the purpose described in (ii) herein, as the case may be.

L.The extinguishment of the intercorporate debt upon the wind-up of each of Newco1, Newco2, Newco3 and Newco4 as described in paragraph 33 above, will not give rise to a "forgiven amount" within the meaning thereof in subsection 80(1) or 80.01(1), by virtue of the provisions of subsection 80.01(4).

M.The provisions of subsections 15(1), 56(2), 69(4) and 246(1) will not be applied as a result of the proposed transactions, in and by themselves.

N.As a result of the proposed transactions, in and by themselves, subsection 245(2) 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.

Opinion

Provided that:

(a)our understanding of the facts and proposed transactions described herein is correct;

(b)the definition of "permitted redemption" in subsection 55(1) is amended in substantially the same form as was proposed in Bill C-69;

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

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

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

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

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

which has not been described herein,

it is our opinion that by virtue of paragraph 55(3)(b), subsection 55(2) will not apply to the taxable dividends referred to in the ruling given in C. above and, for greater certainty, subsection 55(3.1) will not apply to deny the exemption under paragraph 55(3)(b).

Comments

1.The dividend deemed to be paid by DC to Holdco 4 in ruling D. above will be subject to Part IV tax pursuant to paragraph 186(1)(a), as DC will not be connected with Holdco 4 within the meaning of subsection 186(4).

2.For purposes of Part VI.1, Holdco 3 does not have a substantial interest in DC. Therefore, the dividend deemed to be paid by DC to Holdco 3 in ruling D. above will not be an excluded dividend for purposes of subsection 191.1(1) and may be subject to Part VI.1 tax pursuant to subsection 191.1(2).

3.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 property referred to herein, 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.

Yours truly,

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