30 November 1996 Ruling 9633793 - BUTTERFLY

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:

Whether certain "pre-butterfly" share transfers and redemptions should be considered part of same series of transactions or events that includes the butterfly.

Position:

No

Reasons:

Share transactions were carried out for estate planning reasons and involved subsection 164(6). The transactions had to be completed by February 13, 1997 in order to satisfy the conditions in 164(6). These transactions would have been carried out regardless of the butterfly.

XXXXXXXXXX							963379
XXXXXXXXXX

Attention: XXXXXXXXXX

XXXXXXXXXX, 1997

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 dated XXXXXXXXXX you provided additional information in respect of, and amendments to, the 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

"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;

"adjusted cost base" has the meaning assigned to that term in section 54;

"BCA" means the Business Corporations Act (XXXXXXXXXX) and, where applicable, its predecessor statutes;

"CBCA" means the Canada Business Corporations Act;

"capital dividend account" has the meaning assigned to that term in subsection 89(1);

"capital property" has the meaning assigned to that term in section 54;

"Daughter 1" refers to XXXXXXXXXX;

"Daughter 2" refers to XXXXXXXXXX;

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

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

"eligible capital property" has the meaning assigned to that term in section 54;

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

"Father" refers to XXXXXXXXXX;

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

"Holdco" refers to XXXXXXXXXX which was incorporated in XXXXXXXXXX and was continued on XXXXXXXXXX under the BCA. The head office of Holdco is located in XXXXXXXXXX;

"Mother" refers to XXXXXXXXXX;

"Opco" refers to XXXXXXXXXX which was incorporated in XXXXXXXXXX and was continued on XXXXXXXXXX under the BCA. Opco's head office is located in XXXXXXXXXX;

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

"predecessor corporation" has the meaning assigned by subsection 87(1);

"private corporation" has the meaning assigned to that term in subsection 89(1);

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

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

"Son" refers to XXXXXXXXXX;

"Son-in-law" refers to XXXXXXXXXX;

"specified financial institution" ("SFI") and "restricted financial institution" have the meanings assigned under subsection 248(1);

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

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

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

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

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

Facts

Father and Mother were spouses. Son, Daughter 1 and Daughter 2 are the adult children of Father and Mother. Son-in-law is the spouse of Daughter 2 and the brother-in-law of Son and Daughter 1. Each of Son, Daughter 1, Daughter 2 and Son-in-law is a resident of Canada.

Holdco is a private corporation and a taxable Canadian corporation. The fiscal year end of Holdco is XXXXXXXXXX.

The authorized share capital of Holdco consists of XXXXXXXXXX Class XXXXXXXXXX voting common shares, XXXXXXXXXX Class XXXXXXXXXX non-voting common shares and XXXXXXXXXX Class XXXXXXXXXX non-cumulative, redeemable, non-voting preferred shares with a redemption amount of $XXXXXXXXXX per share.

The issued and outstanding share capital of Holdco consists of XXXXXXXXXX Class XXXXXXXXXX voting common shares having an aggregate paid-up capital of $XXXXXXXXXX Class XXXXXXXXXX non-voting common shares having an aggregate paid-up capital of $XXXXXXXXXX and XXXXXXXXXX Class XXXXXXXXXX non-cumulative, redeemable, non-voting preferred shares having an aggregate paid-up capital of $XXXXXXXXXX and redemption value of $XXXXXXXXXX per share. The shares of Holdco are currently held as follows:

XXXXXXXXXX

Prior to XXXXXXXXXX the shares of Holdco were held as follows:

XXXXXXXXXX

On XXXXXXXXXX, Father transferred XXXXXXXXXX of his Class XXXXXXXXXX common shares of Holdco to Mother and XXXXXXXXXX of his Class A common shares thereof to each of Son, Daughter 1 and Daughter 2.

On XXXXXXXXXX, Father passed away, leaving his Class XXXXXXXXXX preferred shares of Holdco to Mother.

On XXXXXXXXXX, Mother passed away and her XXXXXXXXXX Class XXXXXXXXXX common shares, XXXXXXXXXX Class XXXXXXXXXX common shares and XXXXXXXXXX Class XXXXXXXXXX preferred shares of Holdco were then held by her estate (the "Estate"). The executors of the Estate are Daughter 1 and a person who deals at arm's length with the family.

Before XXXXXXXXXX the XXXXXXXXXX Class XXXXXXXXXX common shares of Holdco were distributed by the Estate equally to Mother's three children: Son, Daughter 1 and Daughter 2.

Subsequent to the distribution of the Class XXXXXXXXXX common shares of Holdco, and before XXXXXXXXXX, Holdco purchased for cancellation its Class XXXXXXXXXX common shares then held by the Estate for their fair market value (estimated to be approximately $XXXXXXXXXX). As consideration for this purchase, Holdco issued a non-interest bearing demand promissory note payable to the Estate having a principal amount and fair market value equal to the fair market value of the shares purchased for cancellation.

The XXXXXXXXXX Class XXXXXXXXXX preferred shares of Holdco held by the Estate were then distributed equally to Son, Daughter 1 and Daughter 2.

Holdco's primary asset is its investment in Opco which is described in paragraph 4 below. Holdco's only significant liability is the demand note payable to the Estate which is described in paragraph 2 above. As at XXXXXXXXXX, Holdco had $XXXXXXXXXX of RDTOH, before the XXXXXXXXXX dividend refund of $XXXXXXXXXX. The capital dividend account of Holdco as at XXXXXXXXXX had a balance of approximately $XXXXXXXXXX.

Opco is a private corporation and a taxable Canadian corporation. Opco's fiscal year end is XXXXXXXXXX.

The authorized share capital of Opco consists of an unlimited number of Class XXXXXXXXXX voting common shares and an unlimited number of Class XXXXXXXXXX non-cumulative, redeemable, non-voting preferred shares.

The issued and outstanding share capital of Opco consists of XXXXXXXXXX Class XXXXXXXXXX voting common shares having an aggregate paid-up capital of $XXXXXXXXXX and which are currently held as follows:

Holdco XXXXXXXXXX
Son XXXXXXXXXX
Daughter 1 XXXXXXXXXX
Daughter 2 XXXXXXXXXX
XXXXXXXXXX

Since Opco is controlled by Holdco, Opco is related to Holdco pursuant to subparagraph 251(2)(b)(i).

XXXXXXXXXX Class XXXXXXXXXX common shares of Opco were initially issued to Father in XXXXXXXXXX. During the period from XXXXXXXXXX until XXXXXXXXXX, Father transferred XXXXXXXXXX Class XXXXXXXXXX shares of Opco to each of Mother, Son, Daughter 1 and Daughter 2. In XXXXXXXXXX, Father transferred his remaining XXXXXXXXXX Class XXXXXXXXXX shares of Opco to Holdco in exchange for XXXXXXXXXX Class XXXXXXXXXX preferred shares of Holdco.

As a result of Mother's death on XXXXXXXXXX her XXXXXXXXXX Class XXXXXXXXXX common shares of Opco were then held by the Estate.

Subsequent to the distribution of the Class XXXXXXXXXX common shares of Holdco as described in paragraph 2 above and before XXXXXXXXXX, Opco purchased for cancellation its Class XXXXXXXXXX common shares then held by the Estate for their fair market value (estimated to be approximately $XXXXXXXXXX). As consideration for this purchase, Opco issued a non-interest bearing demand promissory note payable to the Estate having a principal amount and fair market value equal to the fair market value of the shares purchased.

None of the shareholders of Opco or Holdco has acquired any of the shares of Opco or Holdco, respectively, in contemplation of the proposed transactions described below. The purchases of the Class XXXXXXXXXX common shares of Holdco and the Class XXXXXXXXXX common shares of Opco held by the Estate were carried out in order to incur a capital loss that could be carried back to Mother's final tax return in accordance with subsection 164(6). In order to satisfy the requirements of subsection 164(6) the capital loss of the Estate had to be incurred by XXXXXXXXXX (i.e. within the Estate's first taxation year). As such, the purchases of the Class XXXXXXXXXX common shares of Holdco and the Class XXXXXXXXXX common shares of Opco held by the Estate did not occur in contemplation of, nor do they form part of the same series of transactions or events as, the proposed transactions described below. These purchases occurred as a result of Mother's death and would have occurred regardless of the proposed transactions described below.

These purchases were part of a separate series of transactions or events dealing with the wind up of the Estate as it related to the shares of Holdco and Opco which were owned by Mother at the time of her death.

Opco's primary assets are a mortgage receivable, and interests in XXXXXXXXXX real estate rental properties. One of the rental properties is wholly owned by Opco. The other XXXXXXXXXX are held on a co-ownership basis. Opco is not in partnership with the other co-owner(s). These assets represent capital property to Opco. In addition, Opco holds a life insurance policy on Son-in-law. As at XXXXXXXXXX the cash surrender value of this policy was $XXXXXXXXXX. Opco's other assets consist of current assets, including cash, term deposits, marketable securities and accounts receivable that are not trade receivables.

Opco's liabilities consist of professional fees payable, security deposits payable, commissions payable and the demand note payable to the Estate which is described in paragraph 4 above.

As at XXXXXXXXXX, Opco had $XXXXXXXXXX of RDTOH, before the XXXXXXXXXX dividend refund of $XXXXXXXXXX. The capital dividend account of Opco as at XXXXXXXXXX had a balance of approximately $XXXXXXXXXX.

The outstanding common and preferred shares of Opco and Holdco represent capital property to the holders thereof.

Proposed Transactions

Opco and Holdco (hereinafter, at times, referred to as the "predecessor corporations") will amalgamate under the provisions of the BCA to form a new corporation, Amalco, in such a manner that

a)all 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 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 shareholders (except any predecessor corporation), who owned shares of the capital stock of any predecessor corporation 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 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 Class XXXXXXXXXX voting common shares, and an unlimited number of Class XXXXXXXXXX non-cumulative non-voting preferred shares. The preferred shares will be redeemable at $XXXXXXXXXX per share.

Son, Daughter 1 and Daughter 2 will each exchange the XXXXXXXXXX Class XXXXXXXXXX common shares of Opco, the XXXXXXXXXX Class XXXXXXXXXX common shares of Holdco and the XXXXXXXXXX Class XXXXXXXXXX common shares of Holdco that each will hold immediately before the amalgamation for XXXXXXXXXX common shares of Amalco. Son-in-law will exchange his XXXXXXXXXX Class XXXXXXXXXX common share of Holdco for XXXXXXXXXX common shares of Amalco. Amalco will add to the stated capital account maintained for its common shares an amount equal to the aggregate PUC of the Class XXXXXXXXXX and XXXXXXXXXX common shares of the predecessor corporations (other than any common shares held by a predecessor corporation).

Son, Daughter 1 and Daughter 2 will each exchange the XXXXXXXXXX Class XXXXXXXXXX preferred shares of Holdco that they will own immediately before the amalgamation for XXXXXXXXXX preferred shares of Amalco. The amount added to the stated capital account maintained for the preferred 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 Son, Daughter 1, Daughter 2 and Son-in-law as a consequence of the amalgamation. The issued and outstanding shares of Amalco will represent capital property to each of its shareholders.

The fair market value of the shares of Amalco received by each of Son, Daughter 1, Daughter 2 and Son-in-law will be equal to the fair market value of the shares of the predecessor corporations owned by that shareholder immediately before the amalgamation.

Daughter 2 and Son-in-law will incorporate a new holding company ("Newco") under the BCA. Newco will be a private corporation and a taxable Canadian corporation. The authorized share capital of Newco will consist of an unlimited number of common shares without par value, an unlimited number of non-voting first preferred shares and an unlimited number of voting, redeemable, retractable preferred shares. Newco will not issue any shares prior to the transactions described in paragraph 11 below.

Each of Daughter 2 and Son-in-law will transfer all of their common shares of Amalco to Newco in exchange for similar common shares of Newco having a fair market value equal to the fair market value of the common shares so transferred. Daughter 2 will transfer all of her preferred shares of Amalco to Newco in exchange for first preferred shares of Newco having a fair market value equal to the fair market value of the preferred shares of Amalco so transferred. No other consideration will be received by either Daughter 2 or Son-in-law in respect of such transfers.

In respect of each such transfer, an election will be filed in accordance with the provisions of subsection 85(1) and within the time limit prescribed in subsection 85(6). The agreed amount for the purpose of the joint election to be filed by each of Daughter 2 and Newco and Son-in-law and Newco will be equal to the adjusted cost base of the shares of Amalco so transferred. The agreed amount for purposes of the subsection 85(1) elections referred to above will not exceed the fair market value of such shares.

The amount that will be added to the stated capital of the common shares of Newco for the purposes of the BCA will be equal to the fair market value of the common shares of Amalco transferred to Newco as described above. The amount that will be added to the stated capital of the first preferred shares of Newco for the purposes of the BCA will be equal to the fair market value of the preferred shares of Amalco transferred to Newco as described above.

Immediately before the transfers of property as described in paragraph 14 below, the property of Amalco 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 Amalco, including any cash, term deposits, marketable securities (other than portfolio investments), accounts receivable and the cash surrender value of any life insurance policies,

(b) investment property, comprising all the assets of Amalco, other than cash or near cash property, any income from which would, for the purposes of the Act, be income from property or a specified investment business, 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, Amalco will only have cash or near cash property and investment property.

For greater certainty, any tax accounts, such as the balance of any RDTOH account (including the dividend refund to Amalco arising as a result of proposed transaction 16 below) or capital dividend account of Amalco, will not be considered property of Amalco for purposes of the proposed transactions described herein.

In determining the net fair market value of its cash or near cash property and investment property immediately before the transfers described in paragraph 14 below, liabilities of Amalco will be allocated to, and be deducted in the calculation of, the net fair market value of each such type of property of Amalco in the following manner:

(a) current liabilities will be allocated to cash or near cash property (including any cash, term deposits, marketable securities and accounts receivable) in the proportion that the fair market value of each such property is of the fair market value of all cash or near cash property. The allocation of current liabilities as described herein will not exceed the aggregate fair market value of all cash or near cash property of Amalco;

(b) liabilities, other than current liabilities, that relate to a particular property, will then be allocated to the particular property (and effectively to the type to which the particular property belongs) to the extent of its fair market value;

(c)liabilities, other than current liabilities, that pertain to a type of property, but not a particular property, will then be allocated to that type of property, but not in excess of the net fair market value of such type of property after the allocations described in steps (a) and (b) above; and

(d) if any liabilities ("excess unallocated liabilities") remain after the allocations described in steps (a), (b) and (c) are made, such excess unallocated liabilities (including excess current liabilities, if any), will then be allocated to the cash or near cash property and investment property of Amalco based on the relative net fair market value of each type of property as determined after steps (a), (b) and (c) above.

For the purpose of calculating the net fair market value of the types of property of Amalco, deferred taxes, if any, will be ignored.

Following the allocation of liabilities as described herein, Amalco will, for the purposes of the definition of "distribution" in subsection 55(1), own only cash or near cash property and investment property.

Immediately following the determination of the net fair market value of each type of property of Amalco, as described in paragraphs 12 and 13 above, Amalco will transfer certain of its cash or near cash property and investment property to Newco such that the net fair market value (after allocating and deducting, in the manner described in paragraph 13 above, the liabilities of Amalco which are to be assumed by Newco as described herein) of each such type of property of Amalco to be transferred will be equal to the proportion of the net fair market value of all that type of property of Amalco, determined immediately before the transfer referred to herein that:

(a) the fair market value, immediately before the transfer, of all shares of the capital stock of Amalco owned by Newco

is of

(b) the fair market value, immediately before the transfer, of all the issued shares of the capital stock of Amalco.

As consideration for the property transferred to it, Newco will assume certain liabilities of Amalco and Newco will issue to Amalco such number of its voting, redeemable and retractable preferred shares (the "Newco Preferred Shares") that will have an aggregate redemption amount and fair market value that will be equal to the amount by which the aggregate fair market value of the properties transferred to it exceeds the aggregate of the liabilities of Amalco assumed by Newco.

For any asset transferred in paragraph 14 above which is an eligible property, Amalco and Newco will jointly elect, in prescribed form and within the time referred to in subsection 85(6), to have the rules in subsection 85(1) apply to such transfer so that the amount agreed upon in their election will not be less than:

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

(b) in the case of depreciable property of a prescribed class, an amount equal to the least of the amounts described in subparagraphs 85(1)(e)(i) to (iii), and

(c) in the case of eligible capital property, if any, an amount equal to the least of the amounts described in subparagraphs 85(1)(d)(i) to (iii).

In addition, in respect of each eligible property included in such election the amount agreed upon in such election will not be greater than the fair market value, at the time of the disposition, of such property, nor will it be less than the aggregate of the fair market value of any liability assumed as consideration for such property.

The amount to be added to the stated capital in respect of the Newco Preferred Shares will be equal to the redemption amount of such shares.

Newco will redeem a sufficient number of the Newco Preferred Shares held by Amalco such that the subsequent redemption of the remaining Newco Preferred Shares, as described in paragraph 20 below, will give rise to a dividend refund equal to that percentage of Newco's RDTOH at the time immediately before the subsequent redemption takes place that:

(a)the fair market value, immediately before any redemption of Amalco's share, of all the issued shares of the capital stock of Amalco owned by Daughter 1 and Son

is of

(b)the fair market value, immediately before any redemption of Amalco shares, of all the shares of the capital stock of Amalco.

As consideration for this redemption, Newco will issue a non-interest bearing demand promissory note payable to Amalco having a principal amount and fair market value equal to the aggregate redemption amounts of these Newco Preferred Shares. Amalco will accept the note as full payment of the redemption price of these Newco Preferred Shares.

Newco will cause its first taxation year to end at the end of the day on which the Newco Preferred Shares held by Amalco are redeemed as described in paragraph 16 above.

Amalco will purchase for cancellation its common shares held by Newco and will redeem its preferred shares both for their fair market value. As consideration for this purchase and redemption, Amalco will issue a non-interest bearing demand promissory note payable to Newco having a principal amount and fair market value equal to the aggregate fair market value of the common and preferred shares so purchased or redeemed. Newco will accept the note as full payment of the purchase and redemption price of the Amalco shares.

In order to avoid a circularity problem with respect to the calculation of the RDTOH accounts of Amalco and Newco, Amalco will cause its first taxation year to end at the end of the day on which it purchases for cancellation its common shares and redeems its preferred shares held by Amalco.

Subsequent to Amalco's first taxation year end, Newco will redeem the remaining Newco Preferred Shares held by Amalco for consideration consisting of a non-interest bearing demand promissory note payable to Amalco and having a principal amount and fair market value equal to the aggregate redemption amount of the remaining Newco Preferred Shares. Amalco will accept the note as full payment of the redemption price of the remaining Newco Preferred Shares.

The notes referred to in paragraphs 16, 18 and 20 above will be set off against each other in full satisfaction thereof and will be cancelled.

Immediately following the transfer described in paragraph 14 above, the net fair market value of each type of property retained by Amalco (but not including the Newco Preferred Shares), determined in accordance with the guidelines described in paragraphs 12 and 13 above, will be equal to that proportion of the aggregate net fair market value of that type of property of Amalco immediately before the transfer described in paragraph 14 above that,

(a)the aggregate fair market value of all of the issued and outstanding shares of Amalco owned by Son and Daughter 1, immediately before the transfer described in paragraph 14 above,

is of

(b)the aggregate fair market value of all of the issued shares of Amalco immediately before such transfer.

Additional Information

Except as described herein, no liabilities have been or will be incurred by, and no assets have been or will be acquired by or disposed of by Amalco, Opco or Newco in contemplation of and before the proposed transactions, except in the ordinary course of the business of the corporation.

None of Amalco, Holdco, Opco or Newco is, or will be at the time of the proposed transactions, an SFI.

None of the shares of Amalco, Newco, Opco or Holdco 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).

Purpose of the Proposed Transactions

The purpose of the proposed transactions is to permit each of Son-in-law and Daughter 2 (jointly), and Son and Daughter 1 (jointly), to manage and maintain control over their interests in the assets of Opco and Holdco independent of the desires and wishes of the other.

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.Subsection 85(1) will apply to the transfer of the shares of Amalco by Son-in-law and Daughter 2, as described in paragraph 11 above, such that the agreed amounts in respect of each transfer shall be deemed to be the transferor's proceeds of disposition and Newco's cost thereof pursuant to paragraph 85(1)(a). For greater certainty, paragraph 85(1)(e.2) will not apply to the transfers referred to herein.

B.The provisions of paragraphs 84.1(l)(a) will apply to reduce the paid-up capital of the common shares and the first preferred shares of Newco, as the case may be, referred to in paragraph 11 above to an amount equal to the greater of the paid-up capital of the Amalco shares transferred to Newco as consideration for such shares described therein or the adjusted cost base, as defined for purposes of paragraphs 84.1(2)(a) and (a.1), of such Amalco shares to their holder.

C.The provisions of subsection 85(1), other than paragraph 85(1)(e.2) thereof, will apply to the transfer of each eligible property from Amalco to Newco, as described in paragraph 14 above, such that the agreed amount in respect of any such property will be deemed to be the proceeds of disposition thereof to Amalco and Newco's cost thereof by virtue of paragraph 85(1)(a).

For purposes of this ruling, the reference in subparagraph 85(1)(e)(i) to "...the undepreciated capital cost to the taxpayer of all property of that class immediately before the disposition..." shall be interpreted to mean the portion of the undepreciated capital cost to the taxpayer of all property of that class that the capital cost to him of the property of that class transferred is of the capital cost to him of all property of that class.

D.The provisions of subsection 85(2.1) will apply to reduce the paid-up capital of the Newco Preferred Shares referred to in paragraphs 14 and 15 above by the amount by which:

(i) the aggregate stated capital of the Newco Preferred Shares issued as a result of the acquisition by Newco of the property of Amalco

exceeds the amount

(ii) by which the aggregate cost, determined under subsection 85(1) where relevant, to Newco of the property transferred to it by Amalco, as described in paragraphs 14 and 15 above, exceeds the amount of the liabilities of Amalco assumed by Newco as part consideration for such property.

E.The provisions of subsection 84(3) will apply to deem Newco to have paid a dividend to Amalco

(a) on the redemption of the Newco Preferred Shares as described in paragraph 16 above; and

(b) on the redemption of the Newco Preferred Shares as described in paragraph 20 above.

The amount of each such deemed dividend relating to the redemption of the Newco Preferred Shares will be equal to the amount by which the particular redemption amount paid exceeds the paid-up capital of the particular shares immediately before the redemption.

F.The provisions of subsection 84(3) will apply to deem Amalco to have paid a dividend to Newco on the purchase for cancellation by Amalco of its common shares from Newco as described in paragraph 18 above. The amount of the deemed dividend relating to the purchase for cancellation of the common shares of Amalco will be equal to the amount by which the amount paid by Amalco on such purchase exceeds the paid-up capital in respect of such shares.

G.The deemed dividends referred to in rulings E and F above, to the extent that they are taxable dividends, will:

(i) be included in each recipient's income pursuant to paragraph 12(1)(j),

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

(iii)pursuant to the provisions of paragraph (j) of the definition of "proceeds of disposition" in section 54, be excluded in computing the proceeds of disposition to Amalco or Newco, as the case may be, of the shares so redeemed.

H.Subsection 112(3) will apply to any loss arising on the disposition of the shares of Amalco or Newco as described in paragraphs 16, 18 and 20 above.

I.The common shares of Amalco will not, as a result of the proposed transactions in and by themselves, become taxable preferred shares within the meaning assigned by subsection 248(1).

J.By virtue of paragraph (a) of the definition of "substantial interest" in subsection 191(2), Amalco will have a substantial interest in Newco. Consequently, no tax will be payable under section 187.2 or subsection 191.1(1) on the dividend arising on the redemption of the Newco Preferred Shares referred to in Ruling E, since the 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 dividend and an "excluded dividend", within the meaning assigned by paragraph (a) of the definition of "excluded dividend" in subsection 191(1), in the capacity of Newco as the payer of the dividend.

K.By virtue of subsection 186(2) and paragraph 186(4)(a), Amalco will be connected with Newco and Newco will be connected with Amalco. Consequently, pursuant to paragraph 186(1)(b),

(a) Newco shall be subject to Part IV tax in an amount equal to that proportion of the dividend refund to which Amalco will become entitled for its taxation year in which the dividend referred to in ruling F., above, is paid, that the amount of such dividend received by Newco is of the aggregate of all taxable dividends paid by Amalco in its taxation year in which such dividend is paid; and

(b) Amalco shall be subject to Part IV tax in an amount equal to that proportion of the dividend refund to which Newco will become entitled for its taxation year in which the dividend referred to in ruling E.(b) above, is paid, that the amount of such dividend received by Amalco is of the aggregate of all taxable dividends paid by Newco in its taxation year in which such dividend is paid.

L.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 rulings given in E and F above and, for greater certainty, subsection 55(3.1) will not apply to deny the exemption under paragraph 55(3)(b).

M.The settlement of the promissory notes, as described in paragraph 21 above, will not give rise to a "forgiven amount" within the meaning of subsection 80(1) or 80.01(1).

N.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.

O.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.

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 adjusted cost base 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. In particular, nothing in this ruling should be construed as acceptance of the tax consequences of any estate planning transactions described in paragraphs 2 and 4 above.

Yours truly,

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