30 November 1996 Ruling 9637683 - BUTTERFLY RULING

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:

This was a standard double-wing butterfly. There were several minor issues which arose, all of which were routine to butterfly rulings.

Position:

Favourable rulings were given

Reasons:

See Statement of Principal Issues for details

XXXXXXXXXX							963768
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 taxpayer. In your letters of XXXXXXXXXX you provided additional information in respect of, and amendments to, 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").

Definitions

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

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

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

(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 to that term in subsection 89(1) of the Act;

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

(f)"cost amount" has the meaning assigned that term in subsection 248(1) of the Act;

(g)"DC" means XXXXXXXXXX and is more fully described in paragraph 4 below;

(h)"Holdco A" means XXXXXXXXXX and is more fully described in paragraph 2 below;

(i)"Holdco B" means XXXXXXXXXX and is more fully described in paragraph 3 below;

(j)"Mr. A" means XXXXXXXXXX and is more fully described in paragraph 1 below;

(k)"Mr. B" means XXXXXXXXXX and is more fully described in paragraph 1 below;

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

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

(n)"Shellco" means XXXXXXXXXX and is more fully described in paragraph 5 below;

(o)"Sisterco1" means XXXXXXXXXX and is more fully described in paragraph 6 below;

(p)"Sisterco2" means XXXXXXXXXX and is more fully described in paragraph 7 below;

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

(r)"specified investment business" has the meaning assigned to that term by subsection 125(7) of the Act;

(s)"SubcoB" means XXXXXXXXXX and is more fully described in paragraph 5 below;

(t)"Subco1" means XXXXXXXXXX and is more fully described in paragraph 5 below;

(u)"Subco2" means XXXXXXXXXX and is more fully described in paragraph 5 below; and

(v)"Subco3" means XXXXXXXXXX and is more fully described in paragraph 5 below;

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

(x)"taxable dividend" has the meaning assigned to that term by subsection 89(1) of the Act.

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

FACTS

1.Mr. A and Mr. B are not related and each is a resident of Canada.

2.Holdco A is a TCC and a CCPC which was incorporated in XXXXXXXXXX under the BCA. All of the issued and outstanding shares of Holdco A are owned by Mr. A.

The authorized share capital of Holdco A consists of an unlimited number of common and voting special shares. On incorporation of Holdco A, XXXXXXXXXX common shares were issued to Mr. A. Additional common shares of Holdco A were issued to Mr. A on or about XXXXXXXXXX as consideration for the transfer by him, pursuant to subsection 85(1) of the Act, of all of the shares of DC which were then owned by Mr. A. No voting special shares of Holdco A have been issued.

3.Holdco B is a TCC and a CCPC which was incorporated in XXXXXXXXXX under the BCA. All of the issued and outstanding shares of Holdco B are owned by Mr. B.

The authorized share capital of Holdco B consists of an unlimited number of common and voting special shares. On incorporation of Holdco B, XXXXXXXXXX common shares were issued to Mr. B. Additional common shares of Holdco B were issued to Mr. B on or about XXXXXXXXXX as consideration for the transfer by him, pursuant to subsection 85(1) of the Act, of all of the shares of DC which were then owned by Mr. B. No voting special shares of Holdco B have been issued.

4.DC is a TCC and a CCPC incorporated on XXXXXXXXXX under the BCA. The issued and outstanding share capital of DC consists of XXXXXXXXXX common shares which are held equally by Holdco A and Holdco B. The aggregate PUC in respect of these shares is $XXXXXXXXXX. The fair market value of each share is greater than its ACB to its holder. The common shares of DC represent capital property to each of Holdco A and Holdco B.

Following the completion of the transactions described below which occurred on or about XXXXXXXXXX, the assets of DC consisted of:

a)cash and short term investments with a fair market value of approximately $XXXXXXXXXX;

b)a demand note receivable from Subco1 in the amount of approximately $XXXXXXXXXX;

c)shares of Subco1 with a fair market value of approximately $XXXXXXXXXX; and

d)marketable securities with a fair market value of approximately $XXXXXXXXXX.

Also, DC has RDTOH of approximately $XXXXXXXXXX which arose as a consequence of a dividend refund received by Subco1. DC will have a balance in its CDA at the time the proposed transactions described herein are carried out. DC currently has some liabilities, however, all liabilities will be paid prior to the proposed transactions described below.

The cost amount of each asset owned by DC is less than or equal to the fair market value of the asset. It is expected that there will be no significant change in the assets of DC at the date of the proposed transactions described below although the fair market value of the assets may change.

5.Subco1 is a TCC and a CCPC which up until XXXXXXXXXX carried on an active business operation (XXXXXXXXXX). Subco1 also owns land held for development which represents inventory to Subco1. There was also real estate held by Subco1 as capital property, specifically the "XXXXXXXXXX", which was XXXXXXXXXX. However, the XXXXXXXXXX has been recently sold.

Subco1 also owns all of the shares of Subco2. Subco2 owns real estate which was used in the XXXXXXXXXX business. Subco2 receives income from Subco1 in respect of XXXXXXXXXX from the property by Subco1 and also receives some rental income from a third party. Subco2 also owns a wholly-owned subsidiary corporation, Subco3. Subco3 owns property which was once used in the XXXXXXXXXX business and currently receives rental income from this property.

On or about XXXXXXXXXX, Subco1 acquired from Mr. B all of the issued and outstanding shares of Shellco, a shell corporation, for $XXXXXXXXXX. Shellco is a TCC and a CCPC. Subco1 then transferred, pursuant to subsection 85(1) of the Act, all of its business assets used in the XXXXXXXXXX operations and its shares of SubcoB, a TCC and CCPC having nominal assets, to Shellco. As consideration for these assets, Shellco assumed liabilities, including those relating to the XXXXXXXXXX operations, of Subco1 and issued XXXXXXXXXX common shares to Subco1. The PUC of the common shares of Shellco is equal to the amount by which the aggregate of the cost of the properties transferred to Shellco (determined pursuant to subsection 85(1) of the Act where relevant) exceeds the amount of liabilities assumed by Shellco as consideration therefor.

The purpose of this transaction was to enable Mr. B to acquire Shellco which will carry on the XXXXXXXXXX business and to enable Subco1 to carry on the real estate development business.

Mr. B then purchased the shares of Shellco held by Subco1 for their fair market value of $XXXXXXXXXX paid in cash.

6.Sisterco1 is a TCC and a CCPC which manufactures XXXXXXXXXX which it sells to third parties. Prior to XXXXXXXXXX, the issued and outstanding shares of Sisterco 1 were owned equally by Mr. A and Mr. B. On or about XXXXXXXXXX, Holdco B purchased a portion of Mr. A's shares of Sisterco1 for $XXXXXXXXXX and Sisterco1 purchased for cancellation Mr. A's remaining shares for $XXXXXXXXXX.

7.Sisterco2 is a TCC and a CCPC which owns a licence to XXXXXXXXXX. Sisterco2 receives income from Shellco in respect of the XXXXXXXXXX licence agreement by Shellco (XXXXXXXXXX). The issued and outstanding shares of Sisterco 2 are owned by Mr. B. Prior to XXXXXXXXXX, the issued and outstanding shares of Sisterco 2 were owned equally by Mr. A and Mr. B. On or about XXXXXXXXXX, Mr. B purchased the shares of Sisterco2 from Mr. A for their fair market value of $XXXXXXXXXX.

8.The following transactions were also implemented as part of the reorganization which was carried out on or about XXXXXXXXXX:

(a) DC paid a dividend of $XXXXXXXXXX of which Holdco A and Holdco B each received $XXXXXXXXXX;

(b) DC repaid demand loans from Mr. A, Mr. B and Mr. B's mother of $XXXXXXXXXX, respectively;

(c) DC loaned $XXXXXXXXXX to Subco1 to permit Subco1 to pay accrued bonuses from XXXXXXXXXX, to pay the tax thereon and to repay demand loans payable to Mr. A and Mr. B.

(d) Using proceeds from the sale of the shares of Shellco as described in paragraph 5 above, Subco1 repaid demand loans from DC in the amount of $XXXXXXXXXX. Also, Subco1 paid a capital dividend of $XXXXXXXXXX to DC.

(e) DC paid capital dividends totalling $XXXXXXXXXX to Holdco A and Holdco B, which amount included gains from the sale of marketable securities of DC, as well as the capital dividend received from Subco1 as described in subparagraph (d) above.

9.Mr. A and Mr. B together operated Subco1 for many years. A couple of years ago Mr. A, as he approached retirement age, decided that he would like to give up his active interest in the XXXXXXXXXX operations but he wished to retain an active interest in the real estate development operations on XXXXXXXXXX. A plan was developed to transfer the XXXXXXXXXX operations to a company operated by Mr. B. The real estate operations would continue to be operated jointly by Mr. A and Mr. B.

The business operations over the years have been very successful and resulted in the acquisition of a substantial investment portfolio in DC, the parent company to Subco1. Neither Mr. A nor Mr. B have any plans to dispose of any of the present assets of DC. However, as they start to go their separate ways, they decided that they would like to separate their interest in DC by undertaking the butterfly reorganization proposed below. The restructuring which occurred on or about XXXXXXXXXX, as described in paragraphs 5 through 8 above, was intended to proceed, and did proceed, whether or not the proposed butterfly reorganization of DC takes place. Those transactions are independent of, and are not connected with or related to, the transactions which will occur if the proposed butterfly reorganization proceeds. Accordingly, the restructuring which was undertaken on or about XXXXXXXXXX was not carried out in contemplation of the proposed transactions described below and does not form part of the series of transactions which includes the transactions proposed below.

PROPOSED TRANSACTIONS

10.Holdco A and Holdco B will each cause the incorporation of a new corporation pursuant to the BCA ("Sub-Holdco A" and "Sub-Holdco B", respectively). On incorporation, Holdco A will acquire common shares of Sub-Holdco A and Holdco B will acquire common shares of Sub-Holdco B. Each of Sub-Holdco A and Sub-Holdco B will be a TCC and a CCPC. The authorized capital of each of Sub-Holdco A and Sub-Holdco B will include common shares and a class of voting special shares ("Class A shares") which will be redeemable and retractable at an amount equal to the fair market value of the property for which they are issued and which will be entitled to dividends at the discretion of the directors.

11.Immediately before the transfers of property as described in paragraph 12 below, the property of DC (other than its shares of, and note receivable from, Subco1) 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, term deposits and marketable securities (other than portfolio investments);

(b) investment property, comprising all 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 property or a specified investment business; and

(c) business 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 an active business carried on by DC.

For these purposes, other than its shares of, and note receivable from, Subco1, DC 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 or CDA of DC, will not be considered property of DC for purposes of the proposed transactions described herein.

12.DC will transfer one-half of:

(a) its cash or near cash property;

(b) its investment property;

(c) its shares of Subco1; and

(d) its demand note receivable from Subco1;

to each of Sub-Holdco A and Sub-Holdco B.

As sole consideration for the property so transferred, each of Sub-Holdco A and Sub-Holdco B will issue to DC that number of its Class XXXXXXXXXX shares having a fair market value and aggregate redemption amount equal to the fair market value of the assets of DC received by each of Sub-Holdco A and Sub-Holdco B, as the case may be.

The Class XXXXXXXXXX shares of Sub-Holdco A and Sub-Holdco B will represent capital property to DC.

The Class XXXXXXXXXX shares of Sub-Holdco A or Sub-Holdco B, as the case may be, issued to DC will be entitled to more than 10% (but less than 50%) of the voting rights under all circumstances in respect of the issued share capital of Sub-Holdco A and Sub-Holdco B, as the case may be, and will represent more than 10% of the fair market value of all of the issued share capital of Sub-Holdco A or Sub-Holdco B, as the case may be, such that each of Sub-Holdco A and Sub-Holdco B will be connected with DC pursuant to paragraph 186(4)(b) of the Act.

For the purposes of subsection 191(4) of the Act, the terms and conditions of the Class XXXXXXXXXX shares of Sub-Holdco A and Sub-Holdco B, as the case may be, to be issued as described herein will specify an amount in respect of each such share, including an amount for which the share is to be redeemed, acquired or cancelled. The amount to be specified in respect of each of its Class XXXXXXXXXX shares, at the time of its issuance by a resolution to be made by the board of directors of Sub-Holdco A or Sub-Holdco B, as the case may be, will be expressed as a dollar amount, will not be determined by a formula and will not exceed the fair market value of the property to be received by Sub-Holdco A or Sub-Holdco B, as the case may be, as consideration for such shares. The agreement between Sub-Holdco A or Sub-holdco B, as the case may be, and DC pursuant to which its Class XXXXXXXXXX shares will be issued will also refer to the redemption price as XXXXXXXXXX.

13.DC and each of Sub-Holdco A and Sub-Holdco B 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 DC that is a capital property. The amount agreed upon in such elections in respect of each capital property so transferred will be equal to the lesser of the amounts described in subparagraphs 85(1)(c.1)(i) and (ii) of the Act.

For greater certainty the agreed amount for any capital property included in the subsection 85(1) elections referred to herein will not be greater than the fair market value, at the time of the disposition, of such property.

Each of Sub-Holdco A and Sub-Holdco B will add to the stated capital account maintained for its Class XXXXXXXXXX shares an amount equal to the aggregate of the cost (determined pursuant to subsection 85(1) of the Act, where relevant) of the properties transferred to that transferee.

14.Each of Sub-Holdco A and Sub-Holdco B will then redeem its Class XXXXXXXXXX shares held by DC for an amount equal to their fair market value (the "Redemption Price") and as payment of the Redemption Price will issue to DC a non-interest bearing note (the "Sub-Holdco A Note" and the "Sub-Holdco B Note") payable on demand having a principal amount and fair market value equal to the Redemption Price. DC will accept the notes as full payment for the Redemption Price of the Class XXXXXXXXXX shares of Sub-Holdco A and Sub-Holdco B so redeemed.

15.Immediately following the transactions described above, Holdco A and Holdco B will cause Sub-Holdco A and Sub-Holdco B to be wound up pursuant to the provisions of the BCA. As a result of the wind-ups, the assets and liabilities of Sub-Holdco A (including the obligation owing by Sub-Holdco A under the Sub-Holdco A Note) and Sub-Holdco B (including the obligation owing by Sub-Holdco B under the Sub-Holdco B Note), as the case may be, will become assets and liabilities of Holdco A and Holdco B, respectively.

16.Immediately following the transactions described above, the shareholders of DC, will, by special resolution, resolve to wind up and dissolve DC under the applicable provisions of the BCA. In connection with the winding-up, DC will distribute to Holdco A and Holdco B, respectively, the Sub-Holdco A Note and the Sub-Holdco B Note.

Prior to the distribution of such notes, DC 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 DC will become entitled as a result of the proposed transactions described herein, DC will distribute one-half of such amount to each of Holdco A and Holdco B. 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 DC will have been distributed or discharged, as the case may be. Articles of Dissolution will then be executed and filed accordingly. The common shares of DC will be cancelled and DC will be dissolved.

ADDITIONAL INFORMATION

17.Except as described in this letter, no assets have been or will be acquired by or disposed of by DC or a corporation controlled by DC in contemplation of and before the proposed transfer of properties described in paragraph 12 above. Nor is it contemplated that subsequent to the implementation of the transactions described herein under "Proposed Transactions" that Holdco A or Holdco B will transfer or sell any of its assets to any other person except as described herein or in the normal course of its business.

18.None of DC, Holdco A, Holdco B, Sub-Holdco A or Sub-Holdco B is, or will be at the time of the proposed transactions, an SFI.

19.None of the shares of DC, Holdco A, Holdco B, Sub-Holdco A or Sub-Holdco B 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

The purpose of the proposed transactions is to allow Mr. A and Mr. B to continue to hold, through Holdco A and Holdco B, his proportional share of the property of DC.

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.Subject to the application of subsection 69(11) of the Act, the provisions of subsection 85(1) of the Act, other than paragraph 85(1)(e.2) thereof, will apply to the transfer of each capital property which is the subject of an election under subsection 85(1) as described in paragraphs 12 and 13 above by DC to each of Sub-Holdco A and Sub-Holdco B such that the agreed amount in respect of each such property will 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.

B.As a result of the redemption by Sub-Holdco A and Sub-Holdco B of their Class XXXXXXXXXX shares held by DC, as described in paragraph 14 above, and as a result of the distributions by DC in the course of its winding-up, as described in paragraph 16 above:

(a) By virtue of paragraphs 84(3)(a) and 84(3)(b) of the Act, each of Sub-Holdco A and Sub-Holdco B will be deemed to have paid, and DC will be deemed to have received, a taxable dividend equal to the amount by which the amount paid in respect of the redemption by each of Sub-Holdco A and Sub-Holdco B of its Class XXXXXXXXXX shares exceeds the PUC of such shares; and

(b)(i)Pursuant to paragraph 88(2)(b) and subsection 84(2), but subject to (ii) to (iv) herein, each of Holdco A and Holdco B will be deemed to have received a dividend (the "winding-up dividend") on its common shares of DC equal to the proportion of the amount by which the aggregate fair market value of the property of DC distributed by DC to Holdco A and Holdco B 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 Holdco A and Holdco B, 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 DC'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 16 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)DC'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 DC 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.The deemed dividends referred to in Rulings B(a) and (b) above, to the extent that they are taxable dividends, will:

(i)be included in each recipients income pursuant to paragraph 12(1)(j) of the Act;

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

(iii)be excluded in computing the proceeds of disposition to the holder of the shares so redeemed or purchased for cancellation pursuant to paragraph (j) of the definition of proceeds of disposition in section 54 of the Act; and

(iv)by virtue of subsection 112(3) of the Act, reduce the loss, if any, in respect of the disposition of the shares on which the dividend is deemed to be received.

D.Provided that the specified amount referred to in paragraph 12 above in respect of the Class XXXXXXXXXX shares of each of Sub-Holdco A and Sub-Holdco B which are to be redeemed, as described in paragraph 14 above, is equal to their Redemption Amount, Parts IV.1 and VI.1 of the Act will not apply to the dividend deemed to have been paid by each of Sub-Holdco A and Sub-Holdco B, as described in ruling B(a) above, because each such dividend will, pursuant to subsection 191(4) of the Act, be an excepted dividend for the purposes of section 187.2 and an excluded dividend for the purposes of section 191.1 of the Act.

E.Provided that 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, then by virtue of paragraph 55(3)(b) of the Act, subsection 55(2) of the Act will not apply to the taxable dividend referred to in the ruling given in B(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.By virtue of paragraph 186(4)(b) of the Act, each of Sub-Holdco A and Sub-Holdco B will be connected with DC and DC is connected with each of Holdco A and Holdco B. Consequently,

(a) provided that neither of Sub-Holdco A nor Sub-Holdco B is entitled to a dividend refund (within the meaning of subsection 129(1) of the Act) in respect of its taxation year in which it is deemed to pay the dividend referred to in Ruling B above, as the case may be, DC will not be subject to Part IV tax under subsection 186(1) of the Act in respect of such dividend; and

(b) Each of Sub-Holdco A and Sub-Holdco B shall be subject to Part IV tax in an amount equal to that proportion of the dividend refund to which DC will become entitled for its taxation year in which the dividends referred to in ruling C, above, are paid, that the amount of each such dividend received by Sub-Holdco A and Sub-Holdco B is of the aggregate of all taxable dividends paid by DC in its taxation year in which such dividend is paid.

G.The provisions of subsection 88(1) of the Act will apply to the wind-ups of Sub-Holdco A and Sub-Holdco B as described in paragraph 15 above.

H.The extinguishment of the debt obligations as a result of the cancellation of the Sub-Holdco A Note and the Sub-Holdco B Note, as described in paragraph 16 above, will not give rise to a "forgiven amount", within the meaning thereof in subsections 80(1) and 80.01(1) of the Act.

I.DC will not realize any capital gain or incur any capital loss upon the extinguishment of the debt obligations as a result of the cancellation of the Sub-Holdco A Note and the Sub-Holdco B Note, as described in paragraph 16 above.

J.The common shares of DC 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) of the Act.

K.The provisions of subsections 15(1), 56(2), 56(4) and 246(1) of the Act will not apply to any of the proposed transactions described in paragraphs 10 through 16 above, in and by themselves.

L.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.

Opinions

Provided that our understanding of the facts and proposed transactions described herein is correct and further provided that the proposed amendment to the definition of "permitted redemption" in subsection 55(1) of the Act is enacted in substantially the same form as proposed in Bill C-69 which received first reading on December 2, 1996, it is our opinion that provided that 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, 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 B(a) 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.

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.

Yours truly,

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