30 November 1997 Ruling 9722003 - REORGANIZATION, ATTRIBUTION

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 there is a disposition of the trust assets and whether section 74.4 applies.

Position: No disposition. Section 74.4 does not apply.

Reasons: No changes resulting from creation of new trusts. Exclusion by virtue of 74.4(4) - no designated person will receive any trust income or property until the actual trust wind-up.

XXXXXXXXXX
XXXXXXXXXX 3-972200
XXXXXXXXXX
Attention: XXXXXXXXXX

XXXXXXXXXX, 1998

Dear Sirs:

Re: Advance Income Tax Ruling
XXXXXXXXXX ("Father")
XXXXXXXXXX ("Sibling 1")
XXXXXXXXXX ("Sibling 2")
XXXXXXXXXX ("Holdco 1")
XXXXXXXXXX ("Holdco 2")
XXXXXXXXXX ("Holdco 3")
XXXXXXXXXX ("Holdco 4")
XXXXXXXXXX (the "Trust")

We are writing in response to your letter of XXXXXXXXXX wherein you requested an advance income tax ruling for the above taxpayers. We also acknowledge your letters of XXXXXXXXXX. This letter incorporates the changes outlined in your letter of XXXXXXXXXX and supercedes all previous letters of this date.

To the best of your knowledge, and that of the parties to this ruling, none of the issues contained in this advance income tax ruling:

1. is in an earlier return of the taxpayer or a related person,

2. is being considered by a tax services office or a taxation centre in connection with a previously filed tax return of the taxpayer or a related person,

3. is under objection by the taxpayer or related person,

4. is before the courts or, if a judgment has been issued, the time limit for appeal to a higher court has not expired, or

5. is the subject of a ruling previously issued by the Directorate.

DEFINITIONS

In this letter, unless the context otherwise requires:

1. "Act" means the Income Tax Act, R.S.C. 1985 (5th Supp.) c.1, as amended, and, unless otherwise indicated, all legislative references are to provisions of the Act;

2. "Adjusted Cost Base" ("ACB") has the meaning assigned by section 54;

3. "Canadian-Controlled Private Corporation" ("CCPC") has the meaning assigned by subsection 125(7);

4. "Eligible Property" has the meaning assigned by subsection 85(1.1);

5. "Paid-Up Capital" ("PUC") has the meaning assigned by subsection 89(1);

6. "Public Corporation" has the meaning assigned by subsection 89(1); and

7. "Taxable Canadian Corporation" has the meaning assigned by subsection 89(1).

FACTS

1. Father is an individual resident in the Province of XXXXXXXXXX and has two children, Sibling 1 and Sibling 2, both of whom are resident in the Province of XXXXXXXXXX.

2. Sibling 1 has XXXXXXXXXX children each of whom is resident in the Province of XXXXXXXXXX.

3. Sibling 2 has XXXXXXXXXX children each of whom is resident in the Province of XXXXXXXXXX.

4. The children of Sibling 1 and Sibling 2 will be collectively referred to as the "Grandchildren".

XXXXXXXXXX ("Holdco 5") is a body corporate, incorporated pursuant to the XXXXXXXXXX as amended (the "Companies Act"), and is a Public Corporation and a Taxable Canadian Corporation. Holdco 5 is a XXXXXXXXXX. However, no single member of the XXXXXXXXXX family has control of Holdco 5 and will not, as a result of the proposed transaction, acquire control of Holdco 5. Holdco 5, through a series of subsidiary companies, carries on XXXXXXXXXX.

5. The authorized capital of Holdco 5 consists of XXXXXXXXXX common shares, without nominal or par value, XXXXXXXXXX common shares, without nominal or par value, XXXXXXXXXX preferred shares (the "ordinary preferred shares") with a par value of $XXXXXXXXXX each, issuable in series, redeemable at par. XXXXXXXXXX.

6. In XXXXXXXXXX an estate freeze was carried out by Father involving the "freeze" of Father’s interests in a substantial number of Holdco 5 Class A and Holdco 5 Class B shares held indirectly through Holdco 3 and Holdco 4. The freeze was in favour of the Grandchildren as the beneficiaries of the Trust. Sibling 1 and Sibling 2 will become the trustees of the Trust to carry out the reorganization provided for herein.

7. The interests of Father, Sibling 1, Sibling 2 and the Grandchildren in Holdco 5 are held indirectly through Holdco 1, Holdco 2, Holdco 3 and Holdco 4. Holdco 1 also holds a significant market portfolio in addition to shares of Holdco 4 and Holdco 5. Holdco 2, Holdco 3 and Holdco 4 hold no other assets (other than a small amount of cash from time to time).

• The Trust is governed by the XXXXXXXXXX Trust Agreement (the "Trust Agreement") and has the following relevant characteristics:

a. Settlor - Father;

b. Trustees are currently XXXXXXXXXX but they will be replaced by Sibling 1 and Sibling 2 (Father has never been a Trustee), Trustees’ decisions do not require the consent or direction of Father;

c. assets consist only of common shares of Holdco 4;

d. Beneficiaries - Grandchildren with a gift over to the issue of a Grandchild who has died prior to the Time of Division as defined in the Trust Agreement. Paragraph XXXXXXXXXX of the Trust Agreement provides that any gifts that fail to vest are first to be distributed among the living Grandchildren and if there are none then alive then to Sibling 1 and Sibling 2 as the children of Father and if there are no children of Father alive at the relevant time then the failed gift would vest in Father’s nephews and nieces then alive (under no circumstances are assets to be distributed to the Settlor, Father);

e. the Trust Agreement includes a general power of encroachment in favour of the Grandchildren;

f. the Trust is a discretionary trust and a "personal trust" as defined for the purposes of the Act; and

g. the Time of Division of the Trust is defined in paragraph XXXXXXXXXX of the Trust Agreement as being the earlier of:

i. the date which is XXXXXXXXXX from the date of the Trust Agreement;

ii. such date as the Trustees may in their absolute discretion determine; and

iii. the date on which the first Grandchild attains the age of XXXXXXXXXX years (none of the Grandchildren is, or will be prior to XXXXXXXXXX years of age).

Article XXXXXXXXXX of the Trust Agreement sets out the procedure to be followed at the Time of Division.

Pursuant to the terms of Article XXXXXXXXXX of the Trust Agreement, at the Time of Division the Trustees are required to set aside one share for each Grandchild in equal shares per stirpes. Once divided, the shares are to be held in trust for the

particular Grandchild or the issue of such Grandchild until XXXXXXXXXX from the date of the Trust Agreement or the date such Grandchild attains the age of XXXXXXXXXX years, whichever is the earlier, subject to a general power of encroachment available to the Trustees in favour of such Grandchild or the issue of a deceased Grandchild. Therefore, at the Time of Division the assets of the Trust are not actually distributed to the beneficiaries but are divided among the beneficiaries until the date of distribution as defined in Article XXXXXXXXXX of the Trust Agreement.

8. Paragraph XXXXXXXXXX of the Trust Agreement provides as follows:

a. Notwithstanding the provisions of paragraph XXXXXXXXXX of the Trust Agreement the Trustees may, if they see fit, in their sole and absolute discretion, appoint any share directed by the said paragraph XXXXXXXXXX to be set aside by them to:

i. another trust provided that the Trustees are of the opinion that the persons beneficially interested in such other trust are the same persons and have similar interests in such other trust and the Beneficiaries of such share, and the terms of such other trust are substantially identical to the terms upon which the Trustees are to hold such shares; or

ii. a company of which the Beneficiary of such share is the sole beneficial owner of all issued and outstanding shares except for voting preference shares not entitled to any dividends, having an aggregate par value not exceeding $XXXXXXXXXX and, having such other terms and conditions as the Trustees in their sole and absolute discretion determine.

b. The appointment of a share as aforesaid shall be in satisfaction of all of the capital interest of all Beneficiaries’ interests in such share.

9. Holdco 1 is a body corporate, incorporated pursuant to the Companies Act and is a CCPC and a Taxable Canadian Corporation. The share capital of Holdco 1 consists of:

a. XXXXXXXXXX common shares with a par value of $XXXXXXXXXX per share, XXXXXXXXXX of which are issued and outstanding and beneficially owned by Father;

b. XXXXXXXXXX non-voting preferred shares with a par value of $XXXXXXXXXX per share, redeemable/retractable at par, XXXXXXXXXX of which are issued and outstanding and beneficially owned by Father;

c. XXXXXXXXXX non-voting preferred shares with a par value of $XXXXXXXXXX per share redeemable/retractable at par, XXXXXXXXXX of which are issued and outstanding and beneficially owned by Father.

10. Holdco 2 is a body corporate, incorporated pursuant to the Companies Act, and is a CCPC and a Taxable Canadian Corporation. The share capital of Holdco 2 consists of XXXXXXXXXX common shares with a par value of $XXXXXXXXXX per share, XXXXXXXXXX of which are issued and outstanding and beneficially owned by Father.

11. Holdco 3 is a body corporate, incorporated pursuant to the Companies Act, and is a CCPC and a Taxable Canadian Corporation. The share capital of Holdco 3 consists of:

a. XXXXXXXXXX Class A common shares with a par value of $XXXXXXXXXX per share, XXXXXXXXXX of which are issued and outstanding and beneficially owned by Holdco 4;

b. XXXXXXXXXX Class B common shares with a par value of $XXXXXXXXXX per share, XXXXXXXXXX of which are issued and outstanding, XXXXXXXXXX of which are beneficially owned by Sibling 1 and XXXXXXXXXX of which are beneficially owned by Sibling 2; and

c. XXXXXXXXXX voting preferred shares with a par value of $XXXXXXXXXX per share redeemable/retractable at par, XXXXXXXXXX of which are issued and outstanding and beneficially owned by Father.

The Class A and Class B common shares are equal in all respects except that a dividend may be declared on one class to the exclusion of the other.

12. Holdco 4 is a body corporate, incorporated pursuant to the Companies Act, and is a CCPC and a Taxable Canadian Corporation. The share capital of Holdco 4 consists of:

a. XXXXXXXXXX common shares with a par value of $XXXXXXXXXX per share, all of which are issued and outstanding and beneficially owned by the Trust;

b. XXXXXXXXXX Class A non-voting preferred shares redeemable/retractable at $XXXXXXXXXX per share, all of which are issued and outstanding and beneficially owned by Holdco 2;

c. XXXXXXXXXX Class B non-voting preferred shares redeemable/retractable at $XXXXXXXXXX per share, all of which are issued and outstanding and beneficially owned by Holdco 2;

d. XXXXXXXXXX Class C non-voting preferred shares with a par value of $XXXXXXXXXX per share redeemable/retractable at $XXXXXXXXXX per share, all of which are issued and outstanding and beneficially owned by Holdco 1; and

e. XXXXXXXXXX Class D voting preferred shares with a par value of $XXXXXXXXXX per share, all of which are issued and outstanding and beneficially owned by Father.

PROPOSED TRANSACTIONS:

13. Father will incorporate two companies pursuant to the Companies Act ("S1 Holdco" and "S2 Holdco") and will receive on the incorporation one special voting share of each corporation, having a par value of $XXXXXXXXXX, the terms of which will provide that, upon the issuance of common shares by S1 Holdco or S2 Holdco, the special voting share of such company will be purchased for cancellation at par value. The capital stock of S1 Holdco will otherwise consist of:

a. XXXXXXXXXX Class A common shares with a par value of $XXXXXXXXXX per share;

b. XXXXXXXXXX Class B common shares with a par value of $XXXXXXXXXX per share;

c. XXXXXXXXXX Class A voting, redeemable, retractable preferred shares with a par value of $XXXXXXXXXX per share; and

d. XXXXXXXXXX Class B non-voting, redeemable, retractable preferred shares with a par value of $XXXXXXXXXX per share issuable in series.

The Class A and Class B common shares are equal in all respects except that a dividend may be declared on one class to the exclusion of the other.

The capital stock of S2 Holdco will be identical except that the par value of the Class A common shares will be $XXXXXXXXXX per share and the par value of the Class B common shares will be $XXXXXXXXXX per share.

Each series of Class B preferred shares issued by S1 Holdco and S2 Holdco as described below will contain a price adjustment clause to ensure that their value is equal to the value of the assets received as consideration for their issue.

Father will settle XXXXXXXXXX trusts which will be referred to individually as the "XXXXXXXXXX") having terms and conditions appropriate to fulfil the requirements of paragraph XXXXXXXXXX of the Trust Agreement. XXXXXXXXXX will collectively be referred to as the "S1 Children’s Trusts". XXXXXXXXXX will be collectively referred to as the "S2 Children’s Trusts".

The provisions of the XXXXXXXXXX trusts will be as follows (using the Children’s Trust 1A as an example):

XXXXXXXXXX

e. Settlor - Father.

f. Trustee - Sibling 1.

g. Assets - $XXXXXXXXXX contributed by Settlor.

h. Beneficiaries - The XXXXXXXXXX of Sibling 1 (XXXXXXXXXX) would be the primary beneficiary with a gift over to the issue of XXXXXXXXXX if XXXXXXXXXX dies prior to the date of distribution which will be the same as the date of distribution as provided for in the Trust Agreement (Article XXXXXXXXXX). Any gift that fails to vest will first be distributed among the living Grandchildren of Father (including any living Grandchildren that are children of Sibling 2) and, if none are then alive, then to Sibling 1 and Sibling 2 as children of Father in equal shares and, if there are no children of Father alive at the relevant time, then the failed gift would vest in Father’s nephews and nieces then alive (under no circumstances would assets be distributed to the settlor, Father). Therefore, the beneficiaries would be identical to the beneficiaries of the share of the Trust that would be set aside for XXXXXXXXXX pursuant to Article XXXXXXXXXX of the Trust Agreement at the Time of Division. Decisions made by the Trustee will not require the consent or direction of Father.

i. XXXXXXXXXX will include a general power of encroachment in favour of XXXXXXXXXX on terms identical to the general power of encroachment found in paragraph XXXXXXXXXX of the Trust Agreement.

j. XXXXXXXXXX will be a discretionary trust and a "personal trust" as defined for the purposes of the Act.

k. The date of distribution of XXXXXXXXXX will be as provided for in Article XXXXXXXXXX of the Trust Agreement which provides that the date of distribution is the earlier of:

i. XXXXXXXXXX from the date of the Trust Agreement; and

ii. the date such Grandchild attains the age of XXXXXXXXXX years.

XXXXXXXXXX would be exactly the same except that Sibling 1’s XXXXXXXXXX would be the primary beneficiary. XXXXXXXXXX.

The interests of beneficiaries under the S1 Children’s Trusts and the S2 Children’s Trusts will be identical to the interests of the beneficiaries of the Trust following the Time of Division as that term is defined in the Trust Agreement (as more fully explained at paragraph 10. hereof).

S2 Children’s Trust

The terms of the S2 Children’s Trusts will be identical to the terms of the S1 Children’s Trust except that Sibling 2 will be the Trustee and each of his/her children would be the prime beneficiary of a separate trust (XXXXXXXXXX).

14. Father will subscribe for XXXXXXXXXX Class A voting preferred shares of S1 Holdco for an aggregate subscription equal to the aggregate par value of such shares, being $XXXXXXXXXX, and will subscribe for XXXXXXXXXX Class A voting preferred shares of S2 Holdco for an aggregate subscription price equal to the aggregate par value of such shares, being $XXXXXXXXXX.

15. XXXXXXXXXX percent of the Class C preferred shares of Holdco 4 held by Holdco 1 will be transferred by Holdco 1 to S1 Holdco and XXXXXXXXXX% of the Class C preferred shares of Holdco 4 held by Holdco 1 will be transferred to S2 Holdco pursuant to section 85. The proposal is to move the Class C preferred shares of Holdco 4 to S1 Holdco and S2 Holdco on a section 85 rollover and eliminate the inter-corporate shareholdings created by the rollover. This will be accomplished as follows:

a. Father will transfer, at fair market value, to S1 Holdco that percentage of the common shares of Holdco 1 having a fair market value equal to the fair market value of the XXXXXXXXXX% Class C preferred shares of Holdco 4 being transferred to S1 Holdco. As sole consideration therefor, Father will receive from S1 Holdco Class B preferred shares, Series I of S1 Holdco having an aggregate redemption and retraction price and fair market value equal to the fair market value of the Holdco 1 common shares transferred to S1 Holdco. Father and S1 Holdco will jointly elect in accordance with the provisions of subsection 85(1) and within the time referred to in subsection 85(6), such that the common shares of Holdco 1 will be transferred to S1 Holdco at an agreed amount equal to the ACB of the common shares of Holdco 1 to Father, which amount will be less than the fair market value of such shares. The aggregate addition to the paid-up capital in respect of the Class B preferred shares, Series I of S1 Holdco will not exceed the ACB of the common share of Holdco 1 to Father being transferred to S1 Holdco. The ACB of the Holdco 1 shares to Father will be equal to the ACB as determined for the purposes of section 84.1.

b. Father will transfer, at fair market value, to S2 Holdco that percentage of the common shares of Holdco 1 having a fair market value equal to the fair market value of the XXXXXXXXXX% of the Class C preferred shares of Holdco 4 to be transferred by Holdco 1 to S2 Holdco. As sole consideration therefor, Father will receive from S2 Holdco Class B preferred shares, Series I of S2 Holdco having an aggregate redemption and retraction price and fair market value equal to the fair market value of the Holdco 1 common shares being transferred to S2 Holdco, Father and S2 Holdco will jointly elect in accordance with the provisions of subsection 85(1) and within the time referred to in subsection 85(6), such that the common shares of Holdco 1 will be transferred to S2 Holdco at an agreed amount equal to the ACB of the Holdco 1 common shares to Father, which amount will be less than the fair market value of such shares. The aggregate addition to the paid-up capital in respect of the Class B preferred shares, Series I of S2 Holdco will not exceed the ACB of the common shares of Holdco 1 to Father being transferred to S2 Holdco. The ACB of the Holdco 1 shares to Father will be equal to the ACB as determined for the purposes of section 84.1.

c. Holdco 1 will transfer, at fair market value, to S1 Holdco XXXXXXXXXX% of the Class C preferred shares of Holdco 4 and, as sole consideration therefor, S1 Holdco will issue to Holdco 1 Class B preferred shares, Series II having an aggregate redemption and retraction price equal to the fair market value of the Class C preferred shares of Holdco 4 being transferred to S1 Holdco. Holdco 1 and S1 Holdco will jointly elect in accordance with the provisions of subsection 85(1) and within the time referred to in subsection 85(6), such that the Class C preferred shares of Holdco 4 will be transferred to S1 Holdco at an agreed amount equal to the ACB of the Class C preferred shares to Holdco 1, which amount will be less than the fair market value of such shares. The aggregate addition to the paid-up capital in respect of the Class B preferred shares, Series II of S1 Holdco will not exceed the ACB of the Class C preferred shares of Holdco 4 to Holdco 1 being transferred to S1 Holdco.

d. Holdco 1 will transfer, at fair market value, to S2 Holdco the remaining Class C preferred shares of Holdco 4 (XXXXXXXXXX%) following the transfer to S1 Holdco in subparagraph (c) hereof and, as sole consideration therefor, S2 Holdco will issue to Holdco 1 Class B preferred shares, Series II having an aggregate redemption and retraction price equal to the fair market value of the Class C preferred shares of Holdco 4 being transferred to S2 Holdco. Holdco 1 and S2 Holdco will jointly elect in accordance with the provisions of subsection 85(1) and within the time referred to in subsection 85(6), such that the Class C preferred shares of Holdco 4 will be transferred to S2 Holdco at an agreed amount equal to the ACB of the Class C preferred shares to Holdco 1, which amount will be less than the fair market value of such shares. The aggregate addition to the paid-up capital in respect of the Class B preferred shares, Series II of S2 Holdco will not exceed the ACB of the Class C preferred shares of Holdco 4 to Holdco 1 being transferred to S2 Holdco.

e. Holdco 1 will purchase for cancellation, at fair market value, the common shares of Holdco 1 held by S1 Holdco and S2 Holdco in exchange for demand non-interest-bearing promissory notes payable to those companies having a principal amount equal to the fair market value of the shares so purchased from those companies.

f. S1 Holdco and S2 Holdco will redeem, at their aggregate redemption price, the preferred shares issued to Holdco 1 pursuant to subparagraphs (c) and (d) above in exchange for demand non-interest-bearing promissory notes payable to Holdco 1 by the particular issuer having an aggregate principal amount equal to the aggregate redemption price of the shares being redeemed by that issuer.

g. The demand non-interest-bearing promissory notes will be set off between Holdco 1 and S1 Holdco and between Holdco 1 and S2 Holdco and cancelled without further payment.

This procedure will move the Class C preferred shares of Holdco 4 held by Holdco 1 to S1 Holdco and S2 Holdco on a tax-deferred basis and eliminate any cross-shareholdings between Holdco 1 and each of S1 Holdco and S2 Holdco.

16. The assets held by Holdco 3 will be divided between Holdco 4, S1 Holdco and S2 Holdco in the following manner:

a. Sibling 1 will transfer, at fair market value, the XXXXXXXXXX Class B common shares of Holdco 3 held by him/her to S1 Holdco in exchange for Class B common shares of S1 Holdco having an aggregate par value of $XXXXXXXXXX and an aggregate fair market value equal to the fair market value of the Holdco 3 Class B common shares so transferred. Sibling 1 and S1 Holdco will jointly elect in accordance with the provisions of subsection 85(1) and within the time referred to in subsection 85(6), such that the Class B common shares of Holdco 3 will be transferred to S1 Holdco at an agreed amount equal to the ACB of the Class B common shares of Holdco 3 to Sibling 1, which amount will be less than the fair market value of such shares. The aggregate addition to the paid-up capital in respect of the Class B common shares of S1 Holdco will not exceed the ACB of the Class B common shares of Holdco 3 to Sibling 1. The ACB of the common shares of Holdco 3 to Sibling 1 will be equal to the ACB as determined for the purposes of section 84.1. The number of common shares being issued to Sibling 1 will give Sibling 1 an interest in S1 Holdco at the end of the proposed transactions having a value equal to the value of his/her shares of Holdco 3.

b. Father will transfer, at fair market value, to S1 Holdco XXXXXXXXXX% of the XXXXXXXXXX% non-cumulative preferred shares of Holdco 3 and as sole consideration therefor S1 Holdco will issue to Father Class B preferred shares, Series III having an aggregate redemption and retraction price and fair market value equal to the fair market value of the XXXXXXXXXX% non-cumulative preferred shares of Holdco 3 transferred to S1 Holdco by Father. Father and S1 Holdco will jointly elect in accordance with the provisions of subsection 85(1) and within the time referred to in subsection 85(6), such that the XXXXXXXXXX% non-cumulative preferred shares of Holdco 3 will be transferred to S1 Holdco at an agreed amount equal to the ACB of such shares to Father, which amount will be less than the fair market value of such shares. The aggregate addition to the paid-up capital in respect of the Class B preferred shares, Series III of S1 Holdco will not exceed the ACB of the XXXXXXXXXX% non-cumulative preferred shares of Holdco 3 to Father. The ACB of the XXXXXXXXXX% non-cumulative preferred shares of Holdco 3 to Father will be the same as the ACB as determined for the purposes of section 84.1.

c. Holdco 3 will transfer, at fair market value, to S1 Holdco that percentage of the value of its assets that is equal to the percentage of the value of its shares held by S1 Holdco and as sole consideration therefor S1 Holdco will issue to Holdco 3 Class B preferred shares, Series IV having an aggregate redemption and retraction price and fair market value equal to the fair market value of the assets being transferred by Holdco 3 to S1 Holdco. Holdco 3 and S1 Holdco will jointly elect in accordance with the provisions of subsection 85(1) and within the time referred to in subsection 85(6), such that each of the assets of Holdco 3 being transferred to S1 Holdco that is an Eligible Property will be transferred at an agreed amount equal to the ACB of that asset to Holdco 3, which amount will be less than the fair market value of each such asset. The assets will include a combination of Holdco 5 Class A and Holdco 5 Class B shares. The aggregate addition to the paid-up capital in respect of the Class B preferred shares, Series IV of S1 Holdco will not exceed the aggregate ACB of the subject assets being transferred by Holdco 3 to S1 Holdco.

d. Sibling 2 will transfer, at fair market value, to S2 Holdco the XXXXXXXXXX Class B common shares of Holdco 3 held by him/her, and as sole consideration therefor S2 Holdco will issue to Sibling 2 Class B common shares with an aggregate par value of $XXXXXXXXXX and an aggregate fair market value equal to the aggregate fair market value of the shares so transferred. S2 Holdco and Sibling 2 will jointly elect in accordance with the provisions of subsection 85(1) and within the time referred to in subsection 85(6), such that the Class B common shares of Holdco 3 will be transferred to S2 Holdco at an agreed amount equal to the ACB of the Class B common shares of Holdco 3 to Sibling 2, which amount will be less than the fair market value of such shares. The aggregate addition to the paid-up capital in respect of the common shares of S2 Holdco will not exceed the ACB of the Class B common shares of Holdco 3 to Sibling 2. The ACB of the Class B common shares of Holdco 3 to Sibling 2 will be equal to the ACB of such shares for the purposes of section 84.1. The number of Class B common shares being issued to Sibling 2 will give Sibling 2 an interest in S2 Holdco at the end of the proposed transactions having a value equal to the value of his/her shares of Holdco 3.

e. Father will transfer, at fair market value, to S2 Holdco the balance of the XXXXXXXXXX% non-cumulative preferred shares of Holdco 3 held by Father (representing XXXXXXXXXX% of his original holdings) and as sole consideration therefor S2 Holdco will issue to Father Class B preferred shares, Series III having an aggregate redemption and retraction price equal to the aggregate fair market value of the shares so transferred. Father and S2 Holdco will jointly elect in accordance with the provisions of subsection 85(1) and within the time referred to in subsection 85(6), such that the XXXXXXXXXX% non-cumulative preferred shares of Holdco 3 will be transferred to S2 Holdco at an agreed amount equal to the ACB of the XXXXXXXXXX% non-cumulative preferred shares of Holdco 3 to Father, which amount will be less than the fair market value of such shares. The aggregate addition to the paid-up capital in respect of the Class B preferred shares, Series III of S2 Holdco will not exceed the ACB to Father of the XXXXXXXXXX% non-cumulative preferred shares of Holdco 3. The ACB of such shares will be equal to the ACB of such shares for the purposes of section 84.1.

f. Holdco 3 will transfer, at fair market value, to S2 Holdco that percentage of the value of its assets that is equal to the percentage of the value of its shares held by S2 Holdco and as sole consideration therefor S2 Holdco will issue to Holdco 3 Class B preferred shares, Series IV having an aggregate redemption and retraction price and fair market value equal to the fair market value of the assets being transferred by Holdco 3 to S2 Holdco. Holdco 3 and S2 Holdco will jointly elect in accordance with the provisions of subsection 85(1) and within the time referred to in subsection 85(6), such that each of the assets of Holdco 3 being transferred to S2 Holdco that is an Eligible Property will be transferred at an agreed amount equal to the ACB of that asset to Holdco 3, which amount will be less than the fair market value of each such asset. The assets will include a combination of Holdco 5 Class A and Holdco 5 Class B shares. The aggregate addition to the paid-up capital in respect of the Class B preferred shares, Series IV of S2 Holdco will not exceed the aggregate ACB of the subject assets being transferred by Holdco 3 to S2 Holdco.

g. Holdco 3 will purchase for cancellation, at fair market value, the common shares and redeem, at the redemption price, the XXXXXXXXXX% non-cumulative preferred shares of Holdco 3 held by S1 Holdco and S2 Holdco in exchange for demand non-interest-bearing promissory notes payable to the holder having an aggregate principal amount equal to the fair market value or redemption price of the shares of the holder being purchased or redeemed.

h. S1 Holdco and S2 Holdco will redeem, at their redemption price, their respective preferred shares issued to Holdco 3 in exchange for demand non-interest-bearing promissory notes payable to Holdco 3 by the particular issuer, each having an aggregate principal amount equal to the fair market value of the shares being redeemed by that issuer.

i. The demand non-interest-bearing promissory notes between Holdco 3 and S1 Holdco and Holdco 3 and S2 Holdco will be set off and cancelled without further payment.

j. At this point Holdco 4 will be the sole shareholder of Holdco 3 and Holdco 4 will cause Holdco 3 to be wound up pursuant to subsection 88(1), transferring the balance of its assets to Holdco 4. The PUC of the shares of Holdco 3 held by Holdco 4 immediately prior to the wind-up will be equal to or less than the ACB of such shares to Holdco 4.

17. The special preferred shares of S2 Holdco and S1 Holdco held by Father will be redeemed by those respective companies for an aggregate redemption price of $XXXXXXXXXX which will be equal to the PUC of such shares and the ACB to Father of such shares. Such ACB will be equal to the ACB for the purposes of section 84.1.

18. The Class A and Class B preferred shares of Holdco 4 held by Holdco 2 will be transferred to S1 Holdco and S2 Holdco in the appropriate percentages (XXXXXXXXXX% and XXXXXXXXXX% respectively) in the following manner:

a. Father will transfer, at fair market value, to S1 Holdco XXXXXXXXXX% of the common shares of Holdco 2 to S1 Holdco and as sole consideration therefor S1 Holdco will issue Class B preferred shares, Series V having an aggregate redemption and retraction price equal to the fair market value of the shares of Holdco 2 being transferred by Father to S1 Holdco. Father and S1 Holdco will jointly elect in accordance with the provisions of subsection 85(1) and within the time referred to in subsection 85(6), such that the common shares of Holdco 2 will be transferred to S1 Holdco at an agreed amount equal to the ACB of the common shares of Holdco 2 to Father, which amount will be less than the fair market value of such shares. The aggregate addition to the paid-up capital in respect of the Class B preferred shares, Series V will not exceed the ACB of the common shares of Holdco 2 being transferred by Father to S1 Holdco. The ACB of the shares of Holdco 2 to Father will be equal to the ACB of the said shares for the purposes of section 84.1.

b. Holdco 2 will transfer, at fair market value, to S1 Holdco XXXXXXXXXX% of the XXXXXXXXXX% Class A preferred shares and XXXXXXXXXX% of the XXXXXXXXXX% Class B preferred shares of Holdco 4 and as sole consideration therefor S1 Holdco will issue to Holdco 2 Class B preferred shares, Series VI having an aggregate redemption and retraction price and fair market value equal to the fair market value of the Holdco 4 Class A and Class B preferred shares being transferred by Holdco 2 to S1 Holdco. Holdco 2 and S1 Holdco will jointly elect in accordance with the provisions of subsection 85(1) and within the time referred to in subsection 85(6), such that the Class A and Class B preferred shares of Holdco 4 will be transferred to S1 Holdco at an agreed amount equal to the ACB of such shares to Holdco 2, which amount will be less than the fair market value of such shares. The aggregate addition to the paid-up capital in respect of the Class B preferred shares, Series VI of S1 Holdco will not exceed the ACB of the Class A and Class B preferred shares of Holdco 4 being transferred by Holdco 2 to S1 Holdco.

c. Father will transfer, at fair market value, to S2 Holdco the remaining balance of the common shares of Holdco 2 to S2 Holdco and as sole consideration therefor S2 Holdco will issue to Father Class B preferred shares, Series V having an aggregate redemption and retraction price and fair market value equal to the fair market value of the common shares of Holdco 2 being transferred to S2 Holdco. Father and S2 Holdco will jointly elect in accordance with the provisions of subsection 85(1) and within the time referred to in subsection 85(6), such that the common shares of Holdco 2 will be transferred to S2 Holdco at an agreed amount equal to the ACB of the common shares of Holdco 2 to Father, which amount will be less than the fair market value of such shares. The aggregate addition to the paid-up capital in respect of the Class B preferred shares, Series V will not exceed the ACB of the common shares of Holdco 2 to Father being transferred to S2 Holdco. The ACB of the Holdco 2 common shares to Father will be equal to the ACB of such shares as determined for the purposes of section 84.1.

d. Holdco 2 will purchase for cancellation, at fair market value, the common shares of Holdco 2 held by S1 Holdco in exchange for a demand non-interest-bearing promissory note payable to S1 Holdco having an aggregate principal amount equal to the fair market value of the shares being purchased.

e. S1 Holdco will redeem, at the aggregate redemption price, the Class B preferred shares, Series VI issued to Holdco 2 in exchange for a demand non-interest-bearing promissory note payable to Holdco 2 having an aggregate principal amount equal to the fair market value of the shares being redeemed.

f. The demand non-interest-bearing notes between Holdco 2 and S1 Holdco will be set off and cancelled without further payment.

g. At this point S2 Holdco will be the sole shareholder of Holdco 2 and will cause Holdco 2 to be wound-up pursuant to subsection 88(1), transferring the balance of its assets to S2 Holdco. The PUC of the shares of Holdco 2 held by S2 Holdco immediately prior to the wind-up will be equal to or less than the ACB of such shares to S2 Holdco.

19. The assets of Holdco 4, consisting of a combination of Holdco 5 Class A and Holdco 5 Class B shares, will be transferred to S1 Holdco and S2 Holdco in the appropriate percentages in the following manner:

a. The Trust will transfer, at fair market value, to S1 Holdco XXXXXXXXXX% of the common shares of Holdco 4 held by the Trust and as sole consideration therefor S1 Holdco will issue Class A common shares with an aggregate par value of $XXXXXXXXXX and an aggregate fair market value equal to the fair market value of the common shares of Holdco 4 so transferred to S1 Holdco. The Trust and S1 Holdco will jointly elect in accordance with the provisions of subsection 85(1) and within the time referred to in subsection 85(6) thereof, such that the common shares of Holdco 4 will be transferred to S1 Holdco at an agreed amount equal to the ACB of the common shares to the Trust, which amount will be less than the fair market value of such shares. The aggregate addition to the paid-up capital in respect of the Class A common shares of S1 Holdco will not exceed the ACB of the common shares of Holdco 4 to the Trust. The ACB of the common shares of Holdco 4 to the Trust will be equal to the ACB of such shares as determined for the purposes of section 84.1.

b. Father will transfer to S1 Holdco XXXXXXXXXX % of the Class D voting preferred shares of Holdco 4 to S1 Holdco in exchange for cash in an amount equal to the redemption and retraction price and fair market value of the Class D voting preferred shares. The redemption and retraction price and fair market value of the Class D voting shares will be equal to the ACB of such shares to Father. The ACB of such shares to Father will be equivalent to the ACB of such shares as determined for the purposes of section 84.1.

c. Holdco 4 will transfer, at fair market value, to S1 Holdco 43% of its assets consisting almost exclusively of Holdco 5 Class A and Holdco 5 Class B shares (Holdco 4 has no other assets other than a small amount of cash from time to time) and as sole consideration therefor S1 Holdco will issue to Holdco 4 Class B preferred shares, Series VII having an aggregate redemption and retraction price and fair market value equal to the fair market value of the assets being transferred by Holdco 4 to S1 Holdco. S1 Holdco and Holdco 4 will jointly elect in accordance with the provisions of subsection 85(1) and within the time referred to in subsection 85(6) such that each of the assets of Holdco 4 being transferred to S1 Holdco that is an Eligible Property will be transferred at an agreed amount equal to the ACB of that asset to Holdco 4, which amount will be less than the fair market value of each such asset. The aggregate addition to the paid-up capital in respect of the Class B preferred shares, Series VII of S1 Holdco will not exceed the aggregate ACB of the assets being transferred by Holdco 4 to S1 Holdco.

d. S1 Holdco will redeem, for their redemption price, the Class B preferred shares, Series VII issued to Holdco 4 and issue to Holdco 4 a demand non-interest-bearing promissory note with a principal amount equal to the redemption price of the said shares as consideration for the redemption.

e. Holdco 4 will purchase for cancellation, at fair market value, the shares of Holdco 4 held by S1 Holdco and as consideration therefor issue a demand non-interest-bearing promissory note with a principal amount equal to the fair market value of the shares so purchased.

f. The demand non-interest-bearing notes between Holdco 4 and S1 Holdco will be set off and cancelled without further payment.

g. Father will transfer, at fair market value, to S2 Holdco the remaining balance of the Class D voting preferred shares of Holdco 4 held by him following the transfer in subparagraph (b) above in exchange for cash in an amount equal to the redemption and retraction price and fair market value of the Class D voting preferred shares. The redemption and retraction price and fair market value of the Class D voting preferred shares will be equal to the ACB of such shares to Father. The ACB of such shares to Father will be equal to the ACB of such shares as determined for the purposes of section 84.1.

h. The Trust will transfer, at fair market value, the balance of the shares of Holdco 4 owned by the Trust to S2 Holdco and as sole consideration therefor, S2 Holdco will issue Class A common shares with an aggregate par value of $XXXXXXXXXX and having an aggregate fair market value equal to the aggregate fair market value of the Holdco 4 shares so transferred to the Trust. The Trust and S2 Holdco will jointly elect in accordance with the provisions of subsection 85(1) and within the time referred to in subsection 85(6), such that the common shares of Holdco 4 will be transferred to S2 Holdco at an agreed amount equal to the ACB of the common shares to the Trust, which amount will be less than the fair market value of such shares. The aggregate addition to the paid-up capital in respect of the Class A common shares of S2 Holdco will not exceed the ACB of the common shares of Holdco 4 to the Trust. The ACB of the common shares of Holdco 4 to the Trust will be equal to the ACB as determined for the purposes of section 84.1.

i. At this point S2 Holdco will be the sole shareholder of Holdco 4 and will cause Holdco 4 to be wound-up pursuant to subsection 88(1), transferring the balance of its assets to S2 Holdco. The PUC of the shares of Holdco 4 held by S2 Holdco immediately prior to the wind-up will be equal to or less than the ACB of such shares to S2 Holdco.

20. The Trustees of the Trust will exercise their discretion to determine the Time of Division pursuant to the terms of the Trust Agreement and divide the assets of the Trust equally between the Grandchildren then living by setting aside for the children of Sibling 1 the shares of S1 Holdco and for the children of Sibling 2 the shares of S2 Holdco.

21. Further, the Trustees will exercise their right pursuant to paragraph XXXXXXXXXX of the Trust Agreement to distribute the shares belonging to each of the children of Sibling 1 to the S1 Children’s Trusts and to distribute the share of the assets of the Trust belonging to each of the children of Sibling 2 to the S2 Children’s Trusts in satisfaction of each beneficiary’s capital interest in the Trust. As a result, the XXXXXXXXXX shares assigned to Sibling 1’s children will be transferred to the S1 Children’s Trusts and the XXXXXXXXXX shares assigned to Sibling 2’s children will be transferred to the S2 Children’s Trusts.

OTHER INFORMATION

22. The following file or will file their federal tax returns at the XXXXXXXXXX Taxation Centre and deal or will deal with the XXXXXXXXXX Tax Services Office:

a. XXXXXXXXXX

XXXXXXXXXX

b. XXXXXXXXXX

XXXXXXXXXX

c. XXXXXXXXXX

XXXXXXXXXX

d. XXXXXXXXXX

XXXXXXXXXX

e. XXXXXXXXXX

XXXXXXXXXX

f. XXXXXXXXXX

XXXXXXXXXX

g. XXXXXXXXXX

XXXXXXXXXX

h. XXXXXXXXXX

i. XXXXXXXXXX

j. XXXXXXXXXX

23. It is your opinion that it will not be necessary to obtain court approval of any of the proposed transactions described herein even though certain of the beneficiaries and possible beneficiaries are minors or unborn since all transactions involving the Trust are specifically contemplated by the terms of that trust including:

a. division of interests (paragraph XXXXXXXXXX),

b. transfer to new trusts (paragraph XXXXXXXXXX), and

c. transfer of assets to corporation (paragraphs XXXXXXXXXX).

PURPOSE OF THE PROPOSED TRANSACTIONS

Father wishes, to the extent possible, to divide his family’s interest in the Holdco 5 Class A and Class B shares between Sibling 1 and his/her family and Sibling 2 and his/her family. Currently the interests are combined through a maze of corporations and a combined trust. The revised structure allows Sibling 1 and Sibling 2 greater flexibility in dealing with their own family situations subject to the overriding control by Father.

This will not be an estate freeze but the continuation of a pre-existing estate freeze. Sibling 1 and Sibling 2 are not freezing their interests in Holdco 5 as part of this series of transactions but merely rearranging and consolidating their respective family interests through S1 Holdco and S2 Holdco.

The reorganization provides flexibility to Father, Sibling 1 and Sibling 2 as well as simplifying an inordinately complex corporate structure. There will be no attempt to avoid the 21-year deemed disposition rule pursuant to section 104 as the S1 Children’s Trusts and the S2 Children’s Trusts will be wound-up in accordance with their terms prior to the date of the 21-year deemed disposition pursuant to section 104 of the currently existing Trust. Therefore, the applicants are working within the terms of the Act to rearrange an existing estate freeze to provide flexibility to the families of Sibling 1 and Sibling 2 and simplify the estate of Father.

The purpose of the proposed transactions is to divide the respective interests of Sibling 1 and his/her children from Sibling 2 and his/her children. This is to be accomplished primarily by a series of section 85 rollovers, inter-corporate share redemptions and section 88 wind-ups.

XXXXXXXXXX

RULINGS

Provided that the above statements of facts and proposed transactions are accurate and constitute complete disclosure of all the relevant facts and proposed transactions and that the proposed transactions are carried out as set forth herein, the following rulings are given:

A. Provided the relevant parties jointly elect under subsection 85(1), in prescribed form and within the time referred to in subsection 85(6), in respect of the transfers of property described in subparagraphs:

(1) 19(a), 19(b), 19(c) and 19(d);
(2) 20(a), 20(b), 20(c), 20(d), 20(e) and 20(f);
(3) 22(a), 22(b), and 22(c); and
(4) 23(a), 23(c) and 23(h);

a vendor’s proceeds of disposition of, and a purchaser’s cost of, a particular property transferred will, by virtue of paragraph 85(1)(a), be deemed to be equal to the amount agreed upon in respect of that property, as described in the relevant paragraph referred to above. For greater certainty, paragraph 85(1)(e.2) will not be applicable in respect of the transfers.

B. In respect of the redemptions or purchases for cancellation described in the following paragraph or subparagraphs:

(1) 19(e) and 19(f);
(2) 20(g) and 20(h);
(3) 21.;
(4) 22(d) and 22(e); and
(5) 23(d) and 23(e);

the amount by which the amount paid on the redemption or purchase for cancellation exceeds the PUC of the particular shares so redeemed or purchased will be deemed to be a dividend paid by the particular payor and received by the particular recipient, by virtue of paragraph 84(3)(a) or 84(3)(b), as applicable. The provisions of subsection 112(3) will apply to any loss which may otherwise arise to the recipient as a result of the redemption or purchase.

C. By virtue of paragraph 55(3)(a), the provisions of subsection 55(2) will not apply to the dividends (other than the dividend described in paragraph 21. above) deemed to be received by a recipient, as described in ruling B. above, provided that there is not:

(1) a disposition of any property to a person with whom the payor or the recipient is not related; or

(2) a significant increase in the interest in any corporation of a person with whom the payor or recipient is not related,

which is part of the series of transactions or events, determined with reference to subsection 248(10), that includes the proposed transactions described herein.

D. Each of the dividends described in ruling B. above will be deemed to be an "excluded dividend" by virtue of paragraph (a) of the definition of "excluded dividend" contained in subsection 191(1) and, therefore, will not be subject to tax under Part VI.1.

E. The application of section 84.1 to the transactions described in subparagraphs 19(a), 19(b), 20(a), 20(b), 20(d), 20(e), 22(a), 22(c), 23(a), 23(b), 23(g) and 23(h), and paragraph 21. above will not result in an immediate deemed dividend to Father, Sibling 1, Sibling 2 or the Trust.

F. The provisions of subsection 88(1) will apply to the wind-up of the corporations described in subparagraphs 20(j), 22(g) and 23(i) above so that the parent corporation in each of the wind-ups will be deemed to have disposed of the shares of the subject corporation at the ACB to the parent corporation of the shares of the subject corporation and the subject corporation will be deemed to have disposed of its assets at the cost to the subject corporation of such assets. The cost to the parent corporation of the assets received on the winding-up from the subject corporation will be equal to the cost to the subject corporation of such assets.

G. The Trust and the beneficiaries thereof will not incur a disposition as defined in section 54 as a result of the division of assets of the Trust into shares as provided by paragraph 24. above or the distribution of those shares to the S1 Children’s Trusts and the S2 Children’s Trusts pursuant to paragraph 25. above.

H. Each of the S1 Children’s Trusts and the S2 Children’s Trusts will have a cost amount with respect to the property received from the Trust equal to the cost amount of such property to the Trust.

I. Section 105 will not be applied to cause an amount to be included in the income of any person as a result of the proposed transactions, in and by themselves.

J. Subsection 75(2) will not apply to the S1 Children’s Trusts or the S2 Children’s Trusts as a result of the proposed transactions, in and by themselves.

K. Provided that a designated person has not received or otherwise obtained the use of any of the income or capital of the Trust, the S1 Children’s Trusts or the S2 Children’s Trusts, and no deduction has been made by the Trust, the S1 Children’s Trusts or the S2 Children’s Trusts in computing its income under subsection 104(6) or (12) in respect of amounts paid or payable to, or included in the income of, that person while being a designated person in respect of Father, Sibling 1 or Sibling 2, then by virtue of the provisions of subsection 74.4(4), subsection 74.4(2) will not apply to any of the transfers of property by Father, Sibling 1 or Sibling 2 to any corporation in which the Trust, the S1 Children’s Trusts or the S2 Children’s Trusts has or will have an interest as described above.

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

M. The cancellation of the notes, as described in subparagraphs 19(g), 20(i), 22(f) and 23(f) above, will not give rise to a "forgiven amount" for purposes of sections 80, 80.01 and 80.03.

N. The provisions of subsection 245(2) will not be applied as a result of the proposed transactions, in and by themselves, to redetermine the tax consequences confirmed herein.

The above rulings are based on the Act in its present form and do not take into account any proposed amendments to the Act.

The above rulings are given subject to the limitations and qualifications set out in Information Circular 70-6R3 dated December 30, 1996 issued by Revenue Canada ("IC 70-6R3") and are binding provided the proposed transactions are completed by XXXXXXXXXX.

OPINION

Provided that proposed subparagraphs 55(3)(a)(i) to (v) and subsection 55(3.01) are enacted in substantially the same form as set out in the proposed amendments in Bill C-28 which was passed by the House of Commons on April 21, 1998, it is our opinion that subsection 55(2) will not apply to the taxable dividends described in ruling B. above (other than the dividend described in paragraph 21. above), provided that as part of the series of transactions or events as part of which the said dividends are received, there is no event described in proposed subparagraphs 55(3)(a)(i) to (v) which has not been described herein as a proposed transaction.

The foregoing comment is given in accordance with the practice referred to in paragraph 22 of IC 70-6R3 and is not binding on Revenue Canada.

COMMENTS

1. Nothing in this letter should be construed as our confirmation of the tax consequences of any transaction except those consequences expressly confirmed above.

2. Nothing in this ruling should be construed as implying that Revenue Canada has agreed to or reviewed the determination of the ACB or PUC of any shares referred to herein.

3. Nothing in this letter should be construed as confirming that, for the purposes of any of the rulings given herein, any adjustments to the redemption values of the Class B preferred shares issued by S1 Holdco and S2 Holdco pursuant to the price adjustment clauses referred to in paragraph 16. above, will be effective retroactively to the time of the issuance of such shares. Furthermore, the rulings in this letter are not intended to apply to the operation of the price adjustment clauses, since their coming into effect will be due to circumstances that do not constitute proposed transactions that are seriously contemplated. The general position of the Department with respect to price adjustment clauses is as stated in Interpretation Bulletin IT-169.

Yours truly,

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

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