30 November 1996 Ruling 9722663 - BUTTERFLY REORGANIZATION

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 Estate holding note received on the redemption of shares of corporation is affiliated with corporation immediately after redemption.

Position:

No

Reasons:

Note is not a demand note, terms provide for repayment over a number of years, assets in corporation may be liquidated easily to satisfy any demand for annual payments.

XXXXXXXXXX				3-972266
XXXXXXXXXX

Attention: XXXXXXXXXX

XXXXXXXXXX, 1997

Dear Sirs:

Re: XXXXXXXXXX
Advance Income Tax Ruling Request

This is in reply to your letter of XXXXXXXXXX in which you requested various advance income tax rulings on behalf of the above-noted taxpayers. We also acknowledge your letters of XXXXXXXXXX and our telephone conversations in connection herewith.

We understand that, to the best of your knowledge and that of the taxpayers involved, 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, or is under objection or appeal.

Definitions

In this letter unless otherwise expressly stated:

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

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

(c) XXXXXXXXXX;

(d) "CBCA" means the Canada Business Corporations Act;

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

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

(g) "distribution" has the meaning assigned by subsection 55(1);

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

(i) "forgiven amount" has the meaning assigned by subsections 80(1) and 80.01(1);

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

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

(l) "personal trust" has the meaning assigned by subsection 248(1);

(m) "private corporation" has the meaning assigned by subsection 89(1);

(n) "RDTOH" means "refundable dividend tax on hand" which has the meaning assigned by subsection 129(3);

(o) "restricted financial institution" has the meaning assigned by subsection 248(1);

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

(q) "specified financial institution" has the meaning assigned by subsection 248(1); and

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

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

FACTS

1. Holdco 1 is a taxable Canadian corporation and a private corporation which was incorporated on XXXXXXXXXX. Its taxation year ends on XXXXXXXXXX.

2. The authorized share capital of Holdco 1 consists of:

(a) XXXXXXXXXX Class XXXXXXXXXX voting Common shares without par value;

(b) XXXXXXXXXX Class XXXXXXXXXX voting Common shares without par value; and

(c) XXXXXXXXXX non-voting redeemable and retractable preference shares with a par value of $XXXXXXXXXX per share.

The Class XXXXXXXXXX and Class XXXXXXXXXX Common shares are convertible on a one-for-one basis into shares of the other class at the option of the shareholder. The issued Class XXXXXXXXXX and Class XXXXXXXXXX Common shares of Holdco 1 are entitled to vote, receive dividends and share in the assets of Holdco 1 on its winding-up. The preference shares of Holdco 1 are entitled to non-cumulative dividends at the rate of XXXXXXXXXX% per annum in priority to the declaration of any dividend on the Class XXXXXXXXXX and Class XXXXXXXXXX Common shares of Holdco 1 and are non-voting.

The issued and outstanding shares of Holdco 1 together with the name of each of its shareholders, the adjusted cost base to each shareholder of its shares in Holdco 1 and the paid-up capital of such shares are as follows:

Shareholder Number and Class Adjusted cost Paid-up
Base Capital

Holdco 2 XXXXXXXXXX

Holdco 3 XXXXXXXXXX

Holdco 4 XXXXXXXXXX

Holdco 5 XXXXXXXXXX

3. The previous shareholders of Holdco 1 were XXXXXXXXXX all of whom are siblings. Each sibling transferred his or her shares of Holdco 1 to his or respective holding company, Holdco 2, Holdco 3, Holdco 4 and Holdco 5. Each of Holdco 2, Holdco 3, Holdco 4, and Holdco 5 represents the interest of the family of one sibling.

4. Holdco 1 is a holding company with investments in Canadian, U.S. and foreign securities, which are managed by XXXXXXXXXX.

The fair market values, as at XXXXXXXXXX, of the assets of Holdco 1 are as follows:

Fair Market Value Adjusted Cost Base

Assets managed by:

XXXXXXXXXX

The largest liabilities are loans from Holdco 1's shareholders totaling $XXXXXXXXXX.

Holdco 1 does not have significant influence, within the meaning of section 3050 of the CICA Handbook over any corporation.

5. As at XXXXXXXXXX, Holdco 1 had a balance of $XXXXXXXXXX in its capital dividend account and as at XXXXXXXXXX RDTOH of $XXXXXXXXXX.

6. Holdco 2 is a taxable Canadian corporation and a private corporation which was incorporated on XXXXXXXXXX. Holdco 2's taxation year ends on XXXXXXXXXX.

The authorized share capital of Holdco 2 consists of:

(a) XXXXXXXXXX Class XXXXXXXXXX Common Shares without par value;

(b) XXXXXXXXXX Class XXXXXXXXXX Common Shares without par value;

(c) XXXXXXXXXX Class XXXXXXXXXX Preference shares with a par value of $XXXXXXXXXX each;

(d) XXXXXXXXXX Class XXXXXXXXXX Preference shares with a par value of $XXXXXXXXXX each;

(e) XXXXXXXXXX Class XXXXXXXXXX Preference shares with a par value of $XXXXXXXXXX each; and

(f) XXXXXXXXXX Class XXXXXXXXXX Preference shares with a par value of $XXXXXXXXXX each.

The issued and outstanding shares of Holdco 2 together with the name of each of its shareholders, the adjusted cost base to each shareholder of his or her shares in Holdco 2 and the paid-up capital of such shares are as follows:

Shareholder Number and Class Adjusted cost Paid-up
Base Capital

XXXXXXXXXX

7. Each class of preference shares of Holdco 2 has a fixed value redemption price. These shares are retractable and redeemable but are non-voting. Each class of preference shares was issued in exchange for certain property and its redemption price is based on the fair market value of that property at the time of transfer. The only class of shares that is entitled to vote are the Class XXXXXXXXXX Common shares which are held by XXXXXXXXXX. The Class XXXXXXXXXX Common and Class XXXXXXXXXX Common shares entitle the holder of those shares to participate equally in the winding-up of Holdco 2 and to receive dividends.

The shareholders of Holdco 2 are XXXXXXXXXX.

8. Holdco 3 is a taxable Canadian corporation and a private corporation which was incorporated on XXXXXXXXXX. Holdco 3's taxation year ends on XXXXXXXXXX.

The authorized share capital of Holdco 3 consists of:

(a) XXXXXXXXXX Class XXXXXXXXXX Common shares without par value;

(b) XXXXXXXXXX Class XXXXXXXXXX Common shares without par value; and

(c) XXXXXXXXXX non-voting redeemable and retractable preference shares with a par value of $XXXXXXXXXX each.

The Class XXXXXXXXXX Common shares have attached to them the right to vote but are not entitled to dividends or to share on the winding-up of Holdco 3. The rights attached to the Class XXXXXXXXXX Common shares include the right to receive dividends at the discretion of the directors and to share in the assets of Holdco 3 on its winding-up but not the right to vote.

The issued and outstanding shares of Holdco 3 together with the name of each of its shareholders, the adjusted cost base to each shareholder of his or her shares in Holdco 3 and the paid-up capital of such shares are as follows:

Shareholder Number and Class Adjusted cost Paid-up
Base Capital

XXXXXXXXXX

immediately after its incorporation in exchange for her shares of Holdco 1. The Holdco 3 preference shares have a fixed value redemption price equal to the fair market value of the Holdco 1 shares at the time of the exchange. At the time of the exchange, Holdco 3 issued XXXXXXXXXX Class XXXXXXXXXX Common shares to XXXXXXXXXX and XXXXXXXXXX Class XXXXXXXXXX Common shares to each of her XXXXXXXXXX children. The Class XXXXXXXXXX Common shares are the only voting shares issued by Holdco 3. One of XXXXXXXXXX children subsequently died, and the Class XXXXXXXXXX Common shares she owned were transferred equally to her XXXXXXXXXX surviving siblings. These XXXXXXXXXX siblings continue to own their Class XXXXXXXXXX Common shares.

10. XXXXXXXXXX died on XXXXXXXXXX. Pursuant to her will, the executors of the Estate are her XXXXXXXXXX sons, XXXXXXXXXX. Her will leaves the residue of her estate including her shares of Holdco 3 equally to her children, XXXXXXXXXX. The will also provides administrative powers for the executors to sell, call in or convert into money all or so much of the properties of the Estate at such time or times, in such manner and upon such terms as the executors shall consider to be necessary or advisable.

The Estate is a personal trust.

11. The fair market value of the shares of Holdco 3 owned by XXXXXXXXXX at the time of her death was $XXXXXXXXXX. The deemed disposition of her shares of Holdco 3 pursuant to subsection 70(5) resulted in a capital gain of $XXXXXXXXXX.

12. Holdco 4 is a taxable Canadian corporation and a private corporation which was incorporated on XXXXXXXXXX. Holdco 4's taxation year ends on XXXXXXXXXX.

The authorized share capital of Holdco 4 consists of :

(a) XXXXXXXXXX Class XXXXXXXXXX Common shares without par value;

(b) XXXXXXXXXX Class XXXXXXXXXX Common shares without par value;

(c) XXXXXXXXXX Class XXXXXXXXXX Common shares without par value; and

(d) XXXXXXXXXX non-voting redeemable and retractable non-cumulative Preference shares with a par value of $XXXXXXXXXX each.

The issued and outstanding shares of Holdco 4 together with the name of each of its shareholders, the adjusted cost base to each shareholder of his or her shares in Holdco 4 and the paid-up capital of such shares are as follows:

Shareholder Number and Class Adjusted cost Paid-up
Base Capital

XXXXXXXXXX

13. Holdco 4 issued the preference shares to XXXXXXXXXX immediately after its incorporation in exchange for her shares of Holdco 1. The preference shares of Holdco 4 have a fixed value redemption price equal to the fair market value of the Holdco 1 shares at the time of the exchange. The shares of each class of the common shares are entitled to receive dividends at the discretion of the directors and to share equally on a winding-up of the Company. Only the Class XXXXXXXXXX Common shares are entitled to vote. XXXXXXXXXX owns the only issued Class XXXXXXXXXX Common shares. The other shareholders are her daughters.

14. Holdco 5 is a taxable Canadian corporation and a private corporation which was incorporated in XXXXXXXXXX. Holdco 5's taxation year ends on XXXXXXXXXX.

The authorized capital of Holdco 5 consists of:

(a) XXXXXXXXXX redeemable Preferred shares with a par value of $XXXXXXXXXX each; and

(b) XXXXXXXXXX Common shares with a par value of $XXXXXXXXXX each.

The Holdco 5 preferred shares of which there are none outstanding are redeemable and retractable and entitled to non-cumulative dividends in preference to any dividends on the common shares at a rate of XXXXXXXXXX% per annum on the amount paid-up for the preferred shares.

The issued and outstanding shares of Holdco 5 together with the name of each of its shareholders, the adjusted cost base to each shareholder of his or her shares in Holdco 5 and the paid-up capital of such shares are as follows:

Shareholder Number and Class Adjusted cost Paid-up
Base Capital

XXXXXXXXXX

XXXXXXXXXX

15. The shareholders of Holdco 5 are all related to XXXXXXXXXX. XXXXXXXXXX is her husband and the other shareholders are her children or grandchildren.

16. The shareholders of Holdco 2 are referred to collectively as the "XXXXXXXXXX Family"; the shareholders of Holdco 3, excluding the XXXXXXXXXX, are referred to collectively as the "XXXXXXXXXX Family"; the shareholders of the Holdco 4 are referred to collectively as the "XXXXXXXXXX Family"; and the shareholders of Holdco 5 are referred to collectively as the "XXXXXXXXXX Family". Holdco 2, Holdco 3, Holdco 4 and Holdco 5 are referred to collectively as the "Holding Companies".

17. Each of the shareholders of the Holding Companies is a resident of Canada for purposes of the Act. XXXXXXXXXX was a resident of Canada at the time of her death and the Estate is resident in Canada.

18. Immediately before the transfers of property described in paragraph 28 below (the "Butterfly Transfers"), the property of Holdco 1 will be classified into two types of property for the purposes of a distribution, as follows:

(a) cash or near cash property, comprising all of the current assets of Holdco 1, including any cash, deposits, accounts receivable, inventory and rights arising from prepaid expenses (hereinafter referred to as "prepaid expenses"); and

(b) investment property, comprising all of the assets of Holdco 1, 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.

For greater certainty, the balance of the capital dividend account and RDTOH of Holdco 1 do not constitute property of Holdco 1 for purposes of the Butterfly Transfers.

19. Holdco 1, Holdco 2, Holdco 3, Holdco 4, Holdco 5 and Subco 1, Subco 2, Subco 3 and Subco 4 (subsidiary corporations to be incorporated as described in paragraph 26 below) are neither restricted financial institutions nor specified financial institutions.

20. No property has or will become property of, and no liabilities have been or will be incurred by, Holdco 1 in contemplation of and before the Butterfly Transfer, except as described herein.

21. None of Holdco 2, Holdco 3, Holdco 4 or Holdco 5 will dispose of any of the assets owned by Holdco 1, immediately before the Butterfly Transfers, following the Proposed Transactions as part of the same series of transactions or events, other than in the ordinary course of business and in the case of Holdco 3 also as described in paragraph 38 below .

22. There are not, and will not be at any time prior to the completion of the Proposed Transactions, any guarantee agreements in respect of any of the shares of Holdco 1, Holdco 2, Holdco 3, Holdco 4, Holdco 5, Subco 1, Subco 2, Subco 3 or Subco 4.

23. None of Holdco 1, Holdco 2, Holdco 3, Holdco 4, Holdco 5, Subco 1, Subco 2, Subco 3 or Subco 4 has entered, or will enter, into a dividend rental arrangement in respect of any of the shares to be redeemed as part of the Proposed Transactions.

24. None of the shares of Holdco 1, Holdco 2, Holdco 3, Holdco 4, Holdco 5, Subco 1, Subco 2, Subco 3 or Subco 4 will be issued or acquired as part of a series of transactions described in subsection 112(2.5).

PROPOSED TRANSACTIONS

25. Holdco 1 will alter its articles under the XXXXXXXXXX to allow it to repurchase its shares.

26. Each of Holdco 2, Holdco 3, Holdco 4 and Holdco 5 will incorporate a new corporation under the XXXXXXXXXX ("Subco 1", "Subco 2", "Subco 3" and "Subco 4", respectively). Each of Subco 1, Subco 2, Subco 3 and Subco 4 will be a taxable Canadian corporation and a private corporation.

The authorized share capital of each of Subco 1, Subco 2, Subco 3 and Subco 4 will include a class of voting common shares and a class of fixed-value redeemable and retractable preference shares with a par value of $XXXXXXXXXX each. The preference shares of Subco 1, Subco 3 and Subco 4 will be non-voting and the preference shares of Subco 2 will be voting.

27. Holdco 1 will discharge all of its current liabilities, except its indebtedness to its shareholders, by a payment of cash.

28. Following the discharge of its current liabilities described in paragraph 27, Holdco 1 will sell, at fair market value, to each of Subco 1, Subco 2, Subco 3 and Subco 4 a portion of its cash and near-cash property and investment property. As a result of such transfers, the fair market value of the cash and near-cash property and investment property received by Subco 1, Subco 2, Subco 3 or Subco 4, as the case may be, will be equal to the proportion of the fair market value of all of the cash and near-cash property and investment property, respectively, owned by Holdco 1 immediately before the transfer, that:

(a) the fair market value, immediately before the transfer, of all the shares of

the capital stock of Holdco 1 owned by:

(i) Holdco 2, in the case of Subco 1;

(ii) Holdco 3, in the case of Subco 2;

(iii) Holdco 4, in the case of Subco 3; and

(iv) Holdco 5, in the case of Subco 4, at that time

is of

(b) the fair market value, immediately before the transfer, of all the issued shares of the capital stock of Holdco 1 at that time.

In consideration for such transfers, each of Subco 1, Subco 2, Subco 3 and Subco 4 will assume a proportion of the liabilities of Holdco 1 and each of Subco 1, Subco 2, Subco 3 and Subco 4 will issue preference shares to Holdco 1. The preference shares issued by each of Subco 1, Subco 2, Subco 3 and Subco 4 will have a redemption amount equal to the fair market value of the properties at the time of the transfer less the amount of liabilities assumed by that transferee. The liabilities assumed by each transferee, in respect of eligible properties transferred, will not exceed the aggregate of the agreed amounts in respect of such properties.

In the case of Subco 2, its preference shares issued to Holdco 1 will represent more than XXXXXXXXXX% of the issued share capital of Subco 2, having full voting rights under all circumstances and will have a value equal to more than XXXXXXXXXX% of the fair market value of all the issued shares of Subco 2, but will not be sufficient to cause Holdco 1 to acquire control of Subco 2.

Each transferee will add to the capital maintained for its preference shares under corporate law (XXXXXXXXXX) an amount equal to the amount of the par values of the preference shares issued by the particular transferee. The par values of the preference shares issued by each transferee will be an amount equal to the amount by which the aggregate of the cost amounts, in the case of eligible properties, and the fair market value, in the case of other properties, transferred to the particular transferee exceeds the liabilities assumed by that transferee.

29. Holdco 1 and each of Subco 1, Subco 2, Subco 3 and Subco 4 will jointly elect in prescribed form within the time limit referred to in subsection 85(6), to have the provisions of subsection 85(1) apply to the transfer of each property of Holdco 1 that is an eligible property transferred to Subco 1, Subco 2, Subco 3 or Subco 4, as the case may be. The agreed amount in respect of each such property so transferred will be an amount equal to or less than the fair market value of the property at the time of the transfer.

The fair market value of each property will equal or exceed the agreed amount in respect thereof with the exception of the Class XXXXXXXXXX shares of XXXXXXXXXX held by Holdco 1. The fair market value of the Class XXXXXXXXXX shares of XXXXXXXXXX, which will be transferred to each of Subco 1, Subco 2, Subco 3 and Subco 4 in the same proportion as the proportion for the transfer of the properties of Holdco 1 described in paragraph 28 above, will be less than their cost amount at the time of the transfer and it is the intention of Holdco 1 that the loss created will be offset against capital gains realized by Holdco 1 in the year.

30. Each of Holdco 2, Holdco 3, Holdco 4 and Holdco 5 will subscribe for one common share of Holdco 1 for a nominal amount.

31. Each of Subco 1, Subco 2, Subco 3 and Subco 4 will then redeem its preference shares owned by Holdco 1 and will each issue to Holdco 1 a non-interest-bearing demand promissory note (the "Subco 1 Note", the "Subco 2 Note", the "Subco 3 Note" and the "Subco 4 Note") each having a principal amount and fair market value equal to the redemption price of the preference shares of Subco 1, Subco 2, Subco 3 or Subco 4, as the case may be.

Each of Holdco 2, Holdco 3, Holdco 4 and Holdco 5 will elect, in prescribed form (T2027) and within the time referred to in paragraph 80.01(4)(c), to have the rules in subsection 80.01(4) apply with respect to the settlement of any liability owing to Holdco 2, Holdco 3, Holdco 4 or Holdco 5, as the case may be, that was assumed by a Subco on the transfers of property, described in paragraph 28 above, upon the wind-up of that particular Subco.

32. Each of Subco 1, Subco 2, Subco 3 and Subco 4 will then be wound up, each into its respective parent, Holdco 2, Holdco 3, Holdco 4 and Holdco 5. As a result of the wind-ups, the Subco 1 Note will become a liability of Holdco 2, the Subco 2 Note will become a liability of Holdco 3, the Subco 3 Note will become a liability of Holdco 4 and the Subco 4 Note will become a liability of Holdco 5.

33. Following the wind-up of each of Subco 1, Subco 2, Subco 3 and Subco 4 as described in paragraph 31 above, Holdco 1 will purchase for cancellation, at fair market value, its Class XXXXXXXXXX common shares and preference shares held by each of Holdco 2, Holdco 3, Holdco 4 and Holdco 5 in two stages:

(a) in the first stage, Holdco 1 will purchase a sufficient number of common shares or part thereof from each of Holdco 2, Holdco 3, Holdco 4 and Holdco 5 which will result in a deemed dividend in each case, pursuant to the provisions of subsection 84(3), equal to XXXXXXXXXX% of Holdco 1's capital dividend account immediately before that time, which Holdco 1 will elect, pursuant to subsection 83(2), to have been paid from its capital dividend account; and

(b) in the second stage, Holdco 1 will purchase the balance of its Class XXXXXXXXXX common shares and preference shares held by Holdco 2, Holdco 3, Holdco 4 and Holdco 5.

Holdco 1 will issue to each of Holdco 2, Holdco 3, Holdco 4 and Holdco 5 as consideration for the purchase of its Class XXXXXXXXXX common shares and preference shares a non-interest-bearing demand promissory note having a principal amount equal to the fair market value of the shares purchased from each of Holdco 2, Holdco 3, Holdco 4 and Holdco 5 (the "Holdco 1 Note 1", the "Holdco 1 Note 2", the "Holdco 1 Note 3" and the "Holdco 1 Note 4").

34. The Subco 1 Note will be set off against the Holdco 1 Note l; the Subco 2 Note will be set off against the Holdco 1 Note 2; the Subco 3 Note will be set off against the Holdco 1 Note 3 and the Subco 4 Note will be set off against the Holdco 1 Note 4 and the notes will be cancelled.

35. The formal dissolution of Holdco 1 will be delayed pending the receipt of the dividend refund due to Holdco 1 on the deemed dividends arising from the purchase for cancellation of the shares of Holdco 1 described in paragraph 33 above. The cash received by Holdco 1 from the dividend refund will be paid net of any liabilities arising after the transfers of properties, as described in paragraph 28 above, immediately to each of Holdco 2, Holdco 3, Holdco 4 and Holdco 5 in the same proportions as described in paragraph 28 above and Holdco 1 will then be dissolved.

36. The Estate will transfer to each of XXXXXXXXXX Class XXXXXXXXXX common shares of Holdco 3.

37. Following the transfer by the Estate of the Class XXXXXXXXXX common shares of Holdco 3 to the individual beneficiaries of the Estate as described in paragraph 36 above, Holdco 3 will redeem its preference shares owned by the Estate for a redemption price of $XXXXXXXXXX. Holdco 3 will pay the redemption price with its available cash and, for any balance owing, by the issuance of a non-interest-bearing note and with the principal payable in equal installments on each of the first five anniversary dates from the date of issue. Holdco 3 will have the option to prepay the principal of the note at any time.

Holdco 3 will not elect, pursuant to subsection 83(2), that the deemed dividend arising on the redemption of its preference shares owned by the Estate described herein, will be paid from its capital dividend account.

The legal representatives of the Estate will elect, in prescribed manner and within the time prescribed, pursuant to subsection 164(6) to deem the capital loss realized by the Estate on the redemption of the preference shares of Holdco 3, as described herein, to be a capital loss of XXXXXXXXXX for the taxation year in which she died.

38. Holdco 3 will sell, at fair market value for cash, property with a fair market value not to exceed XXXXXXXXXX% of the fair market value, at the time of the Butterfly Transfers, of the properties received by Holdco 3 on the Butterfly Transfer, otherwise than as a result of a disposition in the ordinary course of business of Holdco 3. The proceeds from the sale of these properties will be utilized to reduce Holdco 3's liability in respect of the note issued as described in paragraph 37 above.

PURPOSES OF PROPOSED TRANSACTIONS

39. The purposes of the proposed transactions are:

(a) to allow for the pro-rata distribution of the assets of Holdco 1 to its shareholders on a tax-free basis, which had been decided on by the shareholders of Holdco 1 prior to the death of XXXXXXXXXX; and

(b) to allow the Estate to apply the capital loss arising from the redemption of the Holdco 3 preference shares, as described in paragraph 38 above, to offset the capital gain that arose on the deemed disposition of the Holdco 3 shares held by XXXXXXXXXX at the time of her death.

RULINGS

Provided that the above statements are accurate and constitute complete disclosure of all of the relevant facts, proposed transactions and the purposes of the proposed transactions, we confirm the following:

A. The provisions of subsection 85(1) will apply to the transfer by Holdco 1 of its properties that are eligible properties to each of Subco 1, Subco 2, Subco 3 and Subco 4 described in paragraph 28 above such that the agreed amount in respect of each transfer of eligible property will be deemed to be the transferor's proceeds of disposition and the transferee's cost thereof pursuant to paragraph 85(1)(a).

B. Subsection 85(2.1) will apply to reduce the paid-up capital of the preference shares of Subco 1, Subco 2, Subco 3 and Subco 4 issued to Holdco 1 described in paragraph 28 above, to an amount equal to the aggregate of the agreed amounts in the elections filed by Holdco 1 and Subco 1, Subco 2, Subco 3 or Subco 4, as the case may be, less the amount of the liabilities assumed by Subco 1, Subco 2, Subco 3 or Subco 4, as the case may be.

C. On the redemption of the preference shares of each of Subco 1, Subco 2, Subco 3 and Subco 4 held by Holdco 1, as described in paragraph 31 above, the amount, if any, by which the amount paid to redeem these shares exceeds the paid-up capital of these shares immediately before the redemption:

(i) will be deemed pursuant to paragraph 84(3)(a) to be a dividend paid by the issuer of such shares; and

(ii) will be deemed pursuant to paragraph 84(3)(b) to be a dividend received by the holder of such shares.

D. On the purchase for cancellation of the of the Class XXXXXXXXXX common shares and preference shares of Holdco 1 held by each of Holdco 2, Holdco 3, Holdco 4 and Holdco 5, as described in paragraph 33 above, the amount, if any, by which the amount paid to purchase these shares exceeds the paid-up capital of these shares immediately before the purchase for cancellation:

(i) will be deemed pursuant to paragraph 84(3)(a) to be a dividend paid by the issuer of such shares; and

(ii) will be deemed pursuant to paragraph 84(3)(b) to be a dividend received by the holder of such shares.

E. The deemed dividends referred to in Rulings C and D above, to the extent that they are taxable dividends, will:

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

(ii) by virtue of the application of paragraph (j) of the definition "proceeds of disposition" in section 54, the amount of such dividends will be excluded from the proceeds of disposition of the share, and any loss arising from the disposition of the share will be reduced by the amount of such dividends pursuant to subsection 112(3).

F. No taxes under Part IV of the Act will be payable in respect of a dividend described in Ruling C and Ruling D above except as provided in paragraph 186(1)(b).

G. Part VI.1 of the Act will not apply to the deemed dividends described in Ruling C and Ruling D above because the dividends will be excluded dividends pursuant to paragraph (a) of the definition of "excluded dividend" in subsection 191(1).

H. By virtue of the provisions of paragraph 55(3)(b), the provisions of subsection 55(2) will not apply to the deemed dividends described in Ruling D above, provided that, as part of the series of transactions that includes the proposed transactions described herein, there is no:

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

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

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

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

which has not been described herein.

I. The extinguishment of the Subco 1 Note, Subco 2 Note, Subco 3 Note, Subco 4 Note, Holdco 1 Note 1, Holdco 1 Note 2, Holdco 1 Note 3 and Holdco 1 Note 4 described in paragraph 34 above will not give rise to a forgiven amount.

J. The extinguishment of the liabilities of Subco 1 owing to Holdco 2, of Subco 2 owing to Holdco 3, of Subco 3 owing to Holdco 4, of Subco 4 owing to Holdco 5 described in paragraph 32 above will, in each case, result in the amount paid in satisfaction of the principal amount of the subsidiary's obligation being equal to the amount that would be the cost amount to Holdco 2, Holdco 3, Holdco 4 or Holdco 5, as the case may be, of the particular subsidiary's obligation by virtue of subsection 80.01(4).

K. The provisions of subsection 85(4), paragraph 40(2)(e) and paragraph 40(2)(g) will not apply with respect to:

(i) a capital loss that may arise as a result of the disposition of Holdco 1's property as described in paragraph 28 above; or

(ii) a capital loss that may arise as a result of the redemption of the Holdco 3 preference shares held by the Estate as described in paragraph 37 above.

L. The provisions of subsection 88(1) will apply to the winding-up, as described in paragraph 32 above, of each of Subco 1, Subco 2, Subco 3 and Subco 4 into its respective parent, Holdco 2, Holdco 3, Holdco 4 and Holdco 5.

M. The provisions of subsections 15(1), 56(2), 56(4), 69(4) and 246(1), will not apply to the proposed transactions, in and by themselves.

N. Subsection 245(2) will not be applied to the proposed transactions, in and by themselves, to redetermine the tax consequences confirmed in the rulings given.

These rulings are given subject to the limitations and qualifications set out in Information Circular 70-6R3 dated December 30, 1996 issued by Revenue Canada and are binding provided that the proposed transactions other than as described in paragraph 35 above are completed before XXXXXXXXXX.

These rulings are based on the Act as it reads and do not take into account any future amendments, whether currently proposed or not, to the Act.

OPINIONS

1. Provided that:

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

(b) the proposed amendment to the definition of "permitted redemption" in subsection 55(1) is reintroduced and enacted in substantially the same form as proposed in Bill C-69, which was tabled by the Minister of Finance on December 2, 1996; and

(c) as part of the series of transactions or events that includes the proposed transactions described herein, there is no:

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

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

(iii) acquisition of shares in the circumstances described in subparagraph 55(3.1)(b)(iii);

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

(v) acquisition of property in the circumstances described in paragraph 55(3.1)(d)

which has not been described herein,

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

2. Provided that proposed subsections 40(3.3), 40(3.6) and 112(3.2) are reintroduced and enacted in substantially the same form as set out in Bill C-69 which was tabled by the Minister of Finance on December 2, 1996, it is our opinion that:

(a) any capital loss realized by Holdco 1 on the disposition of its property as described in paragraph 28 above;

(b) any capital loss realized by the Estate on the redemption of the Holdco 3 preference shares as described in paragraph 37 above

will not be denied or reduced by proposed subsections 40(3.3), 40(3.6) or 112(3.2).

The foregoing opinions are not rulings and, in accordance with the practice referred to in Information Circular 70-6R2, are not binding on Revenue Canada.

COMMENTS

Nothing in this letter should be construed as implying that the Department has agreed to or accepted:

(a) the determination of the fair market value or adjusted cost base of any property referred to herein, or the paid-up capital of any shares; or

(b) any tax consequences arising from the facts or proposed transactions described above other than those specifically confirmed in the rulings given.

Yours truly,

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