30 November 1997 Ruling 9722893 - XXXXXXXXXX BUTTERFLY (SPLIT-UP/GROSS-ASSET)

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 an amalgamation followed by a "split-up" gross-asset butterfly. The distributing corporation (Amalco) rolled its assets (farming business and certain investment assets) to its three shareholders (i.e. transferee corporations/Newcos). The three Newcos were created immediately prior to the butterfly at which time the parents and children transferred their shares of Amalco to each Newco.

Position:

The main issue involved a subsection 55(4) issue (i.e. the parents maintained control of all the Newcos, however, one of the Newcos had a trust as a shareholder) that arose as a consequence of a paragraph 55(3)(a) opinion which was being sought, in addition to the 55(3)(b) ruling, by the taxpayer's representative. Other routine butterfly issues also arose.

Reasons:

All routine issues were resolved in accordance with prior policies. The taxpayer's representative withdrew his request for a paragraph 55(3)(a) opinion. Accordingly, the subsection 55(4) issue did not have to be resolved.

XXXXXXXXXX							972289
XXXXXXXXXX

Attention: XXXXXXXXXX

XXXXXXXXXX, 1998

Dear Sirs:

Re: XXXXXXXXXX
Advance Income Tax Ruling

We are writing in response to your letter of XXXXXXXXXX wherein you requested an advance income tax ruling on behalf of the above-referenced taxpayers. In your letters of XXXXXXXXXX you provided additional information in respect of the facts and proposed transactions described in your original letter. We also acknowledge the information provided during our various telephone conversations (XXXXXXXXXX).

To the best of your knowledge, and that of the taxpayers involved, none of the issues contained herein:

(i) is in an earlier return of the taxpayers or a related person;

(ii) is being considered by a tax services office or taxation centre in connection with a previously filed tax return of the taxpayers or a related person;

(iii)is under objection by the taxpayers or a related person; and

(iv) is before the courts or, if a judgement has been issued, the time limit for appeal to a higher court has not expired.

Unless otherwise stated all references to a statute are to the Income Tax Act R.S.C. 1985 (5th Supp.), c.1, as amended, (the "Act").

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 of the Act;

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

(c)"capital dividend" has the meaning assigned to that term in subsection 83(2) of the Act;

(d)"capital dividend account" ("CDA") has the meaning assigned by subsection 89(1) of the Act;

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

(f)"Child 1", "Child 2" and "Child 3" means XXXXXXXXXX, respectively, the children of Mother and Father, all of whom are residents of Canada.

XXXXXXXXXX

(g)"dividend refund" has the meaning assigned to that term in subsection 129(1) of the Act;

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

(i) "Father" means XXXXXXXXXX, a resident of Canada;

(j) "Mother" means XXXXXXXXXX, a resident of Canada;

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

(l)"Predecessor 1" means XXXXXXXXXX, a corporation that was incorporated on XXXXXXXXXX and has its registered office located in the province of XXXXXXXXXX. It files its corporate tax return at the XXXXXXXXXX Taxation Centre;

(m)"Predecessor 2" means XXXXXXXXXX, a corporation that was incorporated on XXXXXXXXXX and has its registered office located in the province of XXXXXXXXXX. It files its corporate tax return at the XXXXXXXXXX Taxation Centre;

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

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

(p)"related" has the meaning assigned to that term in subsection 251(2) of the Act;

(q)"Sisterco" means XXXXXXXXXX, a corporation that is related to both Predecessor 1 and Predecessor 2 and is controlled by the XXXXXXXXXX Trust. Sisterco's assets are all or substantially all comprised of short-term deposits;

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

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

(t)"taxable dividend" has the meaning assigned to that term by subsection 89(1) of the Act; and

(u)"Trust" means the XXXXXXXXXX. XXXXXXXXXX, are both adults and are the sole beneficiaries of the Trust. The trustees are Mother and Father.

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

FACTS

1.Predecessor 1 is a TCC and a private corporation which is governed by the BCA. The authorized share capital of Predecessor 1 consists of XXXXXXXXXX Class XXXXXXXXXX shares and XXXXXXXXXX Class XXXXXXXXXX shares. The Class XXXXXXXXXX shares are common voting shares without par value. The Class XXXXXXXXXX shares are common non-voting shares without par value. The Class XXXXXXXXXX and Class XXXXXXXXXX shares of Predecessor 1 are held as follows:

	Shareholder	Class XXXXXX	     Class XXXXXX

	Father		XXXXXXXXXX
	Mother		XXXXXXXXXX
	Child 1		XXXXXXXXXX
	Child 2		XXXXXXXXXX
	Child 3		XXXXXXXXXX

	Total		XXXXXXXXXX

The Class XXXXXXXXXX and Class XXXXXXXXXX shares of Predecessor 1 have nominal ACB and PUC.

The Class XXXXXXXXXX and Class XXXXXXXXXX shares of Predecessor 1 represent capital property to each of its shareholders.

2.Predecessor 1's assets are made up of cash, receivables and long-term investments. The long-term investments include, XXXXXXXXXX Capital Bonds, shares of Predecessor 2 and Sisterco, as well as an amount receivable from Sisterco ("Sisterco Receivable") in the amount of $XXXXXXXXXX. The Sisterco Receivable is not expected to be repaid within the near future and has been classified on Sisterco's financial statements as a non-current liability.

Predecessor 1's liabilities consist of an amount owing to Predecessor 2 in the amount of $XXXXXXXXXX. Predecessor 1 also has some nominal accrued liabilities and amounts due to shareholders.

Predecessor 1 owns less than XXXXXXXXXX% of the issued voting shares of Sisterco and does not have significant influence, within the meaning of section 3050 of the CICA Handbook, over Sisterco. The Sisterco Receivable has no specific terms of repayment. The shares of Sisterco and the Sisterco Receivable represent investment property to Predecessor 1.

Predecessor 1 currently owns XXXXXXXXXX Class XXXXXXXXXX shares of Predecessor 2, as is more fully described in paragraph 3 below. These shares will be cancelled upon the amalgamation of Predecessor 1 and Predecessor 2, as is described below under "Proposed Transactions".

As at XXXXXXXXXX, Predecessor 1 has a nil balance in its CDA and it has no RDTOH. In addition, Predecessor 1 has no balance in its pre-1972 capital surplus on hand, as that term is defined in subsection 88(2.1) of the Act.

3.Predecessor 2 is a TCC and a private corporation which is governed by the BCA. The authorized share capital of Predecessor 2 consists of an unlimited number of both Class XXXXXXXXXX shares and Class XXXXXXXXXX shares. The Class XXXXXXXXXX shares are common voting shares without par value. The Class XXXXXXXXXX shares are common non-voting shares without par value. The Class XXXXXXXXXX and Class XXXXXXXXXX shares of Predecessor 2 are held as follows:

	Shareholder	Class XXXXXX		Class XXXXXX

	Father		XXXXXXXXXX
	Mother		XXXXXXXXXX
	Child 1		XXXXXXXXXX
	Child 2		XXXXXXXXXX
	Child 3		XXXXXXXXXX
	Trust		XXXXXXXXXX
	Predecessor 1	XXXXXXXXXX

	Total		XXXXXXXXXX

The Class XXXXXXXXXX shares of Predecessor 2 have nominal ACB and PUC. The ACB and PUC of the Class XXXXXXXXXX shares of Predecessor 2 is as follows:

	Class XXXXXX	  ACB  		  PUC   

	Mother		XXXXXXXXXX
	Child 1		XXXXXXXXXX
	Child 2		XXXXXXXXXX
	Child 3		XXXXXXXXXX
	Trust		XXXXXXXXXX
	Predecessor 1	XXXXXXXXXX

	Total	     XXXXXXXXXX

The Class XXXXXXXXXX and Class XXXXXXXXXX shares of Predecessor 2 represent capital property to each of its shareholders.

4.Predecessor 2 carries on a farming business the income from which is computed on the cash method in accordance with subsection 28(1) of the Act. Predecessor 2's assets are made up of cash, term deposits, treasury bills, accrued interest receivable, an amount due from Predecessor 1 and various assets relating to its farming business. The assets relating to its farming business are comprised of the following:

Shares of XXXXXXXXXX
Patronage Reserves
Inventories
Equipment/Automotive
XXXXXXXXXX Buildings
XXXXXXXXXX Land
XXXXXXXXXX Buildings

XXXXXXXXXX

Predecessor 2's current liabilities consist of an amount due to Sisterco in the amount of $XXXXXXXXXX and some nominal accounts payable. Predecessor 2's long-term liabilities consist of amounts due to shareholders in the amount of $XXXXXXXXXX and a loan payable of $XXXXXXXXXX.

As at XXXXXXXXXX, Predecessor 2 has a nil balance in its CDA and it has no RDTOH. In addition, Predecessor 2 has no balance in its pre-1972 capital surplus on hand.

PROPOSED TRANSACTIONS

5.Predecessor 1 will pay its outstanding accrued liabilities and amounts due to shareholders with its cash on hand and accrued interest receivable. This will leave as Predecessor 1's only liability the amount owing to Predecessor 2. The amount owing to Predecessor 2 will be eliminated upon the amalgamation of Predecessor 1 and Predecessor 2 as described in paragraph 6 below.

Predecessor 2 will pay its current and long term liabilities with its cash on hand, term deposits and treasury bills.

6.Predecessor 1 and Predecessor 2 will amalgamate under the provisions of the BCA to form a new corporation, Amalco, in such manner that:

(a)all of the property of Predecessor 1 and Predecessor 2 (other than the amount due to Predecessor 2 from Predecessor 1 and shares of Predecessor 2 held by Predecessor 1) owned by either corporation immediately before the merger will become property of Amalco as a result of the merger,

(b)all of the liabilities of Predecessor 1 and Predecessor 2 (other than the amount owed by Predecessor 1 to Predecessor 2) will become liabilities of Amalco as a result of the merger, and

(c)all the shareholders of Predecessor 1 and Predecessor 2 (other than Predecessor 1) immediately before the merger will receive shares of the capital stock of Amalco by virtue of the merger.

Amalco's authorized share capital will consist of an unlimited number of voting, participating common shares and an unlimited number of Class XXXXXXXXXX preferred shares. The Class XXXXXXXXXX preferred shares of Amalco will have the following attributes:

i) non-voting,

ii)redeemable at $XXXXXXXXXX per share,

iii)bear a XXXXXXXXXX% non-cumulative dividend,

iv)retractable at the option of the holder,

v)redeemable at the option of the company, and

vi)have preference over the common shares.

Upon the amalgamation, the XXXXXXXXXX shares of Predecessor 2 held by Predecessor 1 will be cancelled (hereinafter a reference to "shareholders of Predecessor 2" excludes Predecessor 1). In addition, the amount owing to Predecessor 2 from Predecessor 1 will be cancelled. The principal amount of the indebtedness is equal to the "cost amount" of that indebtedness to Predecessor 2 as computed in accordance with subsection 248(1) and paragraphs 80.01(3)(a) and (b) of the Act.

Upon the amalgamation, Father, Mother and Child 1 will receive XXXXXXXXXX common shares of Amalco, respectively, with a nominal aggregate fair market value of $XXXXXXXXXX. In addition, all the shareholders of Predecessor 1 and Predecessor 2 will receive 1 Class XXXXXXXXXX preferred share of Amalco for each $XXXXXXXXXX of value of their shareholdings in Predecessor 1 and Predecessor 2 less the value (i.e. $XXXXXXXXXX per share) of any common shares of Amalco which they received. For greater certainty, the aggregate fair market value of the common shares and Class XXXXXXXXXX shares of Amalco received by any particular shareholder upon the amalgamation will be equal to the aggregate fair market value of that shareholder's shares in Predecessor 1 and Predecessor 2 immediately before the amalgamation.

The amount to be added to the stated capital account maintained for the common shares and the Class XXXXXXXXXX preferred shares of Amalco, in aggregate, will not exceed the total of all amounts each of which is the PUC in respect of a share of all outstanding and issued shares of both predecessor corporations (excluding the shares of Predecessor 2 held by Predecessor 1) immediately before the amalgamation ("the old PUC"). Furthermore, the old PUC will be added to the stated capital account maintained for the common shares and the Class XXXXXXXXXX preferred shares of Amalco in the proportion that

(i)the fair market value, at that particular time, of the common shares of Amalco or the Class XXXXXXXXXX preferred shares of Amalco, as the case may be,

		is of

(ii) the total fair market value, at that particular time, of the common shares and Class XXXXXXXXXX preferred shares of Amalco.

7.Child 1 and Mother will incorporate a new corporation ("Newco 1") under the BCA. Newco 1 will have an authorized share capital consisting of an unlimited number of non-voting Class XXXXXXXXXX preferred shares, an unlimited number of Class XXXXXXXXXX voting common shares and an unlimited number of Class XXXXXXXXXX non-voting common shares. The Class XXXXXXXXXX preferred shares of Newco 1 will have the following attributes:

i)issuable in series,

ii)redeemable at the fair market value of the consideration for which they are issued,

iii)bear a XXXXXXXXXX% non-cumulative dividend,

iv)retractable at the option of the holder,

v)redeemable at the option of the company, and

vi)have preference over the common shares.

No shares of Newco 1 will be issued on incorporation.

8.Shortly after the incorporation of Newco 1, Child 1 will subscribe for 1 Class XXXXXXXXXX voting common share in Newco 1 for $XXXXXXXXXX and XXXXXXXXXX Class XXXXXXXXXX non-voting common shares in Newco 1 for $XXXXXXXXXX. Mother will subscribe for 2 Class XXXXXXXXXX voting common shares in Newco 1 for $XXXXXXXXXX. Child 1 and Mother will be the sole shareholders of Newco 1.

9.Child 2 and Father will incorporate a new corporation ("Newco 2") under the BCA. Newco 2 will have an authorized share capital consisting of an unlimited number of non-voting Class XXXXXXXXXX preferred shares, an unlimited number of Class XXXXXXXXXX voting common shares and an unlimited number of Class XXXXXXXXXX non-voting common shares. The Class XXXXXXXXXX preferred shares of Newco 2 will have the following attributes:

i)issuable in series,

ii)redeemable at the fair market value of the consideration for which they are issued,

iii)bear a XXXXXXXXXX% non-cumulative dividend,

iv)retractable at the option of the holder,

v)redeemable at the option of the company, and

vi)have preference over the common shares.

No shares of Newco 2 will be issued on incorporation.

10.Shortly after the incorporation of Newco 2, Child 2 will subscribe for 1 Class XXXXXXXXXX voting common share in Newco 2 for $XXXXXXXXXX and XXXXXXXXXX Class XXXXXXXXXX non-voting common shares in Newco 2 for $XXXXXXXXXX. Father will subscribe for XXXXXXXXXX Class XXXXXXXXXX voting common shares in Newco 2 for $XXXXXXXXXX. Child 2 and Father will be the sole shareholders of Newco 2.

11.Child 3, the Trust and Mother will incorporate a new corporation ("Newco 3") under the BCA. Newco 3 will have an authorized share capital consisting of an unlimited number of non-voting Class XXXXXXXXXX preferred shares, an unlimited number of Class XXXXXXXXXX voting common shares and an unlimited number of Class XXXXXXXXXX non-voting common shares. The Class XXXXXXXXXX preferred shares of Newco 3 will have the following attributes:

i)issuable in series,

ii)redeemable at the fair market value of the consideration for which they are issued,

iii)bear a XXXXXXXXXX% non-cumulative dividend,

iv)retractable at the option of the holder,

v)redeemable at the option of the company, and

vi)have preference over the common shares.

No shares of Newco 3 will be issued on incorporation.

12.Shortly after the incorporation of Newco 3, Child 3 will subscribe for 1 Class XXXXXXXXXX voting common share in Newco 3 for $XXXXXXXXXX and XXXXXXXXXX Class XXXXXXXXXX non-voting common shares in Newco 3 for $XXXXXXXXXX. The Trust will subscribe for XXXXXXXXXX Class XXXXXXXXXX non-voting common shares in Newco 3 for $XXXXXXXXXX. Mother, acting on her own behalf, will subscribe for XXXXXXXXXX Class XXXXXXXXXX voting common shares in Newco 3 for $XXXXXXXXXX. Child 3, the Trust and Mother will be the sole shareholders of Newco 3.

13.Child 1 will transfer the XXXXXXXXXX common shares and the Class XXXXXXXXXX preferred shares of Amalco that he owns to Newco 1. As sole consideration for each such transfer, Newco 1 will issue to Child 1, respectively, XXXXXXXXXX Class XXXXXXXXXX common shares and an equal number of redeemable, retractable Class XXXXXXXXXX preferred shares that have a fair market value and aggregate redemption amount equal to the fair market value of the Class XXXXXXXXXX preferred shares of Amalco transferred therefor.

The amount that will be added to the stated capital of the Class XXXXXXXXXX common shares and the Class XXXXXXXXXX preferred shares of Newco 1, respectively, will be equal to the fair market value of the common shares or Class XXXXXXXXXX preferred shares of Amalco, as the case may be, immediately before the disposition.

Child 1 and Newco 1 will elect, jointly and in prescribed form and within the time limits referred to in subsection 85(6) of the Act, to have the rules in subsection 85(1) of the Act apply to the transfer of the common shares and the Class XXXXXXXXXX preferred shares of Amalco by Child 1 to Newco 1. The amount agreed upon in each such election in respect of the common shares and Class XXXXXXXXXX preferred shares so transferred will be the lesser of the amounts described in subparagraph 85(1)(c.1)(i) and (ii) of the Act.

14.Mother will transfer the XXXXXXXXXX common shares and the Class XXXXXXXXXX preferred shares of Amalco that she owns to Newco 1. As sole consideration for each such transfer, Newco 1 will issue to Mother, respectively, XXXXXXXXXX Class XXXXXXXXXX common shares and an equal number of redeemable, retractable Class XXXXXXXXXX preferred shares having a fair market value and aggregate redemption amount equal to the fair market value of the Class XXXXXXXXXX preferred shares of Amalco transferred therefor.

The amount that will be added to the stated capital of the Class XXXXXXXXXX common shares and the Class XXXXXXXXXX preferred shares of Newco 1, respectively, will be equal to the fair market value of the common shares or Class XXXXXXXXXX preferred shares of Amalco, as the case may be, immediately before the disposition.

Mother and Newco 1 will elect, jointly and in prescribed form and within the time limits referred to in subsection 85(6) of the Act, to have the rules in subsection 85(1) of the Act apply to the transfer of the common shares and the Class XXXXXXXXXX preferred shares of Amalco by Mother to Newco 1. The amount agreed upon in each such election in respect of the common shares and Class XXXXXXXXXX preferred shares so transferred will be the lesser of the amounts described in subparagraph 85(1)(c.1)(i) and (ii) of the Act.

15.Child 2 will transfer the Class XXXXXXXXXX preferred shares of Amalco that she owns to Newco 2. As sole consideration for such transfer, Newco 2 will issue to Child 2 an equal number of redeemable, retractable Class XXXXXXXXXX preferred shares having a fair market value and aggregate redemption amount equal to the fair market value of the Class XXXXXXXXXX preferred shares of Amalco transferred therefor.

The amount that will be added to the stated capital of the Class XXXXXXXXXX preferred shares of Newco 2 will be equal to the fair market value of the Class XXXXXXXXXX preferred shares of Amalco immediately before the disposition.

Child 2 and Newco 2 will elect, jointly and in prescribed form and within the time limits referred to in subsection 85(6) of the Act, to have the rules in subsection 85(1) of the Act apply to the transfer of the Class XXXXXXXXXX preferred shares of Amalco by Child 2 to Newco 2. The amount agreed upon in the election will be equal to the lesser of the amounts described in subparagraph 85(1)(c.1)(i) and (ii) of the Act.

16.Father will transfer the XXXXXXXXXX common shares and the Class XXXXXXXXXX preferred shares of Amalco that he owns to Newco 2. As sole consideration for each such transfer, Newco 2 will issue to Father, respectively, XXXXXXXXXX Class XXXXXXXXXX common shares and an equal number of redeemable, retractable Class XXXXXXXXXX preferred shares having a fair market value and aggregate redemption amount equal to the fair market value of the Class XXXXXXXXXX preferred shares of Amalco transferred therefor.

The amount that will be added to the stated capital of the Class XXXXXXXXXX common shares and the Class XXXXXXXXXX preferred shares of Newco 2, respectively, will be equal to the fair market value of the common shares or Class XXXXXXXXXX preferred shares of Amalco, as the case may be, immediately before the disposition.

Father and Newco 2 will elect, jointly and in prescribed form and within the time limits referred to in subsection 85(6) of the Act, to have the rules in subsection 85(1) of the Act apply to the transfer of the common shares and the Class XXXXXXXXXX preferred shares of Amalco by Father to Newco 2. The amount agreed upon in each such election in respect of the common shares and Class XXXXXXXXXX preferred shares so transferred will be the lesser of the amounts described in subparagraph 85(1)(c.1)(i) and (ii) of the Act.

17.Child 3 will transfer the Class XXXXXXXXXX preferred shares of Amalco that she owns to Newco 3. As sole consideration for such transfer, Newco 3 will issue to Child 3 an equal number of redeemable, retractable Class XXXXXXXXXX preferred shares having a fair market value and aggregate redemption amount equal to the fair market value of the Class XXXXXXXXXX preferred shares of Amalco transferred therefor.

The amount that will be added to the stated capital of the Class XXXXXXXXXX preferred shares of Newco 3 will be equal to the fair market value of the Class XXXXXXXXXX preferred shares of Amalco immediately before the disposition.

Child 3 and Newco 3 will elect, jointly and in prescribed form and within the time limits referred to in subsection 85(6) of the Act, to have the rules in subsection 85(1) of the Act apply to the transfer of the Class XXXXXXXXXX preferred shares of Amalco by Child 3 to Newco 3. The amount agreed upon in the election will be equal to the lesser of the amounts described in subparagraph 85(1)(c.1)(i) and (ii) of the Act.

18.The Trust will transfer the Class XXXXXXXXXX preferred shares of Amalco that it owns to Newco 3. As sole consideration for such transfer, Newco 3 will issue to the Trust an equal number of redeemable, retractable Class XXXXXXXXXX preferred shares having a fair market value and aggregate redemption amount equal to the fair market value of the Class XXXXXXXXXX preferred shares of Amalco transferred therefor.

The amount that will be added to the stated capital of the Class XXXXXXXXXX preferred shares of Newco 3 will be equal to the fair market value of the Class XXXXXXXXXX preferred shares of Amalco immediately before the disposition.

The Trust and Newco 3 will elect, jointly and in prescribed form and within the time limits referred to in subsection 85(6) of the Act, to have the rules in subsection 85(1) of the Act apply to the transfer of the Class XXXXXXXXXX preferred shares of Amalco by the Trust to Newco 3. The amount agreed upon in the election will be equal to the lesser of the amounts described in subparagraph 85(1)(c.1)(i) and (ii) of the Act.

19.Immediately before the transfer of properties described in paragraph 20 below, the assets of Amalco will be classified into three types of property for the purpose of the definition of "distribution" in subsection 55(1) of the Act, as follows:

(a)cash or near cash property, comprising all of the current assets of Amalco including, in particular, cash, bank deposits, term deposits, treasury bills and inventory,

(b) investment property, comprising all of the assets of Amalco, other than any cash or near cash property, any income from which would, for the purposes of the Act, be income from property, including the Sisterco Receivable, the shares in Sisterco and the XXXXXXXXXX Capital Bonds, and

(c) business property, comprising all of the assets of Amalco other than cash or near cash property, any income from which would, for purposes of the Act, be income from an active business carried on by Amalco.

Any inventory of Amalco that is initially classified in accordance with paragraph 19(a) as cash or near cash property, that relates to a business previously carried on by Predecessor 1 or Predecessor 2 and that will relate to a business that will be carried on by Newco 1 and that will be sold by Newco 1 in the ordinary course of that business, will then be reclassified as business property.

20.Amalco will then sell at fair market value to each of Newco 1, Newco 2 and Newco 3 a portion of its cash or near-cash property, investment property and business property. As a result of such transfers, the fair market value of the cash or near-cash property, the investment property and the business property to be received by each of Newco 1, Newco 2 and Newco 3, determined in the manner described in paragraph 19 above, will be equal to or approximate the proportion (the "Newco 1 Proportion", "Newco 2 Proportion" or "Newco 3 Proportion", as the case may be) of the fair market value of each type of property of Amalco, determined in the manner described in paragraph 19 above, immediately before the transfer, that:

(a)the aggregate of the fair market value, immediately before the transfer, of all shares of the capital stock of Amalco owned by Newco 1, Newco 2 and Newco 3, as the case may be, at that time

		is of

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

The Sisterco Debt, Sisterco Shares and the XXXXXXXXXX Capital Bonds will each be distributed to Newco 1, Newco 2 and Newco 3 based on the Newco 1 Proportion, Newco 2 Proportion and Newco 3 Proportion, as the case may be. At this time it is anticipated that the business properties of Amalco will be distributed to Newco 1, Newco 2 and Newco 3 as follows:

Newco 1

Shares of XXXXXXXXXX
Patronage Reserves
Inventories
XXXXXXXXXX Buildings
XXXXXXXXXX Land

Newco 2

XXXXXXXXXX Buildings

XXXXXXXXXX

Newco 3

XXXXXXXXXX

It is anticipated that the equipment will be allocated to each of Newco 1, Newco 2 and Newco 3 in a manner that will enable the business property of Amalco to be distributed based on the Newco 1 Proportion, Newco 2 Proportion or Newco 3 Proportion, as the case may be. For greater certainty, in the event inventory of Amalco is distributed to Newco 2 or Newco 3, such inventory will be classified as cash or near cash property.

Although the proportion of the fair market value of Amalco's cash or near-cash property, investment property and business property transferred to Newco 1, Newco 2 or Newco 3, as the case may be, may not be exactly equal to the Newco 1 Proportion, Newco 2 Proportion or Newco 3 Proportion, as the case may be, it will be approximately equal to the Newco 1 Proportion, Newco 2 Proportion or Newco 3 Proportion, as the case may be. Any difference between the fair market value of the cash or near-cash property, investment property and business property transferred to Newco 1, Newco 2 or Newco 3, as the case may be, from Amalco and the Newco 1 Proportion, Newco 2 Proportion or Newco 3 Proportion, as the case may be, of the fair market value of Amalco's cash or near-cash property, investment property and business property will not exceed XXXXXXXXXX% of the Newco 1 Proportion, Newco 2 Proportion or Newco 3 Proportion, as the case may be, of the fair market value of the cash or near-cash property, investment property and business property of Amalco, as the case may be.

In consideration for such transfers, each of Newco 1, Newco 2 and Newco 3 will issue XXXXXXXXXX Class XXXXXXXXXX preferred shares and assume the Newco 1 Proportion, the Newco 2 Proportion or the Newco 3 Proportion, as the case may be, of the liabilities of Amalco. The XXXXXXXXXX Class XXXXXXXXXX preferred shares issued by each of Newco 1, Newco 2 and Newco 3 will have an aggregate redemption value and fair market value equal to the amount by which the fair market value of the properties transferred to Newco 1, Newco 2 or Newco 3, as the case may be, as described herein exceeds the amount of the liabilities assumed by Newco 1, Newco 2 or Newco 3, as the case may be, as described herein.

21.Amalco and each of Newco 1, Newco 2 and Newco 3 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 Amalco that is an eligible property. The amount agreed upon in each such election in respect of each of the eligible properties so transferred will be equal to

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

(b)in the case of inventories, the amount determined under paragraph 85(1)(c.2) of the Act;

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

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

For greater certainty, the agreed amount for any eligible property included in the subsection 85(1) elections referred to herein will not be less than the amount of any liabilities assumed by Newco 1, Newco 2 or Newco 3, as the case may be, as consideration for the transfer of such property and will not exceed the fair market value of each such property.

Each of Newco 1, Newco 2 and Newco 3 will add to the stated capital account maintained for its Class XXXXXXXXXX preferred shares an amount equal to the fair market value of the properties transferred less the amount of liabilities assumed by that transferee as consideration therefor.

22.Newco 1, Newco 2 and Newco 3 will each redeem the XXXXXXXXXX Class XXXXXXXXXX preferred shares issued to Amalco as described in paragraph 21 above, by the issuance by each of Newco 1, Newco 2 and Newco 3 of a non-interest bearing demand note (the "Newco 1 Note", "Newco 2 Note" and "Newco 3 Note") having a principal amount and fair market value equal to the redemption amount of the Class XXXXXXXXXX preferred shares of Newco 1, Newco 2 and Newco 3 so redeemed. Amalco will accept the Newco 1 Note, Newco 2 Note and Newco 3 Note, as the case may be, as full payment for the redemption amount of the Class XXXXXXXXXX preferred shares of Newco 1, Newco 2 and Newco 3 so redeemed.

At the end of the day on which the XXXXXXXXXX Class XXXXXXXXXX preferred shares of each of Newco 1, Newco 2 and Newco 3 are redeemed, each of Newco 1, Newco 2 and Newco 3 will cause its first taxation year to end.

23.On the day following the redemption of the Class XXXXXXXXXX preferred shares of Newco 1, Newco 2 and Newco 3 as described in paragraph 22 above, the shareholders of Amalco, will, by special resolution, resolve to wind up and dissolve Amalco under the applicable provisions of the BCA. In connection with the winding-up, Amalco will distribute to Newco 1, Newco 2 and Newco 3, respectively, the Newco 1 Note, the Newco 2 Note and the Newco 3 Note.

It is not anticipated that Amalco will have a CDA balance prior to the distribution of such notes, thus it will not be necessary for Amalco to make an election under subsection 83(2) and subparagraph 88(2)(b)(i) of the Act with respect to capital dividends.

As a result of the assignment and distribution of the above notes, the obligations under the notes will be cancelled.

It is anticipated that no dividend refund will be forthcoming to Amalco as a consequence of the subsection 84(2) winding-up dividend. Thus, all properties and liabilities of Amalco will now have been distributed or discharged, as the case may be. Articles of Dissolution will then be executed and filed accordingly. The common shares and Class XXXXXXXXXX preferred shares of Amalco will be cancelled and Amalco will be dissolved.

ADDITIONAL INFORMATION

24.Newco 1, Newco 2 and Newco 3 do not contemplate the sale of any property acquired in the proposed butterfly described in paragraphs 20 to 23 above, other than inventory sold in the normal course of carrying on the farming business.

25.Except as described in this letter, no liabilities have been or will be incurred by, and no assets have been or will be acquired by or disposed of by Predecessor 1, Predecessor 2 or Amalco in contemplation of and before the proposed butterfly.

26.None of Amalco, Newco 1, Newco 2 or Newco 3 is, or will be at the time of the proposed transactions, an SFI.

27.None of the shares of Amalco, Newco 1, Newco 2 or Newco 3 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.

28.Upon completion of the proposed butterfly transactions described above, Newco 1 will use the XXXXXXXXXX as well as any equipment transferred to either of Newco 2 or Newco 3 as described in paragraph 20 above. Newco 1 will pay Newco 2 and Newco 3 fair market value rent for the use of the XXXXXXXXXX land and the equipment.

PURPOSE OF THE PROPOSED TRANSACTIONS

29.The individuals that are the subject of this ruling request now wish to divide the assets of Predecessor 1 and Predecessor 2 to enable each of them to pursue their separate and different investment and estate planning objectives independently of each other.

RULINGS GIVEN

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

A.The amalgamation of Predecessor 1 and Predecessor 2, as described in paragraph 6 above, will be an amalgamation described in subsection 87(1) of the Act.

B.Subject to the application of the provisions of subsections 20(1.2) and 26(5) of the Income Tax Application Rules and to the application of paragraph 88(2.2)(b) of the Act, which applies for the purposes stated in the preamble to subsection 88(2.2) of the Act, and subject also to the application of subsection 85(5.1) of the Act as it may apply to the transfer referred to in (vii) herein, the provisions of subsection 85(1) of the Act will apply to:

(i)the transfer of the common shares and Class XXXXXXXXXX preferred shares of Amalco by Child 1 to Newco 1 as described in paragraph 13 above,

(ii)the transfer of the common shares and Class XXXXXXXXXX preferred shares of Amalco by Mother to Newco 1 as described in paragraph 14 above,

(iii)the transfer of the Class XXXXXXXXXX preferred shares of Amalco by Child 2 to Newco 2 as described in paragraph 15 above,

(iv)the transfer of the common shares and Class XXXXXXXXXX preferred shares of Amalco by Father to Newco 2 as described in paragraph 16 above,

(v)the transfer of the Class XXXXXXXXXX preferred shares of Amalco by Child 3 to Newco 3 as described in paragraph 17 above,

(vi)the transfer of the Class XXXXXXXXXX preferred shares of Amalco by the Trust to Newco 3 as described in paragraph 18 above, and

(vii)the transfer of each eligible property which is the subject of an election under subsection 85(1) as described in paragraphs 20 and 21 above by Amalco to each of Newco 1, Newco 2 and Newco 3,

such that the agreed amounts in respect of each such transfer shall, subject to paragraph 85(1)(e.2) of the Act, 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. For greater certainty, paragraph 85(1)(e.2) of the Act will not apply to the transfers referred to herein with the exception of the transfer of the common shares of Amalco by Child 1, Mother and Father, as the case may be, to Newco 1 or Newco 2, as the case may be, as described in paragraphs (i), (ii) and (iv) herein.

C.As a result of the redemption by Newco 1, Newco 2 and Newco 3 of their Class XXXXXXXXXX preferred shares held by Amalco, as described in paragraph 22 above, and as a result of the distributions by Amalco in the course of its winding-up, as described in paragraph 23 above:

(a) By virtue of paragraphs 84(3)(a) and 84(3)(b) of the Act, each of Newco 1, Newco 2 and Newco 3 will be deemed to have paid, and Amalco will be deemed to have received, a taxable dividend equal to the amount by which the amount paid in respect of the redemption by Newco 1, Newco 2 and Newco 3 of their Class XXXXXXXXXX preferred shares exceeds the PUC of such shares; and

(b)Pursuant to paragraph 88(2)(b) and subsection 84(2), each of Newco 1, Newco 2 and Newco 3 will be deemed to have received a dividend (the "winding-up dividend") on its common shares and Class XXXXXXXXXX preferred shares of Amalco, as the case may be, equal to the proportion of the amount by which the aggregate fair market value of the property of Amalco distributed by Amalco to Newco 1, Newco 2 and Newco 3 on its winding-up as consideration for the cancellation of its common shares and Class XXXXXXXXXX preferred shares, as the case may be, exceeds the PUC thereof, that the number of shares of such class held by Newco 1, Newco 2 and Newco 3, as the case may be, is of the number of all such shares that are cancelled.

(c)(i)By virtue of subsection 186(2) and paragraph 186(4)(a) of the Act, each of Newco 1, Newco 2 and Newco 3 will be connected with Amalco. Provided that each of Newco 1, Newco 2 and Newco 3 is not entitled to a dividend refund in respect of its taxation year in which it is deemed to pay the dividend referred to in (a) above, Amalco will not be subject to Part IV tax under subsection 186(1) in respect of such dividend; and

(ii)By virtue of subsection 186(2) and paragraph 186(4)(a) of the Act, Amalco will be connected with each of Newco 1, Newco 2, and Newco 3. Provided that Amalco is not entitled to a dividend refund in respect of its taxation year in which it is deemed to pay the dividends referred to in (b) above, each of Newco 1, Newco 2 and Newco 3 will not be subject to Part IV tax under subsection 186(1) in respect of such dividends.

(d)The taxable dividends deemed to have been received by Amalco and each of Newco 1, Newco 2 and Newco 3 as a result of the redemption of the Class XXXXXXXXXX preferred shares of Newco 1, Newco 2 and Newco 3, as the case may be, and the winding-up of Amalco described in paragraphs (a) and (b) herein will be deductible by each of them in computing its respective taxable income pursuant to subsection 112(1). For greater certainty, the provisions of subsections 112(2.2) and (2.4) will not apply to deny the subsection 112(1) deduction in respect of such dividends.

(e)The taxable dividends deemed to have been received by Amalco and each of Newco 1, Newco 2 and Newco 3 as a result of the redemption of the Class XXXXXXXXXX preferred shares of Newco 1, Newco 2 and Newco 3, as the case may be, and the winding-up of Amalco described in paragraphs (a) and (b) herein will be excluded from the proceeds of disposition of the shares by virtue of paragraph (j) of the definition of "proceeds of disposition" in section 54 of the Act.

D.By virtue of the definition of "substantial interest" as set out under paragraph 191(2)(a), Amalco will have a substantial interest in each of Newco 1, Newco 2 and Newco 3 immediately before the redemption of their Class XXXXXXXXXX preferred shares as described in paragraph 22 above and each of Newco 1, Newco 2 and Newco 3 will have a substantial interest in Amalco immediately before the cancellation of its Class XXXXXXXXXX preferred shares as described in paragraph 23 above. Consequently, no tax will be payable under either section 187.2 or section 191.1 in respect of:

(i)the dividend deemed to have been paid by Newco 1, Newco 2 and Newco 3, as the case may be, to Amalco upon the redemption of the Class XXXXXXXXXX preferred shares of each such corporation since each such dividend will be an "excepted dividend" within the meaning assigned by paragraph (b) of the definition of "excepted dividend" in section 187.1 in the capacity of Amalco as the recipient of the particular dividend, and shall be an "excluded dividend" within the meaning of paragraph (a) of the definition of "excluded dividend" in subsection 191(1) in the capacity of Newco 1, Newco 2 and Newco 3, as the case may be, as the payer of the particular dividend, or

(ii)the dividend deemed to have been paid by Amalco to Newco 1, Newco 2 or Newco 3, as the case may be, upon the cancellation of the Class XXXXXXXXXX preferred shares of Amalco since each such dividend will be an "excepted dividend" within the meaning assigned by paragraph (b) of the definition of "excepted dividend" in section 187.1 in the capacity of Amalco as the recipient of the particular dividend, and shall be an "excluded dividend" within the meaning of paragraph (a) of the definition of "excluded dividend" in subsection 191(1) in the capacity of Amalco as the payer of the particular dividend.

E.Provided that as part of the series of transactions or events that includes the proposed transactions described herein, there is not:

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

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

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

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

which has not been described herein, then by virtue of paragraph 55(3)(b) of the Act, subsection 55(2) of the Act will not apply to the taxable dividends referred to in the rulings given in subparagraphs C(a) and (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.The application of paragraph 84.1(1)(a) of the Act to:

(a)the transfer of the XXXXXXXXXX common shares and the Class XXXXXXXXXX preferred shares of Amalco by Child 1 to Newco 1, as described in paragraph 13 above,

(b)the transfer of the XXXXXXXXXX common shares and the Class XXXXXXXXXX preferred shares of Amalco by Mother to Newco 1, as described in paragraph 14 above,

(c)the transfer of the Class XXXXXXXXXX preferred shares of Amalco by Child 2 to Newco 2, as described in paragraph 15 above,

(d)the transfer of the XXXXXXXXXX common shares and the Class XXXXXXXXXX preferred shares of Amalco by Father to Newco 2, as described in paragraph 16 above,

(e)the transfer of the Class XXXXXXXXXX preferred shares of Amalco by Child 3 to Newco 3, as described in paragraph 17 above, and

(f)the transfer of the Class XXXXXXXXXX preferred shares of Amalco by the Trust to Newco 3, as described in paragraph 18 above, and

will apply to reduce the PUC of the common shares and the Class XXXXXXXXXX preferred shares, as the case may be, of Newco 1, Newco 2 or Newco 3, as the case may be, referred to in paragraphs 13 to 18 above, to an amount equal to the greater of the PUC of the common shares or Class XXXXXXXXXX preferred shares of Amalco, as the case may be, which are transferred as consideration for such common or Class XXXXXXXXXX preferred shares of Newco 1, Newco 2 or Newco 3 or the aggregate ACB of those common or preferred shares, as the case may be, as determined under paragraphs 84.1(2)(a) and (a.1) of the Act, to Child 1, Mother, Child 2, Father, Child 3 or the Trust, as the case may be, immediately before the disposition. The provisions of paragraph 84.1(1)(b) of the Act will not apply to deem any dividend to have been paid by Newco 1, Newco 2 or Newco 3, as the case may be, to each such person.

G.The provisions of subsection 85(2.1) of the Act will apply to reduce the PUC of the Class XXXXXXXXXX preferred shares of each of Newco 1, Newco 2 and Newco 3, as referred to in paragraphs 20 and 21 above, by the amount by which:

(a)the aggregate PUC of the Class XXXXXXXXXX preferred shares of Newco 1, Newco 2 or Newco 3, as the case may be, otherwise determined as a result of the acquisition by each such corporation of the property of Amalco

		exceeds the amount 

(b)by which the aggregate cost to Newco 1, Newco 2 or Newco 3, as the case may be, of the property of Amalco transferred to it as described in paragraph 20 above exceeds the amount of the liabilities of Amalco assumed by Newco 1, Newco 2 or Newco 3, as the case may be, as part consideration for such property.

H.The extinguishment of the debt obligations as a result of the cancellation of the Newco 1 Note, Newco 2 Note and Newco 3 Note, as described in paragraph 23 above, will not give rise to a "forgiven amount" within the meaning of subsection 80(1) or 80.01(1) of the Act.

I.The provisions of subsection 15(1), 56(2), 56(4), 69(4) and 246(1) of the Act will not apply to the proposed transactions described herein, in and by themselves.

J.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 limitations and qualifications set out in Information Circular 70-6R3 dated December 31, 1996 and are binding on Revenue Canada provided that the proposed transactions are completed by XXXXXXXXXX.

The above rulings are based on the law as it presently reads and do not take into account any proposed amendments to the Act which, if enacted into law, could have an effect on the rulings provided herein.

COMMENTS

Nothing in this ruling should be construed as implying that Revenue Canada 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