30 November 1997 Ruling 9813423 - BUTTERFLY

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CRA.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ARC.

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the Department.

Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle du ministère.

Principal Issues:

butterfly reorganization

Position:

routine

Reasons:

routine

XXXXXXXXXX 981342
XXXXXXXXXX

Attention: XXXXXXXXXX

XXXXXXXXXX, 1998

Dear Sirs:

Re: Proposed reorganization of XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX

This is in reply to your letters of XXXXXXXXXX, wherein you requested an advance income tax ruling on behalf of the above-noted taxpayers.

You advise that to the best of your knowledge and that of the taxpayers involved,

(i) none of the issues involved in this advance income tax ruling request are under objection or appeal or are being considered by any district taxation offices or taxation centres of the Department in connection with a tax return already filed, and

(ii) none of the issues involved in the requested rulings are the subject of any notice of objection or are under appeal.

Statute and Entity Definitions:

(a) “XXXXXXXXXX” means XXXXXXXXXX, a corporation incorporated under the CBCA by certificate of incorporation dated XXXXXXXXXX. On XXXXXXXXXX in the course of winding-up, XXXXXXXXXX transferred and assigned all of its property to its sole shareholder, XXXXXXXXXX, as more particularly described at paragraph 28 hereof;

(b) “XXXXXXXXXX” means XXXXXXXXXX, a corporation incorporated under the CBCA by certificate of incorporation dated XXXXXXXXXX, all of the issued and outstanding shares of which are owned by XXXXXXXXXX;

(c) “XXXXXXXXXX” means XXXXXXXXXX, a corporation incorporated under the CBCA by certificate of incorporation dated XXXXXXXXXX, all of the issued and outstanding shares of which are owned by XXXXXXXXXX;

(d) “XXXXXXXXXX” means XXXXXXXXXX, a corporation incorporated under the CBCA by certificate of incorporation dated XXXXXXXXXX, of which XXXXXXXXXX% of its issued and outstanding shares are owned individually by XXXXXXXXXX, and the remaining XXXXXXXXXX% of such shares are owned by XXXXXXXXXX;

(e) “XXXXXXXXXX” means XXXXXXXXXX, a corporation incorporated under the CBCA by certificate of incorporation dated XXXXXXXXXX, all of the issued and outstanding shares of which are owned by XXXXXXXXXX;

(f) “XXXXXXXXXX” means XXXXXXXXXX, a corporation incorporated under the CBCA by certificate of incorporation dated XXXXXXXXXX. On XXXXXXXXXX, in the course of winding-up, XXXXXXXXXX transferred and assigned all of its property to its sole shareholder, the Estate of the Late XXXXXXXXXX (the “Estate”), as more particularly described at paragraph 29 hereof;

(g) "Canco" means XXXXXXXXXX, a corporation incorporated under the CBCA by certificate of incorporation dated XXXXXXXXXX, of which XXXXXXXXXX% of the issued and outstanding shares are owned directly and indirectly by XXXXXXXXXX Trust and XXXXXXXXXX% of such shares are owned indirectly by the children of the Late XXXXXXXXXX and trusts established for the benefit of such children, as more particularly described at paragraph 12 hereof. Canco is a CCPC and a TCC;

Canco was established by the late XXXXXXXXXX (“Father”) to hold Inc shares on behalf of the XXXXXXXXXX family, to the extent of XXXXXXXXXX% on behalf of trusts for his daughter XXXXXXXXXX and her children, and XXXXXXXXXX% on behalf of trusts for his son XXXXXXXXXX and the XXXXXXXXXX children of XXXXXXXXXX first marriage, namely XXXXXXXXXX;

(h) "CBCA" means the Canada Business Corporations Act as amended;

(i) "XXXXXXXXXX" means XXXXXXXXXX, a corporation incorporated under the CBCA by certificate of incorporation dated XXXXXXXXXX, all of the issued and outstanding shares of which are owned by XXXXXXXXXX;

(j) "Inc" means XXXXXXXXXX, a corporation resulting from Articles of Amalgamation dated XXXXXXXXXX issued under the CBCA on the amalgamation of XXXXXXXXXX. The shares of XXXXXXXXXX were cancelled upon such amalgamation and the issued and outstanding share capital of XXXXXXXXXX were converted into common shares of Inc on the basis of XXXXXXXXXX common shares of XXXXXXXXXX for each common share of Inc. The issued and outstanding common shares of Old Inc were converted into issued and fully paid common shares of the amalgamated entity, Inc, on the basis of one common share of Old Inc for one common share of Inc. Inc is a public corporation, the outstanding common shares of which trade on the XXXXXXXXXX Stock Exchanges. Inc currently has approximately XXXXXXXXXX issued and outstanding common shares;

(k) "XXXXXXXXXX Trust" means the XXXXXXXXXX Trust established by Father by deed of donation on XXXXXXXXXX, on behalf of his said daughter, XXXXXXXXXX, and her children;

(l) "XXXXXXXXXX" means XXXXXXXXXX, a corporation incorporated under the CBCA by certificate of incorporation dated XXXXXXXXXX, of which XXXXXXXXXX% of its issued and outstanding shares are owned by XXXXXXXXXX Trust and XXXXXXXXXX% of such shares are owned by XXXXXXXXXX; and

(m) "XXXXXXXXXX Trust" means the XXXXXXXXXX Trust established by Father by deed of donation on XXXXXXXXXX on behalf of his said son, XXXXXXXXXX, and the children of his first marriage. Pursuant to the deed of donation establishing the XXXXXXXXXX Trust, a separate trust is deemed established for the beneficiaries of each of the beneficiaries thereunder. XXXXXXXXXX passed away on XXXXXXXXXX and separate subtrusts have been established for each of the capital beneficiaries thereof, known as the “XXXXXXXXXX Subtrust", "XXXXXXXXXX Subtrust", "XXXXXXXXXX Subtrust" and "XXXXXXXXXX Subtrust".

Income Tax Definitions

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

(a) "Act" means the Income Tax Act R.S.C. 1985, c. 1 (5th SUPP.) as amended as of the date hereof including the amendments contained in Bill C-28 which received Royal Assent on June 18, 1998;

(b) "adjusted cost base" or "ACB" has the meaning assigned to the term "adjusted cost base" in section 54 of the Act;

(c) "Canadian-controlled private corporation" or "CCPC" has the meaning assigned to that term by subsection 89(1) of the Act;

(d) “capital gain" has the meaning assigned to that term by paragraph 39(1)(a) of the Act;

(e) “capital loss" has the meaning assigned to that term by paragraph 39(1)(b) of the Act;

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

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

(h) "paid-up capital" or "PUC" has the meaning assigned to the term "paid-up capital" in subsection 89(1) of the Act;

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

(j) "public corporation” has the meaning assigned to that term in subsection 89(1) of the Act;

(k) "refundable dividend tax on hand" or "RDTOH" has the meaning assigned to that term in subsection 129(3) of the Act;

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

(m) "specified investment business" has the meaning assigned to that term by subsection 248(1) of the Act;

(n) "specified person" has the meaning assigned to that term by paragraph (h) of the definition of “taxable preferred share" set forth in subsection 248(1 ) of the Act;

(o) "taxable Canadian corporation" or “TCC” has the meaning assigned to that term in subsection 89(1) of the Act; and

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

Unless otherwise indicated in this letter, all dollar amounts referred to herein are in Canadian dollars.

Our understanding of the relevant facts, proposed transactions and the purpose(s) of the proposed transactions are as follows.

Facts:

1. Father was a resident of Canada who died on XXXXXXXXXX. Father was one of the founders of Inc.

2. On XXXXXXXXXX, the XXXXXXXXXX Trust and the XXXXXXXXXX Trust subscribed for XXXXXXXXXX and XXXXXXXXXX common shares of Canco respectively and Father transferred XXXXXXXXXX common shares of Old Inc to Canco in consideration of XXXXXXXXXX class A preferred shares of Canco (the "Canco preferred shares"). In respect of this transaction, Father and Canco elected jointly in prescribed form and within the time limits referred to in subsection 85(6) of the Act to have the rules of subsection 85(1) apply to the transfer of the said XXXXXXXXXX common shares of Old Inc to Canco, so that both the proceeds of disposition to Father and the cost to Canco of the shares of Old Inc so transferred would be equal to Father’s adjusted cost base of same.

3. Corresponding with the aforesaid holdings of common shares, Father provided for specific legacies in his Will, bequeathing the Canco preferred shares to the XXXXXXXXXX Trust and the XXXXXXXXXX Trust in the proportions of XXXXXXXXXX% and XXXXXXXXXX% respectively, a transposition error of such percentages having been acknowledged and corrected.

4. XXXXXXXXXX.

5. On XXXXXXXXXX, Old Inc approved a stock split whereby the holder of a common share of Inc received an additional common share for each common share held at the time of the stock split. All of the common shares of Old Inc owned by Canco prior to the stock split were acquired by Canco from Father in XXXXXXXXXX, pursuant to section 85 of the Act and all of such shares had been acquired by Father before January 1, 1972.

6. On XXXXXXXXXX, Canco sold XXXXXXXXXX common shares of Old Inc in an arm's length transaction. At the date of his death, Father owned XXXXXXXXXX common shares of Inc. At the date of this ruling request, the holdings of the Estate have been reduced to XXXXXXXXXX common shares (after taking into account the stock split on XXXXXXXXXX, more particularly described below at paragraph 30) as a result of the sale of (i) XXXXXXXXXX Inc shares on XXXXXXXXXX, (ii) XXXXXXXXXX Inc shares in XXXXXXXXXX, and (iii) XXXXXXXXXX Inc shares in XXXXXXXXXX.

7. On XXXXXXXXXX, Father, XXXXXXXXXX, transferred XXXXXXXXXX (XXXXXXXXXX Canco preferred shares having been previously redeemed) Canco preferred shares to XXXXXXXXXX in consideration for XXXXXXXXXX class A common shares thereof. In respect of this transaction, Father and XXXXXXXXXX elected jointly in prescribed form and within the time limits referred to in subsection 85(6) of Act to have the rules of subsection 85(1) apply to the transfer of the Canco preferred shares to XXXXXXXXXX, so that both the proceeds of disposition to Father and the cost to XXXXXXXXXX of the Canco preferred shares so transferred would equal Father's adjusted cost base of same.

8. On XXXXXXXXXX,a further XXXXXXXXXX Canco preferred shares were redeemed and at the date of death of Father there remained outstanding XXXXXXXXXX Canco preferred shares all of which were held by XXXXXXXXXX.

9. On XXXXXXXXXX, Canco transferred XXXXXXXXXX Inc shares to its wholly-owned subsidiary, XXXXXXXXXX, on a rollover basis and subsequently sold all of the shares of XXXXXXXXXX, whose sole assets consisted of the said XXXXXXXXXX Inc shares, to XXXXXXXXXX. Shortly thereafter, XXXXXXXXXX caused the liquidation of XXXXXXXXXX, thereby distributing the XXXXXXXXXX Inc shares to it, and then sold to its clients some or all of the aforesaid shares.

10. Canco presently owns XXXXXXXXXX common shares in the capital of Inc. The adjusted cost base of the Inc shares to Canco is nominal. Canco holds its Inc shares as capital property.

11. The authorized share capital of Canco consists of:

a) an unlimited number of class A preferred shares without par value which are entitled to vote, entitled to a non-cumulative dividend of XXXXXXXXXX% per annum and redeemable at the option of the corporation at $XXXXXXXXXX per share;

b) an unlimited number of class B preferred shares, without par value, which are entitled to vote, entitled to a non-cumulative dividend of $XXXXXXXXXX per annum and redeemable at the option of the corporation at their paid-up amount; and

c) an unlimited number of common shares without par value.

12. The issued and outstanding share capital of Canco is owned as follows:

Shareholder Number Paid-up capital ACB

Common shares:

XXXXXXXXXX

XXXXXXXXXX

XXXXXXXXXX

XXXXXXXXXX

XXXXXXXXXX

XXXXXXXXXX

Class A Preferred shares

Held by the Estate for:

XXXXXXXXXX

XXXXXXXXXX

13. On or about XXXXXXXXXX, the XXXXXXXXXX Trust distributed XXXXXXXXXX common shares to each of XXXXXXXXXX in partial satisfaction of their respective capital interests in the said trust.

14. On or about XXXXXXXXXX acquired its XXXXXXXXXX common shares in the capital of Canco from the XXXXXXXXXX Trust. In respect of this transaction, XXXXXXXXXX and XXXXXXXXXX Trust elected jointly in prescribed form and within the time limits referred to in subsection 85(6) of the Act, to have the rules of subsection 85(1) apply to the transfer of the shares of Canco, so that the proceeds of disposition to XXXXXXXXXX Trust and the cost to XXXXXXXXXX of the shares of Canco so transferred would equal the XXXXXXXXXX Trust's adjusted cost base of same.

15. On or about XXXXXXXXXX acquired its XXXXXXXXXX common shares in the capital of Canco from the XXXXXXXXXX Trust. In respect of this transaction, XXXXXXXXXX and XXXXXXXXXX Trust elected jointly in prescribed form and within the time limits referred to insubsection 85(6) of the Act to have the rules of subsection 85(1) apply to the transfer of the shares of Canco so that both the proceeds of disposition to the XXXXXXXXXX Trust and the cost to XXXXXXXXXX of the shares of Canco so transferred would equal the XXXXXXXXXX Trust's adjusted cost base of same.

16. On or about XXXXXXXXXX acquired its XXXXXXXXXX shares in the capital of Canco from XXXXXXXXXX. In respect of this transaction, XXXXXXXXXX elected jointly in prescribed form and within the time limits referred to in subsection 85(6) of the Act, to have the rules of subsection 85(1) apply to the transfer of the shares of Canco so that both the proceeds of disposition to XXXXXXXXXX and the cost to XXXXXXXXXX of the shares of Canco so transferred would equal XXXXXXXXXX adjusted cost base of same.

17. On or about XXXXXXXXXX acquired its XXXXXXXXXX shares in the capital of Canco from XXXXXXXXXX. In respect of this transaction, XXXXXXXXXX elected jointly in prescribed form and within the time limits referred to in subsection 85(6) of the Act, to have the rules of subsection 85(1) apply to the transfer of the shares of Canco, so that both the proceeds of disposition to XXXXXXXXXX and the cost to XXXXXXXXXX of the shares of Canco so transferred would equal XXXXXXXXXX adjusted cost base of same.

18. On or about XXXXXXXXXX acquired its XXXXXXXXXX common shares in the capital of Canco from XXXXXXXXXX. In respect of this transaction, XXXXXXXXXX elected jointly in prescribed form and within the time limits referred to in subsection 85(6) of the Act, to have the rules of subsection 85(1) apply to the transfer of the shares of Canco, so that both the proceeds of disposition to XXXXXXXXXX and the cost to XXXXXXXXXX of the shares of Canco so transferred would equal XXXXXXXXXX adjusted cost base of same.

19. On or about XXXXXXXXXX transferred all the shares of XXXXXXXXXX to XXXXXXXXXX. In respect of this transaction, XXXXXXXXXX elected jointly in prescribed form and within the time limits referred to in subsection 85(6) of the Act, to have the rules of subsection 85(1) apply to the transfer of the shares of XXXXXXXXXX, so that the proceeds of disposition to XXXXXXXXXX and the cost to XXXXXXXXXX of the shares of XXXXXXXXXX so transferred would equal XXXXXXXXXX adjusted cost base of same.

20. On or about XXXXXXXXXX,Canco paid a dividend to its common shareholders of $XXXXXXXXXX per common share.

21. The Last Will and Testament of Father provides, inter alia, for a specific legacy of XXXXXXXXXX% of the Canco preferred shares in favour of the XXXXXXXXXX Trust and XXXXXXXXXX% in favour of the XXXXXXXXXX Trust.

The Estate has undertaken to transfer the Canco preferred shares (transferred to the Estate, as hereinafter described) to the XXXXXXXXXX Trust and the XXXXXXXXXX Trust in satisfaction of the aforesaid legacy upon receipt of the federal and provincial clearance certificates.

22. The sole executors and trustees under the Last Will and Testament of Father are XXXXXXXXXX, all of whom are resident in Canada save and except for XXXXXXXXXX who is resident in XXXXXXXXXX.

23. The fiscal year-end of the Estate is XXXXXXXXXX.

24 The fiscal year-end of Canco is XXXXXXXXXX.

25. As at its XXXXXXXXXX year-end, the balance in the RDTOH account of Canco was nominal and as of the date hereof the capital dividend account of Canco is nominal.

26. The Estate indirectly held through XXXXXXXXXX, a Canadian-controlled private corporation incorporated under the CBCA on XXXXXXXXXX, the outstanding XXXXXXXXXX Canco preferred shares. XXXXXXXXXX also owned marketable securities and cash.

27. On or about XXXXXXXXXX, the Estate transferred the XXXXXXXXXX shares to XXXXXXXXXX. In respect of this transaction, XXXXXXXXXX elected jointly and prescribed form and within the time limits referred to in subsection 85(6) of the Act to have the rules of subsection 85(1) apply to the transfer of the XXXXXXXXXX shares, so that both the proceeds of disposition to the Estate and the cost to XXXXXXXXXX of the shares so transferred would equal the adjusted cost base of such shares to the Estate.

28. On or about XXXXXXXXXX passed a resolution authorizing the winding-up of XXXXXXXXXX in accordance with the provisions of the CBCA. On that date, XXXXXXXXXX and XXXXXXXXXX entered into a winding-up agreement under the terms of which all of the assets of XXXXXXXXXX, save for cash or other liquid assets to be used for the payment of taxes and other remaining costs of liquidation, were transferred and distributed to, and all of the liabilities of XXXXXXXXXX were assumed by, XXXXXXXXXX, and this transaction was a winding-up of XXXXXXXXXX governed by subsection 88(1) of the Act. XXXXXXXXXX designated in respect of its non-depreciable capital property including, for greater certainty, the XXXXXXXXXX Canco preferred shares received by it on the winding-up of XXXXXXXXXX, in its return of income for the XXXXXXXXXX taxation year, an amount pursuant to paragraph 88(1)(d) of the Act.

29. On or about XXXXXXXXXX, the Estate passed a resolution authorizing the winding-up of XXXXXXXXXX in accordance with the provisions of the CBCA. On that date, the Estate and XXXXXXXXXX entered into a winding-up agreement under the terms of which all of the assets of XXXXXXXXXX, save for cash or other liquid assets to be used for the payment of taxes and other remaining costs of liquidation, were transferred and distributed to, and all the liabilities of XXXXXXXXXX were assumed by, the Estate, and this transaction was a winding-up of XXXXXXXXXX governed by subsection 88(2) of the Act.

30. On XXXXXXXXXX, the Inc shares were split on a XXXXXXXXXX basis.

31. As of the date hereof, the principal asset of Canco is its investment in Inc consisting of XXXXXXXXXX common shares of its capital. The shares of Inc represent capital property to Canco. The only material liability of Canco is a loan payable to the Estate in the amount of $XXXXXXXXXX. It is anticipated that this loan will be repaid on or before XXXXXXXXXX, in order to provide the Estate with funding for its tax liability.

Proposed Transactions:

32. The Canco preferred shares will be distributed by the Estate to the XXXXXXXXXX Trust and the XXXXXXXXXX Trust, pursuant to the terms of the Last Will and Testament of Father, in partial satisfaction of their capital interest therein.

33. XXXXXXXXXX will cause its articles of incorporation to be amended by adding thereto one (1) non-voting, redeemable and retractable preferred share which shall be entitled to receive, as and when declared from time to time by the board of directors, non-cumulative dividends not exceeding an amount equal to XXXXXXXXXX% per annum calculated on the XXXXXXXXXX Special Share Redemption Amount (as hereinafter defined) (the “XXXXXXXXXX Special Share”). The XXXXXXXXXX Special Share shall be redeemable and retractable for an amount (the “XXXXXXXXXX Special Share Redemption Amount”) equal to the fair market value of the consideration received by XXXXXXXXXX upon the issuance of such share. The holder of the XXXXXXXXXX Special Share will be entitled to receive on the dissolution or winding-up of XXXXXXXXXX a distribution of the net assets of XXXXXXXXXX in an amount equal to the XXXXXXXXXX Special Share Redemption Amount in priority to any distribution to be made to holders of any other shares of any class of the capital stock of XXXXXXXXXX.

XXXXXXXXXX

34. Immediately before the transfer of property described in paragraph 35 below, the property owned by Canco will be classified into three types of property for the purposes of paragraph 55(3)(b) of the Act, as follows:

a) cash or near-cash property, comprising all of the current assets of Canco, including any cash, deposits, marketable securities, accounts receivable, inventories and prepaid expenses;

b) investment property, comprising all of the assets of Canco, other than any cash or near-cash property and business property, any income from which would, for the purposes of the Act, be income from property or a specified investment business; and

c) business property, comprising all of the assets of Canco, other than cash or near-cash property, any income from which would, for the purpose of the Act, be income from a business (other than a specified investment business);

Canco will not have any business property at the time of the transfers described in paragraph 35 below. For greater certainty, any tax accounts, such as the balance of RDTOH or CDA of Canco, will not be considered property for purposes of the proposed transactions described herein.

Immediately before the transfers of property described in paragraph 35 below, the only property which will be owned by Canco, other than cash or near-cash property, will be its share investment in Inc. For greater certainty, Canco does not exercise significant influence (within the meaning of Section 3050 of the CICA Handbook) over Inc and, consequently, the net fair market value of the property of Canco will not be determined on a consolidated look-through basis.

35. Canco will transfer to XXXXXXXXXX a pro-rata share of all of its cash or near-cash property and investment property in a manner such that the fair market value of the cash or near-cash property and investment property so transferred to Holdings will be equal to that proportion of the fair market value of all the cash or near-cash property and investment property of Canco, immediately before the transfer that:

a) the aggregate fair market value, immediately before the transfer, of the Canco shares owned by XXXXXXXXXX,

is of

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

For greater certainty, the above transfers will be made on a gross fair market value basis rather than on a net equity basis. Therefore, XXXXXXXXXX will have received a pro-rata share of each type of property of Canco, as described above. Similarly, XXXXXXXXXX will assume the same pro-rata share of each liability of Canco as more particularly described in paragraph 36 below.

36. As consideration for the property so transferred pursuant to paragraph 35, XXXXXXXXXX will:

a) assume a pro-rata share of each of the liabilities of Canco (the "Assumed Liabilities") provided however, that the Assumed Liabilities will not exceed the aggregate of the amounts determined under paragraph 37 below; and

b) issue to Canco the XXXXXXXXXX Special Share having an aggregate redemption price and an aggregate fair market value equal to the amount by which the aggregate fair market value of the cash or near-cash property and investment property so transferred exceeds the Assumed Liabilities.

To the extent that the pro-rata share of liabilities to be assumed by XXXXXXXXXX exceeds the Assumed Liabilities, as determined in accordance with the above (such amount is hereinafter referred to as the "Excess Liabilities"), XXXXXXXXXX will assume the full amount of such Excess Liabilities of Canco. As consideration therefor, Canco will issue to XXXXXXXXXX a non-interest-bearing demand promissory note (the "Canco Excess Liabilities Note") having a principal amount and a fair market value equal to the Excess Liabilities so assumed by XXXXXXXXXX.

37. Canco and XXXXXXXXXX will elect jointly in prescribed form and within the time limits referred to in subsection 85(6) of the Act, to have the rules of subsection 85(1) of the Act apply to the transfer of any eligible property of Canco that has a fair market value in excess of its adjusted cost base in paragraph 35 above so that the amount agreed upon in such election in respect of such eligible property so transferred will be equal to the ACB of such eligible property so transferred to XXXXXXXXXX immediately before the transfer. The amount to be added to the stated capital account of the XXXXXXXXXX Special Share will be equal to the amount by which the aggregate cost amounts in respect of the property pursuant to the election under subsection 85(1) of the Act exceeds the amount of the Assumed Liabilities.

38. Immediately after the transfer of the shares of Inc described in paragraph 35 above Canco will purchase for cancellation the XXXXXXXXXX common shares of its capital held by XXXXXXXXXX at their fair market value which amount will be equal to the XXXXXXXXXX Special Share Redemption Amount, and in consideration therefor Canco will issue a non-interest-bearing demand promissory note (the "Canco Repurchase Note") in favour of XXXXXXXXXX having a principal amount equal to the purchase price of the XXXXXXXXXX common shares of Canco acquired from XXXXXXXXXX. The Canco Repurchase Note will be assignable by the holder thereof. XXXXXXXXXX will accept the Canco Repurchase Note as full payment for the purchase price of the Canco shares so acquired.

39. Immediately following the repurchase of the XXXXXXXXXX Canco common shares as described in paragraph 38 above, XXXXXXXXXX will redeem its XXXXXXXXXX Special Share held by Canco at its fair market value being an amount equal to the XXXXXXXXXX Special Share Redemption Amount and such redemption price will be paid in full by XXXXXXXXXX by the transfer and assignment to Canco of the Canco Excess Liabilities Note and the Canco Repurchase Note referred to in paragraphs 36 and 38 above. Canco will accept the Canco Excess Liabilities Note and the Canco Repurchase Note as full payment for the redemption price of the XXXXXXXXXX Special Share so redeemed. The Canco Excess Liabilities Note and the Canco Repurchase Note will thereupon be extinguished and cancelled notwithstanding that the mutual indebtedness of Canco and XXXXXXXXXX resulting from the repurchase described in paragraph 38 and the redemption described in this paragraph may not be of identical amounts.

40. Immediately following the transfer described in paragraph 35 above, the acquisition of the Canco common shares as described in paragraph 38 and the redemption of the XXXXXXXXXX Special Share as described in paragraph 39 above, the net fair market value of each type of property retained by Canco will be equal to that proportion of the aggregate net fair market value of that type of property of Canco immediately before the transfer described in paragraph 35 above that,

a) the aggregate fair market value of all of the issued and outstanding shares of Canco immediately after the redemption of the XXXXXXXXXX Special Share described in paragraph 39 above.

is of

b) the aggregate fair market value of all of the shares of Canco immediately before such redemption.

PURPOSE OF THE PROPOSED TRANSACTIONS

41. The purpose of the proposed transactions is to allow XXXXXXXXXX to acquire direct and beneficial ownership of its interest in the common shares of Inc presently owned by Canco, thereby allowing each of the two branches of the XXXXXXXXXX family (i.e. XXXXXXXXXX family and XXXXXXXXXX family) to implement their own investment strategy with respect to such assets.

ADDITIONAL INFORMATION

42. The share provisions relating to the XXXXXXXXXX Special Share will provide that in the event that it is subsequently held or determined by a final judgment of any competent administrative tribunal or court or by a negotiated settlement with any revenue authority that the aggregate net fair market value of any property that is relevant to the determination of the redemption price of such share is different than the fair market value assigned thereto, the redemption amount of such share shall be automatically adjusted retroactively, nunc pro tunc, to reflect the aggregate net fair market value so held or determined.

43. 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 XXXXXXXXXX or a corporation controlled by one of them in contemplation of or before the proposed transfers of properties described in paragraph 35 above.

44. Except as described in this letter, no property transferred to any corporation in the course of the reorganization contemplated herein will, thereafter, be transferred directly or indirectly, in the course of that reorganization to any person.

45. None of the shares of Canco or XXXXXXXXXX has been or will be, at any time during the implementation of the proposed transactions described herein:

a) 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.

46. Neither Canco nor XXXXXXXXXX is, or will be at the time of the proposed transactions, a specified financial institution.

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) Subsection 107(2) of the Act will apply in respect of the distribution of the Canco preferred shares by the Estate to the XXXXXXXXXX Trust and the XXXXXXXXXX trust so that:

(i) of disposition equal to the cost amount thereof to the Estate immediately before the distribution;

(ii) the XXXXXXXXXX Trust and the XXXXXXXXXX Trust will each be deemed to have acquired the Canco preferred shares distributed to each of them at a cost equal to the cost amount to the Estate of the Canco preferred shares so distributed to each of them: and

(iii) each of the XXXXXXXXXX Trust and the XXXXXXXXXX Trust will be deemed to have disposed of a portion of its capital interest in the Estate for proceeds equal to the cost amount of the Canco preferred shares received by each of them.

B) Provided that joint elections are filed pursuant to subsection 85(1) of the Act, in the prescribed form within the prescribed time, the provisions of subsection 85(1) of the Act will apply to the transfer of each eligible property by Canco to XXXXXXXXXX, as described in paragraph 35 above, such that the agreed amount in respect of each such transfer will be deemed to be the proceeds of disposition to Canco and the cost thereof to XXXXXXXXXX pursuant to paragraph 85(1)(a) of the Act. For greater certainty, the provisions of paragraph 85(1)(e.2) of the Act will not apply to the transfer described herein.

C) The provisions of subsection 85(2.1) of the Act will not apply to reduce the PUC of the XXXXXXXXXX Special Share to be issued to Canco by XXXXXXXXXX as described in paragraphs 36 and 37 above.

D) As a result of the acquisition by Canco of its common shares as described in paragraph 38 above and the redemption by XXXXXXXXXX of the XXXXXXXXXX Special Share as described in paragraph 39 above:

(i) by virtue of paragraphs 84(3)(a) and 84(3)(b) of the Act:

(a) Canco will be deemed to have paid, and XXXXXXXXXX will be deemed to have received, a taxable dividend equal to the amount by which the amount paid in respect of the acquisition of the common shares of Canco exceeds the aggregate PUC thereof;

and

(b) XXXXXXXXXX will be deemed to have paid, and Canco will be deemed to have received, a taxable dividend equal to the amount by which the amount paid in respect of the redemption of the XXXXXXXXXX Special Share exceeds the PUC thereof;

(ii) the taxable dividends deemed to have been received by XXXXXXXXXX and Canco as a result of the redemptions referred to in D(i)(a) and D(i)(b) herein will be included in computing their respective incomes pursuant to paragraph 12(1)(j) of the Act and be deductible by each of them in computing their respective taxable incomes pursuant to subsection 112(1) of the Act. For greater certainty, the provisions of subsections 112(2.1), (2.2), (2.3) and (2.4) of the Act will not apply to deny the subsection 112(1) deduction in respect of such dividends;

(iii) pursuant to paragraph (j) of the definition of "proceeds of disposition" in section 54 of the Act, the proceeds of disposition in respect of the acquisition of the common shares of Canco held by XXXXXXXXXX, and in respect of the redemption of the XXXXXXXXXX Special Share held by Canco will be reduced by the amount of the dividend deemed by paragraph 84(3)(b) of the Act to be received by the holder of the particular share; and

(iv) the dividends described in D(i) above will not be subject to tax under Part IV of the Act except as provided in paragraph 186(1)(b).

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

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

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

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

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

which has not been described herein, then by virtue of paragraph 55(3)(b) of the Act, subsection 55(2) of the Act will not apply to the taxable dividends referred to in the rulings given in subparagraphs D and for greater certainty, subsection 55(3.1) of the Act will not apply to deny the exemption under paragraph 55(3)(b) of the Act.

F. By virtue of the definition of “substantial interest”as set out under paragraph 191(2)(a) of the Act:

(i) XXXXXXXXXX will have a substantial interest in Canco immediately before the redemption of the XXXXXXXXXX Special Share as described in paragraph 39 above. Consequently, no tax will be payable under either section 187.2 or section 191.1 of the Act in respect of the dividend deemed to be paid by XXXXXXXXXX to Canco upon the redemption of the XXXXXXXXXX Special Share since such dividend will be an "excepted dividend” within the meaning assigned by paragraph (b) of the definition of "excepted dividend" in section 187.1 of the Act in the capacity of Canco as the recipient of the particular dividend, and will be an “excluded dividend” within the meaning of paragraph (a) of the definition of “excluded dividend" in subsection 191(1) of the Act in the capacity of XXXXXXXXXX as the payer of the particular dividend;

and

(ii) Canco will have a substantial interest in XXXXXXXXXX immediately before the acquisition of the Canco common shares as described in paragraph 38 above. Consequently, no tax will be payable under either section 187.2 or section 191.1 of the Act in respect of the dividend deemed to be paid by Canco to XXXXXXXXXX upon the acquisition of the Canco common shares since such dividend will be an “excepted dividend" within the meaning assigned by paragraph (b) of the definition of “excepted dividend" in section 187.1 of the Act in the capacity of XXXXXXXXXX as the recipient of the particular dividend, and will be an "excluded dividend" within the meaning of paragraph (a) of the definition of "excluded dividend" in subsection 191(1) of the Act in the capacity of Canco as the payer of the particular dividend.

G The extinguishment of the Canco Repurchase Note and the Canco Excess Liabilities Note if any, as described in paragraph 39 above will not give rise to a "forgiven amount" within the meaning of subsection 80(1) or 80.01(1) of the Act. Neither Canco nor XXXXXXXXXX will realize any gain or incur any loss as a result of the transfer and assignment to Canco of the Canco Repurchase Note and Canco Excess Liabilities Note by XXXXXXXXXX and the resultant extinguishment and cancellation of the Canco Repurchase Note and Canco Excess Liabilities Note as described in paragraph 38 above.

H. The provisions of subsections 15(1), 56(2), 56(4), 69(4) and 246(1) of the Act will not apply as a result of the proposed transactions described herein, in and by themselves.

I. Subsection 245(2) of the Act will not be applied as a result of the proposed transactions, in and by themselves, to redetermine the tax consequences in the rulings given.

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

The above rulings are based on the Act in its present form and do not take into account any proposed amendments to the Act which, if enacted, could have an effect on the rulings provided herein.

COMMENTS

You have informed us, in paragraph 42 above, that the redemption amount of the XXXXXXXXXX Special Share will be adjusted automatically retroactively if there is an adjustment to the value of the property for which such share was issued.

Nothing in this letter should be interpreted as confirming that:

(a) for purposes of the Act, any adjustment made pursuant to any such price adjustment clause in respect of a transaction subsequent to the time of such transaction will be effective, retroactively, to the time of such transaction;

(b) for the purposes of the Act, any amount paid pursuant to any such price adjustment clause, in respect of a transaction subsequent to the time of such transaction will be an additional payment of the redemption of any share redeemed; or

(c) in the event that any adjustment is made pursuant to any such price adjustment clause, the proposed transactions referred to above will be considered to have been carried out as described herein, in particular, for the purposes of the ruling E above.

The operation of a price adjustment clause is not a proposed transaction and, consequently, advance rulings are not given by the Department in respect thereof. The Department’s general position with respect to price adjustment clasues in agreements is set out in Interpretation Bulletin IT-169 dated August 6, 1974.

Nothing in this ruling should be construed as implying that Revenue Canada has reviewed, accepted or otherwise agreed to:

• the determination of the adjusted cost base of any share or the paid-up capital of any shares referred to herein; or
• 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

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