1999 Ruling 9921363 - 55(3)(A) BUTTERFLY RULING

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

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

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

Principal Issues: (See Statement of Principal Issues)

Position: (See Statement of Principal Issues)

Reasons: (See Statement of Principal Issues)

XXXXXXXXXX 		992136

Attention: XXXXXXXXXX

XXXXXXXXXX, 1999

Dear Sirs:

Re: XXXXXXXXXX
XXXXXXXXXX
Advance Income Tax Ruling

This is in reply to your letter dated XXXXXXXXXX requesting an advance income tax ruling on behalf of the above-referenced taxpayers. In your letter dated XXXXXXXXXX you provided additional information concerning the facts and proposed transactions and certain amendments to the rulings requested as described in your original letter. We also acknowledge the information provided during our various telephone conversations (XXXXXXXXXX).

All of the above-referenced taxpayers file their T2 Returns with the XXXXXXXXXX Taxation Centre.

To the best of your knowledge and that of the taxpayers involved, none of the issues involved in this request:

(a) is involved in an earlier return of the taxpayer or a related person,

(b) is being considered by a tax services office or taxation centre in connection with a tax return already filed by the taxpayer or a related person,

(c) is under objection, and

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

Definitions

In this letter the following terms have the meanings specified:

(a) "Act" means the Income Tax Act, chapter 1, R.S.C. 1985 (5th supp.), as amended as at the date hereof, and all references to a Part, section, subsection, paragraph, subparagraph or clause is a reference to the specified provision of the Act;

(b) "adjusted cost base" has the meaning assigned to that term by section 54 of the Act;

(c) "agreed amount" in respect of a property means the amount that the transferor and the transferee of the property have agreed upon in their election under subsection 85(1);

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

(e) "Canadian-controlled private corporation" has the meaning assigned to that term by subsection 125(7) of the Act;

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

(g) "cost amount" has the meaning assigned to that term by subsection 248(1) of the Act;

(h) "depreciable property" has the meaning assigned to that term by subsection 13(21) of the Act;

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

(j) "forgiven amount" has the meaning assigned to that term by subsection 80(1) and 80.01(1) of the Act;

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

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

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

(n) "series of transactions or events" has the meaning assigned to that term by subsection 248(10) of the Act;

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

(p) "stated capital account" has the meaning assigned to that term by the BCA;

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

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

Facts

A. XXXXXXXXXX ("Existing Holdco") is a Canadian-controlled private corporation which was incorporated on XXXXXXXXXX under the laws of XXXXXXXXXX. It files its annual income tax return at the XXXXXXXXXX Taxation Centre. The taxation year of Existing Holdco ends on XXXXXXXXXX of each year.

All of the issued and outstanding shares in the capital of Existing Holdco, namely, XXXXXXXXXX common shares, are owned by XXXXXXXXXX ("Mr.") who is a resident of Canada. The paid-up capital of such common shares of Existing Holdco is less than their adjusted cost base to Mr. The common shares of Existing Holdco are held by Mr. as capital property.

The only material assets of Existing Holdco are the shares it holds in the capital of XXXXXXXXXX ("Propertyco"), and XXXXXXXXXX voting preference shares of XXXXXXXXXX, a Canadian-controlled private corporation that it controls. As at XXXXXXXXXX, Existing Holdco did not have a balance in its RDTOH, and it does not expect to have any RDTOH at the end of the taxation year in which the proposed transactions are implemented.

B. Propertyco is a Canadian-controlled private corporation which was incorporated on XXXXXXXXXX under the laws of XXXXXXXXXX. Propertyco files its annual income tax return at the XXXXXXXXXX Taxation Centre. The taxation year of Propertyco ends on XXXXXXXXXX of each year.

All of the issued and outstanding shares in the capital of Propertyco (namely, XXXXXXXXXX Class A voting common shares, which are referred to hereafter as common shares) are owned by Existing Holdco. The paid-up capital of the common shares of Propertyco is less than their adjusted cost base to Existing Holdco. The common shares of Propertyco are held by Existing Holdco as capital property. As at XXXXXXXXXX, Propertyco did not have a balance in its RDTOH, and it does not expect to have any RDTOH at the end of the taxation year in which the proposed transactions are implemented.

C. Propertyco owns the property (commonly referred to by the taxpayers as XXXXXXXXXX (the "Property"). The Property comprises a XXXXXXXXXX building that is used for rental (and related business) purposes and related land, improvements (such as pavement) and chattels. The Property represents capital property to Propertyco.

D. Propertyco owes to an arm's length lender amounts of interest-bearing indebtedness (the "Property Indebtedness"). The Property Indebtedness is secured by a mortgage on the Property, and represents money borrowed by Propertyco for the purpose of earning income from the Property, as described in subparagraph 20(1)(c)(i) of the Act. Propertyco owes to an arm's length bank amounts of interest-bearing indebtedness which are secured by charges on various properties of Propertyco including the Property (the "Property Bank Debt").

E. Propertyco also owns a XXXXXXXXXX % co-ownership interest (the "Interest") in XXXXXXXXXX lands, facilities and chattels and related inventories, accounts receivable and deposits (collectively, the "Facility") that Propertyco and an arm's length third party (XXXXXXXXXX, or the "Co-owner") hold as equal tenants-in-common. The Facility, which the taxpayers commonly refer to as "XXXXXXXXXX", is located in XXXXXXXXXX, and is used as a XXXXXXXXXX. Under the XXXXXXXXXX co-ownership agreement between Propertyco and the Co-owner governing their relationship (the "Joint Venture Agreement"), all revenues derived by the Co-owners (including XXXXXXXXXX) and all liabilities incurred by them in respect of the Facility are shared or borne on a XXXXXXXXXX basis. The real property comprising the Interest represents capital property to Propertyco.

F. Propertyco owes to an arm's length lender its share of interest-bearing indebtedness owing in respect of the Facility, in addition to owing accounts payable and accrued liabilities to arm's length suppliers and employees (collectively the "Interest Indebtedness"). With the exception of the trade payables and accrued liabilities, which are unsecured, the Interest Indebtedness (along with the corresponding indebtedness owing by the Co-owner) is secured by a mortgage on the Facility. The interest-bearing indebtedness so owing by it was borrowed by Propertyco for the purpose of producing income from the Interest, as described in subparagraph 20(1)(c)(i) of the Act, and the accounts payable and accrued liabilities so owing by it were incurred by it for the purpose of producing income from the Interest.

Proposed Transactions

G. Propertyco will cause a corporation ("Nominee") to be incorporated under the BCA. Nominee will be a Canadian-controlled private corporation and a taxable Canadian corporation. The authorized capital of Nominee will be an unlimited number of common shares. Upon incorporation of Nominee, Propertyco will subscribe for one common share for a cash subscription price of $XXXXXXXXXX.

H. Propertyco will transfer the registered title to the Property and its co-ownership interest in the real property included in the Facility to Nominee for no consideration. Nominee will execute a declaration of trust acknowledging that it holds the registered title to the Property and to such interest in the Facility on behalf of Propertyco.

I. Existing Holdco will cause a corporation ("Property Holdco") to be incorporated under the BCA. Property Holdco will be a Canadian-controlled private corporation and a taxable Canadian corporation. The authorized capital of Property Holdco will consist of an unlimited number of common shares. Existing Holdco will subscribe for two common shares of Property Holdco for a cash subscription price of $XXXXXXXXXX.

J. Property Holdco will cause a corporation ("Property Subco") to be incorporated under the BCA. Property Subco will be a Canadian-controlled private corporation and a taxable Canadian corporation. The authorized capital of Property Subco will consist of an unlimited number of common shares and an unlimited number of a class of preference shares (the "Preference Shares"). The Preference Shares will be non-voting, entitled to dividends as and when declared by the directors, redeemable and retractable at their redemption amount which will be equal to the fair market value of the consideration for which they are issued (in aggregate, the "Preference Share Redemption Amount"), bear a quarterly non-cumulative dividend equal to XXXXXXXXXX % of the Preference Share Redemption Amount and will rank ahead of the common shares as to the payment of dividends and, on a liquidation or winding-up, of the redemption amount.

Property Holdco will subscribe for one common share of Property Subco for a cash subscription price of $XXXXXXXXXX.

K. Existing Holdco will transfer a portion of the outstanding common shares in the capital of Propertyco to Property Holdco in consideration for the issuance to Existing Holdco of common shares of Property Holdco having a fair market value at that time equal to that of the common shares which will be so transferred. The number of common shares of Propertyco which will be so transferred to Property Holdco will be equal to that proportion of all of the issued and outstanding common shares in the capital of Propertyco that

a) the aggregate of the fair market value of the Property and the Interest at the time of the transfer of the beneficial ownership thereof by Propertyco to Property Subco referred to in paragraph 13 below (the "Property Transfer") less the aggregate of the Property Indebtedness and the Interest Indebtedness,

is of

b) the aggregate fair market value of all of the property of Propertyco immediately before the Property Transfer less all liabilities of Propertyco immediately before the Property Transfer.

L. Existing Holdco and Property Holdco will jointly elect pursuant to subsection 85(1) of the Act and within the time limit referred to in subsection 85(6) in respect of the transfer of Propertyco common shares referred to in paragraph 11 above. The agreed amount in respect of the transferred common shares will be equal to the lesser of the cost amount to Existing Holdco of such shares and their fair market value at the time of the transfer. The amount added to the stated capital of the common shares of Property Holdco so issued to Existing Holdco will not exceed such agreed amount.

M. Propertyco will transfer its beneficial ownership of the Property and the Interest (collectively referred to as the "Transferred Properties") to Property Subco in consideration for:

(a) the assumption by Property Subco of the Property Indebtedness and the Interest Indebtedness (collectively the "Transferred Property Indebtedness");

and

(b) the issuance of Preference Shares of Property Subco having an aggregate Preference Share Redemption Amount and fair market value equal to the fair market value of the Transferred Properties at the time of the Property Transfer minus the amount of the Transferred Property Indebtedness.

Unearned insurance premiums, unearned rent deposits and prepaid rents, accrued mortgage interest, realty taxes, municipal taxes, local and provincial rates and special taxes and public utility charges will be apportioned and allowed to the time of the Property Transfer, on the basis that such expenses are for the account of Property Subco to the extent that they relate to the period on or after the time of the Property Transfer.

N. Propertyco and Property Subco will jointly elect pursuant to subsection 85(1) of the Act and within the time limit referred to in subsection 85(6) in respect of the transfer of each eligible property included in the Property Transfer. The agreed amount in such election in respect of each eligible property included in the Transferred Properties will be the lesser of the cost amount of that property to Propertyco and the fair market value thereof at the time of the Property Transfer. In each case the agreed amount will not be less than the amount of any liabilities assumed by Property Subco as consideration for the particular property. The amount added to the stated capital of the Preference Shares will not exceed the aggregate of such agreed amounts.

O. Nominee, which will continue to hold registered title to the real property included in the Transferred Properties following the time of the Property Transfer, will execute a declaration of trust acknowledging that it holds the registered title to such real property on behalf of the beneficial owner thereof, which will be Property Subco.

P. Immediately after the Property Transfer, Property Subco will redeem all of its issued and outstanding Preference Shares for a redemption price equal to the Preference Share Redemption Amount. Payment of the redemption price will be satisfied by the issuance of a non-interest bearing promissory note, payable on demand, having a principal amount and fair market value equal to the redemption amount. Contemporaneously with such redemption by Property Subco, Propertyco will purchase for cancellation the common shares of Propertyco held by Property Holdco for a purchase price equal to the fair market value of such shares. Payment of the purchase price will be satisfied by the issuance by Propertyco of a non-interest bearing promissory note, payable on demand, having a principal amount and fair market value equal to the purchase price.

Q. Propertyco will sell the common share owned by it in the capital of Nominee to Property Subco for cash consideration of $XXXXXXXXXX, being an amount which is equal to its fair market value.

R. Mr. will settle an irrevocable trust (the "Spousal Trust") by transferring to it the sum of $XXXXXXXXXX and a portion of his common shares in the capital of Existing Holdco. The number of common shares of Existing Holdco which will be so transferred (the "Gifted Shares") will be equal to that proportion of all of the issued and outstanding common shares in the capital of Existing Holdco that the fair market value of all of the issued and outstanding shares of Property Holdco at the time of the transfer is to the aggregate fair market value of all of the property of Existing Holdco immediately before the transfer less all liabilities of Existing Holdco immediately before the transfer. For greater certainty, the number of the Gifted Shares will not be more than 50% of all the issued and outstanding common shares in the capital of Existing Holdco. Mr. will not elect in his return of income for the year in which the settlement occurs to not have the provisions of subsection 73(1) of the Act apply to the settlement.

S. The trustees of the Spousal Trust (the "Spousal Trustees") will be Mr. and his spouse, XXXXXXXXXX ("Mrs."). Mrs., who is resident in Canada, will be entitled to receive (and will in fact receive) all the income of the Spousal Trust that arises before her death and, until the date of her death, the Spousal Trustees will have the discretion to encroach on capital in favour of Mrs. (and not in favour of any other person). The Trust Deed will further provide that, on the date of death of Mrs., the property of the Spousal Trust will be allocated and set aside for one or more of the children of Mrs. (whose only children are the children of Mr.) and all the issue of such children, including children born or adopted after the date of settlement (the "Children Beneficiaries") on such basis as Mrs. may designate by written instrument delivered to the Spousal Trustees prior to the date of her death. In the absence of such a valid designation, the property of the Spousal Trust will be divided on the death of Mrs. into shares and held in trust for the Children Beneficiaries on the terms specified in the Trust Deed (or to the estate of Mrs. if no Children Beneficiaries survive the death of Mrs. or if the last to survive of the Children Beneficiaries dies before all the property of the Spousal Trust has vested in possession of one or more Children Beneficiaries). None of the beneficiaries of the Spousal Trust will be a person who is not related, for the purposes of section 55, with Mr.

T. The Spousal Trust will cause a corporation ("New Holdco") to be incorporated under the BCA. New Holdco will be a Canadian-controlled private corporation and a taxable Canadian corporation. The authorized capital of New Holdco will consist of an unlimited number of common shares carrying one vote per share, an unlimited number of preference shares (the "New Preference Shares"), and an unlimited number of voting preference shares (the "Voting Shares").

U. The New Preference Shares will have the same attributes as the Preference Shares (with their aggregate redemption amount being referred to hereafter as (the "New Preference Share Redemption Amount").

V. The Voting Shares will carry one vote per share, will be redeemable and retractable for their redemption amount of $XXXXXXXXXX per share and (if not already redeemed) will be entitled to receive the redemption amount on a winding-up or liquidation of New Holdco, will bear a non-cumulative annual dividend of XXXXXXXXXX % of the redemption amount, and will rank ahead of the New Preference Shares and the common shares as to the payment of dividends and, on a liquidation or winding-up, of the redemption amount.

W. The Spousal Trust will use the $XXXXXXXXXX contributed to it by Mr. to subscribe for one common share of New Holdco for a cash subscription price of $XXXXXXXXXX.

X. The Spousal Trust will transfer all the Gifted Shares to New Holdco in consideration for the issuance to it of common shares of New Holdco having a fair market value at that time equal to that of the Gifted Shares. The Spousal Trust and New Holdco will jointly elect pursuant to subsection 85(1) of the Act and within the time limit referred to in subsection 85(6) in respect of such transfer of the Gifted Shares. The agreed amount in respect of the transferred Gifted Shares will be equal to the lesser of the adjusted cost base to the Spousal Trust of such shares and their fair market value at the time of the transfer. The amount added to the stated capital of the common shares of New Holdco so issued to the Spousal Trust will not exceed the lesser of such agreed amount and the adjusted cost base, as determined pursuant to subsection 84.1(2), of the Gifted Shares to the Spousal Trust.

Y. Mr. will subscribe for Voting Shares of New Holdco for an aggregate cash subscription price equal to the aggregate redemption amount of the Voting Shares so acquired by him. The number of shares so issued to him will be sufficient to result in his Voting Shares having more than two-thirds of the votes attached to all the issued and outstanding shares in the capital of New Holdco.

Z. Existing Holdco will transfer all the issued and outstanding common shares in the capital of Property Holdco to New Holdco in consideration for New Preference Shares whose New Preference Share Redemption Amount and fair market value will be equal to the aggregate fair market value of the transferred common shares. Existing Holdco and New Holdco will jointly elect pursuant to subsection 85(1) of the Act and within the time limit referred to in subsection 85(6) in respect of such transfer of common shares of Property Holdco. The agreed amount in respect of the transferred common shares will be equal to the lesser of the cost amount to Existing Holdco of such shares and their fair market value at the time of the transfer. The amount added to the stated capital of the New Preference Shares so issued to Existing Holdco will not exceed such agreed amount.

AA. Immediately after the transfer to New Holdco of the common shares in the capital of Property Holdco, New Holdco will redeem all of the issued and outstanding New Preference Shares for a redemption price equal to their fair market value, being the New Preference Share Redemption Amount. Contemporaneously with such redemption by New Holdco, Existing Holdco will purchase for cancellation the Gifted Shares for a purchase price equal to their fair market value. Payment of the purchase price in each case will be satisfied by the issuance by the purchaser or redeemer of a non-interest bearing promissory note, payable on demand, having a principal amount and fair market value equal to the redemption or purchase price payable by it.

BB. The promissory note issued by New Holdco in satisfaction of the purchase price for the New Preference Shares ("New Holdco promissory note") will be settled in full by being set off against the promissory note issued by Existing Holdco in satisfaction of the purchase price for the Gifted Shares ("Existing Holdco promissory note"), as described in paragraph 27 above, so that each of the two promissory notes will be settled in full and cancelled.

CC. New Holdco, Property Holdco and Property Subco will be amalgamated pursuant to the short-form amalgamation provisions of the BCA. The authorized and issued share capital of the amalgamated corporation ("Amalco") will be identical to that of New Holdco and all of the property and liabilities of the three amalgamating corporations will become property and liabilities of Amalco.

DD. The promissory note issued by Property Subco (as described in paragraph 16 above) in satisfaction of the redemption price for the Preference Shares now owing by Amalco ("Amalco promissory note") will be settled in full by being set off against the promissory note issued by Propertyco (as described in paragraph 16 above) in satisfaction of the aggregate purchase price for the common shares of Propertyco ("Propertyco promissory note") now held by Amalco, so that both promissory notes will be settled in full and cancelled, notwithstanding that their principal amounts may differ.

Additional Information

EE. There will not be, before the completion of the proposed transactions described herein, any "guarantee agreements" within the meaning of subsection 112(2.2) of the Act in relation to the Preference Shares issued by Property Subco, the common shares of Propertyco held by Existing Holdco or Property Holdco, the New Preference Shares issued by New Holdco and the Gifted Shares and none of such shares will be issued or acquired as part of a transaction or a series of transactions of the type described in subsection 112(2.5) of the Act.

FF. None of Propertyco, Property Holdco, Property Subco, New Holdco and Existing Holdco is, or will be at any time before the completion of the proposed transactions described herein, a corporation described in any of paragraphs (a) to (f) of the definition of "financial intermediary corporation" in subsection 191(1) of the Act.

GG. The Preference Shares issued by Property Subco, the common shares of Propertyco held by Existing Holdco or Property Holdco, the New Preference Shares issued by New Holdco and the Gifted Shares will not be, at any time before the completion of the proposed transactions described herein, shares to which paragraph (g) of the definition of "taxable preferred share" in subsection 248(1) of the Act or paragraph (1)(e) of the definition of "taxable RFI share" in subsection 248(1) of the Act will apply to deem the share to be a taxable preferred share or a taxable RFI share.

HH. For purposes of paragraph 20(1)(c) of the Act, the method regularly followed by Propertyco in computing its income for purposes of the Act is to deduct amounts, described in paragraph 20(1)(c), payable in respect of a taxation year, as opposed to amounts paid in the taxation year.

Purpose of the Proposed Transactions

Mr. wishes to make a gift to a spousal trust of indirect ownership of the Property and the Interest on a "rollover" basis. Although he will retain indirect control over the two properties through the holding of the Voting Shares, the relatively nominal redemption amount of those shares will not detract from substantially all the indirect economic interest in the properties being transferred to the Spousal Trust.

The transactions have no "income-spitting" objective: it is recognized that any dividends received by the Spousal Trust on its common shares of New Holdco (and any capital gains realized on their disposition) will be included in the computation of Mr.'s income.

Rulings Given

Provided that the preceding statements constitute a complete and accurate disclosure of all of the relevant facts, proposed transactions and purpose of the proposed transactions, and provided that the proposed transactions are completed in the manner described above, our rulings are as follows:

A. Provided joint elections are filed pursuant to subsection 85(1) of the Act and within the time set forth in subsection 85(6), the provisions of subsection 85(1) other than paragraph 85(1)(e.2) will, subject to subsection 13(21.2) and subsection 20(1.2) of the Income Tax Application Rules, apply to the transfer by Propertyco of the Transferred Properties to Property Subco as described in paragraph 13 above with the result that the agreed amount for purposes of paragraph 85(1)(a) of the Act will be deemed to be Propertyco's proceeds of disposition and Property Subco's cost thereof, and the cost to Propertyco of the Preference Shares of Property Subco will be determined in accordance with the provisions of paragraph 85(1)(g).

B. As a result of (i) the redemption of the Preference Shares by Property Subco described in paragraph 16 above, (ii) the purchase for cancellation by Propertyco of the common shares of Propertyco held by Property Holdco described in paragraph 16 above, (iii) the redemption by New Holdco of the New Preference Shares described in paragraph 27 above, and (iv) the purchase for cancellation by Existing Holdco of the Gifted Shares described in paragraph 27 above (the purchased or redeemed shares in each case being referred to as the "Purchased Shares"),

a) the corporation in whose capital the Purchased Shares are held will be deemed by paragraph 84(3)(a) of the Act to have paid, and the holder of the Purchased Shares will be deemed by paragraph 84(3)(b) of the Act to have received, a dividend (the "Deemed Dividend") equal to the amount by which the purchase (or redemption) price exceeds the paid-up capital of the Purchased Shares;

b) pursuant to paragraph (j) of the definition of "proceeds of disposition" in section 54 of the Act, the amount of the Deemed Dividend will be excluded in determining the holder's proceeds of disposition for the Purchased Shares;

c) provided that the Deemed Dividend is a taxable dividend, the holder will be entitled, pursuant to subsection 112(1) of the Act, to deduct the amount of the Deemed Dividend in computing its taxable income for the taxation year in which the Deemed Dividend is deemed to be received;

d) by virtue of subsections 186(2) and 186(4), the corporation in whose capital the Purchased Shares are held will be connected with the holder of such Purchased Shares; consequently, provided that the corporation in whose capital the particular Purchased Shares are held is not entitled to a dividend refund (within the meaning of subsection 129(1) of the Act) in respect of its taxation year in which it is deemed to pay the Deemed Dividend referred to above, the holder of such Purchased Shares will not be subject to Part IV tax in respect of such dividend;

e) no taxes under Part IV.1 of the Act will be payable by the holder in respect of a Deemed Dividend as the Deemed Dividend will be an "excepted dividend" by virtue of paragraph (b) of the definition thereof in section 187.1 of the Act; and

f) no taxes under Part VI.1 of the Act will be payable by the corporation deemed to pay a Deemed Dividend as such dividend will be an "excluded dividend" by virtue of paragraph (a) of the definition thereof in subsection 191(1) of the Act.

C. By virtue of paragraph 55(3)(a), the provisions of subsection 55(2) will not apply to the Deemed Dividends, referred to in ruling B above, received by the holders of the Purchased Shares, provided that there is no disposition or increase in interest described in any of subparagraphs 55(3)(a)(i) to (v) as part of a series of transactions or events which includes the redemption of the Preference Shares by Property Subco described in paragraph 16 above, the purchase for cancellation by Propertyco of the common shares of Propertyco held by Property Holdco described in paragraph 16 above, the redemption by New Holdco of the New Preference Shares described in paragraph 27 above, and the purchase for cancellation by Existing Holdco of the Gifted Shares described in paragraph 27 above. For greater certainty, the proposed transactions described herein, in and by themselves, will not be considered to result in any disposition or increase in interest described in any of subparagraphs 55(3)(a)(i) to (v).

D. By virtue of subsections 74.1(1) and 74.3(1) of the Act applying to include in the computation of Mr.'s income any income received (while Mrs. is his spouse) by the Spousal Trust on the common shares in the capital of New Holdco owned by it, subsection 74.4(2) of the Act will not apply during the lifetime of Mrs. to deem Mr. to receive an amount as interest in respect of the fair market value of the Gifted Shares as a result of the proposed transactions in and by themselves.

E. As a result of the settlement of the Gifted Shares (referred to in paragraph 18 above), Mr. will be deemed, pursuant to subsection 73(1), to dispose of the Gifted Shares for proceeds of disposition equal to the adjusted cost base to him of such shares, and the Spousal Trust will be deemed to acquire them for a cost equal to the same amount.

F. Following the assumption as described in paragraph 13 above by Property Subco of the Property Indebtedness, the interest paid thereon in the year or payable in respect of the year (depending on the method regularly followed by Property Subco) will, to the extent that it does not exceed a reasonable amount, be deductible pursuant to paragraph 20(1)(c) by Property Subco (or Amalco, as the case may be) in computing its income for purposes of the Act, provided that the Transferred Properties acquired by Property Subco from Propertyco continue to be used by it (or Amalco, as the case may be) for the purpose of earning income from a business or property (other than property the income from which would be exempt or for property that is a life insurance policy) and provided that interest arising on the Property Indebtedness before the time of the Property Transfer was deductible by Propertyco in computing its income for purposes of the Act.

G. The repayment of:

(i) the New Holdco promissory note held by Existing Holdco and the Existing Holdco promissory note held by New Holdco as described in paragraph 28; and

(ii) the Amalco promissory note held by Propertyco and the Propertyco promissory note held by Amalco as described in paragraph 30,

will not give rise to a "forgiven amount".

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

I. As a result of the proposed transactions in and by themselves, subsection 245(2) will not be applied to predetermine the tax consequences described in the rulings requested above.

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

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

Comments

Nothing in this ruling should be construed as implying that Revenue Canada, Customs, Excise and Taxation has agreed to or reviewed:

(a) the determination of the fair market value or adjusted cost base of any particular asset or the paid-up capital 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

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