1999 Ruling 9923993 - REORGANIZATION

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

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

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

Principal Issues: standard ruling, no issues

Position:

Reasons:

XXXXXXXXXX
XXXXXXXXXX 3-992399
XXXXXXXXXX

Attention: XXXXXXXXXX

XXXXXXXXXX, 1999

Dear Sirs:

Re: Advance income tax ruling
XXXXXXXXXX

We are writing in response to your letters of XXXXXXXXXX wherein you requested an advance income tax ruling in respect of the following taxpayers:

(a) XXXXXXXXXX ("DC"), business number XXXXXXXXXX;

(b) XXXXXXXXXX ("Aco"), business number XXXXXXXXXX;

(c) XXXXXXXXXX ("Bco"), business number XXXXXXXXXX;

(d) XXXXXXXXXX ("Cco"), business number XXXXXXXXXX;

(e) XXXXXXXXXX ("A"), social insurance number XXXXXXXXXX;

(f) XXXXXXXXXX ("B"), social insurance number XXXXXXXXXX; and

(g) XXXXXXXXXX ("C"), social insurance numberXXXXXXXXXX;

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

1. is in an earlier return of the taxpayers or a related person;

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

3. is under objection by the taxpayers or a related person;

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

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

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

Definitions

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

(a) XXXXXXXXXX;

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

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

(d) "Canadian-controlled private corporation" ("CCPC") has the meaning assigned by subsection 125(7);

(e) "capital dividend" has the meaning assigned by subsection 83(2);

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

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

(h) "cost amount" has the meaning assigned by subsection 248(1);

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

(j) "eligible property" has the meaning assigned by subsection 85(1.1);

(k) "FMV" means fair market value;

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

(m) "pre-1972 capital surplus on hand" ("pre-1972 CSOH") has the meaning assigned by subsection 88(2.1);

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

(o) "specified class" has the meaning assigned by subsection 55(1);

(p) "specified financial institution" ("SFI") has the meaning assigned by subsection 248(1);

(q) "specified investment business" has the meaning assigned by subsection 125(7);

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

(s) "taxable dividend" has the meaning assigned by subsection 89(1); and

(t) "transferee corporation" has the meaning assigned by the definition of "distribution" in subsection 55(1).

The facts, proposed transactions and purpose of the proposed transactions are as follows:

Facts

1. A is the father of B and C, all of whom are resident in Canada. A, B and C are trustees of XXXXXXXXXX ("First Trust") and XXXXXXXXXX ("Second Trust").

2. DC is a TCC and a CCPC that was incorporated by letters patent under the former Canada Corporations Act on XXXXXXXXXX and continued under the CBCA by articles of continuance dated XXXXXXXXXX. DC's fiscal period ends on XXXXXXXXXX.

3. The authorized share capital of DC consists of an unlimited number of special shares and an unlimited number of common shares. The special shares are non-voting, fully participating as to dividends, redeemable at the amount paid up thereon, and are entitled, on dissolution, only to a preferential return of the amount paid up thereon together with declared and unpaid dividends.

4. The issued and outstanding share capital of DC consists of common shares which are held as capital property by their holders as follows: Aco - XXXXXXXXXX; Bco - XXXXXXXXXX and Cco - XXXXXXXXXX.

5. The First Trust and the Second Trust were created on XXXXXXXXXX. The settlor of the First Trust was B. The settlor of the Second Trust was C. In all other respects, the terms of the First Trust and the Second Trust are identical. Beneficiaries under each trust are the children and more remote issue of B and C. Net income of each trust is payable to one or more of those children of B and C who have attained the age of majority. Property of the First Trust and the Second Trust is distributable on the twentieth anniversary of their respective creation, or such earlier date as the trustees determine.

6. On the distribution date, the property of each of the First Trust and Second Trust is to be divided into two separate funds, one for the benefit of B's children then alive (the "B Fund") and one for the benefit of C's children then alive (the "C Fund") in the proportion that the number of B's children then alive (with representation for surviving issue) bears to the number of C's children then alive (with representation for surviving issue).

7. The B Fund is to be divided into as many equal shares as there are children of B then living. Likewise, the C Fund is to be divided into as many equal shares as there are children of C then living. The equal shares are impressed with a trust in favour of a child (the trustee is the child's father) under the terms of which one-third of trust property is payable when that child attains the age of XXXXXXXXXX years and the remainder when the child attains XXXXXXXXXX years of age.

8. Each of Aco, Bco and Cco is a TCC and a CCPC. Aco was incorporated under the XXXXXXXXXX on XXXXXXXXXX. Bco and Cco were incorporated under the XXXXXXXXXX on XXXXXXXXXX. The fiscal periods of Aco, Bco and Cco end on XXXXXXXXXX.

9. The authorized share capital of each of Aco, Bco and Cco consists of an unlimited number of Class A shares, Class B shares, Class C shares and common shares. The Class A shares are voting, bear a quarterly variable preferential non-cumulative dividend not exceeding XXXXXXXXXX % of the redemption amount of the Class A shares, are redeemable and retractable, and have a liquidation entitlement equal to their redemption amount plus declared and unpaid dividends. The "redemption amount" of a Class A share is the quotient obtained when the FMV of the net consideration received on the first issuance of Class A shares is divided by the number of Class A shares first issued. The Class B shares are voting, bear a fixed preferential dividend of XXXXXXXXXX per annum, are redeemable and retractable, and have a liquidation entitlement equal to $XXXXXXXXXX per Class B share plus declared and unpaid dividends. The Class C shares and the common shares are fully participating; however, the Class C shares are non-voting while the common shares are voting.

10. The issued and outstanding shares of Aco are held as capital property by their holders as follows:

 A			XXXXXXXXXX Class A shares and XXXXXXXXXX Class B XXXXXXXXXX;
 First Trust		XXXXXXXXXX Class C shares; and
 Second Trust	XXXXXXXXXX Class C shares.

11. The issued and outstanding share capital of Bco consists of XXXXXXXXXX common shares which are held as capital property by B.

12. The issued and outstanding share capital of Cco consists of XXXXXXXXXX common shares which are held as capital property by C.

13. With respect to the Class B shares of Aco:

(a) the PUC in respect of the class immediately before the beginning of the series of transactions or events that includes a distribution by DC was not less than the FMV of the consideration for which the shares of that class then outstanding were issued;

(b) under neither the terms and conditions of the shares nor any agreement in respect of the shares are the shares convertible into or exchangeable for shares other than shares of a specified class or shares of the capital stock of a transferee corporation in relation to DC;

(c) under neither the terms and conditions of the shares nor any agreement in respect of the shares is any holder of the shares entitled to receive on the redemption, cancellation or acquisition of the shares by DC or by any person with whom DC does not deal at arm's length (excluding any premium for early redemption) an amount greater than the total of the FMV of the consideration for which the shares were issued and the amount of any unpaid dividends thereon; and

(d) the cost of each share of the class, at the time of its issuance, to its original owner, was equal to the FMV at that time of the consideration for which it was issued.

14. The aggregate FMV of the shares of each class of DC, Aco, Bco and Cco is not less than the aggregate ACB of the particular shares. The aggregate ACB of those shares is not less than the PUC of the particular shares.

The common shares of DC held by Aco, Bco and Cco were acquired from persons not dealing at arm's length who owned the shares on XXXXXXXXXX. The shares had an FMV on valuation day in excess of their PUC and ACB.

15. At XXXXXXXXXX DC was indebted to Aco, A personally and to a family foundation.

16. DC is an investment holding corporation. Its assets consist of a portfolio of cash, short-term investments, marketable securities, loans and venture capital investments.

17. On XXXXXXXXXX DC declared and paid a cash dividend of $XXXXXXXXXX to its common shareholders: Aco, Bco and Cco. DC elected pursuant to subsection 83(2), in prescribed manner and prescribed form, such that the dividend was deemed to be a capital dividend. The amount of the dividend was equal to the amount of the CDA of DC at the time of the declaration of the dividend. Aco used the funds received to redeem XXXXXXXXXX of its Class A shares owned by A.

18. DC and Aco may have balances in their respective CDA's and RDTOH accounts at the time the proposed transactions described herein are undertaken.

Proposed Transactions

19. Aco will redeem for $XXXXXXXXXX its XXXXXXXXXX Class B XXXXXXXXXX issued and outstanding and owned by A.

20. Each of Aco, Bco and Cco will incorporate under the XXXXXXXXXX, a wholly-owned subsidiary ("Acosub", "Bcosub" and "Ccosub", respectively). Each of Acosub, Bcosub and Ccosub will be a TCC and a CCPC. The purpose of incorporating the subsidiary corporations is to use those corporations to receive the property of the distributing corporation prior to the acquisition of such property by the shareholders of the distributing corporation. This is necessary as DC is a controlled subsidiary of Aco and, under corporate law, DC cannot generally acquire shares in its parent, Aco. This would be required in the course of the intended reorganization since on Aco's acquisition of DC's assets, Aco would issue shares to DC as partial consideration. To avoid this problem, a wholly-owned subsidiary must initially acquire Aco's portion of DC's assets and the subsidiary would then be wound up into Aco. The use of wholly-owned subsidiaries of DC's shareholders also avoids the circular calculation of Part IV tax on the dividends that will be deemed to be paid and received as a result of the reorganization.

21. The share capital of Acosub, Bcosub and Ccosub will be identical to the share capital of Aco, Bco and Cco, respectively, except that there will be no votes attached to the Class A shares.

22. Immediately before the transfers of property described in paragraph 23 below, the property of DC will be determined on a consolidated look-through basis which includes the appropriate pro rata share of the assets of any corporation or partnership over which DC has the ability to exercise significant influence. The assets will then be classified into three types of property for purposes of the definition of "distribution" described in subsection 55(1), as follows:

(a) cash or near cash property, comprising all of the current assets of DC including any cash, term deposits, marketable securities (other than portfolio investments), and amounts due from affiliates in which DC does not have significant influence;

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

(c) business property, comprising all of the assets of DC, other than cash or near cash property and investment property, any income from which would, for purposes of the Act, be income from a business (other than a specified investment business.

DC will be considered to have significant influence over a corporation if it has the ability to exercise significant influence, within the guidelines provided by section 3050 of the CICA Handbook, over that corporation or over any corporation which has significant influence over that corporation. For purposes of determining DC's appropriate pro rata share of each type of property of the assets of DC, the FMV of the shares of any corporation over which DC has the ability to exercise significant influence, any partnership interest and any amount receivable by DC from such a corporation or partnership will be allocated among the three types of property by multiplying the FMV of the shares, partnership interest or amount receivable from the particular corporation, as the case may be, by the proportion that the FMV of each type of property owned by the particular corporation or partnership (as determined in this paragraph) is of the aggregate FMV of all the property owned by the corporation or partnership.

DC does not currently have any business property and it is not anticipated that DC will, immediately before the transfers of property described in paragraph 23 below, have any such property.

For greater certainty, any tax accounts such as the balance of RDTOH or CDA of DC will not be considered property of DC for purposes of the proposed transactions described herein.

23. DC will transfer, at FMV, XXXXXXXXXX %, XXXXXXXXXX % and XXXXXXXXXX % of each of its assets to Acosub, Bcosub and Ccosub, respectively (each transferee will receive specific identifiable property). Immediately after the transfers, the FMV of each type of property for purposes of the definition of "distribution" described in subsection 55(1) received by the particular subsidiary corporation will be equal to the proportion of the FMV of all that type of property of DC determined immediately before the transfers that the aggregate FMV, immediately before the transfers, of all the shares of DC held by the parent corporation of the particular subsidiary is of the aggregate FMV of all the issued and outstanding shares of DC immediately before the transfers.

24. In consideration for the transfers described in paragraph 23 above,

(a) Acosub, Bcosub and Ccosub will respectively assume XXXXXXXXXX%, XXXXXXXXXX% and XXXXXXXXXX% of each of DC's liabilities; and

(b) Acosub, Bcosub and Ccosub will each issue to DC that number of its Class A shares having an aggregate redemption amount equal to the amount by which the aggregate FMV of DC's assets so acquired by each exceeds the aggregate FMV of the liabilities assumed by each.

The Class A shares of Acosub, Bcosub and Ccosub will represent capital property to DC.

25. In respect of the transfers described in paragraph 23 above, DC and each of Acosub, Bcosub and Ccosub will jointly elect pursuant to subsection 85(1), in prescribed form and within the time referred to in subsection 85(6), to transfer each property that is an eligible property at an agreed amount which will be equal to the lesser of its cost amount to DC and its FMV. The principal amount of any DC liability assumed in part consideration for a transferred property will not exceed its agreed amount.

26. Each of Acosub, Bcosub and Ccosub will add to the stated capital account in respect of its Class A shares issued to DC an amount equal to the aggregate of the agreed amounts in respect of the properties acquired by it less the aggregate of the principal amounts of the liabilities assumed by it.

27. All of the Class A shares of Acosub, Bcosub and Ccosub held by DC will be redeemed for their redemption amounts. Each of Acosub, Bcosub and Ccosub will satisfy the redemption price by issuing demand non-interest-bearing promissory notes having a principal amount equal to the aggregate redemption price of the shares so redeemed (the "Acosub Note"', the "Bcosub Note" and the "Ccosub Note", respectively).

28. Each of Acosub, Bcosub and Ccosub will thereafter be wound up, distributing to their respective parent corporation: Aco, Bco and Cco all of their assets and liabilities (including the promissory notes described in paragraph 27 above).

29. The common shares of DC owned by Aco and Cco will be purchased for cancellation, at FMV, by DC. The purchase price will be satisfied by DC transferring to Aco the Acosub Note and Aco's proportionate share of DC's dividend refund receivable arising by virtue of the dividends that will be deemed to be paid on the purchases for cancellation and by DC transferring to Cco the Ccosub Note and Cco's proportionate share of DC's dividend refund receivable arising by virtue of the dividends that will be deemed to be paid on the purchases for cancellation. The Acosub Note and the Ccosub Note will be extinguished and cancelled.

30. DC, as a wholly-owned subsidiary of Bco, will be wound up into Bco, distributing to Bco the Bcosub Note and Bco's proportionate share of DC's dividend refund receivable arising by virtue of the dividends that will be deemed to be paid on the purchases for cancellation described in paragraph 29 above. No agreement or resolution relating to the winding-up of DC or the distribution of its property will provide for the cancellation of any shares of DC. The Bcosub Note will be extinguished and cancelled.

31. XXXXXXXXXX corporations will be incorporated under the XXXXXXXXXX - XXXXXXXXXX 1stcos and XXXXXXXXXX 2ndcos. Each of the 1stcos and 2ndcos will be a TCC and a CCPC.

32. The authorized share capital of each 1stco and 2ndco will consist of Class A shares, Class B shares, Class C shares, Class D shares and common shares. The attributes of the Class A shares, Class B shares, Class C shares, and common shares will be identical to the attributes of Aco's Class A shares, Class B shares, Class C shares and common shares. The Class D shares will be identical in all respects to the Class A shares except that the Class D shares will be non-voting.

33. Each of A, the First Trust and the Second Trust will transfer, at FMV, XXXXXXXXXX of its respective shares of Aco to each of the XXXXXXXXXX 1stcos and the XXXXXXXXXX 2ndcos such that each 1stco and each 2ndco will receive XXXXXXXXXX Class A shares and XXXXXXXXXX Class C shares of Aco. As consideration, A will receive XXXXXXXXXX Class A shares of each 1stco and 2ndco in exchange for the Class A shares of Aco transferred and each of the First Trust and Second Trust will receive XXXXXXXXXX Class C shares of each 1stco and 2ndco in exchange for the transfer of XXXXXXXXXX Class C shares of Aco by each of them to each 1stco and 2ndco. Each 1stco and 2ndco will add an amount to the stated capital account of its shares so issued equal to the PUC of the Aco shares so received.

34. In respect of the transfers described in paragraph 33 above, each of A, First Trust and Second Trust will jointly elect with each of the 1stcos and 2ndcos pursuant to subsection 85(1), in prescribed form and within the time referred to in subsection 85(6), to transfer the Aco shares at an agreed amount which will be equal to the lesser of its cost amount to the transferor and its FMV.

35. Immediately before the transfers of property described in paragraph 36 below, the property of Aco will be classified into three types of property for purposes of the definition of "distribution" described in subsection 55(1) as follows:

(a) cash or near cash property, comprising all of the current assets of Aco, including any cash, term deposits and marketable securities (other than portfolio investments);

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

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

Aco does not currently have any business property and it is not anticipated that Aco will, immediately before the transfers of property as described in paragraph 36 below, have any such property.

For greater certainty, any tax accounts, such as the balance of RDTOH or CDA of Aco will not be considered property of Aco for purposes of the proposed transactions described herein.

36. Aco will transfer, at FMV, XXXXXXXXXX of its assets to each of the XXXXXXXXXX 1stcos and the XXXXXXXXXX 2ndcos (each transferee will receive specific identifiable property) in consideration for the assumption by each 1stco and 2ndco of XXXXXXXXXX of each of Aco's liabilities and the issuance of that number of Class D shares having an aggregate redemption amount equal to the amount by which the FMV of Aco's assets acquired by each 1stco and 2ndco exceeds the aggregate FMV of the liabilities assumed. Immediately after the transfers, the FMV of each type of property for purposes of the definition of "distribution" described in subsection 55(1) received by a transferee corporation will be equal to the proportion of the FMV of all that type of property of Aco immediately before the transfer determined immediately before the transfers that the aggregate FMV, immediately before the transfers, of all the shares of Aco held by the transferee corporation is of the aggregate FMV of all the issued and outstanding shares of Aco immediately before the transfers.

37. In respect of the transfers described in paragraph 36 above, Aco and each of the 1stcos and 2ndcos will jointly elect pursuant to subsection 85(1), in prescribed form and within the time referred to in subsection 85(6), to transfer the property at an agreed amount which will be equal to the lesser of its cost amount to the transferor and its FMV. The principal amount of any Aco liability assumed in part consideration for a transferred property will not exceed its agreed amount.

38. Each of the 1stcos and 2ndcos will add to the stated capital account in respect of its Class D shares issued to Aco an amount equal to the aggregate of the agreed amounts in respect of the properties acquired by it less the aggregate of the principal amounts of the liabilities assumed by it.

39. All of the Class D shares of the 1stcos and the 2ndcos will be redeemed for their redemption amounts. Each of the 1stcos and the 2ndcos will satisfy the redemption price by issuing demand non-interest-bearing promissory notes having a principal amount equal to the aggregate redemption price of the shares so redeemed.

40. The first taxation year of each 1stco and 2ndco will occur subsequent to the redemptions described in paragraph 39 above but prior to the winding-up of Aco described in paragraph 41 below. The interposition of a taxation year between the deemed dividend arising on the redemption of the Class D shares of each transferee corporation and the deemed dividend arising on the winding-up of the distributing corporation is to avoid the circularity of the Part IV tax calculation where dividends are paid and received in the same taxation year.

41. Aco will be wound up, distributing to each 1stco and 2ndco, respectively, the promissory note evidencing indebtedness of that particular 1stco or 2ndco to Aco and a proportionate share of Aco's dividend refund receivable arising on the winding-up dividend. No agreement or resolution relating to the winding-up of Aco or the distribution of its property will provide for the cancellation of any shares of Aco.

42. Prior to the distribution described in paragraph 41 above, Aco will elect, pursuant to subsection 83(2), in prescribed manner and prescribed form, that the full amount of any dividend referred to in subparagraph 88(2)(b)(i) be deemed to be a capital dividend. The resolution approving payment of the capital dividend will provide that to the extent that the amount of the capital dividend payable exceeds the balance of Aco's CDA at the time the dividend becomes payable, the directors of Aco will elect to treat the excess as a separate dividend that is a taxable dividend that became payable at that time.

43. The distribution date of the First Trust and the Second Trust will be advanced to follow upon the completion of the transfer of Aco's assets as described in paragraph 36 above.

Additional Information

44. Title to all transferred assets will be registered in the name of a nominee corporation all the directors of which will be A, B and C. The sole function of the nominee corporation will be to hold title to specific assets as bare trustee for the beneficial owner (that is, Bco, Cco, the 1stcos and the 2ndcos). Since the relationship will be one of agency, the nominee corporation will deal with the property in accordance with instructions from the principals.

45. No assets have been or will be acquired by, or disposed of by, and no liabilities have been or will be incurred by DC, Aco or a corporation controlled by DC or Aco, in contemplation of and before the transfers described in paragraphs 23 and 36 above, except as described herein.

46. Except as described herein, none of the parties will dispose of any property to an unrelated person as part of a series of transactions that includes the proposed transactions.

47. None of the parties is contemplating an acquisition of control of any corporation referred to above except as described herein.

48. None of the shares of DC, Aco, Cco or a 1stco or 2ndco is, 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) 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); or

(c) the subject of a dividend rental arrangement as that term is defined in subsection 248(1).

49. None of DC, Aco, Bco, Cco, or a 1stco or 2ndco is, or will be, at the time of the proposed transactions, an SFI.

Purpose of the Proposed Transactions

The purpose of the proposed transactions is to divide the assets of DC in order to separate the financial interests of B and C and the grandchildren of A and to provide each of B and C with the option of managing his/her immediate family assets and pursuing independent investment objectives.

Rulings Provided

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

A. Provided that the transferor and the transferee jointly file an election pursuant to subsection 85(1), in the prescribed form and within the prescribed time, in respect of the transfers of property described in paragraphs 23, 33 and 36 above, the provisions of subsection 85(1) will apply to the transfer of each eligible property such that the agreed amount in respect of each such transfer will be deemed to be the proceeds of disposition to transferor and the cost thereof to transferee pursuant to paragraph 85(1)(a). For greater certainty, paragraph 85(1)(e.2) will not apply in respect of the transfers described herein.

B. Subsection 84.1(1) will not apply to reduce the PUC of the shares of any 1stco or 2ndco issued on the transfers described in paragraph 33 above.

C. As a result of the redemption by Acosub, Bcosub and Ccosub of their Class A shares held by DC as described in paragraph 27 above, the amount, if any, by which the amount paid on the redemption exceeds the PUC of such shares immediately before the redemption will be deemed, by virtue of paragraphs 84(3)(a) and 84(3)(b), to be a dividend paid by Acosub, Bcosub and Ccosub and a dividend received by DC.

D. As a result of the purchase for cancellation by DC of its Class A shares held by Aco and Cco as described in paragraph 29 above, the amount, if any, by which the amount paid on the purchase for cancellation exceeds the PUC of such shares immediately before the purchase for cancellation will be deemed, by virtue of paragraphs 84(3)(a) and 84(3)(b), to be a dividend paid by DC and a dividend received by Aco and Cco.

E. As a result of the redemption by each 1stco and 2ndco of their Class D shares held by Aco as described in paragraph 39 above, the amount, if any, by which the amount paid on the redemption exceeds the PUC of such shares immediately before the redemption will be deemed, by virtue of paragraphs 84(3)(a) and 84(3)(b), to be a dividend paid by each 1stco and 2ndco and a dividend received by Aco.

F. As a result of the distributions by Aco in the course of its winding-up described in paragraph 41 above:

(a) pursuant to paragraph 88(2)(b) and subsection 84(2), but subject to (b) to (d) herein, Aco will be deemed to have paid, and each 1stco and 2ndco to have received, a dividend (the "winding-up dividend") on the Class A and Class C shares of Aco, as the case may be, equal to the proportion of amount by which the amount of the funds or property distributed by Aco to each 1stco and 2ndco in respect of the Class A and Class C shares, as the case may be, on the winding-up exceeds the amount by which the PUC of the Class A shares and Class C shares of Aco, as the case may be, is reduced as a result of the distribution, that the number of shares of such class held by each 1stco and 2ndco, as the case may be, is of the number of issued shares of such class outstanding immediately before the distribution;

(b) pursuant to subparagraph 88(2)(b)(i), such portion of the winding-up dividend referred to in (a) herein as does not exceed Aco's CDA determined immediately before the payment of the winding-up dividend will be deemed, for purposes of the subsection 83(2) election referred to in paragraph 42 above, to be the full amount of a separate dividend;

(c) pursuant to subparagraph 88(2)(b)(ii), the portion of the winding-up dividend that is equal to the lesser of:

(A) Aco's pre-1972 CSOH as determined immediately before the payment of the winding-up dividend; and

(B) the amount by which the winding-up dividend exceeds the portion thereof, if any, in respect of which Aco will elect under subsection 83(2);

will be deemed not to be a dividend, and

(a) pursuant to subparagraph 88(2)(b)(iii), the winding-up dividend, to the extent that it exceeds the portion thereof referred to in (b) herein that is deemed to be a separate dividend and the portion referred to in (c) herein that is deemed not to be a dividend, will be deemed to be a separate dividend that is a taxable dividend. To the extent that the amount elected for the purposes of subsection 83(2) exceeds Aco's CDA balance at the time that the dividend becomes payable, the excess will be deemed, by reason of subsection 184(3), to be a separate dividend that is a taxable dividend payable at that time, provided that Aco files an election under subsection 184(3), in the prescribed form and within the prescribed time, in respect of such excess.

G. The deemed dividends referred to in rulings C to E and F(a), to the extent that they are taxable dividends, will

(a) be included in each recipient's income pursuant to paragraph 12(1)(j);

(b) be deductible by the recipient pursuant to subsection 112(1) in computing its taxable income for the year in which the dividend is deemed to have been received and, for greater certainty, such deduction will not be denied by any of subsections 112(2.1) to (2.4) and the provisions of subsection 112(3) will apply to reduce any loss which may otherwise arise to the recipient as a result of the purchase for cancellation or redemption; and

(c) be excluded in computing the proceeds of disposition to the holder of the shares so redeemed or cancelled pursuant to paragraph (j) of the definition of "proceeds of disposition" in section 54.

H. The provisions of subsection 55(2) will not apply to any of the deemed dividends referred to in rulings C to E and F(a) above by virtue of the application of paragraph 55(3)(b) provided that, as part of the series of transactions or events that includes the proposed transactions described herein, there is no:

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

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

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

(d) acquisition of property in the circumstances described in paragraphs 55(3.1)(c) or (d)

which has not been described herein and, for greater certainty, subsection 55(3.1) will not apply to deny the application of paragraph 55(3)(b).

I. The dividends described in rulings C to E and F(a) above will not be subject to tax under Parts IV.1 and VI.1 by virtue of paragraph (b) of the definition of "excepted dividend" in section 187.1 and paragraph (a) of the definition of "excluded dividend" in subsection 191(1) because each of the dividend recipients will have a substantial interest, within the meaning of subsection 191(2), in the particular payor corporations.

J. The dividends described in rulings C to E and F(a) above will not be subject to tax under Part IV except as provided in paragraph 186(1)(b).

K. The extinguishment of the debt obligations as a result of merger on the windings-up of DC and Aco as described in paragraphs 30 and 41 above, will not give rise to a "forgiven amount" within the meaning of subsections 80(1) and 80.01(1).

L. DC and Aco will not realize any capital gain or incur any capital loss upon the extinguishment of the debt obligations as a result of merger.

M. The provisions of subsection 88(1) will apply to the winding-up of DC into Bco as described in paragraph 30 above.

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

O. Subsection 245(2) will not be applied as a result of the proposed transaction, in and by themselves, to redetermine the tax consequences confirmed herein.

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

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

Comment

Nothing in this ruling should be construed as implying that the CCRA has agreed to or reviewed:

(a) the determination of the ACB or FMV of any property referred to herein or the PUC of any shares referred to herein;

(b) the determination of any of the balances of the CDA or RDTOH referred to herein; and

(c) 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