2025 Ruling 2024-1040061R3 - Multi-wing split-up net asset 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.

Principal Issues: Whether the exception to the application of subsection 55(2) provided in paragraph 55(3)(b) will apply to the proposed transactions.

Position: Yes.

Reasons: Conditions for application have been met and the "butterfly denial rules" in subsection 55(3.1) do not apply.

XXXXXXXXXX									2024-104006

Dear XXXXXXXXXX:

Re: Advance Income Tax Ruling
XXXXXXXXXX

This is in reply to your letter dated XXXXXXXXXX in which you requested an advance income tax ruling on behalf of the taxpayers described herein.

This letter is based solely on the facts, proposed transactions, additional information and purposes of the proposed transactions described below. Any documentation submitted in respect of your request does not form part of the facts, proposed transactions or additional information unless specifically reproduced therein and any references to documentation are provided solely for the convenience of the reader.

We understand that to the best of your knowledge and that of the taxpayers, none of the proposed transactions and/or issues involved in this ruling are the same as, or substantially similar to, transactions and/or issues that are:

(a) in a previously filed tax return of the taxpayer or a related person and;

(i) being considered by the CRA in connection with such return;

(ii) under objection by the taxpayer or a related person; or

(iii) the subject of a current or completed court process involving the taxpayer or a related person; and

(b) the subject of an advance income tax ruling previously considered by the Income Tax Rulings Directorate of the CRA in connection with the taxpayer or a person related to the taxpayer.

The tax account numbers, Tax Services Offices and the Tax Centres and addresses of the taxpayers involved are as follows:

XXXXXXXXXX

Unless otherwise stated:

(a) all references herein to a part, section, subsection, paragraph or subparagraph is a reference to the relevant provision of the Income Tax Act, R.S.C. 1985 c.1 (5th Supp.) (the “Act”), as amended to the date of this letter;

(b) all terms and conditions used in this letter that are defined in the Act have the meaning given in such definition;

(c) all references to monetary amounts are in Canadian dollars; and

(d) the singular should be read as plural and vice versa where the circumstances so require.

DEFINITIONS

The following abbreviations, terms and expressions have the meanings specified, and the relevant parties to the Proposed Transactions (as defined below) will be referred to as follows:

“Act 1” means the XXXXXXXXXX;

“adjusted cost base” or “ACB” means “adjusted cost base” as defined in section 54;

“agreed amount” means the amount agreed to by the transferor and the transferee in respect of the transfer of eligible property in a joint election filed pursuant to subsection 85(1);

“XXXXXXXXXX account” means the self-managed XXXXXXXXXX government savings account that consists of two different funds: (a) XXXXXXXXXX deposits, which are not taxable upon withdrawal (similar to a bank account); and (b) government contributions and interest earned on both funds, which are taxed as investment income upon withdrawal;

“arm’s length” has the meaning assigned by subsection 251(1);

“capital dividend” has the meaning assigned by subsection 83(2);

“capital property” has the meaning assigned by section 54;

“CCPC” means “Canadian-controlled private corporation” as that term is defined in subsection 125(7);

“CDA” means “capital dividend account” as that term is defined in subsection 89(1);

“CRA” means Canada Revenue Agency;

“DC” means XXXXXXXXXX, a corporation incorporated under Act 1, as described in Paragraph 1;

“DC Class 1 Common Shares” means the Class 1 Common shares of DC, as described in Paragraph 2a.;

“DC Class 1 Special Shares” means the Class 1 special shares of DC, as described in Paragraph 2d.;

“DC Class 2 Common Shares” means the Class 2 Common shares of DC, as described in Paragraph 2a.;

“DC Class 2 Special Shares” means the Class 2 special shares of DC, as described in Paragraph 2e.;

“DC Class 3 Common Shares” means the Class 3 Common shares of DC, as described in Paragraph 2a.;

“DC Class A Special Shares” means the Class A special shares of DC, as described in Paragraph 2b.;

“DC Class B Special Shares” means the Class B special shares of DC, as described in Paragraph 2c.;

“DC Common Shares” means the Common shares of DC, as described in Paragraph 2a.;

“DC New Common Shares” means the New Common shares of DC, as described in Paragraph 2a.;

“DC Redemption Notes” means the DC Redemption Note 1 and the DC Redemption Note 2, collectively;

“DC Redemption Note 1” means the non-interest bearing demand promissory note to be issued by DC to TC1 on the purchase for cancellation of the DC Class 2 Common Shares and the redemption of the DC Class A Special Shares and the DC Class 1 Special Shares owned by TC1, as described in Paragraph 35;

“DC Redemption Note 2” means the non-interest bearing demand promissory note to be issued by DC to TC2 on the purchase for cancellation of the DC Class 1 Common Shares and the redemption of the DC Class A Special Shares and the DC Class 1 Special Shares owned by TC2, as described in Paragraph 36;

“DC Transfer 1” refers to the transfer of property by DC to TC1 as described in Paragraph 27 to Paragraph 29;

“DC Transfer 2” refers to the transfer of property by DC to TC2 as described in Paragraph 30 to Paragraph 32;

“DC Transfers” means the DC Transfer 1 and DC Transfer 2, collectively;

“distribution” has the meaning assigned by subsection 55(1);

“dividend refund” has the meaning assigned by subsection 129(1);

“dividend rental arrangement” has the meaning assigned by subsection 248(1);

“eligible dividend” has the meaning assigned by subsection 89(14);

“eligible property” has the meaning assigned by subsection 85(1.1);

“ERDTOH” means “eligible refundable dividend tax on hand” which has the meaning assigned by subsection 129(4);

“fair market value” or “FMV” means the highest price available in an open and unrestricted market between informed and prudent parties dealing at arm’s length and under no compulsion to act, expressed in terms of money;

“XXXXXXXXXX Property 1” means the following whole parcels of XXXXXXXXXX owned by DC that will be transferred by DC to TC1 on the DC Transfer 1:

a) Parcel #2
XXXXXXXXXX;

b) Parcel #5
XXXXXXXXXX;

c) Parcel #7
XXXXXXXXXX; and

d) Parcel #8

XXXXXXXXXX.

“XXXXXXXXXX Property 2” means the following whole parcels of XXXXXXXXXX owned by DC that will be transferred by DC to TC2 on the DC Transfer 2:

a) Parcel #1
XXXXXXXXXX;

b) Parcel #3
XXXXXXXXXX;

c) Parcel #4
XXXXXXXXXX;

d) Parcel #9
XXXXXXXXXX; and

e) Parcel #10

XXXXXXXXXX.

“financial intermediary corporation” has the meaning assigned by subsection 191(1);

“GRIP” means “general rate income pool” as that expression is defined in subsection 89(1);

“Individual A” means XXXXXXXXXX, an individual who is resident in Canada for purposes of the Act. Individual A is the parent of Sibling 1 and Sibling 2 and the grandparent of Individual B;

“Individual B” means XXXXXXXXXX, an individual who is resident in Canada for purposes of the Act. Individual B is the nephew of Sibling 1 and Sibling 2 and the grandchild of Individual A;

“Individual C” means XXXXXXXXXX, the late parent of Sibling 1 and Sibling 2, the late spouse of Individual A and the late grandparent of Individual B;

“NERDTOH” means “non-eligible refundable dividend tax on hand” which has the meaning assigned by subsection 129(4);

“paid-up capital” or “PUC” means “paid-up capital” as defined in subsection 89(1);

“Paragraph” means a numbered paragraph in this letter;

“principal amount” has the meaning assigned by subsection 248(1);

“private corporation” has the meaning assigned by subsection 89(1);

“proceeds of disposition” has the meaning assigned by section 54;

“Proposed Transactions” means the proposed transactions described in Paragraphs 10 to 37;

“Redemption Amount” means an amount equal to the FMV of the consideration received upon issuance of such shares;

“related person” has the meaning assigned by subsection 251(2);

“restricted financial institution” has the meaning assigned by subsection 248(1);

“Sibling 1” means XXXXXXXXXX, an individual who is resident in Canada for purposes of the Act. Sibling 1 is the child of Individual A and Individual C, is the sibling of Sibling 2 and the uncle of Individual B;

“Sibling 2” means XXXXXXXXXX, an individual who is resident in Canada for purposes of the Act. Sibling 2 is the child of Individual A and Individual C, is the sibling of Sibling 1 and the uncle of Individual B;

“Sibling 1 Trust” means the XXXXXXXXXX, as described in Paragraph 8;

“Sibling 2 Trust” means the XXXXXXXXXX, as described in Paragraph 9;

“specified financial institution” has the meaning assigned by subsection 248(1);

“taxable Canadian corporation” has the meaning assigned in subsection 89(1);

“taxable preferred share” has the meaning assigned by subsection 248(1);

“taxation year” has the meaning assigned by subsection 249(1);

“TCs” means TC1 and TC2, collectively;

“TC Redemption Notes” means the TC1 Redemption Note and the TC2 Redemption Note, collectively;

“TC1” means a corporation to be incorporated under Act 1 as described in Paragraph 13;

“TC1 Class A Special Shares” means the Class A Special shares of TC1, as described in Paragraph 14b.;

“TC1 Class B Special Shares” means the Class B Special shares of TC1, as described in Paragraph 14c.;

“TC1 Class C Special Shares” means the Class C Special shares of TC1, as described in Paragraph 14d.;

“TC1 Class V Special Shares” means the Class V Special shares of TC1, as described in Paragraph 14e.;

“TC1 Common Shares” means the Common shares of TC1, as described in Paragraph 14a.;

“TC1 Redemption Note” means the non-interest bearing demand promissory note to be issued by TC1 to DC on the redemption of the TC1 Class A Special Shares owned by DC, as described in Paragraph 33a.;

“TC2” means a corporation to be incorporated under Act 1, as described in Paragraph 13;

“TC2 Class A Special Shares” means the Class A Special shares of TC2, as described in Paragraph 14b.;

“TC2 Class B Special Shares” means the Class B Special shares of TC2, as described in Paragraph 14c.;

“TC2 Class C Special Shares” means the Class C Special shares of TC2, as described in Paragraph 14d.;

“TC2 Class V Special Shares” means the Class V Special shares of TC2, as described in Paragraph 14e.;

“TC2 Common Shares” means the Common shares of TC2, as described in Paragraph 14a.;

“TC2 Redemption Note” means the non-interest bearing demand promissory note to be issued by TC2 to DC on the redemption of the TC2 Class A Special Shares owned by DC, as described in Paragraph 33b.;

“Titlecos” means Titleco1 and Titleco2, collectively;

“Titleco1” means a corporation to be incorporated under Act 1 as described in Paragraph 13;

“Titleco1 Class A Special Shares” means the Class A Special shares of Titleco1, as described in Paragraph 14b.;

“Titleco1 Class B Special Shares” means the Class B Special shares of Titleco1, as described in Paragraph 14c.;

“Titleco1 Class C Special Shares” means the Class C Special shares of Titleco1, as described in Paragraph 14d.;

“Titleco1 Class V Special Shares” means the Class V Special shares of Titleco1, as described in Paragraph 14e.;

“Titleco1 Common Shares” means the Common shares of Titleco1, as described in Paragraph 14a.;

“Titleco2” means a corporation to be incorporated under Act 1, as described in Paragraph 13;

“Titleco2 Class A Special Shares” means the Class A Special shares of Titleco2, as described in Paragraph 14b.;

“Titleco2 Class B Special Shares” means the Class B Special shares of Titleco2, as described in Paragraph 14c.;

“Titleco2 Class C Special Shares” means the Class C Special shares of Titleco2, as described in Paragraph 14d.;

“Titleco2 Class V Special Shares” means the Class V Special shares of Titleco2, as described in Paragraph 14e.; and

“Titleco2 Common Shares” means the Common shares of Titleco2, as described in Paragraph 14a.

FACTS

DC

1. DC is a taxable Canadian corporation and a CCPC that was incorporated on XXXXXXXXXX under Act 1. DC has a taxation year and fiscal period end of XXXXXXXXXX.

2. DC’s authorized share capital consists of an unlimited number of Common Shares, New Common Shares, Class 1 Common Shares, Class 2 Common Shares, Class 3 Common Shares, Class A Special Shares, Class B Special Shares, Class 1 Special Shares and Class 2 Special Shares with the following rights, privileges and conditions:

(a) DC Common Shares, DC New Common Shares, DC Class 1 Common Shares, DC Class 2 Common Shares and DC Class 3 Common Shares are voting shares and include the right to receive non-cumulative dividends as and when declared by the board of directors, and to receive the remaining property of DC on a liquidation, dissolution or on the winding-up of DC.

(b) DC Class A Special Shares are non-voting and are redeemable and retractable for XXXXXXXXXX dollar per share. These shares have a non-cumulative, discretionary dividend entitlement of up to XXXXXXXXXX% per annum of the Redemption Amount of the shares.

(c) DC Class B Special Shares carry XXXXXXXXXX votes per share and are redeemable and retractable for XXXXXXXXXX dollar per share. These shares have a non-cumulative, discretionary dividend entitlement.

(d) DC Class 1 Special Shares are non-voting and are redeemable and retractable for the amount received by DC on first issuance. These shares have a non-cumulative, discretionary dividend entitlement of up to XXXXXXXXXX% per annum of the Redemption Amount of the shares.

(e) DC Class 2 Special Shares are non-voting and are redeemable and retractable for XXXXXXXXXX dollar per share. These shares have a non-cumulative, discretionary dividend entitlement of up to XXXXXXXXXX% per annum of the Redemption Amount of the shares.

3. The issued and outstanding shares of DC are as follows:

	Shareholder		Class				PUC		ACB
	Sibling 1 Trust	XXXXX Class 2 Common	XXXXX		XXXXX
	Sibling 2 Trust	XXXXXX Class 1 Common	XXXXX		XXXXX
	Individual B	XXXXX Class 1 Common	XXXXX		XXXXX
				XXXXX Class 3 Common	XXXXX		XXXXX
				XXXXX Class 1 Special	XXXXX		XXXXX
				XXXXX Class 2 Special	XXXXX		XXXXX
	Sibling 1		XXXXX Class A Special	XXXXX		XXXXX
				XXXXX Class 1 Special	XXXXX		XXXXX
	Sibling 2		XXXXX Class A Special	XXXXX		XXXXX
				XXXXX Class 1 Special	XXXXX		XXXXX
	Individual A	XXXXX Class A Special	XXXXX		XXXXX
				XXXXX Class 1 Special	XXXXX		XXXXX

4. The shareholders of DC hold their shares of DC as capital property.

5. DC operates an active XXXXXXXXXX. DC’s shares constitute a XXXXXXXXXX.

6. According to its balance sheet for the period ended XXXXXXXXXX, DC’s principal assets and liabilities consist of:

Assets

(a) Temporary investments, XXXXXXXXXX account, prepaid expenses, inventories, accounts receivable; and

(b) Long term investments including share of XXXXXXXXXX. and XXXXXXXXXX, parcels of XXXXXXXXXX.

Liabilities

a) Bank indebtedness, accounts payable, due to shareholders; and

b) Long term debt.

There have not been any material change in the composition of DC’s assets and liabilities since XXXXXXXXXX.

7. As at XXXXXXXXXX, DC had the following tax balances:

(a) ERDTOH – XXXXXXXXXX;
(b) NERDTOH – XXXXXXXXXX;
(c) GRIP – XXXXXXXXXX; and
(d) CDA – XXXXXXXXXX.

Sibling 1 Trust

8. The Sibling 1 Trust was settled under the laws of XXXXXXXXXX with the following terms:

(a) Individual C settled the Sibling 1 Trust;

(b) The trustees of the Sibling 1 Trust are Sibling 1 and Sibling 1’s spouse; and

(c) The beneficiaries of the Sibling 1 Trust include Sibling 1, Sibling 1’s spouse, the issue of Sibling 1 and Individual B.

Sibling 2 Trust

9. The Sibling 2 Trust was settled under the laws of XXXXXXXXXX with the following terms:

(a) Individual C settled the Sibling 2 Trust;

(b) The trustees of the Sibling 2 Trust are Sibling 2 and Sibling 2’s spouse; and

(c) The beneficiaries of the Sibling 2 Trust include Sibling 2, Sibling 2’s spouse, the issue of Sibling 2 and Individual B.

PROPOSED TRANSACTIONS

The Proposed Transactions will occur in the order presented unless otherwise indicated, with the exception of filing the applicable election forms, which will be filed within the applicable due dates following the completion of the Proposed Transactions.

Dividend payments

10. Reserved.

11. DC will declare and pay a taxable cash dividend to each holder of the DC Class 1 Common Shares, DC Class 2 Common Shares and DC Class 3 Common Shares that will result in each of the Sibling 1 Trust, the Sibling 2 Trust and Individual B receiving a dividend equal to their proportionate common shareholdings. The aggregate amount of such dividends paid by DC will equal three quarters of DC’s GRIP balance at that time. For greater certainty, DC will designate the taxable dividends to be eligible dividends pursuant to subsection 89(14).

12. At the same time as the transaction described in Paragraph 11, DC will pay a cash dividend to Individual A, on their DC Class 1 Special Shares, in an amount equal to DC’s CDA balance at that time. DC will make an election, within the time and manner prescribed by subsection 83(2), such that the dividend will be a capital dividend.

Incorporation of TCs and Titlecos

13. Each of Sibling 1 Trust and Sibling 2 Trust will incorporate two corporations under Act 1. Sibling 1 Trust will incorporate TC1 and Titleco1 and subscribe for 1 Common Share of each of these corporations for $XXXXXXXXXX Class V Special Shares of each of these corporations for $XXXXXXXXXX. Sibling 2 Trust will incorporate TC2 and Titleco2 and subscribe for 1 Common Share of each of these corporations for $XXXXXXXXXX Class V Special Shares of each of these corporations for $XXXXXXXXXX. The TCs and the Titlecos will be taxable Canadian corporations and CCPCs.

14. The authorized share capital of each of the TCs and Titlecos will consist of an unlimited number of:

(a) Common Shares that carry XXXXXXXXXX vote per share and are entitled to discretionary, non-cumulative dividends. These shares will include the right to participate in and receive the remaining property of the corporation on a liquidation, dissolution or on the winding-up of the corporation after satisfaction of all rights of the special share holders.

(b) Class A Special Shares are entitled to XXXXXXXXXX vote per share and are redeemable and retractable for the amount received by DC on first issuance, subject to a price adjustment clause. These shares have a non-cumulative, discretionary dividend entitlement of up to XXXXXXXXXX% per annum of the Redemption Amount of the shares.

(c) Class B Special Shares are non-voting and are redeemable and retractable for the amount received by DC on first issuance, subject to a price adjustment clause. These shares have a non-cumulative, discretionary dividend entitlement of up to XXXXXXXXXX% per annum of the Redemption Amount of the shares.

(d) Class C Special Shares are non-voting and are redeemable and retractable for the amount received by DC on first issuance, subject to a price adjustment clause. These shares have a non-cumulative, discretionary dividend entitlement of up to XXXXXXXXXX% per annum of the Redemption Amount of the shares.

(e) Class V Special Shares are entitled to XXXXXXXXXX vote per share and are redeemable and retractable for $XXXXXXXXXX per share. These shares are not entitled to dividends. The Class V Special Shares rank above the Common Shares with respect to the return of stated capital and the Redemption Amount on a liquidation, dissolution or on the winding-up of the corporation.

Legal Title Transfers

15. Prior to the implementation of any of the transactions described below, DC will transfer legal title to the XXXXXXXXXX Property 1 to Titleco1 such that Titleco1 will agree to hold legal title to the XXXXXXXXXX Property 1, to be transferred by DC to TC1 as described under the DC Transfer 1.

DC will enter into a bare trust agreement with Titleco1 in respect of the XXXXXXXXXX Property 1, the terms of which will include the following:

(a) Titleco1 will hold legal title to the property described above as nominee, agent and bare trustee for the sole benefit and account of DC, and for greater certainty, DC will be the only beneficiary of such trust and will remain the beneficial owner of such property;

and

(b) Titleco1, as agent for DC, will deal with the property described in a. exclusively as directed by DC.

Following the subsequent transfer of the beneficial ownership of the XXXXXXXXXX Property 1 by DC to TC1 as described under DC Transfer 1, a similar bare trust agreement between Titlco1 and TC1 will be implemented.

16. Prior to the implementation of any of the transactions described below, DC will transfer legal title to the XXXXXXXXXX Property 2 to Titleco2 such that Titleco2 will agree to hold legal title to the XXXXXXXXXX Property 2, to be transferred by DC to TC2 as described under the DC Transfer 2.

DC will enter into a bare trust agreement with Titleco2 in respect of the XXXXXXXXXX Property 2, the terms of which will include the following:

(a) Titleco2 will hold legal title to the property described above as nominee, agent and bare trustee for the sole benefit and account of DC, and for greater certainty, DC will be the only beneficiary of such trust and will remain the beneficial owner of such property;

and

(b) Titleco2, as agent for DC, will deal with the property described in a. exclusively as directed by DC.

Following the subsequent transfer of the beneficial ownership of the XXXXXXXXXX Property 2 by DC to TC2 as described under DC Transfer 2, a similar bare trust agreement between Titlco2 and TC2 will be implemented.

DC Share Transfers

17. Sibling 1 will transfer all of their DC Class A Special Shares and all of their DC Class 1 Special Shares to TC1 for consideration consisting solely of XXXXXXXXXX TC1 Class B Special Shares and XXXXXXXXXX TC1 Class C Special Shares, with an aggregate FMV equal to each of the aggregate FMV of the DC Class A Special Shares and DC Class 1 Special Shares, respectively, transferred to TC1 by Sibling 1 at that time.

18. Sibling 1 and TC1 will jointly elect, in prescribed form and within the time referred to in subsection 85(6), to have the provisions of subsection 85(1) apply to the transfers of the DC Class A Special Shares and the DC Class 1 Special Shares to TC1 as described in Paragraph 17. For greater certainty, the agreed amount will be the lesser of the amounts described in subparagraphs 85(1)(c.1)(i) and (ii). The amount added to the stated capital account of the respective shares issued to Sibling 1, in Paragraph 17, will be restricted to the greater of (i) the aggregate PUC, immediately before the disposition, of the respective shares transferred to TC1, as the case may be; and (ii) the aggregate ACB to Sibling 1 immediately before the disposition, of such shares, taking into account any adjustments provided in paragraphs 84.1(2)(a) and (a.1).

19. Sibling Trust 1 will transfer all of its DC Class 2 Common Shares to TC1 for consideration consisting solely of XXXXXXXXXX TC1 Class A Common Shares with an aggregate FMV equal to the aggregate FMV of the DC Class 2 Common Shares transferred to TC1 by Sibling Trust 1 at that time.

20. Sibling Trust 1 and TC1 will jointly elect, in prescribed form and within the time referred to in subsection 85(6), to have the provisions of subsection 85(1) apply to the transfers of the DC Class 2 Common Shares to TC1 as described in Paragraph 19. For greater certainty, the agreed amount will be the lesser of the amounts described in subparagraphs 85(1)(c.1)(i) and (ii). The amount added to the stated capital account of the respective shares issued to Sibling Trust 1, in Paragraph 19, will be restricted to the greater of (i) the aggregate PUC, immediately before the disposition, of the respective shares transferred to TC1, as the case may be; and (ii) the aggregate ACB to Sibling Trust 1 immediately before the disposition, of such shares, taking into account any adjustments provided in paragraphs 84.1(2)(a) and (a.1).

21. Sibling 2 will transfer all of their DC Class A Special Shares and all of their DC Class 1 Special Shares to TC2 for consideration consisting solely of XXXXXXXXXX TC2 Class B Special Shares and XXXXXXXXXX TC2 Class C Special Shares, with an aggregate FMV equal to each of the aggregate FMV of the DC Class A Special Shares and DC Class 1 Special Shares, respectively, transferred to TC2 by Sibling 2 at that time.

22. Sibling 2 and TC2 will jointly elect, in prescribed form and within the time referred to in subsection 85(6), to have the provisions of subsection 85(1) apply to the transfers of the DC Class A Special Shares and the DC Class 1 Special Shares to TC2 as described in Paragraph 21. For greater certainty, the agreed amount will be the lesser of the amounts described in subparagraphs 85(1)(c.1)(i) and (ii). The amount added to the stated capital account of the respective shares issued to Sibling 2, in Paragraph 21, will be restricted to the greater of (i) the aggregate PUC, immediately before the disposition, of the respective shares transferred to TC2, as the case may be; and (ii) the aggregate ACB to Sibling 2 immediately before the disposition, of such shares, taking into account any adjustments provided in paragraphs 84.1(2)(a) and (a.1).

23. Sibling Trust 2 will transfer all of its DC Class 1 Common Shares to TC2 for consideration consisting solely of XXXXXXXXXX TC2 Class A Common Shares with an aggregate FMV equal to the aggregate FMV of the DC Class 1 Common Shares transferred to TC2 by Sibling Trust 2 at that time.

24. Sibling Trust 2 and TC2 will jointly elect, in prescribed form and within the time referred to in subsection 85(6), to have the provisions of subsection 85(1) apply to the transfers of the DC Class 1 Common Shares to TC2 as described in Paragraph 23. For greater certainty, the agreed amount will be the lesser of the amounts described in subparagraphs 85(1)(c.1)(i) and (ii). The amount added to the stated capital account of the respective shares issued to Sibling Trust 2, in Paragraph 23, will be restricted to the greater of (i) the aggregate PUC, immediately before the disposition, of the respective shares transferred to TC2, as the case may be; and (ii) the aggregate ACB to Sibling Trust 2 immediately before the disposition, of such shares, taking into account any adjustments provided in paragraphs 84.1(2)(a) and (a.1).

Distribution

The classification of DC’s property

25. Immediately before the DC Transfers described in Paragraphs 27 to 32, the property of DC will be classified into the following types of property:

(a) cash or near-cash property, comprising of all the current assets of DC including, cash and cash equivalents, temporary investments, XXXXXXXXXX accounts, prepaid expenses, accounts receivable and XXXXXXXXXX;

(b) business 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 an active business (other than a Specified Investment Business); and

(c) 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 from a specified investment business.

It is anticipated that DC will not own any investment property immediately prior to the DC Transfers.

For greater certainty, for the purposes of the distribution:

(d) DC will not have a significant influence over any corporation or other entity;

(e) tax accounts of DC, such as CDA, GRIP, NERDTOH or ERDTOH, if any, will not be considered property;

(f) the amount of any deferred tax will not be considered to be a property, as the case may be, for the purposes of the Proposed Transactions;

(g) amounts owing to DC that are due on demand or within 12 months will be considered to be cash or near-cash property; and

(h) any amount in respect of a refund of taxes, and interest thereon, actually receivable will be treated as cash or near-cash property.

The allocation of liabilities

26. In determining the net FMV of each type of property of DC immediately before the DC Transfers described in Paragraphs 27 to 32, the liabilities of DC will be allocated to, and deducted in the calculation of, the net FMV of each such type of property to DC, in the following manner:

(a) the total amount of DC’s current liabilities will be allocated to DC’s cash or near cash property and will not exceed the aggregate FMV of all of DC’s cash or near-cash property;

(b) following the allocation of the current liabilities described in subparagraph (a), any remaining net FMV of accounts receivable, inventory and prepaid expenses will be reclassified as business property and excluded from the net FMV of DC’s cash or near-cash property, to the extent that such property will be collected, sold or consumed by DC, TC1 or TC2, as the case may be, in the ordinary course of the business to which they relate (for clarity, cash will not be reclassified to business property);

(c) liabilities of DC, other than those described in subparagraph (a), that relate to a particular property will then be allocated to the particular property (and effectively to the type of property to which the particular property belongs) to the extent of its FMV. The liabilities that pertain to a type of property but not to a particular property will be allocated to that type of property, but not in excess of the net FMV of such type of property after the allocation of liabilities to a particular property, as described herein; and

(d) if any liabilities remain after the allocations described in subparagraphs (a) and (c) are made, such remaining liabilities will then be allocated to the cash or near-cash property and business property of DC, on the basis of the relative net FMV of each type of property immediately prior to the allocation of such remaining liabilities, but after the allocation of the liabilities as described in subparagraphs (a) and (c). However, where DC is considered to have a negative amount of a type of property because of the allocations in subparagraphs (a) or (c), for purposes of allocating the remaining liabilities, the net FMV of that type of property will be deemed nil resulting in none of these liabilities being allocated to that type of property.

For greater certainty, for purposes of determining the type and net FMV of each type of property:

(i) a deferred income tax liability, if any, will not be considered a liability because such amount does not represent a legal obligation;

(ii) amounts owing by DC that have a term of less than 12 months or are due on demand with no fixed terms of repayment are considered current liabilities; and

(iii) no amount will be considered to be a liability unless it represents a true legal liability that is capable of quantification.

DC Transfer 1

27. Immediately following the classification of DC’s types of property, DC will transfer a proportionate share of each type of property owned by DC at that time to TC1, such that immediately following the DC Transfer 1 and the assumption by TC1 of a portion of DC’s liabilities, the net FMV of each type of property transferred by DC to TC1 is equal to or approximates that proportion of each type of property determined by the formula:

A x B/C

where:

A is the net FMV, immediately before the DC Transfer 1, of all property of that type owned by DC at that time;

B is the aggregate FMV, immediately before the distribution, of all the shares of the capital stock of DC owned by TC1 at that time; and

C is the aggregate FMV, immediately before the distribution, of all the issued and outstanding shares of the capital stock of DC at that time.

For the purpose of this Paragraph, the expression “approximate that proportion” means that the discrepancy from that proportion, if any, will not exceed 1%, determined as a percentage of the net FMV of each type of property that each of TC1 and TC2 will receive as compared to what TC1 would have received (or DC would have retained) had it received (or retained) its appropriate proportion of the net FMV of that type of property of DC.

28. As consideration for the transfer of property by DC to TC1 on the DC Transfer 1, TC1 will:

(a) assume an appropriate amount of liabilities of DC so that TC1 receives a proportionate share of the net FMV of each type of property owned by DC; and

(b) issue XXXXXXXXXX TC1 Class A Special Shares to DC having an aggregate FMV and redemption value equal to the aggregate FMV of the distribution property that TC1 received on the DC Transfer 1, less the amount of liabilities that TC1 respectively assumed.

For greater certainty, the TC1 Class A Special Shares will be taxable preferred shares and short-term preferred shares, which will be held by DC as capital property.

29. In respect of the distribution of property under the DC Transfer 1, DC will jointly elect, with TC1 in prescribed form and within the time allowed by subsection 85(6), to have the provisions of subsection 85(1) apply to the transfers of each eligible property of DC that is transferred to TC1. The agreed amount in respect of each such eligible property will be as follows:

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

(b) in the case of depreciable property of a prescribed class, if any, an amount not less than the least of the amounts described in subparagraphs 85(1)(e)(i), (ii) and (iii); and

(c) in the case of inventory, an amount determined in accordance with the formula set out in paragraph 85(1)(c.2).

For greater certainty, the amount of liabilities that are allocated by DC to a particular eligible property that is subject to an election under subsection 85(1), and that are assumed TC1, which, will not exceed the agreed amount for that particular property in accordance with paragraph 85(1)(b). The amount of liabilities assumed by TC1, which are allocated by DC to a particular property that is not subject to an election under subsection 85(1), will not exceed the FMV of any such property.

TC1 will add to the stated capital account maintained for the TC1 Class A Special Shares, an amount equal to the amount by which the aggregate of the agreed amounts, in the case of each eligible property, and the aggregate FMV, in the case of other properties respectively transferred to TC1, exceeds the amount of DC liabilities assumed by TC1.

For greater certainty, the amount added to the stated capital account for the TC1 Class A Special Shares issued by TC1 as partial consideration for the distribution property under the DC Transfer 1, will not exceed the maximum amount that could be added to the aggregate PUC of such shares without a reduction taking place pursuant to subsection 85(2.1).

DC Transfer 2

30. Immediately following the classification of DC’s types of property and concurrently with the DC Transfer 1, DC will transfer a proportionate share of each type of property owned by DC at that time, such that immediately following the DC Transfer 2 and the assumption by TC2 of a portion of DC’s liabilities, the net FMV of each type of property transferred by DC to TC2 (after allocating and deducting the liabilities of DC, in the manner described in Paragraph 26) is equal to or approximates that proportion of each type of property determined by the formula:

A x B/C

where:

A is the net FMV, immediately before the DC Transfer 2, of all property of that type of property owned by DC at that time;

B is the aggregate FMV, immediately before the distribution, of all the shares of the capital stock of DC owned by TC2 at that time; and

C is the aggregate FMV, immediately before the distribution, of all the issued and outstanding shares of the capital stock of DC at that time.

For the purpose of this Paragraph, the expression “approximate that proportion” means that the discrepancy from that proportion, if any, will not exceed 1%, determined as a percentage of the net FMV of each type of property that each of TC1 and TC2 will receive as compared to what TC2 would have received (or DC would have retained) had it received (or retained) its appropriate proportion of the net FMV of that type of property of DC.

31. As consideration for the transfer of property by DC to TC2 on the DC Transfer 2, TC2 will:

(a) assume an appropriate amount of liabilities of DC so that TC2 receives a proportionate share of the net FMV of each type of property owned by DC; and

(b) issue XXXXXXXXXX TC2 Class A Special Shares to DC having an aggregate FMV and redemption value equal to the aggregate FMV of the distribution property that TC2 received on the DC Transfer 2, less the amount of liabilities assumed by TC2.

For greater certainty, the TC2 Class A Special Shares will be taxable preferred shares and short-term preferred shares, which will be held by DC as capital property.

32. In respect of the distribution of property under the DC Transfer 2, DC will jointly elect, with TC2 in prescribed form and within the time allowed by subsection 85(6), to have the provisions of subsection 85(1) apply to the transfers of each eligible property of DC that is transferred to TC2. The agreed amount in respect of each such eligible property will be as follows:

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

(b) in the case of depreciable property of a prescribed class, if any, an amount not less than the least of the amounts described in subparagraphs 85(1)(e)(i), (ii) and (iii); and

(c) in the case of inventory, an amount determined in accordance with the formula set out in paragraph 85(1)(c.2).

For greater certainty, the amount of liabilities that are allocated by DC to a particular eligible property that is subject to an election under subsection 85(1), and that are assumed by TC2, will not exceed the agreed amount for that particular property. The amount of liabilities assumed by TC2, which are allocated by DC to a particular property that is not subject to an election under subsection 85(1), will not exceed the FMV of any such property.

TC2 will add to the stated capital account maintained for the TC2 Class A Special Shares, an amount equal to the amount by which the aggregate of the agreed amounts, in the case of each eligible property, and the aggregate FMV, in the case of other properties respectively transferred to TC2, exceeds the DC liabilities assumed by TC2.

For greater certainty, the amount added to the stated capital account for the TC2 Class A Special Shares issued by TC2 as partial consideration for the distribution property under the DC Transfer 2, will not exceed the maximum amount that could be added to the aggregate PUC of such shares without a reduction taking place pursuant to subsection 85(2.1).

Share Redemptions

33. Each of the TCs will redeem all of the respective TC Class A Special Shares held by DC for an amount equal to the Redemption Amount of such shares. As consideration therefor:

(a) TC1 will issue the TC1 Redemption Note to DC; and

(b) TC2 will issue the TC2 Redemption Note to DC.

Each such redemption note will have a principal amount and FMV equal to the aggregate Redemption Amount of the respective TC Class A Special Shares owned by DC. DC will accept the TC1 Redemption Note and the TC2 Redemption Note as payment in full for the respective TC Class A Special Shares so redeemed.

34. Immediately after the transaction step described in Paragraph 33, each of TC1 and TC2 will select its first taxation year end.

35. DC will redeem or purchase for cancellation, as the case may be, the following shares in the order presented:

(a) all of the DC Class A Special Shares;

(b) all of the DC Class 1 Special Shares; and

(c) all of the DC Class 2 Common Shares

held by TC1 for the Redemption Amount or FMV of such shares, as the case may be.

As consideration therefor, DC will issue the DC Redemption Note 1 to TC1 with a principal amount and FMV equal to the aggregate Redemption Amount and FMV, as the case may be, of the DC Class A Special Shares, DC Class 1 Special Shares and the DC Class 2 Common Shares held by TC1, immediately before the redemption and purchase for cancellation. TC1 will accept the DC Redemption Note 1 as payment in full for the redemption and purchase for cancellation.

36. DC will redeem or purchase for cancellation, as the case may be, the following shares in the ordered presented:

(a) all of the DC Class A Special Shares;

(b) all of the DC Class 1 Special Shares; and

(c) all of the DC Class 1 Common Shares

held by TC2 for the Redemption Amount or FMV of such shares, as the case may be.

As consideration therefor, DC will issue the DC Redemption Note 2 to TC2 with a principal amount and FMV equal to the aggregate Redemption Amount and FMV, as the case may be, of the DC Class A Special Shares, DC Class 1 Special Shares and the DC Class 2 Common Shares, held by TC2, immediately before the redemption and purchase for cancellation. TC2 will accept the DC Redemption Note 2 as payment in full for the redemption and purchase for cancellation.

Promissory Note Settlements

37. The DC Redemption Note 1 will be set-off in full against the TC1 Redemption Note and the DC Redemption Note 2 will be set-off in full against the TC2 Redemption Note. Such promissory notes will be cancelled without payment.

ADDITIONAL INFORMATION

38. Except as described in the Facts and the Proposed Transactions, no property has been or will be acquired by DC, in contemplation of and before the Proposed Transactions, other than in a transaction described in subparagraphs 55(3.1)(a)(i) to (iv).

39. There has not, and will not be, as part of the series of transactions or events that includes the Proposed Transactions, any disposition or acquisition of property in circumstances described in subparagraphs 55(3.1)(b)(i) or (iii), or an acquisition of control in the circumstances described in subparagraph 55(3.1)(b)(ii).

40. None of the property received by the TCs as part of the series of transactions or events that includes the distribution of property under the DC Transfers, will be acquired by a person unrelated to the TCs, or by a partnership, in the circumstances described in paragraph 55(3.1)(c).

41. None of the corporations referred to herein is or will be, at any time during the series of transactions or events that includes the Proposed Transactions, a specified financial institution, a restricted financial institution or a corporation described in any of the paragraphs (a) to (f) of the definition of financial intermediary corporation.

42. During the implementation of the Proposed Transactions, none of the shares of the corporations referred to herein will be:

(a) the subject of any undertaking or agreement that is referred to in subsection 112(2.2) as a guarantee agreement;

(b) issued or acquired as part of a transaction, event or series of transactions or events of the type described in subsection 112(2.5);

(c) the subject of a dividend rental arrangement;

(d) the subject of any secured undertaking of the type described in paragraph 112(2.4)(a); or

(e) issued for consideration that is or includes:

(i) an obligation of the type described in subparagraph 112(2.4)(b)(i), other than an obligation of a corporation that is related (otherwise than by reason of a right referred to in paragraph 251(5)(b)); or

(ii) any right of the type described in subparagraph 112(2.4)(b)(ii).

43. Immediately before the redemption of the TC Class A Special Shares in Paragraph 33, each of the TCs will be connected to DC pursuant to paragraph 186(4)(a) and subsection 186(2). DC will also have a substantial interest in each of the TCs as that term is defined in subsection 191(2) at that time.

44. Immediately before the redemptions of the shares of DC held by the TCs, as described in Paragraph 35 and Paragraph 36, DC will be connected to each of the TCs pursuant to paragraph 186(4)(a) and subsection 186(2). The TCs will also have a substantial interest in DC as that term is defined in subsection 191(2) at that time.

45. The Proposed Transactions will not result in any of the Taxpayers being unable to pay its existing tax liabilities.

PURPOSE OF THE PROPOSED TRANSACTIONS

46. The purpose of the Proposed Transactions is to separate DC’s XXXXXXXXXX operations into separate corporations as Sibling 1 and Sibling 2 wish to carry on their respective portion of this business independently from one another, and from Individual B, who will continue to carry on the operations in DC.

RULINGS

Provided that the above statements of Facts, Proposed Transactions, Additional Information and Purpose of the Proposed Transactions are accurate and constitute a complete disclosure of all relevant information and provided that the Proposed Transactions are completed in the manner described above, our rulings are as follows:

A. Subject to the application of subsection 69(11), provided that the requisite joint elections are filed in prescribed form and manner within the prescribed time specified in subsection 85(6) and provided that each particular property so transferred is an eligible property in respect of which shares have been issued as full or partial consideration therefor, the provisions of subsection 85(1) will apply to the transfer of each eligible property owned by DC to TC1 and TC2, as the case may be, on the DC Transfers such that the agreed amount in respect of each such transfer of eligible property will be deemed to be the transferor’s proceeds of disposition of the particular property and the transferee’s cost thereof.

For greater certainty, paragraph 85(1)(e.2) will not apply to any of these transfers.

For the purposes of the transfer described above, the reference in subparagraph 85(1)(e)(i) to the “undepreciated capital cost to the taxpayer of all property of that class immediately before the disposition” shall be interpreted to mean that proportion of the undepreciated capital cost to DC of all property of that class immediately before the transfer that the FMV of the assets of that class transferred to each of TC1 and TC2 is of the FMV of all assets of that class.

B. Subsection 84(3) will apply on the redemption or the purchase for cancellation, as the case may be, of the:

(a) TC1 Class A Special Shares held by DC, as described in Paragraph 33a., to deem TC1 to have paid and DC to have received, a dividend on such shares equal to the amount, if any, by which the amount paid by TC1 on the redemption of the TC1 Class A Special Shares exceeds the aggregate PUC in respect of such shares immediately before the redemption;

(b) TC2 Class A Special Shares held by DC, as described in Paragraph 33b., to deem TC2 to have paid and DC to have received, a dividend on such shares equal to the amount, if any, by which the amount paid by TC2 on the redemption of the TC2 Class A Special Shares exceeds the aggregate PUC in respect of such shares immediately before the redemption;

(c) DC Class 2 Common Shares, DC Class A Special Shares and DC Class 1 Special Shares held by TC1, as described in Paragraph 35, to deem DC to have paid and TC1 to have received, a dividend on such shares equal to the amount, if any, by which the amount paid by DC on the purchase for cancellation of the DC Class 2 Common Shares and the redemption of the DC Class A Special Shares and DC Class 1 Special Shares exceeds the aggregate PUC in respect of such shares immediately before the redemption or purchase for cancellation, as the case may be;

(d) DC Class 2 Common Shares, DC Class A Special Shares and DC Class 1 Special Shares held by TC2, as described in Paragraph 36, to deem DC to have paid and TC2 to have received, a dividend on such shares equal to the amount, if any, by which the amount paid by DC on the purchase for cancellation of the DC Class 1 Common Shares and the redemption of the DC Class A Special Shares and DC Class 1 Special Shares exceeds the aggregate PUC in respect of such shares immediately before the redemption or purchase for cancellation, as the case may be;

C. The dividends described in Rulings B above that are taxable dividends:

(a) will be included in computing the income of the person deemed to have received such a dividend pursuant to subsection 82(1) and paragraph 12(1)(j);

(b) will be deductible by the recipient pursuant to subsection 112(1) in computing its taxable income for the taxation year in which such a dividend is deemed to have been received, and, for greater certainty, such deduction will not be prohibited by subsections 112(2.1), (2.2), (2.3) or (2.4);

(c) will be excluded in determining the recipient corporation’s proceeds of disposition of the shares so redeemed, purchased or cancelled pursuant to paragraph (j) of the definition of proceeds of disposition in section 54;

(d) will, by virtue of subsection 112(3), reduce the loss, if any, in respect of the disposition of the shares on which the dividend is deemed to be received; and

(e) will not be subject to tax under Part IV except, as provided in paragraph 186(1)(b), to the extent that the payer corporation is entitled to a dividend refund for its taxation year in which it paid such dividend, which, for greater certainty, will include the taxable dividends described in Rulings B above;

(f) will not be subject to Part IV.1; and

(g) will not be subject to Part VI.1 by virtue of paragraph (a) of the definition of excluded dividend in subsection 191(1).

D. Provided that, as part of the series of transactions or events that includes the Proposed Transactions, there is not:

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

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

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

(d) an acquisition of property in the circumstances described in subparagraph 55(3.1)(b)(iii); or

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

which has not been described in this letter, then by virtue of paragraph 55(3)(b), subsection 55(2) will not apply to the taxable dividends referred to in Ruling B above, and, for greater certainty, subsection 55(3.1) will not apply to deny the exemption under paragraph 55(3)(b).

E. The set-off and cancellation of the DC Redemption Notes and the TC Redemption Notes as described in Paragraph 37, will not, in and of itself, give rise to a forgiven amount. In addition, neither DC or the TCs will otherwise realize a gain or incur any loss as a result of such extinguishment.

F. The provisions of subsections 15(1), 56(2) and 246(1) will not apply to any of the Proposed Transactions, in and by themselves.

G. The provisions of subsection 245(2) will not be applied to the Proposed Transactions, in and by themselves, to re-determine the tax consequences confirmed in the rulings given above.

The above rulings are given subject to the limitations and qualifications set forth in Information Circular 70-6R12 issued on April 1, 2022, and are binding on the CRA provided that the Proposed Transactions are completed within six months of the date of this letter, unless otherwise specified.

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.

OTHER COMMENTS

Unless otherwise confirmed in the above rulings, nothing in this letter should be construed as implying that the CRA has confirmed, reviewed or has made any determination in respect of:

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

(b) the balance of the CDA, GRIP, ERDTOH or NERDTOH of any corporation;

(c) the attribution of safe income to any share of any corporation referred to herein (see generally CRA documents 2020-0861031C6 and 2021-0889611E5, and the paper titled “CRA Update on Subsection 55(2) and Safe Income – Where Are We Now” delivered at the Canadian Tax Foundation Conference on December 22, 2023, for guidance on the allocation of safe income on a corporate reorganization); and

(d) any other tax consequence relating to the facts, Proposed Transactions or any transaction or event taking place either prior to the Proposed Transactions or subsequent to the Proposed Transactions, whether described in this letter or not, other than those specifically described in the rulings given above, including whether any of the Proposed Transactions would also be included in a series of transactions or events that includes other transactions or events that are not described in this letter.

Nothing in this letter should be construed as confirmation, express or implied, that, for the purposes of any of the rulings given above, any adjustment to the FMV of the properties transferred or the redemption amount of the shares issued as consideration, whether pursuant to a price adjustment clause or otherwise, will be effective retroactively to the time of the transfer and issuance of shares. Furthermore, the operation of a price adjustment clause may invalidate one or more rulings provided. The general position of the CRA with respect to price adjustment clauses is stated in Income Tax Folio S4-F3-C1, Price Adjustment Clauses.

An invoice for our fees in connection with this ruling request will be forwarded to you under separate cover.

Yours Truly,

XXXXXXXXXX
Manager, Reorganizations Section II
For Division Director
Reorganizations Division
Income Tax Rulings Directorate