2006 Ruling 2006-0181061R3 - Butterfly Distribution - XXXXXXXXXX

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: Supplemental ruling to 2006-016566 to incorporate minor revisions to facts and proposed transactions.

Position: Changes accepted.

Reasons: No impact on any of the rulings given.

XXXXXXXXXX 								2006-018106

XXXXXXXXXX, 2006

Dear XXXXXXXXXX:

Subject: XXXXXXXXXX - Advance Income Tax Ruling Request

This is in reply to your email request on XXXXXXXXXX, wherein you requested certain changes to the advance income tax ruling issued to the above-noted taxpayers on XXXXXXXXXX, 2006 (our file number 2006-016566 and referred to as the "Previous Ruling"). You also confirm that none of the proposed transactions described in the Previous Ruling have been entered into.

Further to your request, this letter cancels and replaces the Previous Ruling in its entirety.

You have advised us that to the best of your knowledge and that of the taxpayer involved none of the issues involved in this ruling request:

(i) in an earlier return of the taxpayer or any related person;

(ii) being considered by a tax services office ("TSO") or taxation centre ("TC") in connection with a previously filed tax return by the taxpayer or any related person;

(iii) under objection by the taxpayers or any related person;

(iv) before the courts or, if a judgment has been issued, the time limit for appeal to a higher court has expired; or

(v) the subject of a ruling previously issued by the Income Tax Rulings Directorate.

The taxpayer has also represented that the proposed transactions described herein will not result in the taxpayer or any related person described herein being unable to pay its existing outstanding tax liabilities.

DEFINITIONS

In this letter, unless otherwise specified, all monetary amounts are expressed in Canadian dollars and the following terms have the meanings specified below:

(a) "Act" means the Income Tax Act (Canada), R.S.C. 1985 (5th Supp.) C.1, as amended from time to time and consolidated to the date of this letter and, unless otherwise expressly stated, every reference herein to a part, section or subsection, paragraph or subparagraph and clause or subclause is a reference to the relevant provision of the Act, and the Income Tax Regulations thereunder are referred to as the "Regulations";

(b) "adjusted cost base" ("ACB") has the meaning assigned by section 54 and subsection 248(1);

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

(d) "BCA" means the Business Corporations Act XXXXXXXXXX;

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

(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) "DC" means XXXXXXXXXX;

(j) "DC Amalco" means the corporate entity resulting from the amalgamation of DC and DC Subco as described in Paragraph 19;

(k) "DC Subco" means XXXXXXXXXX;

(l) "depreciable property" has the meaning assigned by subsection 13(21);

(m) "disposition" has the meaning assigned by subsection 248(1);

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

(o) "dividend refund" has the meaning assigned by subsection 129(1);

(p) "Effective Date" means the day in which the Proposed Transactions described in Paragraphs 21 to 26 are carried out;

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

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

(s) "fair market value" ("FMV") means the highest price available in an open and unrestricted market, between informed, prudent parties, acting at arm's length and under no compulsion to act, expressed in terms of cash;

(t) "Holdco 1" means XXXXXXXXXX;

(u) "Holdco 2" means XXXXXXXXXX;

(v) "Newco" means XXXXXXXXXX;

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

(x) "Paragraph" refers to a numbered paragraph in this advance income tax ruling;

(y) "private corporation" has the meaning assigned by subsection 89(1);

(z) "proceeds of disposition" ("POD") has the meaning assigned by section 54;

(aa) "Proposed Transactions" means the transactions described in Paragraphs 14 to 28;

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

(cc) "related persons" has the meaning assigned by section 251;

(dd) "series of transactions or events" includes the related transactions or events referred to in subsection 248(10);

(ee) "stated capital" has the meaning assigned by the BCA;

(ff) "taxable Canadian corporation" has the meaning assigned by subsection 89(1); and

(gg) "taxable dividend" has the meaning assigned by subsection 89(1).

FACTS

1. DC is a private corporation and a taxable Canadian corporation. DC was formed by Articles of Amalgamation dated the XXXXXXXXXX. By Articles of Amendment dated XXXXXXXXXX, DC's name was changed from XXXXXXXXXX to its current name. The amalgamation did not take place in contemplation of the Proposed Transactions. DC has a XXXXXXXXXX taxation year-end. DC deals with the XXXXXXXXXX TSO.

2. XXXXXXXXXX

3. The current assets of DC include cash, an escrow bank account, amounts due from credit cards, temporary investments, accounts receivable, inventory, prepaid expenses and loans receivable. This escrow bank account contains funds that DC is under an unconditional commitment to set aside for the payment of property taxes relating to XXXXXXXXXX pursuant to the relevant loan agreement. The business assets of DC consist of the XXXXXXXXXX properties (and the related furniture, fixtures and equipment); land which is currently used as XXXXXXXXXX ; and two escrow bank accounts. These two escrow bank accounts contain funds that DC is under an unconditional commitment to set aside for the future acquisition of furniture, fixtures and equipment as required pursuant to the relevant loan agreement. The XXXXXXXXXX properties are held as investments and thus are considered to be investment properties.

4. The current liabilities of DC are comprised of accounts payable, accrued liabilities, current portion of long-term debt, taxes payable, loans payable to related companies, amounts owing to directors, and demand loans payable to XXXXXXXXXX. The long-term liabilities of DC are secured by mortgages on XXXXXXXXXX All of DC's long-term debt relates to property used by DC in its XXXXXXXXXX business.

5. The authorized share capital of DC consists of an unlimited number of common shares of which XXXXXXXXXX common shares are issued to Holdco 1 and XXXXXXXXXX common shares are issued to Holdco 2. The common shares of DC have a PUC of $XXXXXXXXXX and ACB of $XXXXXXXXXX.

6. The authorized share capital of Holdco 1 consists of an unlimited number of redeemable and retractable voting Class A shares and an unlimited number of common shares. Currently, the issued and outstanding shares of Holdco 1 consists solely of XXXXXXXXXX Class A, all of which are owned by Sibling1, and XXXXXXXXXX common shares, all of which are owned by The Sibling1 Family Trust. Holdco 1 is a taxable Canadian corporation and is controlled by Sibling1. Holdco 1 has a XXXXXXXXXX taxation year-end and deals with the XXXXXXXXXX TSO.

7. The authorized share capital of Holdco 2 consists of an unlimited number of redeemable and retractable voting Class A shares and an unlimited number of common shares. Currently, the issued and outstanding shares of Holdco 2 consists solely of XXXXXXXXXX Class A, all of which are owned by Sibling2, and XXXXXXXXXX common shares, all of which are owned by The Sibling2 Family Trust. Holdco 2 is a taxable Canadian corporation and is controlled by Sibling2. Holdco 2 has a XXXXXXXXXX taxation year-end and deals with the XXXXXXXXXX TSO.

8. The authorized share capital of DC Subco consists of an unlimited number of common shares. The only issued shares of DC Subco are XXXXXXXXXX common shares owned by DC. The common shares of DC Subco have a nominal fair market value. The assets of DC Subco include XXXXXXXXXX considered to have no commercial value. DC Subco deals with the XXXXXXXXXX TSO.

9. Sibling1 and Sibling2 are brothers, each of whom is resident in Canada.

10. DC has a positive CDA balance, in part, by reason of the disposition of a XXXXXXXXXX property owned by DC in XXXXXXXXXX. The sale proceeds consisted of cash, the assumption of debt and a small vendor take-back mortgage that was paid in full within the year. XXXXXXXXXX

11. In XXXXXXXXXX, DC completed a debt refinancing with XXXXXXXXXX. As part of this debt refinancing, DC negotiated a $XXXXXXXXXX line of credit with XXXXXXXXXX that is secured by a pledge of the XXXXXXXXXX. This line of credit does not revolve on an annual basis and no principal payments are required on this line during its XXXXXXXXXX-year term. This debt refinancing took place as part of the ongoing business operations of DC and was not undertaken in contemplation of the proposed distribution.

12. DC has also entered into an agreement with XXXXXXXXXX to provide "take-out' financing for certain amounts owing to XXXXXXXXXX that will be secured by a first charge on the XXXXXXXXXX (the "XXXXXXXXXX Loan") subsequent to the completion of the Proposed Transactions. Presently, it is not known whether XXXXXXXXXX will continue to provide long-term financing to DC (or DC Amalco following the proposed amalgamation of DC and DC Subco described in Paragraph 19) under the XXXXXXXXXX Loan subsequent to the proposed distribution. Therefore, a secondary lender, XXXXXXXXXX, has agreed to provide suitable replacement financing to DC (or DC Amalco, as the case may be) should XXXXXXXXXX request that the XXXXXXXXXX Loan be repaid subsequent to the proposed distribution. Although this replacement credit facility is in place, it has not yet been determined whether any advances will ever be required by DC (or DC Amalco, as the case may be). However, for greater certainty, no advances on this "take-out" financing have been made, nor will any such advances be made, prior to the completion of the Proposed Transactions.

13. DC has historically paid annual bonuses to Sibling1 and Sibling2 and, consistent with past practice, DC (or DC Amalco, as the case may be) will pay additional bonuses to Sibling1 and Sibling2 at some time prior to the date of the proposed distribution.

13.1 Newco was incorporated on XXXXXXXXXX under the BCA. Newco is a private corporation and a taxable Canadian corporation and will be authorized to carry on the same business and investment activities that are currently being carried on by DC.

The authorized share capital of Newco consist of an unlimited number of non-voting Class A preference shares ("Class A Shares") and an unlimited number of common shares. The Class A Shares of Newco have the following general attributes:

(i) each Class A Share is redeemable, subject to applicable law, at any time at the option of the issuer for a amount ("Redemption Amount") equal to the aggregate FMV of the property received as consideration for the issuance of such share divided by the number of Class A Shares issued as consideration therefore, plus any declared but unpaid dividends;

(ii) each Class A Share is retractable, subject to applicable law, at any time at the option of the holder for an amount equal to the Redemption Amount;

(iii) the Redemption Amount is subject to a price adjustment clause;

(iv) the holder of a Class A Share is entitled to a non-cumulative cash dividend as and when declared by the Board of Directors from time to time, which dividend need not also be declared on any other class of shares of Newco if the resulting realizable value of the net assets of Newco after payment of the dividends would be less than the aggregate of the Redemption Amounts of all of the Class A Shares then outstanding;

(v) the holder of a Class A Share is entitled, upon the liquidation, dissolution or winding-up of Newco, to a payment in priority to all other classes of shares of Newco of an amount equal to the Redemption Amount to the extent of the amount or value of property available under applicable law for payment to shareholders upon dissolution, but is entitled to no more than the amount of that payment; and

(vi) for the purpose of subsection 191(4), the terms and conditions of Class A Shares will specify an amount in respect of each Class A Share at the time of issuance. The amount to be specified in respect of each Class A Share, will be pursuant to a resolution of the board of directors of Newco, will be expressed as a dollar amount, will not be determined by a formula and will not exceed the FMV of the property received by Newco as consideration for the issuance of such share.

No shares of Newco were issued on incorporation.

PROPOSED TRANSACTIONS

Pre-Distribution Transactions

14. Holdco 2 will incorporate a new corporation ("Bare Trusteeco") pursuant to the provisions of the BCA. Bare Trusteeco will be a taxable Canadian corporation and a CCPC. The authorized capital of Bare Trusteeco will consist of an unlimited number of common shares. On incorporation, Holdco 2 will subscribe for XXXXXXXXXX common shares in Bare Trusteeco (representing all of the issued and outstanding shares in the capital stock of Bare Trusteeco) for nominal consideration of $XXXXXXXXXX per share.

Bare Trusteeco will have no other property other than the property described in this Paragraph and will have no purpose or activity other than to acquire legal title (but not beneficial title) of such real property described in Paragraph 18 as nominee, agent and bare trustee for the beneficial owner of such real property.

15. The directors of DC will pass a resolution to increase the stated capital (and consequently the paid-up capital) of the issued and outstanding common shares of DC by an amount that will not exceed the amount of DC's CDA immediately before such paid-up capital increase. DC will file an election, pursuant to subsection 83(2), in prescribed manner and prescribed form, in respect of the entire amount of the dividend deemed to be paid by DC to the holders of its common shares under subsection 84(1) as a result of this paid-up capital increase.

16. In order to facilitate the proposed distribution described in Paragraph 24, DC will cause some or all of the real property described as XXXXXXXXXX to be severed in equal (XXXXXXXXXX %) interests.

17. XXXXXXXXXX will separate the existing $XXXXXXXXXX line of credit (currently secured by the XXXXXXXXXX) into two distinct credit facilities. XXXXXXXXXX will allocate a portion of the current balance of the line of credit to the XXXXXXXXXX and be granted a mortgage over the XXXXXXXXXX as security for this loan. Consequently, one of the credit facilities will be secured with the XXXXXXXXXX and the balance will continue to be secured with the XXXXXXXXXX.

18. DC will transfer its legal title (but not beneficial ownership) to the XXXXXXXXXX, a XXXXXXXXXX % severed interest in the XXXXXXXXXX, a XXXXXXXXXX% severed interest in the XXXXXXXXXX, a severed interest in XXXXXXXXXX (hereinafter referred to as the "Trusteed Real Property") to Bare Trusteeco. DC will enter into a bare trust agreement with Bare Trusteeco the terms of which will include the following:

(a) Bare Trusteeco will hold legal title to the Trusteed Real Property as nominee, agent and bare trustee for the sole benefit and account of DC as principal and beneficial owner, and

(b) Bare Trusteeco will not deal with the Trusteed Real Property in any way, or execute any instrument, document or encumbrance in respect of the Trusteed Real Property without prior written consent or direction of DC.

For greater certainty, DC (or DC Amalco following the proposed amalgamation of DC and DC Subco described in Paragraph 19) will be the only beneficiary of such bare trust arrangement and will remain the beneficial owner of such property and Bare Trusteeco will deal with such property exclusively as directed by DC (or DC Amalco, as the case may be) at all times. On the subsequent transfer of the beneficial ownership of the Trusteed Real Property by DC Amalco to Newco as contemplated in Paragraph 24, a similar bare trust agreement between Newco and Bare Trusteeco will be executed as described in Paragraph 25.

19. DC will amalgamate with DC Subco pursuant to XXXXXXXXXX the BCA to form DC Amalco such that:

(a) all of the property (except amounts receivable from any predecessor corporation or shares of the capital stock of any predecessor corporation) of DC and DC Subco immediately before the amalgamation will become property of DC Amalco by virtue of the amalgamation;

(b) all of the liabilities (except amounts payable to any predecessor corporation) of DC and DC Subco will become liabilities of DC Amalco by virtue of the amalgamation; and

(c) all the shares of DC Subco owned by DC immediately prior to the amalgamation will be cancelled on the amalgamation and on amalgamation, the XXXXXXXXXX common shares of DC held by each of Holdco 1 and Holdco 2 will become shares in DC Amalco having an aggregate fair market value equal to the fair market value immediately before the amalgamation of the XXXXXXXXXX common shares owned by such corporation in DC.

For greater certainty, the aggregate paid-up capital of the common shares of DC Amalco immediately after the amalgamation will be equal to the aggregate paid-up capital of the common shares of DC immediately before the amalgamation and will exclude any paid-up capital in respect of the shares in the capital stock of DC Subco. On the amalgamation, DC Amalco and Bare Trusteeco will be subject to the bare trust agreement referred to in Paragraph 18.

Butterfly Transactions

20. Reserved.

21. On the Effective Date, Holdco 2 will transfer its XXXXXXXXXX common shares of DC Amalco to Newco for a purchase price equal to the aggregate FMV of such shares. As consideration therefor, Newco will issue a number of common shares of Newco (the "Newco Common Shares") to Holdco 2, having an aggregate FMV equal to the aggregate FMV of the common shares of DC Amalco transferred to Newco.

The aggregate amount added to the paid-up capital of the Newco Common Shares issued to Holdco 2 will equal the aggregate paid-up capital attributable to the XXXXXXXXXX common shares of DC Amalco transferred to Newco by Holdco 2.

Holdco 2 and Newco will jointly elect under subsection 85(1), in prescribed form and within the time limits prescribed by subsection 85(6), in respect of the transfer of the common shares of DC Amalco to Newco. The agreed amount specified in respect of the transfer will be equal to the aggregate adjusted cost base to Holdco 2 of the XXXXXXXXXX common shares of DC Amalco so transferred. For greater certainty, the aggregate adjusted cost base of the XXXXXXXXXX common shares of DC Amalco will not be greater than the FMV of such shares at the time of the transfer.

22. Immediately before the transfers of property described in Paragraph 24, the property of DC Amalco will be classified into three types of property for the purposes of the definition of distribution in subsection 55(1), as follows:

(a) cash or near-cash property, consisting of all of the current assets of DC Amalco, including cash which includes, for greater certainty, the one escrow bank account in respect of which DC Amalco is under an unconditional commitment to set aside for the payment of property taxes on XXXXXXXXXX, amounts due from credit cards, temporary investments, accounts receivable, inventory, prepaid expenses and the current portion of any loans receivable;

(b) investment property, consisting of all of the assets of DC Amalco other than cash or near-cash property and business property, any income from which would, for the purposes of the Act, constitute income from property or income from a specified investment business and for greater certainty would include the XXXXXXXXXX properties described in Paragraph 3;

(c) business property, consisting of all of the assets of DC Amalco other than property described in (a) or (b) above, any income from which would be income from a business (other than a specified investment business) and for greater certainty would include the business assets described in Paragraph 3.

For greater certainty, for purposes of this distribution:

(d) tax accounts of DC Amalco, such as the balance of non-capital losses, RDTOH or CDA, if any, and deferred finance charges will not be considered property;

(e) no amount will be considered to be a liability unless it represents a true legal liability which is capable of quantification; and

(f) the amount of any deferred income tax will not be considered a liability for the purposes of the Proposed Transactions.

23. In determining the net FMV of each of the three types of property of DC Amalco immediately before the transfers of property described in Paragraph 24, the liabilities of DC Amalco will be allocated to, and be deducted in the calculation of the net FMV of each type of property of DC Amalco as follows:

(a) current liabilities of DC Amalco, including the current portion of long-term debt, will be allocated to each cash or near-cash property in the proportion that the fair market value of each such property is of the fair market value of all cash or near-cash property. The allocation of current liabilities as described herein will not, however, exceed the total FMV of the cash or near cash property of DC Amalco;

(b) following the allocation of current liabilities to cash or near-cash property of DC Amalco as described in (a), if the amount of DC Amalco's cash or near cash property exceeds its current liabilities, the net fair market value of any accounts receivable and inventory of DC Amalco will be reclassified as business property and excluded from the net fair market value DC Amalco's cash or near-cash property, to the extent that such property will be sold or used in the ordinary course of business to be carried on by Newco or DC Amalco;

(c) liabilities (other than current liabilities) of DC Amalco that relate to a particular property, will be allocated to the particular property and to the type of property to which the particular property belongs to the extent of its fair market value and the liabilities that pertain to a type (but not to a particular property) will be allocated to that type of property, but not in excess of the net fair market value 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 paragraphs (a) and (c) above are made ("excess unallocated liabilities"), such excess unallocated liabilities will be allocated to the cash or near cash property, investment property and business property, if any, of DC Amalco, based on the relative net fair market value of each type of property prior to the allocation of such excess unallocated liabilities.

As a result of the foregoing determinations it is expected that DC Amalco will have only business property and investment property immediately before the proposed distribution.

For the purposes of this Paragraph, and for the purposes of the Proposed Transactions, no amount will be considered to be a liability of DC Amalco unless it represents a true legal liability that is capable of quantification. For greater certainty, although there are outstanding letters of credit issued by DC Amalco, funds have not been drawn against those letters of credit and therefore they are not considered to be liabilities of DC Amalco. In addition, deferred taxes relating to the business property and the investment property to be transferred pursuant to subsection 85(1) in the course of the Proposed Transactions will not be taken into account for the purposes of valuing the transferred property.

24. DC Amalco will transfer to Newco a pro rata portion (i.e. XXXXXXXXXX%) of each type of property owned by it at that time, as determined in accordance with Paragraphs 22 and 23, such that immediately following such transfers, the net FMV of each type of property transferred to Newco will approximate that proportion of the net FMV of all property of DC Amalco of that type determined immediately before the transfer that:

(a) the aggregate fair market value, immediately before the transfer, of all of the shares in the capital stock of DC Amalco owned by Newco at that time

is of

(b) the aggregate fair market value, immediately before the transfer, of all of the issued and outstanding shares in the capital stock of DC Amalco at that time.

For the purposes of this Paragraph, the expression "approximate that proportion" means that the discrepancy of that proportion, if any, will not exceed one percent (1%), determined as a percentage of the net fair market value of each type of property which Newco will receive as compared to what Newco would have received had Newco received its appropriate pro rata share of the net fair market value of that type of property.

As consideration for the transfer of property by DC Amalco to Newco described in this Paragraph, Newco will assume an appropriate amount of liabilities owing by DC Amalco, including such liabilities that specifically relate to property that is transferred to Newco, and Newco will issue to DC Amalco a number of its Class A Shares having an aggregate Redemption Amount and aggregate FMV equal to the amount by which the aggregate FMV of such property received by Newco exceeds the aggregate amount of liabilities of DC Amalco assumed by Newco.

Pursuant to XXXXXXXXXX the BCA, the directors of Newco will resolve to add to the stated capital account for the Class A Shares an amount which would not exceed the fair market value of the property transferred (less any liabilities assumed by Newco) in consideration for such Class A Shares. The paid-up capital in respect of the Class A Shares so issued by Newco will be subject to the provisions of subsection 85(2.1).

In respect of the transfers of property described in this Paragraph, DC Amalco and Newco will jointly elect pursuant to subsection 85(1) in prescribed form and within the time limits prescribed by subsection 85(6) with respect to the transfer of each property that is an eligible property and the agreed amount for the purposes of each election will be equal to:

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

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

For the purposes of the joint election described herein, the reference to the "undepreciated capital cost to the taxpayer of all property of that class immediately before the disposition" found in subparagraph 85(1)(e)(i) will be interpreted to mean that proportion of the undepreciated capital cost to the taxpayer of all the property of that class that the FMV of the assets that are transferred immediately before the disposition is of the FMV of all property of that class immediately before the disposition.

The agreed amount for any particular property included in the subsection 85(1) elections referred to in this Paragraph will not be less than the amount of any liabilities treated as being assumed by Newco as consideration for the transfer of the particular property and will not exceed the FMV of the particular property. The amount of liabilities to be allocated to any property that is not the subject of an election under subsection 85(1) will not exceed the fair market value of such property.

25. On the distribution of property described in Paragraph 24, Newco will receive beneficial ownership of the Trusteed Real Property, legal title of which has been transferred to Bare Trusteeco, as described in Paragraph 18.

Accordingly, immediately prior to the transfer of the beneficial ownership of the Trusteed Real Property by DC Amalco to Newco, Newco will enter into a bare trust agreement with Bare Trusteeco similar to the bare trust agreement described in Paragraph 18, the terms of which will include that Bare Trusteeco will hold legal title (and not beneficial ownership) to the Trusteed Real Property transferred by DC Amalco to Newco as nominee, agent and bare trustee for the sole benefit and account of Newco as principal and beneficial owner.

26. DC Amalco will purchase for cancellation its XXXXXXXXXX common shares of DC Amalco held by Newco for their FMV. DC Amalco will pay the aggregate purchase price for these DC Amalco common shares by issuing to Newco a non-interest bearing demand promissory note (the "DC Amalco Note") having a principal amount and FMV equal to the aggregate FMV of the DC Amalco common shares so purchased for cancellation and Newco will accept the DC Amalco Note as full payment of the purchase price of such shares. At the end of the day on which this purchase for cancellation takes place DC Amalco will cause its first taxation year to end.

27. On the first business day following the end of DC Amalco's first taxation year, Newco will redeem its Class A Shares held by DC Amalco for their aggregate FMV and aggregate Redemption Amount. Newco will pay the aggregate Redemption Amount by issuing to DC Amalco a non-interest bearing demand promissory note (the "Newco Note") having a principal amount and fair market value equal to the aggregate Redemption Amount. DC Amalco will accept the Newco Note issued by Newco as full payment for the aggregate Redemption Amount of the Class A Shares.

28. The principal amount owing by Newco to DC Amalco under the Newco Note will be set-off against the principal amount owing by DC Amalco to Newco under the DC Amalco Note such that each such note will be cancelled in full satisfaction of the obligations under each such note.

ADDITIONAL INFORMATION

29. With the possible exception of the proposed transaction described in Paragraph 17, the Proposed Transactions described above will occur in the order presented unless otherwise indicated, with the exception of filing the applicable election forms, as described in Paragraphs 21 and 24, which will be filed within the applicable due date following the completion of the Proposed Transactions.

30. No property has been acquired by DC or DC Amalco or will become property of DC or DC Amalco and no liabilities have been or will be incurred by DC or DC Amalco in contemplation of and before the Proposed Transactions, except in the ordinary course of business, or as otherwise described above. Neither DC Amalco nor Newco has any specific intentions of disposing of any property owned by it to an unrelated person following the completion of the Proposed Transactions or as part of the series of transactions or events that includes the Proposed Transactions.

31. Except as otherwise described herein, neither Holdco 1 nor Holdco 2 will dispose of any shares of DC, DC Amalco or Newco, nor will any of the shareholders of Holdco 1 or Holdco 2, dispose of any shares of Holdco 1 or Holdco 2, as part of the series of transactions or events that includes the Proposed Transactions.

32. Neither DC, DC Amalco nor Newco is, or will be, a specified financial institution or a corporation described in any of paragraphs (a) to (f) of the definition of "financial intermediary corporation' in subsection 191(1) at any time during the series of transactions or events that includes the Proposed Transactions described herein.

33. None of the shares of DC, DC Amalco or Newco (including the shares to be issued as described in the Proposed Transactions) is or will be at any time during the series of transactions or events that includes the Proposed Transactions described herein:

(a) the subject of any undertaking that is 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 referred to in subsection 112(2.3).

34. Each of DC Amalco and Newco will have the financial capacity to honour, upon presentation for payment, the amount payable under its promissory note as described in Paragraph 26 and 27, as the case may be.

35. XXXXXXXXXX

36. At some time after the completion of the Proposed Transactions, Newco and Bare Trusteeco may amalgamate so that registered title and beneficial title will be held in one amalgamated corporation.

PURPOSE OF THE PROPOSED TRANSACTIONS

37. The shareholders of Holdco 1 and Holdco 2 wish to carry on separate businesses independently. The Proposed Transactions will allow the shareholders of Holdco 2 to have direct and separate control over their pro rata share of DC Amalco's property so that they may deal with the properties independently, taking into account their own business and investment philosophy. After the Proposed Transactions are completed, the separate existence of DC Amalco and Newco will also facilitate independent estate planning for the shareholders of Holdco 1 and Holdco 2.

38. The purpose of the transfer by DC of its legal title to the Trusteed Real Property to Bare Trusteeco described in Paragraph 18 is to allow the subsequent transfer of the beneficial ownership of the Trusteed Real Property described in Paragraph 24 to be exempt from XXXXXXXXXX tax.

RULINGS

Provided that the preceding statements constitute a complete and accurate disclosure of all of the relevant facts, proposed transactions and the purpose of the Proposed Transactions, and provided that the Proposed Transactions are completed in the manner described above, our rulings are as set forth below.

A. Upon the occurrence of the amalgamation of DC and DC Subco to form DC Amalco as described in Paragraph 19:

(a) the provisions of subsection 87(1) will, in part by virtue of subsection 87(1.1), apply; and

(b) provided that the common shares of DC are held by a particular holder thereof as capital property, the provisions of subsection 87(4) (excluding paragraphs 87(4)(c) to (e)) will apply to such holder, such that the holder will be considered to have received shares of DC Amalco in consideration for the disposition by such holder of the common shares of DC and will be deemed to have disposed of such common shares for proceeds equal to, and to have acquired the DC Amalco shares at a cost equal to, the ACB to the particular holder of such common shares immediately before the amalgamation.

B. As a result of the increase in stated capital of the common shares by DC as described in Paragraph 15, DC will be deemed to have paid to each holder of the common shares in DC and each such holder will be will be deemed to have received a dividend pursuant to subsection 84(1) in an aggregate amount equal to the paid-up capital increase of the common shares owned by such holder.

C. Provided that DC elects pursuant to subsection 83(2) in respect of the full amount of the dividend described in Ruling B, in prescribed form and manner, such dividend will be deemed to be a capital dividend.

D. Pursuant to paragraph 53(1)(b), the ACB of a shareholder's common shares in DC will be increased by the amount of that shareholder's deemed dividend described in Ruling B.

E. Subject to the application of subsection 69(11), provided the appropriate joint elections are filed in the prescribed form and manner within the time limits 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 therefore, the provisions of subsection 85(1) will apply to:

(a) the transfer of the common shares of DC Amalco by Holdco 2 to Newco as described in Paragraph 21; and

(b) the transfer of each eligible property by DC Amalco to Newco as described in Paragraph 24;

such that the agreed amount in respect of each such transfer shall be deemed to be the transferor's proceeds of disposition and the transferee's cost amount thereof pursuant to paragraph 85(1)(a) and that paragraph 85(1)(e.2) will not apply to the transfers referred to herein.

F. The transfer by DC of its legal title to the Trusteed Real Property to Bare Trusteeco described in Paragraph 18 will not constitute a disposition for the purposes of the Act provided Bare Trusteeco can reasonably be considered to act as agent for DC (or DC Amalco, as the case may be) and ultimately Newco as described in Paragraph 25, with respect to all dealings with such Trusteed Real Property.

G. As a result of the redemption by Newco of the Class A Shares described in Paragraph 27 and the purchase for cancellation by DC Amalco of the XXXXXXXXXX DC Amalco Common Shares described in Paragraph 26, by virtue of subsection 84(3);

(a) Newco will be deemed to have paid, and DC Amalco will be deemed to have received, a taxable dividend equal to the amount by which the amount paid by Newco in respect of its redemption of the Class A Shares owned by DC Amalco exceeds the paid-up capital of such class of shares immediately before the redemption; and

(b) DC Amalco will be deemed to have paid, and Newco will be deemed to have received, a taxable dividend equal to the amount by which the amount paid by DC Amalco in respect of the repurchase of the XXXXXXXXXX common shares of DC Amalco owned by Newco exceeds the paid-up capital attributable to such common shares immediately before the purchase for cancellation; and

(c) The taxable dividends described in described in (a) and (b) above:

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

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

(iii) will be excluded in determining the POD to the recipient of the shares so redeemed, purchased or cancelled pursuant to paragraph (j) of the definition of "proceeds of disposition" in section 54;

(iv) 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;

(v) will not be subject to tax under Part IV except to the extent that such payer corporation is entitled to a dividend refund for its taxation year in which it paid such dividend; and

(vi) will not be subject to tax under Part IV.1 or VI.1.

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

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

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

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

I. For the purposes of the provisions of the Act described in subsection 256(7):

(i) by virtue of subparagraph 256(7)(a)(i) control of DC Amalco will not be considered to be acquired solely because of the acquisition of the XXXXXXXXXX common shares of DC Amalco by Newco described in Paragraph 21; and

(ii) except for the purposes of section 55, by virtue of subparagraph 256(7)(a)(ii) control of DC Amalco will not be considered to be acquired solely because of the purchase for cancellation of the XXXXXXXXXX DC common shares held by Newco described in Paragraph 26.

J. The set-off and cancellation of the principal amounts owing by Newco on the Newco Note with the principal amount owing by DC Amalco to Newco on the DC Amalco Note as described in Paragraph 28 will not result in a "forgiven amount" within the meaning of either subsection 80(1) or section 80.01. In addition, neither DC Amalco nor Newco will otherwise realize any gain or loss as a result of such set-off and cancellation.

K. The provisions of subsections 15(1), 56(2), 69(1), 69(4) and 246(1) will not apply to any of the Proposed Transactions, in and by themselves.

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

The above rulings are subject to the limitations and qualifications set out in Information Circular 70-6R5 dated May 17, 2002 and are binding on CRA provided that the Proposed Transactions are completed by XXXXXXXXXX. The above rulings are based on the law as it presently reads and do not take into account any proposed amendments to the Act and the Regulations which, if enacted into law, could have an effect on the rulings provided herein.

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 paid-up capital of any share or the adjusted cost base or fair market value of any property referred to herein; or

(b) 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, including those referred to in Paragraph 21, 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 include other transactions or events that are not described in this letter.

Yours truly,

XXXXXXXXXX
Section Manager
for Division Director
Reorganizations and Resources Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch