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 proposed butterfly reorganization meets the requirements of paragraph 55(3)(b).
Position: Yes
Reasons: Meets requirements of the law.
XXXXXXXXXX
2010-036468
XXXXXXXXXX
XXXXXXXXXX , 2010
Dear XXXXXXXXXX :
Re: Advance Income Tax Ruling Request
XXXXXXXXXX (the "Taxpayers")
We are writing in response to your letter of XXXXXXXXXX wherein you requested an advance income tax ruling on behalf of the taxpayers referred to above. The documents submitted as part of your request are part of this document only to the extent described herein.
We understand that to the best of your knowledge and that of the taxpayers on whose behalf this ruling is being requested, none of the issues involved in this ruling request is:
(a) in an earlier return of any of the taxpayers or a related person;
(b) being considered by a tax services office or taxation centre in connection with a previously filed tax return of any of the taxpayers or a related person;
(c) under objection by any of the taxpayers or a related person;
(d) the subject of a ruling previously issued by the Income Tax Rulings Directorate; or
(e) except as described herein, before the Courts.
Unless otherwise indicated, all statutory references are to the Income Tax Act R.S.C. 1985, c. 1 (5th Supp.), as amended, (the "Act") and all terms and conditions used herein that are defined in the Act have the meaning given in such definition unless otherwise indicated. All references to monetary amounts are in Canadian dollars.
Our understanding of the facts, proposed transactions and the purpose of the proposed transactions is as follows:
DEFINITIONS
In the Ruling the following terms have the meanings specified:
"ACB" means "adjusted cost base" as that expression is defined in section 54 and subsection 248(1).
"agreed amount" has the meaning assigned by subsection 85(1).
"CCPC" means "Canadian-Controlled Private Corporation" as that expression is defined in subsection 125(7).
"CDA" means "capital dividend account" as defined by subsection 89(1).
"Child A1" means XXXXXXXXXX , son of Sibling A and Spouse A.
"Child A2" means XXXXXXXXXX , daughter of Sibling A and Spouse A.
"Child B1" means XXXXXXXXXX , daughter of Sibling B and Spouse B.
"Child B2" means XXXXXXXXXX , son of Sibling B and Spouse B.
"Child B3" means XXXXXXXXXX , son of Sibling B and Spouse B.
"CRA" means the Canada Revenue Agency.
"capital dividend" means a dividend in respect of which an election was made pursuant to subsection 83(2).
"capital property" has the meaning assigned by section 54.
"connected" has the meaning assigned by subsection 186(4).
"cost amount" has the meaning assigned by subsection 248(1).
"DC1" means XXXXXXXXXX , a corporation incorporated under the provisions of the XXXXXXXXXX on XXXXXXXXXX . The principal business address of DC1 is: XXXXXXXXXX . Its taxation year end is XXXXXXXXXX . DC1 owns commercial rental properties and holds investments in various real-estate co-tenancies and other corporations. It earns rental, interest, and dividend income from its various rental properties, co-tenancies, and other investments. DC1 does not have more than five full-time employees and, for purposes of the Act, reports its income from such property as income from a specified investment business. The assets of DC1, which include DC1's proportionate share of assets and liabilities of co-tenancies in which DC1 has an interest, include: (i) rental properties, which are capital properties to DC1, comprised of buildings and the land on which they are situated, located throughout the province of XXXXXXXXXX ; (ii) accounts receivable and prepaid expenses relating to the operations of the rental properties; (iii) mortgage receivable from a company over which DC1 has significant influence; (iv) investments in other corporations over which DC1 has significant influence; and, (v) cash deposits. The liabilities of DC1 include: (i) accounts payable and accrued liabilities relating to the operation of the rental properties; and, (ii) shareholder loans.
"DC2" means the entity formed upon the amalgamation of FC1 and FC2, as described in Paragraph 8.
"depreciable property" has the meaning assigned by subsection 248(1).
"disposition" has the meaning assigned by subsection 248(1).
"distribution" has the meaning assigned by subsection 55(1).
"dividend refund" has the meaning assigned by subsection 129(1).
"eligible property" has the meaning assigned by subsection 85(1.1).
"fair market value" means the highest price available in an open and unrestricted market between informed prudent parties acting at arm's length and without compulsion to act, expressed in terms of cash.
"FamilyCo" means XXXXXXXXXX . FamilyCo was incorporated under the XXXXXXXXXX on XXXXXXXXXX . The principal business address of FamilyCo is XXXXXXXXXX . Its taxation year end is XXXXXXXXXX .
"FC1" means XXXXXXXXXX . FC1 was incorporated under the XXXXXXXXXX on XXXXXXXXXX . The principal business address of FC1 is XXXXXXXXXX . Its taxation year end is XXXXXXXXXX .
"FC2" means XXXXXXXXXX . FC2 was incorporated under the XXXXXXXXXX
on XXXXXXXXXX . The principal business address of FC2 is XXXXXXXXXX . Its taxation year end is XXXXXXXXXX .
"Mr. A" means XXXXXXXXXX .
XXXXXXXXXX
"Paragraph" means a numbered paragraph in this letter.
"private corporation" has the meaning assigned by subsection 89(1).
"proceeds of disposition" has the meaning assigned by section 54.
"Proposed Transactions" means the transactions described in the Proposed Transactions section of this letter.
"PUC" means "paid-up capital" as defined by subsection 89(1).
"RDTOH" means "refundable dividend tax on hand" as defined by subsection 129(3).
"Regulations" means the Income Tax Regulations promulgated under the Act.
"related persons" has the meaning assigned by section 251.
"restricted financial institution" has the meaning assigned by subsection 248(1).
"series of transactions or events" includes the transactions or events referred to in subsection 248(10).
"Sibling A" means XXXXXXXXXX , a child of Mr. A.
"Sibling B" means XXXXXXXXXX , a child of Mr. A.
"significant influence" has the meaning assigned by section 3050 of the CICA Handbook.
"specified financial institution" has the meaning assigned by subsection 248(1).
"specified investment business" has the meaning assigned by subsection 125(7).
"Spouse A" means XXXXXXXXXX , the spouse of Sibling A.
"Spouse B" means XXXXXXXXXX , the spouse of Sibling B.
"Sub-Transferee A" means the corporation to be incorporated by Transferee A, as described in Paragraph 9.
"Sub-Transferee A Note 1" means the non-interest-bearing demand promissory note having a principal amount and fair market value equal to the aggregate redemption amount of the Sub-Transferee A Class A preferred shares held by DC1 and redeemed as described in Paragraph 24.
"Sub-Transferee A Note 2" means the non-interest-bearing demand promissory note having a principal amount and fair market value equal to the aggregate redemption amount of the Sub-Transferee A Class B preferred shares held by DC2 and redeemed as described in Paragraph 26.
"taxable dividend" has the meaning assigned by subsection 89(1).
"taxable Canadian corporation" has the meaning assigned by subsection 89(1).
"Transferee A" means XXXXXXXXXX . Transferee A was incorporated under the XXXXXXXXXX on XXXXXXXXXX . The principal business address of Transferee A is: XXXXXXXXXX . Its taxation year end is XXXXXXXXXX .
"Transferee A Cancellation Note 1" means the non-interest-bearing demand promissory note having a principal amount and fair market value equal to the aggregate purchase price of the DC1 common shares held by Transferee A and purchased for cancellation as described in Paragraph 29.
"Transferee A Cancellation Note 2" means a non-interest-bearing demand promissory note having a principal amount and fair market value equal to the aggregate purchase price of the DC2 common shares and the DC2 Class B Special shares held by Transferee A and respectively purchased for cancellation and redeemed as described in
Paragraph 30.
"Transferee B" means a corporation to be incorporated by Sibling B under the provisions of the XXXXXXXXXX , as described in Paragraph 11.
"Transferee B Cancellation Note 1" means the non-interest-bearing demand promissory note having a principal amount and fair market value equal to the aggregate purchase price of the DC1 common shares held by Transferee B and purchased as described in Paragraph 29.
"Transferee B Cancellation Note 2" means the non-interest-bearing demand promissory note having a principal amount and fair market value equal to the aggregate purchase
price of DC2 common shares and the DC2 Class B Special shares held by Transferee B and respectively purchased for cancellation and redeemed as described in Paragraph 30.
"Transferee B Note 1" means the non-interest-bearing demand promissory note having a principal amount and fair market value equal to the aggregate redemption amount of the Transferee B Class A preferred shares held by DC1 and redeemed as described in Paragraph 25.
"Transferee B Note 2" means the non-interest-bearing demand promissory note having a principal amount and fair market value equal to the aggregate redemption amount of the Transferee B Class B preferred shares held by DC2 and redeemed as described in Paragraph 27.
"Trust B" means XXXXXXXXXX .
FACTS
1. DC1 is a CCPC and a taxable Canadian corporation.
The authorized share capital of DC1 consists of:
- an unlimited number of non-voting Class A Special shares, bearing a maximum non-cumulative XXXXXXXXXX % dividend, that are redeemable and retractable at a redemption amount to be fixed at time of issue;
- XXXXXXXXXX voting Class B Special shares bearing a XXXXXXXXX% non-cumulative dividend, that are redeemable for an amount equal to $XXXXXXXXXX per share;
- XXXXXXXXXX non-voting Class C Special shares bearing a maximum XXXXXXXXXX % non-cumulative dividend, that are redeemable for an amount equal to $XXXXXXXXXX per share; and,
- an unlimited number of voting common shares without par value.
The following table outlines the issued and outstanding shares:
Shareholder # Shares ACB PUC
Transferee A XXXXX common shares $ XXXXX $ XXXXX
Sibling B XXXXX common shares $ XXXXX $ XXXXX
The DC1 common shares are held by each of the above-mentioned shareholders as capital property and no shares of DC1 have been acquired by any person in
contemplation of the Proposed Transactions, except as provided for in
Paragraph 13.
DC1 is expected to have a nominal RDTOH balance and a CDA balance of nil immediately prior to the commencement of the Proposed Transactions.
2. FamilyCo is a CCPC and a taxable Canadian corporation.
FamilyCo has investments in various wholly-owned subsidiary corporations. It earns dividend income from its various investments. FamilyCo reports its income from such property as income from a specified investment business.
The authorized share capital of FamilyCo consists of:
- an unlimited number of Class A common shares; and,
- an unlimited number of Class B common shares.
There are, prior to the implementation of the Proposed Transactions, XXXXXXXXXX , issued and outstanding Class A shares, owned as follows:
Shareholder # Shares % Ownership
Sibling A XXXXXXXXX XXXXXXXXX %
Spouse A XXXXXXXXX XXXXXXXXX %
Child A1 XXXXXXXXX XXXXXXXXX %
Child A2 XXXXXXXXX XXXXXXXXX %
Sibling B XXXXXXXXX XXXXXXXXX %
Spouse B XXXXXXXXX XXXXXXXXX %
Trust B XXXXXXXXX XXXXXXXXX %
Transferee A XXXXXXXXX XXXXXXXXX %
DC1 XXXXXXXXX XXXXXXXXX %
FC1 XXXXXXXXX XXXXXXXXX %
FC2 XXXXXXXXX XXXXXXXXX %
Various Arm's Length Third Parties XXXXXXXXX XXXXXXXXX %
The FamilyCo common shares are held by each of the above-mentioned shareholders as capital property.
3. FC1 is a CCPC and a taxable Canadian corporation.
FC1 holds investments in various corporations. It earns interest and dividend income from its various investments. FC1 reports its income from such property as income from a specified investment business. The assets of FC1 include: (i) investments in other corporations over which DC1 has significant influence; (ii)
note receivable from FC2; and, (iii) cash deposits. The liabilities of FC1 include shareholder loans.
Subject to Paragraph 7, FC1 is expected to have a nominal RDTOH balance and a CDA balance of nil immediately prior to the commencement of the Proposed Transactions.
The authorized share capital of FC1 consists of:
- an unlimited number of Class A Special shares;
- XXXXXXXXXX voting Class B Special shares bearing a XXXXXXXXXX% non-cumulative dividend, that are redeemable for an amount equal to $XXXXXXXXXX per share; and,
- an unlimited number of voting common shares.
The following table outlines the issued and outstanding shares:
Shareholder # Shares ACB PUC
Sibling A XXXXX common shares $ XXXXX $ XXXXX
XXXXX Class B Special shares $ XXXXX $ XXXXX
Sibling B XXXXX common shares $ XXXXX $ XXXXX
XXXXX Class B Special shares $ XXXXX $ XXXXX
The FC1 Class B Special shares and common shares are held by each of the above-mentioned shareholders as capital property. Subject to Paragraphs 8, 12 and 13, no shares of FC1 or DC2 have been acquired by any person in contemplation of the Proposed Transactions.
4. FC2 is a CCPC and a taxable Canadian corporation.
FC2 owns commercial rental properties and holds investments in various real-estate co-tenancies and other corporations. FC2 earns rental, interest, and dividend income from its various rental properties, co-tenancies, and other investments. FC2 does not have more than five full-time employees and, for purposes of the Act, reports its income from such property as income from a specified investment business. The assets of FC2, which include FC2's proportionate share of assets and liabilities of co-tenancies in which FC2 has an interest, include: (i) rental properties, which are capital properties to FC2, comprised of buildings and the land on which they are situated, located throughout the province of XXXXXXXXXX and a condominium in the state of XXXXXXXXXX ; (ii) accounts receivable, prepaid expenses, and office equipment relating to the rental properties operations; (iii) mortgage receivable from a company over which FC2 has significant influence; (iv) investments in other corporations over which FC2 has significant influence; and, (v) cash deposits. The liabilities of FC2 include: (i) accounts payable, accrued liabilities, and prepaid rent relating to the rental properties operations; and, (ii) shareholder loans and amounts payable to companies that have significant influence over FC2.
The authorized share capital of FC2 consists of:
- an unlimited number of non-voting Class A Special shares, that are redeemable and retractable;
- XXXXXXXXXX voting Class B special shares, bearing a XXXXXXXXXX% non-cumulative dividend, that are redeemable for an amount equal to $XXXXXXXXXX per share;
- XXXXXXXXXX non-voting Class C Special shares, bearing a XXXXXXXXXX % non-cumulative dividend, that are redeemable for an amount equal to $XXXXXXXXXX per share; and,
- XXXXXXXXXX voting common shares.
The following table outlines the issued and outstanding shares:
Shareholder # Shares ACB PUC
Sibling A XXXX Class B Special shares $ XXXX $ XXXX
Sibling B XXXX Class B Special shares $ XXXX $ XXXX
FC1 XXXX Common shares $ XXXX $ XXXX
The FC2 Class B Special shares and common shares are held by each of the above-mentioned shareholders as capital property. Subject to Paragraphs 8, 12 and 13, no shares of FC2 or DC2 have been acquired by any person in contemplation of the Proposed Transactions. Subject to Paragraph 7, FC2 is expected to have a RDTOH balance of approximately $XXXXXXXXXX and a CDA balance of approximately $XXXXXXXXXX immediately prior to the commencement of the Proposed Transactions.
5. Transferee A is a CCPC and a taxable Canadian corporation.
The authorized share capital of Transferee A consists of:
- XXXXXXXXXX non-voting preference shares, bearing a XXXXXXXXX% non-cumulative dividend, that are for an amount equal to $XXXXXXXXXX per share; and,
- XXXXXXXXXX voting common shares.
The following table outlines the issued and outstanding shares:
Shareholder # Shares ACB PUC
Sibling A XXXXX Common shares $ XXXXX $ XXXXX
Spouse A XXXXX Common shares $ XXXXX $ XXXXX
The Transferee A common shares are held by each of the above-mentioned shareholders as capital property. Subject to Paragraph 12, no shares of Transferee A have been acquired by any person in contemplation of the Proposed Transactions. Sibling A acquired his XXXXXXXXXX Common shares on XXXXXXXXXX . Spouse A acquired XXXXXXXXXX Common shares on XXXXXXXXXX , and acquired XXXXXXXXXX Common share on XXXXXXXXXX . Transferee A is expected to have a RDTOH balance of approximately $XXXXXXXXXX and a CDA balance of approximately $XXXXXXXXXX prior to the commencement of the Proposed Transactions.
6. Trust B is an inter-vivos trust settled on XXXXXXXXXX by Mr. A. The trustees of Trust B are Mr. A and Sibling B. The beneficiaries of Trust B are the issue of Sibling B and Spouse B: Child B1, Child B2, and Child B3.
6.1. Each of: Child A1, Child A2, Child B1, Child B2, Child B3, Mr. A, Sibling A, Sibling B, Spouse A, and Spouse B, is an individual resident in Canada for purposes of the Act.
PROPOSED TRANSACTIONS
FC2 and FC1 dividend payments and DC2 created from the amalgamation of FC2 and FC1
7. On XXXXXXXXXX , FC2 declared and paid in cash to FC1 a capital dividend equal to the approximate balance in its CDA at that time and a taxable dividend equal to XXXXXXXXXX times the approximate balance in its RDTOH account at that time. FC2 elected, in prescribed manner and prescribed form, within the time determined under subsection 83(2), for the provisions of subsection 83(2) to apply to the capital dividend paid.
On XXXXXXXXXX , FC1 declared and paid in cash to each of Sibling A and Sibling B, according to their proportionate shareholdings, a capital dividend equal to the approximate balance in its CDA at that time and a taxable dividend equal to XXXXXXXXXX times the approximate balance in its RDTOH account at that time. FC1 elected, in prescribed manner and prescribed form, within the time determined under subsection 83(2), for the provisions of subsection 83(2) to apply to the capital dividend paid.
8. On or about XXXXXXXXXX , FC1 and FC2 filed Articles of Amalgamation under the XXXXXXXXXX and were amalgamated to form DC2. By virtue of the amalgamation, all of the property and liabilities of FC1 and FC2 became property and liabilities of DC2. Sibling A and Sibling B each received XXXXXXXXXX common shares and XXXXXXXXXX Class B Special shares of DC2 in exchange for their shares of FC1 and FC2. The FC2 shares held by FC1 were cancelled.
Amendment to the Articles of Transferee A
8.1. The Articles of Transferee A will be amended to: cancel the XXXXXXXXXX non-voting preference shares; to provide for the issuance of an unlimited number of voting common shares; and to create and to provide for the issuance of an unlimited number of Class A special shares. The Class A special shares will be voting, bear a non-cumulative maximum dividend of up to XXXXXXXXXX %, and be redeemable and retractable at an amount equal to the aggregate fair market value of the consideration paid for the issuance thereof divided by the number of shares so issued.
8.2 Transferee A will issue to the holders of its Common shares an additional XXXXXXXXXX Common shares for each Common share held. For greater certainty, after the issuance of the additional Common shares described in this Paragraph Sibling A will hold XXXXXXXXXX Common shares and Spouse A will hold XXXXXXXXXX Common shares in Transferee A.
Establishment of Sub-Transferee A and Transferee B
9. Transferee A will incorporate Sub-Transferee A under the provisions of the XXXXXXXXXX . Sub-Transferee A will be a taxable Canadian corporation.
The Articles of Incorporation of Sub-Transferee A will provide that the authorized capital will include an unlimited number of the following separate classes of shares:
(a) fully participating common shares;
(b) Class A non-voting, redeemable, retractable preferred shares ("Class A Preferred shares"); and
(c) Class B non-voting, redeemable, retractable preferred shares ("Class B Preferred shares").
The Class A Preferred shares and the Class B Preferred shares of Sub-Transferee A will have the following attributes:
(a) each share will be redeemable, subject to applicable law, at any time at the option of Sub-Transferee A at a redemption amount equal to the aggregate fair market value of the consideration paid to Sub-Transferee A on issuance thereof divided by the number of shares issued as consideration therefor (plus any declared but unpaid dividends);
(b) each share will be retractable, subject to applicable law, at any time at the option of the holder at a retraction amount equal to the redemption amount described above;
(c) the holder of each share will be 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 Sub-Transferee A;
(d) there will be a provision restricting the payment of dividends on other classes of shares so that no such dividends may be paid on any other class of shares of Sub-Transferee A if the resulting realizable value of the net assets of Sub-Transferee A after payment of the dividends would be less than the aggregate of the redemption amounts of all of the Class B Preferred shares of Sub-Transferee A then outstanding;
(e) the holder of each share will be entitled, upon the liquidation, dissolution or winding-up of Sub-Transferee A, to a payment in priority to all other classes of common shares of Sub-Transferee A and on a pari passu basis with other classes of preferred shares of Sub-Transferee A of an amount equal to the redemption amount therefor to the extent of the amount or value of property available under applicable law for payment to shareholders upon dissolution, but will be entitled to no more than the amount of that payment; and
(f) the holder of each share will not be entitled to vote at meetings of the shareholders of Sub-Transferee A, other than as provided under the XXXXXXXXXX .
10. One or more common shares of Sub-Transferee A will be issued to Transferee A on incorporation for nominal consideration. On incorporation, Sub-Transferee A will not have any assets, or have incurred any liabilities, other than the nominal consideration received for issuing its common shares.
11. Sibling B will incorporate Transferee B. Transferee B will be a taxable Canadian corporation.
The Articles of Incorporation of Transferee B will provide that the authorized capital will include an unlimited number of the following separate classes of shares:
(a) fully participating common shares;
(b) Class A non-voting, redeemable, retractable preferred shares ("Class A Preferred shares");
(c) Class B non-voting, redeemable, retractable preferred shares ("Class B Preferred shares"); and
(d) Class C voting, redeemable, retractable preferred shares ("Class C Preferred shares").
The Class A Preferred shares and the Class B Preferred shares of Transferee B will have the following attributes:
(a) each share will be redeemable, subject to applicable law, at any time at the option of Transferee B at a redemption amount equal to the aggregate fair market value of the consideration paid to Transferee B on issuance thereof divided by the number of shares issued as consideration therefor (plus any declared but unpaid dividends);
(b) each share will be retractable, subject to applicable law, at any time at the option of the holder at a retraction amount equal to the redemption amount described above;
(c) the holder of each share will be 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 Transferee B;
(d) there will be a provision restricting the payment of dividends on other classes of shares so that no such dividends may be paid on any other class of shares of Transferee B if the resulting realizable value of the net assets of Transferee B after payment of the dividends would be less than the aggregate of the redemption amounts of all of the Class B Preferred shares of Transferee B then outstanding;
(e) the holder of each share will be entitled, upon the liquidation, dissolution or winding-up of Transferee B, to a payment in priority to all other classes of common shares of Transferee B and on a pari passu basis with other classes of preferred shares of Transferee B of an amount equal to the redemption amount therefor to the extent of the amount or value of property available under applicable law for payment to shareholders upon dissolution, but will be entitled to no more than the amount of that payment; and
(f) the holder of each share will not be entitled to vote at meetings of the shareholders of Transferee B, other than as provided under the XXXXXXXXXX .
One or more common shares of Transferee B will be issued to Sibling B on incorporation for nominal consideration. On incorporation, Transferee B will not have any assets, or have incurred any liabilities, other than the nominal consideration received for issuing its common shares.
11.1. The Class C Preferred shares of Transferee B will be entitled to one (1) vote per share, be entitled to the payment of a non-cumulative dividend as and when declared by the directors of Transferee B, and be redeemable and retractable at an amount equal to the aggregate fair market value of the consideration paid for the issuance thereof dividend by the number of shares so issued.
Transfers of FamilyCo, DC1 and DC2 to Transferee A and Transferee B
12. Each of Sibling A and Spouse A will transfer his or her respective interest in the FamilyCo Class A common shares to Transferee A, and Sibling A will transfer his XXXXXXXXXX common shares of DC2, and XXXXXXXXXX Class B Special shares of DC2 to Transferee A, and, as consideration therefore, Transferee A will issue a number of common shares to each particular transferor having an aggregate fair market value equal to the aggregate fair market value of the particular transferor's shares transferred to Transferee A.
Each of Sibling A and Spouse A will jointly elect, along with Transferee A, in prescribed form and within the time determined under subsection 85(6), for the
provisions of subsection 85(1) to apply to each transfer of shares described above.
Specifically, the agreed amount in each joint election will not be less than the least of the amounts specified in subparagraphs 85(1)(c.1)(i) and (ii) and in each case, the agreed amount will not exceed the fair market value of the particular shares for which such common shares of Transferee A were issued.
For purposes of the Act, the increase to the PUC of the common shares of Transferee A that are issued as consideration for the particular shares transferred to Transferee A will not exceed the amount of PUC attributable to the particular shares for which such Transferee A common shares were issued. For greater certainty, the increase to the PUC of the common shares of Transferee A will not exceed the maximum amount that could be added to the PUC of such shares having regard to paragraph 84.1(1)(a).
13. Each of Sibling B and Spouse B will transfer their respective interest in the FamilyCo Class A common shares to Transferee B, and Sibling B will transfer her XXXXXXXXXX common shares of DC1, XXXXXXXXXX common shares of DC2, and XXXXXXXXXX Class B Special shares of DC2 to Transferee B, and, as consideration therefor, Transferee B will issue a number of common shares to each particular transferor having an aggregate fair market value equal to the aggregate fair market value of the particular transferor's shares transferred to Transferee B.
Each of Sibling B and Spouse B will jointly elect, along with Transferee B, in prescribed form and within the time determined under subsection 85(6), for the provisions of subsection 85(1) to apply to each transfer of shares described above.
Specifically, the agreed amount in each joint election will not be less than the
least of the amounts specified in subparagraphs 85(1)(c.1)(i) and (ii) and in each case, the agreed amount will not exceed the fair market value of the particular shares for which such common shares of Transferee B were issued.
For purposes of the Act, the increase to the PUC of the common shares of Transferee B that are issued as consideration for the particular shares transferred to Transferee B will not exceed the amount of PUC attributable to the particular shares for which such Transferee B common shares were issued. For greater certainty, the increase to the PUC of the common shares of Transferee B will not exceed the maximum amount that could be added to the PUC of such shares having regard to paragraph 84.1(1)(a).
Transfer of the DC1 Transferred Assets
14. Immediately prior to the transfers of property described in Paragraph 15.3 below, the property of DC1, including the shares of any corporation owned by DC1 and over which DC1 has the ability to exercise significant influence, will be classified
on a consolidated basis into three types of property for purposes of the definition of "distribution" in subsection 55(1) and paragraph 55(3)(b) as follows:
(a) Cash or Near Cash Property, comprising all of the current assets, including any cash, term deposits, accounts receivable, rights arising from prepaid expenses, and any marketable securities other than marketable securities that are held as portfolio investments;
(b) Business Property, comprising all of the assets, other than cash or near cash property, any income from which would, for purposes of the Act, be income from a business (other than a specified investment business) carried on; and,
(c) Investment Property, comprising all of the assets, 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.
15. For purposes of calculating the fair market value of each type of property, as described in Paragraph 14 above, the fair market value of the shares of a particular corporation over which DC1 has the ability to exercise significant influence, and of any indebtedness receivable by DC1 from such a corporation, will be allocated among the XXXXXXXXXX types of property of DC by multiplying the fair market value of the shares and indebtedness of the particular corporation by the proportion that the fair market value of each type of property owned by the particular corporation (as determined according to Paragraph 14 above) is of the total fair market value of all the property owned by the particular corporation.
15.1. For purposes of determining the fair market value of the property of DC1, the following principles will also apply:
(a) any tax accounts of DC1 or any entity over which it has significant influence, including the balance of its GRIP, RDTOH, CDA and any losses available for carry-forward, if any, will not be considered property of DC1;
(b) no amount will be considered to be a liability unless it represents a true legal liability which is capable of quantification; and
(c) the amount of any deferred income tax will not be considered a liability because such amount does not represent a legal obligation of DC1.
15.2. The transfers of property described in Paragraph 15.3 below, will be made on a gross fair market value basis. In determining the gross fair market value of each type of property of DC1 immediately before the transfers, no liabilities of DC1 will
be allocated to, and deducted in, the calculation of the gross fair market value of each type of property of DC1.
15.3. Immediately following the determination of the gross fair market value of each type of property described in Paragraph 14 above, DC1 will transfer XXXXXXXXXX % of each type of property owned by it at that time to each of Sub-Transferee A and Transferee B, as the case may be, such that immediately following such transfers, the gross fair market value of each type of property so transferred by DC1 to each of Sub-Transferee A and Transferee B, as the case may be, determined in accordance with the guidelines described in Paragraphs 14. 15, 15.1, and 15.2 above, will approximate that proportion of the gross fair market value of all property of DC1 of that type determined immediately before such transfer that:
(a) the aggregate fair market value, immediately before the transfers, of all of the shares of DC1 owned by either of Sub-Transferee A or Transferee B, as the case may be, at that time
is of
(b) the aggregate fair market value, immediately before the transfers, of all of the issued and outstanding shares of DC1 at that time.
For the purposes of this Paragraph, the expression "approximate that proportion" means the discrepancy from that proportion, if any, would not exceed one percent (1%) determined as a percentage of the fair market value of the property that each of Sub-Transferee A and Transferee B, as the case may be, has received compared to what it would have received had it received its appropriate pro rata share of DC1's property.
16. As consideration for the transfer of the DC1 assets each of Sub-Transferee A and Transferee B will:
(a) assume a portion of the aggregate liabilities of DC1 immediately before the transfers in the proportion determined by Paragraph 15.3 above; and
(b) issue to DC1 a number of Class A preferred shares having an aggregate redemption amount and fair market value equal to the fair market value of the DC1 property received less the amount of the liabilities of DC1 assumed as described in (a).
17. DC1 may make payments to each of Sub-Transferee A and Transferee B (by transferring property to Sub-Transferee A or Transferee B) in consideration for Sub-Transferee A and Transferee B assuming undertakings of DC1 to which paragraph 12(1)(a) applies. Any such payments made by DC1 to Sub-Transferee A and Transferee B will be considered to be part of the distribution, as described in Paragraph 15.3, made by DC1 to each of Sub-Transferee A and Transferee B. For the purposes of paragraph 20(24)(b), Sub-Transferee A and Transferee B will receive the amounts in the course of business and will include the amounts in income under paragraph 12(1)(a). DC1 and each of Sub-Transferee A and Transferee B will elect, jointly and in prescribed form and within the time referred to in subsection 20(25), to have the rules in subsection 20(24) apply.
18. In respect of the transfers of the DC1 assets described in Paragraph 15.3, DC1 and Sub-Transferee A and Transferee B, as the case may be, will jointly elect, in prescribed form and within the time determined under subsection 85(6), for the provisions of subsection 85(1) to apply to the transfer of each eligible property transferred by DC1. The agreed amount in respect of each eligible property so transferred will not be greater than the fair market value of such property nor will it be less than the lesser of the fair market value and the cost amount to DC1 of such property. For greater certainty, the agreed amount in respect of each such transferred property will be within the limits prescribed as follows:
(a) the amounts specified in subparagraphs 85(1)(d)(i), (ii) and (iii) in the case of any eligible capital property;
(b) the amounts specified in subparagraphs 85(1)(e)(i), (ii) and (iii) in the case of depreciable property of a prescribed class; and
(c) the amounts specified in subparagraphs 85(1)(c.1)(i) and (ii) in the case of capital property (other than depreciable property of a prescribed class) and inventory.
For the purposes of the joint elections under subsection 85(1) described in this Paragraph, the reference to "the undepreciated capital cost to the taxpayer of all the property of that class immediately before the disposition" in subparagraph 85(1)(e)(i) will be read to mean the proportion of the undepreciated capital cost to DC1 of all the property of that class that the capital cost of the property immediately before the disposition is of the aggregate capital costs of all property of that class immediately before the disposition.
For the purposes of the Act, the increase to the PUC of the Sub-Transferee A and Transferee B Class A preferred shares issued to DC1 by Sub-Transferee A and Transferee B as consideration for the property transferred to it as described in Paragraph 15.3 will not exceed the amount by which the aggregate of the agreed amounts under subsection 85(1) in respect of such transferred property to Sub-Transferee A or Transferee B exceeds the aggregate amount of liabilities of DC1 assumed by Sub-Transferee A or Transferee B. For greater certainty, the increase to the PUC of the Class A preferred shares issued to DC1 by Sub-Transferee A and Transferee B as consideration for the property transferred to it as described in Paragraph 15.3 will not exceed the maximum amount that could be added to the PUC of such shares having regard to subsection 85(2.1).
Transfer of the DC2 Transferred Assets
19. Immediately prior to the transfers of property described in Paragraph 20.3, the property of DC2, including the shares of any corporation owned by DC2 and over which DC2 has the ability to exercise significant influence, will be classified on a consolidated basis into three types of property for purposes of the definition of "distribution" in subsection 55(1) and paragraph 55(3)(b) as follows:
(a) Cash or Near Cash Property, comprising all of the current assets, including any cash, term deposits, accounts receivable, rights arising from prepaid expenses, and any marketable securities other than marketable securities that are held as portfolio investments;
(b) Business Property, comprising all of the assets, other than cash or near cash property, any income from which would, for purposes of the Act, be income from a business (other than a specified investment business) carried on; and,
(c) Investment Property, comprising all of the assets, other than cash or near cash property, any income from which would, for purposes of the Act, be income from property or a specified investment business.
20. For purposes of calculating the fair market value of each type of property, as described above, the fair market value of the shares of a particular corporation over which DC2 has the ability to exercise significant influence, and of any indebtedness receivable by DC2 from such a corporation, will be allocated among the XXXXXXXXXX types of property of DC2 by multiplying the fair market value of the shares and indebtedness of the particular corporation by the proportion that the fair market value of each type of property owned by the particular corporation (as determined according to Paragraph 19 above) is of the total fair market value of all the property owned by the particular corporation.
20.1. For purposes of determining the fair market value of the property of DC2, the following principles will also apply:
(a) any tax accounts of DC2, including the balance of its GRIP, RDTOH, CDA and any losses available for carry-forward, if any, will not be considered property of DC2;
(b) no amount will be considered to be a liability unless it represents a true legal liability which is capable of quantification; and
(c) the amount of any deferred income tax will not be considered a liability because such amount does not represent a legal obligation of DC2.
20.2. The transfers of property described in Paragraph 20.3 below will be made on a gross fair market value basis. In determining the gross fair market value of each type of property of DC2 immediately before the transfers, no liabilities of DC2 will be allocated to, and deducted in the calculation of the gross fair market value of each type of property of DC2.
20.3. Immediately following the determination of the gross fair market value of each type of property described in Paragraph 19 above, DC2 will transfer XXXXXXXXXX % of each type of property owned by it at that time to each of Sub-Transferee A and Transferee B, as the case may be, such that immediately following the transfers, the gross fair market value of each type of property so transferred by DC2 to each of Sub-Transferee A and Transferee B, as the case may be, determined in accordance with the guidelines described in Paragraphs 19, 20, 20.1 and 20.2 above, will approximate that proportion of the gross fair market value of all property of DC2 of that type determined immediately before such transfer that:
(a) the aggregate fair market value, immediately before the transfers, of all of the shares of DC2 owned by either of Sub-Transferee A or Transferee B, as the case may be, at that time
is of
(b) the aggregate fair market value, immediately before the transfers, of all of the issued and outstanding shares of DC2 at that time.
For the purposes of this Paragraph, the expression "approximate that proportion" means the discrepancy from that proportion, if any, would not exceed one percent (1%) determined as a percentage of the fair market value of the property that each of Sub-Transferee A and Transferee B, as the case may be, receives compared to what it would have received had it received its appropriate pro rata share of DC2's property.
21. As consideration for the transfer of the DC2 Transferred Assets each of Sub-Transferee A and Transferee B will:
(a) assume a portion of the liabilities of DC2 immediately before the transfers in the proportion determined by Paragraph 20.3 above; and,
(b) issue to DC2 a number of Class B preferred shares having an aggregate redemption amount and fair market value equal to the fair market value of the
DC2 property received less that amount of the liabilities assumed as described in (a).
22. DC2 may make payments to each of Sub-Transferee A and Transferee B (by transferring property to Sub-Transferee A or Transferee B) in consideration for Sub-Transferee A and Transferee B assuming undertakings of DC2 to which paragraph 12(1)(a) applies. Any such payments made by DC2 to Sub-Transferee A and Transferee B will be considered to be part of the distribution, as described in Paragraph 20.3, made by DC2 to each of Sub-Transferee A and Transferee B. For the purposes of paragraph 20(24)(b), Sub-Transferee A and Transferee B will receive the amounts in the course of business and will include the amounts in income under paragraph 12(1)(a). DC2 and each of Sub-Transferee A and Transferee B will elect, jointly and in prescribed form within the time referred to in subsection 20(25), to have the rules in subsection 20(24) apply.
23. In respect of the transfers of the DC2 transferred assets described in Paragraph 20.3, DC2 and each of Sub-Transferee A or Transferee B, as the case may be, will jointly elect, in prescribed form and within the time determined under subsection 85(6), for the provisions of subsection 85(1) to apply to the transfer of each eligible property of DC2. The agreed amount in respect of each eligible property so transferred will not be greater than the fair market value of such property nor will it be less than the lesser of the fair market value and the cost amount to DC2 of such property. For greater certainty, the agreed amount in respect of each such transferred property will be within the limits described below:
(a) the amounts specified in subparagraphs 85(1)(d)(i), (ii) and (iii) in the case of any eligible capital property;
(b) the amounts specified in subparagraphs 85(1)(e)(i), (ii) and (iii) in the case of depreciable property of a prescribed class; and
(c) the amounts specified in subparagraphs 85(1)(c.1)(i) and (ii) in the case of capital property (other than depreciable property of a prescribed class) and inventory.
For the purposes of the joint elections under subsection 85(1) described in this Paragraph, the reference to "the undepreciated capital cost to the taxpayer of all the property of that class immediately before the disposition" in subparagraph 85(1)(e)(i) will be read to mean the proportion of the undepreciated capital cost to DC2 of all the property of that class that the capital cost of the property immediately before the disposition is of the aggregate capital costs of all property of that class immediately before the disposition.
For the purposes of the Act, the increase to the PUC of the Sub-Transferee A and Transferee B Class B preferred shares issued to DC2 by Sub-Transferee A and
Transferee B as consideration for the property transferred to it as described in Paragraph 20.3 will not exceed the amount by which the aggregate of the agreed amounts under subsection 85(1) in respect of such transferred property to Sub-Transferee A or Transferee B exceeds the aggregate amount of liabilities of DC2 assumed by Sub-Transferee A or Transferee B. For greater certainty, the increase to the PUC of the Class B preferred shares issued to DC2 by Sub-Transferee A and Transferee B as consideration for the property transferred to it as described in Paragraph 20.3 will not exceed the maximum amount that could be added to the PUC of such shares having regard to subsection 85(2.1).
Repurchases, Redemptions and Wind-up of Sub-Transferee A
24. Sub-Transferee A will redeem all of its Class A Preferred shares held by DC1 for an amount equal to the redemption amount and fair market value of such shares. As consideration therefor, Sub-Transferee A will issue to DC1 the Sub-Transferee A Note 1. DC1 will accept Sub-Transferee A Note 1 as full and absolute payment of the redemption amount in respect of Sub-Transferee A's redeemed Class A preferred shares.
25. Transferee B will redeem all of its Class A Preferred shares held by DC1 for an amount equal to the redemption amount and fair market value of such shares. As consideration therefor, Transferee B will issue to DC1 the Transferee B Note 1. DC1 will accept Transferee B Note 1 as full and absolute payment of the redemption amounts in respect of Transferee B's redeemed Class A preferred shares.
26. Sub-Transferee A will redeem all of its Class B Preferred shares held by DC2 for an amount equal to the redemption amount and fair market value of such shares. As consideration therefor, Sub-Transferee A will issue to DC2 the Sub-Transferee
A Note 2. DC2 will accept Sub-Transferee A Note 2 as full and absolute payment of the redemption amount in respect of Sub-Transferee A's redeemed Class B preferred shares.
27. Transferee B will redeem all of its Class B Preferred shares held by DC2 for an amount equal to the redemption amount and fair market value of such shares. As consideration therefore, Transferee B will issue to DC2 the Transferee B Note 2. DC2 will accept Transferee B Note 2 as full and absolute payment of the redemption amounts in respect of Transferee B's redeemed Class B preferred shares.
28. Immediately following the share redemptions described in Paragraphs 24 and 26, Sub-Transferee A will, by special resolution, resolve to wind-up and dissolve into Transferee A in accordance with the provisions of the XXXXXXXXXX . As a consequence of the wind-up, all of the property of Sub-Transferee A will be distributed to Transferee A and Transferee A will assume any liabilities owing by Sub-Transferee A, including the Sub-Transferee A Note 1 and Sub-Transferee A Note 2.
29. DC1 will purchase for cancellation all of the outstanding common shares of DC1 held by each of Transferee A and Transferee B. As consideration for the purchase for cancellation of Transferee A's DC1 common shares, DC1 will issue Transferee A the Transferee A Cancellation Note 1. As consideration for the purchase of Transferee B's DC1 common shares, DC1 will issue Transferee B the Transferee B Cancellation Note 1. Transferee A will accept the Transferee A Cancellation Note 1, and Transferee B will accept the Transferee B Cancellation Note 1, as full and absolute payment for the aggregate purchase price of their DC1 common shares.
30. DC2 will redeem all of the outstanding DC2 Class B Special shares and will purchase for cancellation all of the outstanding common shares of DC2 held by each of Transferee A and Transferee B. As consideration for the redemption of Transferee A's DC2 Class B Special shares and the purchase for cancellation of Transferee A's DC2 common shares, DC2 will issue to Transferee A the Transferee A Cancellation Note 2. As consideration for the redemption of Transferee B's DC2 Class B Special shares and the purchase for cancellation of Transferee B's DC2 common shares, DC2 will issue to Transferee B the Transferee B Cancellation Note 2. Transferee A will accept the Transferee A Cancellation Note 2, and Transferee B will accept the Transferee B Cancellation Note 2, as full and absolute payment for the aggregate redemption and purchase price of their shares of DC2.
31. DC1 will pay the principal amount of the Transferee A Cancellation Note 1 by transferring to Transferee A the Sub-Transferee A Note 1, which will be accepted by Transferee A in full payment of DC1's obligations. Transferee A will pay the principal amount of the Sub-Transferee A Note 1 by transferring to DC1 its Transferee A Cancellation Note 1, which will be accepted by DC1 in full payment of Transferee A's obligation. The Sub-Transferee A Note 1 and Transferee A Cancellation Note 1 will be marked thereon "paid in full" and cancelled.
DC1 will pay the principal amount of the Transferee B Cancellation Note 1 by transferring to Transferee B the Transferee B Note 1, which will be accepted by Transferee B in full payment of DC1's obligations. Transferee B will pay the principal amount of the Transferee B Note 1 by transferring to DC1 its Transferee B Cancellation Note 1, which will be accepted by DC1 in full payment of Transferee B's obligation. The Transferee B Note 1 and Transferee B Cancellation Note 1 will be marked thereon "paid in full" and cancelled.
32. DC2 will pay the principal amount of the Transferee A Cancellation Note 2 by transferring to Transferee A the Sub-Transferee A Note 2, which will be accepted
by Transferee A in full payment of DC2's obligations. Transferee A will pay the principal amount of the Sub-Transferee A Note 2 by transferring to DC2 its Transferee A Cancellation Note 2, which will be accepted by DC2 in full payment of Transferee A's obligation. The Sub-Transferee A Note 2 and Transferee A Cancellation Note 2 will be marked thereon "paid in full" and cancelled.
DC2 will pay the principal amount of the Transferee B Cancellation Note 2 by transferring to Transferee B the Transferee B Note 2, which will be accepted by Transferee B in full payment of DC2's obligations. Transferee B will pay the principal amount of the Transferee B Note 2 by transferring to DC2 its Transferee B Cancellation Note 2, which will be accepted by DC2 in full payment of Transferee B's obligation. The Transferee B Note 2 and Transferee B Cancellation Note 2 will be marked thereon "paid in full" and cancelled.
33. Each of Transferee A and Transferee B will, by special resolution, resolve to liquidate and dissolve DC1 pursuant to the provisions of the XXXXXXXXXX . In due course, DC1 will file tax returns and, after the receipt of any dividend refund or other tax refunds and attending to other administrative matters, file articles of dissolution. Upon receipt of the Certificate of Dissolution, DC1 will be formally dissolved.
34. Each of Transferee A and Transferee B will, by special resolution, resolve to liquidate and dissolve DC2 pursuant to the provisions of the XXXXXXXXXX . In due course, DC2 will file tax returns and, after the receipt of any dividend refund or other tax refunds and attending to other administrative matters, file articles of dissolution. Upon receipt of the Certificate of Dissolution, DC2 will be formally dissolved.
35. In respect of the transfers of DC1 and DC2 assets described in Paragraphs 15.3 and 20.3 that are investments, or interests, in real-estate co-tenancies, the new co-tenancy agreements that will be entered into by Sub-Transferee A and Transferee B, and their successors or assigns, in respect of these assets will indicate that: (i) the co-tenants do not intend to create a partnership as they will not be carrying on business in common with a view to profit; (ii) no co-tenant can act on behalf of any other co-tenant without obtaining prior consent from that other co-tenant; (iii) each co-tenant has a well-defined and separate interest in, and ownership of, the properties subject to the co-tenancy agreement; (iv) a co-tenant cannot charge and/or grant security over the co-tenanted properties as a whole (ie. the other co-tenants' interests) as each co-tenant only has the right to deal with its own interest in the co-tenanted properties; (v) profit and loss is calculated by each co-tenant individually and there is no mechanism in the co-tenancy agreement that deals with the allocation of profit and loss; and (vi) the liability of a co-tenant is limited to its own expenses.
36. The Proposed Transactions will occur in the order presented unless otherwise indicated, with the exception of the filing of the applicable election forms described in Paragraphs 7, 12, 13, 18 and 23, which will be filed before the applicable due date.
37. Upon completion of the Proposed Transactions, each of Transferee A and Transferee B will operate as separate entities, each carrying on its own specified investment business with the particular transferred assets received by each corporation.
38. No property has or will become property of DC1, DC2, FC1 or FC2 in contemplation of and before the distributions described in Paragraphs 15.3 and
20.3, except in the ordinary course of DC1's, DC2's, FC1's or FC2's business or as otherwise described herein.
39. Except as specifically described in the Proposed Transactions, there is no expectation or intention that DC1 or DC2, or any of Transferee A, Sub-Transferee A or Transferee B, will dispose of any property as part of a series of transactions or events that includes the Proposed Transactions, other than in the ordinary course of such corporation's business.
40. None of the shares of DC1 or DC2, or any of Transferee A, Sub-Transferee A, or Transferee B, will be at any time during a series of transactions or events that includes the Proposed Transactions:
(a) the subject of any undertaking that is referred to in subsection 112(2.2) as the subject of 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.
41. None of DC1 or DC2, or any of Transferee A, Sub-Transferee A, or Transferee B, is, or will be, during a 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 paragraphs (a) to (f) of the definition of "financial intermediary corporation" in subsection 191(1).
42. DC1, DC2, Transferee A, Sub-Transferee A, and Transferee B will have the financial capacity to honour, upon presentation for payment, the amount payable under any promissory note issued by the particular corporation as part of the Proposed Transactions.
PURPOSE OF PROPOSED TRANSACTIONS
The purpose of the Proposed Transactions is to distribute to each of Transferee A and Transferee B their proportionate share of the properties of DC1, FC1, and FC2 such that each of Sibling A, through Transferee A, and Sibling B, through Transferee B, will have separate ownership of his or her pro rata share of DC1's, FC1's and FC2's properties. This will allow Sibling A and Sibling B to pursue, in an independent manner, his or her own particular interests with respect to his or her proportionate share of the DC1, FC1 and FC2 assets, including individual estate and succession plans to be developed and implemented independently by each such individual.
As a consequence, the following transactions may be undertaken after the transactions described herein:
a) Sibling A and Spouse A may complete an estate plan under which their common shares of Transferee A are exchanged for a new class of special shares of Transferee A which are retractable at the fair market value of the common shares and have voting control of Transferee A.
b) A trust may be established by Mr. A for the benefit of Child A1, Child A2, the grandchildren of Sibling A and Spouse A, and possibly Sibling A. The trust would subscribe for the new common shares of Transferee A.
c) Sibling B and Spouse B may complete an estate plan under which their common shares of Transferee B are exchanged for a new class of special shares of Transferee B which are retractable at the fair market value of the common shares and have voting control of Transferee B.
d) A trust may be established by Mr. A for the benefit of Child B1, Child B2, Child B3, the grandchildren of Sibling B and Spouse B, and possibly Sibling B. The trust would subscribe for the new common shares of Transferee B.
RULINGS
Provided that the above statements of facts, Proposed Transactions and purpose of the proposed transactions are accurate and constitute complete disclosure of all the relevant facts and the Proposed Transactions, our rulings are as follows:
A. By virtue of subsection 20(24), DC1 and DC2 will be entitled to deduct in computing their income for the taxation year in which the assumption occurs, the amounts paid to Sub-Transferee A and Transferee B in respect of the undertakings of DC1 and DC2 to which paragraph 12(1)(a) applies and that are assumed by Sub-Transferee A and Transferee B as described in Paragraphs 17 and 22, to the extent that the payments are reasonable, and such amount will be deemed to be an amount described in paragraph 12(1)(a) in respect of DC1 and DC2.
B. The provisions of subsection 88(1) will apply to the winding-up of Sub-Transferee A into Transferee A as described in Paragraph 28, such that:
a) Sub-Transferee A will be deemed, pursuant to paragraph 88(1)(a), to have disposed of its assets (other than any interest in a partnership) in each case for an amount equal to the cost amount to Sub-Transferee A of the particular asset immediately before the winding-up;
b) Transferee A will be deemed, pursuant to paragraph 88(1)(b), to have disposed of the Sub-Transferee A common shares that Transferee A owns for proceeds of disposition equal to the greater of the amounts described in subparagraphs 88(1)(b)(i) and (ii); and
c) Transferee A will be deemed, pursuant to paragraph 88(1)(c), to have acquired the assets of Sub-Transferee A that are distributed to Transferee A on the wind-up for an amount equal to the proceeds of disposition to Sub-Transferee A of each property.
C. Subsection 84(3) will apply:
a) on the redemption by Sub-Transferee A of its Class A Preferred shares owned by DC1 described in Paragraph 24, to deem Sub-Transferee A to have paid and DC1 to have received;
b) on the redemption by Transferee B of its Class A Preferred shares owned by DC1 described in Paragraph 25, to deem Transferee B to have paid and DC1 to have received;
c) on the redemption by Sub-Transferee A of its Class B Preferred shares owned by DC2 described in Paragraph 26, to deem Sub-Transferee A to have paid and DC2 to have received;
d) on the redemption by Transferee B of its Class B Preferred shares owned by DC2 described in Paragraph 27, to deem Transferee B to have paid and DC2 to have received;
e) on the purchase for cancellation of the DC1 common shares owned by each of Transferee A and Transferee B described in Paragraph 29, to deem DC1 to have paid and each of Transferee A and Transferee B to have received; and
f) on the redemption of the DC2 Class B Special shares and purchase for cancellation of the DC2 common shares owned by each of Transferee A and Transferee B described in Paragraph 30, to deem DC2 to have paid and each of Transferee A and Transferee B to have received;
a dividend equal to the amount, if any, by which the amount paid upon such redemption or purchase for cancellation, as the case may be, exceeds the PUC in respect of such shares immediately before such redemption or purchase for cancellation, as the case may be, and any such dividend:
g) will be included, pursuant to subsection 82(1) and paragraph 12(1)(j), in computing the income of the corporation which received such dividend;
h) will be deductible pursuant to subsection 112(1) by the corporation which received the dividend;
i) will not be a dividend to which any of subsections 112(2.1), (2.2), (2.3), or (2.4) apply;
j) will be excluded, pursuant to paragraph (j) of the definition of "proceeds of disposition" in section 54, in determining the proceeds of disposition to the recipient corporation of the shares which are redeemed or purchased for cancellation;
k) will not be subject to tax under Part IV, except as provided in paragraph 186(1)(b), as the dividends will be received from a connected corporation;
l) will not be subject to tax under Parts IV.1 or VI.1 as the dividend would be considered an excepted dividend for the purposes of Part IV.1 and an excluded dividend for the purposes of Part VI.1.
D. The provisions of subsection 112(3) will apply to reduce any loss that may otherwise be determined for a particular shareholder as a result of the redemptions and purchases for cancellation of shares described in Paragraphs 24, 25, 26, 27, 29, and 30.
E. 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);
an acquisition of shares of DC1 or DC2 in the circumstances described in subparagraph 55(3.1)(b)(iii); ord)
e) an acquisition of property in the circumstances described in paragraph 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 C and, for greater certainty, subsection 55(3.1) will not apply to deny the exemption under paragraph 55(3)(b).
F. The repayment of the Transferee A Cancellation Note 1, Transferee A Cancellation Note 2, Sub-Transferee A Note 1, Sub-Transferee A Note 2, Transferee B Cancellation Note 1, Transferee B Cancellation Note 2, Transferee B Note 1, and Transferee B Note 2 described in Paragraphs 31 and 32, will not, in and of themselves, give rise to a "forgiven amount" within the meaning of subsections 80(1) or 80.01(1) nor will DC1, DC2, Transferee A or Transferee B otherwise realize any gain or incur any loss as a result thereof.
G. Provided that immediately prior to the commencement of the Proposed Transactions the common shares of FamilyCo constitute capital property to Sibling A and Spouse A, and the common shares and Class B Special shares of DC2 constitute capital property to Sibling A, the transfer of such shares to Transferee A described in Paragraph 12 will not, in and by itself, cause such shares to not be capital property of Transferee A.
H. Provided that immediately prior to the commencement of the Proposed Transactions the Class A common shares of FamilyCo constitute capital property to Sibling B and Spouse B, the common shares of DC1 constitute capital property to Sibling B, and the common shares and Class B Special shares of DC2 constitute capital property to Sibling B, the transfer of such shares to Transferee B described in Paragraph 13 will not, in and by itself, cause such shares to not be capital property of Transferee B.
I. The provisions of subsections 15(1), 56(2), 56(4) or 246(1) will not apply to any of the Proposed Transactions, in and of themselves.
J. 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 issued by the CRA on May 17, 2002, and are binding on the CRA provided that the steps described in the Proposed Transactions are completed within XXXXXXXXXX months of the date of this letter. The above rulings are based on the law as it presently reads, and do not take into account any proposed amendments to the Act which, if enacted, could have an effect on the rulings provided herein.
Nothing in this letter should be construed as implying that the CRA has confirmed, reviewed or made any determination in respect of:
(a) any tax consequences relating to the Facts or the Proposed Transactions other than those specifically described in the above rulings;
(b) the fair market value or the ACB of any particular asset, the PUC of any share, or the outstanding balance of any tax accounts such as RDTOH, CDA or GRIP, for any of the corporate entities described herein;
(c) any related transactions or events (including the implementation of any subsequent estate freeze) that may be included in the Series of Transactions or Events that includes the receipt of a dividend deemed to be paid and received in the course to the Butterfly Reorganization; and
(d) the legal relationships between parties referred to herein.
An invoice for our fees in connection with this ruling request will be forwarded to you under separate cover.
Yours truly,
XXXXXXXXXX
For Director
Reorganizations and Resources Division
Income Tax Rulings Directorate
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