2011 Ruling 2011-0403031R3 - Post mortem planning

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 a pipeline transaction implemented by the Estate will be subject to subsections 84(2) and 245(2)

Position: No

Reasons: The proposed pipeline transaction satisfies the administrative requirements established by the CRA in previous rulings issued in respect of similar arrangements

XXXXXXXXXX

								2011-040303
								XXXXXXXXXX 

XXXXXXXXXX , 2011

Dear XXXXXXXXXX :

Re: Advance Income Tax Ruling
XXXXXXXXXX
(Business Number XXXXXXXXXX , XXXXXXXXXX Tax Center)

We are writing in response to your request for an income tax ruling (“Rulings Request”) dated XXXXXXXXXX . We also took into consideration the additional information provided in your letter dated XXXXXXXXXX , and the email correspondence we have exchanged between XXXXXXXXXX

PRELIMINARY MATTERS:

To the best of your knowledge, none of the issues involved in this Ruling Request:

(a) is in an earlier return of Opco, or a related person;

(b) is being considered by a tax services office or a taxation centre in connection with a previously filed tax return of Opco or a related person;

(c) is under objection by Opco or a related person;

(d) is before the Courts or, if a judgment has been issued, the time limit for appeal to a higher court has expired; and

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

Unless otherwise indicated, all statutory references in this letter are to the Income Tax Act (Canada) R.S.C. 1985 c. 1 (5th Suppl.) (the “Act”) and all references to monetary amounts are in Canadian dollars

DEFINITIONS:

1. “ACB” means adjusted cost base as this term is defined in subsection 54(1);

2. “Agreed Amount” means the amount agreed by the Estate and Newco in the joint election that they filed under subsection 85(1) in respect of the transfer of the Transferred Shares to Newco as described in paragraph 99 below;

2.1 “Amalco Class A preferred shares” means the XXXXXXXXXX Class A preferred shares that the Estate will hold in Amalco further to the Amalgamation;

3. “Amalgamation” means the amalgamation of Opco and Newco;

4. “Amalgamation Date” means the date stated in Amalco’s certificate of amalgamation;

5. “Beneficiary 1” means XXXXXXXXXX , a Canadian resident and XXXXXXXXXX XXXXXXXXXX , who is a beneficiary of the Estate;

6. “Beneficiary 2” means XXXXXXXXXX , a Canadian resident and XXXXXXXXXX XXXXXXXXXX , who is a beneficiary of the Estate;

7. “Board” means the board of directors of Newco;

8. “Business Number” means the business number attributed by the CRA to each corporation for tax compliance purposes;

9. “Capital Dividend” means the dividend declared and paid by Opco to the Estate as described in paragraphs 90 and 91 below;

10. “Capital Gain Exemption” means the total amount of $XXXXXXXXXX that XXXXXXXXXX deducted pursuant to subsection 110.6(2.1) to reduce the capital gain inclusion that arose from the transactions described in paragraphs 69 and 70 below;

11. “Capital Property” has the meaning assigned by subsection 54(1);

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

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

14. “Class A Redemption Amount” means the amount determined by dividing the excess of the FMV of Transferred Shares over the principal amount of the Promissory Note by the aggregate number of Issued Shares;

15. “Class B Redemption Amount” means an amount equal to $XXXXXXXXXX for each Class B preferred share in Newco to be redeemed or retracted;

16. “Cost Amount” has the meaning assigned by subsection 248(1);

17. “CRA” means the Canada Revenue Agency;

18. “Dividend Refund” means a dividend refund claimed by a taxpayer pursuant to paragraph 129(1)(b);

19. XXXXXXXXXX ;

20. “Effective Date” means the date when the Pipeline Transaction will be implemented;

21. “Estate” means the estate of XXXXXXXXXX . whose only beneficiaries are XXXXXXXXXX ;

22. “Estate Debt” means the non-interest bearing debt equal to $XXXXXXXXXX payable by the Estate to Opco to fund the payment of the tax liability that arose from XXXXXXXXXX ’s death;

23. “XXXXXXXXXX” means XXXXXXXXXX , which is a company incorporated under the Business Corporation Act (XXXXXXXXXX ) that is wholly owned by XXXXXXXXXX;

24. “FMV” means fair market value, which refers to the highest price available in an open and unrestricted market between informed and prudent parties acting at arm’s length and under no compulsion to act, expressed in terms of cash;

24.1 "GRIP" means "general rate income pool" as that term is defined by subsection 89(1);

25. “Hard ACB of the Transferred Shares” means the aggregate of: (i) the aggregate ACB as adjusted by paragraphs 84.1(2)(a) and (a.1) attributable to the XXXXXXXXXX common shares that the Estate held in Opco immediately after XXXXXXXXXX ’s death and (ii) the Pro-Rated ACB as adjusted by paragraphs 84.1(2)(a) and (a.1) (including the reduction by the Pro-Rated Capital Gain Exemption Amount) attributable to the XXXXXXXXXX Class B preferred shares that the Estate held in Opco;

26. “Holdco” means XXXXXXXXXX , which is a corporation incorporated under the Canada Business Corporation Act whose shares are owned by Subco 2`s employees;

27. “Ineligible Property” has the meaning assigned by paragraph 88(1)(c);

28. “Investment Advisor 1” means XXXXXXXXXX , which manages the portion of the Marketable Securities invested in mutual funds and segregated funds the aggregate FMV of which is less than XXXXXXXXXX % of the FMV of the Marketable Securities;

29. “Investment Advisor 2” means XXXXXXXXXX , which manages investment property the aggregate FMV of which exceeds XXXXXXXXXX % of the FMV of the Marketable Securities;

30. “Investment Policy Statement” means the document dated XXXXXXXXXX prepared by Investment Advisor 2, which describes the investment objectives governing the management of the marketable securities under the management of Investment Advisor 2 held by Opco;

31. “Issued Shares” means XXXXXXXXXX Class A preferred shares to be issued by Newco to the Estate in partial consideration for the Transferred Shares;

32. XXXXXXXXXX

33. “Marketable Securities” means the diversified portfolio of investment property held by Opco that includes cash and cash equivalents, fixed income instruments such as corporate and treasury bonds, shares of private and public corporations and units in mutual / segregated funds;

34. “Newco” means XXXXXXXXXX , which was incorporated by the Estate under the Business Corporation Act (XXXXXXXXXX ) on XXXXXXXXXX as further described in paragraph 89 below;

35. “Newco’s Authorized Share Capital” means the authorized capital of Newco as fully described in Newco’s certificate of incorporation dated XXXXXXXXXX , which includes: (1) an unlimited number of Class A preferred shares having the following terms and conditions: (i) no voting right to the election of the directors of that corporation, (ii) entitlement to receive, in preference and priority to the rights of common shareholders, a non-cumulative annual dividend not in excess of XXXXXXXXXX % of the Class A Redemption Amount, (iii) entitlement to receive an amount equal to the sum of the Class A Redemption Amount and the aggregate, if any, of any declared but unpaid dividend if the share is redeemed or retracted by Newco; and (iv) entitlement to receive an amount equal to the sum of the Class A Redemption Amount and the aggregate, if any, of any declared but unpaid dividend upon the liquidation, wind-up or discontinuance of Newco before any asset is distributed to the common shareholders, (2) an unlimited number of Class B preferred shares having the following terms and conditions: (i) entitlement to that number of votes equal to XXXXXXXXXX % of the votes attaching to all of the other issued and outstanding voting shares; (ii) no dividend entitlement; (iii) entitlement to receive an amount equal to the sum of the Class B Redemption Amount if the share is redeemed or
retracted; and (iv) no entitlement to receive any amount upon the liquidation, wind-up or discontinuance of Newco; and (3) an unlimited number of common shares having the following terms and conditions: (i) entitlement to one vote per common share at any meeting of the shareholders of Newco; (ii) entitlement to receive a dividend per share equal to an amount to be determined by the Board provided that the Board has declared and paid the maximum amount of dividend the Class A preferred shareholders are entitled to receive; (iii) entitlement to share equally in the distribution of the remaining assets upon the liquidation, wind-up or discontinuance of Newco subject to the priority granted to the Class A preferred shareholders;

36. “Newco Redemption Amount” means the excess of the FMV of the Transferred Shares on the Effective Date over the principal amount of the Promissory Note.

37. “Opco” means XXXXXXXXXX , which is a corporation incorporated under the Business Corporation Act (XXXXXXXXXX ) on XXXXXXXXXX ;

38. “Opco Redemption Amount” means the amount payable by Opco on every Class B preferred share in the event of the dissolution or winding-up of Opco, or the redemption or retraction of the Class B preferred shares, which is equal to the aggregate consideration received by Opco for all the Class B preferred shares issued divided by the total number of Class B preferred shares;

39. “Participation Interest in Subco 2” means the aggregate participation interest that Subco 1 held in Subco 2 comprised of XXXXXXXXXX common shares, XXXXXXXXXX Class A limited non-voting cumulative preferred shares, XXXXXXXXXX Class B limited non voting cumulative preferred shares, and XXXXXXXXXX Class D limited, discretionary non cumulative preferred shares in that corporation;

40. “Pipeline transaction” means the transaction described in paragraph 99 below;

41. “Predecessor Corporations” mean Opco and Newco;

42. “Proceeds of Disposition” has the meaning assigned at section 54;

43. “Promissory Note” means the promissory note having a principal amount equal to $XXXXXXXXXX to be issued by Newco to the Estate in partial consideration for the Transferred Shares;

44. “Proposed Transactions” means the transactions described in paragraphs 99 to 116 below;

45. “Pro-Rated ACB of the XXXXXXXXXX Class B preferred shares” means a portion equal to XXXXXXXXXX % of the ACB of the XXXXXXXXXX Class B preferred shares that the Estate held in Opco immediately after XXXXXXXXXX ’s death;

46. “Pro-Rated FMV of the XXXXXXXXXX Class B preferred shares” means a portion equal to XXXXXXXXXX % of the redemption value of the XXXXXXXXXX Class B preferred shares that the Estate held in Opco immediately after XXXXXXXXXX ’s death as described in paragraph 74 below;

47. “Pro-Rated Capital Gain Exemption Amount” means a portion equal to XXXXXXXXXX % of the aggregate amounts that XXXXXXXXXX claimed under section 110.6 during XXXXXXXXXX lifetime in respect of the XXXXXXXXXX Class B preferred shares that XXXXXXXXXX held in Opco as described in paragraphs 69 and 70 below;

48. “Public Corporation” has the meaning assigned by subsection 89(1);

49. “PUC” means paid-up capital as this term is defined in subsection 89(1);

50. “RDTOH” means refundable dividend tax on hand as this term is defined in subsection 129(3);

51. “Redeemed Shares” means the XXXXXXXXXX Class B preferred shares of Opco redeemed as described in paragraph 92 below;

52. “Share Redemption” means Opco’s redemption of the XXXXXXXXXX Class B preferred shares that the Estate held in that corporation as described in paragraph 92 below;

53. “Subco 1” means XXXXXXXXXX , which is a corporation incorporated under the Business Corporation Act (XXXXXXXXXX);

54. “Subco 2” means XXXXXXXXXX , which is a CCPC incorporated under the Business Corporation Act (XXXXXXXXXX ) that XXXXXXXXXX ;

55. “Subco 2 Group” means the group of corporations holding, directly or indirectly, a participation interest in Subco 2;

56. “Taxable dividend” has the meaning assigned by subsection 89(1);

57. “TCC” means taxable Canadian corporation as this term is defined in subsection 89(1);

58. “Terminal Year” means the last taxation year of XXXXXXXXXX as a result of XXXXXXXXXX death;

59. “Transferred Shares” means (1) the XXXXXXXXXX common shares; and (2) the XXXXXXXXXX Class B preferred shares in Opco that the Estate will transfer to Newco as described in paragraph 99 below which have the following terms and conditions: (i) no voting right at meetings of shareholders, (ii) entitlement to receive, in preference and priority to any payment of dividends on the common shares, non-cumulative annual dividend at a rate of $XXXXXXXXXX per share per annum, (iii) entitlement to receive the Opco Redemption Amount if the Class B preferred shares held in Opco are redeemed or retracted, and (iv) entitlement to receive an amount equal to Opco Redemption Amount, in preference and priority to any payment to common shareholders, upon the dissolution or winding-up of Opco;

60. “Trustees” mean XXXXXXXXXX who were appointed as trustees for the Estate pursuant to the terms of the Will;

61. “Will” means XXXXXXXXXX ’s last will and testament;

FACTS:

The Subco 2 Group

62. Opco is a TCC and a CCPC which has an XXXXXXXXXX taxation year-end.

63. The Estate currently holds all of the issued and outstanding shares in Opco comprised of XXXXXXXXXX common shares, and XXXXXXXXXX Class B preferred shares in that corporation.

64. The aggregate FMV of all the Opco shares held by the Estate was equal to $XXXXXXXXXX as of XXXXXXXXXX . Given that the redemption value of the XXXXXXXXXX Class B preferred shares is equal to $XXXXXXXXXX , the FMV of the XXXXXXXXXX common shares that the Estate holds in that corporation will be approximately equal to $XXXXXXXXXX at the Effective Date.

65. Opco is a holding corporation whose only activity is to hold the Marketable Securities, and XXXXXXXXXX common shares in Subco 1 representing, in aggregate, XXXXXXXXXX % of the issued and outstanding shares in that corporation. XXXXXXXXXX also owns XXXXXXXXXX common shares in Subco 1 representing XXXXXXXXXX % of the issued and outstanding shares in that corporation.

66. Subco 1 is a TCC and a CCPC that holds investment property, and the Participation Interest in Subco 2. The aggregate FMV of the assets held by Subco 1 was equal to $XXXXXXXXXX as of XXXXXXXXXX . The Participation Interest in Subco 2 is equal to $XXXXXXXXXX whereas the aggregate FMV of the investment property held by Subco 1 is approximately equal to $XXXXXXXXXX .

67. Holdco owns a controlling interest in Subco 2, which is comprised of XXXXXXXXXX common shares in that corporation.

Opco’s shareholding before and after XXXXXXXXXX ’s death

The crystallization of XXXXXXXXXX ’s Capital Gain Exemption during XXXXXXXXXX lifetime

68. Prior to XXXXXXXXXX held XXXXXXXXXX common shares in Opco.

69. On XXXXXXXXXX exchanged XXXXXXXXXX common shares that XXXXXXXXXX held in Opco in consideration for XXXXXXXXXX Class B preferred shares in that corporation pursuant to the provisions of section 85. XXXXXXXXXX acquired an additional XXXXXXXXXX new common shares from treasury for $XXXXXXXXXX in the aggregate. The amount agreed by XXXXXXXXXX and Opco in the joint election they filed was equal to $XXXXXXXXXX , which resulted in a capital gain equal to $XXXXXXXXXX that was included in computing XXXXXXXXXX income. XXXXXXXXXX applied a portion of the Capital Gain Exemption equal to $XXXXXXXXXX to eliminate the inclusion of that capital gain in the computation of XXXXXXXXXX income.

70. On XXXXXXXXXX filed an election pursuant to subsection 110.6(19) pursuant to which XXXXXXXXXX was deemed to have disposed the XXXXXXXXXX Class B preferred shares that XXXXXXXXXX held in Opco for an amount equal to $XXXXXXXXXX , and to have reacquired such property immediately after that time at a cost equal to $XXXXXXXXXX . The capital gain equal to $XXXXXXXXXX that arose from that transaction was included in computing XXXXXXXXXX income. XXXXXXXXXX applied a portion of the Capital Gain Exemption equal to $XXXXXXXXXX to eliminate the inclusion of that capital gain in the computation of XXXXXXXXXX income. The ACB of the XXXXXXXXXX Class B preferred shares that XXXXXXXXXX held in Opco was equal to $XXXXXXXXXX as a result of the above transaction.

The Opco shares held by XXXXXXXXXX immediately before XXXXXXXXXX death

71. Immediately before XXXXXXXXXX death, XXXXXXXXXX . held XXXXXXXXXX common shares, and XXXXXXXXXX Class B preferred shares in Opco having the following tax attributes:

	ACB	FMV	PUC
XXXX CS	$XXXXXXXXXX 	$XXXXXXXXXX 	$XXXXXXXXXX
XXXX Class B PS	$XXXXXXXXXX 	$XXXXXXXXXX 	$XXXXXXXXXX 

The tax consequences resulting from XXXXXXXXXX ’s death

72. XXXXXXXXXX died on XXXXXXXXXX

73. The Estate is in charge of collecting XXXXXXXXXX ’s assets, paying XXXXXXXXXX ’s liabilities and distributing XXXXXXXXXX ’s net assets in accordance with the terms of the Will.

74. XXXXXXXXXX is deemed to have disposed of the XXXXXXXXXX common shares, and the XXXXXXXXXX Class B preferred shares that XXXXXXXXXX held in Opco at the time of XXXXXXXXXX death, and to have received proceeds of disposition equal to the FMV of those shares immediately before XXXXXXXXXX death pursuant to paragraph 70(5)(a). The Estate is deemed to have acquired the XXXXXXXXXX common shares and the XXXXXXXXXX Class B preferred shares that were held by XXXXXXXXXX at the time of XXXXXXXXXX death at a cost equal to their FMV immediately before XXXXXXXXXX death pursuant to paragraph 70(5)(b).

75. The tax attributes of the XXXXXXXXXX common shares, and the XXXXXXXXXX Class B preferred shares that the Estate held in Opco immediately after XXXXXXXXXX s death were as follows:

	ACB	FMV	PUC
XXXX CS	$XXXXXXXXXX 	$XXXXXXXXXX 	$XXXXXXXXXX
XXXX Class B PS	$XXXXXXXXXX 	$XXXXXXXXXX 	$XXXXXXXXXX 

76. XXXXXXXXXX is deemed to have realized a capital gain equal to $XXXXXXXXXX and $XXXXXXXXXX respectively upon XXXXXXXXXX death as a result of the deemed disposition of the XXXXXXXXXX common shares, and the XXXXXXXXXX Class B preferred shares that XXXXXXXXXX held in Opco.

77. The Estate incurred the Estate Debt to fund the tax liability that arose XXXXXXXXXX `s death.

78. According to the terms of the Will, the residue of XXXXXXXXXX ’s property after the Estate collects XXXXXXXXXX s assets and discharges XXXXXXXXXX liabilities shall be distributed XXXXXXXXXX .

The investment property held by Opco and the investment activities conducted by Opco’s investment advisors

The investment property held by Opco

79. Opco owns the Marketable Securities.

80. According to the discretionary asset allocation included in the Investment Policy Statement, cash and cash equivalents (including T-bills) are targeted to be equal to XXXXXXXXXX % of the total FMV of the investment property managed by Investment Advisor 2.

81. Any increase in Opco’s cash balance will be reinvested, in whole or in part, in new investment assets in order to meet the long-term investment objectives governing the management of the Marketable Securities. For that reason, cash and cash equivalents have consistently represented a small portion of Opco’s investment portfolio prior to and after XXXXXXXXXX s death.

82. As of XXXXXXXXXX , the FMV of the Marketable Securities was equal to $XXXXXXXXXX

The investment activities conducted by Opco

83. The Marketable Securities are managed by Investment Advisor 1 and Investment Advisor 2.

84. According to the Investment Policy Statement, the investment property managed by Investment Advisor 2 is intended to provide sufficient income growth to keep up with inflation, and to provide moderate capital appreciation with a view of meeting long-term financial objectives (at least XXXX years).

85. In accordance with the Investment Policy Statement, the majority of the equity holdings held by Opco under the administration of Investment Advisor 2 will be invested in mid to large companies, and that the majority of the fixed-income portfolio held by Opco will be invested in investment grade bonds.

86. Investment Advisor 2 has to regularly monitor the financial markets, and engage in trading activity in order to meet the investment objectives stated in the Investment Policy Statement.

87. The investment activities carried on by Investment Advisor 1 and Investment Advisor 2 in respect of Opco’s investment portfolio will not be affected by the Proposed Transactions.

The outstanding balance of Opco`s tax accounts

88. Opco`s GRIP, CDA and RDTOH will respectively be equal to approximately $XXXXXXXXXX , $XXXXXXXXXX and $XXXXXXXXXX prior to the implementation of the steps described in paragraphs 90 to 96.

The incorporation of Newco

89. On XXXXXXXXXX , the Estate incorporated Newco, and subscribed for XXXXXXXXXX common shares in that corporation for a $XXXXXXXXXX cash consideration.

Opco’s payment of a capital dividend to the Estate

90. On XXXXXXXXXX , the directors of Opco declared a dividend in the amount of $XXXXXXXXXX . The dividend was satisfied by way of a legal set-off against the Estate Debt and the issuance of a promissory note, payable to the Estate, for the balance, in the amount of $XXXXXXXXXX . The said promissory note is to be repaid within the next XXXXXXXXXX (XXXXXXXXXX ) days.

91. The directors of Opco filed the election provided in subsection 83(2) in prescribed form and manner in respect of the full amount of the dividend referred in paragraph 90 above on or before the date the dividend was paid to treat the dividend as a capital dividend to the extent of Opco’s CDA.

The Share Redemption

92. On XXXXXXXXXX , Opco proceeded with the Share Redemption and redeemed the Redeemed Shares for an amount equal to their aggregate redemption value of $XXXXXXXXXX . Upon the redemption, an amount was added to the shareholder loan account equal to the redemption proceeds. The amount of the dividend so added is to be repaid in cash or in kind in the next XXXXXXXXXX (XXXXXXXXXX ) days.

93. As a result of the Share Redemption, Opco is deemed to have paid, and the Estate is deemed to have received a dividend equal to $XXXXXXXXXX pursuant to paragraphs 84(3)(a) and (b). Opco made a designation in respect of the entire amount of the dividend that is deemed to have been paid for the purposes of subsection 89(14).

94. Opco will file an application in writing with the CRA within the time period defined in paragraph 129(1)(b) to claim a Dividend Refund equal to the lesser of: (i) the XXXXXXXXXX of the dividend deemed to have been paid by Opco, and (ii) the outstanding balance of Opco`s RDTOH at the end of the taxation year during which the Share Redemption occurred;

95. A capital loss equal to the difference between the Proceeds of Disposition of the Redeemed Shares, namely $XXXXXXXXXX , and the ACB of the Redeemed Shares, namely $XXXXXXXXXX , will also arise from the Share Redemption.

96. On or before the last day of the Estate’s first taxation year, the Trustees will elect under subsection 164(6) to deem the capital loss arising from Opco’s redemption of the Redeemed Shares to be a capital loss of XXXXXXXXXX from the disposition of XXXXXXXXXX property in XXXXXXXXXX Terminal Year.

97. [Reserved]

98. Further to the Share Redemption, the Estate will hold shares of Opco (XXXXXXXXXX common shares and XXXXXXXXXX Class B preferred shares) and XXXXXXXXXX common shares in Newco. Opco’s CDA and RDTOH will respectively be equal to $XXXXXXXXXX and XXXXXXXXXX .

PROPOSED TRANSACTIONS:

The Pipeline Transaction

99. On the Effective Date, the Estate will assign the Transferred Shares to Newco in consideration for the Promissory Note, and the Issued Shares.

100. The Transferred Shares will have an aggregate PUC equal to $XXXXXXXXXX , an aggregate ACB equal to the sum of the FMV of the XXXXXXXXXX common shares in Opco immediately after XXXXXXXXXX ’s death and the Pro-Rated ACB of the XXXXXXXXXX Class B preferred shares and an aggregate FMV equal to the sum of the FMV of the XXXXXXXXXX common shares that the Estate holds in Opco at the Effective Date and the Pro-Rated FMV of the XXXXXXXXXX Class B preferred shares.

101. The Estate and Newco will file a joint election in prescribed form and within the time provided in subsection 85(6) for the provisions of subsection 85(1) to apply to the assignment of the Transferred Shares to Newco. The Agreed Amount will be equal to the Cost Amount of the Transferred Shares, which is equal to the aggregate of the ACB of the XXXXXXXXXX common shares that the Estate held in Opco immediately after XXXXXXXXXX ’s death and the Pro-Rated ACB of the XXXXXXXXXX Class B preferred shares. The Agreed Amount will not exceed the FMV of the Transferred Property nor will it be less than the amounts described in paragraph 85(1)(c.1). The Estate’s assignment of the Transferred Shares to Newco will be subject to a price adjustment clause.

102. The principal amount of the Promissory Note will be equal to the Hard ACB of the Transferred Shares less an amount of $XXXXXXXXXX , which is the amount to be added to the PUC in respect of the Issued Shares.

103. The FMV of the Issued Shares will be equal to the Newco Redemption Amount.

104. The sum of the principal amount of the Promissory Note and the amount added to the PUC in respect of the Issued Shares will not exceed the Hard ACB of the Transferred Shares.

105. Further to the Estate’s assignment of the Transferred Shares to Newco, the Estate will hold: (i) the Issued Shares and (ii) the Promissory Note.

The investment activities carried on by Opco in respect of the Marketable Securities prior to the Amalgamation

106. Opco will remain a separate and distinct entity for a period of one year after the Effective Date during which the asset allocation of the Marketable Securities as well as the investment activities carried on by Investment Advisor 1 and Investment Advisor 2 in respect of the Marketable Securities will be governed by the same guidelines as before the implementation of the Pipeline Transaction.

The Amalgamation

107. Opco and Newco will amalgamate pursuant to subsection 177(1) of the Business Corporations Act (XXXXXXXXXX ) to form Amalco.

108. In accordance with subsection 87(1), all the property and all the liabilities of the Predecessor Corporations immediately before the Amalgamation will become the property and liabilities of Amalco. In addition, all of the shareholders (except any Predecessor Corporations) who owned shares of the capital stock of any Predecessor Corporation immediately before the Amalgamation will receive shares in Amalco

109. The authorized share capital of Amalco will be the same as Newco’s Authorized Share Capital. Moreover, the tax attributes of each class of shares that the Estate will hold in Amalco after the Amalgamation will be identical to the tax attributes of the corresponding class of issued and outstanding shares that the Estate held in Newco prior to the Amalgamation.

110. The outstanding balance of Amalco’s CDA and RDTOH will be nominal as a result of the Opco’s declaration and payment of the Capital Dividend, and the Dividend Refund claimed by Opco as a result of the Share Redemption.

111. Amalco intends to increase the Cost Amount of some or all of the Marketable Securities, and the XXXXXXXXXX common shares that it holds in Subco 1 in accordance with paragraphs 88(1)(c) and (d).

The redemption of the Amalco Class A preferred shares

112. The Amalco Class A preferred shares will be gradually redeemed after the Amalgamation Date;

113. The redemption of the Amalco Class A preferred shares will trigger a deemed dividend pursuant to subsection 84(3) equal to the excess of the Newco Redemption Amount and the amount added to the PUC of the Issued Shares.

114. The directors of Amalco will resolve, and file the election in prescribed form and manner to treat a portion of the deemed dividend arising from the redemption of the Amalco Class A preferred shares as a capital dividend to the extent of Amalco’s CDA, and the remainder portion of that dividend to be a Taxable Dividend to the Estate.

The repayment of the Promissory Note

115. The Promissory Note will be gradually repaid over a period of at least one year after the Amalgamation Date, but the amount of the repayments in any given quarter of that year will not exceed XXXXXXXXXX % of the principal amount of the Promissory Note when it was issued.

The Estate’s distribution of XXXXXXXXXX ’s net assets

116. Once all debts and liabilities of the Estate have been ascertained and settled, the Trustees will complete the administration of the Estate and distribute the residue XXXXXXXXXX in accordance with the terms of the Will.

PURPOSE OF THE PROPOSED TRANSACTIONS:

117. The purpose of the Proposed Transactions is to:

(a) Return XXXXXXXXXX funds equal to:

(i) the ACB of the Transferred Shares to the Estate, which are deemed to have been acquired at a cost equal to their FMV immediately before XXXXXXXXXX ’s death, and

(ii) the outstanding balance of Opco’s CDA and RDTOH at the time of the Proposed Transactions.

(b) Increase the Cost Amount of the some of the Capital Property held by Opco to minimize the tax consequences that may arise from their future disposition.

RULINGS:

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

A. Subsection 84.1(1) will not apply to deem the Estate to have received a dividend from Newco as a result of the Proposed Transactions.

B. Subsection 84(2) will not apply as a result of the Proposed Transactions, in and by themselves, to deem a dividend to have been paid by Opco and received by the Estate or by Beneficiary 1 or Beneficiary 2.

C. The provisions of subsection 245(2) will not apply as a result of the Proposed Transactions, in and by themselves, to redetermine the tax consequences stated in the rulings given above.

These Rulings are subject to the limitations and qualifications set out in Information Circular 70-6R5 dated May 17, 2002 and are binding on the CRA provided that the Proposed Transactions are completed no later than six months of the date of this letter. The 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.

COMMENTS:

Nothing in this letter should be construed as implying that the CRA has confirmed, reviewed or made any determination in respect of:

(a) The PUC of any shares or the FMV or the ACB of any particular asset referred herein;

(b) The outstanding balance of the GRIP, CDA or RDTOH of any corporation; or

(c) Any other tax consequences relating to the Facts, Proposed Transactions or any event taking place either prior to or subsequent to the Proposed Transactions whether described in this letter or not other than those specifically described in the above Rulings;

Nothing is this letter should be construed as a confirmation, express or implied, that, for the purpose of any of the Rulings listed above, any adjustment to the FMV of the properties transferred or the redemption amount of the shares issued as consideration, whether pursuant to a price adjustment clause or otherwise, will be effective retroactively to the time of the transfer or issuance of shares. Furthermore, none of the Rulings listed above are intended to apply to or in the event of the operation of a price adjustment clause since such adjustments will be due to circumstances that do not constitute Proposed Transactions that are seriously contemplated. The general position of the CRA with respect to price adjustment clauses is stated in Interpretation Bulletin IT-169

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
Legislative Policy and Regulatory Affairs Branch