2010 Ruling 2008-0279961R3 - Butterfly reorganization

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

Principal Issues: (1) Whether the distribution of DC's cash & near cash and investment property to holding companies to be incorporated by each beneficiary of a family Trust qualifies for the butterfly exemption stated in paragraph 55(3)(b) of the Act;

Position: (1) Yes

Reasons: (1) The various transactions completed prior to the distribution of DC's property will not be subject the butterfly exemption denial rule stated in subparagraphs 55(3.1)(b)(ii) of the Act.

XXXXXXXXXX
									2008-027996
									XXXXXXXXXX 

XXXXXXXXXX , 2010

Dear XXXXXXXXXX :

Re: Advance Income Tax Ruling
XXXXXXXXXX

This is in reply to your letter dated XXXXXXXXXX wherein you requested an advance income tax ruling on behalf of XXXXXXXXXX as amended further to our request dated XXXXXXXXXX .

DEFINITIONS

In this letter, unless the context otherwise requires, the following terms have the meaning specified below:

"A" means XXXXXXXXXX , an individual resident in Canada;

"ACB" has the meaning assigned to "adjusted cost base" by section 54;

"ACo" means a corporation to be incorporated by A. The authorized share capital of ACo will consist of an unlimited number of common shares, and of Class A special shares, Class B special shares and Class C special shares, all without par value;

"ACo Debt 1" means a non-interest bearing promissory note having a Principal Amount of $XXXXXXXXXX ;

"Aco Debt 2" means a non-interest bearing promissory note having a Principal Amount not exceeding the Agreed Amount described in paragraph 22 below;

"ACo Note" means a non-interest bearing promissory note issued by ACo on the redemption of its XXXXXXXXXX Class C Special Shares;

"Act" means the Income Tax Act, R.S.C. 1985 c.1 (5th Supp.), as amended to the date hereof, and, unless otherwise stated, every reference herein to a Part, section, subsection, paragraph or subparagraph is a reference to the relevant provision of the Act;

"Agreed Amount" in respect of a property means the amount that the transferor and the transferee of the property have agreed upon in their election under subsection 85(1) in respect of the property;

"A Promissory Note" means a promissory note having a Principal Amount of $XXXXXXXXXX as of XXXXXXXXXX ;

"Arm's Length" has the meaning assigned by subsection 251(1);

"Articles of Dissolution" means the articles of dissolution that DC will send to the Director pursuant to subsection 210(4) of the CBCA after DC has distributed all its property and discharged all its liabilities as described in this letter;

"B" means XXXXXXXXXX , an individual resident in Canada;

"BCo" means a corporation to be incorporated by B. The authorized share capital of BCo will consist of an unlimited number of common shares, and of Class A special shares, Class B special shares and Class C special shares, all without par value;

"Bco Debt 1" means the non-interest bearing promissory note having a Principal Amount of $XXXXXXXXXX ;

"BCo Debt 2" means the promissory note having a Principal Amount not exceeding the ACB of the DC shares described in paragraph 25 below;

"BCo Note" means the non-interest bearing promissory note issued by BCo on the redemption of its XXXXXXXXXX Class C Special Shares;

"B Promissory Note" means a promissory note having a Principal Amount of $XXXXXXXXXX as of XXXXXXXXXX ;

"C" means the late XXXXXXXXXX ;

"CCo" means XXXXXXXXXX , which owns the right to receive royalties in respect of the works of C;

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

"Canadian-Controlled Private Corporation" has the meaning assigned by subsection 125(7);

"Capital Dividend" has the meaning assigned by subsection 83(2);

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

"Capital Property" has the meaning assigned by section 54;

"Certificate of Dissolution" means the certificate of dissolution that the Minister will issue upon receipt of the Articles of Dissolution pursuant to subsection 210(5) of the CBCA;

"Class A PS" means the class A preferred shares of DC, which are non participating, voting and redeemable for an amount equal to their Stated Capital;

"Class A Special Shares" means the class A special shares of ACo or Bco, which will be non-participating, voting (one vote per share), redeemable and retractable at a price equal to their Issue Price and which will not be entitled to receive dividends;

"Class B PS" means the class B preferred shares of DC, which are non-participating, non-voting and redeemable for an amount equal to their Stated Capital;

"Class B Special Shares" means the class B special shares of ACo or BCo, which will be non-participating, non-voting, redeemable and retractable at a price equal to their Issue Price, and will not be entitled to receive dividends;

"Class C PS" means the class C preferred shares of DC, which are non-participating, non-voting, and redeemable for an amount equal to their Stated Capital and which are entitled to receive payment of a dividend of XXXXXXXXXX %;

"Class C Special Shares" means the class C special shares of ACo or BCo, which will be voting (one vote per share) redeemable and retractable at a price equal to their Issue Price and will not be entitled to receive dividends;

"Class D PS" means the class D preferred shares of DC, which are non-participating, non-voting, redeemable for an amount equal to their Stated Capital and which are entitled to receive payment of a dividend which shall not exceed XXXXXXXXXX % after the payment of any dividend payable on the Class C PS;

"Class E PS" means class E preferred shares of DC, which are non participating, non voting, redeemable for an amount equal to their Stated Capital and which are entitled to receive payment of a dividend which shall not exceed XXXXXXXXXX % after the payment of any dividend payable on the Class C PS and Class D PS;

"Common Shares" means the common shares of Aco or Bco, which will be participating, voting (one vote per share) and entitled to receive dividends at the discretion of their respective board of directors;

"CRA" means the Canada Revenue Agency;

"D" means XXXXXXXXXX , who is the founding partner of XXXXXXXXXX ;

"DC" means XXXXXXXXXX , which was formed as a result of the amalgamation of XXXXXXXXXX and XXXXXXXXXX on XXXXXXXXXX . The registered office of DC is located at XXXXXXXXXX . DC's taxation year and fiscal period ends on XXXXXXXXXX of each year. Each of XXXXXXXXXX and XXXXXXXXXX was incorporated after XXXXXXXXXX . DC's share capital is made of DC Common Shares, Class A PS, Class B PS, Class C PS, Class D PS and Class E PS;

"DC Common Shares" means the Common Shares of DC, which are participating, voting and which are entitled to receive dividends after the payment of any dividend payable on the Class C PS, Class D PS and Class E PS;

"Director" means the person appointed by the Minister to carry out the duties and exercise the powers of the director under the CBCA;

"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);

"Estate" means the estate of C;

"FMV" means the fair market value of a property, being the highest price available in an open and unrestricted market, between informed prudent parties, acting at Arm's Length and with no compulsion to act, expressed in terms of cash;

"Issue Price" means the FMV of the consideration received by a corporation for the issuance of its shares;

"Minister" means such member of the Queen's Privy Council for Canada as is designated by the Governor in Council as the minister for the purposes of the CBCA;

"Net Capital Loss" has the meaning assigned by subsection 111(8);

"Non-Capital Loss" has the meaning assigned by subsection 111(8);

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

"Principal Amount" has the meaning assigned by subsection 248(1);

"Private Corporation" has the meaning assigned by subsection 89(1);

"Proceeds of Disposition" has the meaning assigned by section 54, which is extended pursuant to paragraph 85(1)(a);

"Proposed Transactions" means the transactions described in the Proposed Transactions section of this letter;

"RDTOH" has the meaning assigned by subsection 129(3);

"Related" in respect of a person has the meaning assigned by subsection 251(2);

"Series of Transactions or Events" has the meaning assigned to that term by the common law, and includes any related transaction or event referred to in subsection 248(10);

"Special Resolution" has the meaning assigned by subsection 2(1) of the CBCA;

"Specified Investment Business" has the meaning assigned by subsection 125(7);

"Stated Capital" means the amount reported in the Stated Capital Account attributable to a share;

"Stated Capital Account" refers to the account maintained for a class of shares in accordance with subsection 26(1) of the CBCA;

"Taxable Canadian Corporation" has the meaning assigned by subsection 89(1);

"Taxable Dividend" has the meaning assigned by subsection 89(1);

"Trust" means the testamentary trust that arose as a consequence of C's death whose beneficiaries are A and B, and whose Trustees are A, B and D;

"Trust Agreement" means the agreement governing the settlement of the Trust, and the Trustees' management of the property under their administration;

"Trustees" means the trustees in charge of managing the property vested indefeasibly in the Trust;

"Types of Property" means the three (3) Types of Property into which DC's assets may be classified into for the purposes of the Distribution, namely: (a) cash or near cash property, comprising all of DC's current assets, cash, marketable securities (other than portfolio investments), accounts receivable, inventory, prepaid expenses and such number of shares of CCo having an aggregate FMV equal to the fraction of the FMV of the shares of CCo held by DC that the aggregate FMV of the cash and near cash property owned by CCo immediately before the transfer of DC's assets is of the aggregate FMV of all the Types of Property owned by CCo at that time; (b) business property, comprising all of DC's assets other than cash or near cash property, any income from which would be income from a business (other than a Specified Investment Business) carried on by DC and such number of shares of CCo having an aggregate FMV equal to the fraction of the FMV of the shares of CCo held by DC that the aggregate FMV of business property owned by CCo immediately before the transfer of DC's assets is of the aggregate FMV of all the Types of Property owned by CCo at that time; and (c) investment property, comprising all of DC's assets other than cash or near cash property, any income from which would be income from property or a Specified Investment Business and such number of shares of CCo having an aggregate FMV equal to the fraction of the FMV of the shares of CCo held by DC that the aggregate FMV of investment property owned by CCo immediately before the transfer of DC's assets is of the aggregate FMV of all the Types of Property owned by CCo at that time;

"Will" means the last will and testament of C; and

"Winding-Up Dividend" has the meaning assigned by subsection 84(2).

FACTS

Procedural requirements pertaining to the rulings process

1. None of the issues involved in this letter:

a) is in an earlier return of DC or a person Related to it;

b) is being considered by a tax services office or a taxation centre in connection with a previously filed tax return of DC or a person Related to it;

c) is under objection by DC or a person Related to it;

d) is before the Courts; or

e) is the subject of a ruling previously considered by the CRA.

The tax consequences arising from C's death

2. A and B are the adult children of C.

3. C is deemed to have disposed of all the capital property it held (including the DC shares) at their FMV immediately before the date of his death, and the Estate is deemed to have acquired such property at such value.

4. The liquidators of the Estate were A, B and D, who took possession of the property that C owned at the date of his death, discharged the outstanding claims which were associated with such property, and distributed C's net assets to the Trust in accordance with the terms of the Will.

5. The Trust held XXXXXXXXXX Class A PS, XXXXXXXXXX Class C PS and XXXXXXXXXX Class E PS in DC further to the Estate's distribution of C's net assets in compliance with the terms of the Will.

6. According to the terms of the Trust Agreement, the Trustees have to distribute the capital of the Trust to its beneficiaries in XXXXXXXXXX . However, the Trustees are entitled to distribute part or all the capital of the Trust to its beneficiaries at an earlier date if they elect to do so before XXXXXXXXXX .

DC's business activities, capital structure, shareholding and net assets

7. DC is a Taxable Canadian Corporation and a Canadian Controlled Private Corporation. DC's only undertaking is the investment of its funds.

8. DC's authorized share capital consists of an unlimited number of Common Shares, Class A PS, Class B PS, Class C PS, Class D PS and Class E PS.

9. DC's issued share capital is held as follows:

SHAREHOLDER		NUMBER AND CLASS OF SHARES	PUC		ACB
Estate		XXXXX  Class A PS			$XXXXXX 	$XXXXX
     			XXXXX Class C PS			$ XXXXX	$ XXXXX

      		XXXXX Class E PS			$ XXXXX	$ XXXXX

B 			XXXXX Common Shares		$ XXXXX	$ XXXXX
			XXXXX Class B PS			$ XXXXX	$ XXXXX
			XXXXX Class D PS			$ XXXXX	$ XXXXX

A 			XXXXX Common Shares		$ XXXXX	$ XXXXX
			XXXXX Class B PS			$ XXXXX	$ XXXXX
			XXXXX Class D PS			$ XXXXX	$ XXXXX

10. Prior to XXXXXXXXXX , A owed to DC the liability represented by the A Promissory Note and B owed to DC the liability represented by the B Promissory Note. On XXXXXXXXXX , DC transferred and assigned to the Trust the A Promissory Note and the B Promissory Note by way of a reduction of the PUC in respect of its Class C PS by an aggregate amount of $XXXXXXXXXX .

11. Each of DC's shareholders holds his/its shares of DC as Capital Property.

12. None of the DC shares owned by the Trust, A or B were acquired in contemplation of the Proposed Transactions.

13. Immediately before undertaking the Proposed Transactions, DC will own marketable securities consisting of publicly traded Canadian and U.S. stocks, bonds and other financial instruments. DC will also own a small amount of cash arising from the receipt of dividends, of interest on its marketing securities and of proceeds of disposition of such securities. It is DC's investment policy to keep all of its property fully invested in publicly-traded stocks or bonds at all times. The income arising from DC's investment portfolio is reported as investment income, and the marketable securities held by DC are held as Capital Property.

14. Immediately before undertaking the Proposed Transactions, DC will also own XXXXXXXXXX % of the shares in CCo, which are being held as Capital Property.

15. DC's liabilities include an amount of $XXXXXXXXXX payable to the Trust.

16. As of XXXXXXXXXX , the aggregate FMV of DC's assets prior to allocating DC's liabilities against these assets was approximately $XXXXXXXXXX . The aggregate ACB of DC's assets was approximately equal to $XXXXXXXXXX .

PROPOSED TRANSACTIONS

The Proposed Transactions will not result in DC or any person Related to it being unable to pay its existing outstanding tax liabilities. They will be implemented in the sequence described below:

The incorporation of ACo and BCo

17. ACo and BCo will be incorporated. The authorized share capital of ACo and BCo will consist of an unlimited number of Common Shares, Class A Special Shares, Class B Special Shares and Class C Special Shares. ACo and BCo will not issue any shares upon their incorporation.

18. The only undertaking of ACo and BCo will be the investing of their respective funds and marketable securities. Each of ACo and BCo will be a Taxable Canadian Corporation and a Private Corporation.

The capital distribution of the Estate to each of A and B

19. The Trustees will distribute XXXXXXXXXX Class A PS, XXXXXXXXXX Class C PS and XXXXXXXXXX Class E PS in DC to each of A and B by way of a capital distribution in satisfaction of their capital entitlement in the Trust.

The transfer of the DC shares to ACo and BCo

A's transfer of the DC Common Shares, Class A PS, Class B PS, Class C PS, Class D PS and Class E PS to ACo

20. A will transfer the XXXXXXXXXX Class A PS, XXXXXXXXXX Class C PS and XXXXXXXXXX Class E PS it held in DC to Aco in consideration for the Aco Debt 1, which has a Principal Amount equal to the aggregate FMV (and PUC) of the Class A PS, Class C PS and Class E PS in DC transferred to ACo.

21. A will also transfer XXXXXXXXXX the Common shares, XXXXXXXXXX Class B PS, XXXXXXXXXX Class D PS he held in DC to ACo in consideration for the Aco Debt 2, and XXXXXXXXXX Common Shares in Aco having a FMV equal to the excess of the FMV of the XXXXXXXXXX Common Shares, XXXXXXXXXX Class B PS and XXXXXXXXXX Class D PS in DC transferred to Aco over the Principal Amount of the Aco Debt 2.

22. A and ACo will elect jointly and in prescribed form and within the time limits referred to in subsection 85(6) to have the rules stated in subsection 85(1) to apply in respect of the transfer of the XXXXXXXXXX Common Shares, XXXXXXXXXX Class B PS and XXXXXXXXXX Class D PS in DC to ACo described in paragraph 21 above. For greater certainty, the Agreed Amount so elected will not be less than the lesser of the two (2) amounts described in paragraph 85(1)(c.1) .

23. Pursuant to subsection 26(3) of the CBCA, ACo will add to the Stated Capital Account maintained for the XXXXXXXXXX Common Shares issued to A an amount equal to the excess of the greater of the aggregate PUC, or the aggregate ACB as adjusted by paragraphs 84.1(2)(a) and (a.1) attributable to each of the XXXXXXXXXX Common Shares, XXXXXXXXXX Class B PS and XXXXXXXXXX Class D PS in DC that A transferred to ACo over the Principal Amount of the Aco Debt 2. In accordance with the requirements stated in paragraph 84.1(1)(a), an amount of $XXXXXXXXXX will be added to the Stated Capital Account for the ACo Common Shares.

B's transfer of Common Shares, and Class B and D PS

24. B will transfer the XXXXXXXXXX Class A PS, XXXXXXXXXX Class C PS and XXXXXXXXXX Class E PS it held in DC to Bco in consideration for the Bco Debt 1, which has a Principal Amount equal to the aggregate FMV of the Class A PS, Class C PS and Class E PS in DC transferred to ACo.

25. B will also transfer XXXXXXXXXX the Common shares, XXXXXXXXXX Class B PS, XXXXXXXXXX Class D PS he held in DC to BCo in consideration for the Bco Debt 2, and XXXXXXXXXX Common Shares in Bco having a FMV equal to the excess of the FMV of the XXXXXXXXXX Common Shares, XXXXXXXXXX Class B PS and XXXXXXXXXX Class D PS in DC transferred to Aco over the Principal Amount of the Bco Debt 2.

26. B and BCo will elect jointly in prescribed form and within the time limits referred to in subsection 85(6) to have the rules stated in subsection 85(1) to apply in respect of the transfer of the XXXXXXXXXX Common Shares, XXXXXXXXXX Class B PS and XXXXXXXXXX Class D PS in DC to BCo described in paragraph 25 above. The Agreed Amount in respect of each Common Share, Class B PS and Class D PS so transferred to BCo Class will be equal to their respective ACB. For greater certainty, the Agreed Amount so elected will not be less than the lesser of the two (2) amounts described in paragraph 85(1)(c.1) .

27. Pursuant to subsection 26(3) of the CBCA, BCo will add to the Stated Capital Account of the Common Shares an amount equal to the excess of the greater of the aggregate PUC, or the aggregate ACB as adjusted by paragraphs 84.1(2)(a) and (a.1) attributable to each of the XXXXXXXXXX Common Shares, XXXXXXXXXX Class B PS and XXXXXXXXXX Class D PS in DC that B transferred to BCo over the Principal Amount of
the Bco Debt 2. In accordance with the requirements stated in paragraph 84.1(1)(a), an amount of $XXXXXXXXXX will be added to the Stated Capital Account of the BCo Common Shares.

The transfer of DC's assets to ACo and BCo

The transferred assets

28. Immediately before the transfer of DC's assets described in paragraph 31 below, it is anticipated that DC will not own any business property. Therefore, the only Types of Property that will be transferred to ACo and BCo are as follows:

(a) cash or near cash property, comprising all of the current assets of DC including cash, bank deposits, term deposits and loans; and

(b) investment property, comprising of shares of publicly traded corporations and the shares of CCo.

29. For greater certainty, DC's and CCo's tax accounts such as the balance of its Non-Capital Losses, Net Capital Losses, CDA and RDTOH, if any, will not be considered as DC's property for the purposes of determining whether a Distribution is made.

The allocation of DC's liabilities to the transferred assets

30. DC's property will be respectively distributed to ACo and BCo without a proportionate allocation of liabilities related to each of the Types of Property that DC held immediately before the transfer.

The proportionate transfer of DC's assets to ACo and BCo

31. DC will proceed with the Distribution by transferring to each of ACo and BCo XXXXXXXXXX % of:

(a) its cash or near cash property; and

(b) its investment property;

such that, immediately after the transfer, the FMV of each Type of Property received by ACo and BCo will be equal to or approximate the proportion of the amount determined by the formula A x B/C where:

A is the FMV of all the property of each Type of Property owned by DC immediately before the transfer;

B is the FMV of all the shares of the capital stock of DC respectively owned by ACo and BCo immediately before the transfer;

C is the FMV of the all the shares of the capital stock of DC immediately before the transfer.

32. For the purposes of calculating the amount described in paragraph 31 above, the expression "approximates the proportion" means that the discrepancy from that proportion, if any, would not exceed XXXXXXXXXX % determined as a percentage of the FMV of each Type of Property that ACo and BCo would have received had it received its pro rata share of the FMV of that Type of Property.

33. DC and each of ACo and BCo will jointly elect, in prescribed form and within the time referred to in subsection 85(6), to have the provisions of subsection 85(1) apply to each Eligible Property that is respectively transferred by DC to ACo and BCo as described in Paragraph 31 above. The Agreed Amount in respect of each Eligible Property so transferred will not be less than the lesser of the amounts described in subparagraphs 85(1)(c.1)(i) and (ii) nor will it exceed the FMV of the property so transferred to Aco or Bco in accordance with paragraph 85(1)(c). In addition, the Agreed Amount will not be less that the amount permitted in paragraph 85(1)(b).

The consideration to be issued by ACo and BCo

34. As a consideration for DC's property so transferred, each of ACo and BCo will: (a) assume DC's liabilities, if any, that can be allocated to DC's property respectively transferred to ACo and BCo in the same proportion as described in paragraph 31 above (the amount of DC's liabilities to be assumed by ACo and BCo will not exceed the aggregate ACB of the property respectively transferred to ACo and BCo), and (b) issue to DC XXXXXXXXXX Class C Special Shares having a FMV and aggregate redemption amount equal to the amount by which the FMV of DC's assets respectively transferred to ACo and BCo as described in paragraph 31 above exceeds the amount of the liabilities respectively assumed by each of ACo and BCo.

35. For greater certainty, the amount added to the Stated Capital Account in respect of the Class C Special Shares to be respectively issued by ACo and BCo in consideration for the transferred property described in paragraph 31 above will not be adjusted as a result of the application of subsection 85(2.1).

36. Immediately following the issuance of the Class C Special Shares described in paragraph 34 above, DC will own more than XXXXXXXXXX % of the issued share capital of each of ACo and BCo which have full voting rights under all circumstances and which have a FMV which exceeds more than XXXXXXXXXX % of the FMV of all the issued shares of the capital stock of each of ACo and BCo.

The redemption of the Class C Special Shares that DC held in ACo and BCo

37. ACo will redeem the XXXXXXXXXX Class C Special Shares of its capital stock owned by DC for an amount equal to their Issue Price, and will issue the ACo Note to DC

38. BCo will redeem the XXXXXXXXXX Class C Special Shares of its capital stock owned by DC for an amount equal to their Issue Price, and will issue to DC the BCo Note as a consideration for the redemption of the XXXXXXXXXX Class C Special Shares so issued by ACo and BCo.

39. The ACo Note and the BCo Note will be payable on demand, and will have a principal amount equal to the Issue Price of the XXXXXXXXXX Class C Special Shares respectively issued by ACo and BCo. DC will accept the ACo Note and BCo Note as full payment for the redemption of the Class C Special Shares that it owned in each of ACo and BCo.

40. At the end of the day on which the Class C Special Shares of each of ACo and BCo are redeemed, each of ACo and BCo will cause its first taxation year to end.

The PUC increase in respect of DC's Common Shares

41. DC's shareholders will pass a Special Resolution to increase the Stated Capital of its Common Shares by an amount equal to the outstanding balance of DC's CDA at that time. DC will file the appropriate election within the time prescribed under subsection 83(2) in respect of the dividend deemed to arise from the PUC increase in respect of DC's Common Shares.

The winding-up of DC

42. On the day following the redemption of the Class C Special Shares of ACo and BCo as described in paragraphs 37 and 38 above, DC's shareholders will pass a Special Resolution to wind-up and dissolve DC under the applicable provisions of the CBCA. In connection with the winding-up, DC will distribute the ACo Note to ACo, and the BCo Note to BCo. No agreement or resolution will provide for the cancellation of any of the DC shares as a result of the winding-up of DC. The legal obligations represented by ACo Note and the BCo Note will be extinguished as a result of their assignment to ACo and BCo in the course of DC's winding-up.

43. Following the completion of the Proposed Transactions, all properties of DC will have been distributed and all liabilities of DC either discharged or assumed by ACo or BCo.

44. Articles of Dissolution will be filed with the Director. Upon receipt of the Articles of Dissolution, the Director will issue a Certificate of Dissolution. DC will cease to exist on the date shown on the Certificate of Dissolution.

45. Should DC be entitled to receive a Dividend Refund in the course of the Proposed Transactions described herein, it will distribute, as part of the winding-up, such an amount to each of ACo and BCo in the same proportion as described in paragraph 31 above. The Dividend Refund, if any, will not arise until after the end of the fiscal period in which the Proposed Transactions described above are completed.

PURPOSE OF THE PROPOSED TRANSACTIONS

46. The purpose of the Proposed Transactions is to transfer to each of ACo and BCo their pro rata share of the cash and near cash, and investment property currently held by DC so that A and B can determine the investment policies applicable to the property that ACo and BCo will receive from DC as a result of the proposed butterfly reorganization.

ADDITIONAL INFORMATION

47. No property has or will become property of DC in contemplation of, and before the proposed Distribution described in Paragraph 30 above. In addition, no liabilities have been, or will be incurred or discharged by DC in contemplation of and before the Distribution described in Paragraph 31 above (from time to time, DC buys and sells the investments described in paragraph 13, sometimes pursuant to advice from an investment advisor).

48. Except as otherwise described herein, no shares of DC or of any other corporation referred to herein has been acquired or will be acquired or disposed of as part of a Series of Transactions or Events that includes the Proposed Transactions.

49. Subsequent to the implementation of the Proposed Transactions, neither ACo nor BCo intends to otherwise transfer or sell any of the assets that it will receive in the course of the Proposed Transactions except in the normal course of its investment activities (ACo and BCo will hold and dispose of the investements received from DC in the normal course of their investment activities as part of the ongoing management of the portfolio of assets received from DC).

50. None of the shares issued by ACo and BCo in the course of the Proposed Transactions:

a) is or will be subject to a guarantee agreement within the meaning referred to in subsection 112(2.2);

b) is or will be part of a Dividend Rental Arrangement within the meaning referred to in subsection 112(2.3); or

c) has been or will be issued or acquired as part of a transaction or event or Series of Transactions or Events of the type described in subsection 112(2.5).

RULINGS

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

A. Subject to the application of subsection 69(11), provided that the appropriate joint elections are filed in the prescribed form and manner within the time limits specified in subsection 85(6) and provided that each particular property so transferred is an Eligible Property in respect of which shares have been issued as full or partial consideration therefore, the provisions of subsection 85(1) will apply to:

(a) A's transfer to ACo of XXXXXXXXXX DC Common Shares, XXXXXXXXXX Class B PS and XXXXXXXXXX Class D PS that he held in DC as described in paragraph 21 above;

(b) B's transfer to BCo of XXXXXXXXXX DC Common Shares, XXXXXXXXXX Class B PS and XXXXXXXXXX Class D PS that he held in DC as described in paragraph 25 above;

(c) DC's transfer of the cash and near cash and the investment property that it held immediately before their transfer to ACo and BCo as described in paragraph 31 above;

such that the Agreed Amount in respect of each such transfers shall be deemed to be the transferor's Proceeds of Disposition and the transferee's ACB thereof pursuant to paragraph 85(1)(a) . For greater clarity, paragraph 85(1)(e.2) will not apply to the transfers of property described above.

B. The provisions of subsection 84.1 will not apply to respectively deem either of A or B to have received a dividend as a result of the receipt of the ACo Debt 1 and the BCo Debt 1 in consideration for their transfer to ACo and BCo of the XXXXXXXXXX Class A PS, XXXXXXXXXX Class C PS and XXXXXXXXXX Class E PS that they held in DC to ACo and BCo as described in paragraphs 20 and 24 above.

C. Paragraph 40(3.4)(a) will deem DC's Net Capital Losses, if any, arising from the disposition of its property described in paragraph 31 above to be XXXXXXXXXX at the time of such disposition. However, subparagraph 40(3.4)(b)(v) will deem such Net Capital Losses to occur immediately before DC's winding-up begins as described in paragraph 42 above.

D. Provided that, as part of the Series of Transactions or Events that includes the Proposed Transactions, there is not:

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

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

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

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

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

which has not been described herein, then by virtue of paragraph 55(3)(b), subsection 55(2) will not apply to the Taxable Dividends resulting from either the redemption by ACo or BCo of its Class C Special Shares owned by DC described in paragraphs 37 and 38 above, or DC's winding-up described in paragraph 42 above. For greater certainty, subsection 55(3.1) will not apply to deny the exemption stated in paragraph 55(3)(b).

E. The provisions of subsections 15(1), 56(2) and 246(1) will not apply to the Proposed Transactions.

F. Subsection 245(2) will not apply 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 6 months of the date of this letter. Moreover, 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.

OTHER COMMENTS

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

(a) Any other tax consequences relating to the facts and Proposed Transactions other than those specifically described in the above rulings;

(b) The FMV or the ACB of any particular asset, the PUC of any share, and the outstanding balance of various tax accounts such as RDTOH for any of the corporate entities described herein; and

(c) The related transactions to be included in the Series of Transactions or Events that includes the receipt of a dividend deemed to be paid and received as a consequence of the Proposed Transactions

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

Yours truly,

XXXXXXXXXX
For Director
Reorganizations and Resources Division
Income Tax Rulings Directorate
Policy and Legislation Branch