2010 Ruling 2009-0306341R3 - Trusts as Shareholders on a Butterfly

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

Principal Issues: Whether 55(3.1)(b) applies to a distribution of transferee corporation shares by a trust to its beneficiary following the butterfly distribution so as to taint the butterfly?

Position: Not in these circumstances.

Reasons: In these circumstances, even if a distribution of transferee corporation shares is part of the butterfly series of transactions the distribution is to a beneficiary that is related to the vendor.

XXXXXXXXXX
									2009-030634
									XXXXXXXXXX
      								XXXXXXXXXX 

XXXXXXXXXX , 2010

Dear XXXXXXXXXX :

Re: Advance Income Tax Ruling
XXXXXXXXXX

This is in reply to your letter of XXXXXXXXXX in which you requested an advance income tax ruling on behalf of the taxpayers referred to above. We also acknowledge our subsequent telephone conversations and correspondence concerning your request. The documents submitted with 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:

(i) is in an earlier return of any such taxpayers or a related person,

(ii) is being considered by a tax services office or taxation centre in connection with a previously filed tax return of any such taxpayers or a related person,

(iii) is under objection by any of such taxpayers or a related person,

(iv) is, in relation to any of such taxpayers or a related person, before the courts or is the subject of a judgment the time limit for appeal from which has not expired, or

(v) is the subject of a ruling previously considered by the Directorate in relation to any of such taxpayers or a related person.

DEFINITIONS

In this letter, unless otherwise indicated or the context otherwise requires, the following terms have the meanings specified below:

(a) "Act" means the Income Tax Act, R.S.C. 1985, c.1 (5th Supp.), as amended from time to time and consolidated to the date of this letter and, unless otherwise indicated, legislative references such as those made to a part, division, section, subsection, paragraph, subparagraph, clause or subclause are to provisions of the Act;

(b) "adjusted cost base" (also referred to as "ACB") has the meaning assigned by section 54;

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

(d) "arm's length" has the meaning assigned by subsection 251(1);

(e) "BCA" means the Business Corporations Act, R.S.O. 1990, c. B.16, as amended;

(f) "BN" means the business number assigned to the particular entity by the CRA;

(g) "Canadian-controlled private corporation" (also referred to as "CCPC") has the meaning assigned by subsection 125(7);

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

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

(j) "cost amount" has the meaning assigned by subsection 248(1);

(k) "CRA" means the Canada Revenue Agency;

(l) "DC" means XXXXXXXXXX , a corporation incorporated on XXXXXXXXXX under the BCA and who files its tax returns at the XXXXXXXXXX Tax Centre;

(m) "DC Note" means a non-interest-bearing promissory note of DC that is payable on demand;

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

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

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

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

(r) "excepted dividend" has the meaning assigned by section 187.1;

(s) "excluded dividend" has the meaning assigned by subsection 191(1);

(t) "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;

(u) "forgiven amount" has the meaning assigned by subsections 80(1) and 80.01(1);

(v) "guarantee agreement" has the meaning assigned by subsection 112(2.2);

(w) "Mrs. X" means XXXXXXXXXX ;

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

(y) "Paragraph" refers to a particular numbered paragraph in this letter except where it is not capitalized, in which case it refers to a provision of the Act unless otherwise indicated or the context otherwise requires;

(z) "Parent" means XXXXXXXXXX , deceased XXXXXXXXXX ;

(aa) "pre-1972 capital surplus on hand" (also referred to as "CSOH") has the meaning assigned by subsection 88(2.1);

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

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

(dd) "Proposed Transactions" means the proposed transactions described in Paragraphs 11 through 24 of this letter;

(ee) "refundable dividend tax on hand" (also referred to as "RDTOH") has the meaning assigned by subsection 129(3);

(ff) "Regulations" means the regulations under the Act;

(gg) "related persons" has the meaning assigned by subsection 251(2);

(hh) "restricted financial institution" has the meaning assigned by subsection 248(1);

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

(jj) "Sibling" means either Sibling1 or Sibling2, as the context requires;

(kk) "Sibling1" means XXXXXXXXXX , an individual who is a resident of Canada,XXXXXXXXXX ;

(ll) "Sibling2" means XXXXXXXXXX , an individual who is a resident of Canada, XXXXXXXXXX ;

(mm) "Sibling1Co" means the corporation incorporated under the BCA by Trust 1 pursuant to the proposed transaction described in Paragraph 11 below;

(nn) "Sibling2Co" means the corporation incorporated under the BCA by Trust 2 pursuant to the proposed transaction described in Paragraph 12 below;

(oo) "SiblingCos" means Sibling1Co and Sibling2Co, collectively, and "SiblingCo" means either one of such corporations, as the context requires;

(pp) "SiblingCo Note" means a non-interest-bearing promissory note of a particular SiblingCo that is payable on demand and "SiblingCo Notes" means the SiblingCo Note of both SiblingCos;

(qq) "specified financial institution" has the meaning assigned by subsection 248(1);

(rr) "specified investment business" has the meaning assigned by subsection 125(7);

(ss) "specified person" has the meaning assigned by paragraph (h) of the definition "taxable preferred share" in subsection 248(1);

(tt) "stated capital" and "stated capital account" have the meanings assigned thereto by the BCA;

(uu) "Subparagraph" refers to a particular numbered subparagraph in this letter except where it is not capitalized, in which case it refers to a provision of the Act unless otherwise indicated or the context otherwise requires;

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

(ww) "taxable dividend" has the meaning assigned by subsection 89(1);

(xx) "Trust 1" means the XXXXXXXXXX , established for the benefit of Sibling1, an inter vivos trust that is administered by the Trustees;

(yy) "Trust 2" means the XXXXXXXXXX , established for the benefit of Sibling2, an inter vivos trust that is administered by the Trustees;

(zz) "Trusts" means Trust 1 and Trust 2, collectively, and "Trust" means either one of such Trusts, as the context requires; and

(aaa) "Trustees" means XXXXXXXXXX , each in XXXXXXXXXX capacity as a trustee of Trust 1 and of Trust 2.

FACTS

1. By agreement made XXXXXXXXXX , a trust was created by Parent for the benefit of his daughter, Mrs. X, and her heirs.

2. Mrs. X died on XXXXXXXXXX and, at that time, was resident and domiciled in the province of XXXXXXXXXX . At the time of her death, Sibling1 and Sibling2 were the only heirs of Mrs. X.

3. On the death of Mrs. X, the property remaining in the trust described in Paragraph 1 was divided equally between Trust 1 and Trust 2.

4. Sibling1 is the beneficiary of Trust 1, and Sibling2 is the beneficiary of Trust 2.

5. DC is a taxable Canadian corporation and a Canadian-controlled private corporation. The taxation year of DC ends on XXXXXXXXXX .

6. The authorized share capital of DC consists of an unlimited number of common shares.

7. DC has XXXXXXXXXX common shares issued and outstanding, of which XXXXXXXXXX are held by each of Trust 1 and Trust 2, respectively. The aggregate ACB and aggregate PUC of the DC shares owned by each of Trust 1 and Trust 2 is $XXXXXXXXXX and $XXXXXXXXXX , respectively. The aggregate FMV of the common shares owned by each Trust is approximately $XXXXXXXXXX .

8. The only activity of DC is the investment of its funds. The principal assets of DC consist of shares of public corporations, which represent capital property to DC.

9. DC has no significant liabilities.

10. At the end of its XXXXXXXXXX taxation year, the RDTOH balance of DC was $XXXXXXXXXX , it was entitled to a dividend refund for that year of $XXXXXXXXXX and its CDA balance was $XXXXXXXXXX .

PROPOSED TRANSACTIONS

11. Trust 1 will incorporate Sibling1Co, which will be a taxable Canadian corporation and a private corporation. The authorized share capital of Sibling1Co will include an unlimited number of shares of each of the following classes:

(a) one class of voting common shares; and

(b) one class of preference shares having the following attributes:

(i) each preference share will be redeemable, subject to applicable law, at any time at the option of Sibling1Co at a redemption amount (the "Redemption Amount") equal to the aggregate FMV of the consideration paid to Sibling1Co on issuance thereof divided by the number of Sibling1Co preference shares issued as consideration therefore, plus any declared but unpaid dividends;

(ii) each preference share will be retractable, subject to applicable law, at any time at the option of the holder for an amount equal to the Redemption Amount;

(iii) the holder of each preference share will be entitled to a non-cumulative cash dividend as and when declared by the board of directors of Sibling1Co from time to time, which dividend need not also be declared on any other class of shares of Sibling1Co;

(iv) 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 Sibling1Co if the resulting realizable value of the net assets of Sibling1Co after payment of the dividends would be less than the aggregate Redemption Amount of all of the Sibling1Co preference shares then outstanding;

(v) the holder of each Sibling1Co preference share will be entitled, upon the liquidation, dissolution or winding-up of Sibling1Co, to a payment in priority to all other classes of shares of Sibling1Co of an amount equal to the Redemption Amount therefore 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;

(vi) the holder of each Sibling1Co preference share will have full voting rights under all circumstances within the meaning of subparagraph 186(1)(b)(i); and

(vii) for the purposes of subsection 191(4), the amount specified in respect of each Sibling1Co preference share shall be the amount specified by a director or an officer of Sibling1Co in a certificate that is made: (i) effective concurrently with the issuance of such Sibling1Co preference share; and (ii) pursuant to a resolution of the board duly passed and evidenced in writing authorizing the issuance of such Sibling1Co preference share, such amount to be expressed as a dollar amount (and not expressed as a formula) and shall not exceed the fair market value of the consideration for which such Sibling1Co preference share is issued.

One common share of Sibling1Co will be issued to Trust 1 in the course and for the purpose of organizing the corporation.

12. Trust 2 will incorporate Sibling2Co, which will be a taxable Canadian corporation and a private corporation. The authorized share capital of Sibling2Co will include an unlimited number of shares of each of the following classes:

(a) one class of voting common shares; and

(b) one class of preference shares having the following attributes:

(i) each preference share will be redeemable, subject to applicable law, at any time at the option of Sibling2Co at a redemption amount (the "Redemption Amount") equal to the aggregate FMV of the consideration paid to Sibling2Co on issuance thereof divided by the number of Sibling2Co preference shares issued as consideration therefore, plus any declared but unpaid dividends;

(ii) each preference share will be retractable, subject to applicable law, at any time at the option of the holder for an amount equal to the Redemption Amount;

(iii) the holder of each preference share will be entitled to a non-cumulative cash dividend as and when declared by the board of directors of Sibling2Co from time to time, which dividend need not also be declared on any other class of shares of Sibling2Co;

(iv) 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 Sibling2Co if the resulting realizable value of the net assets of Sibling2Co after payment of the dividends would be less than the aggregate Redemption Amount of all of the Sibling2Co preference shares then outstanding;

(v) the holder of each Sibling2Co preference share will be entitled, upon the liquidation, dissolution or winding-up of Sibling2Co, to a payment in priority to all other classes of shares of Sibling2Co of an amount equal to the Redemption Amount therefore 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;

(vi) the holder of each Sibling2Co preference share will have full voting rights under all circumstances within the meaning of subparagraph 186(1)(b)(i); and

(vii) for the purposes of subsection 191(4), the amount specified in respect of each Sibling2Co preference share shall be the amount specified by a director or an officer of Sibling2Co in a certificate that is made: (i) effective concurrently with the issuance of such Sibling2Co preference share; and (ii) pursuant to a resolution of the board duly passed and evidenced in writing authorizing the issuance of such Sibling2Co preference share, such amount to be expressed as a dollar amount (and not expressed as a formula) and shall not exceed the fair market value of the consideration for which such Sibling2Co preference share is issued.

One common share of Sibling2Co will be issued to Trust 2 in the course and for the purpose of organizing the corporation.

13. The DC shares will be transferred by the Trusts to the SiblingCos, as follows:

(a) in the event that the FMV of the XXXXXXXXXX DC shares owned by a Trust does not exceed their ACB to that Trust, the Trust will transfer its DC shares to the SiblingCo owned by it in exchange for a SiblingCo Note of that SiblingCo having a FMV and principal amount equal to the FMV of the DC shares transferred to that SiblingCo; and

(b) in the event that the FMV of the XXXXXXXXXX DC shares owned by a Trust exceeds their ACB to that Trust, the Trust will transfer its DC shares to the SiblingCo owned by it in exchange for:

(i) a SiblingCo Note of that SiblingCo having a FMV and principal amount equal to the ACB of the DC shares transferred to that SiblingCo, and

(ii) XXXXXXXXXX common shares of that SiblingCo.

For greater certainty, the ACB of the DC shares in each case will be their ACB otherwise determined and adjusted in accordance with the provisions of subsection 84.1(2) of the Act.

Having regard to paragraph 84.1(1)(a), no amount will be added by either SiblingCo to the stated capital account maintained for any particular class of shares of its capital stock issued to a Trust in consideration of the transfer by the Trust of its DC shares.

14. In the event that shares of a SiblingCo are issued to a particular Trust in consideration for the transfer by it of DC shares in accordance with Subparagraph 13(b) above, the particular Trust will jointly elect with that SiblingCo, in prescribed form and within the time referred to in subsection 85(6), to have the rules in subsection 85(1) apply to such transfer. The agreed amount for purposes of each such election will not be less than the lesser of the two amounts specified in paragraph 85(1)(c.1), nor will such amount exceed the FMV of the DC shares that are transferred to the particular SiblingCo.

15. Immediately before the transfers of property described in Paragraph 17 below, DC's property will be classified into three different types for purposes of the definition of "distribution" in subsection 55(1), as follows:

(a) cash or near-cash property, consisting of all current assets of DC, including cash, interest and dividend receivables;

(b) investment property, consisting of all the assets of DC, other than cash or near-cash property, any income from which would, for purposes of the Act, be income from property or from a specified investment business; and

(c) business property, consisting of all assets of DC, other than cash or near-cash property, any income from which would, for purposes of the Act, be
income from an active business carried on by DC, other than a specified investment business.

For greater certainty, DC does not have the ability to exercise significant influence over any corporation or other entity in which it has an investment. Consequently, DC is not required to use the consolidated look-through method for determining the appropriate proportion of each of the three types of property (cash or near cash and investment and business property ) that any such investment would represent.

Any tax accounts of DC, such as any non-capital loss or net capital loss, the amount of any RDTOH or CSOH or the balance of any CDA, will not be considered property for purposes of the classification described herein.

16. In determining the net FMV of each type of property of DC immediately before the transfers of property described in Paragraph 17 below, the liabilities of DC
will be allocated to, and will be deducted in the calculation of, the net FMV of each type of property of DC in the following manner:

(a) current liabilities of DC will be allocated to each cash or near-cash property of DC in the proportion that the FMV of each such property is of the FMV of all cash or near-cash property owned by DC provided that the allocation of current liabilities as described herein will not, in any event, exceed the total FMV of the cash or near cash property of DC;

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

(c) if any liabilities (hereinafter referred to as "excess unallocated liabilities") remain after the allocations described in Subparagraphs (a) and (b) above are made, such excess unallocated liabilities (including any excess current liabilities, if any), will then be allocated to the cash or near cash property, investment property, and business property of DC based on the relative net FMV of each type of property prior to the allocation of such excess unallocated liabilities but after the allocation of the liabilities described in Subparagraphs (a) and (b) above.

17. Immediately following the determination of DC's types of property as described in Paragraph 15, DC will transfer to each SiblingCo a pro rata portion of the net FMV of each type of property owned by DC, as determined in accordance with Paragraphs 15 and 16 so that, immediately after the property transfers and liability assumptions, the net FMV of each of the three types of property of DC transferred to each SiblingCo will, for greater certainty, approximate the proportion determined by the formula:

A x B/C

where:

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

B: is the FMV, immediately before the transfer, of all of the DC shares owned at that time by the particular SiblingCo; and

C: is the FMV, immediately before the transfer, of all the issued and outstanding DC shares at that time.

For the purposes of this Paragraph the expression "approximate the proportion" means that any discrepancy between the net FMV of a particular type of property of DC that is received by a particular SiblingCo and the net FMV of that type of property that the particular SiblingCo would have received had it received it's pro rata (i.e. 50%) share thereof will not exceed one percent (1%).

18. For purposes of determining the net FMV of the property of DC as described in Paragraphs 15 and 16, the following principles will apply:

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

(b) the amount of any deferred income tax in the financial statements will not be considered a liability because such amount does not represent a legal obligation of DC; and

(c) any tax accounts of DC, including the balance of its RDTOH, CDA and any losses available for carry forward, if any, will not be considered to be a property or liability of DC.

19. As consideration for the transfers of property described in Paragraph 17 above, each SiblingCo will:

(a) assume an appropriate amount of liabilities of DC; and

(b) issue to DC preference shares of its capital stock that represent more than XXXXXXXXXX % of all of the issued shares (having full voting rights under all circumstances) of the particular SiblingCo and that have an aggregate
redemption amount and aggregate FMV equal to the aggregate FMV of all property transferred by DC to the SiblingCo less the amount of the liabilities of DC assumed by the particular SiblingCo as described in Subparagraph (a).

Following the issuance by a SiblingCo of its preference shares to DC, those preference shares will have an aggregate FMV that is more than XXXXXXXXXX % of the aggregate FMV at that time of all of the issued shares of the particular SiblingCo.

In accordance with clause 24(3)(a) of the BCA, the amount that will be added to the stated capital account maintained by each SiblingCo in respect of its preference shares upon the share issuance hereinbefore described in this Paragraph will be limited to the maximum amount permitted to be added to the PUC of such shares without a corresponding deduction under subsection 85(2.1).

20. DC and each SiblingCo will jointly elect, in prescribed form and within the time referred to in subsection 85(6), to have the rules in subsection 85(1) apply to the transfer of each eligible property of DC transferred to the SiblingCo the FMV of
which exceeds or may exceed the cost amount thereof to DC. The amount agreed upon in such election in respect of any particular eligible property:

(a) will not be greater than the FMV of such property at the time of the transfer,

(b) will not be less than the amount of any liabilities assumed by the SiblingCo as consideration for the transfer of such property, and

(c) will not be less than such of the following amounts as are applicable:

(i) in the case of any capital property (other than depreciable property of a prescribed class) or inventory, the lesser of the amounts described in subparagraphs 85(1)(c.1)(i) and (ii);
(ii) in the case of any eligible capital property, the least of the amounts described in subparagraphs 85(1)(d)(i), (ii) and (iii); and

(iii) in the case of any depreciable property of a prescribed class, the least of the amounts described in subparagraphs 85(1)(e)(i), (ii) and (iii).

Where a marketable security to be transferred by DC to a SiblingCo has a FMV that is less than its ACB, the particular SiblingCo will not assume liabilities of DC in an amount greater than the FMV of the particular security as consideration for such marketable security and, for greater certainty, no election under subsection 85(1) will be made in respect of the transfer of such security.

21. Following the transfers of property described in Paragraph 17 above, and immediately before the end of each SiblingCo's first taxation year, each SiblingCo will redeem all preference shares of its capital stock held by DC at the redemption price of such shares, which the SiblingCo will pay by issuing to DC its SiblingCo Note having a principal amount and FMV equal to the aggregate redemption price of such shares. The SiblingCo Notes so issued will be accepted by DC in full payment of the redemption price of such preference shares.

22. On the next business day following the first taxation year-ends of the SiblingCos, DC will purchase for cancellation all the DC shares held by each SiblingCo at the FMV thereof and will satisfy the purchase price by issuing a DC Note to each SiblingCo, the principal amount and FMV of each DC Note of which will be equal to the FMV of the DC shares so purchased from the particular SiblingCo for cancellation.

If DC shall have a balance in its CDA immediately before the purchase of the DC shares held by a SiblingCo, as contemplated by this Paragraph, the purchase will occur in the separate transactions described below.

(a) DC will purchase for cancellation that number of DC shares held by each SiblingCo as will result in DC being deemed to have paid and each SiblingCo being deemed to have received, pursuant to subsection 84(3), one or more dividends equal in the aggregate to one-half of the amount of DC's CDA balance immediately before that time.

DC will elect, in prescribed manner and prescribed form at or before the earlier of the time and the day referred to in subsection 83(2), to have the
provisions of subsection 83(2) apply to the full amount of each such deemed dividend.

(b) DC will then purchase for cancellation all remaining DC shares held by the SiblingCos.

In the event there are two purchases for cancellation of shares from each SiblingCo, as described above, instead of issuing a single DC Note to each SiblingCo, DC will issue two DC Notes to each SiblingCo: one in payment of the purchase price of the DC shares purchased for cancellation in the first transaction described in Subparagraph (a) above and the other in payment of the purchase price of the DC shares purchased for cancellation in the second transaction described in Subparagraph (b) above. Each DC Note will have a principal amount and FMV equal to the FMV of the DC shares the purchase price of which is to be paid by the issuance of that note.

23. The principal amount owing by each SiblingCo to DC under a particular SiblingCo Note will be set off against the principal amount owing by DC to that SiblingCo under the particular DC Note(s) so that the holder of each such note will agree to the cancellation of the note in full satisfaction of that party's obligations under the other such note(s).

24. Articles of dissolution will be filed by DC with the appropriate government body and upon receipt of a certificate of dissolution or similar certification of the government body, DC will be dissolved.

ADDITIONAL INFORMATION

25. The Proposed Transactions will occur in the order presented unless otherwise indicated, with the exception of the filing of any applicable election forms in respect of the Proposed Transactions, as described in Paragraphs 14, 20 and 22, which will be filed within the period described in the relevant Paragraph.

26. None of DC and the SiblingCos will be, at any time during the series of transactions or events that includes the Proposed Transactions, a specified financial institution, a restricted financial institution, or a corporation described in
any of paragraphs (a) to (f) of the definition of "financial intermediary corporation" in subsection 191(1).

27. None of the shares of DC, and none of the shares of the SiblingCos, will be, at any time during the implementation of the Proposed Transactions:

(a) subject to a guarantee agreement that is given by a specified financial institution or a specified person in relation to a specified financial institution for any purpose referred to in subsection 112(2.2);

(b) a share issued or acquired as part of a transaction or event or a series of transactions or events contemplated by subsection 112(2.5); or

(c) the subject of a "dividend rental arrangement", as defined in subsection 248(1).

28. From time to time DC buys and sells marketable securities as investments. No property has been or will be acquired by DC, and no liabilities have been or will be incurred by DC in contemplation of and before the Proposed Transactions except in the normal course of the investment activities of DC. On completion of the Proposed Transactions, the SiblingCos will each own their pro rata share of
the assets formerly owned by DC. The SiblingCos may continue to buy and sell marketable securities as investments in the normal course of their investment activities.

29. Each Trust will, within a reasonable time after the later of the time that the Sibling beneficiary of the particular Trust attains the age of 21 years and the day on which the transactions described in Paragraph 23 hereof are completed, distribute to the particular Sibling beneficiary all of its properties in satisfaction of the particular Sibling beneficiary's capital interest in the Trust.

30. Except as described in this letter, none of the current shareholders of DC are contemplating the sale or transfer of any shares of DC or Sibling1Co or Sibling2Co.

PURPOSE OF PROPOSED TRANSACTIONS

31. The purpose of the Proposed Transactions is to divide the assets of DC before the time that each Sibling will receive the assets of XXXXXXXXXX particular Trust in satisfaction of XXXXXXXXXX capital interest therein, so as to give each Sibling the flexibility to separately manage XXXXXXXXXX own investments and to plan and provide for XXXXXXXXXX own financial needs through XXXXXXXXXX own holding company.

32. Due to specific, non-tax-related, personal circumstances, the Trustees consider it advisable to complete the Proposed Transactions at a time that is before the time that the Siblings will receive the assets of the Trusts in satisfaction of their capital interests in the Trusts.

RULINGS

Provided that the preceding statements constitute a complete and accurate disclosure of all relevant facts, the Proposed Transactions, additional information and the purposes of the Proposed Transactions, and provided that the Proposed Transactions are completed as described, our rulings are as follows:

A. Provided that the requisite joint elections are filed in prescribed form and within the time referred to in subsection 85(6), and subject to the application of subsection 69(11), the provisions of subsection 85(1) will apply to the transfers of the DC shares held by each Trust to the particular SiblingCo controlled by it, as described in Paragraph 13, such that the agreed amount in respect of each such transfer will be deemed to be each Trust's proceeds of disposition and each respective SiblingCo's cost thereof. For greater certainty, paragraph 85(1)(e.2) will not apply to the transfers referred to herein.

B. Provided that the requisite joint elections are filed in prescribed form and within the time referred to in subsection 85(6), and subject to the application of subsection 69(11), the provisions of subsection 85(1) will apply to the transfers of eligible property held by DC to each SiblingCo as described in Paragraph 17, such that the agreed amount in respect of each such transfer will be deemed to be DC's proceeds of disposition and each respective SiblingCo's cost thereof. For greater certainty, paragraph 85(1)(e.2) will not apply to the transfers referred to herein.

C. As a result of the redemption by the SiblingCo's of their preference shares, as described in Paragraph 21, and of the purchase for cancellation by DC of the DC shares, as described in Paragraph 22, by virtue of subsection 84(3):

(a) each SiblingCo will be deemed to have paid, and DC will be deemed to have received, a taxable dividend equal to the amount by which the amount paid by each SiblingCo to DC on the redemption of its preference shares owned by DC exceeds the PUC of such preference shares immediately before the redemption;

(b) DC will be deemed to have paid, and each SiblingCo will be deemed to have received, a dividend equal to the amount by which the amount paid by DC to each SiblingCo on the purchase for cancellation of the DC shares owned by the particular SiblingCo exceeds the PUC of such DC shares immediately before the purchase for cancellation; and

(c) to the extent that each deemed dividend referred to in Subparagraphs (a) and (b) is a taxable dividend, each such dividend:

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

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

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

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

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

(vi) will not be subject to tax under Part IV.1; and

(vii) will not be subject to tax under VI.1 except, in the case of the taxable dividend deemed to be received by DC, to the extent that the amount paid by a SiblingCo on the redemption of its preference shares owned by DC exceeds the amount specified in respect of those shares for the purposes of subsection 191(4).

D. 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.l)(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 in the circumstances described in subparagraph 55(3.l)(b)(iii); or

(e) an acquisition of property in the circumstances described in subparagraph 55(3.l)(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 above and, for greater certainty, subsection 55(3.1) will not apply to deny the exemption under paragraph 55(3)(b).

E. The cancellation of the SiblingCo Notes and the DC Notes as described in Paragraph 23 will not, in and by itself, result in a forgiven amount.

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

G. Subsection 245(2) will not apply to the Proposed Transactions, in and by themselves, to re-determine the tax consequences confirmed herein.

Our rulings are given subject to the limitations set out in Information Circular 70-6R5 dated May 17, 2002, and are binding on the CRA provided the Proposed Transactions are completed within six months of the date of this letter. Our rulings are based on the law as it currently reads and do not take into account any proposed amendments to the Act or Regulations which, if enacted into law, could have an effect on the rulings provided herein.

COMMENTS

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

(a) the PUC of any share, the ACB or FMV of any property referred to herein or the balance of the CDA or RDTOH of any corporation;

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

Yours truly,

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