2010 Ruling 2009-0325191R3 - Standard Split-up 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: Standard Butterfly Ruling

Position: Ruling issued.

Reasons: Satisfies all statutory and administrative requirements

XXXXXXXXXX  							2009-032519		

XXXXXXXXXX , 2010

Dear XXXXXXXXXX :

Re: Advance Income Tax Ruling Request
XXXXXXXXXX

This is in reply to your letters dated XXXXXXXXXX , in which you requested an advance income tax ruling on behalf of the above noted taxpayers. We also acknowledge the information provided in correspondence and telephone conversations (XXXXXXXXXX ) concerning your request. The information contained in documents submitted with your request forms part of this ruling only to the extent it is expressly referred to or described herein.

You have advised that to the best of your knowledge and that of each of the taxpayers on whose behalf this ruling is requested, none of the issues involved in this ruling is

(a) in an earlier tax return of one of the taxpayers or any related person;

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

(c) under objection by one of the taxpayers or a related person;

(d) before the courts or, if a judgment has been issued, the time limit for appeal to a higher court has not expired; or

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

You have also advised that, to the best of your knowledge and that of each of the taxpayers, the proposed transactions will not result in any of the taxpayers or any related person described herein being unable to pay its existing outstanding tax liabilities.

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

DEFINITIONS

In this letter, all monetary amounts are expressed in Canadian dollars unless otherwise indicated, and the following terms or expressions have the meaning specified:

"ACB" means "adjusted cost base" as defined in section 54;

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

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

"BCA" means the Business Corporations Act XXXXXXXXXX and, where applicable, its predecessor and successor statutes;

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

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

"capital property" has the meaning assigned by section 54;

"CDA" means "capital dividend account" as defined in subsection 89(1);

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

"CRA" means the Canada Revenue Agency;

"Daughter" refers to XXXXXXXXXX ;

"DC" refers to XXXXXXXXXX .;

"DC Note" has the meaning assigned by Paragraph 31;

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

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

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

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

"eligible capital property" has the meaning assigned by subsection 54;

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

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

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

"Grandchild1" refers to XXXXXXXXXX ;

"Grandchild2" refers to XXXXXXXXXX ;

"Grandmother" refers to XXXXXXXXXX ;

"GRIP" means "general rate income pool" as defined in subsection 89(1);

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

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

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

"Proposed Transactions" means the transactions described in Paragraphs 23 to 32;

"PUC" means "paid up capital" as defined in subsection 89(1);

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

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

"RDTOH" means "refundable dividend tax on hand" as defined in subsection 129(3);

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

"SIN" means Social Insurance Number;

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

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

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

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

"TC" refers to XXXXXXXXXX .;

"TC Note" has the meaning assigned by Paragraph 30;

"Unrelated Shareholder1" refers to XXXXXXXXXX ; and

"Unrelated Shareholder2" refers to XXXXXXXXXX .

FACTS

1. DC is a private corporation, a CCPC and a TCC incorporated on XXXXXXXXXX under the BCA.

2. DC's fiscal and taxation year ends on XXXXXXXXXX . DC deals with the XXXXXXXXXX Tax Services Office and files its corporate income tax returns at the XXXXXXXXXX Taxation Centre.

3. The authorized capital of DC is described in the Articles of Incorporation as follows:
The classes of share, and any maximum number of shares that the corporation is authorized to issue:

Class "A" - XXXXXXXXXX ; Class "B" - XXXXXXXXXX ; Class "C" - XXXXXXXXXX ; Class "D" - XXXXXXXXXX
All classes rank equally in all respects. Pursuant to XXXXXXXXXX the BCA, the rights of the holders of the shares include only the following:

(a) the right to vote at any meeting of shareholders of the corporation;

(b) to receive any dividend declared by the corporation; and

(c) to receive the remaining property of the corporation on dissolution.

Prior to the commencement of the Proposed Transactions, the issued and outstanding shares of DC are held by Unrelated Shareholder1 who holds XXXXXXXXXX Class "A" Common Shares; Unrelated Shareholder2 who holds XXXXXXXXXX Class "B" Common Shares and Grandmother who holds XXXXXXXXXX Class "C" Common Shares and XXXXXXXXXX Class "D" Common Shares.

4. All of the Class "A", Class "B", Class "C" and Class "D" Common Shares in the share capital of DC are owned by Unrelated Shareholder1, Unrelated Shareholder2 and Grandmother, respectively, as capital property. Unrelated Shareholder1 and Unrelated Shareholder2 acquired their shares on incorporation. Grandmother acquired her shares on the death of her husband in XXXXXXXXXX . None of the shares were acquired in contemplation of the Proposed Transactions.

5. Unrelated Shareholder1 and Unrelated Shareholder2 are husband and wife and each is a resident of Canada. Neither of Unrelated Shareholder1 or Unrelated Shareholder2 are related to any of Grandmother, Daughter, Grandchild1, Grandchild2 or TC.

6. DC did not have a balance in its RDTOH account at the end of its XXXXXXXXXX taxation year, and will not have a balance in its RDTOH account at the end of the taxation year in which the Proposed Transactions are completed.

7. DC's principal business is the rental of real estate property owned by it to XXXXXXXXXX . DC does not employ more than five full-time employees in its rental business.

8. The assets of DC consist of:

(a) cash, accounts receivable and rights arising from the prepayment of certain expenses; and

(b) real property held for the purpose of earning rental income. DC owns XXXXXXXXXX rental properties.

9. DC holds its rental properties as capital property.

10. DC's liabilities consist of:

(a) current liabilities which include accounts payable, security deposits and amounts due to shareholders ("Shareholders' Loans"); and

(b) long-term debts which include bank loans ("Bank Loans") used to acquire the rental properties.

11. The Shareholder's Loans are payable on demand. The Bank Loans are secured by the rental properties.

12. TC is a private corporation, a CCPC and a TCC incorporated on XXXXXXXXXX under the BCA.

13. TC's fiscal and taxation year ends on XXXXXXXXXX . TC deals with the XXXXXXXXXX Tax Services Office and files its corporate income tax returns at the XXXXXXXXXX Taxation Centre.

14. The authorized capital of TC includes the following classes of shares:

(a) Class "D" Preferred Shares

(i) non-voting;

(ii) no par value;

(iii) redeemable and retractable, subject to applicable law, at any time for an amount equal to the amount determined by dividing the aggregate FMV of the property received by the corporation on the issuance of the Class "D" Preferred Shares less the aggregate FMV of any non-share consideration issued or liabilities assumed by the corporation, by the number of the Newco Class "D" Preferred Shares issued;

(iv) the redemption and retraction amount is subject to a price adjustment clause;

(v) entitlement to a preferential and non-cumulative annual dividend;

(vi) the amount of each dividend payable on the shares is calculated as a fixed amount or by reference to a fixed percentage of an amount equal to the fair market value of the consideration for which the shares were issued;

(vii) the annual rate of the dividend, expressed as a percentage of an amount equal to the fair market value of the consideration for which the shares were issued, shall not exceed the prescribed rate of interest at the time the shares were issued, pursuant to subparagraph 256(1.1)(d)(ii);

(viii) on dissolution or other distribution by the corporation, the shares will rank ahead of any Common Shares; and

(ix) not convertible or exchangeable;

(b) Class "E" Preferred Shares

(i) the holders of issued and outstanding Class "E" Preferred Shares are entitled as a class to XXXXXXXXXX % of the votes of all issued and outstanding voting shares;

(ii) no par value;

(iii) redeemable and retractable, subject to applicable law, at any time for an amount equal to $XXXXXXXXXX per share;

(iv) the specified amount for each share for purposes of subsection 191(4) of the Income Tax Act (Canada) will be $XXXXXXXXXX per share and will not be subject to adjustment;

(v) the redemption and retraction amount is subject to a price adjustment clause based on the fair market value of the consideration for which such share was issued;

(vi) entitled to a preferential and non-cumulative annual dividend;

(vii) the amount of each dividend payable on the shares is calculated as a fixed amount or by reference to a fixed percentage of an amount equal to the fair market value of the consideration for which the shares were issued;

(viii) the annual rate of the dividend, expressed as a percentage of an amount equal to the fair market value of the consideration for which the shares were issued, shall not exceed the prescribed rate of interest at the time the shares were issued, pursuant to subparagraph 256(1.1)(d)(ii);

(ix) on dissolution or other distribution by the corporation, the shares will rank ahead of any Common Shares; and

(x) not convertible or exchangeable.
Prior to the commencement of the Proposed Transactions, the issued and outstanding shares of TC are held by Daughter who holds XXXXXXXXXX Class "A" Common Shares, Grandchild1 who holds 1 Class "B" Common Share and Grandchild2 who holds 1 Class "A" Common Share.

15. All of the Class "A", Class "B" and Class "C" Common Shares in the share capital of TC are owned by Daughter, Grandchild1 and Grandchild2, respectively, as capital property. All of such shares were acquired prior to XXXXXXXXXX and were not acquired in contemplation of the Proposed Transactions.

16. Grandmother is the mother of Daughter, and Daughter's adult children are Grandchild 1 and Grandchild 2. Each of Grandmother, Daughter, Grandchild1 and Grandchild2 is:

(a) related to each other pursuant to paragraph 251(2)(a); and

(b) a resident of Canada for the purposes of the Act.

17. TC did not have a balance in its RDTOH account at the end of its XXXXXXXXXX taxation year, and will not have a balance in its RDTOH account at the end of the taxation year in which the Proposed Transactions are completed.

18. TC's principal business is XXXXXXXXXX . TC is paid solely by DC for the provision of its business services. TC does not employ more than five full-time employees in its business.

19. The assets of TC consist of cash and accounts receivable.

20. TC's liabilities consist of current liabilities which include accounts payable.

21. DC and TC are not related to each other pursuant to section 251 and are not associated with each other pursuant to subsection 256(1).

22. For the purposes of section 55, by virtue of subparagraph 55(5)(e) (i), Grandchild1 and Grandchild2 are:

(i) not related to each other; and

(ii) related to TC.

PROPOSED TRANSACTIONS

23. Grandmother will transfer her XXXXXXXXXX Class "C" and XXXXXXXXXX Class "D" Common Shares in the capital of DC to TC and in consideration therefore, TC will issue a number of Class "D" Preferred Shares having an aggregate redemption amount and FMV equal to the FMV of the Common Shares of DC transferred to TC. The increase in the PUC of the Class "D" Preferred Shares issued by TC to Grandmother will be determined with regard to paragraph 84.1(1)(a).

24. Grandmother and TC will file a joint election in the prescribed form and within the time referred to in subsection 85(6) to have the provisions of subsection 85(1) apply to the transfer. The agreed amount for the purposes of such election, in each case, 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 Common Shares of DC that are transferred to TC.

25. Immediately before the transfer of property described in Paragraph 27, the property owned by DC will be classified into the following three types of property for the purposes of the definition of "distribution" in subsection 55(1), as follows:

a) cash or near-cash property, comprising all of the current assets of DC, including cash, accounts receivables and prepaid expenses;

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

26. In determining the net FMV of its cash or near cash property, investment property and business property immediately before the transfers described in Paragraph 27, liabilities of DC will be allocated to, and be deducted in the calculation of, the net FMV of each such type of property of DC in the following manner:

a) current liabilities of DC will be allocated to cash or near cash property (including any cash, accounts receivable and prepaid expenses) in the proportion that the FMV of each such property is of the FMV of all cash or near cash property. The allocation of current liabilities as described herein will not exceed the aggregate FMV of all cash or near cash property of DC;

b) liabilities of DC, other than current liabilities, 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. 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 steps a) and b) 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.

26.1 For purposes of determining the net FMV of the property of DC as described in Paragraphs 25 and 26, 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 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 GRIP, RDTOH, CDA and any losses available for carry forward, if any, will not be considered property of DC.

27. Immediately following the determination of the net FMV of each type of property described in Paragraphs 25 and 26 above, DC will transfer a portion of each type of property owned by it at the time to TC such that immediately following such transfers, the net FMV of each type of property transferred by DC to TC will 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 shares of the capital stock of DC owned, at that time, by TC; and

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

For the purposes of this Paragraph, the expression "approximate that proportion" means that the discrepancy of that proportion, if any, will not exceed one percent (1%), determined as a percentage of the net FMV of the property that TC will receive as compared to what it would have received had it received its appropriate pro rata share of DC's property.

28. As consideration for the property transferred by DC to TC, TC will:

a) assume an appropriate amount of liabilities of DC so that on a net basis TC will receive its share of the net FMV of each type of property owned by DC as determined under Paragraph 26; and

b) issue to DC a number of its Class "E" Preferred Shares having an aggregate redemption amount and FMV equal to the FMV of the property received by such TC less the amount of the liabilities of DC assumed by TC as described in (a).

29. DC and TC will file a joint election in the prescribed form and within the time referred to in subsection 85(6) to have the provisions of subsection 85(1) apply to the transfer of each eligible property that is transferred by DC to TC as described in Paragraph 27. The agreed amount in respect of each eligible property so transferred will not be greater than the FMV of such property nor will it be less than the lesser of the FMV and the cost amount to DC of such property. For greater certainty, the agreed amount in respect of each such transferred property will be within the limits prescribed as follows:

(a) in the case of capital property (other than depreciable property of a prescribed class) and inventory, an amount not less than the lesser of the amounts described in subparagraphs 85(1)(c.1)(i) and (ii);

(b) in the case of depreciable property of a prescribed class, an amount not less than the least of the amounts described in subparagraphs 85(1)(e)(i), (ii) and (iii); and

(c) in the case of eligible capital property, an amount not less than the least of the amounts described in subparagraphs 85(1)(d)(i), (ii) and (iii).

For greater certainty, the increase in the PUC of the Class "E" Preferred Shares will be determined having regard to subsection 85(2.1).

The aggregate of such elected amounts will not be less than the aggregate amount of DC's liabilities so assumed for such properties.

30. TC will redeem its Class "E" Preferred Shares owned by DC for an amount equal to the aggregate redemption amount and FMV of such shares. As consideration therefore, TC will issue a non-interest bearing demand promissory note (the "TC Note") having a principal amount and FMV equal to the aggregate redemption amount and FMV of the Class "E" Preferred Shares in the capital of TC redeemed. DC will accept the TC Note as full and absolute payment for the amount due to DC from the redemption of such Class "E" Preferred Shares.

31. DC will purchase for cancellation the XXXXXXXXXX Class "C" and XXXXXXXXXX Class "D" Common Shares in the capital of DC owned by TC for an amount equal to the FMV of such Common Shares and, as payment therefore, DC will issue a non-interest bearing demand promissory note (the "DC Note") having a principal amount and FMV equal to the aggregate FMV of the XXXXXXXXXX Class "C" and XXXXXXXXXX Class "D" Common Shares in the capital of TC redeemed. DC will accept the DC Note as full and absolute payment for the amount due to DC from the purchase for cancellation of such Class "C" and Class "D" Common Shares.

32. Immediately following the transaction in Paragraph 31, the obligations under the TC Note and the DC Note will be set-off against each other as payment in full of such notes and the notes will be cancelled.

ADDITIONAL INFORMATION

33. The Proposed Transactions described herein will occur in the order presented unless otherwise indicated, with the exception of the filing of the applicable election forms described in Paragraphs 24 and 29, which will be filed by the applicable due date following completion of the Proposed Transactions.

34. None of the shares in the capital of DC or TC will be at any time during a series of transactions or events that includes the Proposed Transactions:

a) the subject of a "guarantee agreement" within the meaning assigned by subsection 112(2.2);

b) a share that is issued or acquired as part of a transaction, event or series of transactions or events of the type described in subsection 112(2.5); or

c) the subject of a "dividend rental arrangement" within the meaning assigned by subsection 248(1).

35. Neither DC or TC will be, at any time before the completion of the Proposed Transactions, a specified financial institution or a restricted financial institution.

36. The Class "E" Preferred Shares in the capital of TC held by DC will, by the number of such shares issued and outstanding, represent more than 10% of the issued share capital (having full voting rights under all circumstances) of TC; and have a fair market value of more than 10% of the fair market value of all of the issued shares of the capital stock of TC.

37. Each issued and outstanding Class "C" and Class "D" Common Share in the capital of DC is not a "taxable preferred share" as defined in subsection 248(1);

38. For purposes of subsection 191(4), the amount specified in respect of each TC Class "E" Preferred Share shall be the amount specified under the description of the rights, privileges, restrictions and conditions attaching to the Class "E" Preferred Shares in the Articles of Amendment, such amount to be expressed as a dollar amount (and not expressed by formula) and be equal to the FMV of the consideration for which such Class "E" Preferred Share is issued.

39. No property has or will become property of DC, and no liabilities have been, or will be, incurred or discharged by DC, in contemplation of and before the Proposed Transactions, except as described herein.

40. Neither DC nor TC has any expectation or intention to dispose any property owned by it, as part of the series of transactions or events that include the Proposed Transactions, other than as described herein.

PURPOSE OF THE PROPOSED TRANSACTIONS

41. The purpose of the Proposed Transactions is to permit Grandmother to separate her interest in DC from the interests of Unrelated Shareholder1 and Unrelated Shareholder2 in order to enable each of them to own their various property interests independently from the other.

RULINGS

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

A. Subject to subsection 69(11), the provisions of subsection 85(1) will apply to the transfer of the XXXXXXXXXX Class C and XXXXXXXXXX Class D Common Shares in the capital of DC held by Grandmother to TC, as described in Paragraph 23, such that the agreed amount in respect of such transfer will be deemed to be Grandmother's proceeds of disposition and TC's cost of acquisition. For greater certainty, paragraph 85(1)(e.2) will not apply to such transfer.

B. Subject to subsection 69(11), the provisions of subsection 85(1) will apply to the transfers of eligible property held by DC to TC as described in Paragraph 27, such that the agreed amount in respect of each such transfer will be deemed to be DC's proceeds of disposition and TC's cost of such property. For greater certainty, paragraph 85(1)(e.2) will not apply to such transfers.

C. As a result of the redemption by TC of its Class E Preferred Shares described in Paragraph 30 and the purchase for cancellation by DC of its XXXXXXXXXX Class "C" and XXXXXXXXXX Class "D" Common Shares described in Paragraph 31, by virtue of subsection 84(3):

a) TC 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 TC in respect of its redemption of the Class "E" Preferred Shares in the capital of TC owned by DC exceeds the PUC of such class of shares immediately before the redemption;

b) DC will be deemed to have paid, and TC will be deemed to have received, a taxable dividend equal to the amount by which the amount paid by DC in respect of the purchase for cancellation of the XXXXXXXXXX Class "C" and XXXXXXXXXX Class "D" Common Shares of DC owned by TC exceeds the PUC of such Common Shares immediately before the purchase for cancellation;

c) the taxable dividend received by DC, as described in (a) above:

i) will be included in computing the income, pursuant to subsection 82(1) and paragraph 12(1)(j), of DC;

ii) will be deductible by DC 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, such deduction 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 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) provided the amount paid by TC to DC on the redemption of each Class "E" Preferred Share is equal to the amount specified in respect of such share for the purpose of Section 191(4), will not be subject to tax under Part VI.1; and

d) the taxable dividend received by TC, as described (b) above:

i) will be included in computing the income, pursuant to subsection 82(1) and paragraph 12(1)(j), of TC;

ii) will be deductible by TC 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, such deduction 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 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; and

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

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 paragraph 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 set-off and cancellation of the DC Note and the TC Note as described in Paragraph 32 will not, in and of itself, result in a forgiven amount within the meaning of subsection 80(1) and 80.01(1).

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

G. Subsection 245(2) will not apply as a result of the Proposed Transactions, in and by themselves, to redetermine the tax consequences confirmed in the rulings given.

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

OTHER 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 or the ACB or FMV of any property referred to herein;

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

c) any other tax consequence relating to the facts, Proposed Transactions or any transaction or event taking place either prior to the Proposed Transactions or subsequent to the Proposed Transactions, whether described in this letter or not, 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.

Nothing in this letter should be construed as confirmation, express or implied, that, for the purpose of any of the rulings given 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 and issuance of shares. In addition, any such adjustment could affect the ruling given in Ruling D above. Furthermore, none of the rulings given in this letter are intended to apply to or in the event of the operation of a price adjustment clause, since such adjustment 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.

Yours truly,

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