2005 Ruling 2005-0127871R3 - Split-up Butterfly - Family Farm Corporation

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: Split-up butterfly of a family farm corporation owned by an estate that was created on the death of the principal shareholder. Creation of a life interest and residual interest in certain real property owned by the distributing corporation. The life interest will be transferred to one transferee corporation while the residual interest will be transferred to another transferee corporation.

Position: Favourable rulings given.

Reasons: In compliance with the law.

XXXXXXXXXX 								2005-012787

XXXXXXXXXX, 2005

Dear XXXXXXXXXX:

Re: XXXXXXXXXX ("DC") - Advance Income Tax Ruling Request

This is in reply to your letter of XXXXXXXXXX, as modified by your other correspondence, wherein you requested an advance income tax ruling on behalf of the above-noted taxpayer. You have advised us that to the best of your knowledge and that of the taxpayer involved none of the issues involved in this ruling request are:

(i) in an earlier return of the taxpayer or a related person;

(ii) being considered by a tax services office ("TSO") or taxation centre ("TC") in connection with a previously filed tax return of the taxpayer or a related person;

(iii) under objection by the taxpayer or a related person;

(iv) before the courts or, if a judgment has been issued, the time limit for appeal to a higher court has expired; or

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

The taxpayer has also represented that the proposed transactions described herein will not result in the taxpayer or a related person described herein being unable to pay its existing outstanding tax liabilities.

DEFINITIONS

In this letter, the following terms or expressions have the meaning specified:

(a) "Act" means the Income Tax Act, R.S.C. 1985 (5th Supp.) c.1, as amended from time to time and consolidated to the date of this letter and, 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, and the Income Tax Regulations thereunder are referred to as the "Regulations";

(b) "adjusted cost base" ("ACB") has the meaning assigned by subsection 248(1);

(c) "BCA" means the Business Corporations Act XXXXXXXXXX

(d) "BN" means the business number issued to the particular entity by CRA;

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

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

(g) "capital property" has the meaning assigned by the definition in section 54;

(h) "Clearance Certificate" means the certificate described in subsection 159(2);

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

(j) "CRA" means Canada Revenue Agency;

(k) "Deceased" means XXXXXXXXXX

(l) "Estate" means the testamentary trust created on the death of the Deceased;

(m) "Executor" means XXXXXXXXXX

(n) "fair market value" ("FMV") means the highest price, expressed in terms of money or money's worth, obtainable in an open and unrestricted market between knowledgeable, informed and prudent parties acting at arm's length, neither party being under any compulsion to transact;

(o) "Individual 1" means XXXXXXXXXX

(p) "Individual 2" means XXXXXXXXXX

(q) "ITAR" means the Income Tax Application Rules, R.S.C. 1985 c. 2 (5th Supplement) as amended;

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

(s) "Paragraph" refers to a numbered paragraph in this letter;

(t) "permitted redemption" has the meaning assigned by subsection 55(1);

(u) "personal trust" has the meaning assigned by subsection 248(1);

(v) "Property1" means that parcel of land, situate in the Province of XXXXXXXXXX, which is legally described as follows:

XXXXXXXXXX

(w) "Property2" means a life estate interest in Property1, including the right to most of the income derived from the use of Property1, which will last for the duration of the lifetime of Individual 2;

(x) "Property3" means:

(i) the remainder interest in Property1 which is subject to the life estate interest described as Property2; and

(ii) the right, for the duration of the lifetime of Individual 2, to receive or be paid a small, fixed portion of the income which is derived from the use of Property1;

(y) "Property4" means the parcel of land, situate in the Province of XXXXXXXXXX, which is legally described as follows:

XXXXXXXXXX

(z) "Proposed Transactions" means the transactions described in Paragraphs 18 to 35;

(aa) "refundable dividend tax on hand" ("RDTOH") has the meaning assigned by subsection 129(3);

(bb) "related persons" has the meaning assigned by section 251;

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

(dd) "share of the capital stock of a family farm corporation" has the meaning assigned by subsection 70(10);

(ee) "Sibling 1" means XXXXXXXXXX

(ff) "Sibling 2" means XXXXXXXXXX

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

(hh) "specified investment business" ("SIB") has the meaning assigned by subsection 248(1);

(ii) "stated capital" has the meaning assigned by the BCA;

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

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

(ll) "testamentary trust" has the meaning assigned by subsection 248(1); and

(mm) "valuation day" ("V-day") has the meaning assigned by section 24 of the ITAR.

FACTS

1. DC is a CCPC and a TCC. DC was incorporated on XXXXXXXXXX and was continued under the BCA on XXXXXXXXXX. DC's fiscal and taxation year ends XXXXXXXXXX and its BN is XXXXXXXXXX. DC deals with the XXXXXXXXXX TSO and files its federal corporate tax returns at the XXXXXXXXXX TC.

2. DC has carried on the business of farming on certain lands that DC owns and/or leases in the Province of XXXXXXXXXX since XXXXXXXXXX. DC's principal farming business activities include XXXXXXXXXX.

3. The authorized share capital of DC is comprised of the following classes of shares:

• an unlimited number of Class A Voting Shares;
• an unlimited number of Class B Voting Shares
• an unlimited number of Class C Non-Voting Shares
• an unlimited number of Class D Non-Voting Preferred Shares and
• an unlimited number of Class E Voting Preferred Shares.

Currently, DC has XXXXXXXXXX Class A Voting Shares ("Class A Shares") and XXXXXXXXXX Class E Voting Preferred Shares ("Class E Shares") issued and outstanding, which are held as follows:

DC Shareholder Class A Shares Class E Shares
Estate XXXXXXXXXX XXXXXXXXXX
Individual 1 XXXXXXXXXX
Total XXXXXXXXXX XXXXXXXXXX

The Estate has de jure control of DC.

4. The Estate holds its Class A Shares and Class E Shares (collectively referred to as the "Estate's DC Shares") as capital property and each such share has a fair market value greater than its ACB. Similarly, Individual 1 holds his Class A Shares as capital property and each such share has a fair market value greater than its ACB. None of the aforementioned shares was acquired by the particular holder in contemplation of the Proposed Transactions described herein. Currently, each of the issued and outstanding Class A Shares and Class E Shares is a share of the capital stock of a family farm corporation.

5. Individual 1 is one of XXXXXXXXXX surviving adult children of the Deceased. Individual 2 is the spouse of Individual 1. Individual 1 and Individual 2 are currently separated and living apart and have been for some time. Sibling1 and Sibling 2 are the adult children of Individual 1 and Individual 2. Each of the aforementioned individuals is, and has always been, resident in Canada for the purposes of the Act. Individual 1 deals with the XXXXXXXXXX TSO and file his tax returns with the XXXXXXXXXX TC while Individual 2, Sibling 2 and Sibling 1 each deal with the XXXXXXXXXX TSO and file their tax returns with the XXXXXXXXXX TC.

6. The Estate came into existence on the date of the Deceased's death, XXXXXXXXXX. The Deceased was resident in Canada immediately before the time of his death for the purposes of the Act. The Estate is a testamentary trust, a personal trust and is resident in Canada. Individual 1 and the Executor were named by the Deceased's will as co-executors of the Estate, but on XXXXXXXXXX, the Executor was appointed as the sole executor of the Estate. The Executor was the Deceased's XXXXXXXXXX. The Estate's T3 returns are filed with the XXXXXXXXXX TC and it otherwise deals with the XXXXXXXXXX TSO. The beneficiaries of the Estate include Individual 1, Individual 1's siblings, Individual 2, Sibling 1 and Sibling 2. None of the aforementioned individuals is deemed to be related to the Estate for the purposes of section 55 under subparagraph 55(5)(e)(ii).

7. The Deceased was actively engaged in the farming business of DC on a regular and continuous basis for several decades prior to his death. At the time up to and including the time immediately before the death of the Deceased, Individual 1, Individual 2, Sibling 1 and Sibling 2 were all actively engaged in the farming business of DC on a regular and continuous basis and each share of DC qualified as a share of the capital stock of a family farm corporation.

8. XXXXXXXXXX. As a consequence of such allegations and pursuant to an order by the XXXXXXXXXX (the "Court"), from XXXXXXXXXX, Sibling 2 was appointed Receiver-Manager of DC. Since XXXXXXXXXX, after the discharge of the Receiver-Manager by the Court and pending the completion of the administration of the Estate, the Court directed that all the lands owned by DC, except for Property1 and Property4, could be used by Individual 1 in Individual 1's XXXXXXXXXX business, while Property1 and Property4 could be used by Individual 2 in Individual 2's XXXXXXXXXX business. Following the Court's direction, each of Individual 1 and Individual 2 have used such lands in their respective XXXXXXXXXX business on a regular and continuous basis.

9. As a result of financial problems that arose, in part, as a result of the XXXXXXXXXX, by the mid to late summer of XXXXXXXXXX, DC had the following unpaid debts:

(a) $XXXXXXXXXX owing to the XXXXXXXXXX (the "Bank) under a loan agreement (the "Bank Loan"), the repayment of which was secured by a mortgage granted to the Bank on certain land owned by DC;

(b) $XXXXXXXXXX owing to Sibling 2, pursuant to a court order, for services Sibling 2 performed during the period when Sibling 2 served as the Receiver-Manager of DC;

(c) $XXXXXXXXXX owing to Sibling 2 (together with interest which had accrued thereon), pursuant to a court order, in respect of legal fees and disbursements which Sibling 2 incurred on behalf of DC when Sibling 2 served as the Receiver-Manager of DC;

(d) $XXXXXXXXXX owing to Individual 2, pursuant to a court order, for services performed by Individual 2 with respect to XXXXXXXXXX services rendered to DC during the period when Sibling 2 served as the Receiver-Manager of DC; and

(e) $XXXXXXXXXX owing to Individual 2 (payable on demand and not subject to any fixed repayment terms) with respect to funds Individual 2 had previously loaned to DC.

10. DC had defaulted in its required payments under the Bank Loan and the Bank had threatened to commence foreclosure proceedings with respect to its mortgage security. However, with the concurrence of the Court, the Bank delayed foreclosure proceedings on the basis of the Executor's efforts and representation to have DC and/or the Estate sell certain property and use the proceeds from such sale to repay the amount owing to the Bank under the Bank Loan.

11. In connection with the above, and pursuant to an order by the Court, the Estate caused DC to sell certain land and a grazing lease for cash in order to pay some of the debts owing by DC as described in Paragraph 9 as follows:

• the full amount owing by DC under the Bank Loan described in Paragraph 9(a) on XXXXXXXXXX;
• the full amount owing by DC to Sibling 2 for the unpaid wages described in Paragraph 9(b) on XXXXXXXXXX;
• the full amount owing by DC to Sibling 2 for Sibling 2's legal fees, disbursements and interest (which the Court subsequently fixed at $XXXXXXXXXX) described in Paragraph 9(c) on XXXXXXXXXX;
• the full amount owing by DC to Individual 2 for unpaid wages described in Paragraph 9(d) on XXXXXXXXXX; and
• $XXXXXXXXXX of the $XXXXXXXXXX owing to Individual 2 in respect of shareholder's loan described in Paragraph 9(e) on XXXXXXXXXX.

12. On XXXXXXXXXX, DC also used some of the remaining sale proceeds described in Paragraph 11 to: repay the remaining balance of $XXXXXXXXXX owing by DC to Individual 2 on the shareholder loan described in Paragraph 9(e) and to repay a shareholder loan in the amount of $XXXXXXXXXX owing to Individual 1 and a shareholder loan in the amount of $XXXXXXXXXX owing to Estate.

13. You maintain that the Court ordered repayment of DC's debts as described in Paragraphs 11 and 12 was not undertaken in contemplation of the Proposed Transactions and would have taken place regardless of whether the Proposed Transactions take place.

14. Currently, the assets of DC consist of:

• some cash and income taxes recoverable;
• land, including the land described as Property 1 and Property 2;
• buildings and improvements used in DC's XXXXXXXXXX business;
• XXXXXXXXXX;
• hay and feed; and
• machinery and equipment used in DC's XXXXXXXXXX business.

DC currently has no debts and it is expected that DC will not have any cash or outstanding debts at the time the Proposed Transactions are carried out.

15. DC presently has a positive CDA balance and a positive RDTOH balance. It is possible, although unlikely, that the Court may also order DC to sell additional land owned by it and distribute such funds as dividends to the Estate for the purpose of allowing the Estate to settle its outstanding debts before the Proposed Transactions are completed. If the aforementioned Court ordered sale and debt repayment transactions do take place, such transactions will have been undertaken regardless of whether the Proposed Transactions described herein take place or not and such sales may affect the CDA and RDTOH balances of DC.

16. Pursuant to the terms of the Deceased's will, the Executor is to transfer the shares of DC to Individual 1 on the condition that, within a reasonable period of time after the Deceased's death, Property1 and Property4 are to be transferred to Individual 2, in such manner as the Executor, in his sole and absolute discretion, determines to be the most tax effective. Accordingly, in accordance with the terms of the Deceased's will and as part of a proposed written settlement agreement between Individual 1 and Individual 2 and the other beneficiaries of the Estate, the parties have agreed that Property2 will be transferred to a new corporation to be owned by Individual 2 and Property3 will be transferred to a new corporation to be owned by Sibling 1 and Sibling 2 as described in the Proposed Transactions. XXXXXXXXXX

17. In accordance with the proposed settlement agreement described in Paragraph 16, you advise that CRA, in a letter to the Executor dated XXXXXXXXXX, agreed to extend Estate's 36-month time period for having property vest indefeasibly in a child for a further period of XXXXXXXXXX months for the purposes of subsection 70(9.2).

PROPOSED TRANSACTIONS

18. Two new corporations (hereinafter referred to as "Transferee 1" and "Transferee 2") will be incorporated under the BCA. Each of Transferee 1 and Transferee 2 will be a TCC and neither corporation will be a specified financial institution or a restricted financial institution. The authorized share capital of each of Transferee 1 and Transferee 2 will include the following classes of shares:

(a) an unlimited number of fully participating Class A common shares with one vote per share;

(b) an unlimited number of fully participating Class B common shares with one vote per share; and

(c) an unlimited number of non-voting Class C preferred shares with each such share being redeemable and retractable, subject to applicable law, at any time for an amount ("Redemption Amount") equal to the aggregate net FMV of the consideration for which all of such shares are issued divided by the number of such shares issued.

19. On incorporation of Transferee1 no shares of its capital stock will be issued, however, Sibling 1 and Sibling 2 will each become directors of Transferee 1. Transferee 1 will be registered for Goods and Services Tax ("GST") purposes.

20. On incorporation of Transferee2 no shares of its capital stock will be issued, however, Individual 2 will become a director of Transferee 2. Transferee 2 will be registered for GST purposes.

21. The following transfers of shares of DC will occur contemporaneously:

(a) Individual 1 will transfer, as a gift, to Sibling1 a number of Class A Shares of DC which have an aggregate fair market value equal to 50% of the fair market value of Property3 (the shares received by Sibling 1 are hereinafter called "Sibling 1's DC Shares"); and

(b) Individual 1 will transfer, as a gift, to Sibling 2 a number of Class A Shares of DC which have an aggregate fair market value equal to 50% of the fair market value of Property3 (the shares received by Sibling 2 are hereinafter called "Sibling 2's DC Shares").

22. The following transfers of shares will occur contemporaneously:

(a) The Estate will transfer to Individual 2, in satisfaction of all of Individual 2's capital interest in the Estate, a number of the Estate's DC Shares which have an aggregate fair market value equal to the aggregate fair market value of Property2 and Property3 (the shares received by Individual 2 are hereinafter called "Individual 2's DC Shares"); and

(b) The Estate will transfer to Individual 1, in satisfaction of part of Individual 1's capital interest in the Estate, the remaining amount of the Estate's DC Shares.

Individual 1 will acquire de jure control of DC as a consequence of the acquisition of the Estate's DC Shares as described in (b).

23. The following transfers of shares will occur contemporaneously:

(a) Sibling 1 will transfer Sibling 1's DC Shares to Transferee 1. As sole consideration therefor, Transferee 1 will issue to Sibling 1 an identical number of Class A common shares of the capital stock of Transferee 1 having an aggregate FMV equal to the FMV at that time of Sibling 1's DC Shares;

(b) Sibling 2 will transfer Sibling 2's DC Shares to Transferee 1. As sole consideration therefor, Transferee 1 will issue to Sibling 2 an identical number of Class B common shares of the capital stock of Transferee 1 having an aggregate FMV equal to the FMV at that time of Sibling 2's DC Shares; and

(c) Individual 2 will transfer Individual 2's Shares to Transferee 2. As the sole consideration for the receipt of Individual 2's DC Shares, Transferee 2 will issue to Individual 2 Class A common shares of the capital stock of Transferee 2 having an aggregate FMV equal to the FMV at that time of Individual 2's DC Shares.

For greater certainty, the number of Class A common shares of Transferee 1 issued to Sibling 1 on the share transfer described in (a) will be equal to the number of Class B common shares of Transferee 1 issued to Sibling 2 on the share transfer described in (b).

24. In respect of the share transfers described in Paragraphs 23(a) and (b), each of Sibling 1 and Sibling 2, as the case may be, will jointly elect with Transferee 1 in prescribed form and within the time period referred to in subsection 85(6), to have the rules in subsection 85(1) apply to these transfers. The agreed amount in respect of each such transfer will be an amount equal to the cost amount of Sibling 1's DC Shares or Sibling 2's DC Shares, as the case may be, immediately prior to such transfer and for greater certainty, will be an amount equal to the lesser of the two amounts described in subparagraphs 85(1)(c.1)(i) and (ii).

25. In respect of the share transfer described in Paragraph 23(c), Transferee 2 and Individual 2 will jointly elect in prescribed form and within the time period referred to in subsection 85(6), to have the rules in subsection 85(1) apply to that transfer. The agreed amount in respect of Individual 2's DC Shares so transferred will be an amount equal to the cost amount of Individual 2's DC Shares, immediately prior to such transfer and for greater certainty, will be an amount equal to the lesser of the two amounts described in subparagraphs 85(1)(c.1)(i) and (ii).

26. For the purposes of the BCA, the amount to be added to the stated capital of the Transferee 1 Class A common shares, that are issued as consideration for Sibling 1's DC Shares as described in Paragraph 23(a), will be an amount that is equal to the aggregate PUC of Sibling 1's DC Shares. Similarly, the amount to be added to the stated capital of the Transferee 1 Class B common shares, that are issued as consideration for Sibling 2's DC Shares as described in Paragraph 23(b), will be an amount that is equal to the aggregate PUC of Sibling 2's DC Shares and the amount to be added to the stated capital of the Transferee 2 Class A common shares, that are issued as consideration for Individual 2's DC Shares as described in Paragraph 23(c), will be an amount that is equal to the aggregate PUC of Individual 2's DC Shares.

27. Immediately before the transfer of properties as described in Paragraph 28, the property of DC will be classified into 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 and income taxes recoverable;

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

(c) investment property, comprising all of the assets of DC, other than cash or near cash property or property described in (b) above, any income from which would, for the purposes of the Act, be income from property or a SIB.

It is anticipated that DC will not have any cash or near cash property or investment property immediately before the transfer of properties described in Paragraph 28 and that DC will only have business property. For greater certainty, any tax accounts, such as the balance of any RDTOH or CDA of DC, will not be considered to be property of DC for purposes of the classification described in this Paragraph.

28. Immediately following the classification of DC's property as described in Paragraph 27, DC will transfer to each of Transferee 1 and Transferee 2, on a contemporaneous basis, such corporation's pro-rata portion of each type of property owned by DC at that time on a gross fair market value basis. Specifically, DC will contemporaneously transfer Property3 to Transferee 1 and Property2 and Property4 to Transferee 2 such that immediately after such transfers, the gross fair market value of each type of property received by Transferee 1 and Transferee 2, as the case may be, will be equal to or will approximate that proportion of the gross fair market value of all the property of that type owned by DC immediately before such transfers of property described herein that:

(a) the aggregate fair market value, immediately before the transfer, of all the shares of the capital stock of DC owned at that time by the particular transferee corporation (i.e. Transferee 1 or Transferee 2, as the case may be), is of

(b) the aggregate fair market value, immediately before the transfer, of all the issued shares of the capital stock of DC at that time.

For the purpose of this Paragraph the expression "approximate that proportion" means the discrepancy from that proportion, if any, that would not exceed one percent (1%) determined as a percentage of the gross fair market value of each type of property that each particular transferee corporation received compared to what such particular transferee corporation would have received had such particular transferee corporation received its appropriate pro-rata share of the gross fair market value of that type of property.

As consideration for the transfer of property by DC to Transferee 1 described herein, Transferee 1 will issue a number of its non-voting Class C preferred shares (the "Transferee 1 Class C Preferred Shares") to DC having an aggregate FMV and aggregate redemption amount equal to the FMV at that time of Property3.

Similarly, as consideration for the transfer of property by DC to Transferee 2 described herein, Transferee 2 will issue a number of its non-voting Class C preferred shares (the "Transferee 2 Class C Preferred Shares") having an aggregate FMV and aggregate redemption amount equal to the FMV at that time of Property2 and Property4.

29. DC and Transferee 1 will jointly elect pursuant to subsection 85(1) in prescribed form and within the time period referred to in subsection 85(6), to have the rules in subsection 85(1) apply to the transfer of Property3 described in Paragraph 28. The agreed amount for the transfer of Property3 will be equal to the cost amount of Property3 to DC immediately prior to such transfer and for greater certainty, will be an amount equal to the lesser of the two amounts described in subparagraphs 85(1)(c.1)(i) and (ii).

30. DC and Transferee 2 will jointly elect pursuant to subsection 85(1) in prescribed form and within the time period referred to in subsection 85(6) to have the rules in subsection 85(1) apply to the transfer of Property2 and Property4 described in Paragraph 28. The respective agreed amount for the transfer of Property2 and Property4, as the case may be, will be equal to the respective cost amount of Property2 and Property4, as the case may be, to DC immediately prior to such transfer, and for greater certainty, will be an amount equal to the lesser of the two amounts described in subparagraphs 85(1)(c.1)(i) and (ii).

31. For the purposes of the BCA, $XXXXXXXXXX will be added to the stated capital for all of the Transferee 1 Class C Preferred Shares that are issued as consideration for Property3 as described in Paragraph 28 and $XXXXXXXXXX will be added to the stated capital for all of the Transferee 2 Class C Preferred Shares that are issued as consideration for Property2 and Property4 as described in Paragraph 28.

32. Immediately following the transfer of the property described in Paragraph 28, the following share redemptions or share purchases for cancellation will occur contemporaneously:

(a) Transferee 1 will redeem all of the Transferee 1 Class C Preferred Shares owned by DC for an amount equal to the aggregate FMV and aggregate Redemption Amount of such shares. As consideration therefor, Transferee 1 will issue to DC a demand non-interest bearing promissory note having a principal amount and FMV equal to the aggregate FMV and aggregate Redemption Amount of the Transferee 1 Class C Preferred Shares so redeemed (the "Transferee 1 Redemption Note"). DC will accept the Transferee 1 Redemption Note as full and absolute payment for the aggregate Redemption Amount of the Transferee 1 Class C Preferred Shares along with any risk of the Transferee 1 Redemption Note being dishonoured;

(b) DC will purchase for cancellation or redeem, as the case may be, all of its shares that are owned by Transferee 1 for an amount equal to their aggregate FMV and/or aggregate redemption amount, if applicable. As consideration therefor, DC will issue to Transferee 1 a demand non-interest bearing promissory note having a principal amount and FMV equal to the aggregate FMV and/or aggregate redemption amount, if applicable, of such shares so purchased/redeemed (the "DC Redemption Note 1"). Transferee 1 will accept the DC Redemption Note 1 as full and absolute payment for the aggregate FMV and/or redemption amount, if applicable, of such purchased/redeemed shares of DC along with the risk of the DC Redemption Note 1 being dishonoured; and

(c) Transferee 2 will redeem all of the Transferee 2 Class C Preferred Shares owned by DC for an amount equal to the aggregate FMV and aggregate Redemption Amount of the Transferee 2 Class C Preferred Shares held by Transferee 2. As consideration therefor, Transferee 2 will issue to DC a demand non-interest bearing promissory note having a principal amount and FMV equal to the aggregate FMV and aggregate Redemption Amount of the Transferee 2 Class C Preferred Shares so redeemed (the "Transferee 2 Redemption Note"). DC will accept the Transferee 2 Redemption Note as full and absolute payment for the aggregate Redemption Amount of the Transferee 2 Class C Preferred Shares along with the risk of the Transferee 2 Redemption Note being dishonoured; and

(d) DC will purchase for cancellation or redeem, as the case may be, all of its shares that are owned by Transferee 2 for an amount equal to their aggregate FMV and/or aggregate redemption amount, if applicable. As consideration therefor, DC will issue to Transferee 2 a demand non-interest bearing promissory note having a principal amount and FMV equal to the aggregate FMV and/or aggregate redemption amount, if applicable, of such shares so purchased/redeemed (the "DC Redemption Note 2"). Transferee 2 will accept the DC Redemption Note 2 as full and absolute payment for the aggregate FMV and/or redemption amount, if applicable, of such purchased/redeemed shares of DC along with the risk of the DC Redemption Note 2 being dishonoured.

33. Immediately following the transactions described in Paragraph 32, the following transactions will occur contemporaneously:

(a) Pursuant to an agreement entered into between DC and Transferee 1, the principal amount owing by DC to Transferee 1 under the DC Redemption Note 1 and the principal amount owing by Transferee 1 to DC under the Transferee 1 Redemption Note will be set off in full against each other and each such note will be marked paid in full and cancelled; and

(b) Pursuant to an agreement entered into between DC and Transferee 2, the principal amount owing by DC to Transferee 2 under the DC Redemption Note 2 and the principal amount owing by Transferee 2 to DC under the Transferee 2 Redemption Note will be set off in full against each other and each such note will be marked paid in full and cancelled.

34. Transferee 1 will execute a guarantee in favour of the Estate (the "Transferee 1 Guarantee") pursuant to which Transferee 1 will guarantee any and all indebtedness owing by Individual 2 to the Estate pursuant to an indemnity agreement and Transferee 1 will execute and issue a mortgage to the Estate over Property3 as collateral security to the Estate for the payment of any and all indebtedness owing to the Estate by Transferee 1 pursuant to the Transferee 1 Guarantee.

35. Transferee 2 will execute a guarantee in favour of the Estate (the "Transferee 2 Guarantee") pursuant to which Transferee 2 will guarantee any and all indebtedness owing by Individual 2 to the Estate pursuant to an indemnity agreement and Transferee 2 will execute and issue a mortgage to the Estate over Property2 and Property4 as collateral security to the Estate for the payment of any and all indebtedness owing to the Estate by Transferee 2 pursuant to the Transferee 2 Guarantee.

ADDITIONAL INFORMATION

36. Unless otherwise specified, the Proposed Transactions described herein will occur in the order in which they are set out above and such Proposed Transactions will commence on the date agreed to by the parties, with the exception of filing the applicable election forms, as described in Paragraphs 24, 25, 29 and 30, which will be filed within the applicable due date following the completion of the Proposed Transactions.

37. No property has or will become property of DC, Transferee 1 or Transferee 2 and no liabilities have been or will be incurred by DC, Transferee 1 or Transferee 2 in contemplation of and before the transfers of property described in Paragraph 28, except as otherwise described herein.

38. Except as outlined herein, DC does not have any intention of disposing of any property currently owned by it following the Proposed Transactions and neither Transferee 1 nor Transferee 2 have any intention of disposing of any property received by it on the distribution as part of a series of transactions which includes the Proposed Transactions, other than a disposition that may occur in the ordinary course of carrying on such corporation's business.

39. There are not, and will not be at any time prior to completion of the Proposed Transactions, any agreements or undertakings which constitute or include a "guarantee agreement", as defined in subsection 112(2.2), in respect of any of the shares of DC, Transferee 1 or Transferee 2.

40. Neither DC, Transferee 1 nor Transferee 2 has, or will have, entered into a "dividend rental arrangement", as defined in subsection 248(1), in respect of any of the issued shares referred to herein (including the shares to be issued as described in the Proposed Transactions).

41. None of the shares of DC, Transferee 1 or Transferee 2 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).

42. Neither DC, Transferee 1 nor Transferee 2 will be a corporation described in any of paragraphs (a) to (f) included in the definition of "financial intermediary corporation" which is contained in subsection 191(1).

43. Each of DC, Transferee 1 and Transferee 2 will have the financial capacity to honour, upon presentation for payment, the amount payable under the promissory note issued by it as part of the Proposed Transactions as described in Paragraph 32.

PURPOSE OF THE PROPOSED TRANSACTIONS

44. The overall purpose of the Proposed Transactions described above is to:

(a) achieve a tax deferred transfer of Property3 from DC to Transferee 1, a corporation controlled and owned by Sibling 1 and Sibling 2, in accordance with the estate planning objectives of Individual 1 and Individual 2; and

(b) achieve a tax deferred transfer of Property2 and Property4 from DC to Transferee 2, a corporation controlled and owned by Individual 2, XXXXXXXXXX and to fulfill the general wishes and directions of the Deceased as set out in the terms of the Deceased's will and as determined by the Executor, in his sole and absolute discretion, to be the most tax effective method.

By dividing the property of DC in this manner, the above noted family members will be better able to independently manage their respective interests in such agricultural property and pursue their own separate financial and agricultural business objectives.

45. The purpose of the transactions described in Paragraphs 34 and 35 is as follows:

The Proposed Transactions involve distributions of property held in the Estate before the Estate will have been able to obtain a Clearance Certificate and prior to the final determination and allocation of the Estate's liability for the payment of costs and income taxes of the Estate among the various bequests made to the beneficiaries. Accordingly, Individual 2 will enter into an indemnity agreement with the Estate pursuant to which Individual 2 will agree to indemnify and reimburse the Estate for the share of the costs and taxes paid or payable by the Estate that ultimately will have to be allocated to Individual 2. The respective guarantees described in Paragraphs 34 and 35 are intended as security for such future obligation.

RULINGS

Provided that the preceding statements constitute a complete and accurate disclosure of all of the relevant facts, proposed 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 set forth below.

A. Subject to the application of subsection 69(11), provided that each of the Class A shares of DC is, immediately before the transfer of such shares described in Paragraph 21, a share of the capital stock of a family farm corporation, the provisions of subsection 73(4) will apply with respect to Individual 1's gift of such Class A shares to Sibling 1 and Sibling 2, as described in Paragraph 21(a) and (b), respectively, such that; Individual 1 will be deemed to have disposed of such Class A shares for proceeds of disposition equal to the amount determined under subparagraph 73(4)(a)(iii); and pursuant to paragraph 74(4)(c), each of Sibling 1 and Sibling 2, as the case may be, will be deemed to have acquired his/her respective Class A shares from Individual 1 for an amount equal to Individual 1's deemed proceeds of disposition in respect of the Class A shares acquired by that particular sibling.

B. Provided that immediately before the time of death of the Deceased, each share of DC was a share of the capital stock of a family farm corporation, and provided that the Proposed Transactions are completed within the period ending 36 months after the date of the death of the Deceased, or within such additional time period as CRA may otherwise grant in writing, the provisions of subsection 70(9.2) will apply with respect to the distributions by the Estate of its shares of DC to Individual 1 and Individual 2 as described in Paragraph 22(a) and (b), respectively, such that the Deceased will be deemed to have disposed of his shares of DC immediately before the time of his death for proceeds of disposition equal to the amount determined under paragraph 70(9.2)(b) and Individual 1 and Individual 2, as the case may be, will be deemed to have acquired their respective shares of DC for an amount equal to the Deceased's deemed proceeds of disposition in respect of such shares received by Individual 1 or Individual 2, as the case may be.

C. Subject to the application of subsection 69(11) and provided the appropriate joint elections are filed in the prescribed form and manner within the time specified in subsection 85(6), the provisions of subsection 85(1) will apply to:

(a) the transfer by Sibling 1 of Sibling 1's DC Shares to Transferee 1 as described in Paragraph 23(a);

(b) the transfer by Sibling 2 of Sibling 2's DC Shares to Transferee 1 as described in Paragraph 23(b);

(c) the transfer by Individual 2 of Individual 2's DC Shares to Transferee 2 as described in Paragraph 23(c);

(d) the transfer by DC of Property3 to Transferee 1 as described in Paragraph 28; and

(e) the transfer by DC of Property4 and Property2 to Transferee 2 as described in Paragraph 28,

such that the agreed amount in respect of each such transfer of eligible property will be deemed to be the transferor's proceeds of disposition of the particular property and the transferee's cost thereof pursuant to paragraph 85(1)(a). For greater certainty, subsection 85(1)(e.2) will not apply to the transfers referred to herein.

D. Subsection 43.1(1) will not apply to the transactions involving the transfer of Property3 and Property2 in Paragraph 28.

E. Subsection 84(3) will apply on the purchase for cancellation or redemption, as the case may be, of,

(a) the Transferee 1 Class C Preferred Shares owned by DC described in Paragraph 32(a), to deem Transferee 1 to have paid and DC to have received;

(b) the shares of DC owned by Transferee 1 described in Paragraph 32(b), to deem DC to have paid and Transferee 1 to have received;

(c) the Transferee 2 Class C Preferred Shares owned by DC described in Paragraph 32(c), to deem Transferee 2 to have paid and DC to have received; and

(d) the shares of DC owned by Transferee 2 described in Paragraph 32(d), to deem DC to have paid and Transferee 2 to have received, a dividend on such shares equal to the amount, if any, by which the aggregate amount paid upon such purchase for cancellation or redemption, as the case may be, exceeds the aggregate PUC in respect of such shares immediately before such purchase for cancellation or redemption, and any such dividend to the extent that it is a taxable dividend:

(e) 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;
(f) will be deductible by the particular recipient of such dividend in computing its taxable income for the year in which such dividend is deemed to have been received pursuant to subsection 112(1), and for greater certainty, the provisions of subsections 112(2.1), (2.2), (2.3) or (2.4) will not apply to deny the subsection 112(1) deduction in respect of such dividend;

(g) will be excluded in determining the proceeds of disposition of the shares by virtue of paragraph (j) of the definition of "proceeds of disposition" in section 54; and

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

F. The corporation that is deemed to have received a dividend described in Ruling E will be subject to tax under subsection 186(1) only to the extent that the particular corporation that is deemed to have paid such dividend is entitled to a dividend refund in respect of its taxation year in which it is deemed to pay that dividend and then only to the extent of the amount calculated in paragraph 186(1)(b).

G. The set off and cancellation of the Transferee 1 Redemption Note against the DC Redemption Note 1 as described in Paragraph 33(a) will not give rise to a "forgiven amount" within the meaning of subsections 80(1) or 80.01(1).

H. The set off and cancellation of the Transferee 2 Redemption Note against the DC Redemption Note 2 as described in Paragraph 33(b) will not give rise to a "forgiven amount" within the meaning of subsections 80(1) or 80.01(1).

I. Provided that, as part of the series of transactions or events that includes the Proposed Transactions described above, there is not:

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

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

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

(d) 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 referred to in Ruling E and, for greater certainty, subsection 55(3.1) will not apply to deny the exemption under paragraph 55(3)(b).

J. Subsection 15(1) will not apply to any of the Proposed Transactions described herein, in and of themselves.

K. Subsection 245(2) will not apply to the Proposed Transactions, in and by themselves, to redetermine the tax consequences confirmed herein.

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 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 paid-up capital of any share or the adjusted cost base or fair market value of any property referred to herein;

(b) 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.

Yours truly,

for Director
Reorganizations and Resources Division
Income Tax Rulings Directorate
Policy and Planning Branch