30 November 1996 Ruling 9629733 - BUTTERFLY RULING (XXXXXXXXXX)

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.

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the Department.

Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle du ministère.

Principal Issues:

This was a sequential butterfly followed by a series of share for share exchanges and share redemptions. The sequential butterfly involved the typical 55(3)(b)/55(3.1) rulings and issues pertaining thereto and the share redemptions that followed the share for share exchange transactions involved the typical 55(3)(a) rulings and issues pertaining thereto.

Position:

Both the 55(3)(a) and (b) rulings were issued.

Reasons:

See the Statement of Principal Issues for full details.

XXXXXXXXXX							962973
XXXXXXXXXX

Attention: XXXXXXXXXX

XXXXXXXXXX, 1997

Dear Sirs:

Re: XXXXXXXXXX
Advance Income Tax Ruling

We are writing in response to your letter of XXXXXXXXXX wherein you requested an advance income tax ruling on behalf of the above-referenced taxpayers and a new corporation which will be incorporated by a current shareholder thereof. In your letters of XXXXXXXXXX, you provided additional information in respect of, and amendments to, the facts and proposed transactions described in your original letter. We also acknowledge the information provided during our various telephone conversations (XXXXXXXXXX).

To the best of your knowledge and that of the taxpayers involved:

(i)none of the issues involved in the requested rulings is being considered by a Tax Services Office or a Taxation Centre in connection with a tax return already filed, and

(ii)none of the issues involved in the requested rulings is the subject of any notice of objection or is under appeal.

Unless otherwise stated all references to a statute are to the Income Tax Act (Canada), R.S.C. 1985 (5th Supp.), c.1, as amended, (the "Act").

In this letter, the following terms have the meanings specified:

(a)"adjusted cost base" ("ACB") has the meaning assigned to that term in section 54 of the Act;

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

(c) "Brother1" refers to XXXXXXXXXX;

(d) "Brother2" refers to XXXXXXXXXX;

(e) XXXXXXXXXX;

(f)"capital dividend account" ("CDA") has the meaning assigned to that term in subsection 89(1) of the Act;

(g)"capital property" has the meaning assigned to that term in section 54 of the Act;

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

(i)"DC1" refers to XXXXXXXXXX;

(j)"DC2" refers to XXXXXXXXXX;

(k)"eligible capital property" has the meaning assigned to that term in section 54 of the Act;

(l)"eligible property" has the meaning assigned to that term in subsection 85(1.1) of the Act;

(m) XXXXXXXXXX;

(n)"Managementco" refers to XXXXXXXXXX;

(o)"Mother" refers to XXXXXXXXXX;

(p)"Opco" refers to XXXXXXXXXX;

(q)"paid-up capital" ("PUC") has the meaning assigned to that term by subsection 89(1) of the Act;

(r)"private corporation" has the meaning assigned to that term in subsection 89(1) of the Act;

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

(t)"related" has the meaning assigned by subsection 251(2) of the Act;

(u) XXXXXXXXXX;

(v)"specified financial institution" ("SFI") has the meaning assigned to that term by subsection 248(1) of the Act;

(w)"specified investment business" ("SIB") has the meaning assigned to that term by subsection 125(7) of the Act;

(x)"taxable Canadian corporation" ("TCC") has the meaning assigned to that term by subsection 89(1) of the Act;

(y)"taxable dividend" has the meaning assigned to that term by subsection 89(1) of the Act; and

(z) "Trust" refers to the XXXXXXXXXX.

Our understanding of the facts, proposed transactions and purpose of the proposed transactions is as follows:

FACTS

1.Brother1 and Mother are individuals resident in Canada.

2.The Trust is a trust resident in Canada. Mother is the sole trustee. The Trust is for the benefit of Brother2 and his children. Brother2 and his children are residents of the United States.

3.Brother1 and Brother2 are Mother's children.

4.DC1, DC2 and Opco are TCCs and private corporations.

5.DC2's issued share capital is comprised of XXXXXXXXXX Class XXXXXXXXXX shares and XXXXXXXXXX Class XXXXXXXXXX shares. The Class XXXXXXXXXX and Class XXXXXXXXXX shares are entitled to one vote per share. The Class XXXXXXXXXX shares are fixed value preference shares. Brother1 and the Trust own, respectively, XXXXXXXXXX of the Class XXXXXXXXXX shares. Mother and Brother1 own, respectively, XXXXXXXXXX of the Class XXXXXXXXXX shares of DC2. The fair market value of the Class XXXXXXXXXX and Class XXXXXXXXXX shares of DC2 exceeds their ACB to each of its holders. DC2 is currently controlled by Mother.

The Class XXXXXXXXXX and Class XXXXXXXXXX shares of DC2 represent capital property to each of its shareholders.

6.DC2 has no significant assets other than shares of DC1.

7.DC1's issued share capital is comprised of XXXXXXXXXX Class XXXXXXXXXX shares. The Class XXXXXXXXXX shares are entitled to one vote per share. DC2 and Brother1, respectively, own XXXXXXXXXX of the Class XXXXXXXXXX shares. Consequently, DC1 is currently controlled by DC2. The fair market value of the Class XXXXXXXXXX shares exceeds their ACB to each of its holders.

The Class XXXXXXXXXX shares of DC1 represent capital property to each of its shareholders.

8.DC1 carries on a business of XXXXXXXXXX.

9.Brother2 was formerly a shareholder of DC1. During XXXXXXXXXX a transaction was carried out pursuant to paragraph 55(3)(b) of the Act, which resulted in assets owned by DC1 being distributed to a corporation controlled by Brother2. As part of this reorganization, DC1 granted a lease of XXXXXXXXXX assets to Brother2's corporation, which remains outstanding. The lease provided for monthly rent and the lease term exceeded the expected useful life of the assets (the term was in excess of XXXXXXXXXX years). The lease provided a right to prepay future rent on a present value basis. When the lease was entered into this amount was expected to approximate the fair market value of the leased property. Approximately a year after the lease was entered into the balance of rent due under the lease was prepaid pursuant to the prepayment right. The cash payment was used by DC1 in its business and is now reflected in its assets. DC1 no longer has any cash balance that is attributable to the rent prepayment. Because the rent prepayment represented income that would have otherwise been received over a number of years, for tax purposes it is being included in business income over the term of the lease. On DC1's financial statements this future income inclusion is represented as a prepaid rent liability. The assets that are subject to the lease continue to be reflected in DC1's financial statements and its capital cost allowance pools. However, the leased assets now have only nominal fair market value because they are subject to a lease that no longer generates rental income.

During XXXXXXXXXX, DC1 sold XXXXXXXXXX assets to Brother1. Brother1 has an obligation, that is not convertible to other property, to pay for these assets over time. The amount owing to DC1 from Brother1 is non-interest bearing and is payable on demand. This amount will be outstanding at the time of the proposed transactions described in this letter. The assets sold to Brother1 from DC1 have not been transferred to a corporation of which Brother1 is a shareholder.

DC1 currently has an outstanding bank loan with an arm's length financial institution in the amount of approximately $XXXXXXXXXX, however, this amount can fluctuate. The bank loan is payable on demand and is secured by all rights, licenses, permits, property and equipment of DC1 used in the XXXXXXXXXX.

DC1 currently owes Mother approximately $XXXXXXXXXX. This loan is interest bearing and is payable on demand. It will not be repaid before the proposed transactions described in this letter are carried out but will likely be repaid by the end of the current year.

During XXXXXXXXXX Brother1 borrowed funds from DC1 to assist him in XXXXXXXXXX. This loan has been repaid in full.

Other than the debts described herein and in paragraph 10 below, there is currently no outstanding debts between DC1 and its shareholders.

In XXXXXXXXXX DC1 participates in XXXXXXXXXX joint venture with a group of investors. Brother1 and Opco have also participated in the joint venture in the recent past. The joint venture is administered by Managementco. A new joint venture is formed each year. The joint ventures have involved the acquisition and development of XXXXXXXXXX. Joint ventures were carried out in XXXXXXXXXX. It is likely annual joint ventures will continue for the foreseeable future. Mother participated in the joint venture in XXXXXXXXXX and may continue to do so in the future.

10.DC1 has a bank operating line of credit which it uses to fund its XXXXXXXXXX. During the course of the year the balance owed on the operating line of credit fluctuates as DC1 expends funds on XXXXXXXXXX activities or repays advances. The operating line of credit is repaid as DC1 earns production income or is reimbursed for expenses by joint venture partners.

From time-to-time Mother, DC1's shareholders and related companies have surplus cash available, generally on a short-term basis. To minimize bank interest costs and transaction fees, DC1 has in the past borrowed these funds on a demand, interest-bearing basis so that it may reduce its line of credit balance. It is not certain that these amounts will be repaid before the proposed transactions are carried out. For example, in addition to the $XXXXXXXXXX loan described above, Mother has approximately $XXXXXXXXXX owing to her by DC1 under this arrangement.

As these transactions are typical of transactions carried out in the ordinary course of business by DC1, related companies and its shareholders, and would be made independently of the proposed transactions as the sole purpose of such loans is to fulfil a business requirement, they do not constitute an acquisition of property by DC1 in contemplation of the proposed butterfly transactions. Similarly, the borrowing by DC1 on its bank line of credit is not an acquisition of assets in contemplation of the butterfly. These loans may be made, and possibly repaid, before and/or after the transactions contemplated herein.

11.Managementco and XXXXXXXXXX are wholly-owned subsidiaries of DC1.

Managementco acts as bare trustee for DC1 and various joint venture partners by XXXXXXXXXX. Managementco also holds legal title to a premises lease on behalf of DC1. The lease is for DC1's office space. DC1 pays the rent under this lease. Managementco's only asset is a cash balance. Any other funds held by Managementco are held on behalf of DC1 and the other joint venture partners and, therefore, are property of those persons.

XXXXXXXXXX acts as bare trustee for a trust. The trust assets have been sold and the trust is currently dormant. It has no assets and is not expected to have assets in the future.

DC1 holds less than a XXXXXXXXXX% interest in a public corporation. These shares have nominal value and would be characterized as investment property. DC1 does not own any shares of any corporations other than Managementco, XXXXXXXXXX and the public corproation described herein.

12.Mother is the sole shareholder of Opco. The issued share capital of Opco is XXXXXXXXXX Class XXXXXXXXXX common shares entitled to one vote per share. The fair market value of the Class XXXXXXXXXX common shares of Opco exceeds their ACB. The Class XXXXXXXXXX common shares of Opco represent capital property to Mother.

Opco carries on a business of XXXXXXXXXX. During XXXXXXXXXX, Opco sold XXXXXXXXXX assets to Mother.

13.None of the shareholders of DC1 or DC2 have acquired the shares of those corporations in contemplation of the proposed transactions described below.

14.DC1, DC2 and Opco have a nil balance in their CDA and they have no RDTOH.

PROPOSED TRANSACTIONS

15.A new corporation ("Subco1") will be incorporated under the provisions of the BCA. The authorized share capital of Subco1 will consist of a class of preferred shares and a class of common shares. On incorporation, Subco1 will issue to DC2 XXXXXXXXXX common shares for consideration of $XXXXXXXXXX.

The preferred shares of Subco1 will be redeemable and retractable for an amount equal to the fair market value of the consideration paid for the shares, non-voting, entitled to dividends not exceeding XXXXXXXXXX% of their redemption price, entitled to their redemption price upon dissolution of the corporation in priority to the common shares, and dividends will not be able to be paid on the common shares if they would leave the corporation with insufficient assets to redeem the preferred shares.

The common shares will be voting, entitled to dividends, as declared by the directors, after payment of dividends on the preferred shares, and entitled to the corporation's assets on dissolution, subject to the rights of the preferred shares.

16.Immediately before the transfer of properties described in paragraph 18 below, the assets of DC1 will be classified into three types of property for the purpose of the definition of "distribution" in subsection 55(1) of the Act, as follows:

(a)cash or near cash property, comprising all of the current assets of DC1 including, in particular, cash, bank deposits, marketable securities, accounts receivable (including the receivable from Brother1 described in paragraph 9 above), inventory and rights arising from prepaid expenses of DC1 (such rights are hereinafter referred to as "prepaid expenses"),

(b) investment property, comprising all of the assets of DC1, other than any cash or near cash property, any income from which would, for the purposes of the Act, be income from property or a SIB, and

(c) business property, comprising all of the assets of DC1 other than cash or near cash property, any income from which would, for purposes of the Act, be income from a business (other than a SIB).

For greater certainty, any tax accounts of DC1 will not be considered to be property of DC1 for purposes of the proposed transactions described herein.

Since the only asset held by Managementco is cash, the Managementco shares held by DC1 will be classified as cash or near cash property of DC1. The property owned by DC1 that has been leased to Brother2 will be recognized as business property since the rental income has historically been reported as business income.

17.In determining the net fair market value of its cash or near cash property, investment property and business property immediately before the property transfers described in paragraph 18 below, the liabilities of DC1 will be allocated to, and be deducted in the calculation of, the net fair market value of each such type of property of DC1 in the following manner:

(a) current liabilities of DC1 will be allocated to cash or near cash property of DC1 in the proportion that the fair market value of each such property is of the fair market value of all cash or near cash property of DC1. The aggregate amount of current liabilities allocated to these assets will not exceed the aggregate fair market value of the cash or near cash property of DC1;

(b) liabilities, other than current liabilities of DC1 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 fair market value. The 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 fair market value of such type of property after the allocation of liabilities to a particular property as described herein; and

(c) if any liabilities remain after the allocations described in steps (a) and (b) above are made ("excess unallocated liabilities"), such excess unallocated liabilities will then be allocated to the cash or near cash property, business property and investment property, if any, of DC1 based on the relative net fair market value of each type of property prior to the allocation of such excess unallocated liabilities.

For the purpose of calculating the net fair market value of the types of property of DC1;

(i)the bank loan, as described in paragraph 9 above, will be treated as a current liability;

(ii)the amount owing to Mother, as described in paragraph 9 above, will be treated as a current liability; and

(iii)the liability reflected in DC1's financial statements regarding the deferred lease rental income, as described in paragraph 9 above, will be ignored as a liability since the fair market value of the leased property, which is nominal, has already recognized this liability.

18.DC1 will then transfer to Subco1 the following (i.e. the "Transferred Properties"):

(a) business property, including an undivided interest in each property of DC1 XXXXXXXXXX;

(b) investment property; and

(c) cash or near cash property;

such that the net fair market value of each type of property so transferred to Subco1 (after allocating and deducting, in the manner described in paragraph 17 above, the liabilities of DC1 which are to be assumed by Subco1 as described herein) will be equal to that proportion of the net fair market value of all property of DC1 of that type determined immediately before such transfer that

(i)the aggregate fair market value, immediately before the transfer, of all of the shares of the capital stock of DC1 owned by DC2 at that time

is of

(ii) the aggregate fair market value, immediately before the transfer, of all of the issued and outstanding shares of the capital stock of DC1 at that time.

As consideration for the transfer of the Transferred Properties, Subco1 will assume certain liabilities of DC1 and will issue to DC1 preferred shares of its capital stock having an aggregate redemption amount and fair market value equal to the amount by which the fair market value of the Transferred Properties exceeds the amount of liabilities assumed by Subco1 as described herein.

The Transferred Properties will not include the receivable owing to DC1 from Brother1 or any of the shares of Managementco and XXXXXXXXXX.

19.DC1 and Subco1 will elect, jointly and in prescribed form and within the time limits referred to in subsection 85(6) of the Act, to have the rules in subsection 85(1) of the Act apply to the transfers of any eligible property of DC1 to Subco1 as part of the transfer of the Transferred Properties as described in paragraph 18 above. The amount agreed upon in such subsection 85(1) elections in respect of each of the eligible properties so transferred will not be less than:

(a) in the case of capital property (other than depreciable property of a prescribed class) and inventory, an amount equal to the least of the amounts described in subparagraphs 85(1)(c.1)(i) and (ii) of the Act;

(b) in the case of depreciable property of a prescribed class, an amount equal to the least of the amounts described in subparagraphs 85(1)(e)(i), (ii) and (iii) of the Act;

(c)in the case of eligible capital property, an amount equal to the least of the amounts described in subparagraphs 85(1)(d)(i), (ii) and (iii) of the Act; and

(d) in the case of XXXXXXXXXX, an amount equal to or greater than $XXXXXXXXXX.

For greater certainty the agreed amount for any eligible property included in the subsection 85(1) elections referred to herein will not be greater than the fair market value, at the time of the disposition, of such property, nor will it be less than the amount of any liabilities assumed by Subco1 as consideration for the transfer of such property.

The amount added to the stated capital of the preferred shares of Subco1 which are to be issued to DC1 as consideration for the Transferred Properties will be equal to the amount by which the aggregate cost of the property to Subco1 (determined pursuant to subsection 85(1) of the Act where relevant) exceeds the amount of the liabilities assumed by Subco1 as consideration therefor.

The preferred shares of Subco1 will be capital property to DC1.

20.Subco1 will then redeem the preferred shares held by DC1 for an amount equal to their fair market value (the "Subco1 Redemption Price") and as payment of the Subco1 Redemption Price will issue to DC1 a non-interest bearing note (the "Subco1 Note") payable on demand having a principal amount and fair market value equal to the Subco1 Redemption Price. DC1 will accept the Subco1 Note as full payment for the Subco1 Redemption Price of the preferred shares so redeemed.

21. Immediately after the redemption of the preferred shares of Subco1 as described in paragraph 20 above, DC1 will then redeem all of its XXXXXXXXXX Class XXXXXXXXXX shares held by DC2 for an amount equal to their fair market value (the "DC1 Redemption Price") and as payment of the DC1 Redemption Price will issue to DC2 a non-interest bearing note (the "DC1 Note") payable on demand having a principal amount and fair market value equal to the DC1 Redemption Price. DC2 will accept the DC1 Note as full payment for the DC1 Redemption Price of the XXXXXXXXXX Class XXXXXXXXXX shares so redeemed.

22.DC2 will cause Subco1 to be wound up pursuant to the provisions of the BCA. As a result of the wind-up, the assets and liabilities of Subco1 (including the obligation owing by Subco1 under the Subco1 Note) will become assets and liabilities of DC2.

23.DC1 and DC2 will set-off, against each other, the DC1 Note and the Subco1 Note. The DC1 Note and the Subco1 Note will be cancelled.

24.Immediately following the transfer described in paragraph 18 above, the redemption of the preferred shares of Subco1 as described in paragraph 20 above and the redemption of the XXXXXXXXXX Class XXXXXXXXXX shares of DC1 as described in paragraph 21 above, the net fair market value of each type of property retained by DC1, determined in accordance with the guidelines described in paragraphs 16 and 17 above and ignoring the DC1 Note and the Subco1 Note, will be equal to that proportion of the aggregate net fair market value of that type of property of DC1 immediately before the transfer described in paragraph 18 above that,

(a)the aggregate fair market value of all of the issued and outstanding Class XXXXXXXXXX shares of DC1 owned by Brother1 immediately before the transfer described in paragraph 18 above,

is of

(b)the aggregate fair market value of all of the shares of DC1 immediately before such transfer.

25.A new corporation ("Parentco") will be incorporated under the provisions of the BCA. The authorized share capital of Parentco will consist of a class of preferred shares and a class of common shares. On incorporation, Parentco will issue to Mother XXXXXXXXXX common shares for consideration of $XXXXXXXXXX.

The preferred shares of Parentco will be redeemable and retractable for an amount equal to the fair market value of the consideration paid for the shares, non-voting, entitled to dividends not exceeding XXXXXXXXXX% of their redemption price, entitled to their redemption price upon dissolution of the corporation in priority to the common shares, and dividends will not be able to be paid on the common shares if they would leave the corporation with insufficient assets to redeem the preferred shares.

The common shares will be voting, entitled to dividends, as declared by the directors, after payment of dividends on the preferred shares, and entitled to the corporation's assets on dissolution, subject to the rights of the preferred shares.

26.Mother and the Trust will transfer all of their Class XXXXXXXXXX and Class XXXXXXXXXX shares of DC2 to Parentco. As sole consideration for such transfers, Parentco will issue preferred shares to each of Mother and the Trust. The aggregate fair market value and redemption value of the preferred shares of Parentco issued to each of Mother and the Trust will be equal to the aggregate fair market value of the Class XXXXXXXXXX and Class XXXXXXXXXX shares of DC2 transferred by each respective transferor to Parentco. The preferred shares of Parentco will be capital property to each of Mother and the Trust.

27.Parentco and each of Mother and the Trust will elect, jointly and in prescribed form and within the time limits referred to in subsection 85(6) of the Act, to have the rules in subsection 85(1) of the Act apply to the transfer of the Class XXXXXXXXXX and Class XXXXXXXXXX shares of DC2 by that shareholder as described in paragraph 26 above to Parentco. The amount agreed upon in each such election in respect of the Class XXXXXXXXXX and Class XXXXXXXXXX shares of DC2 so transferred by each shareholder will be equal to the lesser of the amounts described in subparagraphs 85(1)(c.1)(i) and (ii) of the Act to that shareholder.

The amount added to the stated capital of the preferred shares of Parentco in respect of the preferred shares issued to each of Mother and the Trust in exchange for their Class XXXXXXXXXX and Class XXXXXXXXXX shares of DC2 will be equal to the ACB, determined in accordance with paragraphs 84.1(2)(a) and (a.1), of such Class XXXXXXXXXX and Class XXXXXXXXXX shares of DC2 to each shareholder immediately before their transfer to Parentco.

28.A new corporation ("Subco2") will be incorporated under the provisions of the BCA. The authorized share capital of Subco2 will consist of a class of preferred shares and a class of common shares. On incorporation, Subco2 will issue to Parentco XXXXXXXXXX common shares for consideration of $XXXXXXXXXX.

The preferred shares of Subco2 will be redeemable and retractable for an amount equal to the fair market value of the consideration paid for the shares, non-voting, entitled to dividends not exceeding XXXXXXXXXX% of their redemption price, entitled to their redemption price upon dissolution of the corporation in priority to the common shares, and dividends will not be able to be paid on the common shares if they would leave the corporation with insufficient assets to redeem the preferred shares.

The common shares will be voting, entitled to dividends, as declared by the directors, after payment of dividends on the preferred shares, and entitled to the corporation's assets on dissolution, subject to the rights of the preferred shares.

29.Immediately before the transfer of properties described in paragraph 31 below, the assets of DC2 will be classified into three types of property for the purpose of the definition of "distribution" in subsection 55(1) of the Act, as follows:

(a)cash or near cash property, comprising all of the current assets of DC2 including, in particular, cash, bank deposits, marketable securities, accounts receivable, inventory and rights arising from prepaid expenses of DC2 (such rights are hereinafter referred to as "prepaid expenses"),

(b)investment property, comprising all of the assets of DC2, other than any cash or near cash property, any income from which would, for the purposes of the Act, be income from property or a SIB, and

(c) business property, comprising all of the assets of DC2 other than cash or near cash property, any income from which would, for purposes of the Act, be income from a business (other than a SIB).

For greater certainty, any tax accounts of DC2 will not be considered to be property of DC2 for purposes of the proposed transactions described herein.

30.In determining the net fair market value of its cash or near cash property, investment property and business property immediately before the property transfers described in paragraph 31 below, the liabilities of DC2 will be allocated to, and be deducted in the calculation of, the net fair market value of each such type of property of DC2 in the following manner:

(a) Current liabilities of DC2 will be allocated to cash or near cash property of DC2 in the proportion that the fair market value of each such property is of the fair market value of all cash or near cash property of DC2. The aggregate amount of current liabilities allocated to these assets will not exceed the aggregate fair market value of the cash or near cash property of DC2.

(b) Liabilities, other than current liabilities of DC2 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 fair market value. The 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 fair market value of such type of property after the allocation of liabilities to a particular property as described herein;

(c) if any liabilities remain after the allocations described in steps (a) and (b) above are made ("excess unallocated liabilities"), such excess unallocated liabilities will then be allocated to the cash or near cash property, business property and investment property, if any, of DC2 based on the relative net fair market value of each type of property prior to the allocation of such excess unallocated liabilities.

For the purpose of calculating the net fair market value of the types of property of DC2;

(i)the portion of the bank loan, if any, that is described in paragraph 9 above and assumed by Subco1 and again by DC2 as proposed in paragraphs 18 and 22 above, will be treated as a current liability;

(ii)the portion of the amount owing to Mother, if any, that is described in paragraph 9 above and assumed by Subco1 and again by DC2 as proposed in paragraphs 18 and 22 above, will be treated as a current liability.

31.DC2 will then transfer to Subco2 the following (i.e. the "Transferred Assets"):

(a) business property, including an undivided interest in each property of DC2 which is XXXXXXXXXX;

(b) investment property; and

(c) cash or near cash property;

such that the net fair market value of each type of property so transferred to Subco2 (after allocating and deducting, in the manner described in paragraph 30 above, the liabilities of DC2 which are to be assumed by Subco2 as described herein) will be equal to that proportion of the net fair market value of all property of DC2 of that type determined immediately before such transfer that

(i)the aggregate fair market value, immediately before the transfer, of all of the shares of the capital stock of DC2 owned by Parentco at that time

is of

(ii) the aggregate fair market value, immediately before the transfer, of all of the issued and outstanding shares of the capital stock of DC2 at that time.

As consideration for the transfer of the Transferred Assets, Subco2 will assume certain liabilities of DC2 and will issue to DC2 preferred shares having an aggregate redemption amount and fair market value equal to the amount by which the fair market value of the Transferred Assets exceeds the amount of liabilities assumed by Subco2 as described herein.

32.DC2 and Subco2 will elect, jointly and in prescribed form and within the time limits referred to in subsection 85(6) of the Act, to have the rules in subsection 85(1) of the Act apply to the transfers of any eligible property of DC2 to Subco2 as part of the transfer of the Transferred Assets as described in paragraph 31 above. The amount agreed upon in such subsection 85(1) elections in respect of each of the eligible properties so transferred will not be less than:

(a) in the case of capital property (other than depreciable property of a prescribed class) and inventory, an amount equal to the least of the amounts described in subparagraphs 85(1)(c.1)(i) and (ii) of the Act;

(b) in the case of depreciable property of a prescribed class, an amount equal to the least of the amounts described in subparagraphs 85(1)(e)(i), (ii) and (iii) of the Act;

(c)in the case of eligible capital property, an amount equal to the least of the amounts described in subparagraphs 85(1)(d)(i), (ii) and (iii) of the Act; and

(d)in the case of XXXXXXXXXX, an amount equal to or greater than $XXXXXXXXXX.

For greater certainty the agreed amount for any eligible property included in the subsection 85(1) elections referred to herein will not be greater than the fair market value, at the time of the disposition, of such property, nor will it be less than the amount of any liabilities assumed by Subco2 as consideration for the transfer of such property.

The amount added to the stated capital of the preferred shares of Subco2 which are to be issued to DC2 as consideration for the Transferred Assets will be equal to the amount by which the aggregate cost of the property to Subco2 (determined pursuant to subsection 85(1) of the Act where relevant) exceeds the amount of the liabilities assumed by Subco2 as consideration therefor.

The preferred shares of Subco2 will be capital property to DC2.

33.Subco2 will then redeem the preferred shares held by DC2 for an amount equal to their fair market value (the "Subco2 Redemption Price") and as payment of the Subco2 Redemption Price will issue to DC2 a non-interest bearing note (the "Subco2 Note") payable on demand having a principal amount and fair market value equal to the Subco2 Redemption Price. DC2 will accept the Subco2 Note as full payment for the Subco2 Redemption Price of the preferred shares so redeemed.

34.Immediately after the redemption of the preferred shares of Subco2 as described in paragraph 33 above, DC2 will then redeem all of its Class XXXXXXXXXX and Class XXXXXXXXXX shares held by Parentco for an amount equal to their fair market value (the "DC2 Redemption Price") and as payment of the DC2 Redemption Price will issue to Parentco a non-interest bearing note (the "DC2 Note") payable on demand having a principal amount and fair market value equal to the DC2 Redemption Price. Parentco will accept the DC2 Note as full payment for the DC2 Redemption Price of the Class XXXXXXXXXX and Class XXXXXXXXXX shares so redeemed.

35.Parentco will cause Subco2 to be wound up pursuant to the provisions of the BCA. As a result of the wind-up, the assets and liabilities of Subco2 (including the obligation owing by Subco2 under the Subco2 Note) will become assets and liabilities of Parentco.

36.DC2 and Parentco will set-off, against each other, the DC2 Note and the Subco2 Note. The DC2 Note and the Subco2 Note will be cancelled.

37.Immediately following the transfer described in paragraph 31 above, the redemption of the preferred shares of Subco2 as described in paragraph 33 above and the redemption of the Class XXXXXXXXXX and Class XXXXXXXXXX shares of DC2 as described in paragraph 34 above, the net fair market value of each type of property retained by DC2, determined in accordance with the guidelines described in paragraphs 29 and 30 above and ignoring the DC2 Note and the Subco2 Note, will be equal to that proportion of the aggregate net fair market value of that type of property of DC2 immediately before the transfer described in paragraph 31 above that,

(a)the aggregate fair market value of all of the issued and outstanding shares of DC2 owned by Brother1 immediately before the transfer described in paragraph 31 above,

is of

(b)the aggregate fair market value of all of the shares of DC2 immediately before such transfer.

38.Opco will file Articles of Amendment to:

(a)authorize the issue of a class of non-voting redeemable preferred shares with the following characteristics:

(i)redeemable and retractable for an amount equal to the fair market value of the consideration paid for the shares,

(ii)non-voting,

(iii)entitled to dividends, not exceeding XXXXXXXXXX% of their redemption price,

(iv)entitled to their redemption price upon dissolution of the corporation in priority to the common shares and pro-rata with the voting preferred shares described in (b) below, and

(v)dividends cannot be paid on the common shares if they would leave the corporation with insufficient assets to redeem the redeemable shares;

(b)authorize the issue of a class of voting redeemable preferred shares with the following characteristics:

(i)redeemable and retractable for an amount equal to the fair market value of the consideration paid for the shares,

(ii)voting,

(iii)entitled to dividends, not exceeding XXXXXXXXXX% of their redemption price,

(iv)entitled to their redemption price upon dissolution of the corporation in priority to the common shares and pro-rata with the non-voting preferred shares described in (a) above, and

(v)dividends cannot be paid on the common shares if they would leave the corporation with insufficient assets to redeem the redeemable shares.

As a result of the Articles of Amendment, the Class XXXXXXXXXX common shares will have the following rights:

(i)voting,

(ii)entitled to dividends, as declared by the directors, after payment of dividends on the redeemable shares, and

(iii)entitled to the corporation's assets on dissolution, subject to the rights of the redeemable shares.

39.Mother will exchange her existing Class XXXXXXXXXX common shares of Opco for voting and non-voting redeemable preferred shares. The non-voting redeemable preferred shares issued will have a fair market value and redemption price equal to the fair market value of the shares in Parentco held by the Trust. The voting redeemable preferred shares will have a fair market value and redemption value equal to the remaining value of the Class XXXXXXXXXX common shares of Opco exchanged by Mother.

The aggregate of the amounts to be credited to the stated capital of the voting and non-voting redeemable preferred shares issued on the exchange of each Class XXXXXXXXXX common share will be equal to the aggregate amount of the PUC of the currently issued and outstanding Class XXXXXXXXXX common shares of Opco immediately before the exchange. The aggregate amount of the PUC of the outstanding common shares will be allocated between the voting and non-voting redeemable preferred shares of Opco based on the proportion that the fair market value of the voting and non-voting redeemable preferred shares, as the case may be, is of the fair market value of all new shares issued. Opco will cancel each of the Class XXXXXXXXXX common shares received as a result of the exchange of shares described herein.

40.The Trust will transfer all of its preferred shares of Parentco to Opco. As sole consideration for such transfer, Opco will issue to the Trust Class XXXXXXXXXX common shares of its capital stock having a fair market value equal to the aggregate fair market value of the preferred shares of Parentco transferred by the Trust.

41.The Trust and Opco will elect, jointly and in prescribed form and within the time limits referred to in subsection 85(6) of the Act, to have the rules in subsection 85(1) of the Act apply to the transfer of the preferred shares of Parentco as described in paragraph 40 above to Opco. The amount agreed upon in the election will be equal to the lesser of the amounts described in subparagraph 85(1)(c.1)(i) and (ii) of the Act.

The amount that will be added to the stated capital of the Class XXXXXXXXXX common shares of Opco as a result of the acquisition by Opco of the shares of Parentco will not exceed the greater of the PUC of the preferred shares of Parentco or the aggregate ACB of those shares of Parentco, as determined under paragraphs 84.1(2)(a) and (a.1) of the Act, to the Trust immediately before the disposition.

42.Mother will transfer her non-voting redeemable preferred shares in Opco to Parentco. As sole consideration for such transfer, Parentco will issue to Mother additional common shares of its capital stock.

43.Mother and Parentco will elect, jointly and in prescribed form and within the time limits referred to in subsection 85(6) of the Act, to have the rules in subsection 85(1) of the Act apply to the transfer of the shares of Opco as described in paragraph 42 above to Parentco. The amount agreed upon in the election will be equal to the lesser of the amounts described in subparagraph 85(1)(c.1)(i) and (ii) of the Act.

The amount that will be added to the stated capital of the common shares of Parentco as a result of the acquisition by Parentco of the shares of Opco will not exceed the greater of the PUC of the shares of Opco or the aggregate ACB of those shares of Opco, as determined under paragraphs 84.1(2)(a) and (a.1) of the Act, to Mother immediately before the disposition.

44.Parentco will then redeem its preferred shares held by Opco for an amount equal to their fair market value (the "Parentco Redemption Price") and as payment of the Parentco Redemption Price will issue to Opco a non-interest bearing note (the "Parentco Note") payable on demand having a principal amount and fair market value equal to the Parentco Redemption Price. Opco will accept the Parentco Note as full payment for the Parentco Redemption Price of the non-voting redeemable preferred shares so redeemed.

45.Opco will then redeem all of its non-voting redeemable preferred shares held by Parentco for an amount equal to their fair market value (the "Opco Redemption Price") and as payment of the Opco Redemption Price will issue to Parentco a non-interest bearing note (the "Opco Note") payable on demand having a principal amount and fair market value equal to the Opco Redemption Price. Parentco will accept the Opco Note as full payment for the Opco Redemption Price of the non-voting redeemable preferred shares so redeemed.

46.Opco and Parentco will set-off, against each other, the Opco Note and the Parentco Note. The Opco Note and the Parentco Note will be cancelled.

ADDITIONAL INFORMATION

47.Except as described in this letter, no liabilities have been or will be incurred by, and no assets have been or will be acquired by or disposed of by DC1, DC2 or a corporation controlled by DC1 in contemplation of and before the proposed transfers of properties described in paragraphs 18 and 31 above. Nor is it contemplated that subsequent to the implementation of the transactions described herein under "Proposed Transactions" that DC1, DC2, Parentco or a corporation controlled by DC1 will transfer or sell any of its assets to any other person except as described herein or in the normal course of its business.

48.None of DC1, DC2, Opco or Parentco is, or will be at the time of the proposed transactions, an SFI.

49.None of the shares of DC1, DC2, Opco or Parentco has been or will be, at any time during the implementation of the proposed transactions described herein:

(a) the subject of any undertaking that is referred to in subsection 112(2.2) of the Act as a "guarantee agreement";

(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) of the Act; or

(c) the subject of a dividend rental arrangement as that term is defined in subsection 248(1) of the Act.

50. XXXXXXXXXX.

PURPOSE OF THE PROPOSED TRANSACTIONS

51.The transactions are intended to split up DC1 on a tax-deferred basis so that Brother1 and Mother can implement their differing business strategies. The transactions are also intended to exchange the Trust's economic interest in DC1 for an interest in a corporation that has different assets than DC1 to avoid a conflict of interest between Brother1 and the Trust.

XXXXXXXXXX

Mother is approaching retirement and her primary goal is to ensure she has a secure source of income for the remainder of her life.

XXXXXXXXXX

To permit each shareholder to achieve their goals, it is proposed that a divisive reorganization be carried out so that DC1's assets are split between Brother1 and Mother. This will permit Brother1 to pursue a XXXXXXXXXX strategy without putting Mother's income stream at risk. To reduce Mother's exposure XXXXXXXXXX properties will be distributed to Parentco on an undivided interest basis so that Parentco has an interest in all of DC1's XXXXXXXXXX properties. This will give Parentco an interest in a large number of XXXXXXXXXX.

XXXXXXXXXX

XXXXXXXXXX

The Trust's interest in Parentco will be substituted for an interest in Opco. As a result of the substitution, the Trust will have an interest in different assets than DC1. XXXXXXXXXX. This would eliminate the potential conflict between the Trust's interest in preserving its assets for the benefit of its beneficiaries and Brother1's interest in risking capital to expand DC1.

RULINGS GIVEN

Provided that the preceding statements constitute a complete and accurate disclosure of all of the relevant facts, proposed transactions and 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 the application of the provisions of subsections 20(1.2) and 26(5) of the Income Tax Application Rules (the "ITAR") and to the application of paragraph 88(2.2)(b) of the Act, which applies for the purposes stated in the preamble to subsection 88(2.2) of the Act, and subject also to the application of subsection 85(5.1), the provisions of subsection 85(1) of the Act will apply to the transfer of each eligible property by DC1 to Subco1 which is the subject of an election under subsection 85(1) as described in paragraphs 18 and 19 above such that the agreed amounts in respect of each such transfer shall be deemed to be the transferor's proceeds of disposition and the transferee's cost thereof pursuant to paragraph 85(1)(a) of the Act. For greater certainty, paragraph 85(1)(e.2) of the Act will not apply to the transfers referred to herein.

B.As a result of the redemption by Subco1 of the preferred shares held by DC1 as described in paragraph 20 above and the redemption by DC1 of the XXXXXXXXXX Class XXXXXXXXXX shares held by DC2 as described in paragraph 21 above:

(a)By virtue of paragraphs 84(3)(a) and 84(3)(b) of the Act:

(i)Subco1 will be deemed to have paid, and DC1 will be deemed to have received, a taxable dividend equal to the amount by which the amount paid in respect of the redemption of the preferred shares of Subco1 exceeds the PUC thereof; and

(ii)DC1 will be deemed to have paid, and DC2 will be deemed to have received, a taxable dividend equal to the amount by which the amount paid in respect of the redemption of the XXXXXXXXXX Class XXXXXXXXXX shares exceeds the PUC thereof;

(b)The taxable dividends deemed to have been received by DC1 and DC2 as a result of the redemptions referred to in paragraph (a) herein will be included in computing their respective incomes pursuant to paragraph 12(1)(j) of the Act and be deductible by each of them in computing its respective taxable income pursuant to subsection 112(1) of the Act. For greater certainty, the provisions of subsections 112(2.2) and (2.4) of the Act will not apply to deny the subsection 112(1) deduction in respect of such dividends;

(c)The taxable dividends deemed to have been received by DC1 and DC2 as a result of the redemption of shares referred to in paragraph (a) herein will be excluded from the proceeds of disposition of the shares by virtue of paragraph (j) of the definition of "proceeds of disposition" in section 54 of the Act; and

(d) By virtue of subsection 186(2) and paragraph 186(4)(a) of the Act, Subco1 will be connected with DC1 and DC1 will be connected with DC2. Consequently, provided that neither of DC1 nor DC2 is entitled to a dividend refund (within the meaning of subsection 129(1) of the Act) in respect of its taxation year in which it is deemed to pay the dividends referred to in (a)(i) or (ii) herein, neither of DC1 nor DC2 will be subject to Part IV tax under subsection 186(1) of the Act in respect of such dividend.

C.By virtue of the definition of "substantial interest" as set out under paragraph 191(2)(a) of the Act, DC1 will have a substantial interest in Subco1 immediately before the redemption of the preferred shares of Subco1 as described in paragraph 20 above and DC2 will have a substantial interest in DC1 immediately before the redemption of the XXXXXXXXXX Class XXXXXXXXXX shares of DC1 as described in paragraph 21 above. Consequently, no tax will be payable under either section 187.2 or section 191.1 of the Act in respect of:

(i) the dividend deemed to be paid by Subco1 to DC1 upon the redemption of the preferred shares of Subco1 since such dividend will be an "excepted dividend" within the meaning assigned by paragraph (b) of the definition of "excepted dividend" in section 187.1 of the Act in the capacity of DC1 as the recipient of the particular dividend, and shall be an "excluded dividend" within the meaning of paragraph (a) of the definition of "excluded dividend" in subsection 191(1) of the Act in the capacity of Subco1 as the payer of the particular dividend, or

(ii) the dividend deemed to have been paid by DC1 to DC2 upon the redemption of the XXXXXXXXXX Class XXXXXXXXXX shares of DC1 since such dividend will be an "excepted dividend" within the meaning assigned by paragraph (b) of the definition of "excepted dividend" in section 187.1 of the Act in the capacity of DC2 as the recipient of the particular dividend, and shall be an "excluded dividend" within the meaning of paragraph (a) of the definition of "excluded dividend" in subsection 191(1) of the Act in the capacity of DC1 as the payer of the particular dividend.

D.Provided that as part of the series of transactions or events that includes the proposed transactions described herein, 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 property in the circumstances described in paragraph 55(3.1)(c); or

(d) an acquisition of property in the circumstances described in paragraph 55(3.1)(d),

which has not been described herein, then by virtue of paragraph 55(3)(b) of the Act, subsection 55(2) of the Act will not apply to the taxable dividend referred to in the ruling given in subparagraph B(a)(ii) above and for greater certainty, subsection 55(3.1) of the Act will not apply to deny the exemption under paragraph 55(3)(b) of the Act.

E.The provisions of subsection 88(1) of the Act will apply to the wind-up of Subco1 as described in paragraph 22 above.

F.The set-off and cancellation of the DC1 Note and the Subco1 Note, as described in paragraph 23 above, will not give rise to a "forgiven amount" within the meaning of subsection 80(1) or 80.01(1).

G.Subject to the application of the provisions of subsections 20(1.2) and 26(5) of the ITAR and to the application of paragraph 88(2.2)(b) of the Act, which applies for the purposes stated in the preamble to subsection 88(2.2) of the Act, the provisions of subsection 85(1) of the Act will apply to the transfer of the Class XXXXXXXXXX and Class XXXXXXXXXX shares of DC2 by Mother and the Trust to Parentco as described in paragraphs 26 and 27 above such that the agreed amount in respect of such transfer shall be deemed to be the transferor's proceeds of disposition and the transferee's cost thereof pursuant to paragraph 85(1)(a) of the Act. For greater certainty, paragraph 85(1)(e.2) of the Act will not apply to the transfers referred to herein.

H.Subject to the application of the provisions of subsections 20(1.2) and 26(5) of the ITAR and to the application of paragraph 88(2.2)(b) of the Act, which applies for the purposes stated in the preamble to subsection 88(2.2) of the Act, and subject also to the application of subsection 85(5.1), the provisions of subsection 85(1) of the Act will apply to the transfer of each eligible property by DC2 to Subco2 which is the subject of an election under subsection 85(1) as described in paragraphs 31 and 32 above such that the agreed amounts in respect of each such transfer shall be deemed to be the transferor's proceeds of disposition and the transferee's cost thereof pursuant to paragraph 85(1)(a) of the Act. For greater certainty, paragraph 85(1)(e.2) of the Act will not apply to the transfers referred to herein.

I.As a result of the redemption by Subco2 of the preferred shares held by DC2 as described in paragraph 33 above and the redemption by DC2 of the Class XXXXXXXXXX and Class XXXXXXXXXX shares held by Parentco as described in paragraph 34 above:

(a)By virtue of paragraphs 84(3)(a) and 84(3)(b) of the Act:

(i)Subco2 will be deemed to have paid, and DC2 will be deemed to have received, a taxable dividend equal to the amount by which the amount paid in respect of the redemption of the preferred shares of Subco2 exceeds the PUC thereof; and

(ii)DC2 will be deemed to have paid, and Parentco will be deemed to have received, a taxable dividend equal to the amount by which the amount paid in respect of the redemption of the Class XXXXXXXXXX and Class XXXXXXXXXX shares exceeds the PUC thereof;

(b)The taxable dividends deemed to have been received by DC2 and Parentco as a result of the redemptions referred to in paragraph (a) herein will be included in computing their respective incomes pursuant to paragraph 12(1)(j) of the Act and be deductible by each of them in computing its respective taxable income pursuant to subsection 112(1) of the Act. For greater certainty, the provisions of subsections 112(2.2) and (2.4) of the Act will not apply to deny the subsection 112(1) deduction in respect of such dividends;

(c)The taxable dividends deemed to have been received by DC2 and Parentco as a result of the redemption of shares referred to in paragraph (a) herein will be excluded from the proceeds of disposition of the shares by virtue of paragraph (j) of the definition of "proceeds of disposition" in section 54 of the Act; and

(d) By virtue of subsection 186(2) and paragraph 186(4)(a) of the Act, Subco2 will be connected with DC2 and DC2 will be connected with Parentco. Consequently, provided that neither of DC2 nor Parentco is entitled to a dividend refund (within the meaning of subsection 129(1) of the Act) in respect of its taxation year in which it is deemed to pay the dividends referred to in (a)(i) or (ii) herein, neither of DC2 nor Parentco will be subject to Part IV tax under subsection 186(1) of the Act in respect of such dividend.

J.By virtue of the definition of "substantial interest" as set out under paragraph 191(2)(a) of the Act, DC2 will have a substantial interest in Subco2 immediately before the redemption of the preferred shares of Subco2 as described in paragraph 33 above and Parentco will have a substantial interest in DC2 immediately before the redemption of the Class XXXXXXXXXX and Class XXXXXXXXXX shares of DC2 as described in paragraph 34 above. Consequently, no tax will be payable under either section 187.2 or section 191.1 of the Act in respect of:

(i) the dividend deemed to be paid by Subco2 to DC2 upon the redemption of the preferred shares of Subco2 since such dividend will be an "excepted dividend" within the meaning assigned by paragraph (b) of the definition of "excepted dividend" in section 187.1 of the Act in the capacity of DC2 as the recipient of the particular dividend, and shall be an "excluded dividend" within the meaning of paragraph (a) of the definition of "excluded dividend" in subsection 191(1) of the Act in the capacity of Subco2 as the payer of the particular dividend, or

(ii) the dividend deemed to have been paid by DC2 to Parentco upon the redemption of the Class XXXXXXXXXX and Class XXXXXXXXXX shares of DC2 since such dividend will be an "excepted dividend" within the meaning assigned by paragraph (b) of the definition of "excepted dividend" in section 187.1 of the Act in the capacity of Parentco as the recipient of the particular dividend, and shall be an "excluded dividend" within the meaning of paragraph (a) of the definition of "excluded dividend" in subsection 191(1) of the Act in the capacity of DC2 as the payer of the particular dividend.

K.Provided that as part of the series of transactions or events that includes the proposed transactions described herein, 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 property in the circumstances described in paragraph 55(3.1)(c); or

(d) an acquisition of property in the circumstances described in paragraph 55(3.1)(d),

which has not been described herein, then by virtue of paragraph 55(3)(b) of the Act, subsection 55(2) of the Act will not apply to the taxable dividend referred to in the ruling given in subparagraph I(a)(ii) above and for greater certainty, subsection 55(3.1) of the Act will not apply to deny the exemption under paragraph 55(3)(b) of the Act.

L.The provisions of subsection 88(1) of the Act will apply to the wind-up of Subco2 as described in paragraph 35 above.

M.The set-off and cancellation of the DC2 Note and the Subco2 Note, as described in paragraph 36 above, will not give rise to a "forgiven amount" within the meaning of subsection 80(1) or 80.01(1).

N.The provisions of subsection 86(1) of the Act will apply, and the provisions of subsection 86(2) of the Act will not apply, to the exchange of shares described in paragraph 39 above such that:

the cost to Mother of the voting or non-voting redeemable preferred shares of Opco, as the case may be, shall be deemed by paragraph 86(1)(b) of the Act to be that proportion of the aggregate ACB to Mother, immediately before the share exchange, of the existing Class XXXXXXXXXX common shares of Opco held by Mother, that

the fair market value, immediately after the share exchange, of all of the voting or non-voting redeemable preferred shares of Opco, as the case may be,

is of

the aggregate fair market value, immediately after the share exchange, of all of the voting and non-voting redeemable preferred shares of Opco receivable by Mother for the existing Class XXXXXXXXXX common shares of Opco;

Mother shall be deemed by paragraph 86(1)(c) of the Act to have disposed of her existing Class XXXXXXXXXX common shares of Opco for proceeds of disposition equal to the aggregate cost to Mother of all the voting or non-voting redeemable preferred shares of Opco receivable by Mother on the exchange of her existing Class XXXXXXXXXX common shares of Opco.

O.Subject to the application of the provisions of subsections 20(1.2) and 26(5) of the ITAR and to the application of paragraph 88(2.2)(b) of the Act, which applies for the purposes stated in the preamble to subsection 88(2.2) of the Act, the provisions of subsection 85(1) of the Act will apply to the transfer of the preferred shares of Parentco by the Trust to Opco as described in paragraphs 40 and 41 above such that the agreed amount in respect of such transfer shall be deemed to be the transferor's proceeds of disposition and the transferee's cost thereof pursuant to paragraph 85(1)(a) of the Act. For greater certainty, paragraph 85(1)(e.2) of the Act will not apply to the transfers referred to herein.

P.Subject to the application of the provisions of subsections 20(1.2) and 26(5) of the ITAR and to the application of paragraph 88(2.2)(b) of the Act, which applies for the purposes stated in the preamble to subsection 88(2.2) of the Act, the provisions of subsection 85(1) of the Act will apply to the transfer of the non-voting redeemable preferred shares of Opco by Mother to Parentco as described in paragraphs 42 and 43 above such that the agreed amount in respect of such transfer shall be deemed to be the transferor's proceeds of disposition and the transferee's cost thereof pursuant to paragraph 85(1)(a) of the Act. For greater certainty, paragraph 85(1)(e.2) of the Act will not apply to the transfers referred to herein.

Q.As a result of the redemption by Parentco of its preferred shares held by Opco as described in paragraph 44 above and the redemption by Opco of its non-voting redeemable preferred shares held by Parentco as described in paragraph 45 above:

(a)By virtue of paragraphs 84(3)(a) and 84(3)(b) of the Act:

(i)Parentco will be deemed to have paid, and Opco will be deemed to have received, a taxable dividend equal to the amount by which the amount paid in respect of the redemption of the preferred shares of Parentco exceeds the PUC thereof; and

(ii)Opco will be deemed to have paid, and Parentco will be deemed to have received, a taxable dividend equal to the amount by which the amount paid in respect of the redemption of the non-voting redeemable preferred shares exceeds the PUC thereof;

(b)The taxable dividends deemed to have been received by Opco and Parentco as a result of the redemptions referred to in paragraph (a) herein will be included in computing their respective incomes pursuant to paragraph 12(1)(j) of the Act and be deductible by each of them in computing its respective taxable income pursuant to subsection 112(1) of the Act. For greater certainty, the provisions of subsections 112(2.2) and (2.4) of the Act will not apply to deny the subsection 112(1) deduction in respect of such dividends;

(c)The taxable dividends deemed to have been received by Opco and Parentco as a result of the redemption of shares referred to in paragraph (a) herein will be excluded from the proceeds of disposition of the shares by virtue of paragraph (j) of the definition of "proceeds of disposition" in section 54 of the Act; and

(d) By virtue of subsection 186(2) and paragraph 186(4)(a) of the Act, Parentco will be connected with Opco and Opco will be connected with Parentco. Consequently, provided that neither of Parentco nor Opco is entitled to a dividend refund (within the meaning of subsection 129(1) of the Act) in respect of its taxation year in which it is deemed to pay the dividends referred to in (a)(i) or (ii) herein, neither of Parentco nor Opco will be subject to Part IV tax under subsection 186(1) of the Act in respect of such dividend.

R.By virtue of the definition of "substantial interest" as set out under paragraph 191(2)(a) of the Act, Opco will have a substantial interest in Parentco immediately before the redemption of the preferred shares of Parentco as described in paragraph 44 above and Parentco will have a substantial interest in Opco immediately before the redemption of the non-voting redeemable preferred shares of Opco as described in paragraph 45 above. Consequently, no tax will be payable under either section 187.2 or section 191.1 of the Act in respect of:

(i) the dividend deemed to be paid by Parentco to Opco upon the redemption of the preferred shares of Parentco since such dividend will be an "excepted dividend" within the meaning assigned by paragraph (b) of the definition of "excepted dividend" in section 187.1 of the Act in the capacity of Opco as the recipient of the particular dividend, and shall be an "excluded dividend" within the meaning of paragraph (a) of the definition of "excluded dividend" in subsection 191(1) of the Act in the capacity of Parentco as the payer of the particular dividend, or

(ii) the dividend deemed to have been paid by Opco to Parentco upon the redemption of the non-voting redeemable preferred shares of Opco since such dividend will be an "excepted dividend" within the meaning assigned by paragraph (b) of the definition of "excepted dividend" in section 187.1 of the Act in the capacity of Parentco as the recipient of the particular dividend, and shall be an "excluded dividend" within the meaning of paragraph (a) of the definition of "excluded dividend" in subsection 191(1) of the Act in the capacity of Opco as the payer of the particular dividend.

S.The set-off and cancellation of the Parentco Note and the Opco Note, as described in paragraph 46 above, will not give rise to a "forgiven amount" within the meaning of subsection 80(1) or 80.01(1).

T.The provisions of subsections 15(1), 56(2) and 246(1) of the Act will not apply as a result of the proposed transactions described herein, in and by themselves.

U.As a result of the proposed transactions, in and by themselves, and subject to the comments made below under paragraph (a) of the heading "Comments", subsection 245(2) of the Act will not be applied to redetermine the tax consequences confirmed in the rulings given.

The above rulings are given subject to the general limitations and qualifications set out in Information Circular 70-6R2 dated September 28, 1990, and the Special Release thereto dated September 30, 1992, and are binding on Revenue Canada, Customs, Excise and Taxation provided that the proposed transactions are completed by XXXXXXXXXX.

These rulings are based on the Act in its present form and do not take into account any proposed amendments to the Act which, if enacted into law, could have an effect on the rulings provided herein.

Comments

Nothing in this ruling should be construed as implying that Revenue Canada has agreed to or reviewed:

(a)Any tax implications arising as a result of the transactions described in paragraph 9 above with respect to the lease of certain properties by DC1 to Brother2 and the subsequent prepayment of the rent by Brother2 to DC1;

(b) The determination of the fair market value or ACB of any particular asset or the PUC of any shares referred to herein; or

(c)Any tax consequences relating to the facts and proposed transactions described herein other than those specifically described in the rulings given above.

Opinions

Provided that our understanding of the facts and proposed transactions described herein is correct and further provided that proposed paragraph 55(3)(a) and subsection 55(3.01) of the Act and the proposed amendment to the definition of "permitted redemption" in subsection 55(1) of the Act are enacted in substantially the same form as proposed in Bill C-69 which received first reading on December 2, 1996, it is our opinion that:

(a)provided that there is no disposition or increase in interest described in any of proposed subparagraphs 55(3)(a)(i) to (v) as part of a series of transactions or events which includes the redemption by Parentco of its preferred shares held by Opco and the redemption by Opco of its non-voting redeemable preferred shares held by Parentco, the exception in proposed paragraph 55(3)(a) will prevent the application of subsection 55(2) to the dividend referred to in Ruling Q(a) above. For greater certainty, the proposed transactions described in paragraphs 15 to 46 above, in and by themselves, will not be considered to result in any disposition or increase in interest described in any of proposed subparagraphs 55(3)(a)(i) to (v); and

(b)provided that as part of the series of transactions or events that includes the proposed transactions described herein, there is not:

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

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

(iii)an acquisition of property in the circumstances described in paragraph 55(3.1)(c); or

(iv)an acquisition of property in the circumstances described in paragraph 55(3.1)(d);

which has not been described herein, by virtue of paragraph 55(3)(b) of the Act, subsection 55(2) of the Act will not apply to the taxable dividends referred to in the rulings given in B(a)(i) and I(a)(i) above and, for greater certainty, subsection 55(3.1) of the Act will not apply to deny the exemption under paragraph 55(3)(b) of the Act.

Yours truly,

for Director
Reorganizations and International Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch