30 November 1996 Ruling 9604823 - BUTTERFLY

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

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:

(1) Whether the purchase of the shares of OPCO 2 was made in contemplation of the butterfly? (2) Type of property for real property? (3) Whether the transfers of shares of the Subject Corporations create problems because the transfers are not permitted exchanges (transfers will be made before the amalgamation to avoid valuation problems)? (4) Whether there is an acquisition of control of the Subject Corporations at the time of the transfert of the shares of the Subject Corporations to Chrisco and Masco? (5) Whether there is an acquisition of control of the Subject Corporations because of the amalgamations?

Position and REASONS:

(1) We have accepted that the purchase was not made in contemplation of the butterfly on the basis of the information provided by the taxpayers' representative. We have included in the fact that the purchase was not made in contemplation of the butterfly and is not part of the series of transactions. (2) Real property of Amalco are business property because Amalco will have more than five employees after the amalgamation and the rental income of Amalco will be business income. Moreover, it is more appropriate to include all the real property in the same category. (3) No because the transfers will be between related persons. (4) No. The ultimate control remain with Mr. Chris and Ms. Mas. Moreover, 256(7)(a) will apply. (5) No. Each of the Subject Corporations is controlled by the same group of persons (Mr. Chris and Ms. Mas) and accordingly the Subject Corporations are related.

XXXXXXXXXX							3-960482
XXXXXXXXXX

Attention: XXXXXXXXXX

XXXXXXXXXX, 1997

Dear Sirs:

Re: Advance Income Tax Ruling

XXXXXXXXXX ("Mr. Chris")

XXXXXXXXXX ("Ms. Mas")

XXXXXXXXXX ("HOLDCO 1")
XXXXXXXXXX ("HOLDCO 2")
XXXXXXXXXX ("OPCO 1")
XXXXXXXXXX ("OPCO 2")
XXXXXXXXXX ("OPCO 3")
XXXXXXXXXX ("OPCO 4")
XXXXXXXXXX ("OPCO 5")

This is in reply to your letter dated XXXXXXXXXX wherein you requested an advance income tax ruling on behalf of the above-noted taxpayers. This application amends and restates the application originally requested in your letter of XXXXXXXXXX and subsequent correspondence.

Except where specifically otherwise indicated, words and phrases herein have the same meaning for the purposes of this ruling application as are ascribed to them in the Income Tax Act ("Act") and the Income Tax Regulations ("Regulations").

Our understanding of the facts and proposed transactions is set out as below.

FACTS

1.OPCO 1, OPCO 2, OPCO 3, OPCO 4 and OPCO 5 (collectively the "Subject Corporations") are all Canadian-controlled private corporations as defined in subsection 125(7) of the Act, taxable Canadian corporations as defined in subsection 89(1) of the Act, and have been incorporated under the laws of the Province of XXXXXXXXXX.

The business of each of the Subject Corporations (other than OPCO 1, which holds only shares of OPCO 5) consists of developing and holding rental real estate for long-term investment. OPCO 3 also provides management services to other Subject Corporations and receives management fees for these services.

The shares of the Subject Corporations constitute capital property as defined in section 54 of the Act to the shareholders thereof.

2.Mr. Chris and Ms. Mas are residents of Canada and are brother and sister.

3.Mr. Chris has four children and Ms. Mas has three children, all of whom are over 18 and residents of Canada. XXXXXXXXXX ("Child A"), XXXXXXXXXX ("Child B") and XXXXXXXXXX ("Child C"), are children of Ms. Mas. XXXXXXXXXX ("Child D"), XXXXXXXXXX ("Child E"), XXXXXXXXXX ("Child F") and XXXXXXXXXX ("Child G"), are children of Mr. Chris.

4.The issued common shares of OPCO 5 are owned as follows:

Shareholder Number ACB

OPCO 3 XXXXXX V-Day value
OPCO 1 XXXXXX V-day value
XXXXXX

There is no other issued share of OPCO 5. The paid-up capital ("PUC") of the issued shares is $XXXXXXXXXX.

There is no shareholder agreement between the shareholders of the Subject Corporations other than the agreement of XXXXXXXXXX between the shareholders of OPCO 2.

5.The issued common shares of OPCO 1 are owned as follows:

Shareholder Number ACB

Mr. Chris XXXXXX V-Day value

Ms. Mas XXXXXX V-day value

XXXXXX

There is no other issued share of OPCO 1. The PUC of the issued shares is $XXXXXXXXXX.

6.The issued common shares of OPCO 4 are owned as follows:

Shareholder Number ACB

Mr. Chris XXXXXX V-Day value

Ms. Mas XXXXXX V-Day value

XXXXXX

There is no other issued share of OPCO 4. The PUC of the issued shares is $XXXXXXXXXX.

7.The issued common shares of OPCO 3 are owned as follows:

Shareholder Number ACB

Mr. Chris' wife XXXXXX V-Day value

Mr. Chris XXXXXX V-Day value

Ms. Mas XXXXXX V-Day value

XXXXXX

There is no other issued share of OPCO 3. The PUC of the issued shares is $XXXXXXXXXX.

8.The issued common shares of OPCO 2 are owned as follows:

Shareholder Number ACB

Mr. Chris	       XXXXXX      V-Day value
Ms. Mas	       XXXXXX      V-Day value
	HOLDCO 1	       XXXXXX      $XXXXXXXXXX
	HOLDCO 2	       XXXXXX      $XXXXXXXXXX
		            XXXXXX

There is no other issued shares of OPCO 2. The PUC of the issued shares is $XXXXXXXXXX.

9.The current fair market value ("FMV") of the issued shares of the Subject Corporations exceed their FMV as at December 31, 1971.

10.HOLDCO 1 and HOLDCO 2 were incorporated on XXXXXXXXXX under the laws of XXXXXXXXXX and each is a taxable Canadian corporation as defined in subsection 89(1) of the Act and a Canadian-controlled private corporation as defined in subsection 125(7) of the Act. The authorized capital of HOLDCO 1 and HOLDCO 2 consists of common shares and preference shares. The common shares are participating and voting (one vote per share). The preferred shares are voting (one vote per share), redeemable and retractable for $XXXXXXXXXX per share.

11.The issued shares of HOLDCO 2 are owned as follows:

Shareholder Number Class of shares

	Child A	         XXXXXX        Common
	Child B	         XXXXXX        Common
	Child C	         XXXXXX        Common
Ms. Mas	         XXXXXX        Preferred

The issued shares of HOLDCO 1 are owned as follows:

Shareholder Number Class of shares

	Child D	         XXXXXX          Common
	Child E	         XXXXXX          Common
	Child F	         XXXXXX          Common
	Child G	         XXXXXX          Common
Mr. Chris	         XXXXXX          Preferred

The shares of HOLDCO 1 and HOLDCO 2 were issued on XXXXXXXXXX.

12.On XXXXXXXXXX, HOLDCO 1 and HOLDCO 2 each acquired XXXXXXXXXX common shares of OPCO 2 from XXXXXXXXXX ("Mr. X") for $XXXXXXXXXX each. On XXXXXXXXXX, each of HOLDCO 1 and HOLDCO 2 purchased XXXXXXXXXX common shares of OPCO 2 from XXXXXXXXXX ("Mr. Y") for cash. Mr. X and Mr. Y are not related to Mr. Chris, Ms. Mas, and their children.

XXXXXXXXXX

XXXXXXXXXX

HOLDCO 1 and HOLDCO 2 have not acquired the common shares of OPCO 2 in contemplation of the distribution in the course of the butterfly and the purchases are not part of a series of transactions and events that will include the proposed transactions.

13.Each of the Subject Corporations (other than OPCO 1) owns its real property as capital property as defined in section 54 of the Act. The properties (each consisting of apartment buildings and land) are owned as follows:

Company Rental property FMV

	OPCO 4		XXXXXXXXXX Property 1	XXXXXXXXXX
				XXXXXXXXXX Property 2	XXXXXXXXXX

	OPCO 5		XXXXXXXXXX Property 3	XXXXXXXXXX

	OPCO 3		XXXXXXXXXX Property 4	XXXXXXXXXX
				XXXXXXXXXX Property 5	XXXXXXXXXX

	OPCO 2		XXXXXXXXXX Property 6	XXXXXXXXXX

OPCO 4 has a loan payable to XXXXXXXXXX ("Banko") secured by first mortgage over Property 1. The loan ($XXXXXXXXXX) is repayable in equal instalments of $XXXXXXXXXX and matures on XXXXXXXXXX. It is the only mortgage secured against any of the properties of the Subject Corporations.

14.OPCO 4 reports its rental income from its rental properties as active business income, employing throughout the taxation years more than five full-time employees. The other income of OPCO 4 and the rental income of OPCO 5, OPCO 2 and OPCO 3 are treated as property income or income from a specified investment business (as defined in subsection 125(7) of the Act).

OPCO 5, OPCO 1, OPCO 4 and OPCO 3 have always filed their income tax returns as associated corporations. Each of these companies and OPCO 2 will file their 1997 returns as associated corporations within the meaning of the Act.

15.The State of Israel bonds owned by the Subject Corporations have various terms to maturity of up to fifteen years. However, these bonds can be sold through a broker prior to maturity. The loan by OPCO 4 to Child E is due on demand. The properties of OPCO 3 used in the course of its activity of providing management services are comprised solely of current assets and accounts receivables included in loans to related corporations on its balance sheet. There is no goodwill with respect to this activity.

PROPOSED TRANSACTIONS

16.Mr. Chris' wife will transfer her common share of OPCO 3 to Mr. Chris on a tax free basis. Pursuant to subsection 73(1) of the Act, the proceeds of disposition of Mr. Chris' wife and Mr. Chris ACB will be equal to her ACB immediately before the transfer.

17.Each of the Subject Corporations (other than OPCO 1) will incorporate a new taxable Canadian corporation for each rental property owned by it (which corporations will be referred to as a "Trusteeco") as a wholly owned subsidiary, and will transfer the legal title (but not the beneficial ownership) in the rental properties owned by it to the Trusteeco, so that each Trusteeco will hold legal title to a separate property, as a bare trustee on behalf of the particular Subject Corporation which is the beneficial owner of such property. The Subject Corporations will subscribe for common shares of its Trusteeco(s) for a nominal amount.

18.Mr. Chris will cause a new taxable Canadian corporation to be incorporated pursuant to the XXXXXXXXXX (hereinafter referred to as "CHRISCO").

19.The authorized share capital of CHRISCO will consist of an unlimited number of:

(a) Class XXXXXXXXXX shares having the following attributes:

(i) a Redemption Amount for each share equal to a proportionate amount of the FMV of the consideration received by the corporation upon the issuance of the Class XXXXXXXXXX shares;

(ii) subject to redemption or retraction at the Redemption Amount and entitled to receive the Redemption Amount upon the liquidation, dissolution or winding-up of the corporation, but otherwise non-participating;

(iii) a right to a non-cumulative preferential dividend XXXXXXXXXX% per month on the Redemption Amount, at the discretion of the board of directors;

(iv) a right to one vote per share;

(v) retractable at the option of the holder and redeemable at the option of the corporation.

(b) Common shares which are fully participating and which vote per share.

Mr. Chris will subscribe for one Class XXXXXXXXXX share of CHRISCO on the incorporation date.

20.Mr. Chris will cause a second new taxable Canadian corporation to be incorporated pursuant to the XXXXXXXXXX (hereinafter referred to as "CHRISSUB") which will have an authorized share capital identical to that of CHRISCO.

21.Ms. Mas will cause MASCO and MASSUB to be incorporated in the same manner and with identical share provisions as CHRISCO and CHRISSUB. Ms. Mas will subscribe for one Class XXXXXXXXXX share of MASCO on the incorporation date of MASCO.

22.Mr. Chris will transfer his shares of each of the Subject Corporations (other than OPCO 5) to CHRISCO for FMV consideration consisting solely of XXXXXXXXXX Class XXXXXXXXXX shares in the capital of CHRISCO. The aggregate PUC of the Class XXXXXXXXXX shares of CHRISCO which will be issued to Mr. Chris will be equal to the aggregate PUC ($XXXXXXXXXX) attributable to the transferred shares.

Mr. Chris and CHRISCO will file a joint election pursuant to subsection 85(1) of the Act, in the prescribed form and within the time referred to in subsection 85(6) of the Act. The Agreed Amount will be equal to Mr. Chris' ACB of the transferred shares. The FMV of the transferred shares will exceed the Agreed Amount in respect thereof. Agreed Amount as used in this paragraph and subsequently herein in respect of a property means the amount agreed upon in the election filed pursuant to subsection 85(1) of the Act with respect to that property.

23.HOLDCO 1 will transfer its XXXXXXXXXX common shares of OPCO 2 to CHRISCO for FMV consideration consisting of: (i) assumption by CHRISCO of the loan advanced by OPCO 4 to HOLDCO 1 to acquire its interest in OPCO 2; and (ii) one common share in the capital of CHRISCO with a paid-up capital of $XXXXXXXXXX. The amount of the loan is equal to or less than the ACB ($XXXXXXXXXX) of the common shares.

HOLDCO 1 and CHRISCO will file a joint election pursuant to subsection 85(1) of the Act, in the prescribed form and within the time referred to in subsection 85(6) of the Act. The Agreed Amount will be equal to HOLDCO 1's ACB of the XXXXXXXXXX common shares. The FMV of the transferred shares will exceed the Agreed Amount in respect thereof.

24.Ms. Mas will transfer her shares of each of the Subject Corporations (other than OPCO 5) to MASCO for FMV consideration consisting solely of XXXXXXXXXX Class XXXXXXXXXX shares in the capital of MASCO. The aggregate PUC of the Class XXXXXXXXXX shares of MASCO which are issued to Ms. Mas will be equal to the aggregate PUC ($XXXXXXXXXX) attributable to the transferred shares.

Ms. Mas and MASCO will file a joint election pursuant to subsection 85(1) of the Act, in the prescribed form and within the time referred to in subsection 85(6) of the Act. The Agreed Amount will be equal to Ms. Mas' ACB of the transferred shares. The FMV of the transferred shares will exceed the Agreed Amount in respect thereof.

25.HOLDCO 2 will transfer its XXXXXXXXXX common shares of OPCO 2 to MASCO for FMV consideration consisting of: (i) assumption by MASCO of the loan advanced by OPCO 4 to HOLDCO 2 to acquire its interest in OPCO 4; and (ii) one common share in the capital of MASCO with a PUC of $XXXXXXXXXX. The amount of the loan is equal to or less than the ACB ($XXXXXXXXXX) of the common shares.

HOLDCO 2 and MASCO will file a joint election pursuant to subsection 85(1) of the Act, in the prescribed form and within the time referred to in subsection 85(6) of the Act. The Agreed Amount will be equal to HOLDCO 2's ACB of the XXXXXXXXXX common shares. The FMV of the transferred shares will exceed the Agreed Amount in respect thereof.

26.CHRISCO will subscribe for XXXXXXXXXX common shares of CHRISSUB for XXXXXXXXXX per share. The PUC of the issued common shares will be $XXXXXXXXXX.

27.MASCO will subscribe for XXXXXXXXXX common shares of MASSUB for XXXXXXXXXX per share. The PUC of the issued common shares will be $XXXXXXXXXX.

28.The Subject Corporations will be amalgamated pursuant to the XXXXXXXXXX to form "Amalco". All shares owned by OPCO 3 and OPCO 1 in OPCO 5 will be cancelled as part of the amalgamation. Pursuant to subsection 87(1) of the Act, this transaction will constitute an amalgamation for the purposes of section 87 of the Act. Each of CHRISCO and MASCO, as the sole shareholders of the amalgamating corporations, except for OPCO 1 and OPCO 3 which own shares of OPCO 5, will receive one common share of Amalco for each common share of each Subject Corporations (other than OPCO 5), having in aggregate a FMV and PUC ($XXXXXXXXXX) immediately after the amalgamation equal to the FMV and PUC, respectively, of the shares which they owned in the Subject Corporations (other than OPCO 5) immediately before the amalgamation.

As a result, each of MASCO and CHRISCO will own XXXXXXXXXX common shares of Amalco immediately after the amalgamation. There will be no other issued share of Amalco. All of the inter-corporation receivables and indebtedness will be cancelled as a result of the amalgamation.

29.The business of Amalco will consist of holding rental properties and earning income therefrom. Amalco will not carry on a specified investment business (as defined in subsection 125(7) of the Act) with respect to these rental properties because of the exception for corporations with more than five full-time employees.

30.Based notably on the appraised FMV of the real properties of the Subject Corporations, the parties have agreed that Amalco will segregate, immediately before the transfers of property described in paragraph 33 below, its properties into two packages of equal net FMV (referred to as Package A and Package B) that will be transferred in the course of the butterfly reorganization. Package A and Package B will contain an equal net FMV amount of "cash or near-cash property", "investment property" and "business property". The net FMV means the FMV of the "cash or near-cash property", investment property" or "business property" included in a package minus the liabilities attributed to each type of property respectively.

Package A will include notably Property 1 and Property 5. Package B will include notably Property 2, Property 3, Property 4 and Property 6.

31.The property of Amalco, will be classified into three types of property for the purpose of a distribution, as follows:

(a)"business property", comprised of all buildings, land (including parking areas and roadways) and equipments of Amalco used in its business of holding rental property and earning income therefrom, and the shares of each Trusteeco;

(b) "cash or near-cash property" comprised of all of the current assets of Amalco, including any cash, deposit and similar short-term investments, account receivable, prepaid expenses and State of Israel bond. It will also include loans to related corporations, loan by OPCO 4 to Child E, and loans receivable due on demand.

(c) "investment property", comprised of all of the properties of Amalco, other than cash or near-cash property, any income of which would constitute income from property or from a specified investment business.

32.In determining the net FMV of its cash or near-cash property, investment property and business property (immediately before the proposed transfers of property described in paragraph 33 below), liabilities of Amalco will be deducted in the calculation of the net FMV of each type of property of Amalco in the following manner:

(a) current liabilities of Amalco will be allocated to the cash or near-cash property so that when netted against the cash or near-cash property of package A and Package B, each package will contain an equal net FMV of cash or near-cash property. The allocation of current liabilities will not exceed the FMV of all cash or near-cash properties of Amalco;

(b) liabilities of Amalco (other than current liabilities and the mortgage payable to Banko.) that relate to a particular property, will be allocated to the particular property. Liabilities that pertain to a type of property but not to a particular property, will be allocated to that type of property, but not in excess of the FMV of such type of property. The mortgage payable to Banko will be allocated to the business property so that each of Package A and Package B will contain an equal net FMV of business property.

(c) if any liabilities ("excess unallocated liabilities") remain after the allocation described in steps (a) and (b) are made, such excess unallocated liabilities, will then be allocated to the three types of property based on the relative net FMV of each type of property prior to the allocation of such excess unallocated liabilities.

It will be necessary, in order to achieve a proportionate distribution of properties of Amalco in accordance with the definition of "distribution" in subsection 55(1) of the Act, that the transferee corporation acquiring Package B property assume part of the liabilities of Amalco (mortgage payable to Banko) which relate to specific property in Package A. The calculation of net FMV of the specific Package A property affected will not include the entire amount of the liabilities which relate to those specific property prior to the transfers.

The mortgage payable to Banko and secured against Property 1, will be refinanced (prior to the transfer described in paragraph 33) and split into two separate loans, in order to permit the attribution of part of the loan to each package. The total amount of the principal of the two new separate loans will be equal to the principal of the mortgage payable immediately before the refinancing.

33.Amalco will transfer all of its properties, segregated into Package A and Package B, to CHRISSUB and MASSUB respectively (hereinafter referred to as a "Transferee Corporation") for consideration equal to the FMV of such properties on the date of such transfer, to be satisfied by each Transferee Corporation as follows:

(a) by the assumption of liabilities allocated to such package in the manner described above;

(b) by the issuance of a demand non-interest bearing promissory note ("Promissory Notes I") in an amount equal to the difference between the aggregate Agreed Amount of the properties transferred to that corporation and the liabilities assumed by that corporation; and

(c) as to the balance of the purchase price, by the allotment and issuance to Amalco of XXXXXXXXXX Class XXXXXXXXXX shares having an aggregate Redemption Amount equal to the balance of such consideration, and with an aggregate PUC of $XXXXXXXXXX.

Amalco and each Transferee Corporation will file a joint election pursuant to subsection 85(1) of the Act, in the prescribed form and within the time referred to in subsection 85(6) of the Act. The Agreed Amounts in respect of the transferred assets will be as follows:

(a) with respect to any eligible property (as that expression is defined in subsection 85(1.1) of the Act) described in paragraph 85(1)(c.1) of the Act, an amount equal to the cost amount thereof; and

(b) with respect to eligible property which is depreciable property of a prescribed class, the portion of the undepreciated capital cost to Amalco of all property of that class immediately before the transfer that the capital cost to Amalco of the property of that class transferred is of the capital cost to Amalco of all the property of that class.

The Agreed Amount in respect of any particular property will not exceed the FMV thereof.

In the election filed by Amalco and each Transferee Corporation, the liabilities assumed and Promissory Notes I issued by that Transferee Corporation may be allocated to specific property. In no case will the liabilities and Promissory Notes I allocated to a property exceed the Agreed Amount in respect of that property.

The allocation of liabilities for the purposes of calculating the net FMV of each type of property, will not necessarily coincide with the allocation of liabilities to specific properties for the purposes of filing the election under subsection 85(1) of the Act.

If the liabilities allocated to a particular Transferee Corporation for the purposes of the election filed under subsection 85(1) of the Act exceed the aggregate of the Agreed Amounts in respect of the properties acquired by such Transferee Corporation (such excess liabilities hereinafter called the "Excess Amount"), then such Transferee Corporation will assume the Excess Amount in consideration for the issuance by Amalco of a note ("Promissory Notes II") in an equal amount.

34.Each of CHRISSUB and MASSUB will redeem all of the Class XXXXXXXXXX shares issued to Amalco for the Redemption Amounts of such shares. The Redemption Amounts shall be paid by the issuance and delivery of demand non-interest bearing promissory notes having a principal amount and FMV equal to the Redemption Amounts (the "Promissory Notes III").

35.CHRISCO and MASCO will consent to a resolution requiring the voluntary winding-up and dissolution of Amalco, and pursuant thereto Amalco will distribute all of its properties and liabilities to its shareholders, so that:

(a) the Promissory Notes II payable by Amalco to CHRISSUB and the Promissory Notes I and III payable by CHRISSUB to Amalco will be assumed by CHRISCO and transferred to CHRISCO respectively;

(b) the Promissory Notes II payable by Amalco to MASSUB and the Promissory Notes I and III payable by MASSUB to Amalco will be assumed by MASCO and transferred to MASCO respectively.

36.CHRISSUB and MASSUB will be wound-up and dissolved. CHRISSUB and MASSUB will distribute all of their respective properties and liabilities to CHRISCO and MASCO respectively. As a result, all of Promissory Notes II and Promissory Notes I and III issued by Amalco and each Transferee Corporation respectively will be cancelled by operation of law.

37.As a result of completing the transactions described in paragraphs 33 to 36 above, Amalco will have transferred to each of CHRISCO and MASCO (each individually referred to as a "Parentco") all of its cash and near cash property, all of its investment property and business property, such that the net FMV of the cash and near cash property, the net FMV of the investment property and the net FMV of its business assets, so transferred to each Parentco will be equal to or approximately equal to 50% of the net FMV of all of Amalco's cash and near cash property, 50% of the net FMV of all of Amalco's investment property, and 50% of the net FMV of all of Amalco's business assets, determined immediately before the transfers described in paragraph 33.

38.Each Trusteeco will execute a declaration of trust in favor of the beneficial owner of the subject property to which it holds legal title, consequent upon each transfer of beneficial ownership contemplated by paragraphs 28, 33 and 36 hereof.

PURPOSES OF PROPOSED TRANSACTIONS

39.The purpose of the proposed transactions is to permit the Chris and Mas families that are shareholders of OPCO 1, OPCO 2, OPCO 3, OPCO 4, OPCO 5, HOLDCO 1 and HOLDCO 2, to separate their interests to the extent possible, in order to enable them to own their various separate property interests independently from one another. Secondly, the proposed transactions are intended to enable Mr. Chris to freeze his separate property interests in favor of his adult children and to enable Ms. Mas to freeze her separate property interests in favor of her adult children.

ADDITIONAL INFORMATION

40.To the best of your knowledge, and that of the parties to this ruling, none of the issues involved in the requested rulings is being considered by a tax services office or a taxation centre in connection with an income tax return already filed, or is under objection or appeal.

41.There will not be, as part of the series of transactions or events that includes the proposed transactions described herein, any

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

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

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

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

which has not been described herein.

42.Other than as a result of the proposed amalgamation of the Subject Corporations described in paragraph 28 of Proposed Transactions, no property has or will become property of any of the Subject Corporations or Amalco in contemplation of the proposed transactions.

43.None of the shares referred to in this ruling application is or will be subject to a guarantee agreement, within the meaning of subsection 112(2.2) of the Act, that is given by a person or partnership (other than the issuer of the share or an individual other than a trust), that is a specified financial institution or a specified person in relation to such an institution.

44.None of the shares described herein have been or will be issued or acquired as part of a transaction or event or series of transactions or events of the type described in subsection 112(2.5) of the Act.

45.None of the shares described herein has been or will be the subject of a dividend rental arrangement as that term is defined in subsection 248(1) of the Act.

RULINGS GIVEN

Provided that the above statements of facts and proposed transactions are accurate and constitute complete disclosure of all the relevant facts and proposed transactions, our rulings are as follows:

A.CHRISSUB and MASSUB will be connected with Amalco, within the meaning of subsection 186(4) of the Act, immediately after the transfer of properties described in paragraph 33 above and at the time of the redemption of the Class XXXXXXXXXX shares as described in paragraph 34 above.

B.Upon the redemption by each Transferee Corporation of the Class XXXXXXXXXX shares owned by Amalco as described in paragraph 34 above:

(a) Amalco will be deemed by subsection 84(3) of the Act, to have received at that time, dividends equal to the amounts, if any, by which the amounts paid by each Transferee Corporation on the redemption exceeds the PUC of the Class XXXXXXXXXX shares so redeemed;

(b) the deemed dividends described in subparagraph (a) of this paragraph, will be deductible by Amalco in computing its taxable income pursuant to subsection 112(1) of the Act for the taxation year in which the dividends are deemed to have been received, and the deduction of such dividends will not be denied by subsections 112(2.1) to (2.4) of the Act; and

(c) the deemed dividends described in subparagraph (a) of this paragraph, will not result in any Part IV tax being payable by Amalco, provided that neither Transferee Corporation will be entitled to a dividend refund in respect of its taxation year in which the redemptions take place.

C.Upon the distribution by Amalco of its properties to CHRISCO and MASCO upon its winding-up:

(a) each of CHRISCO and MASCO will be deemed by subsection 84(2) of the Act, to have received at that time a dividend equal to the amount, if any, by which the FMV of the properties of Amalco transferred to such corporation exceeds the amount of the Promissory Notes II of Amalco assumed by the corporation and the amount by which the PUC of the common shares of Amalco held by the corporation immediately before the distribution is reduced on the distribution;

(b) provided that subparagraph 88(2)(b)(i) and (ii) of the Act do not apply, the deemed dividends described in subparagraph (a) of this paragraph will be deductible by CHRISCO and MASCO in computing their taxable incomes pursuant to subsection 112(1) of the Act for the taxation year in which the dividends are deemed to have been received and the deduction of such dividends will not be denied by subsections 112(2.1) to (2.4) of the Act; and

(c) provided that paragraphs 186(1)(c) and (d) do not apply, the deemed dividends described in subparagraph (a) of this paragraph will result in Part IV tax being payable by CHRISCO and MASCO each in an amount equal to one-half of the dividend refund (within the meaning assigned by paragraph 129(1)(a) of the Act) receivable by Amalco as a result of its winding-up.

D.The deemed dividends described in paragraphs B.(a) and C.(a) of Rulings Given, above, will be excepted dividends and excluded dividends, respectively, pursuant to section 187.1 and subsection 191(1) of the Act for the purposes of Part IV.I and Part VI.I of the Act.

E.The provisions of subsections 15(1), 56(2), 69(1) and 246(1) of the Act will not apply to any of the proposed transactions described in paragraphs 16 through 38 above, in and by themselves.

F.By virtue of the application of paragraph 55(3)(b) of the Act, subsection 55(2) of the Act will not apply in respect of any of the taxable dividends deemed to have been received by CHRISCO or MASCO as referred to in paragraph C.(a) of Rulings Given above.

G.The cancellation of the Promissory Notes I, Promissory Notes II and the Promissory Notes III upon the winding-up of MASSUB and CHRISSUB as described in paragraph 36 above, will not give rise to a "forgiven amount" within the meaning thereof in subsection 80(1) of the Act.

H.For the purpose of determining the Agreed Amounts of the depreciable property of a prescribed class, as described in paragraph 33 above, the reference to "the undepreciated capital cost to the taxpayer of all the property of that class immediately before the disposition" found in subparagraph 85(1)(e)(i) of the Act shall be interpreted to mean that portion of the undepreciated capital cost of all the property of that class immediately before the transfer that the capital cost of the property of that class transferred is of the capital cost of all the properties of that class.

I.The provisions of subsection 245(2) of the Act will not be applied as a result of the proposed transactions, in and by themselves, to redetermine the tax consequences confirmed in the rulings given above.

These rulings are given subject to the limitations set out in Information Circular 70-6R2, issued by Revenue Canada, Taxation on December 30, 1996 and are binding provided that the proposed transactions are completed on or before XXXXXXXXXX. These rulings are based on the Act in its present form and do not take into account the effects of any proposed amendments to the Act.

COMMENTS

(a)Nothing in this ruling should be construed as implying that Revenue Canada has agreed or reviewed the determination of the FMV or ACB of any property referred to herein, or the PUC of any shares referred to herein.

(b)Nothing in this ruling should be construed as implying that Revenue Canada has reviewed any tax consequences relating to the facts and proposed transactions described herein other than those specifically described in the rulings given above.

OPINIONS

You have requested a ruling that by virtue of the application of paragraph 55(3)(b) of the Act, subsection 55(2) of the Act will not apply in respect of any taxable dividends deemed to have been received by Amalco as referred to in paragraph B.(a) of Rulings Given above. We are unable to give the ruling requested because the redemption by CHRISSUB and MASSUB is not a "permitted redemption" as defined in subsection 55(1) of the Act. We can, however, provide the following opinion:

Provided that the proposed amendment to the definition of "permitted redemption" in subsection 55(1) of the Act is enacted in substantially the same form as is proposed in Bill C-28, it is our opinion that by virtue of paragraph 55(3)(b) of the Act, subsection 55(2) of the Act will not apply to the dividends referred to in subparagraph B.(a) of Rulings Given above.

In our opinion, the provisions of subsections 74.1(1) and 74.2(2) of the Act may apply with respect to the class XXXXXXXXXX shares of CHRISCO that will be received by Mr. Chris as consideration for the disposition by Mr. Chris to CHRISCO of the common share of OPCO 3 that will be acquired by him from his wife.

The foregoing opinions are not rulings and, in accordance with the practice referred to in Information Circular 70-6R2, are not binding on Revenue Canada.

Yours truly,

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