30 November 1997 Ruling 9730243 - SINGLE-WING BUTTERFLY AND ESTATE FREEZE

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 is a single-wing butterfly combined with an estate freeze involving a CCPC. The assets will be split between the cattle farming operation and the grain farming operation, and the grain assets distributed to a Newco by means of a butterfly transaction. A husband and wife will retain control of both the original farm corporation and the Newco by means of preferred shares, while each of their two sons will hold common shares in one of the two resulting farm corporations to reflect their involvement in either the cattle farming business or in the grain farming business.

Position: This was a standard butterfly reorganization combined with an estate freeze.

Reasons:

XXXXXXXXXX
XXXXXXXXXX 973024
XXXXXXXXXX

Attention: XXXXXXXXXX

XXXXXXXXXX, 1998

Dear Sirs:

Re: XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX
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. In your letter of XXXXXXXXXX you provided additional information in respect of the facts and proposed transactions described in your original letter. We also acknowledge the information provided during our various telephone conversations (XXXXXXXXXX) and your letters of XXXXXXXXXX.

To the best of your knowledge, and that of the taxpayers, none of the issues involved in the ruling request is:

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

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

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

(iv) before the courts and there is no judgment that has been issued in which the time limit for appeal to a higher court has not expired; and

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

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 by section 54 of the Act;

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

(c) “BCA” means the Business Corporations Act (XXXXXXXXXX) and, where applicable, its predecessor statutes;

(d) "Canadian-controlled private corporation" ("CCPC") has the meaning assigned to that term by subsection 125(7) of the Act;

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

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

(g) "cost amount" has the meaning assigned to that term by subsection 248(1) of the Act;

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

(i) "dividend refund" has the meaning assigned to that term by subsection 129(1) of the Act;

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

(k) "forgiven amount" has the meaning assigned to that term by subsection 80(1) and 80.01(1) of the Act;

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

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

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

(o) "restricted financial institution" has the meaning assigned to that term by subsection 248(1) of the Act;

(p) "series of transactions or events" has the meaning assigned to that term by subsection 248(10) of the Act;

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

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

(s) "stated capital account" has the meaning assigned to that term by section 26 of the BCA;

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

(u) "taxable dividend" has the meaning assigned to that term by subsection 89(1) of the Act.

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

FACTS

1. XXXXXXXXXX ("Opco") is a CCPC and a TCC incorporated on XXXXXXXXXX and governed by the provisions of the XXXXXXXXXX. The taxation year of Opco ends on XXXXXXXXXX of each year. Opco carries on a XXXXXXXXXX business ("Business X") and aXXXXXXXXXX business ("Business Y") in XXXXXXXXXX. Opco reports its income under the cash basis referred to in section 28 of the Act.

2. The authorized share capital of Opco consists of an unlimited number of Class A voting common shares, Class B non-voting common shares, Class C non-voting common shares, and Class D redeemable, non-participating preferred shares, redeemable at the amount specified upon issuance.

3. The issued and outstanding share capital of Opco consists of XXXXXXXXXX Class A voting common shares which have an aggregate PUC of $XXXXXXXXXX. Opco has two (2) individual shareholders, XXXXXXXXXX ("Mr. K") and XXXXXXXXXX ("Mrs. K"). Mr. K owns XXXXXXXXXX Class A common shares, and Mrs. K owns 1 Class A common share, for a total of XXXXXXXXXX Class A common shares. The issued and outstanding share capital of Opco and the identity of the shareholders has remained unchanged since incorporation in XXXXXXXXXX. Mr. K and Mrs. K are spouses. XXXXXXXXXX ("Mr. J") and XXXXXXXXXX ("Mr. L") are adult sons of Mr. K and Mrs. K. Each of the individuals is resident in Canada for the purposes of the Act.

The Class A common shares of Opco are capital property to each of Mr. K and Mrs. K.

4. The assets of Opco include cash and accounts receivable, prepaid expenses, patronage reserves, inventory and work in progress, automotive equipment, buildings, computer equipment, machinery, dugouts, paving equipment, and stock investments in XXXXXXXXXX which relate to the farming business of Opco. The liabilities of Opco include accounts payable and accrued liabilities, operating loans, advances payable to shareholders, and long term debt relating to farm machinery and equipment.

5. As at XXXXXXXXXX Opco had a RDTOH balance of $XXXXXXXXXX, a farm loss carryforward of $XXXXXXXXXX, and a CDA balance of $XXXXXXXXXX. A taxable dividend was declared and paid as of XXXXXXXXXX so as to recover the RDTOH balance of $XXXXXXXXXX. This was done to avoid any circular RDTOH issues. At the end of the taxation year in which the proposed transactions are implemented, neither Opco nor Newco will have any RDTOH.

6. Opco has withdrawn its funds from the net income stabilization account ("NISA") program.

7. As at XXXXXXXXXX Opco has advances payable to its shareholders of $XXXXXXXXXX. The advances carry no specific provision for interest or repayment and are unsecured.

8. The only significant transactions that were completed prior to the time of submission of the ruling request were the sale of equipment by Mr. J to Opco in XXXXXXXXXX at fair market value of $XXXXXXXXXX and the sale of a tractor by Mr. L to Opco in XXXXXXXXXX at fair market value of $XXXXXXXXXX. These transfers were not made in contemplation of the proposed distribution. It is anticipated that the transferred assets will be allocated to the individuals from whom they were received by Opco in XXXXXXXXXX.

PROPOSED TRANSACTIONS

9. Mr. J will incorporate a new corporation ("Newco") under the BCA. The new corporation will be a CCPC and a TCC.

10. The authorized share capital of Newco will consist of:

(a) an unlimited number of Class A voting common shares which entitle the holder to one vote per share at all shareholders' meetings;

(b) an unlimited number of Class B non-voting common shares; and

(c) an unlimited number of Class C and Class D preferred shares, each having the following attributes:

(i) redeemable and retractable for a redemption amount equal to the fair market value of the property received therefor (net of liabilities assumed) by the corporation at the time of issuance;

(ii) the Class C preferred shares are entitled to a non-cumulative dividend at a fixed rate of XXXXXXXXXX% per annum (or such greater amount as may be set by the directors of the corporation from time to time, not to exceed a reasonable amount) of the redemption amount and the Class D preferred shares are entitled to a non-cumulative dividend at a fixed rate of XXXXXXXXXX% per annum of the redemption amount;

(iii) entitled to a prior return of the redemption amount on a liquidation, dissolution, or winding-up of the corporation;

(iv) may be purchased, redeemed or cancelled by the corporation in the manner provided in the BCA at the option of either the corporation or the holder for a price not less than the lesser of:

(A) the aggregate redemption amount of such shares to be purchased at the particular time; and

(B) the realizable value of the net assets of the corporation immediately before such purchase;

(v) provide that any preference, right, condition or limitation attaching to the preferred shares can only be amended by a special resolution of the holders of each class of shares of the corporation each voting separately as a class;

(vi) restrict the payment of dividends on other classes of shares so that no such dividends may be paid on any other class of shares of the corporation so as to reduce the value of the preferred shares then outstanding; and

(vii) the holders of the Class C preferred shares will be entitled to one vote per share at all meetings of the shareholders. The Class D preferred shares will be non-voting.

The articles of incorporation of Newco will also provide that subject to the provisions of paragraph (c)(vi) herein, dividends may be declared and paid on any class of shares of Newco to the exclusion of any other class of shares of the corporation.

At the time of incorporation, XXXXXXXXXX Class A common shares of Newco will be issued to Mr. J at a total subscription price and PUC of $XXXXXXXXXX.

11. The articles of Opco will be amended to include an unlimited number of Class E preferred shares having the same rights and restrictions as those of the Newco Class C preferred shares described in paragraph 10.

12. The issued Class A common shares of Opco will be split on a 100 for 1 basis in order to facilitate the transfer of Opco shares to Newco. As a result, Mr. K will hold XXXXXXXXXX Class A common shares and Mrs. K will hold XXXXXXXXXX Class A common shares, for a total of XXXXXXXXXX common shares.

13. The assets of Opco (net of related liabilities) will be divided between those assets relating to Business X and those assets relating to Business Y. It is expected that the net asset value of the two portions will be approximately equal.

14. Immediately before the proposed transfer of property described in paragraph 17 below, the assets of Opco will be classified into three types of property for the purposes 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 Opco, including cash, accounts receivable, inventories and rights arising from any prepaid expenses (hereinafter referred to as "prepaid expenses");

(b) business property, comprising all of the assets of Opco, other than cash or near cash property, any income from which would, for purposes of the Act, be income from an active business carried on by Opco (other than a specified investment business); and

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

For the purposes of this distribution, the patronage account which relates to dividends received on purchases made by Opco from XXXXXXXXXX and to its account with the local cooperative association will be categorized as business property.

For greater certainty, any tax accounts, such as the balance of any non-capital losses, RDTOH or CDA of Opco, will not be considered property for purposes of the proposed transactions described herein.

15. In determining the net fair market value of each type of property owned by Opco immediately before the proposed transfers of property described in paragraph 17 below, the liabilities of Opco will be allocated to, and deducted in the calculation of, the net fair market value of each type of property of Opco as follows:

(a) current liabilities of Opco (including the current portion of any long-term debt and the loans to shareholders) will be allocated to cash or near cash property (including any accounts receivable, inventory and prepaid expenses) of Opco 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 Opco. The allocation of current liabilities of Opco as described herein will not exceed the aggregate fair market value of the cash or near cash property of Opco;

(b) any accounts receivable, inventory and prepaid expenses of Opco that are initially classified in accordance with paragraph 14(a) as cash or near cash property, that will relate to a business that will be carried on by Opco or Newco, as the case may be, and that will be collected, sold or consumed by such corporation in the ordinary course of that business, will then be reclassified as business property and the net fair market value thereof, determined after the allocation of current liabilities described in (a) herein, will be included in the net fair market value of business property and will not be included in the net fair market value of cash or near cash property;

(c) liabilities of Opco, other than current liabilities, that relate to a particular property will then be allocated to the particular property (and effectively to the type to which the particular property belongs) to the extent of its 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;

(d) if any liabilities remain after the allocations described in steps (a) and (c) above are made (hereinafter referred to as "excess unallocated liabilities"), such excess unallocated liabilities will then be allocated to the cash or near cash property, business property and investment property of Opco 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 Opco, deferred taxes, if any, will be ignored.

16. Each of Mr. K and Mrs. K will transfer to Newco that proportion of their issued shares of Opco that the net fair market value of the business property associated with Business Y is of the net fair market value of all of the business property owned by Opco. As sole consideration, Newco will issue to Mr. K and to Mrs. K the same number of Class C preferred shares as the number of Opco shares that they each transfer to Newco, with a fair market value and redemption amount equivalent to the fair market value of the Opco shares transferred to Newco. The preferred shares of Newco will be capital property to Mr. K and Mrs. K, respectively. By virtue of his ownership of Class C preferred shares of Newco, Mr. K will control Newco.

Mr. K and Newco, and Mrs. K and Newco will respectively 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 common shares of Opco to Newco as described herein. The agreed amount specified in each election will be equal to the ACB to Mr. K and Mrs. K, respectively, of the Opco shares immediately before the transfer, which amount will not exceed the fair market value of such shares at the time of transfer.

As a result of the acquisition of common shares of Opco, the amount that will be added to the stated capital of the Newco Class C preferred shares will be equal to the PUC of the Opco shares transferred.

17. Opco will then transfer to Newco a portion of its cash or near cash property, business property relating to Business Y and investment property such that the net fair market value of each type of property so transferred to Newco (after allocating and deducting, in the manner described in paragraph 15 above, the liabilities of Opco which are to be assumed by Newco as described herein) will be equal to that proportion of the net fair market value of all property of Opco of that type determined immediately before such transfer that

(a) the aggregate fair market value, immediately before the transfer, of all of the shares of the capital stock of Opco owned by Newco at that time

is of

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

As consideration for the property so transferred, Newco will:

(c) assume a portion of the liabilities of Opco (not exceeding the cost amount of the properties transferred from Opco), such that the net fair market value of each type of property of Opco transferred to Newco as described herein will be equal to its proportionate share, as determined by the formula described in (a) and (b) above, of the total net fair market value of that type of property owned by Opco immediately before such transfers, and

(d) issue XXXXXXXXXX Newco Class D preferred shares to Opco, having an aggregate fair market value and redemption amount equal to the amount by which the aggregate fair market value of the property transferred to Newco exceeds the amount of the liabilities assumed by Newco as described in (c) above. Newco will add to the stated capital account in respect of the Class D preferred shares it issues an amount equal to the cost to Newco (as determined under section 85 of the Act, where relevant) of the property transferred to Newco less any liabilities assumed by it.

18. In respect of the transfers described in paragraph 17 above, Opco and Newco 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 each asset of Opco that is an eligible property to Newco as described herein. The agreed amount specified in such elections in respect of each eligible property so transferred will be:

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

(b) where the particular property is 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) where the particular property is 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) where the particular property is inventory, the amount described in paragraph 85(1)(c.2).

In each case, the agreed amount will not exceed the fair market value of the respective property, nor will it be less than the amount of any liabilities assumed by Newco with respect to the specific property, as consideration for the transfer of such property.

For the purposes of the joint election described herein, the reference in subparagraph 85(1)(e)(i) to "the undepreciated capital cost to the taxpayer of all property of that class immediately before the disposition" shall be interpreted to mean that proportion of the undepreciated capital cost to the taxpayer of all property of that class that the capital cost of the asset immediately before the disposition is of the capital cost of all property of that class immediately before the disposition.

The subsection 85(1) election referred to herein will exclude any cash, accounts receivable and prepaid expenses.

19. Newco will redeem the XXXXXXXXXX Class D preferred shares held by Opco at the aggregate redemption amount and will pay this amount by issuing to Opco a non-interest-bearing promissory note payable on demand ("Newco Note") having a principal amount and fair market value equal to the aggregate redemption amount of the shares so redeemed. Opco will accept the Newco Note as full payment for the shares so redeemed.

Newco will, immediately before such share redemption, be related to Opco within the meaning of subsection 251(2) and will be connected with Opco within the meaning assigned by subsections 186(2) and 186(4) of the Act.

20. Immediately following the foregoing preferred share redemption, Opco will purchase for cancellation all of the Class A common shares of Opco held by Newco at their fair market value. Opco will pay the purchase price for such shares by issuing to Newco a non-interest-bearing promissory note payable on demand ("Opco Note") having a principal amount and fair market value equal to the fair market value of the common shares so purchased. Newco will accept the Opco Note as full payment for the shares so purchased.

Opco will, immediately before such share purchase, be related to Newco within the meaning of subsection 251(2) and will be connected with Newco within the meaning assigned by subsections 186(2) and 186(4) of the Act.

21. Immediately following the issuance of the promissory notes described in paragraphs 19 and 20 above, the obligation under the Newco Note held by Opco will be offset against the Opco Note held by Newco by way of an offset agreement and both notes will be cancelled.

22. Immediately following the transfer described in paragraph 17 above, the redemption described in paragraph 19 above, and the purchase described in paragraph 20 above, the net fair market value of the property retained by Opco, determined in the manner described in paragraph 14 above (after allocating and deducting liabilities, in the manner described in paragraph 15 above), will be equal to the proportion of the net fair market value of all of the property owned by Opco, determined in the manner described in paragraph 14 above (after allocating and deducting liabilities, in the manner described in paragraph 15 above), immediately before such transfer, that:

(a) the fair market value, immediately before the transfer, of all the issued shares of the capital stock of Opco, other than those owned by Newco at that time

is of

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

23. Upon completion of the transactions described in paragraphs 9 through 22 above, the share capital of Opco will be reorganized by converting the Class A common shares of Opco held by each of Mr. K and Mrs. K into an equal number of Class E preferred shares of Opco having a fair market value and redemption amount equal to the fair market value of the Class A shares owned by such shareholder prior to the conversion, and having an aggregate paid-up capital equal to the paid-up capital of the Class A shares so converted.

24. Concurrently with the capital reorganization described in paragraph 23 above, XXXXXXXXXX Class A voting common shares of Opco will be issued to Mr. L for cash at a subscription price of XXXXXXXXXX per share. Following this share subscrition, Mr. K will, by virtue of his ownership of Class E preferred shares of Opco, control Opco.

ADDITIONAL INFORMATION

25. The Class C preferred shares of Newco and the Class E preferred shares of Opco issued to Mr. K and Mrs. K will not be redeemed by Newco or Opco as part of the series of transactions which includes the butterfly transfer described in paragraphs 9 through 22 above.

26. No assets have been or will be acquired or disposed of by, and no liabilities have been or will be incurred by Opco in contemplation of and before the proposed transfers of property described in paragraph 17 above, except in the ordinary course of business or as described in this letter.

No significant transactions are anticipated to be undertaken after the completion of the proposed transactions.

27. Except as described in this letter or in the ordinary course of its business, Opco will not dispose of any of its assets as part of the proposed series of transactions, and Opco will not dispose of any of its assets to an unrelated person subsequent to the proposed transactions.

28. None of the corporations referred to herein is, or will be at the time of the proposed transactions, a specified financial institution or a restricted financial institution.

29. None of the shares of Opco or Newco is or will be, at any time during the implementation of the proposed transactions described herein:

(a) the subject of any undertaking or agreement 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 referred to in subsection 112(2.3) of the Act as that term is defined in subsection 248(1) of the Act.

30. Both Opco and Newco will have the financial capacity to honour, upon presentation for payment, the amount payable under the promissory note issued by it as part of the proposed transactions.

PURPOSE OF THE PROPOSED TRANSACTIONS

31. Mr. K and Mrs. K wish to retire from active day-to-day involvement in the farming business of Opco. In recent years, Mr. L has been actively involved in Business X and Mr. J has been actively involved in Business Y.

As part of their estate and family planning, Mr. K and Mrs. K wish to "freeze" the present value of their shares, retain control of the farming operations, allow their sons to participate in the future success of the farming operations, and segregate the cattle operation from the grain operation such that each son will benefit from his own efforts.

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 and to the application of subsection 13(21.2) of the Act as it may apply to the transfer referred to in (ii) herein, the provisions of subsection 85(1) of the Act will apply to:

(i) the transfer of the common shares of Opco held by Mr. K and Mrs. K to Newco as described in paragraph 16 above, and

(ii) the transfer of each eligible property by Opco to Newco which is the subject of an election under subsection 85(1) as described in paragraphs 17 and 18 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 Newco of its Class D preferred shares held by Opco described in paragraph 19 above and the consequential purchase for cancellation of the Class A common shares of Opco held by Newco described in paragraph 20 above:

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

(i) Newco 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 Newco preferred shares exceeds the PUC thereof; and

(ii) Opco will be deemed to have paid, and Newco will be deemed to have received, a taxable dividend equal to the amount by which the amount paid in respect of the purchase for cancellation of the Opco common shares exceeds the PUC thereof;

(b) By virtue of subsections 186(2) and 186(4), Newco will be connected with Opco, and Opco will be connected with Newco. Provided that neither Opco nor Newco is entitled to a dividend refund in respect of the taxation year in which it is deemed to pay the dividend referred to in (a)(i) or (ii) herein, neither Opco nor Newco will be subject to Part IV tax under subsection 186(1) of the Act in respect of such dividend;

(c) The taxable dividends deemed to have been received by Opco and Newco as a result of the redemption and purchase for cancellation referred to in (a)(i) or (ii) herein will be deductible by each of them in computing its respective taxable income pursuant to subsection 112(1) of the Act. For greater certainty, the subsection 112(1) deduction in respect of such dividends will not be denied by the provisions of subsections 112(2.1), (2.2), (2.3) or (2.4) of the Act; and

(d) By virtue of paragraph (j) of the definition of "proceeds of disposition" in section 54 of the Act, the amount of the deemed dividends described in (a)(i) or (ii) herein will be excluded from the proceeds of disposition of the shares, and any loss arising from the disposition of those shares will be reduced by the amount of such dividends pursuant to subsection 112(3).

C. 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 subparagraph 55(3.1)(b)(iii); or

(d) an acquisition of property in the circumstances described in paragraphs 55(3.1)(c) or 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 dividends referred to in the rulings given in subparagraph B(a) 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.

D. By virtue of paragraph 191(2)(a) of the Act, Opco will have a substantial interest in Newco immediately before the redemption of the Newco Class D preferred shares as described in paragraph 19 above and Newco will have a substantial interest in Opco immediately before the purchase for cancellation of the Opco Class A common shares described in paragraph 20 above. Consequently, neither Opco nor Newco will be subject to Part IV.1 tax under section 187.2 of the Act or to Part VI.1 tax under section 191.1 of the Act in respect of:

(i) the dividend deemed to have been paid by Newco to Opco upon the redemption of the Newco Class D preferred shares since such dividend will be an "excepted dividend" within the meaning of 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 will 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 Newco as the payer of the particular dividend, or

(ii) the dividend deemed to have been paid by Opco to Newco upon the repurchase of the Opco Class A common shares since such dividend will be an "excepted dividend" within the meaning of paragraph (b) of the definition of "excepted dividend" in section 187.1 of the Act in the capacity of Newco as the recipient of the particular dividend, and will 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.

E. The settlement and cancellation of the Newco Note and Opco Note described in paragraph 21 above will not give rise to a "forgiven amount" within the meaning of subsection 80(1) or 80.01 of the Act.

F. The provisions of subsection 86(2) will not apply to the capital reorganization whereby the Class A common shares of Opco held by Mr. K and Mrs. K are converted to Class E preferred shares of Opco, and Class A common shares of Opco are issued to Mr. L.

G. The provisions of subsections 15(1), 56(2), and 246(1) of the Act will not apply to the proposed transactions, in and by themselves.

H. Subsection 245(2) of the Act will not be applied to the proposed transactions, in and by themselves, to redetermine the tax consequences confirmed in the rulings given.

The above rulings are given subject to the limitations and qualifications set out in Information Circular 70-6R3 dated December 30, 1996 and are binding on Revenue Canada, Customs, Excise and Taxation provided that the proposed transactions are completed by XXXXXXXXXX.

The above rulings are based on the law as it presently reads and do not take into account any proposed amendments to the Act 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, Customs, Excise and Taxation has agreed to or reviewed:

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

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

Yours truly,

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