2096 Ruling 9600293 - FULL GROSS-BASIS BUTTERFLY, PERMITTED REDEMPTION, LOSSES

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:

full gross-basis butterfly, capital losses and terminal losses, whether the transfer of 50% of shares to 2 wings qualifies as a permitted exchange

Position:

favourable rulings given once the transactions were restructured so that the preference shares, which are of a specified class, were redeemed in a permitted redemption

		960029

XXXXXXXXXX

Attention: XXXXXXXXXX

XXXXXXXXXX, 1996

Dear Sirs:

Re: XXXXXXXXXX
Advance Income Tax Ruling

This is in reply to your letter of XXXXXXXXXX in which you requested advance income tax rulings on behalf of the above-noted taxpayers. In your letters of XXXXXXXXXX you informed us of additional information in respect of, and amendments to, the facts and proposed transactions described in your original letter. We also acknowledge the information provided in our various telephone conversations.

To the best of your knowledge, none of the issues involved in this advance ruling request is being considered by a Tax Services Office or a Taxation Centre in connection with a tax return already filed and none of the issues is under objection.

Definitions

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

Unless otherwise indicated, all references to statute are to the Income Tax Act (the "Act");

"adjusted cost base", "capital property", and "proceeds of disposition" have the meanings assigned by section 54 of the Act;

"Canadian-controlled private corporation", "income of the corporation for the year from an active business", and "specified investment business" have the meanings assigned by subsection 125(7) of the Act;

"capital dividend account", "paid-up capital", "private corporation", "taxable Canadian corporation" and "taxable dividend" have the meanings assigned by subsection 89(1) of the Act;

"cost amount", "dividend rental arrangement", and "specified financial institution" have the meanings assigned by subsection 248(1) of the Act;

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

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

"FMV" means the expression "fair market value";

"net capital loss" has the meaning assigned by subsection 111(8) of the Act;

XXXXXXXXXX;

"permitted redemption" and "specified class" have the meanings assigned by subsection 55(1) of the Act;

"predecessor corporation" has the meaning assigned by subsection 87(1) of the Act;

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

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

"terminal loss" has the meaning assigned by subsection 20(16) of the Act; and

"UCC" means the expression "undepreciated capital cost" as defined in subsection 13(21) of the Act.

Facts

XXXXXXXXXX is a resident of Canada for purposes of the Act.

XXXXXXXXXX is a taxable Canadian corporation and a Canadian-controlled private corporation. Its issued shares are owned by XXXXXXXXXX.

XXXXXXXXXX is a taxable Canadian corporation and a Canadian-controlled private corporation. It was incorporated under the laws of XXXXXXXXXX and is currently governed by the XXXXXXXXXX Its fiscal year ends on XXXXXXXXXX constitutes income from an active business carried on by XXXXXXXXXX.

The authorized share capital of XXXXXXXXXX consists of XXXXXXXXXX voting preferred shares, redeemable at the amount paid up thereon, which is $XXXXXXXXXX per share and XXXXXXXXXX voting common shares. The preferred shares constitute shares of a specified class. The issued shares are held as follows:

XXXXXXXXXX.

The paid-up capital of each share is $XXXXXXXXXX These shares constitute capital property to the holders thereof.

XXXXXXXXXX is a taxable Canadian corporation and a Canadian-controlled private corporation. Its fiscal year ends on XXXXXXXXXX The income from XXXXXXXXXX constitutes income from an active business carried on by XXXXXXXXXX.

XXXXXXXXXX.

The authorized share capital of XXXXXXXXXX includes an unlimited number of voting common shares, and an unlimited number of class "XXXXXXXXXX" voting special shares, redeemable at the amount paid up thereon, which is $XXXXXXXXXX per share. The class XXXXXXXXXX special shares constitute shares of a specified class. The issued shares are held as follows:

XXXXXXXXXX.

The paid-up capital of each share is $XXXXXXXXXX These shares constitute capital property to the holders thereof.

XXXXXXXXXX assets consist of the following:

Estimated FMV

XXXXXXXXXX

XXXXXXXXXX properties consist of the following:

FMV

XXXXXXXXXX

No capital or terminal loss will arise from the XXXXXXXXXX as a result of the proposed transactions described below.

The mortgage receivable has been in a state of default since XXXXXXXXXX; the estimated fair market value reflects the fact that it has been determined that no more than XXXXXXXXXX% will be recovered. The other assets related to XXXXXXXXXX activities include XXXXXXXXXX receivable, prepaid expenses, and deferred financing expenses.

XXXXXXXXXX assets consist of the following:

Estimated FMV
Cash, bankers' acceptance $XXXXXXXXXX
Mortgages receivable XXXXXXXXXX
XXXXXXXXXX real estate properties XXXXXXXXXX
Other assets related to XXXXXXXXXX activities XXXXXXXXXX

$XXXXXXXXXX

The XXXXXXXXXX real estate properties consist of the following:

FMV

XXXXXXXXXX

The fair market value of the XXXXXXXXXX so there will be a terminal loss and a capital loss arising as a result of the sale of the land and building as a result of the proposed transactions described below. There will not be any terminal loss or capital loss arising as a result of the disposition of the other XXXXXXXXXX real estate properties listed above.

The other assets related to XXXXXXXXXX activities include accounts receivable, accrued interest receivable, prepaid expenses, deferred financing expenses and deferred charges in relation to XXXXXXXXXX.

The estimated fair market value of the XXXXXXXXXX real estate properties was established by a professional real estate appraiser. No substantial changes should occur in the value of the assets of both corporations between now and the date of completion of the proposed transactions.

As of XXXXXXXXXX a net capital loss of $XXXXXXXXXX is carried forward in XXXXXXXXXX and its balance of RDTOH was $XXXXXXXXXX. As of XXXXXXXXXX had a balance of RDTOH of $XXXXXXXXXX,

Proposed Transactions

On or before XXXXXXXXXX (each of which corporation is referred to as a predecessor corporation) will amalgamate according to the provisions of the XXXXXXXXXX to form one corporate entity referred to as "Amalco" in such manner that:

all of the property (except amounts receivable from any predecessor corporation or shares of the capital stock of any predecessor corporation) of the predecessor corporations immediately before the merger becomes property of Amalco by virtue of the merger;

all of the liabilities (except amounts payable to any predecessor corporation) of the predecessor corporations immediately before the merger become liabilities of Amalco by virtue of the merger; and

all of the shareholders (except any predecessor corporation), who owned shares of the capital stock of any predecessor corporation immediately before the merger, receive shares of the capital stock of Amalco because of the merger.

The authorized capital of Amalco will include an unlimited number of common shares, and an unlimited number of class "XXXXXXXXXX" voting special shares, redeemable at $XXXXXXXXXX per share, being the amount paid up thereon. Amalco will be a taxable Canadian corporation and a Canadian-controlled private corporation.

Upon the amalgamation, Amalco will issue shares as follows:

XXXXXXXXXX

The paid-up capital and adjusted cost base of each share will be $XXXXXXXXXX These shares will constitute capital property to the holders thereof.

The assets of Amalco will consist of the following:

Estimated FMV
Cash and bankers' acceptance $XXXXXXXXXX
Mortgages receivable XXXXXXXXXX
XXXXXXXXXX real estate properties XXXXXXXXXX
Other assets related to XXXXXXXXXX activities XXXXXXXXXX

$XXXXXXXXXX

The income earned by the rental real estate properties will constitute income from an active business to Amalco, and will not constitute income from a specified investment business.

Two new holding companies ("XXXXXXXXXX" and "XXXXXXXXXX") will be incorporated under the XXXXXXXXXX Each of XXXXXXXXXX will be a taxable Canadian corporation and a Canadian-controlled private corporation. The authorized share capital of XXXXXXXXXX will include voting preferred shares, redeemable and retractable for an amount equal to the fair market value of the consideration for which these shares are issued. XXXXXXXXXX will subscribe for XXXXXXXXXX common shares of XXXXXXXXXX for an aggregate consideration of $XXXXXXXXXX will subscribe for XXXXXXXXXX common shares of XXXXXXXXXX for an aggregate consideration of $XXXXXXXXXX

The class XXXXXXXXXX special shares of Amalco issued to Holdings as described in paragraph 9 above will be redeemed for their redemption amount of $XXXXXXXXXX per share. The redemption amount will be satisfied by the payment of cash. This redemption will constitute a permitted redemption.

The shareholders of Amalco will transfer their shares of Amalco to XXXXXXXXXX as follows:

XXXXXXXXXX will transfer his XXXXXXXXXX common shares of Amalco to XXXXXXXXXX for consideration consisting solely of preferred shares of XXXXXXXXXX with a FMV and redemption amount equal to the FMV of the shares of Amalco so transferred. XXXXXXXXXX will jointly elect, in prescribed form and within the time referred to in subsection 85(6) of the Act, to have the rules in subsection 85(1) apply to such transfer. The agreed amount in respect of the transfer will be equal to the adjusted cost base of the Amalco common shares to XXXXXXXXXX which amount will not exceed their FMV. The aggregate paid-up capital of the preferred shares of XXXXXXXXXX issued to XXXXXXXXXX will be equal to the aggregate paid-up capital of the shares of Amalco so transferred.

XXXXXXXXXX will transfer XXXXXXXXXX common shares of Amalco to XXXXXXXXXX for consideration consisting solely of preferred shares of XXXXXXXXXX with a FMV and redemption amount equal to the FMV of the shares of Amalco so transferred. XXXXXXXXXX will jointly elect, in prescribed form and within the time referred to in subsection 85(6) of the Act, to have the rules in subsection 85(1) apply to such transfer. The agreed amount in respect of the transfer will be equal to the adjusted cost base of the Amalco common shares to XXXXXXXXXX which amount will not exceed their FMV. The aggregate paid-up capital of the preferred shares of XXXXXXXXXX issued to XXXXXXXXXX will be equal to the aggregate paid-up capital of the shares of Amalco so transferred.

XXXXXXXXXX will transfer XXXXXXXXXX common shares of Amalco to XXXXXXXXXX for consideration consisting solely of preferred shares of XXXXXXXXXX with a FMV and redemption amount equal to the FMV of the shares of Amalco so transferred. XXXXXXXXXX will jointly elect, in prescribed form and within the time referred to in subsection 85(6) of the Act, to have the rules in subsection 85(1) apply to such transfer. The agreed amount in respect of the transfer will be equal to the adjusted cost base of the Amalco common shares to XXXXXXXXXX which amount will not exceed their FMV. The aggregate paid-up capital of the preferred shares of XXXXXXXXXX issued to XXXXXXXXXX will be equal to the aggregate paid-up capital of the shares of Amalco so transferred.

XXXXXXXXXX will transfer XXXXXXXXXX common shares of Amalco to XXXXXXXXXX for consideration consisting solely of preferred shares of XXXXXXXXXX with a FMV and redemption amount equal to the FMV of the preferred shares of Amalco so transferred. XXXXXXXXXX will jointly elect, in prescribed form and within the time referred to in subsection 85(6) of the Act, to have the rules in subsection 85(1) apply to such transfer. The agreed amount in respect of the transfer will be equal to the adjusted cost base of the Amalco common shares to XXXXXXXXXX which amount will not exceed their FMV. The aggregate paid-up capital of the preferred shares of XXXXXXXXXX issued to XXXXXXXXXX will be equal to the aggregate paid-up capital of the shares of Amalco so transferred.

A new corporation,"Sub A" will be incorporated under the XXXXXXXXXX Sub A will be a taxable Canadian corporation and a Canadian-controlled private corporation. Its authorized share capital will consist of voting common shares and voting preferred shares, redeemable and retractable for an amount equal to the fair market value of the consideration for which they were issued. XXXXXXXXXX will subscribe for XXXXXXXXXX common shares of Sub A for an aggregate consideration of $XXXXXXXXXX

A new corporation,"Sub B" will be incorporated under the XXXXXXXXXX Sub B will be a taxable Canadian corporation and a Canadian-controlled private corporation. Its authorized share capital will consist of voting common shares and voting preferred shares, redeemable and retractable for an amount equal to the fair market value of the consideration for which they were issued. XXXXXXXXXX will subscribe for XXXXXXXXXX common shares of Sub B for an aggregate consideration of $XXXXXXXXXX

Immediately before the transfers of property described in paragraph 16 below, the property of Amalco 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 Amalco, including any cash, bankers' acceptances, accrued interest receivable, instalments and income taxes receivable, and the current portion of the mortgages receivable;

(b)investment property, comprising all of the assets of Amalco, other than cash or near cash property, any income from which would, for the purposes of the Act, be income from property or from a specified investment business, including the mortgages receivable, other than the current portion; and

(c)business property, comprising all of the assets of Amalco, other than cash or near cash property, any income from which would be income from a business (other than a specified investment business), including the XXXXXXXXXX real estate properties, together with any accounts receivable, XXXXXXXXXX receivable, and rights arising from prepaid expenses of Amalco that relate to Amalco's business and that will be collected, sold or consumed by XXXXXXXXXX as the case may be, in the ordinary course of its business.

For greater certainty, any deferred charges, including the deferred financing expenses and the deferred charges in relation to the XXXXXXXXXX any tax accounts, such as the balance of any RDTOH or capital dividend account and any net capital losses of Amalco, will not be considered to be property of Amalco for purposes hereof.

Immediately following the determination of the fair market value of its property as described in paragraph 15 above, Amalco will sell, assign and transfer to each of Sub A and Sub B (referred to as the "Transferees" for the balance of this paragraph), a pro-rata share of its investment property, and its business property, as well as a pro-rata share of all its cash or near-cash property such that the fair market value of each particular type of property so transferred will be equal to that proportion of the fair market value of that particular type of property of Amalco immediately before the transfers of property described herein that:

the aggregate fair market value, immediately before such transfers of property, of all of the shares of Amalco owned by the Transferee

is of

the aggregate fair market value, immediately before such transfers of property, of all of the issued and outstanding shares of the capital stock of Amalco.

As consideration for such property transferred by Amalco to Sub A and Sub B, each of Sub A and Sub B will

assume XXXXXXXXXX% of the liabilities of Amalco; and

issue to Amalco preferred shares of its capital stock such that the aggregate fair market value and redemption amount of such preferred shares will be equal to the amount by which the fair market value of the assets transferred to each of Sub A and Sub B exceeds the fair market value of the liabilities assumed by each of Sub A and Sub B.

In accordance with XXXXXXXXXX each of Sub A and Sub B will add an amount equal to the cost to it, as determined pursuant to subsection 85(1) where applicable, of the assets transferred by Amalco less the amount of liabilities assumed by it, to the stated capital account of its preferred shares.

Amalco and Sub A will jointly elect pursuant to subsection 85(1) of the Act, in prescribed form and within the time referred to in subsection 85(6) of the Act, with respect to the transfer of any eligible property of Amalco that has a fair market value in excess of its cost amount. The agreed amount for each property included in the subsection 85(1) election will not be less than the liabilities assumed in respect of that property and shall:

in the case of each capital property (other than depreciable property) be equal to the lesser of the cost amount to Amalco of the property and the fair market value thereof, except that in the case of some of the non-depreciable capital property, the agreed amount shall be equal to the cost amount plus XXXXXXXXXX of the net capital losses described in paragraph 8 above, plus XXXXXXXXXX of any capital loss arising from the disposition of any property by Amalco to Sub A or Sub B as described herein, not to exceed the fair market value of the propoerty;

in the case of the transfer of the depreciable property, the agreed amount will be equal to the least of the cost amount to Amalco of the property, the cost to Amalco of the property and the fair market value thereof, except that in the case of some of the depreciable property, the agreed amount shall be increased by XXXXXXXXXX of any terminal loss arising from the disposition of any property by Amalco to Sub A or Sub B as described herein, not to exceed the fair market value of such property; and

in the case of eligible capital property, be equal to the least of 4/3 of the cost amount to Amalco of the property, the cost to Amalco of the property, or the fair market value thereof.

Amalco and Sub B will jointly elect pursuant to subsection 85(1) of the Act, in prescribed form and within the time referred to in subsection 85(6) of the Act, with respect to the transfer of any eligible property of Amalco that has a fair market value in excess of its cost amount. The agreed amount for each property included in the subsection 85(1) election will not be less than the liabilities assumed in respect of that property and shall:

in the case of each capital property (other than depreciable property) be equal to the lesser of the cost amount to Amalco of the property and the fair market value thereof, except that in the case of some of the non-depreciable capital property, the agreed amount shall be equal to the cost amount plus XXXXXXXXXX of the net capital losses described in paragraph 8 above, plus XXXXXXXXXX of any capital loss arising from the disposition of any property by Amalco to Sub A or Sub B as described herein, not to exceed the fair market value of such property;

in the case of the transfer of the depreciable property, the agreed amount will be equal to the least of the cost amount to Amalco of the property, the cost to Amalco of the property and the fair market value thereof, except that in the case of some of the depreciable property, the agreed amount shall be increased by XXXXXXXXXX of any terminal loss arising from the disposition of any property by Amalco to Sub A or Sub B as described herein, not to exceed the fair market value of such property; and

in the case of eligible capital property, be equal to the least of 4/3 of the cost amount to Amalco of the property, the cost to Amalco of the property, or the fair market value thereof.

Following the completion of the transfer of the properties as described in paragraph 16 above, Sub A and Sub B will redeem the preferred shares issued to Amalco as consideration for the transfer of assets. The share redemption price will be satisfied by the issuance of notes payable ("Promissory Note A" and "Promissory Note B") by Sub A and Sub B, respectively. Promissory Notes A and B will be payable on demand by the holder thereof, will be non-interest bearing, will have a face value and fair market value equal to the aggregate redemption amount and fair market value of such redeemed shares, and will be assignable by the holder thereof.

Amalco will accept Promissory Notes A and B as full payment of the aggregate redemption amount for the preferred shares of Sub A and Sub B.

Following the redemption of the Class A shares and Class B shares as described in paragraph 17 above, the shareholders of Amalco will, by special resolution, resolve to wind up and dissolve Amalco pursuant to XXXXXXXXXX In connection with the winding-up, Amalco will distribute Promissory Note A to XXXXXXXXXX and Promissory Note B to XXXXXXXXXX.

In the event that Amalco has a balance in its capital dividend account at such time, Amalco will, prior to the distribution of such Notes, elect pursuant to subsection 83(2) of the Act, in prescribed manner and prescribed form, in respect of any amount not exceeding the balance in its capital dividend account.

Sub A will be wound up into XXXXXXXXXX pursuant to subsection 88(1) of the Act. On the winding-up all of the property of Sub A will be transferred to XXXXXXXXXX and all of the liabilities of Sub A will be assumed by XXXXXXXXXX Promissory Note A will be extinguished on the winding-up.

Sub B will be wound up into XXXXXXXXXX pursuant to subsection 88(1) of the Act. On the winding-up all of the property of Sub B will be transferred to XXXXXXXXXX and all of the liabilities of Sub B will be assumed by XXXXXXXXXX Promissory Note B will be extinguished on the winding-up.

Following receipt of the dividend refund to which Amalco will become entitled as a result of the proposed transactions described herein, Amalco will distribute one-half of such amount to each of XXXXXXXXXX The refund will not arise until after the end of the fiscal year in which the dividend was paid (or deemed paid).

All property of Amalco will now have been distributed and all liabilities of Amalco will have been discharged. Articles of dissolution will then be executed and will be filed pursuant to XXXXXXXXXX The common shares of Amalco will be cancelled and Amalco will be dissolved.

Price adjustment clauses as described in IT-169 will be used in all of the transactions.

Purpose of the Proposed Transactions

The objective of the "butterfly" reorganization is to distribute the assets of XXXXXXXXXX to XXXXXXXXXX in order to allow XXXXXXXXXX to separate their respective interests on a pro rata basis.

Additional Information

None of XXXXXXXXXX is or will be, at the time the proposed transactions described above are implemented, a specified financial institution;

none of the shares of XXXXXXXXXX has been or will be subject to a guarantee agreement that is given by a specified financial institution, for any of the purposes described in subsection 112(2.2);

none of the shares of Amalco, Sub A or Sub B is subject to an "undertaking" (as that term is described in subsection 112(2.4) of the Act) that has been secured, in whole or in part, either directly or indirectly in any manner whatever, by any property, and none of the Amalco, Sub A or Sub B shares has been or will be 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; and

none of the shares of Amalco, Sub A or Sub B will be the subject of a dividend rental arrangement.

Except as described in this letter, or in the ordinary course of business, no property has been or will be acquired by XXXXXXXXXX and no liabilities have been or will be incurred by XXXXXXXXXX in contemplation of the proposed transactions described above.

Other than as described herein, no significant transactions have been completed in contemplation of the proposed transactions described herein and none are contemplated after the proposed transactions are completed.

Rulings

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

The provisions of subsections 87(2), (2.1) and (4) of the Act, other than subparagraphs 87(4)(c), (d) and (e) thereof, will apply to the amalgamation of XXXXXXXXXX as described in paragraph 9 above.

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 subsections 85(5) and 85(5.1) of the Act as they may apply to the transfers referred to in (e) and (f) herein, the provisions of subsection 85(1) will apply to:

the sale of the XXXXXXXXXX common shares in Amalco by XXXXXXXXXX to XXXXXXXXXX as described in paragraph 12 above;

the sale of the XXXXXXXXXX common shares in Amalco by XXXXXXXXXX to XXXXXXXXXX as described in paragraph 12 above;

the sale of the XXXXXXXXXX common shares in Amalco by XXXXXXXXXX to XXXXXXXXXX as described in paragraph 12 above;

the sale of the XXXXXXXXXX common shares in Amalco by XXXXXXXXXX to XXXXXXXXXX as described in paragraph 12 above;

the transfer of each eligible property by Amalco to Sub A which is the object of the election as described in paragraph 16 above;

the transfer of each eligible property by Amalco to Sub B which is the object of the election as described in paragraph 16 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.

The application of paragraph 84.1(1)(a) of the Act to the issue of:

the preferred shares of XXXXXXXXXX to XXXXXXXXXX

the preferred shares of XXXXXXXXXX to XXXXXXXXXX

the preferred shares of XXXXXXXXXX to XXXXXXXXXX

the preferred shares of XXXXXXXXXX to XXXXXXXXXX

as described in paragraph 12 above, will not result in a reduction of the paid-up capital of the preferred shares of XXXXXXXXXX so issued.

As a result of the redemption by Sub A and Sub B of the Sub A preferred shares and Sub B preferred shares held by Amalco and as a result of the distributions by Amalco in the course of its winding-up, as described in paragraphs 17 and 18 above:

By virtue of paragraph 84(3)(a) and paragraph 84(3)(b), each of Sub A and Sub B will be deemed to have paid and Amalco 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 Sub A preferred shares and the Sub B preferred shares, as the case may be, exceeds the paid-up capital thereof.

Pursuant to paragraph 88(2)(b) and subsection 84(2), but subject to (ii) to (iv) herein, each of XXXXXXXXXX will be deemed to have received a dividend (the "winding-up dividend") on its common shares of Amalco equal to the proportion of the amount by which the aggregate fair market value of the property of Amalco distributed by Amalco to XXXXXXXXXX as the case may be, on its winding-up as consideration for the cancellation of its common shares, exceeds the paid-up capital of such shares, that the number of shares held by each of XXXXXXXXXX is of the number of shares of that class that are cancelled.

Pursuant to subparagraph 88(2)(b)(i), such portion of the winding-up dividend referred to in (b)(i) as does not exceed Amalco's capital dividend account determined immediately before the payment of the winding-up dividend shall be deemed, for the purposes of the subsection 83(2) election referred to in paragraph 18, to be the full amount of a separate dividend.

Pursuant to subparagraph 88(2)(b)(ii), the portion of the winding-up dividend that is equal to the lesser of:

Amalco's pre-1972 capital surplus on hand as determined immediately before the payment of the winding-up dividend, and

the amount by which the winding-up dividend exceeds the portion thereof in respect of which Amalco will elect under subsection 83(2)

shall be deemed not to be a dividend.

Pursuant to subparagraph 88(2)(b)(iii), the winding-up dividend, to the extent that it exceeds the portion thereof referred to in (ii) herein that is deemed to be a separate dividend and the portion referred to in (iii) herein that is deemed not to be a dividend, shall be deemed to be a separate dividend that is a taxable dividend.

The taxable dividends deemed to have been received by each of Sub A and Sub B and by Amalco as a result of the winding-up of Amalco and the redemption of the Sub A and Sub B preferred shares, as the case may be, which are described in paragraphs D(a) and D(b)(iv) above will:

be deductible by the recipient pursuant to subsection 112(1) of the Act in computing its taxable income for the year in which such dividend is deemed to have been received, and such deduction will not be prohibited by any of subsections 112(2.2), (2.3) or (2.4) of the Act; and

be excluded in computing the proceeds of disposition of the shares so redeemed or purchased for cancellation by virtue of paragraph (j) of the definition of "proceeds of disposition".

Provided that as part of the series of transactions or events that includes the proposed transactions described herein, there is not:

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

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

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

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 dividends referred to in the rulings given in D(b)(iv) 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.

The provisions of subsections 15(1), 56(2), 56(4) and 246(1) of the Act will not apply to any of the proposed transactions described in paragraphs 9 through 21 above, in and of themselves.

As a result of the proposed transactions, in and of themselves, subsection 245(2) of the Act will not be applied to redetermine the tax consequences as described in the rulings given.

These rulings are given subject to the limitations and qualifications set out in Information Circular 70-6R2 issued by Revenue Canada, Taxation on September 28, 1990 and are binding provided that the proposed transactions are completed by XXXXXXXXXX.

The above 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, could have an effect on the rulings provided herein.

Opinion

Provided that:

our understanding of the facts and proposed transactions described herein is correct;

the proposed amendment to the definition of "permitted redemption" in subsection 55(1) of the Act is enacted in substantially the same form as proposed in Amendments to the Income Tax Act and Related Statutes which was issued by the Minister of Finance on April 26, 1995;

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

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

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

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

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

which has not been described herein,

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 taxable dividends referred to in the rulings given in D(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.

Comments

You have informed us, in paragraph 21 above, that the sale agreements relating to the transfers of property described in paragraphs 12 and 16 will include a price adjustment clause which will permit the parties to alter the sale price of any such property, as well as the retraction and redemption amount of any shares received as consideration for such property.

Nothing in this letter should be interpreted as confirming that,

(a)for purposes of the Act, any adjustment made pursuant to any such price adjustment clause in respect of a transaction subsequent to the time of such transaction will be effective, retroactively, to the time of such transaction,

(b)for the purposes of the Act, any amount paid pursuant to any such price adjustment clause, in respect of a transaction subsequent to the time of such transaction will be an additional payment of the redemption or purchase price of any shares redeemed or repurchased, or

(c)in the event that any adjustment is made pursuant to any such price adjustment clause, the proposed transactions referred to in paragraphs 12 to 20 above will be considered to have been carried out as described in those paragraphs, in particular, for the purposes of ruling F above.

The operation of a price adjustment clause is not a proposed transaction and, consequently, advance rulings are not given by the Department in respect thereof. The Department's general position with respect to price adjustment clauses in agreements is set out in Interpretation Bulletin IT-169 dated August 6, 1974.

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, adjusted cost base or V-day value of any particular asset, or the paid-up capital 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.

Each of XXXXXXXXXX will be subject to tax under Part IV of the Act on the taxable dividend received on the winding-up of Amalco described in Ruling D(b)(iv) above, as provided in paragraph 186(1)(b) of the Act.

Yours truly,

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