2004 Ruling 2003-0053731R3 - Gross Asset 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.

Principal Issues: Gross asset butterfly.

Position: Favorable rulings given.

Reasons: Complies with the law.

XXXXXXXXXX 2003-005373

XXXXXXXXXX, 2004

Dear XXXXXXXXXX:

Re: XXXXXXXXXX
Advance Income Tax Ruling Request

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

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

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

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

(iv) before the courts or, if a judgment has been issued, the time limit for appeal to a higher court has not expired.

You indicate that a ruling ("prior ruling") involving the same corporations on somewhat similar series of proposed transactions to those described herein was issued by the Income Tax Rulings Directorate on XXXXXXXXXX, 1996 (#960029). However, you advise that none of the proposed transactions described in the prior ruling were ever implemented. The taxpayers have also represented that none of the proposed transactions described herein will result in any taxpayer described herein being unable to pay its existing outstanding tax liabilities.

DEFINITIONS

In this letter, unless otherwise specified, all monetary amounts are expressed in Canadian dollars and the following terms have the meanings specified below:

(a) "Act" means the Income Tax Act, R.S.C. 1986 (5th Supp.) c.1, as amended from time to time and consolidated to the date of this letter and, unless otherwise expressly stated, every reference herein to a part, section or subsection, paragraph or subparagraph and clause or subclause is a reference to the relevant provision , and the Income Tax Regulations thereunder are referred to as the "Regulations";

(b) "Aco" means XXXXXXXXXX - CRA Business Number: XXXXXXXXXX;

(c) "adjusted cost base" has the meaning assigned by section 54;

(d) "Bco" means XXXXXXXXXX - CRA Business Number: XXXXXXXXXX;

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

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

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

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

(i) "CRA" means the Canada Revenue Agency;

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

(k) "dividend rental arrangement" has the meaning assigned by subsection 248(1);

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

(m) "fair market value" means the highest price available in an open and unrestricted market, between informed, prudent parties, acting at arm's length and under no compulsion to act, expressed in terms of cash;

(n) "Holdings" means XXXXXXXXXX;

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

(p) XXXXXXXXXX;

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

(r) "Paragraph" refers to a numbered paragraph in this advance income tax ruling;

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

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

(u) "private corporation", has the meaning assigned by subsection 89(1);

(v) "proceeds of disposition" has the meaning assigned by section 54;

(w) "Proposed Transactions" means the transactions described in Paragraphs 8 to 17;

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

(y) "series of transactions or events" includes the related transactions or events referred to in subsection 248(10);

(z) "specified class" has the meaning assigned by subsection 55(1);

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

(bb) "specified investment business" has the meaning assigned by subsection 125(7);

(cc) "stated capital" has the meaning assigned by section XXXXXXXXXX;

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

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

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

(gg) "undepreciated capital cost" has the meaning assigned by subsection 13(21).

FACTS

1. XXXXXXXXXX ("Parent") is the widow of XXXXXXXXXX ("R") who died in XXXXXXXXXX. Parent inherited of all of the assets of R, including the shares of Holdings, Aco and Bco that were owned by R at the time of R's death. XXXXXXXXXX ("Sibling 1") and XXXXXXXXXX ("Sibling 2") are the adult children of Parent and R. Each of Parent, Sibling 1 and Sibling 2 are a resident of Canada for purposes of the Act.

2. Holdings is a taxable Canadian corporation and a Canadian-controlled private corporation. Holdings' business includes the holding of the shares of Aco and Bco. Holdco also operates a XXXXXXXXXX. The issued and outstanding shares of Holdings, all of which carry one vote per share, are held as follows:

Parent XXXXXXXXXX Class A Shares
Sibling 1 XXXXXXXXXX Class B Shares
Sibling 2 XXXXXXXXXX Class C Shares

In the course of a reorganization of capital of Holdings which took place after R's death on XXXXXXXXXX, Parent exchanged all the issued and outstanding shares of Holdings that were then owned by Parent at that time for newly authorized Class A Shares of Holdings. On that same day, Sibling 1 subscribed for XXXXXXXXXX newly authorized Class B Shares and Sibling 2 subscribed for XXXXXXXXXX newly authorized Class C Shares for fair market value consideration. These transactions were undertaken for estate planning purposes.

You indicate that the above described transactions were not undertaken in contemplation of the Proposed Transactions and that the reorganization of capital of Holdings would have taken place in the same manner regardless of whether or not the Proposed Transactions are undertaken. Accordingly, you represent that none of the above transactions form part of the same series of transactions or events that includes the Proposed Transactions.

3. Aco is a taxable Canadian corporation and a Canadian-controlled private corporation. Aco was incorporated under the laws of XXXXXXXXXX on XXXXXXXXXX and is currently governed by the XXXXXXXXXX. Aco's fiscal year ends on XXXXXXXXXX. Aco owns and rents real estate properties and invests in mortgages, the income from which constitutes income from a specified investment business.

The authorized share capital of Aco consists of XXXXXXXXXX voting preferred shares, redeemable at the amount paid-up thereon, which is $XXXXXXXXXX per share, and XXXXXXXXXX voting common shares. The issued and outstanding shares of Aco are currently held as follows:

Holdings XXXXXXXXXX preferred shares
Parent XXXXXXXXXX common shares
Sibling 1 XXXXXXXXXX common shares
Sibling 2 XXXXXXXXXX common shares

The stated capital and paid-up capital attributable to each of the above classes of shares is $XXXXXXXXXX per share. These shares constitute capital property to each of the holders thereof. You also represent that the XXXXXXXXXX issued and outstanding preferred shares of Aco have an aggregate fair market value equal to their aggregate redemption amount.

4. Bco is a taxable Canadian corporation and a Canadian-controlled private corporation. Bco was formed as a result of the amalgamation of XXXXXXXXXX. Bco's fiscal year ends on XXXXXXXXXX. Bco owns and rents real estate properties and invests in mortgages, the income from which constitutes income from a specified investment business.

The authorized share capital of Bco includes an unlimited number of voting common shares, and an unlimited number of class A voting special shares, redeemable at the amount paid-up thereon, which is $XXXXXXXXXX per share. The issued and outstanding shares of Bco are currently held as follows:

Holdings XXXXXXXXXX Class A special shares
Parent XXXXXXXXXX common shares
Sibling 1 XXXXXXXXXX common shares
Sibling 2 XXXXXXXXXX common shares

The stated capital and paid-up capital attributable to each of the issued shares described above is $XXXXXXXXXX per share. These shares constitute capital property to each of the holders thereof. You also represent that the XXXXXXXXXX issued and outstanding Class A special shares have an aggregate fair market value equal to their aggregate redemption amount.

5. The estimated fair market value of the assets currently owned by Aco consists of the following:

Estimated FMV
Rental real estate properties $XXXXXXXXXX
Advance to Bco XXXXXXXXXX
Other assets related to rental activities XXXXXXXXXX
Total $XXXXXXXXXX

The rental real estate properties (land and buildings) consist of the following:

Estimated FMV
XXXXXXXXXX $XXXXXXXXXX
XXXXXXXXXX XXXXXXXXXX
Total $XXXXXXXXXX

No capital loss or terminal loss will arise from the disposition of any of the above described properties as a result of the Proposed Transactions described below. The other assets of Aco that are related to its rental real estate activities include rents receivable, prepaid expenses and a vehicle.

6. The estimated fair market value of the assets currently owned by Bco consists of the following:

Estimated FMV
Cash, prepaid expenses, accrued interest
and deferred expenses $XXXXXXXXXX
Mortgages receivable XXXXXXXXXX
Advances to Holdings XXXXXXXXXX
Cash surrender value - Life insurance policies XXXXXXXXXX
Rental real estate properties XXXXXXXXXX
Other asset related to rental activities XXXXXXXXXX
Total $XXXXXXXXXX

The rental real estate properties (land and buildings) consist of the following:

Estimated FMV
XXXXXXXXXX $XXXXXXXXXX
XXXXXXXXXX XXXXXXXXXX
XXXXXXXXXX XXXXXXXXXX
XXXXXXXXXX XXXXXXXXXX
XXXXXXXXXX XXXXXXXXXX
Total $XXXXXXXXXX

For the purposes of the classification and distribution of the three types of property described in Paragraph 12 below, any deferred charges, including deferred financing expenses or deferred charges in relation to the rental commission fees for new tenants, will not be treated as property.

No capital loss or terminal loss will arise from the disposition of any of the above described properties as a result of the Proposed Transactions described below. The only other asset of Bco that is related to the rental real estate activities is a vehicle.

7. The estimated fair market value of the rental real estate properties was established by an independent professional real estate appraiser. It is anticipated that no significant changes should occur in the fair market value of the assets of both Aco and Bco before the Proposed Transactions are implemented.

PROPOSED TRANSACTIONS

8. Immediately prior to the proposed amalgamation of Aco and Bco described in Paragraph 9 below, Aco is expected to have a positive RDTOH balance and a substantial positive CDA balance. Similarly, Bco will have a net capital loss carry forward balance of $XXXXXXXXXX, a negative CDA balance and a positive RDTOH balance.

Consequently, at the end of the day ending immediately before the time of the amalgamation of Aco and Bco, as described in Paragraph 9 below, each of Aco and Bco, as the case may be, will declare and pay a taxable dividend to each of Parent, Sibling 1 and Sibling 2 (each being a holder of common shares of Aco and Bco) such that the aggregate amount of such taxable dividends paid by the particular corporation to such dividend recipients will equal three times the amount of such corporation's RDTOH balance at that time. The payment of these taxable dividends to the particular dividend recipients will be made by having Aco and Bco, as the case may be, credit the full amount of each such taxable dividend to the particular dividend recipient's shareholder loan account.

Immediately after the taxable dividends described above are paid, Bco will also declare and pay another separate dividend to each holder of its common shares (being Parent, Sibling 1 and Sibling 2) such that the aggregate amount of such dividends paid by Bco will equal the amount by which Bco's positive CDA balance at that time exceeds Aco's negative CDA balance at that time. For greater certainty, Bco will make an election, within the time and manner prescribed by subsection 83(2), such that each of these separate dividends will be a capital dividend. The payment of these dividends to the particular dividend recipient will be made by having Bco credit the full amount of such capital dividend to the particular dividend recipient's shareholder loan account.

9. Following the payment of the dividends described in Paragraph 8 above, and on or before XXXXXXXXXX, Aco and Bco (each of which is referred to as a predecessor corporation) will amalgamate according to the provisions of the XXXXXXXXXX to form one corporate entity referred to as "DC Amalco" in such a manner that:

(a) 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 will become property of DC Amalco by virtue of the merger;

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

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

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

Upon the amalgamation, DC Amalco will issue shares as follows:

Holdings XXXXXXXXXX Class A special shares
Parent XXXXXXXXXX common shares
Sibling 1 XXXXXXXXXX common shares
Sibling 2 XXXXXXXXXX common shares

The stated capital and paid-up capital attributable to each of the issued shares described above will be $XXXXXXXXXX per share. The amalgamation agreement will specify that the preferred shares and special shares of each of the predecessor corporations are to be converted into the Class A special shares of DC Amalco and the common shares of each of the predecessor corporations are to be converted into common shares of DC Amalco. For greater certainty, the Class A special shares of DC Amalco will not be convertible or exchangeable nor will any holder be entitled to receive on the redemption, cancellation or acquisition of such shares an amount greater than the total of the fair market value of the consideration for which such shares were issued. Accordingly, the XXXXXXXXXX Class A special shares of DC Amalco will have an aggregate fair market value equal to their aggregate redemption amount of $XXXXXXXXXX. Each holder of a class of shares issued by DC Amalco on the amalgamation will hold such shares as capital property.

The estimated fair market value of the assets owned by DC Amalco will consist of the following:

Estimated FMV
Cash or near cash $XXXXXXXXXX
Mortgages receivable XXXXXXXXXX
Investments XXXXXXXXXX
Rental real estate properties XXXXXXXXXX
Other assets related to rental activities XXXXXXXXXX

Total FMV $XXXXXXXXXX

The income earned by the rental real estate properties of DC Amalco will constitute income from a specified investment business.

10. Two new holding corporations ("Sibling 1 Co" and "Sibling 2 Co") will be incorporated under the XXXXXXXXXX. Each of Sibling 1 Co and Sibling 2 Co (collectively the "Sibling Cos") will be a taxable Canadian corporation and a Canadian-controlled private corporation. The authorized share capital of Sibling 1 Co and Sibling 2 Co will include voting common shares and voting preferred shares, redeemable and retractable for an amount equal to the fair market value of the consideration for which such shares are issued. Sibling 1 will subscribe for XXXXXXXXXX common shares of Sibling 1 Co for an aggregate consideration of $XXXXXXXXXX and Sibling 2 will subscribe for XXXXXXXXXX common shares of Sibling 2 Co for an aggregate consideration of $XXXXXXXXXX.

11. Each of Sibling 1 and Sibling 2 will contemporaneously transfer their XXXXXXXXXX common shares of DC Amalco to their respective Sibling Co (i.e. Sibling 1 will transfer to Sibling Co 1 and Sibling 2 will transfer to Sibling Co 2) for consideration consisting solely of preferred shares of the particular Sibling Co having an aggregate fair market value and redemption amount equal to the aggregate fair market value of the XXXXXXXXXX common shares of DC Amalco so transferred. Sibling 1 and Sibling 1 Co and Sibling 2 and Sibling 2 Co will in respect of such respective transfer jointly elect, in prescribed form and within the time referred to in subsection 85(6), to have the provisions of subsection 85(1) apply to such transfer. The agreed amount in respect of each transfer will be equal to the adjusted cost base of the DC Amalco common shares to Sibling 1 or Sibling 2, as the case may be, at that time, which amount, for greater certainty will not exceed the fair market value of such shares.

The aggregate amount to be added to the respective stated capital account maintained for the preferred shares of Sibling 1 Co issued to Sibling 1 or the preferred shares of Sibling 2 Co issued to Sibling 2 as consideration for the common shares of DC Amalco transferred to it, as the case may be, under the XXXXXXXXXX will be equal to the aggregate paid-up capital attributable to the common shares of DC Amalco so transferred, being XXXXXXXXXX per share.

12. Immediately before the transfers of property described in Paragraph 13 below, the assets of DC Amalco will be classified into three types of property for the purposes of the definition of distribution in subsection 55(1), as follows:

(a) cash or near cash property, comprising all of the current assets of DC Amalco, including any cash, bankers' acceptances, accrued interest receivable, cash surrender value of the life insurance policies, instalments and income taxes receivable, and the current portion of the mortgages receivable;

(b) investment property, comprising all of the assets of DC 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 thereof, including the rental real estate properties, together with any accounts receivable, rents receivable, and rights arising from prepaid expenses of DC Amalco that relate to DC Amalco's specified investment business and that will be collected, sold or consumed by Sibling 1 Co and Sibling 2 Co, or retained by DC Amalco, as the case may be, in the ordinary course of its specified investment business; and

(c) business property, comprising all of the assets of DC Amalco other than property described in (a) and (b) above, any income from which would be income from a business (other than a specified investment business).

For greater certainty, any deferred charges, including the deferred financing expenses, deferred charges in relation to the rental commission fees for new tenants and any tax accounts, such as the balance of any RDTOH, CDA or net capital losses of DC Amalco, will not be considered to be property of DC Amalco for purposes this Paragraph and Paragraph 13. However, any dividend refund receivable by DC Amalco, or any predecessor corporation, will be considered to be cash or near cash property of DC Amalco.

13. Immediately following the classification of DC Amalco's property as described in Paragraph 12 above, DC Amalco will transfer to each of Sibling Co 1 and Sibling 2 Co, a pro rata portion of each type of property owned by DC Amalco at that time, as determined in accordance with Paragraph 12 above, on a gross fair market value basis, such that immediately following such transfers the fair market value of each particular type of property so received by such Sibling Co will be equal to or will approximate that proportion of the fair market value of that particular type of property of DC Amalco immediately before the transfers of property described herein that:

(a) the aggregate fair market value, immediately before such transfers of property, of all of the issued and outstanding shares of capital stock of DC Amalco owned by Sibling Co 1 or Sibling 2 Co, as the case may be;

is of

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

For the purposes of this Paragraph, the expression "approximates the proportion" means the discrepancy from that proportion, if any, that would not exceed XXXXXXXXXX determined as a percentage of the fair market value of the property that each of Sibling Co 1 or Sibling 2 Co, as the case may be, has received compared to what it would have received had it received its appropriate pro rata share of DC Amalco's property.

14. As consideration for the property transferred by DC Amalco to each of Sibling Co 1 and Sibling 2 Co, as the case may be, as described in Paragraph 13 above, each of Sibling 1 Co and Sibling 2 Co, as the case may be, will:

(a) assume a pro rata portion of any liabilities owing by DC Amalco; and

(b) issue to DC Amalco a number of 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 the particular Sibling Co exceeds the fair market value of any liabilities of DC Amalco assumed by it.

Each of Sibling Co 1 and Sibling 2 Co, as the case may be, will jointly elect with DC Amalco pursuant to subsection 85(1), in prescribed form and within the time referred to in subsection 85(6), with respect to the transfer of any eligible property of DC Amalco that has a fair market value in excess of its cost amount. The agreed amount for the purposes of each such election will not be less than:

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

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

(e) in the case of eligible capital property, an amount equal to the lesser of the amounts described in subparagraphs 85(1)(d)(i), (ii) and (iii).

For greater certainty, the agreed amount will be not less than the fair market value, at the time of the disposition, of any non-share consideration received by DC Amalco for such property nor will such amount be greater than the fair market value of a particular eligible property. Notwithstanding the above, where a particular eligible property is a capital property (other than a depreciable property) that has a fair market value in excess of its adjusted cost base, each of Sibling 1 Co and DC Amalco and Sibling 2 Co and DC Amalco, as the case may be, will select an agreed amount, within the parameters described in (c) above, that will, in the aggregate of all such transfers of such eligible property, allow DC Amalco to utilize its net capital loss carry forward balance.

For the purposes of each of the above elections for any property described in (d) above, 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 DC Amalco of all of the property of that class immediately before the disposition that the fair market value at that time of the particular asset that is transferred is of the fair market value at that time of all property of that class.

In accordance with XXXXXXXXXX, each of Sibling 1 Co and Sibling 2 Co, as the case may be, will add an amount to its stated capital account for its preferred shares equal to the aggregate cost to such Sibling Co, as determined pursuant to subsection 85(1) where applicable, of the property transferred by DC Amalco to the particular Sibling Co less the principal amount of any liabilities of DC Amalco assumed by such Sibling Co on such transfer.

15. Following the completion of the transfer of property described in Paragraph 13 above, each Sibling Co will redeem all of its preferred shares issued to DC Amalco for their aggregate redemption amount which, for greater certainty, will equal the aggregate fair market value of such shares. The aggregate redemption amount will be satisfied by each of Sibling 1 Co and Sibling 2 Co, as the case may be, issuing to DC Amalco a demand non-interest bearing note payable (respectively referred to as the "Sibling 1 Co Note" and the "Sibling 2 Co Note") having a principal amount and fair market value equal to the aggregate redemption amount and fair market value of such preferred shares being redeemed. DC Amalco will accept the Sibling 1 Co Note as full payment of the aggregate redemption amount for the preferred shares of Sibling 1 Co and the Sibling 2 Co Note as full payment of the aggregate redemption amount for the preferred shares of Sibling 2 Co. Each Sibling Co will then cause its first taxation year to end immediately following such redemption.

16. Immediately following the end of each Sibling Cos first taxation year, DC Amalco will purchase for cancellation all of its common shares owned by each of the Sibling Cos for their fair market value. As consideration for such redemption DC Amalco will issue to Sibling 1 Co and Sibling 2 Co, as the case may be, a demand non-interest bearing promissory note (respectively referred to as the "DC Amalco Note 1" and the "DC Amalco Note 2") each having a principal amount and fair market value equal to the aggregate fair market value of all such common shares of DC Amalco held by the particular Sibling Co being redeemed. Sibling Co 1 will accept the DC Amalco Note 1 in full satisfaction of the purchase price of its DC Amalco common shares and Sibling Co 2 will accept the DC Amalco Note 2 in full satisfaction of the purchase price of its DC Amalco common shares.

17. The Sibling 1 Co Note and the DC Amalco Note 1 will be set-off and cancelled in full satisfaction of the obligations under each such note. Similarly, the Sibling 2 Co Note and the DC Amalco Note 2 will be set-off and cancelled in full satisfaction of the obligations under each such note.

PURPOSE OF THE PROPOSED TRANSACTIONS

18. The objective of the above butterfly reorganization is to divide the property currently owned by Aco and Bco between Sibling 1, Sibling 2 and Parent in order to allow such shareholders to independently manage their respective interests in such property. By separating these interests, each of Sibling 1, Sibling 2 and Parent can focus on the future growth and development of the assets and pursue his own financial and business objectives.

ADDITIONAL INFORMATION

19. Price adjustment clauses as described in Interpretation Bulletin IT-169 will be used in respect of the Proposed Transactions described in Paragraphs 11 and 13 above.

20. Unless otherwise specified, the Proposed Transactions described herein will occur in the order in which they are set out above and such Proposed Transactions will commence on the date agreed to by the parties.

21. None of the corporations referred to in this letter is or will be, at any time during the series of transactions herein described, a specified financial institution.

22. There will not be at any time prior to the completion of the Proposed Transactions, any agreements or undertakings which constitute or include a "guarantee agreement", as defined in subsection 112(2.2), in respect of any of the issued shares referred to herein (including the shares to be issued as described in the Proposed Transactions).

23. None of the corporations referred to in this letter will have entered into a "dividend rental arrangement", as defined in subsection 248(1), in respect of any of the issued shares referred to herein (including the shares to be issued as described in the Proposed Transactions).

24. None of the issued shares referred to in this letter (including the shares to be issued as described in the Proposed Transactions) 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).

25. None of the corporations referred to in this letter is or will be, at any time before the completion of the Proposed Transactions described above, a corporation described in any of paragraphs (a) to (f) of the definition "financial intermediary corporation" in subsection 191(1).

RULINGS

Provided that the preceding statements constitute a complete and accurate disclosure of all of the relevant facts, proposed transactions and the purpose of the Proposed Transactions, and provided that the Proposed Transactions are completed in the manner described above, our rulings are as set forth below.

A. With respect to the amalgamation of Aco and Bco to form DC Amalco as described in Paragraph 9:

(a) it will be considered to be an amalgamation within the meaning of subsection 87(1);

(b) the provisions of subsection 87(2.1) will apply such that for the purpose of determining DC Amalco's non-capital loss for any taxation year, DC Amalco will be deemed to be the same corporation as, and the continuation of, each predecessor corporation; and

(c) provided the shares of Aco and Bco were capital property to the holders thereof immediately before the amalgamation, the provisions of subsection 87(4), other than paragraphs (c), (d) and (e) thereof, will apply.

B. The provisions of subsection 85(1) will apply to:

(a) the respective transfers of the XXXXXXXXXX common shares in DC Amalco by Sibling 1 to Sibling Co 1 and by Sibling 2 to Sibling 2 Co as described in Paragraph 11 above;

(b) subject to the application of the provisions of subsections 20(1.2) and 26(5) of the Income Tax Application Rules the transfer of each eligible property referred to in Paragraph 13 by DC Amalco to Sibling 1 Co and Sibling 2 Co, as the case may be, which is the object of the joint election described in Paragraph 14 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). For greater certainty, paragraph 85(1)(e.2) will not apply to the transfers referred to herein.

C. The application of section 84.1 to the respective transfers of the common shares of DC Amalco by Sibling 1 to Sibling 1 Co and by Sibling 2 to Sibling 2 Co, as described in Paragraph 11 above, will not result in a reduction of the paid-up capital of the preferred shares issued by the particular Sibling Co on such transfer pursuant to paragraph 84.1(1)(a).

D. As a result of the redemption by Sibling 1 Co of its preferred shares held by DC Amalco and by Sibling 2 Co of its preferred shares held by DC Amalco, as described in Paragraph 15 above, and as a result of the purchase for cancellation by DC Amalco of its common shares held by each of the Sibling Cos, as described in Paragraph 16 above:

(a) by virtue of paragraph 84(3)(a) and paragraph 84(3)(b), each of Sibling 1 Co and Sibling 2 Co, as the case may be, will be deemed to have paid and DC Amalco will be deemed to have received a taxable dividend equal to the amount by which the amount paid in respect of the redemption by such Sibling Co of its preferred shares exceeds the paid-up capital thereof;

(b) by virtue of paragraph 84(3)(a) and paragraph 84(3)(b), DC Amalco will be deemed to have paid and each of Sibling Co 1 and Sibling 2 Co, as the case may be, will be deemed to have received a taxable dividend equal to the amount by which the amount paid by DC Amalco to such Sibling Co on the purchase for cancellation of the DC Amalco common shares held by such Sibling Co exceeds the aggregate paid-up capital attributable to such common shares;

(c) The taxable dividends deemed to have been received by DC Amalco in (a) above and the taxable dividend deemed to have been received by each Sibling Co in (b) above, will:

(i) be deductible by the recipient pursuant to subsection 112(1) 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); and

(ii) 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".

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

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

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

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

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

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

(f) 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), subsection 55(2) will not apply to the taxable dividends referred to in Ruling D above and, for greater certainty, subsection 55(3.1) will not apply to deny the exemption under paragraph 55(3)(b).

F. The set-off and cancellation of the principal amount owing by DC Amalco to Sibling 1 Co on the DC Amalco Note 1 with the principal amount owing by Sibling 1 Co to DC Amalco on the Sibling 1 Co Note and the set-off and cancellation of the principal amount owing by DC Amalco to Sibling 2 Co on the DC Amalco Note 2 with the principal amount owing by Sibling 2 Co to DC Amalco on the Sibling 2 Co Note, as described in Paragraph 17 above, will not give rise to any "forgiven amount" within the meaning of either subsection 80(1) or section 80.01.

G. The provisions of subsections 15(1), 56(2), 56(4) and 246(1) will not apply to the Proposed Transactions, in and by themselves.

H. Subsection 245(2) will not apply to the Proposed Transactions, in and by themselves, to re-determine the tax consequences confirmed in the Rulings given above.

The above rulings are given subject to the limitations and qualifications set out in IC 70-6R5 and are binding on the CRA provided that the proposed transactions are completed by XXXXXXXXXX. These 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.

OTHER COMMENTS

For greater certainty, to the extent that Sibling Co 1, Sibling 2 Co or DC Amalco, as the case may be, has a balance in its RDTOH account at the time such corporation is deemed to pay a taxable dividend described in Ruling D above, a connected corporation receiving such dividend will be subject to tax under Part IV pursuant to paragraph 186(1)(b).

In addition, nothing in this letter should be construed as implying that the CRA has confirmed, reviewed or has made any determination in respect of:

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

(b) any income tax consequences related to the price adjustment clause referred to in Paragraph 19;

(c) any other tax consequence relating to the facts, Proposed Transactions or any transaction or event taking place either prior to the Proposed Transactions or subsequent to the Proposed Transactions, whether described in this letter or not, other than those specifically described in the rulings given above.

Yours truly,

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