2004 Ruling 2003-0046771R3 - split-up 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: standard split-up butterfly

XXXXXXXXXX 2003-004677

XXXXXXXXXX, 2004

Dear XXXXXXXXXX:

Re: XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX
Advance Income Tax Ruling Request

This is in reply to your letter of XXXXXXXXXX in which you requested an advance income tax ruling on behalf of the above-noted taxpayers. In your subsequent letter of XXXXXXXXXX, your facsimiles of XXXXXXXXXX and your emails of XXXXXXXXXX, you provided additional information concerning the facts and proposed transactions described in your original letter. We also acknowledge the information provided during our various telephone conversations (XXXXXXXXXX).

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

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

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

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

(iv) before the courts or, if a judgment has been issued, the time limit for appeal to a higher court has expired; or

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

Definitions

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

(a) "Act" means the Income Tax Act, R.S.C. 1985 (5th Supp.), c.1, as amended. Unless otherwise indicated, all statutory references are to the Act;

(b) "ACB" means "adjusted cost base" as that expression is defined in subsection 248(1);

(c) "agreed amount" means the amount that the taxpayer and the corporation have jointly elected in prescribed form in respect of an eligible property;

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

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

(f) "capital" has the meaning assigned by the provisions of the BCA;

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

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

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

(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) "FMV" represents fair market value which 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 and contracting for a taxable purchase and sale;

(n) "financial intermediary corporation" has the meaning assigned by subsection 191(1);

(o) "guarantee agreement" has the meaning assigned by subsection 112(2.2);

(p) "PUC" means paid-up capital as that expression is defined in subsection 89(1);

(q) "par value" has the meaning assigned by the provisions of the BCA;

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

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

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

(u) "related persons" has the meaning assigned by section 251;

(v) "restricted financial institution" has the meaning assigned by subsection 248(1);

(w) "series of transactions" has the meaning assigned by subsection 248(10);

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

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

(z) "subsidiary wholly-owned corporation" has the meaning assigned by subsection 87(1.4);

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

(bb) "taxable dividend" has the meaning assigned by subsection 89(1), and

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

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

Facts

1. XXXXXXXXXX ("DC") is a CCPC and a TCC. It is governed by the BCA. It was formed on XXXXXXXXXX by an amalgamation ("Amalgamation") of a predecessor corporation, XXXXXXXXXX ("Old DC") and its subsidiary wholly-owned corporation, XXXXXXXXXX ("Subco") under the BCA.

DC's fiscal and taxation years end on XXXXXXXXXX. DC deals with the XXXXXXXXXX Tax Services Office and files its corporate income tax returns at the XXXXXXXXXX Taxation Centre.

The issued and outstanding capital of DC consists of

(a) XXXXXXXXXX Class A common shares (the "DC Class A Common Shares") which are owned by XXXXXXXXXX ("B1"), and

(b) XXXXXXXXXX Class B common shares (the "DC Class B Common Shares") which are owned by XXXXXXXXXX ("B2").

The aggregate PUC of each of the XXXXXXXXXX DC Class A Common Shares and the XXXXXXXXXX DC Class B Common Shares is $XXXXXXXXXX.

The DC Class A and Class B Common Shares are voting without par value. However, the board of directors of DC has the discretion to pay dividends to one particular class of shares to the exclusion of the other class.

The DC shares held by B1 and B2 were not acquired in contemplation of the proposed transactions described below.

B2 holds his DC shares as capital property.

2. DC carries on a XXXXXXXXXX farm operation ("XXXXXXXXXX Farm Operation"). DC has been reporting its income under the cash method as permitted by section 28 of the Act for financial statement and tax purposes.

The assets of DC include:

(a) inventory ("Inventory"), which consists of XXXXXXXXXX and feed ("Feed");

(b) XXXXXXXXXX quota;

(c) accounts receivable, which consist solely of the XXXXXXXXXX cheques outstanding from the previous month;

(d) 3 pieces of farmland together with buildings situated thereon:

(i) XXXXXXXXXX acres of land ("Property 1") in the XXXXXXXXXX;

(ii) 1 farmland located within XXXXXXXXXX of Property 1 ("Property 2");

(iii) 1 farmland located within XXXXXXXXXX of Property 1("Property 3"), and

(e) farm equipment and automobiles.

The XXXXXXXXXX generally are held for up to XXXXXXXXXX years and the Feed is not available for resale and will be consumed in the ordinary course of the XXXXXXXXXX Farm Operation.

DC holds its assets described in (d) and (e) herein as capital property.

The liabilities of DC consist of

(f) current liabilities which include bank advances and accounts payable, and

(g) long-term debts which include bank loans ("Bank Loans"), equipment finance contracts ("Equipment Finance Contracts") and two shareholder's loans ("Shareholder's Loans"), one payable to B1 in the amount of $XXXXXXXXXX and the other payable to B2 in the amount of $XXXXXXXXXX.

The Shareholder's Loans have no fixed repayment date. However, B1 and B2 are prohibited from drawing down their portion of the Shareholder's Loans in excess of DC's net earnings in any year.

The Bank Loans are secured by the property of DC. The Equipment Finance Contracts are all due by XXXXXXXXXX.

DC does not have a balance in its CDA or RDTOH. It is expected that DC will not have a balance in its CDA or RDTOH at the end of the taxation year in which the proposed transactions described below are implemented.

3. B1 and B2 are brothers and they are residents of Canada. B1 and B2 are not related for purposes of section 55 by virtue of subparagraph 55(5)(e)(i) of the Act.

B1 and B2's father, XXXXXXXXXX ("Dad"), passed away in XXXXXXXXXX. Prior to his death, Dad operated a XXXXXXXXXX farm as a proprietorship. Dad acquired Property 1 in XXXXXXXXXX and some XXXXXXXXXX quota ("XXXXXXXXXX Quota") during the course of his XXXXXXXXXX farm operation.

4. B1 and B2 inherited their father's XXXXXXXXXX farm operation including Property 1 and the XXXXXXXXXX Quota when he passed away in XXXXXXXXXX. In the same year, B1 and B2 formed a partnership ("Partnership") and they transferred their inherited XXXXXXXXXX farm operation (other than the XXXXXXXXXX Quota) to the Partnership. B1 and B2 jointly elected in prescribed form and within the time referred to in subsection 96(4) to have the provisions of subsection 97(2) apply to the transfer. Also, B1 and B2 sold their XXXXXXXXXX Quota to the Partnership at its FMV and each reported a capital gain from that disposition in XXXXXXXXXX.

The Partnership acquired Property 2 in XXXXXXXXXX.

5. On XXXXXXXXXX, when Old DC was incorporated, the Partnership transferred its XXXXXXXXXX farm operation to Old DC including Property 1, Property 2 and the XXXXXXXXXX Quota under subsection 85(2). As consideration for the transfer, Old DC issued XXXXXXXXXX of its common shares ("Old DC Common Shares") to the Partnership. The Partnership was wound up within XXXXXXXXXX days after the transfer. Each of B1 and B2 received XXXXXXXXXX Old DC Common Shares on the wind-up of the Partnership under subsection 85(3).

On or about XXXXXXXXXX, Old DC acquired all of the issued and outstanding shares of Subco from an unrelated vendor. Subco also carried on a XXXXXXXXXX farm operation. Subco's assets included Property 3 and some XXXXXXXXXX quota.

On XXXXXXXXXX, Old DC and Subco were amalgamated to form DC pursuant to the provisions of the BCA. On Amalgamation, DC issued XXXXXXXXXX DC Class A Common Shares to B1 and XXXXXXXXXX DC Class B Common Shares to B2. The Amalgamation qualified as a subsection 87(1) amalgamation.

6. B1 and B2 worked together harmoniously for XXXXXXXXXX years until XXXXXXXXXX. Since that date certain events have disrupted that harmony, mainly arising from B2's divorce of his wife of XXXXXXXXXX years in XXXXXXXXXX. B1 and B2 are concerned about possible negative effects of the XXXXXXXXXX, if there should be matrimonial disputes with their spouses, and estate planning.

Proposed Transactions

7. A new corporation ("TC") will be incorporated pursuant to the provisions of the BCA. TC will be a TCC and a CCPC.

The authorized capital of TC will consist of one class of an unlimited number of Class A common shares (the "TC Class A Common shares"); one class of an unlimited number of Class B common shares (the "TC Class B Common shares"); one class of an unlimited number of Class C preferred shares (the "TC Class C Shares"); one class of an unlimited number of Class D preferred shares (the "TC Class D Shares"); one class of an unlimited number of Class E preferred shares (the "TC Class E Shares"); one class of an unlimited number of Class F preferred shares (the "TC Class F Shares"); one class of an unlimited number of Class G preferred shares (the "TC Class G Shares") and one class of an unlimited number of Class H preferred shares (the "TC Class H Shares"), which will include the following attributes:

(a) the TC Class A and Class B Common Shares will be fully participating and voting;

(b) the TC Class C Shares will be voting;

(c) the TC Class C, Class D, Class E, Class F, Class G and Class H Shares will be non-participating;

(d) the TC Class C, Class D, Class E and Class F Shares will be redeemable and retractable, subject to applicable law, at any time for an amount equal to the amount determined by dividing the aggregate FMV of the property received by the corporation on the issuance of the TC Class C, Class D, Class E or Class F Shares, as the case may be, less the aggregate FMV of any non-share consideration issued or liabilities assumed by the corporation, by the number of the TC Class C, Class D, Class E or Class F Shares issued, as the case may be (the "TC Class C Redemption Amount", the "TC Class D Redemption Amount", the "TC Class E Redemption Amount" and the "TC Class F Redemption Amount");

(e) each TC Class D Share will be entitled to a preferential and non-cumulative annual dividend, at the discretion of the directors of the corporation, but not to exceed XXXXXXXXXX % per annum of the TC Class D Redemption Amount. However, if a holder of the Class D Shares requests redemption of its TC Class D Shares and the corporation does not redeem them, then each such shares will be entitled to a cumulative annual dividend at XXXXXXXXXX% per annum of the TC Class D Redemption Amount;

(f) each of the TC Class G and Class H Shares will have a redemption and retraction amount of $XXXXXXXXXX and $XXXXXXXXXX, respectively;

(g) on dissolution or other distribution by the corporation, the TC Class C, Class D, Class E, Class F, Class G and Class H Shares will rank ahead of the TC Class A and Class B Common Shares. However, the TC Class C, Class D, Class E, Class F, Class G and Class H Shares will rank pari passu, and the TC Class A and Class B Common Shares will rank pari passu, on dissolution or other distribution by the corporation, and

(h) the par value of the TC

(I) Class A Common Shares will be $XXXXXXXXXX per share;

(II) Class B Common Shares will be $XXXXXXXXXX per share;

(III) Class C Shares will be $XXXXXXXXXX per share;

(IV) Class D Shares will be $XXXXXXXXXX per share;

(V) Class E Shares will be $XXXXXXXXXX per share;

(VI) Class F Shares will be $XXXXXXXXXX per share;

(VII) Class G Shares will be $XXXXXXXXXX per share, and

(VIII) Class H Shares will be $XXXXXXXXXX per share.

On incorporation of TC, B2 will subscribe for a fractional (XXXXXXXXXX ) TC Class A Common Share for a nominal amount.

8. B2 will transfer his XXXXXXXXXX DC Class B Common Shares to TC. As sole consideration for such transfer, TC will issue XXXXXXXXXX TC Class B Common Shares to B2 having an aggregate FMV equal to the aggregate FMV at that time of the XXXXXXXXXX DC Class B Common Shares that B2 so transferred to TC.

B2 and TC will jointly elect in prescribed form and within the time period referred to in subsection 85(6) to have the provisions of subsection 85(1) apply to the transfer described herein. The agreed amount in respect of the DC Class B Common Shares so transferred by B2 to TC will be equal to the aggregate ACB to B2 of each such shares owned by B2 and transferred to TC at the time of such transfer. For greater certainty, the DC Class B Common Shares owned by B2 will be property described in paragraph 85(1)(c.1) and the elected amount will be within the limits prescribed by that paragraph.

For the purposes of the BCA, the addition to the capital of the TC Class B Common Shares issued by TC to B2 as described herein will be equal to the aggregate PUC of the XXXXXXXXXX DC Class B Common Shares so transferred by B2 to TC, being $XXXXXXXXXX.

9. Immediately before the transfer of property described in paragraph 12 below, the property of DC 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, including cash, accounts receivable and rights arising from the prepayment of certain expenses ("prepaid expenses");

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

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

For the purposes of determining the types of property described herein, the Inventory will be considered as business property.

It is anticipated that DC will not have any investment property immediately before the transfer of property as described in paragraph 12 below.

10. In determining the net FMV of each type of property of DC immediately before the transfer described in paragraph 12 below, the liabilities of DC will be allocated to, and will be deducted in the calculation of, the net FMV of each such type of property of DC in the following manner:

(a) current liabilities of DC (including the current portion of the long-term debts) will be allocated to the cash or near cash property (including any cash, accounts receivable and prepaid expenses) of DC in the proportion that the FMV of each such property is of the FMV of all cash or near cash property owned by it. The amount of current liabilities allocated as described herein will not exceed the aggregate FMV of the cash or near cash property of DC;

(b) liabilities of DC, other than current liabilities, that relate to a particular property will be allocated to the particular property (and effectively to the type to which the particular property belongs) to the extent of its FMV. The liabilities that pertain to a type of property, but not to a particular property, then will be allocated to that type of property, but not in excess of the net FMV of such type of property after the allocation of liabilities to a particular property as described herein, and

(c) if any liabilities remain after the allocations described in steps (a) and (b) above are made ("Excess Unallocated Liabilities"), such Excess Unallocated Liabilities will then be allocated to the cash or near cash property, if any, business property, and investment property, if any, of DC, based on the relative net FMV of each type of property prior to the allocation of such Excess Unallocated Liabilities.

11. For greater certainty, in determining the net FMV of the property of DC as described in paragraphs 9 and 10 above, the following principles will apply:

(a) no amount will be considered to be a liability unless it represents a true legal liability which is capable of quantification;

(b) the amount of any deferred income tax will not be considered a liability for the purposes of the proposed transactions described herein because such amount does not represent a legal obligation of DC, and

(c) any tax accounts, such as the balance of any non-capital losses of DC, will not be considered property of DC.

12. Immediately following the determination of its types of property as described in paragraph 9 above, DC will transfer to TC XXXXXXXXXX% of

(a) its cash or near cash property, if any;

(b) its business property (which XXXXXXXXXX% will include Property 2 and Property 3), and

(c) its investment property, if any,

such that, immediately after the transfer, the net FMV of each type of property of DC (after allocating and deducting, in the manner described in paragraphs 9, 10 and 11 above, the liabilities of DC which are to be assumed by TC as described in (f) herein) which is transferred to TC as described herein, will be equal to that proportion of the net FMV of all of that type of property of DC, determined immediately before the transfer referred to herein that:

(d) the aggregate FMV of the XXXXXXXXXX DC Class B Common Shares owned by TC immediately before the transfer,

is of

(e) the aggregate FMV of all of the issued and outstanding shares of DC immediately before the transfer.

For the purpose of this paragraph and paragraph 15 below, the expression "approximate that proportion" means that the discrepancy from that proportion, if any, would not exceed 1%, determined as a percentage of the net FMV of each type of property which TC has received (or DC has retained) as compared to what TC would have received (or DC would have retained) had it received (or retained) its appropriate pro rata share of the net FMV of that type of property.

You have advised us that, following the allocation of liabilities described in paragraph 10 above and immediately before the transfer of property described herein, on a net equity basis, DC will not have any cash or near cash property. Consequently, DC will not transfer any of its cash or near cash property to TC as described herein.

As consideration for the transfer of property as described herein, TC will:

(f) assume debt of DC that is allocable to the property of DC transferred to it as described herein, and

(g) issue TC Class D Shares to B2 having an aggregate FMV, redemption and retraction amount equal to the aggregate FMV of the property of DC transferred to it as described herein less the amount of the liabilities of DC assumed by it as described in (f) herein.

For greater certainty, the amount of the liabilities of DC assumed by TC described in (f) herein

(i) will include the loan payable to B2 in the amount of $XXXXXXXXXX as described in paragraph 2 above, and

(ii) will not exceed the aggregate cost amount of the property that DC so transferred to TC as described herein.

13. DC and TC 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 to TC of any eligible property of DC that has a FMV in excess of its cost amount. Specifically, the agreed amount under such election in respect of each eligible property so transferred will be equal to:

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

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

(c) in the case of property described in paragraph 85(1)(c.1), an amount equal to the lesser of the amounts specified in subparagraphs 85(1)(c.1)(i) and (ii), and

(d) in the case of inventory described in paragraph 85(1)(c.2), the amount determined in that paragraph.

In each case, the agreed amount will not exceed the FMV of the respective property, nor will it be less than the amount permitted under paragraph 85(1)(b).

For the purposes of the BCA, the addition to the capital of the TC Class D Shares issued by TC to DC as described in paragraph 12 above will be equal to the amount by which the aggregate of the cost (determined pursuant to subsection 85(1) of the Act, where relevant) of the property transferred by DC to TC as described in paragraph 12 above exceeds the principal amount of the liabilities of DC assumed by TC as described in subparagraph 12(f) above.

14. Immediately following the transfer of property as described in paragraph 12, TC will redeem from DC all of its Class D Shares and will issue to DC in consideration therefor, a demand non-interest bearing promissory note having a principal amount and FMV equal to the aggregate redemption amount and FMV of its Class D Shares (the "TC Redemption Note") so redeemed. DC will accept the TC Redemption Note as full satisfaction for the redemption price of its TC Class D Shares so redeemed with the risk of the note being dishonored.

DC will purchase for cancellation all of its Class B Common Shares held by TC and will issue to TC, as payment therefor, a demand non-interest bearing promissory note having a principal amount and FMV equal to the aggregate FMV of its Class B Common Shares so purchased (the "DC Purchase Note"). TC will accept the DC Purchase Note as full satisfaction for the purchase price of its DC Class B Common Shares so purchased with the risk of the note being dishonored.

DC will pay the principal amount of the DC Purchase Note by transferring to TC the TC Redemption Note that will be accepted by TC in full payment of DC's obligation. TC will pay the principal amount of the TC Redemption Note by transferring to DC the DC Purchase Note that will be accepted by DC in full payment of TC's obligation. The DC Purchase Note and the TC Redemption Note will all be marked paid in full and cancelled.

15. Immediately following the transfer described in paragraph 12 above, the net FMV of each type of property retained by DC, determined in the manner described in paragraphs 9, 10 and 11 above, will be equal to that proportion of the aggregate net FMV of that type of property of DC, determined immediately before the transfer described in paragraph 12 above, that:

(a) the aggregate FMV, immediately before the transfer of property described in paragraph 12, of the XXXXXXXXXX DC Class A Common Shares owned by B1

is of

(b) the aggregate FMV, immediately before the transfer of property, of all of the issued and outstanding shares of DC.

Additional Information

16. None of the corporations referred to herein (including the corporations to be incorporated as described in the proposed transactions) is or will be, at any time during the series of transactions herein described, a specified financial institution or a restricted financial institution.

17. No property has been or will be acquired by DC, and no liabilities have been or will be incurred by DC, in contemplation of and before the transfer of property as described in paragraph 12 above, except as described herein.

18. 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) of the Act, in respect of any of the issued shares referred to herein (including the shares to be issued as described in the proposed transactions).

19. Each of DC and TC will not 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).

20. None of the issued shares referred to herein (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) of the Act.

21. None of the corporations described above (including the corporations to be incorporated as described in the proposed transactions) is or will be, at any time before the completion of the proposed transactions described above, a corporation described in any of the paragraphs (a) to (f) of the definition "financial intermediary corporation" in subsection 191(1) of the Act.

22. Each of DC and TC 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

23. The purpose of the proposed transactions described above is to allow B1 and B2 to

(a) separate their interests in DC so that they can pursue their separate estate planning goals;

(b) reduce conflict between the families of B1 and B2, and

(c) forestall future internal and operational problems.

Rulings

Provided that the preceding statements constitute 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 follows:

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

(a) the transfer by B2 of his XXXXXXXXXX DC Class B Common Shares to TC described in paragraph 8 above, and

(b) subject to the application of subsection 69(11) of the Act, the transfer of each eligible property by DC to TC described in paragraph 12 above,

such that the agreed amount in respect of each transfer of eligible property will be deemed to be the transferor's proceeds of disposition and the transferee's cost thereof pursuant to paragraph 85(1)(a). In respect of depreciable property, to the extent that the transferor's capital cost exceeds the transferor's proceeds of disposition of the property, the transferee's capital cost of each such property will be determined in accordance with subsection 85(5).

For the purpose of this ruling, 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 the portion of the undepreciated capital cost of all property of that class immediately before the transfer that the capital cost of the property of that class transferred is of the capital cost of all property of that class.

For greater certainty, paragraph 85(1)(e.2) will not apply to the transfers.

B. Subsection 84(3) will apply on the redemption or purchase for cancellation

(a) of the TC Class D Shares held by DC described in paragraph 14 above, to deem TC to have paid and DC to have received, and

(b) of the DC Class B Common Shares held by TC described in paragraph 14 above, to deem DC to have paid and TC to have received,

a dividend on such shares equal to the amount, if any, by which the aggregate amount paid upon such redemption or purchase for cancellation exceeds the aggregate PUC in respect of such shares immediately before such redemption or purchase for cancellation, and any such dividend

(c) will be included in computing the income, pursuant to subsection 82(1) and paragraph 12(1)(j), of the person deemed to have received such dividend;

(d) will be deductible by each recipient of such dividend in computing its respective taxable income pursuant to subsection 112(1) and, for greater certainty, the provisions of subsections 112(2.1), (2.2), (2.3) or (2.4) will not apply to deny the subsection 112(1) deduction in respect of such dividend;

(e) will be excluded from the proceeds of disposition of the shares by virtue of paragraph (j) of the definition of "proceeds of disposition" in section 54 of the Act;

(f) by virtue of subsection 112(3) of the Act, will reduce the loss, if any, in respect of the disposition of the shares on which the dividend is deemed to be received, and

(g) will not be subject to tax under Part IV.1 and Part VI.1 of the Act on the basis that such dividend will be an excepted dividend by virtue of paragraph (b) of the definition of "excepted dividend" in section 187.1 of the Act and an excluded dividend by virtue of paragraph (a) of the definition of "excluded dividend" in subsection 191(1) of the Act, as each of the recipients will have a substantial interest, within the meaning assigned by paragraph 191(2)(a) of the Act, in the payer corporation at the time such taxable dividend is paid.

C. Provided that each of DC and TC is not entitled to a dividend refund in respect of its taxation year in which it is deemed to pay the dividend referred to in ruling B above, DC and TC will not be subject to Part IV tax under subsection 186(1) in respect of such dividend.

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

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

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

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

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

(e) 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 B above and, for greater certainty, subsection 55(3.1) will not apply to deny the exemption under paragraph 55(3)(b) of the Act.

E. The repayments of the DC Purchase Note held by TC and the TC Redemption Note held by DC described in paragraph 14 above will not give rise to a "forgiven amount" within the meaning of subsection 80(1) or 80.01(1).

F. The provisions of subsections 15(1), 56(2) and 246(1) will not apply to any of the proposed transactions described in paragraphs 7 to 15 above, in and by themselves.

G. The provisions of subsection 245(2) will not be applied as a result of the proposed transactions described in paragraphs 7 to 15 above, in and by themselves, to redetermine the tax consequences confirmed in the rulings given above.

These rulings are given subject to the limitations and qualifications set out in Information Circular 70-6R5 issued by Canada Revenue Agency ("CRA") on May 17, 2002 and are binding on the CRA 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.

Comments

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

(a) the determination of the FMV or the cost amount of any particular asset or the PUC of any shares referred to herein, and

(b) any tax consequences relating to the facts and proposed transactions described herein other than those specifically described in the rulings given above. For greater certainty, our rulings should not be construed as providing comfort that any of the shares of DC or TC is or will be a "share of the capital stock of a family farm corporation" (as defined in subsection 110.6(1) of the Act).

Yours truly,

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