2001 Ruling 2000-0063143 - Butterfly

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

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the Department.

Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle du ministère.

Principal Issues: This is a split-up butterfly of a private corporation. For issues see the Statement of Principal Issues.

Position: Accepted

Reasons:

XXXXXXXXXX 						2000-006314

XXXXXXXXXX, 2001

Dear XXXXXXXXXX:

Re: XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX

This is in reply to your letters of XXXXXXXXXX, wherein you requested an advance income tax ruling on behalf of the above-noted taxpayers.

To the best of your knowledge, none of the issues involved in this ruling:

a) is in an earlier tax return of the taxpayers or a related person;

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

c) is under objection by the taxpayers or a related person;

d) is before the courts; or

e) is the subject of a ruling previously issued by the Income Tax Rulings Directorate.

DEFINITIONS

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

XXXXXXXXXX

"ACB" means "adjusted cost base" as that expression is defined in section 54 and subsection 248(1);

"Act" means the Income Tax Act, R.S.C. 1985 (5th Supp.), c.1, as amended, and unless otherwise stated, all references to statute are references to the Act;

"Agency" means the Canada Customs and Revenue Agency, formerly Revenue Canada, Customs, Excise and Taxation;

"agreed amount" in respect of an asset means the amount that the transferor and transferee of the asset agree upon in their election under subsection 85(1) in respect of that asset;

"arm's length" has the meaning assigned by section 251;

"capital property" has the meaning assigned by subsection 248(1);

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

"depreciable property" has the meaning assigned by subsection 13(21) and subsection 248(1);

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

"CBCA" means the Canada Business Corporation Act;

"CCo" means XXXXXXXXXX;

"Corp" means XXXXXXXXXX;

"DC" means XXXXXXXXXX;

"DC Class C Shares" means the Class C Shares of DC proposed to be created, as described in Paragraph 58 hereof;

"DC Group" means DC and all corporations and partnerships in which DC has a direct or indirect interest;

"First DC Note" means the promissory note to be issued by DC to Newco in satisfaction of the repurchase amount of the DC shares, as described in Paragraph 73;

"FMV" means fair market value;

"FATHER" means XXXXXXXXXX, an individual resident in Canada;

"FATHERCO" means XXXXXXXXXX;

"XXXXXXXXXX Preferred Shares" means the non-voting non-participating preferred shares of XXXXXXXXXX presently owned by DC;

"Investment Common Shares" means the common shares of various corporations, which are described in Paragraph 13;

"Investment Preferred Shares" means the preferred shares of various corporations, which are described in Paragraph 12;

"XXXXXXXXXX Preferred Shares" means the non-voting non-participating preferred shares of XXXXXXXXXX presently owned by DC;

"Newco" means a new corporation to be incorporated under the XXXXXXXXXX, to which the Transferred Assets will be transferred;

"Newco Class A Shares" means the voting non-participating Class A shares of Newco;

"Newco Class B Common Shares" means the non-voting fully participating Class B Common Shares of Newco;

"Newco Class C Common Shares" means the non-voting fully participating Class C Common Shares of Newco;

"Newco Note" means the promissory note to be issued by Newco in satisfaction of the redemption proceeds of the Newco Special Preferred Shares as described in Paragraph 74;

"Newco Special Preferred Shares" means the non-voting redeemable retractable preferred shares of Newco with the terms and conditions described in Paragraph 59;

"Non-Current Debt" means the debt obligations of the DC Group, other than current liabilities;

"XXXXXXXXXX Preferred Shares" means the non-voting non-participating preferred shares of XXXXXXXXXX presently owned by DC;

"Paragraph" refers to a numbered paragraph in this letter;

"P1" means XXXXXXXXXX, a partnership formed under the laws of XXXXXXXXXX;

"P2" means XXXXXXXXXX, a partnership formed under the laws of XXXXXXXXXX;

"P3" means XXXXXXXXXX, a partnership formed under the laws of XXXXXXXXXX;

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

"Proposed Transactions" means the transactions described in Paragraphs 56 to 82 hereof;

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

"related persons" has the meaning assigned by section 251;

"SFI" means a specified financial institution as defined in subsection 248(1);

"significant influence" has the meaning set out in section 3050 of the CICA Handbook;

"SON" means XXXXXXXXXX, an individual resident in Canada;

"SON Note No.1" means the promissory note to be issued by SON to DC as described in Paragraph 79;

"SON Note No.2" means the promissory note to be issued by SON to DC as described in Paragraph 79A;

"stated capital" means stated capital as that expression is used in the XXXXXXXXXX or the CBCA;

"SubA" means XXXXXXXXXX;

"SubA Class C Shares" means the Class C Shares of SubA proposed to be created, as described in Paragraph 58A hereof;

"SubB" means XXXXXXXXXX;

"SubB Class C Shares" means the Class C Shares of SubB proposed to be created, as described in Paragraph 58B hereof;

"SubC" means XXXXXXXXXX;

"SubD" means XXXXXXXXXX;

"SubE" means XXXXXXXXXX;

"SubE Note" means the promissory note to be issued by SubE to DC, as described in Paragraph 61;

"Taxable Canadian Corporation" means a "taxable Canadian corporation" as that expression is defined in subsection 89(1);

"taxable dividend" has the meaning assigned by subsection 89(1) and subsection 248(1);

and

"Transferred Assets" means those assets of DC on the Transaction Date, the beneficial ownership of which will be transferred by DC to Newco as described in Paragraph 68;

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

FACTS

1. FATHER and SON are both Canadian citizens and residents of Canada for the purposes of the Act.

2. FATHER and SON are father and son respectively and as a result are related persons.

3. FATHERCO is a Taxable Canadian Corporation incorporated under the laws of the Province of XXXXXXXXXX, which carries on a XXXXXXXXXX business in Canada.

4. FATHERCO is indirectly controlled by FATHER, through several intervening corporations.

5. CCo is a Taxable Canadian Corporation incorporated under the laws of the Province of XXXXXXXXXX, which carries on business in Canada. CCo is a holding company with its primary asset being its investment in DC.

6. CCo is controlled by SON.

7. Corp is a corporation incorporated under the laws of the State of XXXXXXXXXX, U.S.A. It is not a Taxable Canadian Corporation. Corp is a holding company with its primary assets being its investment in DC and a note receivable from XXXXXXXXXX, a related corporation.

8. Corp is not a resident of Canada for the purposes of the Act and does not carry on business in Canada, although it owns shares of DC. It is owned and controlled indirectly by the XXXXXXXXXX, who are residents of the United States of America.

9. DC is a Taxable Canadian Corporation incorporated under the laws of Canada.

10. DC carries on an XXXXXXXXXX business, through directly held subsidiary corporations and through its ownership interest in P3 and P1.

11. DC has an outstanding loan from the XXXXXXXXXX in the approximate amount of $XXXXXXXXXX.

12. DC owns various non-voting non-participating preferred shares (the "Investment Preferred Shares") in various corporations, which it deals at arm's length with, as follows:

ACB FMV

XXXXXXXXXX

The ACB amounts are also the book values of these shares on the balance sheet of DC. The FMV's are based on a Canadian $/U.S. $ exchange rate of $XXXXXXXXXX.

13. DC also owns XXXXXXXXXX non-participating voting Class C common shares (the "Investment Common Shares") of each of XXXXXXXXXX. In total, these shares have a FMV, an ACB and a book value on the balance sheet of DC of approximately $XXXXXXXXXX.

14. DC is authorized to issue the following number of the following classes of shares:

(a) XXXXXXXXXX Class A Shares ("DC Class A Shares"). These shares are entitled to vote and are not entitled to dividends, and upon the wind-up dissolution, liquidation or distribution of DC's assets are entitled to a return of stated capital of $XXXXXXXXXX, after the DC First Preferred Shares recover the stated capital of $XXXXXXXXXX and the DC Second Preferred Shares recover the "Redemption Amount" - an amount determined by the Board of Directors that will not exceed the stated capital of $XXXXXXXXXX;

(b) XXXXXXXXXX Class B Shares ("DC Class B Shares"). These shares are entitled to a limited vote. These shares are not entitled to dividends, and upon wind-up, dissolution, liquidation, or distribution of DC's assets, are entitled to a return of the stated capital of $XXXXXXXXXX after the DC Class A Shares;

(c) XXXXXXXXXX First Preferred Shares ("DC First Preferred Shares"). These shares are non-voting and have a right to a non-cumulative dividend, if and when declared by the Board of Directors. Upon wind-up, dissolution, liquidation or distribution of DC's assets, these shares have first right to a return of stated capital of $XXXXXXXXXX. After the DC Second Preferred Shares receive their Redemption Amount, the DC Class A Shareholders receive a return of stated capital of $XXXXXXXXXX and the DC Class B Shareholders receive a return of stated capital of $XXXXXXXXXX, the DC First Preferred Shares are entitled to the remainder of the assets of DC; and

(d) XXXXXXXXXX Second Preferred Shares ("DC Second Preferred Shares"). These shares are not entitled to vote, except under certain circumstances pursuant to the CBCA. The shares have a right to a non-cumulative dividend, if and when declared by the Board of Directors, which shall not exceed XXXXXXXXXX% per annum on PUC, and cannot be declared unless and until DC has funds available to the holders of DC First Preferred Shares equal to at least XXXXXXXXXX times the amount of the dividend to be paid to the holders of the DC Second Preferred Shares. Upon wind-up, dissolution, liquidation, or distribution of DC's assets, the DC Second Preferred Shares are entitled, after the return of stated capital to the DC First Preferred Shares, to a Redemption amount - at any price per share determined by the Board of Directors but will not exceed the stated capital of the DC Second Preferred Shares of $XXXXXXXXXX.

15. As of the date hereof, DC has the following issued and outstanding shares owned by the following shareholders:

Class Number Stated Capital Shareholder

DC Class A Shares XXXXXXXXXX $XXXXXXXXXX SON

DC Class B Shares XXXXXXXXXX $XXXXXXXXXX SON

DC First Preferred Shares
XXXXXXXXXX $ XXXXXXXXXX Corp
XXXXXXXXXX $ XXXXXXXXXX FATHERCO
XXXXXXXXXX $ XXXXXXXXXX Cco
XXXXXXXXXX $ XXXXXXXXXX SubA

DC Second Preferred Shares
XXXXXXXXXX $XXXXXXXXXX SubB

16. All of the shares of DC owned by SON, CCo and FATHERCO represent XXXXXXXXXX% of the FMV, immediately before the transfer referred to in Paragraph 68, of all of the issued shares of the capital stock of DC and all of the shares of DC owned by Corp represent XXXXXXXXXX % of the FMV, immediately before the transfer referred to in Paragraph 68, of all of the issued shares of the capital stock of DC. These percentages are derived by the resulting ownership of the DC First Preferred Shares, other than those owned by SubA. The XXXXXXXXXX DC First Preferred Shares held by SubA were not counted in this calculation because DC owns all of the Second Preferred shares of SubA, in which substantially all of SubA's value resides. The DC Class A Shares and the DC Class B Shares have only nominal FMV as they are non-participating. SubB owns all of the DC Second Preferred Shares; however, DC also owns, directly and indirectly, all of the First Preferred shares and Second Preferred shares of SubB, in which substantially all of SubB's value resides.

17. DC owed P3 approximately $XXXXXXXXXX and DC owed SubE approximately $XXXXXXXXXX.

18. SubA is a Taxable Canadian Corporation incorporated under the laws of Canada. SubA is primarily a holding company with an interest in P1. It also owns First Preferred Shares of DC and Third Preferred Shares of SubB.

19. SubA is authorized to issue the following number of the following classes of shares:

(a) XXXXXXXXXX Class A (voting non-participating);

(b) XXXXXXXXXX Class B (voting non-participating);

(c) XXXXXXXXXX First Preferred (non-voting); and

(d) XXXXXXXXXX Second Preferred (non-voting).

20. As of the date hereof, SubA has the following issued and outstanding shares, which are owned by the following shareholders:

Class Number Stated Capital Shareholder

Class A XXXXXXXXXX $XXXXXXXXXX SON

Class B XXXXXXXXXX $XXXXXXXXXX SON

Second Preferred
XXXXXXXXXX $XXXXXXXXXX DC

21. SubB is a Taxable Canadian Corporation incorporated under the laws of Canada.

22. SubB is authorized to issue the following number of the following classes of shares:

(a) XXXXXXXXXX Class A (voting non-participating);

(b) XXXXXXXXXX Class B (voting non-participating);

(c) XXXXXXXXXX First Preferred (non-voting);

(d) XXXXXXXXXX Second Preferred (voting); and

(e) XXXXXXXXXX Third Preferred (non-voting).

23. As of the date hereof, SubB has the following issued and outstanding shares, which shares are owned by the following shareholders:

Class Number Stated Capital Shareholder

Class A (voting) XXXXXXXXXX $XXXXXXXXXX SON

Class B (voting) XXXXXXXXXX $XXXXXXXXXX SON

First Preferred (non-voting)

XXXXXXXXXX $XXXXXXXXXX DC

Second Preferred (voting)
XXXXXXXXXX $XXXXXXXXXX P2

Third Preferred (non-voting)

XXXXXXXXXX $XXXXXXXXXX SubA
XXXXXXXXXX $XXXXXXXXXX FATHERCO
XXXXXXXXXX $XXXXXXXXXX Corp
XXXXXXXXXX $XXXXXXXXXX CCo

24. SubC is a Taxable Canadian Corporation incorporated under the laws of the Province of XXXXXXXXXX.

25. SubC carries on the XXXXXXXXXX business indirectly through its ownership interest in P3. SubC is also a partner in P2 and P1.

26. SubC is authorized to issue XXXXXXXXXX Class A Common Shares.

27. As of the date hereof, SubC has the following issued and outstanding shares, which shares are owned by the following shareholder:

Class Number Stated Capital Shareholder

Class A Common XXXXXXXXXX $XXXXXXXXXX DC

28. SubD is a Taxable Canadian Corporation incorporated under the laws of Canada.

29. SubD is authorized to issue the following number of the following classes of shares:

(a) Unlimited number of Class A Shares; and

(b) XXXXXXXXXX Preferred Shares.

30. As of the date hereof, SubD has the following issued and outstanding shares, which shares are owned by the following shareholders:

Class Number Stated Capital Shareholder

Class A XXXXXXXXXX $XXXXXXXXXX DC as to an undivided XXXXXXXXXX% interest and SubC as to an undivided XXXXXXXXXX% interest.

31. SubE is a Taxable Canadian Corporation incorporated under the laws of the Province of XXXXXXXXXX. SubE is an active corporation primarily engaged in the XXXXXXXXXX business through its XXXXXXXXXX% partnership interest in P3.

32. SubE is authorized to issue an unlimited number of the following classes of shares:

(a) Common (voting);

(b) Class A Preferred (non-voting); and

(c) Class B Preferred (non-voting).

33. As of the date hereof, SubE has the following issued and outstanding shares, which shares are owned by the following shareholders:

Class Number Stated Capital Shareholder

Common XXXXXXXXXX $XXXXXXXXXX DC

Class A Preferred XXXXXXXXXX $XXXXXXXXXX FATHERCO

Class B Preferred XXXXXXXXXX $XXXXXXXXXX FATHERCO

34. P3 is a "Canadian partnership" as that term is defined in subsection 102(1), in that all of its members are resident in Canada for the purposes of the Act.

35. P3 carries on the XXXXXXXXXX business in Canada.

36. The ownership percentages in P3 are as follows:

DC XXXXXXXXXX%

SubE XXXXXXXXXX%

FATHERCO XXXXXXXXXX%

SubC XXXXXXXXXX%

TOTAL 100.00000%

37. P2 is a "Canadian partnership" as that term is defined in subsection 102(1).

38. P2 carries on the XXXXXXXXXX business in Canada.

39. The ownership percentages of P2 are as follows:

SubD XXXXXXXXXX%

SubC XXXXXXXXXX %

TOTAL 100.0%

40. P1 is a "Canadian partnership" as that term is defined in subsection 102(1).

41. P1 carries on the XXXXXXXXXX business in Canada.

42. The ownership percentages of P1 are as follows:

DC XXXXXXXXXX%

SubC XXXXXXXXXX%

SubB XXXXXXXXXX%

SubA XXXXXXXXXX%

TOTAL 100.00000%

Types of Property within DC

43. For the purposes of paragraph 55(3)(b) and the definition of "distribution" in subsection 55(1), the property of DC immediately before the transfer of the Transferred Assets and the allocation of liabilities referred to in Paragraph 68, will consist of three types of property, namely:

(a) cash or near-cash property;

(b) investment property; and

(c) business property.

44. For the purposes of determining the types of property immediately before the transfer of the Transferred Assets described in Paragraph 68, the assets and liabilities of DC will be determined on a consolidated basis, by including the appropriate pro-rata share of the asset of any partnership in which DC has an interest and of any corporation over which DC has the ability to exercise significant influence, such that the shares of or the partnership interests of each member of the DC Group will be "looked-through" to the underlying assets and liabilities of each such corporation or partnership.

45. In determining, on a consolidated basis, the net FMV of each type of property of DC immediately before the transfer described in Paragraph 68, the liabilities of DC and any partnership in which DC has an interest or any corporation over which DC exercises significant influence will be allocated to and will be deducted in the calculation of the net FMV of each such type of property of such corporation or partnership in the following manner:

(a) in determining the net FMV of each type of property of such a corporation or partnership, immediately before the transfer of the Transferred Assets described in Paragraph 68, liabilities of that particular corporation or partnership, will be allocated to, and deducted in the calculation of the net FMV of each type of property of a particular corporation as follows:

(i) current liabilities of such corporation or partnership will be allocated to cash or near-cash property of such corporation or partnership in the proportion that the FMV of each such property is of the FMV of all cash or near-cash property owned by the particular corporation or partnership;

(ii) Non-Current Debt (i.e., other than current liabilities) of such corporation or partnership that relates to a particular asset will be allocated to the particular asset and the type of property to which the particular asset relates to the extent of the FMV of the particular asset, and any such Non-Current Debt not so allocated (i.e., in excess of the FMV of the particular asset) will be allocated as described in subparagraph (iii) below;

(iii) Non-Current Debt (i.e., other than current liabilities) of such corporation or partnership that relates to a type of property but not to a particular asset will be allocated to that type of property of such corporation or partnership to the extent of the net FMV, determined after the allocation described in subparagraph (ii) above, of that type of property. (For these purposes, the bank debt will be allocated to the long-term XXXXXXXXXX properties.);

and

(iv) any liabilities not otherwise allocated in accordance with the rules described above will be allocated to all types of property in proportion to, and to the extent of, the net FMV, determined after the allocations described in subparagraphs (i), (ii) and (iii) above, of each type of property; and

b) in determining, on a consolidated basis, the net FMV of each type of property of DC immediately before the transfer of Transferred Assets described in Paragraph 68, DC will include the appropriate pro-rata share of the net FMV of each type of property of any partnership in which DC has an interest or corporation over which DC exercises significant influence, as described in subparagraph (a) herein, and any liabilities of DC will then be allocated to, and be deducted in the calculation of, the net FMV of each type of property of DC in the following manner:

i) current liabilities of DC will be allocated to cash or near-cash property of DC in the proportion that the FMV of each such property is of the FMV of all cash or near-cash property of DC;

ii) Non-Current Debt that relates to a particular asset will be allocated to the particular asset and the type of property to which the particular asset relates to the extent of the FMV of the particular asset, and any such Non-Current Debt not so allocated will be allocated as described in subparagraph (iii) below;

iii) Non-Current Debt that relates to a type of property but not to a particular asset will be allocated to that type of property to the extent of the net FMV, determined after the allocation described in subparagraph (ii) above, of that type of property. For these purposes, the bank debt will be allocated to the long-term XXXXXXXXXX properties; and

(iv) any liabilities not otherwise allocated in accordance with the rules described above will be allocated to all types of property in proportion to, and to the extent of, the net FMV, determined after the allocation described above of each type of property.

46. The amount of any deferred income tax will not be taken into consideration for this purpose because such amount does not represent a legal obligation of the particular corporation. Deferred revenue which represents revenue received in the ordinary course of business, the recognition of which has been deferred due to the legal obligation of the recipient to either provide services or deliver services to the party from whom such revenue was received, will be treated as a current liability for this purpose to the extent that the amount of such deferred revenues is recorded as a current liability for financial statement purposes, and otherwise as a Non-Current Liability. Deferred revenue in respect of which there is no legal obligation of the recipient to either provide services or deliver goods will not be taken into consideration for the purpose of determining the net FMV of property of any member of the DC Group.

47. The portion of long-term debt due within one year will be treated as a current liability for the purposes of subparagraph 45(a). The balance of long-term debt will constitute the Non-Current Debt.

48. Prior to the commencement of any of the Proposed Transactions, the Investment Preferred Shares, the Investment Common Shares and the units of the XXXXXXXXXX will be the only material investment property owned within DC (or the DC Group), for the purposes of determining the types of property owned by DC immediately before the transfer of properties described below. During the Proposed Transactions, the SubE Note, the SON Note No. 1 and the SON Note No. 2 will be treated as investment property.

Additional Information

49. No property has or will become property of any member of the DC Group and no liabilities have been or will be incurred by any member of the DC Group in contemplation of and before the transfer of the Transferred Assets described in Paragraph 68 (other than the transfers referred to in Paragraphs 60 and 62).

50. Except as outlined in Paragraphs 78 to 82 hereof, no member of the DC Group has any specific intention of disposing of any assets currently owned to an arm's length person following the Proposed Transactions and no such corporation will dispose of any of its assets as part of the series of Proposed Transactions, other than in the ordinary course of business.

51. There are not, and 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 outstanding shares of DC or Newco.

52. No member of the DC Group has, or will have, entered into a dividend rental arrangement, as defined in subsection 248(1), in respect of any of the shares to be repurchased or redeemed as part of the Proposed Transactions.

53. None of the shares of DC or Newco will be issued or acquired as part of a series of transactions of the type described in subsection 112(2.5).

54. Neither Newco nor any member of the DC Group will be a corporation described in any of Paragraphs (a) to (f) of the definition of "financial intermediary corporation" in subsection 191(1).

55. Each of DC, Newco, SubE and SON will have the financial capacity to honour, upon presentation for payment, the amount payable under the respective promissory notes to be issued by each of them as part of the Proposed Transactions.

PROPOSED TRANSACTIONS

56. [Reserved]

57. [Reserved]

58. The Articles of Incorporation of DC will be amended by the creation of a new class of shares (the "DC Class C Shares") which will be non-participating and non-voting, except in the event that there are no longer any DC Class A Shares and DC Class B Shares then issued and outstanding, in which case they will become voting. In addition, the stated capital of the DC Second Preferred Shares will be reduced to $XXXXXXXXXX, without any funds being paid out.

58A. The Articles of Incorporation of SubA will be amended by the creation of a new class of shares (the "SubA Class C Shares") which will be non-participating and non-voting, except in the event that the DC Class C Shares become voting, in which case, they will become voting.

58B. The Articles of Incorporation of SubB will be amended by the creation of a new class of shares (the "SubB Class C Shares") which will be non-participating and non-voting, except in the event that the DC Class C Shares become voting, in which case they will become voting.

58C. The Articles of Incorporation of SubB will be further amended by the creation of an additional XXXXXXXXXX SubB Third Preferred Shares.

59. A newly created corporation ("Newco") will be incorporated under the XXXXXXXXXX which, prior to the transactions referred to below, will not have any assets, liabilities or outstanding shares, other than incorporator's shares. Its Articles of Incorporation will provide that its authorized capital will include an unlimited number of shares of the following classes:

(a) Class "A" (voting, non-participating shares) ("Newco Class "A" Shares");

(b) Class "B" Common (fully participating, non-voting, common shares) ("Newco Class "B" Common Shares");

(c) Class "C" Common (fully participating, non-voting, common shares) ("Newco Class "C" Common Shares"); and

(d) Special Preferred Shares ("Newco Special Preferred Shares") having the following attributes:

(i) redeemable, subject to applicable law, at any time at the option of Newco at a redemption amount per share equal to the aggregate FMV of the consideration received by Newco upon the issuance thereof, divided by the number of Newco Special Preferred Shares issued at that time as consideration therefor (plus any declared but unpaid dividends);

(ii) retractable, subject to applicable law, at any time at the option of the holder thereof at a retraction amount equal to the redemption amount described in subparagraph (i) hereof;

(iii) entitled to a non-cumulative cash dividend as and when declared by the board of directors from time to time, which dividend need not also be declared on any other class of shares of Newco;

(iv) subject to a provision restricting the payment of dividends on other classes of shares so that no such dividends may be paid on any other class of shares of Newco if the resulting realizable value of the net assets of Newco after payment of the dividends would be less than the aggregate of the redemption amounts of all of the Newco Special Preferred Shares then outstanding;

(v) entitled, upon the liquidation, dissolution or winding-up of Newco, to a payment in priority to all other classes of shares of Newco of an amount equal to the redemption amount thereof to the extent of the amount or value of property available under applicable law for payment to the shareholders upon dissolution, will be entitled to no more than the amount of that payment; and

(vi) not entitled to vote at meetings of shareholders of Newco, other than as provided under the XXXXXXXXXX.

59A. All of the parties involved in the Proposed Transactions will agree in writing that none of the DC First Preferred Shares owned by SubA, none of the DC Second Preferred Shares owned by SubB, none of the issued and outstanding shares of SubA and none of the issued and outstanding shares of SubB will be disposed of at any time prior to the completion of all of the Proposed Transactions.

60. DC will sell to SubE all or a portion of the XXXXXXXXXX Preferred Shares and all or a portion of the XXXXXXXXXX Preferred Shares for a total purchase price equal to the FMV of these transferred shares.

61. The consideration to be paid by SubE to DC for these shares will be the issuance of an interest-bearing promissory note (the "SubE Note"), with the principal amount thereof being equal to the FMV of the shares transferred in Paragraph 60. The SubE Note will be interest-bearing and become due and payable XXXXXXXXXX years after its date of issue. DC will accept the SubE Note as full payment of the purchase price.

62. DC will transfer the XXXXXXXXXX Preferred Shares (other than an amount of approximately $XXXXXXXXXX in FMV thereof) to SubE for treasury common shares of SubE having a FMV equal to the FMV of these transferred shares.

63. Pursuant to XXXXXXXXXX, the addition to the stated capital of SubE in respect of the issuance of these Common Shares will be equal to the FMV of the shares transferred to SubE as described in Paragraph 62 above.

64. SON will transfer all of his XXXXXXXXXX DC Class A Shares and XXXXXXXXXX DC Class B Shares to Newco, CCo will transfer all of its XXXXXXXXXX DC First Preferred Shares to Newco, and FATHERCO will transfer all of its DC XXXXXXXXXX First Preferred Shares to Newco.

65. As consideration for these transfers, Newco will issue from treasury XXXXXXXXXX Newco Class "A" Shares to SON, XXXXXXXXXX Newco Class "B" Common Shares to CCo and XXXXXXXXXX Newco Class "C" Common Shares to FATHERCO, so that the ratio of FMV, one to the other, is the ratio of the FMV of the DC shares transferred to Newco by each of them, one to the other.

66. Each of SON and Newco, CCo and Newco, and FATHERCO and Newco will jointly elect, in prescribed form and within the time determined under subsection 85(6), for the provisions of subsection 85(1) to apply to these transfers of DC shares to Newco. The agreed amounts in each case will be the ACB to each of SON, CCo and FATHERCO of the DC shares transferred, which agreed amounts will not exceed the FMV of those shares.

67. Pursuant to XXXXXXXXXX, the addition to the stated capital of Newco in respect of the issuance of its common shares to each of SON, CCo and FATHERCO will not exceed the lesser of the agreed amount under subsection 85(1) in respect of these transfers of the DC shares to Newco and the PUC of such shares.

68. DC will then transfer the following assets (the "Transferred Assets") to Newco:

(a) cash or near-cash property;

(b) investment property (which will include the Investment Common Shares, as well as the XXXXXXXXXX Preferred Shares, the XXXXXXXXXX Preferred Shares and the XXXXXXXXXX Preferred Shares then in SubE); and

(c) business property (which may include all of the common shares of SubE and a small partnership interest in P3, portions of which will include cash or near-cash property, investment property and business property),

such that in respect of each of these types of property owned by DC immediately before the transfer (calculated in accordance with the rules in Paragraphs 43 to 47), Newco receives property of that type the net FMV of which calculated in accordance with the rules in Paragraphs 43 to 47 is equal to or approximates that proportion determined by the formula

A x B/C

where:

"A" is the net FMV, immediately before the transfer, of all property of that type owned at that time by DC,

"B" is the FMV, immediately before the transfer, of all the shares of the capital stock of DC owned at that time by Newco, and

"C" is the FMV, immediately before the transfer, of all the issued shares of the capital stock of DC.

For the purposes of this Paragraph, the expression "approximates that proportion" means the discrepancy from that proportion, if any, that would not exceed XXXXXXXXXX determined as a percentage of the net FMV of the property that Newco has received compared to what it would have received had it received its appropriate pro-rata share of DC's property.

69. As consideration for the transfer of the Transferred Assets to Newco, Newco will issue Newco Special Preferred Shares to DC. The aggregate redemption amount of the Newco Special Preferred Shares will equal the amount by which the aggregate FMV of the Transferred Assets exceeds any debt assumed by Newco.

70. Pursuant to XXXXXXXXXX, the addition to the stated capital of Newco in respect of the issuance of the Newco Special Preferred Shares will not exceed the amount by which the aggregate of the agreed amounts under subsection 85(1) in respect of the Transferred Assets exceeds any debt assumed by Newco.

71. DC and Newco will jointly elect, in prescribed form and within the time determined under subsection 85(6), to have the provisions of subsection 85(1) apply to the transfer of the Transferred Assets to Newco.

Specifically, the amounts agreed upon in each election will not be less than:

(i) in the case of property that is inventory or capital property other than depreciable property of a prescribed class the lesser of the amounts described in subparagraphs 85(1)(c.1)(i) and (ii);

and

(ii) in the case of property that is depreciable property of a prescribed class, the least of the amounts described in subparagraphs 85(1)(e)(i), (ii) and (iii).

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

72. DC will issue XXXXXXXXXX DC Class C Shares to Corp, for a nominal amount, of $XXXXXXXXXX per share or $XXXXXXXXXX in total.

72A. SubA will issue XXXXXXXXXX SubA Class C Shares to Corp for a nominal amount of $XXXXXXXXXX per share or $XXXXXXXXXX in total.

72B. SubB will issue XXXXXXXXXX SubB Class C Shares to Corp for a nominal amount of $XXXXXXXXXX per share or $XXXXXXXXXX in total.

72C. Simultaneously with the occurrence of the transactions proposed in Paragraph 73 below, SubB will issue XXXXXXXXXX SubB Third Preferred Shares to Corp for a nominal amount of $XXXXXXXXXX per share or $XXXXXXXXXX in total.

73. DC will purchase for cancellation all of its Class A Shares, the Class B Shares and the First Preferred Shares owned by Newco for an amount equal to the aggregate FMV of those shares and will issue to Newco a demand promissory note (the "First DC Note") with the principal amount being equal to the foregoing purchase amount. Newco will accept the First DC Note as full payment of the amount owing by DC on this repurchase of the DC shares. Pursuant to this transaction, Corp will acquire control of (a) DC by virtue of its ownership of one hundred DC Class C Shares acquired in Transaction 72; (b) SubA by virtue of its ownership of the XXXXXXXXXX SubA Class Shares acquired in Paragraph 72A; and (c) SubB by virtue of its ownership of the XXXXXXXXXX SubB Class C Shares acquired in Paragraph 72B.

74. Newco will redeem all of the Newco Special Preferred Shares owned by DC for an amount equal to the aggregate FMV of those shares, being the redemption amount of those shares, and will issue to DC a demand promissory note (the "Newco Note") with the principal amount being equal to the foregoing redemption amount. DC will accept the Newco Note as full payment of the redemption amount of the Newco Special Preferred Shares.

75. The principal amount of the First DC Note will be equal to the principal amount of the Newco Note and each will be a demand promissory note with interest payable only from the date of demand for payment by the holder to the date of payment of the amount owing under the particular note at a rate equal to the average monthly prime rate of a Canadian chartered bank.

76. DC will pay the principal amount of the First DC Note by transferring to Newco the Newco Note (which will be accepted by Newco in full payment of the First DC Note) and Newco will pay the principal amount of the Newco Note by transferring to DC the First DC Note (which will be accepted by DC in full payment of the Newco Note). The First DC Note and the Newco Note will both thereupon be marked paid in full and cancelled.

77. Pursuant to Paragraph 111(4)(a), the non-depreciable capital property of DC (including the remaining XXXXXXXXXX Preferred shares, the remaining XXXXXXXXXX Preferred Shares and the remaining XXXXXXXXXX Preferred Shares) will be written down to its FMV, thereby creating capital losses in DC. DC will make the designation contemplated in Paragraph 111(4)(e) of the Act to create sufficient capital gains against which it can fully utilize the capital losses that will arise to it in the course of the Proposed Transactions.

78. DC will sell the remaining XXXXXXXXXX Preferred Shares (having a FMV of approximately $XXXXXXXXXX) and the remaining XXXXXXXXXX Preferred Shares (having a FMV of approximately $XXXXXXXXXX) to SON for a total purchase price equal to the FMV of these transferred shares; provided, however, that the FMV of these shares, together with those sold in Paragraph 79A below, will not be in excess of 10% of the total net FMV of all of the assets retained by DC after the transfer to Newco of the Transferred Assets referred to in Paragraph 68.

79. The consideration to be paid by SON to DC for these shares will be the issuance of an interest-bearing promissory note (the "SON Note No.1"), with a principal amount thereof being equal to the FMV of the shares transferred in Paragraph 78. The SON Note No.1 will become due and payable XXXXXXXXXX years after its date of issue. DC will accept the SON Note No.1 as full payment of the purchase price.

79A. DC will sell the remaining XXXXXXXXXX Preferred Shares (having a FMV of approximately $XXXXXXXXXX) to SON for proceeds of disposition equal to FMV in exchange for an interest-bearing promissory note (the "SON Note No.2"), with the principal amount thereof being equal to the FMV of the said XXXXXXXXXX Preferred Shares. The SON Note No.2 will become due and payable XXXXXXXXXX years after its date of issue and DC will accept this note as full payment of the said purchase price; provided, however, that the FMV of these shares together with those sold in Paragraph 78, will not be in excess of 10% of the total net FMV of all of the assets retained by DC after the transfer to Newco of the Transferred Assets referred to in Paragraph 68.

80. SubE will sell an interest in P3 to DC, for an amount equal to its FMV, provided however that the FMV of this interest in P3 will not be in excess of 10% of the total net FMV of all of the Transferred Assets transferred by DC to Newco and referred to in Paragraph 68.

81. The consideration to be paid by DC to SubE for this interest in P3 will be the issuance of a demand promissory note (the "Second DC Note") with the principal amount being equal to the foregoing purchase amount. SubE will accept the Second DC Note as full payment of the purchase price.

82. The parties will offset the various advances, accounts receivable and promissory notes owing among themselves, so as to reduce the balances thereof to the least amounts possible.

PURPOSES OF THE PROPOSED TRANSACTIONS

The XXXXXXXXXX have been business associates (through a common ownership in DC) since XXXXXXXXXX, when they jointly acquired the XXXXXXXXXX assets which form the foundation of the DC Group. Since that time, the DC Group has been active in the XXXXXXXXXX industry in Canada.

FATHER is now XXXXXXXXXX years old and has been considering his investment objectives and estate planning objectives. For the reasons described below, the two families have decided to structure their joint operation differently to allow for more flexibility in the future. This led to the decision to do a butterfly transaction to allow for each family to operate through separate legal entities: the XXXXXXXXXX through DC and the XXXXXXXXXX through Newco.

A division of the assets would accomplish several objectives:

1) It would allow the XXXXXXXXXX more flexibility in estate planning as the XXXXXXXXXX interest in the DC Group would now be separately owned.

2) The investment objectives of the XXXXXXXXXX have changed over the years, and by separate ownership the two families could pursue future independent corporate objectives and strategies separately, thereby maximizing the value of each corporate entity, while still independently using the lending base and cash flow from their respective interests in P3.

3) The transactions would allow each family more flexibility in raising capital to meet their own objectives. As discussed in #2 above, the two families can each choose a separate debt/equity structure which meets it own goals. This new structure will allow each family to independently go to financial institutions to obtain capital.

4) This transaction will allow each family to declare dividends separately.

RULINGS

Provided that the above statements constitute complete and accurate disclosure of all the relevant facts, proposed transactions and purposes of the proposed transactions, we rule as follows:

A. Provided that the requisite elections are made in the prescribed form and within the prescribed time period, and provided that in each case the property transferred is eligible property, subject to the application of subsection 69(11), the provisions of subsection 85(1) will apply to the transfer:

(a) by SON of his DC Class A Shares and DC Class B Shares to Newco as described in Paragraph 64;

(b) by CCo of its DC First Preferred Shares to Newco as described in Paragraph 64;

(c) by FATHERCO of its DC First Preferred Shares to Newco as described in Paragraph 64; and

(d) by DC of the Transferred Assets to Newco as described in Paragraph 68;

such that the agreed amount in respect of each such transfer of eligible property will be deemed to be the transferor's proceeds of disposition and the transferee's cost thereof under paragraph 85(1)(a).

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

For the purposes of the subsection 85(1) elections described herein, to the extent there is any depreciable property of a prescribed class that is the subject of such an election, the reference to "the undepreciated capital cost to the taxpayer of all the property of that class immediately before the disposition" in subparagraph 85(1)(e)(i) shall be interpreted to mean the proportion of the undepreciated capital cost to the taxpayer of all the property of that class that the FMV of the assets of that class transferred is of the FMV of all assets of that class.

B. For the purposes of subparagraph (b)(iii) of the definition of PUC in subsection 89(1), the PUC of:

(a) the Newco Class "A" Shares issued to SON as described in Paragraph 65;

(b) the Newco Class "B" Common Shares issued to CCo as described in Paragraph 65;

(c) the Newco Class "C" Common Shares issued to FATHERCO as described in Paragraph 65; and

(d) the Newco Special Preferred Shares issued to DC as described in Paragraph 69;

computed without reference to the Act will be equal to their stated capital as determined for purposes of the XXXXXXXXXX or CBCA, as the case may be.

C. Subsection 84(3) will apply:

(a) on the purchase for cancellation, as described in Paragraph 73 of the DC shares owned by Newco, to deem DC to have paid and Newco to have received; and

(b) on the redemption, as described in Paragraph 74, of the Newco Special Preferred Shares owned by DC, to deem Newco to have paid and DC to have received; a dividend on such shares equal to the amount, if any, by which the aggregate amount paid upon such repurchase or redemption exceeds the aggregate PUC in respect of such shares immediately before such repurchase or redemption, and any such dividend:

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

(d) will be deductible pursuant to subsection 112(1) by the corporation deemed to have received the dividend;

(e) will not be a dividend to which any of subsections 112(2.1), (2.2), (2.3) or (2.4) apply;

(f) will be excluded, pursuant to paragraph (j) of the definition of "proceeds of disposition" in section 54, in determining the proceeds of disposition to the recipient corporation of the shares so repurchased or redeemed;

(g) will not be subject to tax under Part IV; and

(h) will not be subject to tax under Parts IV.1 or VI.1.

D. The provisions of subsection 112(3) will apply to reduce any loss which otherwise would be determined for the particular holder as a result of the redemptions and repurchases of shares described in the Proposed Transactions.

E. The cost to DC of the SubE Note, the cost to DC of the SON Note No.1 and the SON Note No.2, the cost to DC of the Newco Note and the cost to Newco of the First DC Note will in each case, upon the issuance thereof, be equal to the principal amount of the particular note. Accordingly, no amount will be included in the income of DC or Newco upon payment of the principal amount of the particular note.

F. The repayment of the Newco Note held by DC and the First DC Note held by Newco as described in Paragraph 76 will not, in and of itself, result in an income inclusion or the application of the provisions of section 80.

G. Provided that the DC shares that will be transferred to Newco as described in Paragraph 64 represented capital property to the holders, the Proposed Transactions, in and of themselves, will not cause them to not be capital property.

H. The provisions of subsections 40(3.3) to (3.6) will not apply to deem DC's capital loss from the dispositions of non-depreciable capital property referred to in Paragraphs 60 and 62 hereof to be nil.

I. Subsection 111(4) will apply to DC when control of DC is acquired by Corp and DC will thereupon be able to utilize the provisions in Paragraph 111(4)(e) and the designation provisions thereof to deem it:

(a) to have disposed of its non-depreciable capital property for an amount equal to the lesser of the fair market value thereof immediately before that time and the greater of the ACB to DC of the property immediately before the disposition and such amount as is designated by DC in respect of the property, and

(b) thereafter to have reacquired the subject property at that amount.

J) Provided that as part of the series of transactions or events that include the Proposed Transactions 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 any shares of a distributing corporation 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, by virtue of paragraph 55(3)(b), subsection 55(2) will not apply to the taxable dividends referred to in Ruling C above and, for greater certainty, subsection 55(3.1) will not apply to deny the exemption under paragraph 55(3)(b).

K. The Proposed Transactions, in and of themselves, will not result in the application of subsections 15(1), 56(2), 56(4) or 246(1).

L) Subsection 245(2) will not be applied as a result of the Proposed Transactions, in and of themselves, to redetermine the tax consequences confirmed in the rulings given above.

These rulings are given subject to the limitations and qualifications set forth in Information Circular 70-6R4 issued on January 29, 2001, and are binding provided that the Proposed Transactions are completed before 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 the Canada Customs and Revenue Agency has reviewed or accepted:

(a) the determination of the ACB, the FMV or the PUC of any shares referred to herein;
or

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

Yours truly,

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