2002 Ruling 2002-0159923 - 55(3)(a)

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 CCRA.

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

Principal Issues:

Parents have controlled Opco since its inception. As part of the proposed transactions, parents will incorporate 3 Holdcos and will control each Holdco. Each of the parents' children will acquire shares of one Holdco. Opco will then transfer a portion of its assets to each Holdco. Whether subsection 55(4) would deem each child not to be related to his or her sibling's Holdco?

Position:

For the reason given below, subsection 55(4) would not apply to deem each child not to be related to his or her sibling's Holdco.

Reasons:

The taxpayer represented that the purpose of having the parents control each Holdco was to protect the parents' economic interest in each Holdco and that none of the purposes of having parents control each Holdco was to cause each child to be related to his or her sibling's Holdco so that subsection 55(2) would not apply to a dividend.

XXXXXXXXXX 2002-015992

XXXXXXXXXX, 2002

Dear XXXXXXXXXX:

Re: XXXXXXXXXX
Advance Income Tax Ruling

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 letters of XXXXXXXXXX and your facsimiles 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 contained herein:

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

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

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

(v) is the subject of a ruling previously issued by the 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) "active business" has the meaning assigned by subsection 125(7);

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

(d) "affiliated persons" has the meaning assigned by subsection 251.1(1);

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

(f) "BCA" means the XXXXXXXXXX, and, where applicable, its predecessor statutes;

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

(h) "capital" has the usage assigned by the provisions of the BCA;

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

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

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

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

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

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

(o) "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;

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

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

(r) "ITAR" refers to the Income Tax Application Rules;

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

(t) "par value" has the usage assigned by the provisions of the BCA;

(u) "pre-1972 capital surplus on hand" has the meaning assigned by subsection 88(2.1);

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

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

(x) "qualified small business corporation share" has the meaning assigned by subsection 110.6(1);

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

(z) "Regulations" refers to the Income Tax Regulations;

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

(bb) "related group" has the meaning assigned by subsection 251(4);

(cc) "rental property" has the meaning assigned by subsection 1100(14) of the Regulations;

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

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

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

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

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

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

(jj) "taxable preferred shares" has the meaning assigned by subsection 248(1);

(kk) "undepreciated capital cost" ("U.C.C.") has the meaning assigned by subsection 13(21); and

(ll) "valuation day" ("V-day") has the meaning assigned by section 24 of the ITAR.

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

Facts

1. XXXXXXXXXX ("Opco") was incorporated under the laws of the Province of XXXXXXXXXX. Opco is a CCPC and a TCC. The taxation year-end of Opco is XXXXXXXXXX. Opco deals with the XXXXXXXXXX Tax Services office and files its corporate income tax returns at the XXXXXXXXXX Taxation Centre.

The authorized capital of Opco consists of

(a) XXXXXXXXXX, common shares (the "Opco Common Shares") with a par value of $XXXXXXXXXX each; and

(b) XXXXXXXXXX Class "A" Voting Redeemable Preferred shares (the "Opco Class A Preferred Shares") with a par value of $XXXXXXXXXX each.

The issued and outstanding capital of Opco is detailed in the following schedule:

Shareholder
Number
Class
Aggregate
Redemption
Amount
Aggregate
ACB
Aggregate
PUC
XXXXXXXX ("Child1")
XXXXXXX
Common Shares

$ XXXXXXXX
$ XXXXXXXXXX
XXXXXXXX ("Child2")
XXXXXXX
Common Shares

$ XXXXXXXX
$ XXXXXXXXXX
XXXXXXXX ("Child3")
XXXXXXX
Common Shares

$ XXXXXXXX
$ XXXXXXXXXX
XXXXXXXX ("Father")
XXXXXXX
Class A Preferred Shares
$XXXXXXXX
$XXXXXXX
$XXXXXXXXX
XXXXXXXX ("Mother")
XXXXXXX
Class A Preferred Shares
$XXXXXXXX
$XXXXXXX
$XXXXXXXXX

Each of the Opco Common Shares and the Opco Class A Preferred Shares is entitled to one vote.

The shares of Opco constitute capital property to each shareholder of Opco. The FMV of each shareholder's shares of Opco exceeds the ACB of the shares to the shareholder.

2. The assets of Opco consist primarily of the following:

(a) cash or near cash of approximately $XXXXXXXXXX;

(b) a receivable of $XXXXXXXXXX from XXXXXXXXXX, a related corporation;

(c) about $XXXXXXXXXX of prepaid expenses;

(d) about $XXXXXXXXXX of income tax receivable; and

(e) XXXXXXXXXX rental properties ("Rental Properties") which consist of:

XXXXXXXXXX.

Rental Properties XXXXXXXXXX described above are class 3 properties and Rental Properties XXXXXXXXXX are class 6 properties described in Schedule II of the Regulations. Rental Properties XXXXXXXXXX each have components which are in class 3 and in class 6.

Opco acquired some of its Rental Properties prior to 1972 and some subsequently. Opco carries on a rental business ("Rental Business"), which derives income from its Rental Properties. Opco's Rental Business is an active business and not a specified investment business, as Opco employs XXXXXXXXXX full-time employees to operate such business, which employees include Child1, Child2 and Child3.

The assets of Opco constitute capital properties to Opco.

3. The liabilities of Opco primarily consist of:

(a) approximately $XXXXXXXXXX of trade amounts payable (e.g., property taxes, running expenses);

(b) $XXXXXXXXXX payable to XXXXXXXXXX, a related corporation;

(c) $XXXXXXXXXX of security deposits from tenants;

(d) amounts payable to Child1 ($XXXXXXXXXX), Child2 ($XXXXXXXXXX) and Child3 ($XXXXXXXXXX); and

(e) $XXXXXXXXXX of rent received in advance from one tenant (unearned revenue).

The amounts payable to Child1, Child2 and Child3 include a bonus payable of $XXXXXXXXXX to each of them.

4. As at XXXXXXXXXX, Opco had:

(a) RDTOH of about $XXXXXXXXXX;

(b) no amount in its capital dividend account; and

(c) an undetermined amount of pre-1972 capital surplus on hand.

5. Father and Mother are the parents of Child1, 2 and 3. Both the parents and the three children are Canadian residents.

6. From XXXXXXXXXX, Father and Mother were the only shareholders of Opco, each holding XXXXXXXXXX Opco Common Shares.

On XXXXXXXXXX, as part of a corporate reorganization to facilitate a family estate freeze of Father and Mother:

(a) Father and Mother transferred their XXXXXXXXXX Opco Common Shares to Opco. As consideration for such transfer, Opco issued to each of Father and Mother XXXXXXXXXX Opco Class A Preferred Shares having an aggregate PUC equal to the aggregate PUC of the XXXXXXXXXX Opco Common Shares so transferred to Opco. The aggregate ACB of the XXXXXXXXXX Opco Class A Preferred Shares issued to each of Father and Mother is equal to the aggregate V-day value of the XXXXXXXXXX Opco Common Shares so transferred to Opco; and

(b) Child1 and Child2 each subscribed for XXXXXXXXXX Opco Common Shares, and Child3 subscribed for XXXXXXXXXX Opco Common Shares, all for a subscription price of $XXXXXXXXXX each.

On XXXXXXXXXX, and again on XXXXXXXXXX, Opco redeemed XXXXXXXXXX of its Class A Preferred Shares held by each of Father and Mother.

On XXXXXXXXXX, Opco redeemed a further XXXXXXXXXX of its Class A Preferred Shares from each of Father and Mother. After that share redemption, Father and Mother each held XXXXXXXXXX Opco Class A Preferred Shares.

At all times since XXXXXXXXXX, Father and Mother have had voting control of Opco.

7. In XXXXXXXXXX, Father claimed a capital gains deduction of $XXXXXXXXXX on the disposition of shares of another corporation.

In XXXXXXXXXX, Mother designated, with respect to her Opco shares, in an election pursuant to subsection 110.6(19), an amount that she believed would result in her realizing a capital gain of $XXXXXXXXXX. However, as the amount she elected was based on her original ACB and not of the V-day value of her Opco shares, her election under subsection 110.6(19) did not result in any capital gain to her and did not increase the ACB of the shares.

8. Each of Father and Mother has a will (collectively referred to hereafter as "Wills"), which provides, inter alia, for the following:

(a) A bequest of that number of the Opco Class A Preferred Shares to Child3 as determined by the family accountant so that, after taking into account any transfer of the Opco Class A Preferred Shares by the other parent to Child3 exclusively, there will be an equalization of the value of all of the interests in Opco held by each of Child1, 2 and 3.

(b) The residue of each estate is to be held in a spousal trust in favour of the surviving spouse for his or her lifetime.

(c) On the death of the survivor of Father and Mother, if each of Child1, 2 and 3 have received interests of approximately equal value in Opco, or if they have not, then after the equalizing bequest to Child3 has been distributed to Child3, the remainder of any of the Opco Class A Preferred Shares owned by Father and Mother pass to the residue of their respective estates to be distributed equally to Child1, 2 and 3, provided that if any or all of the Opco Class A Preferred Shares have been replaced with capital holdings of equal value in three companies, each of which company is owned separately by Child1, 2 and 3 or the members of his or her immediate family, then after the bequest of any equalizing the Opco Class A Preferred Shares has been distributed to Child3, the capital holding in each such company is to be added to the share of the residue of the estate as provided for each of Child1, 2 and 3; and

(d) The residue of each estate passes to Child1, 2 and 3 equally (with grandchildren as alternate beneficiaries) and with specific trust provisions for Child2.

XXXXXXXXXX, both Father and Mother wish Child1 and Child3 to protect Child2's interests and to maintain and preserve his equality and dignity as a valued member of the family. Accordingly, Child2's share of the residue of each estate is to be held by the Executors, which consist of Child1, 2 and 3, in a discretionary trust where the income and capital is to be used for Child2's benefit during his lifetime. On Child2's death any amount remaining is to be divided equally among Child2's children and held in separate discretionary trusts where the income and capital is to be used for each child's benefit with staged distributions of XXXXXXXXXx.

9. Both Father and Mother have delivered to their solicitor powers of attorney in favour of Child1 and Child3 who are to act together. Those powers of attorney are only effective on the joint request of Child1 and Child3 and only in the event that Father or Mother becomes mentally incapable of managing his or her affairs.

Proposed Transactions

10. Father will incorporate three new corporations (" Holdco1", "Holdco2" and "Holdco3") under the provisions of the BCA (Holdo1, 2 and 3 are collectively referred to hereafter as "Holdcos", and individually as "Holdco"). Each Holdco will be a TCC and a CCPC.

The authorized share capital of each Holdco will consist of XXXXXXXXXX shares:

(a) XXXXXXXXXX voting, fully participating common shares having a par value of $XXXXXXXXXX each ("Holdco Common Shares");

(b) XXXXXXXXXX first preferred shares ("Holdco First Class Preferred Shares") having a par value of $XXXXXXXXXX each. They will be:

(i) voting;

(ii) redeemable and retractable, subject to applicable law, at any time for an amount equal to the aggregate FMV of the consideration for which the Holdco First Class Preferred Shares are issued, divided by the number of such shares issued (the "Holdco First Class Redemption Amount");

(iii) entitled to a non-cumulative dividend at the prescribed rate (under paragraph 4301(c) of the Regulations) of the Holdco First Class Redemption Amount. However, they will be entitled to a cumulative dividend if Holdco fails to redeem them at the request of the holder of the shares; and

(iv) will have a preference on dissolution over the Holdco Common Shares; and

(c) XXXXXXXXXX second preferred shares ("Holdco Second Class Preferred Shares") having no par value. They will be:

(i) non-voting;

(ii) redeemable and retractable, subject to applicable law, at any time for an amount equal to the aggregate FMV of the consideration for which the Holdco Second Class Preferred Shares are issued, divided by the number of such shares issued (the "Holdco Second Class Redemption Amount");

(iii) entitled to a non-cumulative dividend at the prescribed rate (under paragraph 4301(c) of the Regulations) of the Holdco Second Class Redemption Amount. However, they will be entitled to a cumulative dividend if Holdco fails to redeem them at the request of the holder of the shares; and

(iv) on dissolution, will rank behind the Holdco First Class Preferred Shares but will have a preference over the Holdco Common Shares.

The Holdco Common Shares and the Holdco First Class Preferred Shares will be entitled to 1 vote per share.

11. On the incorporation of each of Holdco1, 2 and 3, Father will subscribe for one Holdco Common Share for a subscription price of $XXXXXXXXXX. Also, Father, Mother and his children will be the directors of the Holdcos as follows:

(a) Father, Mother and Child1 in the case of Holdco1;

(b) Father, Mother and Child2 in the case of Holdco2; and

(c) Father, Mother and Child3 in the case of Holdco3.

12. (a) Father will transfer XXXXXXXXXX of his Opco Class A Preferred Shares to Holdco1, XXXXXXXXXX of his Opco Class A Preferred Shares to Holdco2 and XXXXXXXXXX of his Opco Class A Preferred Shares to Holdco3; and

(b) Mother will transfer XXXXXXXXXX of her Opco Class A Preferred Shares to Holdco1, XXXXXXXXXX of her Opco Class A Preferred Shares to Holdco2 and XXXXXXXXXX of her Opco Class A Preferred Shares to Holdco3.

As sole consideration for such transfers,

(c) Holdco1 will issue XXXXXXXXXX of its First Class Preferred Shares to each of Father and Mother;

(d) Holdco2 will issue XXXXXXXXXX of its First Class Preferred Shares to Father and XXXXXXXXXX of its First Class Preferred Shares to Mother; and

(e) Holdco3 will issue XXXXXXXXXX of its First Class Preferred Shares to Father and XXXXXXXXXX of its First Class Preferred Shares to Mother,

having an aggregate FMV and redemption amount equal to the aggregate FMV at that time of the Opco Class A Preferred Shares so transferred to each of Holdco1, 2 and 3.

Each of Father and Mother will jointly elect with each of Holdco1, 2 and 3 in prescribed form and within the time period referred to in subsection 85(6) to have the provisions of subsection 85(1) apply to each transfer. The agreed amount in respect of the shares so transferred will be:

(i) in the case of Father and Holdco1, Father and Holdco2, Mother and Holdco1, Mother and Holdco2, equal to the lesser of the amounts described in subparagraphs 85(1)(c.1)(i) and (ii) of the Act; and

(ii) in the case of Father and Holdco3, Mother and Holdco3, equal to an amount that is not greater than the amount permitted by subsection 110.6(2.1), which amount will not be less than the lesser of the amounts described in subparagraphs 85(1)(c.1)(i) and (ii) of the Act, nor will it exceed the aggregate FMV of the Opco Class A Preferred Shares so transferred by Father and Mother to Holdco3, as the case may be.

For the purpose of the BCA, the amount to be added to the capital of the Holdco1 First Class Preferred Shares, the Holdco2 First Class Preferred Shares and the Holdco3 First Class Preferred Shares, as the case may be, will be equal to the aggregate PUC of the Opco Class A Preferred Shares so transferred to each of Holdco1, 2 and 3, as the case may be.

13. Each of Holdco1, Holdco2 and Holdco3 will purchase for cancellation its Common Share held by Father for $XXXXXXXXXX each.

14. Immediately thereafter the purchase for cancellation of the Holdco1, 2 and 3 Common Share held by Father as described in paragraph 13 above,

(a) Child1 will transfer XXXXXXXXXX of her Opco Common Shares to Holdco1;

(b) Child2 will transfer XXXXXXXXXX of his Opco Common Shares to Holdco2; and

(c) Child3 will transfer XXXXXXXXXX of his Opco Common Shares to Holdco3.

As sole consideration for such transfers,

(d) Holdco1 will issue XXXXXXXXXX of its Common Shares to Child1;

(e) Holdco2 will issue XXXXXXXXXX of its Common Shares to Child2; and

(f) Holdco3 will issue XXXXXXXXXX of its Common Shares to Child3,

having an aggregate FMV equal to the aggregate FMV at that time of the Opco Common Shares so transferred to Holdco1, 2 and 3, as the case may be.

Child1 and Holdco1, Child2 and Holdco2, Child3 and Holdco3, 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 each transfer. The agreed amount in respect of the shares so transferred will be:

(i) in the case of Child1 and Holdco1, Child2 and Holdco2, equal to an amount up to $XXXXXXXXXX, which amount will not be less than the lesser of the amounts described in subparagraphs 85(1)(c.1)(i) and (ii) of the Act, nor will it exceed the aggregate FMV of the Opco Common Shares so transferred to Holdco1 and Holdco2, as the case may be; and

(ii) in the case of Child3 and Holdco3, equal to the lesser of the amounts described in subparagraphs 85(1)(c.1)(i) and (ii) of the Act.

For the purpose of the BCA, the amount to be added to the capital of the Holdco1 Common Shares, the Holdco2 Common Shares and the Holdco3 Common Shares, as the case may be, will be equal to the aggregate PUC of the Opco Common Shares so transferred to Holdco1, 2 and 3, as the case may be.

15. Opco will use cash or near cash property to repay $XXXXXXXXXX to each of Child1 and Child3, and $XXXXXXXXXX to Child2.

16. On or before XXXXXXXXXX, Opco will transfer each of its Rental Properties separately to either Holdco1, 2 or 3 in a sequential order as directed by Opco.

As sole consideration for such transfers,

(a) Holdco1 will issue, to Opco, Holdco1 Second Class Preferred Shares having an aggregate redemption amounts and FMV of $XXXXXXXXXX equal to the aggregate FMV of the Rental Properties so transferred to Holdco1;

(b) Holdco2 will issue, to Opco, Holdco2 Second Class Preferred Shares having an aggregate redemption amounts and FMV of $XXXXXXXXXX equal to the aggregate FMV of the Rental Properties so transferred to Holdco2; and

(c) Holdco3 will issue, to Opco, Holdco3 Second Class Preferred Shares having an aggregate redemption amounts and FMV of $XXXXXXXXXX equal to the aggregate FMV of the Rental Properties so transferred to Holdco3.

Opco, Holdco1, Holdco2 and Holdco3 will jointly elect pursuant to subsection 85(1), in prescribed form and within the time referred to in subsection 85(6), with respect to the transfer to each of Holdco1, Holdco2 and Holdco3 of any eligible property of Opco that has a FMV in excess of its cost amount. Specifically, the agreed amount in each joint election,

(d) in the case of depreciable property of a prescribed class, will not be less than the least of the amounts specified in subparagraphs 85(1)(e)(i), (ii) or (iii);

(e) in the case of property described in paragraph 85(1)(c.1), will not be less than the lesser of the amounts specified in subparagraphs 85(1)(c.1)(i) or (ii); and

(f) in the case of eligible capital property, will not be less than the least of the amounts specified in subparagraphs 85(1)(d)(i), (ii) or (iii).

In each case, the agreed amount will not exceed the FMV of the respective property.

Pursuant to the provisions of the BCA, the addition to the capital of the Holdco1 Second Class Preferred Shares, the Holdco2 Second Class Preferred Shares and the Holdco3 Second Class Preferred Shares in respect of the issuance of the Holdoco1 Second Class Preferred Shares, the Holdco2 Second Class Preferred Shares and the Holdco3 Second Class Preferred Shares, as the case may be, will equal the aggregate of the FMV of the property transferred to Holdco1, Holdco2 and Holdco3 as described above.

17. After the transfer of the Opco's Rental Properties to Holdco1, Holdco2 and Holdco3 as described in paragraph 16 above,

(a) XXXXXXXXXX full-time employees of Opco including Child1 will work for Holdco1;

(b) XXXXXXXXXX full-time employees of Opco including Child2 will work for Holdco2; and

(c) XXXXXXXXXX full-time employees including Child3 will work for Holdco3.

As a condition of the proposed transactions described herein, Child1, 2 and 3, and Holdco1, 2 and 3 will enter into an agreement regarding the management, following the completion of the proposed transactions described herein, of the Rental Properties owned by each of Holdco1, 2 and 3.

Opco will enter into a separate Declaration of Bare Trust and Agency Agreement ("Agreement") with each respective Holdco. The terms and conditions of each Agreement will, inter alia, include the following:

(i) Opco will hold legal title to the Rental Properties as nominee, agent and bare trustee for the sole benefit and account of the respective Holdco as principal and beneficial owner; and

(ii) Opco will not deal with the Rental Properties in any way, or execute any instrument, document or encumbrance in respect of the Rental Properties without prior written consent or direction of the respective Holdco.

18. Immediately following the transfers of property as described in paragraph 16 above, each of Holdco1, 2 and 3 will redeem from Opco all of its Second Class Preferred Shares for an amount equal to their FMV, being the aggregate of the Holdco Second Class Redemption Amount, and will issue to Opco in consideration therefor a demand non-interest bearing promissory note with a principal amount and FMV equal to that amount (in the case of Holdco1, the "Holdco1 Redemption Note", in the case of Holdco2, the "Holdco2 Redemption Note" and in the case of Holdco3, the "Holdco3 Redemption Note"). Opco will accept the Redemption Notes of each of Holdco1, 2 and 3 as full payment of the Holdco Second Class Redemption Amounts with the risk of the notes being dishonored.

19. At the end of the day on which the Second Class Preferred Shares of Holdco1, 2 and 3 are redeemed, each of Holdco1, 2 and 3 will cause its first taxation year to end.

20. On the day following the redemption of the Second Class Preferred Shares of Holdco1, 2 and 3 as described in paragraph 19 above, Opco will purchase for cancellation the following Common Shares and redeem the following Class A Preferred Shares:

(a) XXXXXXXXXX of its Common Shares and XXXXXXXXXX of its Class A Preferred Shares from Holdco1;

(b) XXXXXXXXXX of its Common Shares and XXXXXXXXXX of its Class A Preferred Shares from Holdco2; and

(c) XXXXXXXXXX of its Common Shares and XXXXXXXXXX of its Class A Preferred Shares from Holdco3,

for an amount, in each case, equal to their FMV, and will issue to each of Holdco1, Holdco2 and Holdco3 in consideration therefor a demand non-interest bearing promissory note with a principal amount and FMV equal to that amount (in the case of Holdco1, the " Opco Redemption Note1"; in the case of Holdco2, the "Opco Redemption Note2"and in the case of Holdco3, the "Opco Redemption Note3"). The principal amount and FMV of the Opco Redemption Note1 will be equal to the principal amount and FMV of the Holdco1 Redemption Note (being $XXXXXXXXXX), the principal amount and FMV of the Opco Redemption Note2 will be equal to the principal amount and FMV of the Holdco2 Redemption Note (being $XXXXXXXXXX) and the principal amount and FMV of the Opco Redemption Note3 will be equal to the principal amount and FMV of the Holdco3 Redemption Note (being $XXXXXXXXXX).

Holdco1 will accept the Opco Redemption Note1, Holdco2 will accept the Opco Redemption Note2 and Holdco3 will accept the Opco Redemption Note3, in each case, as full and absolute payment of the purchase amount in respect of each purchased Opco Common Share and the redemption amount in respect of each redeemed Opco Class A Preferred Share with the risk of the note being dishonored.

Opco will pay the principal amount of the Opco Redemption Note1, 2 and 3 by transferring to: Holdco1 the Holdco1 Redemption Note; Holdco2 the Holdco2 Redemption Note and Holdco3 the Holdco3 Redemption Note, each of which will be accepted by each of Holdco1, 2 and 3 in full payment of Opco's obligation. Each of Holdco1, 2 and 3 will pay the principal amount of its Redemption Note by transferring to Opco its Opco Redemption Note which will be accepted by Opco in full payment of each of Holdco1, 2 and 3's obligation. The Opco Redemption Note1, 2 and 3, and the Holdco1, 2 and 3 Redemption Note will all be marked paid in full and cancelled.

21. As of XXXXXXXXXX, following the transactions as described in paragraph 20 above, each of Holdco1, 2 and 3 will own XXXXXXXXXX Opco Common Shares. Opco will continue to hold $XXXXXXXXXX of tenant security deposits (and accrued interest) related to the Rental Properties transferred to each of Holdco1, 2 and 3 as described above and cash of approximately $XXXXXXXXXX.

On or before XXXXXXXXXX, Opco will repay all remaining liabilities (other than tenant security deposits and the accrued interest) and will pay a taxable dividend out of all remaining cash and near cash assets (other than the tenant security deposits and the accrued interest), of approximately $XXXXXXXXXX to each of Holdco1, 2 and 3.

Additional Information

22. None of the purposes of the acquisition by Father and Mother of the Holdco shares as described in paragraphs 11 and 12 above is to cause each of Child1, 2 and 3 to be related to his or her siblings Holdco so that subsection 55(2) would not apply to the deemed dividends resulting from the proposed transactions described above. Rather, the only purpose of Mother and Father retaining a controlling interest in each Holdco is to protect their economic interest in each Holdco.

23. 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.

24. 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).

25. Each of Opco, Holdco1, 2 and 3 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).

26. 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.

27. 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.

28. Each of Opco, Holdco1, 2 and 3 will have the financial capacity to honour, upon presentation for payment, the amount payable under the promissory note(s) issued by it as part of the proposed transactions.

29. The Opco Common Shares are not, and will not be at any time prior to the completion of the proposed transactions described above, taxable preferred shares or short-term preferred shares.

30. After the completion of the proposed transactions as described above, Father and Mother will review and if necessary amend their Wills to provide that:

(a) their Holdco1 First Class Preferred Shares will pass to Child1, their Holdco3 First Class Preferred Shares to Child3; and

(b) their Holdco2 First Class Preferred Shares will pass to a testamentary trust of which Child2 is a discretionary income and capital beneficiary during his lifetime, after which his children will be income and capital beneficiaries.

31. Father and Mother have no intention to pass on their Holdco1, 2 and 3 First Class Preferred Shares to Child1, 2 and 3 other than by way of their Wills. However, in contemplation of death, either Father or Mother (or both) may choose to gift his or her Holdco1, 2 and 3 First Class Preferred Shares to Child1, 2 and 3, as the case may be.

Purpose of the Proposed Transactions

32. Father and Mother wish to ensure prior to or upon their deaths that each of their children has an equal interest in the assets of Opco and that each child manages his or her own affairs independently.

33. The purpose of having Opco maintaining its legal title to the Rental Properties after they are transferred to Holdco1, 2 and 3, as described in the proposed transactions above, is to avoid land transfer tax in respect of such transfers.

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 Father and Mother of their Opco Class A Preferred Shares to each of Holdco1, Holdco2 and Holdco3 as described in paragraph 12 above;

(b) the transfer by Child1 of her Opco Common Shares to Holdco1, Child2 of his Opco Common Shares to Holdco2 and Child3 of his Opco Common Shares to Holdco3 as described in paragraph 14 above; and
(c) subject to the application of subsection 13(21.2) and subsections 20(1.2) and 26(5) of the ITAR, the transfer by Opco of its Rental Properties to each of Holdco1, Holdco2 and Holdco3 as described in paragraph 16 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) and, in respect of depreciable property, and 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 greater certainty,

(d) paragraph 85(1)(e.2) will not apply to the transfers; and

(e) subsection 85(2.1) will apply to reduce the PUC of the Holdco Second Class Preferred Shares issued by each respective Holdco described in paragraph 16 above.

B. The provisions of subsection 26(5) of the ITAR will apply for the purposes of computing the ACB to each respective Holdco of the capital property (other than depreciable property or an interest in a partnership) received from Opco as described in paragraph 16 above, provided such capital property was owned by Opco on June 18, 1971.

C. The provisions of subsection 20(1.2) of the ITAR will apply to deem depreciable property of a prescribed class, which is the subject of an election under section 85, transferred by Opco to Holdco1, Holdco2 or Holdco3, as described in paragraph 16 above, to have been acquired by each respective Holdco before 1972 and to have been owned without interruption from December 31, 1971 until such time that it is disposed of by the respective Holdco, provided such depreciable property was owned by Opco prior to 1972 and was owned by Opco without interruption from December 31, 1971 until the time of such transfer.

D. For the purposes of paragraphs 1100(2.2)(e), 1101(1ad)(b) and 1102(14)(d) of the Regulations, the Holdcos will be considered not to have been dealing at arm's length with Opco (otherwise than by virtue of a right referred to in paragraph 251(5)(b) of the Act) at the time they acquire the depreciable property from Opco referred to in paragraph 16 above.

E. Subsection 84(3) will apply on the redemption or purchase for cancellation, as described in paragraphs 18 and 20 above,

(a) of the Second Class Preferred Shares of Holdco1, Holdco2 and Holdco3 held by Opco, to deem each of Holdco1, Holdco2 and Holdco3 to have paid and Opco to have received;

(b) of the Opco Class A Preferred Shares held by each of Holdco1, Holdco2 and Holdco3, to deem Opco to have paid and each of Holdco1, Holdco2 and Holdco3 to have received; and

(c) of the Opco Common Shares held by each of Holdco1, Holdco2 and Holdco3, to deem Opco to have paid and each of Holdco1, Holdco2 and Holdco3 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

(d) 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;

(e) 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 dividends;

(f) 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;

(g) 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

(h) will not be subject to tax under Part IV.1 and Part VI.1 of the Act on the basis that such dividends will be excepted dividends by virtue of paragraph (b) of the definition of "excepted dividend" in section 187.1 of the Act and excluded dividends by virtue of paragraph (a) of the definition of "excluded dividend" in subsection 191(1) of the Act, as Opco, Holdco1, Holdco2 and Holdco3, as the case may be, will have a substantial interest, within the meaning assigned by subsection 191(2) of the Act, in the payer corporation immediately before the redemption of such shares.

F. The taxable dividends paid by Opco and received by each of Holdco1, Holdco2 and Holdco3 on its Opco Common Shares, as described in paragraph 21 above,

(a) will be included in computing the income, pursuant to subsection 82(1) and paragraph 12(1)(j), of each recipient of such dividend; and

(b) 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 dividends.

G. (a) By virtue of subsection 186(2) and paragraph 186(4)(a) of the Act, each of Holdco1, Holdco2 and Holdco3 will be connected with Opco. Provided that each of Holdco1, Holdco2 and Holdco3 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 E above, Opco will not be subject to Part IV tax under subsection 186(1) in respect of such dividend; and

(b) by virtue of subsection 186(2) and paragraph 186(4)(a) of the Act, Opco will be connected with each of Holdco1, Holdco2 and Holdco3. Consequently, each of Holdco1, Holdco2 and Holdco3 shall, pursuant to paragraph 186(1)(b), be subject to Part IV tax in an amount equal to that proportion of the dividend refund to which Opco will become entitled for its taxation year in which it paid the dividends referred to in rulings E and F above, that the amount of each such dividend received by Holdco1, Holdco2 and Holdco3, as the case may be, is of the aggregate of all taxable dividends paid by Opco in its taxation year in which such dividend is paid.

H. By virtue of paragraph 55(3)(a), the provisions of subsection 55(2) will not apply to the taxable dividends referred to in rulings E and F above, provided that there is no disposition or increase in interest described in any of subparagraphs 55(3)(a)(i) to (v) as part of a series of transactions or events that includes the proposed transactions described herein. For greater certainty, the proposed transactions described in paragraphs 10 to 21 above, in and by themselves, will not be considered to result in any disposition or increase in interest described in any of subparagraphs 55(3)(a)(i) to (v).

I. The repayment of the Opco Redemption Note1 held by Holdco1, the Opco Redemption Note2 held by Holdco2, the Opco Redemption Note3 held by Holdco3, and the Holdco1 Redemption Note, the Holdco2 Redemption Note and the Holdco3 Redemption Note held by Opco as described in paragraph 20 above will not give rise to a "forgiven amount" within the meaning of subsection 80(1) or 80.01(1).

J. The provisions of subsections 15(1), 56(2), 56(4), 69(4), and 246(1) will not apply to any of the proposed transactions described in paragraphs 10 to 21 above, in and by themselves.

K. The provisions of subsection 245(2) will not be applied as a result of the proposed transactions described in paragraphs 10 to 21 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 Customs and Revenue Agency ("CCRA") on May 17, 2002 and are binding on the CCRA 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 CCRA has agreed to or reviewed:

(a) the determination of the FMV or the cost amount of any particular asset or the PUC or V-day value 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

(i) any of the Opco shares or the Holdco shares is or will be a qualified small business corporation share; and

(ii) no amounts will be included in Opco's income under subsection 13(1) as a result of its transfer of the Rental Properties to each Holdco as described in paragraph 16 above.

Yours truly,

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