1999 Ruling 9907793 - BUTTERFLY RULING

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: butterfly ruling - see Statement of principal issues

Position: see Statement of principal issues

Reasons: see statement of principal issues

XXXXXXXXXX 		990779

Attention: XXXXXXXXXX

XXXXXXXXXX, 1999

Dear Sirs:

Re: XXXXXXXXXX
Advance Income Tax Ruling

We are writing in response to your letter of XXXXXXXXXX wherein you requested an advance income tax ruling on behalf of the above-noted taxpayer. In your correspondence of XXXXXXXXXX you advised us of certain amendments to the facts and proposed transactions described in your original letter. We also acknowledge the information provided during our telephone conversations (XXXXXXXXXX).

To the best of your knowledge, and that of the taxpayers involved, none of the issues contained herein is:

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

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

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

(iv) subject to a ruling previously issued by the Income Tax Rulings & Interpretations Directorate; or

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

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

(a) "Act" means the Income Tax Act, R.S.C. 1985 c.1 (5th Supp.), as amended to the date hereof, and, unless otherwise stated, every reference herein to a Part, section, subsection, paragraph or subparagraph is a reference to the relevant provision of the Act;

(b) "adjusted cost base" (also referred to as "ACB") has the meaning assigned by section 54;

(c) "agreed amount" in respect of a property means the amount that the transferor and the transferee of the property have agreed upon in their election under subsection 85(1) in respect of the property;

(d) "BCA" means the Companies Act (XXXXXXXXXX);

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

(f) "capital dividend account" (also referred to as "CDA") has the meaning assigned by subsection 89(1);

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

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

(i) "depreciable property" has the meaning assigned by subsection 13(21);

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

(k) "paid-up capital" (also referred to as "PUC") has the meaning assigned by subsection 89(1);

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

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

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

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

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

(q) "subsidiary wholly-owned corporation" has the meaning assigned by subsection 248(1);

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

(s) "taxable dividend" has the meaning assigned by subsection 89(1).

In addition, for the purposes of this letter the individuals and entities referred to herein are referred to as follows:

(aa) "Mr. A" refers to XXXXXXXXXX;

(bb) "Mrs. A" refers to XXXXXXXXXX;

(cc) "Mr B" refers to XXXXXXXXXX;

(dd) "Mrs. B" refers to XXXXXXXXXX;

(ee) "Mr. C" refers to XXXXXXXXXX;

(ff) "Mrs. C" refers to XXXXXXXXXX;

(gg) "Mr. D" refers to XXXXXXXXXX;

(hh) "Mrs. D" refers toXXXXXXXXXX;

(ii) "Mr. X" refers to XXXXXXXXXX;

(jj) "Amalco" refers to XXXXXXXXXX; and

(ll) "Xco" refers to XXXXXXXXXX.

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

FACTS

1. Amalco is a taxable Canadian corporation and a Canadian-controlled private corporation that was formed pursuant to the provisions of the BCA on XXXXXXXXXX as a result of the amalgamation of XXXXXXXXXX ("Holdco"), XXXXXXXXXX ("Opco") and XXXXXXXXXX ("Subco"). The amalgamation referred to herein was carried out in contemplation of the proposed transactions described below.

2. Amalco's issued and outstanding share capital is as follows:

(a) XXXXXXXXXX common shares with a par value of $XXXXXXXXXX per share; and

(b) XXXXXXXXXX Class B preferred shares. The Class B preferred shares of Amalco are cumulative, non-voting and redeemable at the rate of XXXXXXXXXX shares per year @ $XXXXXXXXXX/share. The par value of each share is $XXXXXXXXXX.

The authorized share capital of Amalco also includes an unlimited number of Class A preferred shares having the following attributes:

(i) entitled to one vote per share;

(ii) redeemable at any time by the holder;

(iii) retractable at any time by the issuer at a retraction price to be set at the time of their issue by the board of directors, equal to the fair market value of the consideration received by the company (net of any liabilities assumed) for their issue; and

(iv) entitled to a non-cumulative dividend at a rate to be set at the time of their issue by the board of directors.

The terms and conditions of the Class A preferred shares of Amalco contain a restriction on the payment of dividends on other classes of shares so that no such dividends may be paid on any other class of shares of the corporation so as to reduce the value of the Class A preferred shares then outstanding. In addition, the retraction price of the Class A preferred shares of Amalco will be subject to adjustment if Revenue Canada does not agree to the net value of the consideration for which such shares were issued.

3. The owners of the issued and outstanding shares of Amalco and their PUC are as follows:

Class Of No. of Shareholder Shares Shares PUC
$
Mr. A common XXXXXXXXXX XXXXXXXXXX
Mrs. A common XXXXXXXXXX XXXXXXXXXX
Mr. B common XXXXXXXXXX XXXXXXXXXX
Mrs. B common XXXXXXXXXX XXXXXXXXXX
Mr. C common XXXXXXXXXX XXXXXXXXXX
Mrs. C common XXXXXXXXXX XXXXXXXXXX
Mr. D common XXXXXXXXXX XXXXXXXXXX
Mrs. D common XXXXXXXXXX XXXXXXXXXX
Xco Class B preferred XXXXXXXXXX XXXXXXXXXX

Mr. A and Mr. B are brothers. Mr. C and Mr. D are cousins of Mr. A and Mr. B. Mr. C and Mrs. D are siblings. Each of Mr. A, Mr. B, Mr. C and Mr. D is the spouse of Mrs. A, Mrs. B, Mrs. C and Mrs. D, respectively.

Xco is a taxable Canadian corporation and a Canadian-controlled private corporation which is controlled by Mr. X, who is the father of Mr. C & Mrs. D.

The Amalco shares represent capital property to each of the shareholders referred to above. For the purposes of the Act (other than section 55) Mr. A, Mrs. A, Mr. B and Mrs. B constitute a related group which controls Amalco.

4. Prior to the amalgamation of Holdco, Opco and Subco to form Amalco the current shareholders of Amalco held shares of Holdco having the same attributes as the shares of Amalco which they currently hold. None of the shares of Holdco were acquired in contemplation of the proposed transactions set forth below. The common shares of Holdco which were owned by each of Mrs. A and Mrs. B prior to the amalgamation were acquired from her respective spouse and were subject to the attribution rules found in section 74.1 of the Act. On or about XXXXXXXXXX each of Mr. A and Mr. B gifted XXXXXXXXXX common shares of Holdco to his respective spouse. The provisions of subsection 73(1) applied to these transfers. Then in XXXXXXXXXX, each of Mr. A and Mr. B gifted an additional XXXXXXXXXX common shares of Holdco to his respective spouse. The purpose of these transfers was to crystallize a portion of the capital gains exemption of the transferor. Each of Mr. A and Mr. B elected in his return of income for XXXXXXXXXX not to have the provisions of subsection 73(1) apply in respect of the XXXXXXXXXX transfer.

5. Opco was a taxable Canadian corporation and a Canadian-controlled private corporation which was formed on XXXXXXXXXX as a result of the amalgamation of XXXXXXXXXX ("Former Opco") and one of its subsidiary wholly-owned corporations. Former Opco was incorporated pursuant to the laws of the XXXXXXXXXX. Opco carried on the business of farming, as well as processing of farm products. Opco did not report its income from its farming business in accordance with the cash method referred to in subsection 28(1) of the Act. Its taxation year end was XXXXXXXXXX.

Opco's issued and outstanding share capital consisted of XXXXXXXXXX common shares having a par value of $XXXXXXXXXX each. On XXXXXXXXXX, these XXXXXXXXXX common shares of Opco were transferred to Holdco by the original shareholders in exchange for shares of Holdco. Since that time and up to the time of the amalgamation referred to in paragraph 1 above, Opco was a subsidiary wholly-owned corporation of Holdco.

6. Subco was a taxable Canadian corporation and a Canadian-controlled private corporation. It was incorporated pursuant to the laws of the XXXXXXXXXX. Subco carried on the business of farming. Subco did not report its income from its farming business in accordance with the cash method referred to in subsection 28(1) of the Act. Its taxation year end was XXXXXXXXXX.

Subco's issued and outstanding share capital consisted of XXXXXXXXXX common shares having a par value of $XXXXXXXXXX each. These XXXXXXXXXX common shares of Subco were acquired by Opco in an arms length transaction on XXXXXXXXXX. Since that time and up to the time of the amalgamation referred to in paragraph 1 above, Subco was a subsidiary wholly-owned corporation of Opco.

7. Since the amalgamation referred to in paragraph 1, Amalco has carried on the business of farming, as well as processing of farm products. Amalco will not report its income from its farming business in accordance with the cash method referred to in subsection 28(1) of the Act.

The property of Amalco includes:

(a) land used in its farming operations;

(b) assets relating to its processing operations;

(c) farming assets (other than the land described in (a));

(d) accounts receivable, GST receivable, inventory and prepaid expenses relating to the farming operations;

(e) a loan receivable of $XXXXXXXXXX, which has no particular terms of repayment, bears interest at prime and was made to an individual for the purposes of acquiring farm land which is currently used by Amalco in its farming operations. This land would have been acquired by Opco directly (and thereby have become property of Amalco) were it not for XXXXXXXXXX.

The property of Amalco also includes:

• a NISA account of approximately $XXXXXXXXXX;
• income taxes receivable representing the refundable portion of investment tax credits in respect of property acquired by one of the predecessor corporations in its final taxation year;
• amounts receivable from staff;
• amounts receivable from directors and other related parties.

The liabilities of Amalco include a bank overdraft, accounts payable, an amount payable to a shareholder and long term debt. The amount payable to the shareholder is non interest bearing and has no set terms of repayment.

8. It is not expected that Amalco will have a balance in its RDTOH account at the end of its taxation year in which the proposed transactions, described below, are implemented. None of Holdco, Opco or Subco had a balance in its RDTOH account at the end of its XXXXXXXXXX taxation year.

PROPOSED TRANSACTIONS

9. The shareholders of Amalco will incorporate two new corporations (hereinafter referred to as "M&Pco" and "Landco") under the provisions of the BCA. Each of M&Pco and Landco will be a taxable Canadian corporation and a Canadian-controlled private corporation.

The authorized share capital of each of M&Pco and Landco will include:

(a) an unlimited number of common shares having a par value of $XXXXXXXXXX per share;

(b) an unlimited number of Class A preferred shares having a par value of $XXXXXXXXXX per share. The Class A preferred shares will be

(i) entitled to one vote per share;

(ii) redeemable at any time by the holder;

(iii) retractable at any time by the issuer at a retraction price to be set at the time of their issue by the board of directors, equal to the fair market value of the consideration received by the company (net of any liabilities assumed) for their issue; and

(iv) entitled to a non-cumulative dividend at a rate to be set at the time of their issue by the board of directors.

(c) an unlimited number of Class B preferred shares having a par value of $XXXXXXXXXX per share. The Class B preferred shares will be

(i) non-voting;

(ii) redeemable at any time by the holder;

(iii) retractable at any time by the issuer at a retraction price to be set at the time of their issue by the board of directors, equal to the fair market value of the consideration received by the company (net of any liabilities assumed) for their issue; and

(iv) entitled to a non-cumulative dividend at a rate to be set at the time of their issue by the board of directors.

The terms and conditions of both the Class A and Class B preferred shares of M&Pco and Landco will contain a restriction on the payment of dividends on other classes of shares so that no such dividends may be paid on any other class of shares of the corporation so as to reduce the value of the Class A or Class B preferred shares then outstanding. In addition, the retraction price of both the Class A and Class B preferred shares of M&Pco and Landco will be subject to adjustment if Revenue Canada does not agree to the net value of the consideration for which such shares were issued.

On the incorporation of each of M&Pco and Landco, each common shareholder of Amalco will subscribe for the same number of common shares of each such corporation that such shareholder currently holds in Amalco for a subscription price of $XXXXXXXXXX per share.

10. Amalco will take the steps necessary under the provisions of the BCA to reorganize its capital pursuant to the provisions of section 86 of the Act as follows:

(a) to exchange each of its issued and outstanding common shares having a par value of $XXXXXXXXXX per share for XXXXXXXXXX common shares having a par value of $XXXXXXXXXX per share; and

(b) to exchange each of its issued and outstanding Class B preferred shares having a redemption amount of $XXXXXXXXXX per share and a par value of $XXXXXXXXXX per share for XXXXXXXXXX Class B preferred shares having a redemption amount of $XXXXXXXXXX per share and a par value of $XXXXXXXXXX per share.

No elections will be filed under subsection 85(1) of the Act in respect of any of the share exchanges referred to herein. The Amalco shares received by each Amalco shareholder on the share exchanges described herein will have an aggregate fair market value equal to the fair market value of the Amalco shares for which they were exchanged.

11. Immediately before the proposed transfers of property described in paragraphs 15 and 16 below, the property of Amalco will be classified into the following three types of property for the purposes of the distribution to be made pursuant to paragraph 55(3)(b):

(a) cash or near cash property, comprising all of the current assets of Amalco, including cash, accounts receivable, inventories and rights arising from any prepaid expenses;

(b) business property, comprising all of the assets of Amalco, other than cash or near cash property, any income from which would, for purposes of the Act, be income from an active business carried on by Amalco; and

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

The amount of the loan receivable which relates to the acquisition of land used in Amalco's farming operation and the NISA account, both as described in paragraph 7 above, will be classified as a business property. The amount of any income taxes receivable and amounts receivable from directors and related parties as described in paragraph 7 above will be classified as cash or near cash property.

Amalco does not expect to own any investment property immediately before the proposed transfers described in paragraphs 15 and 16 below.

For greater certainty, any tax accounts, such as the balance of any non-capital losses, investment tax credits, RDTOH or CDA of Amalco, will not be considered property for purposes of the proposed transactions described herein.

12. In determining the net fair market value of each type of property owned by Amalco immediately before the proposed transfers of property described in paragraphs 15 and 16 below, the liabilities of Amalco will be allocated to, and deducted in the calculation of, the net fair market value of each type of property of Amalco as follows:

(a) current liabilities of Amalco (including the current portion of any long-term debt) will be allocated to cash or near cash property (including any accounts receivable, inventory and prepaid expenses) of Amalco in the proportion that the fair market value of each such property is of the fair market value of all cash or near cash property of Amalco. The allocation of current liabilities of Amalco as described herein will not exceed the aggregate fair market value of the cash or near cash property of Amalco;

(b) any trade accounts receivable, GST receivable, amounts receivable from staff, inventory and prepaid expenses of Amalco that are initially classified in accordance with paragraph (a) as cash or near cash property, that will relate to a business that will be carried on by Amalco or M&Pco, as the case may be, and that will be collected, sold or consumed by such corporation in the ordinary course of that business, will then be reclassified as business property and the net fair market value thereof, determined after the allocation of current liabilities described in (a) herein, will be included in the net fair market value of business property and will not be included in the net fair market value of cash or near cash property;

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

(d) if any liabilities remain after the allocations described in steps (a) and (c) above are made (hereinafter referred to as "excess unallocated liabilities"), such excess unallocated liabilities will then be allocated to the cash or near cash property, business property and investment property of Amalco based on the relative net fair market value of each type of property prior to the allocation of such excess unallocated liabilities.

For the purpose of calculating the net fair market value of the types of property of Amalco, deferred taxes, if any, will be ignored and any amount payable to a shareholder as described in paragraph 7 above will constitute a current liability of Amalco.

13. Each of Mr. A, Mrs. A, Mr. B, Mrs. B, Mr. C, Mrs. C, Mr. D and Mrs. D will transfer to Landco a number of his or her common shares of Amalco in exchange for an identical number of common shares of Landco. The number of Amalco common shares to be transferred to Landco by each such shareholder will be equal to the Landco Proportion of the common shares of Amalco owned by such shareholder.

At the same time, X Ltd. will transfer to Landco that number of Class B preferred shares of Amalco equal to the Landco Proportion of the Class B preferred shares of Amalco owned by it for Class B preferred shares of Landco having an aggregate fair market value equal to that of the Amalco Class B preferred shares so transferred.

The Landco Proportion is the proportion that the net fair market value of the farm land to be transferred to Landco, as described in paragraph 15 below, is of the net fair market value of all of the business property of Amalco, as determined pursuant to the guidelines described in paragraphs 11 and 12 above, immediately before the transfers described in paragraphs 15 and 16 below.

Immediately before the transfers described in paragraphs 15 and 16 below, the fair market value of the shares of Landco owned by each such shareholder will be equal to or approximate the amount determined by the formula

			(A x B) + D
			        C

as found in subparagraph (b)(iii) of the definition of "permitted exchange" in subsection 55(1). In addition, no person who is not currently a shareholder of Amalco will own any shares of Landco.

For the purposes of the Act (other than section 55), Mr. A, Mrs. A, Mr. B and Mrs. B will constitute a related group which controls Landco.

The amount to be added to the stated capital of Landco in respect of the issuance of the Landco common shares as described herein will not exceed the aggregate PUC of the Amalco common shares transferred to Landco while the amount to be added to the stated capital of Landco in respect of the issuance of the Landco Class B preferred shares as described herein will not exceed the aggregate PUC of the Amalco Class B preferred shares transferred to Landco.

In respect of the transfers described herein, each of Mr. A, Mrs. A, Mr. B, Mrs. B, Mr. C, Mrs. C, Mr. D, Mrs. D and X Ltd. will jointly elect with Landco, pursuant to subsection 85(1), in prescribed form and within the time referred to in subsection 85(6), in respect of the disposition of such shareholder's Amalco common shares or Class B preferred shares. The agreed amount in respect of each such election will not be less than the lesser of the amounts specified in subparagraphs 85(1)(c.1)(i) or (ii) and will not exceed the fair market value of the Amalco shares.

14. Each of Mr. A, Mrs. A, Mr. B, Mrs. B, Mr. C, Mrs. C, Mr. D and Mrs. D will transfer to M&Pco a number of his or her common shares of Amalco in exchange for an identical number of common shares of M&Pco. The number of Amalco common shares to be transferred to M&Pco by each such shareholder will be equal to the M&Pco Proportion of the common shares of Amalco owned by such shareholder.

At the same time, X Ltd. will transfer to M&Pco that number of Class B preferred shares of Amalco equal to the the M&Pco Proportion of the Class B preferred shares of Amalco owned by it for Class B preferred shares of M&Pco having an aggregate fair market value equal to that of the Amalco Class B preferred shares so transferred.

The M&Pco Proportion is the proportion that the net fair market value of the business property to be transferred to M&Pco, as described in paragraph 16 below, is of the net fair market value of all of the business property of Amalco, as determined pursuant to the guidelines described in paragraphs 11 and 12 above, immediately before the transfers described in paragraphs 15 and 16 below.

Immediately before the transfers described in paragraphs 15 and 16 below, the fair market value of the shares of M&Pco owned by each such shareholder will be equal to or approximate the amount determined by the formula

			(A x B) + D
			       C

as found in subparagraph (b)(iii) of the definition of "permitted exchange" in subsection 55(1). In addition, no person who is not currently a shareholder of Amalco will own any shares of M&Pco.

For the purposes of the Act (other than section 55), Mr. A, Mrs. A, Mr. B and Mrs. B will constitute a related group which controls M&Pco.

The amount to be added to the stated capital of M&Pco in respect of the issuance of the M&Pco common shares as described herein will not exceed the aggregate PUC of the Amalco common shares transferred to M&Pco while the amount to be added to the stated capital of M&Pco in respect of the issuance of the M&Pco Class B preferred shares as described herein will not exceed the aggregate PUC of the Amalco Class B preferred shares transferred to M&Pco.

In respect of the transfers described herein, each of Mr. A, Mrs. A, Mr. B, Mrs. B, Mr. C, Mrs. C, Mr. D, Mrs. D and X Ltd. will jointly elect with M&Pco, pursuant to subsection 85(1), in prescribed form and within the time referred to in subsection 85(6), in respect of the disposition of such shareholder's Amalco common shares or Class B preferred shares. The agreed amount in respect of each such election will not be less than the lesser of the amounts specified in subparagraphs 85(1)(c.1)(i) or (ii) and will not exceed the fair market value of the Amalco shares.

15. Contemporaneously with the transfer described in paragraph 16 below, Amalco will transfer to Landco at fair market value:

(a) all of the land used in its farming business;

(b) cash or near cash property; and

(c) investment property, if any;

such that, immediately after the transfer, the net fair market value of the cash or near cash property, the business property and investment property, if any, of Amalco which is transferred to Landco as described herein, will approximate that proportion of the net fair market value of all of that type of property of Amalco, determined immediately before the transfer referred to herein that :

(d) the aggregate fair market value of the Amalco common shares and Class B preferred shares owned by Landco, immediately before the transfer,

is of

(e) the aggregate fair market value of all of the issued and outstanding shares of Amalco immediately before the transfer.

For the purpose of this paragraph, paragraph 16 and paragraph 27 below, the expression "approximate that proportion" means that the discrepancy from that proportion, if any, would not exceed 1%, determined as a percentage of the fair market value of each type of property which the particular transferee corporation has received (or Amalco has retained) as compared to what that transferee corporation would have received (or Amalco would have retained) had it received (or retained) its appropriate pro rata share of the fair market value of that type of property. However, the aggregate net fair market value of all property of Amalco transferred to Landco as described herein will be equal to the proportion determined by (d) and (e) above of the aggregate net fair market value of all property of Amalco immediately before the transfer.

As consideration for the transfer of property described herein, Landco will issue Class A preferred shares of its capital stock having an aggregate fair market value and redemption amount equal to the fair market value of the property transferred to Landco as described herein.

The amount to be added to the stated capital of Landco in respect of the issuance of the Landco Class A preferred shares will not exceed the aggregate of the cost (determined pursuant to subsection 85(1) of the Act, where relevant) of the property transferred to Landco as described herein.

Immediately following the share issue described herein, by virtue of subsections 186(2) and 186(4), Landco will be connected with Amalco and Amalco will be connected with Landco.

16. Contemporaneously with the transfer described in paragraph 15 above, Amalco will transfer to M&Pco at fair market value:

(a) all of the business assets relating to its processing operations;

(b) cash or near cash property; and

(c) investment property, if any;

such that, immediately after the transfer, the net fair market value of the cash or near cash property, the business property and investment property, if any, of Amalco which is transferred to M&Pco as described herein, will approximate that proportion of the net fair market value of all of that type of property of Amalco, determined immediately before the transfer referred to herein that :

(d) the aggregate fair market value of the Amalco common shares and Class B preferred shares owned by M&Pco, immediately before the transfer,

is of

(e) the aggregate fair market value of all of the issued and outstanding shares of Amalco immediately before the transfer.

The aggregate net fair market value of all property of Amalco transferred to M&Pco as described herein will be equal to the proportion determined by (d) and (e) above of the aggregate net fair market value of all property of Amalco immediately before the transfer.

As consideration for the transfer of property described herein, M&Pco will issue Class A preferred shares of its capital stock having an aggregate fair market value and redemption amount equal to the fair market value of the property transferred to M&Pco as described herein.

The amount to be added to the stated capital of M&Pco in respect of the issuance of the M&Pco Class A preferred shares will not exceed the aggregate of the cost (determined pursuant to subsection 85(1) of the Act, where relevant) of the property transferred to M&Pco as described herein.

Immediately following the share issue described herein, by virtue of subsections 186(2) and 186(4), M&Pco will be connected with Amalco and Amalco will be connected with M&Pco.

17. Each of Landco and M&Pco will jointly elect with Amalco pursuant to subsection 85(1) of the Act, in prescribed form and within the time referred to in subsection 85(6) of the Act, with respect to the transfer, as described in paragraphs 15 and 16 above, by Amalco to it of any eligible property of Amalco that has a fair market value in excess of its cost amount. Specifically, the agreed amount in each joint election will be:

(a) in the case of depreciable property of a prescribed class, an amount which is not less than the least of the amounts specified in subparagraphs 85(1)(e)(i) to 85(1)(e)(iii) and not greater than the fair market value of the property;

(b) in the case of inventory or any capital property, other than depreciable property of a prescribed class, an amount that is equal to the lesser of the cost amount to Amalco of the property and the fair market value thereof; and

(c) in the case of eligible capital property, an amount which is not less than the least of the amounts specified in subparagraphs 85(1)(d)(i) to 85(1)(d)(iii) and not greater than the fair market value of the property.

18. Each of Landco and M&Pco will redeem its Class A preferred shares held by Amalco at their fair market value and each will pay the respective redemption amount by issuing a non-interest bearing demand promissory note (the "Landco Note" and the "M&Pco Note") having a principal amount and fair market value equal to the fair market value of the shares so redeemed. Amalco will accept the Landco Note and the M&Pco Note as full payment of the redemption amount of the Class A preferred shares redeemed by each such corporation.

Amalco will purchase for cancellation its common shares held by each of Landco and M&Pco at their fair market value. Amalco will also redeem its Class B preferred shares held by each such corporation at their fair market value. The purchase price and redemption amount will be paid by Amalco issuing to each of Landco and M&Pco a non-interest bearing demand promissory note (hereinafter referred to as the "Amalco Note-L" and the "Amalco Note-M") having a principal amount and fair market value equal to the fair market value of the common shares and Class B preferred shares of Amalco held by such corporation. Each of Landco and M&Pco will accept its respective Amalco Note as full payment of the purchase price and redemption price of the Amalco shares so purchased or redeemed.

19. Amalco will pay the principal amount of the Amalco Note-L by transferring to Landco the Landco Note which will be accepted by Landco in full payment of Amalco's obligation. Landco will pay the principal amount of the Landco Note by transferring to Amalco the Amalco Note-L which will be accepted by Amalco in full payment of Landco's obligation. The Amalco Note-L and the Landco Note will both thereupon be marked paid in full and cancelled.

Amalco will pay the principal amount of the Amalco Note-M by transferring to M&Pco the M&Pco Note which will be accepted by M&Pco in full payment of Amalco's obligation. M&Pco will pay the principal amount of the M&Pco Note by transferring to Amalco the Amalco Note-M which will be accepted by Amalco in full payment of M&Pco's obligation. The Amalco Note-M and the M&Pco Note will both thereupon be marked paid in full and cancelled.

20. The following new corporations will be incorporated under the provisions of the BCA:

(a) Mr. A and Mrs. A will incorporate A Ltd.;

(b) Mr. B and Mrs. B will incorporate B Ltd.;

(c) Mr. C and Mrs. C will incorporate C Ltd.; and

(d) Mr. D and Mrs. D will incorporate D Ltd.

Each of A Ltd., B Ltd., C Ltd. and D Ltd. will be a taxable Canadian corporation and a Canadian-controlled private corporation.

The authorized share capital of each of A Ltd., B Ltd., C Ltd. and D Ltd. will consist of:

(a) an unlimited number of common shares having a par value of $XXXXXXXXXX per share;

(b) an unlimited number of Class A preferred shares having the following attributes:

(i) entitled to one vote per share;

(ii) redeemable at any time by the holder;

(iii) retractable at any time by the issuer at a retraction price to be set at the time of their issue by the board of directors, equal to the fair market value of the consideration received by the company (net of any liabilities assumed) for their issue; and

(iv) entitled to a non-cumulative dividend at a rate to be set at the time of their issue by the board of directors.

(c) an unlimited number of Class B preferred shares having the following attributes:

(i) non-voting;

(ii) redeemable at any time by the holder;

(iii) retractable at any time by the issuer at a retraction price to be set at the time of their issue by the board of directors, equal to the fair market value of the consideration received by the company (net of any liabilities assumed) for their issue; and

(iv) entitled to a non-cumulative dividend at a rate to be set at the time of their issue by the board of directors.

The terms and conditions of both the Class A and Class B preferred shares of each corporation will contain a restriction on the payment of dividends on other classes of shares so that no such dividends may be paid on any other class of shares of the corporation so as to reduce the value of the Class A or Class B preferred shares then outstanding. In addition, the retraction price of both the Class A and Class B preferred shares of such corporations will be subject to adjustment if Revenue Canada does not agree to the net value of the consideration for which such shares were issued.

On incorporation of such corporations:

(a) each of Mr. A and Mrs. A will subscribe for common shares of A Ltd. in proportion to their shareholdings in Landco at a subscription price of $XXXXXXXXXX per share;

(b) each of Mr. B and Mrs. B will subscribe for common shares of B Ltd in proportion to their shareholdings in Landco at a subscription price of $XXXXXXXXXX per share;

(c) each of Mr. C and Mrs. C will subscribe for common shares of C Ltd. in proportion to their shareholdings in Landco at a subscription price of $XXXXXXXXXX per share; and

(d) each of Mr. D and Mrs. D will subscribe for common shares of D Ltd. in proportion to their shareholdings in Landco at a subscription price of $XXXXXXXXXX per share.

21. Each of Mr. A and Mrs A will transfer to A Ltd. all of his or her common shares in the capital of Landco at fair market value. As the sole consideration, A Ltd. will issue additional common shares of A Ltd. to each of Mr. A and Mrs. A. In exchange for his or her common shares of Landco, each of Mr. A and Mrs. A will receive one common share of A Ltd. for each Landco common share so transferred.

A Ltd. will add to the stated capital account maintained for its common shares an amount equal to the paid-up capital of the Landco shares transferred to it.

A Ltd. and each of Mr. A and Mrs. A 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 such transfer. The agreed amount in respect of the shares so transferred by each of Mr. A and Mrs. A will be equal to the adjusted cost base of the Landco common shares to the transferor immediately before the transfer, which amount will not exceed the fair market value of the shares.

22 Each of Mr. B and Mrs B will transfer to B Ltd. all of his or her common shares in the capital of Landco at fair market value. As the sole consideration, B Ltd. will issue additional common shares of B Ltd. to each of Mr. B and Mrs. B. In exchange for his or her common shares of Landco each of Mr. B and Mrs. B will receive one common share of B Ltd. for each Landco common share so transferred.

B Ltd. will add to the stated capital account maintained for its common shares an amount equal to the paid-up capital of the Landco shares transferred to it.

B Ltd. and each of Mr. B and Mrs. B 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 such transfer. The agreed amount in respect of the shares so transferred by each of Mr. B and Mrs. B will be equal to the adjusted cost base of such shares to the transferor immediately before the transfer, which amount will not exceed the fair market value of the shares.

23. Each of Mr. C and Mrs C will transfer to C Ltd. all of his or her common shares in the capital of Landco at fair market value. As the sole consideration, C Ltd. will issue additional common shares of C Ltd. to each of Mr. C and Mrs. C. In exchange for his or her common shares of Landco each of Mr. C and Mrs. C will receive one common share of C Ltd. for each Landco common share so transferred.

C Ltd. will add to the stated capital account maintained for its common shares an amount equal to the paid-up capital of the Landco shares transferred to it.

C Ltd. and each of Mr. C and Mrs. C 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 such transfer. The agreed amount in respect of the shares so transferred by each of Mr. C and Mrs. C will be equal to the adjusted cost base of such shares to the transferor immediately before the transfer, which amount will not exceed the fair market value of the shares.

24. Each of Mr. D and Mrs D will transfer to D Ltd. all of his or her common shares in the capital of Landco at fair market value. As the sole consideration, D Ltd. will issue additional common shares of D Ltd. to each of Mr. D and Mrs. D. In exchange for his or her common shares of Landco each of Mr. D and Mrs. D will receive one common share of D Ltd. for each Landco common share so transferred.

D Ltd. will add to the stated capital account maintained for its common shares an amount equal to the paid-up capital of the Landco shares transferred to it.

D Ltd. and each of Mr. D and Mrs. D 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 such transfer. The agreed amount in respect of the shares so transferred by each of Mr. D and Mrs. D will be equal to the adjusted cost base of such shares to the transferor immediately before the transfer, which amount will not exceed the fair market value of the shares.

25. Xco will transfer to C Ltd. all of its Class B preferred shares in the capital of Landco at fair market value. As the sole consideration, C Ltd. will issue Class B shares of its capital stock to Xco having an aggregate fair market value equal to the fair market value of the Landco Class B preferred shares so transferred.

C Ltd. will add to the stated capital account maintained for its Class B preferred shares an amount equal to the paid-up capital of the Landco Class B preferred shares transferred to it.

C Ltd. and Xco 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 such transfer. The agreed amount in respect of the shares so transferred by Xco will be equal to the adjusted cost base of such shares to Xco immediately before the transfer, which amount will not exceed the fair market value of the shares.

26. Immediately before the transfers of property described in paragraph 27 below, the property of Landco will be classified into the following three types of property for the purposes of the distribution to be made pursuant to paragraph 55(3)(b):

a) cash or near cash property, comprising all of the current assets of Landco;

b) business property, consisting of the farm land transferred to it as described in paragraph 15 above; and

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

It is not expected that Landco will have any investment property immediately before the transfer of property described in paragraph 27.

27. Landco will then transfer all of its property to A Ltd., B Ltd., C Ltd. and D Ltd. (each such corporation is hereinafter referred to as a "Transferee Corporation") at its fair market value. Each Transferee Corporation will receive that portion of each type of property of Landco such that the fair market value of each type of property transferred to that Transferee Corporation as described herein will approximate that proportion of the fair market value of all property of Landco of that type, determined immediately before such transfers of property, that:

(a) the aggregate fair market value (immediately before the transfers described herein) of the Landco shares owned by the particular Transferee Corporation

is of

(b) the aggregate fair market value (immediately before the transfers described herein) of all the issued and outstanding shares in the capital stock of Landco.

As sole consideration for the transferred properties, each of the Transferee Corporations will issue to Landco that number of its Class A preferred shares which will have an aggregate fair market value and an aggregate redemption and retraction value equal to the aggregate fair market value of the properties transferred to the particular Transferee Corporation.

For greater certainty, the number of Class A preferred shares of each of C Ltd. and D Ltd. to be issued to Landco as described herein will represent more than 10 percent (but less than 50%) of all the voting shares of such corporation, and their aggregate fair market value will be more than 10 percent of the aggregate fair market value of all the issued and outstanding shares of such corporation.

For the purposes of subsection 191(4), the terms and conditions of the Class A preferred shares of each of C Ltd. and D Ltd. to be issued as described herein will, at the time of their issue, specify an amount in respect of each such share, including an amount for which the share is to be redeemed, acquired or cancelled. The amount to be specified in respect of each Class A preferred share of C Ltd. and D Ltd., pursuant to a resolution of its board of directors, will be expressed as a dollar amount, will not be determined by a formula and will equal the fair market value of the property to be received by the particular corporation as consideration for such share. The agreement between each of C Ltd. and D Ltd. and Landco pursuant to which its Class A preferred shares will be issued will also refer to the redemption price as a dollar amount.

In respect of the transfer of properties described herein, Landco and each of A Ltd., B Ltd., C Ltd. and D Ltd. will jointly elect pursuant to subsection 85(1), in prescribed form and within the time specified in subsection 85(6), to transfer each property that is a capital property (other than depreciable property of a prescribed class) at an agreed amount that is equal to the lesser of the cost amount to Landco of the property and the fair market value thereof.

Each of the Transferee Corporations will add to the stated capital account in respect of the Class A preferred shares so issued an amount not exceeding the cost (as determined pursuant to subsection 85(1), where relevant) to it of the property so transferred.

28. Each of the Transferee Corporations will redeem its Class A preferred shares held by Landco at their fair market value and each will pay the respective redemption amount by issuing to Landco a non-interest bearing demand promissory note (the "A Note", the "B Note", the "C Note" and the "D Note" - collectively referred to as the "Transferee Notes") having a principal amount and fair market value equal to the fair market value of the shares so redeemed. Landco will accept the Transferee Notes as full payment of the redemption amount of the Class A preferred shares redeemed by each of the Transferee Corporations.

29. Thereafter, the Transferee Corporations, being the sole shareholders of Landco, will, by special resolution, resolve to liquidate and dissolve Landco pursuant to the provisions of the BCA. Under the terms of the winding-up, Landco will assign and distribute the A Note to A Ltd., the B Note to B Ltd., the C Note to C Ltd. and the D Note to D Ltd. As a result of the assignment and distribution of the Transferee Notes, the obligations under the notes will be cancelled. No agreement or resolution relating to the winding up of Landco or the distribution of its property will provide for the cancellation of any shares of Landco.

Following the distribution of the Transferee Notes, all properties of Landco will have been distributed and all liabilities either discharged or assumed by the Transferee Corporations. As soon as practical, Articles of Dissolution will be filed and Landco will be dissolved.

30. Each of A Ltd., B Ltd., C Ltd. and D Ltd will enter into an agreement with Amalco pursuant to which Amalco will agree to perform farming services for each of them. All services rendered under this agreement will be carried out at fair market value.

31. Each of Amalco and M&Pco will enter into a shareholders agreement with its respective shareholders (i.e. A Ltd., B Ltd., C Ltd. and D Ltd.) which will govern their relationships.

ADDITIONAL INFORMATION

32. None of the corporations referred to herein is a specified financial institution or a restricted financial institution.

33. None of the issued shares referred to herein (including the shares to be issued as part of the proposed transactions) is or will be subject to a guarantee agreement within the meaning referred to in subsection 112(2.2).

34. None of the issued shares referred to herein (including the shares to be issued as part of the proposed transactions) is or will be part of a dividend rental arrangement within the meaning referred to in subsection 112(2.3).

35. None of the issued shares referred to herein (including the shares to be issued as part of the proposed transactions) has been or 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).

36. No assets have been or will be acquired or disposed of by any of Holdco, Opco, Subco, Amalco or Landco in contemplation of the proposed transactions, except as described in this letter.

37. None of the parties is contemplating an acquisition of control of any of Amalco, M&Pco or the Transferee Corporations nor is it contemplated that any of the parties will sell or transfer any property to a partnership or person who is not related to the vendor or transferor as part of the series of transactions or events described herein, other than as described herein or in the ordinary course of business.

38. The proposed transactions will have no effect on any outstanding tax liabilities of any of the parties hereto.

PURPOSE OF THE PROPOSED TRANSACTIONS

39. XXXXXXXXXX. The proposed transactions are being implemented to enable the land to be distributed to a separate corporation for each of the families.

The purpose of transferring the processing operations to a separate corporation is to ensure that the non-farming assets of Amalco will not exceed 10% of the fair market value of all of Amalco's assets so that the shares of Amalco will qualify as shares of the capital stock of a family farm corporation for the purposes of subsection 73(4) of the Act.

RULINGS GIVEN

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

A. (a) On the redemption by Landco and M&Pco of its Class A preferred shares held by Amalco as described in paragraph 18, each of Landco and M&Pco will, by virtue of paragraph 84(3)(a), be deemed to have paid, and Amalco will, by virtue of paragraph 84(3)(b), be deemed to have received, a taxable dividend at that time equal to the amount, if any, by which the amount paid to redeem the shares exceeds the PUC of those shares immediately before their redemption; and

(b) On the redemption by Amalco of its Class B preferred shares held by each of Landco and M&Pco and the purchase for cancellation by Amalco of its common shares held by each of Landco and M&Pco as described in paragraph 18, Amalco will, by virtue of paragraph 84(3)(a), be deemed to have paid, and each of Landco and M&Pco will, by virtue of paragraph 84(3)(b), be deemed to have received, a taxable dividend at that time equal to the amount, if any, by which the amount paid to redeem or purchase such shares exceeds the PUC of those shares immediately before the redemption or purchase;

(c) to the extent that the deemed dividends described in (a) and (b) above are taxable dividends, such dividends will, pursuant to subsection 112(1), be deductible in computing the taxable income of the recipient for the year in which the dividends are deemed to have been received and such deduction will not be denied by any of the provisions of subsections 112(2.1), (2.2), (2.3) or (2.4);

(d) by virtue of subsections 186(2) and 186(4), Amalco will be connected with each of Landco and M&Pco, and Landco and M&Pco will each be connected with Amalco. Consequently, none of Landco, M&Pco or Amalco will be subject to tax in respect of the dividends referred to in (a) and (b) above, under Part IV of the Act except as provided for in paragraph 186(1)(b).

B. On the redemption by the Transferee Corporations of their Class A Preferred shares held by Landco as described in paragraph 28 and as a result of the distributions by Landco in the course of its winding-up as described in paragraph 29:

(a) by virtue of paragraphs 84(3)(a) and 84(3)(b), each of the Transferee Corporations will be deemed to have paid, and Landco will be deemed to have received, a taxable dividend at that time equal to the amount, if any, by which the amount paid to redeem the shares exceeds the PUC of those shares immediately before their redemption; and

(b) pursuant to subsection 84(2), Landco will be deemed to have paid, and each of the Transferee Corporations will be deemed to have received, a dividend on their common shares and Class B preferred shares of Landco, as the case may be, equal to the proportion of the amount by which the aggregate fair market value of the property of Landco distributed by it to the Transferee Corporations as holders of shares of that particular class on the winding-up exceeds the amount, if any, that the PUC of that class is reduced, that the number of shares of such class held by the Transferee Corporations is of the number of issued shares of that class outstanding immediately before the distribution;

(c) to the extent that the deemed dividends described in (a) and (b) above are taxable dividends, such dividends will, pursuant to subsection 112(1), be deductible in computing the taxable income of the recipient for the year in which the dividends are deemed to have been received and such deduction will not be denied by any of the provisions of subsections 112(2.1), (2.2), (2.3) or (2.4);

(d) by virtue of paragraph 186(4)(b), C Ltd. and D Ltd. will be connected with Landco and Landco will be connected with each of C Ltd. and D Ltd. By virtue of subsections 186(2) and 186(4), A Ltd. and B Ltd. will be connected with Landco and Landco will be connected with each of A Ltd. and B Ltd. Consequently, none of the Transferee Corporations or Landco will be subject to tax in respect of the dividends referred to in (a) and (b) above, under Part IV of the Act except as provided for in paragraph 186(1)(b).

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

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

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

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

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

which has not been described herein, then by virtue of paragraph 55(3)(b), subsection 55(2) will not apply to the taxable dividends referred to in Rulings A and B above, and for greater certainty, subsection 55(3.1) will not apply to deny the exemption under paragraph 55(3)(b).

D. The settlement of:

(a) the Landco Note and the Amalco Note-L as described in paragraph 19 above;

(b) the M&Pco Note and the Amalco Note-M as described in paragraph 19 above; and

(c) the Transferee Notes as described in paragraph 29 above;

will not give rise to a "forgiven amount" within the meaning of subsection 80(1) or section 80.01 of the Act.

E. Subsection 15(1) will not apply to the proposed transactions described herein, in and by themselves.

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

The above rulings are given subject to the limitations and qualifications set out in Information Circular 70-6R3 dated December 30, 1996 and are binding on Revenue Canada Customs, Excise and Taxation provided that the proposed transactions, other than the formal dissolution of Landco, are completed by XXXXXXXXXX.

The above rulings are based on the law as it presently reads and do not take into account any proposed amendments to the Act which, if enacted into law, could have an effect on the rulings provided herein.

Comments

1. You have informed us, in paragraphs 9 and 20 above, that the redemption price of the Class A preferred shares of Landco, M&Pco and each of the Transferee Corporations will be adjustable in the event that Revenue Canada determines the fair market value of the property received on the issue of such shares to be different than the fair market value as determined by the directors of such corporation.

Nothing in this letter should be interpreted as confirming that,

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

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

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

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

2. Nothing in this ruling should be construed as implying that Revenue Canada, Customs, Excise and Taxation has agreed to or reviewed:

(a) the determination of the fair market value or ACB of any particular asset or the PUC of any shares referred to herein; or

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

Yours truly,

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

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