1998 Ruling 9719943 - BUTTERFLY REORGANIZATION

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.

XXXXXXXXXX
XXXXXXXXXX 		971994
XXXXXXXXXX 

Attention: XXXXXXXXXX

XXXXXXXXXX, 1998

Dear Sirs:

Re: XXXXXXXXXX (“DC”) - XXXXXXXXXX
XXXXXXXXXX (“Family Trust”) - XXXXXXXXXX

We are writing in response to your letter of XXXXXXXXXX, as amended by your letter of XXXXXXXXXX, wherein you requested an advance income tax ruling on behalf of the above-referenced taxpayers. We acknowledge receipt of your correspondence of XXXXXXXXXX as well as the information provided to us during our various meetings and telephone conversations.

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 (5th Supp.) c.1, 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 Business Corporations Act (XXXXXXXXXX);

(e) “capital dividend account” has the meaning assigned by subsection 89(1);

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

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

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

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

(j) “personal trust” has the meaning assigned by subsection 248(1);

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

(l) “proceeds of disposition” has the meaning assigned by section 54;

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

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

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

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

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

(r) "stated capital account" has the meaning assigned by the BCA;

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

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

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

Facts

1. DC was incorporated on XXXXXXXXXX under the BCA. DC is a private corporation and a taxable Canadian corporation. DC's taxation year ends on XXXXXXXXXX.

2. The authorized share capital of DC consists of an unlimited number of common shares. The issued shares of DC consist of XXXXXXXXXX common shares, all of which are held by the Family Trust. The aggregate paid-up capital of the outstanding common shares of DC is $XXXXXXXXXX.

3. The Family Trust was settled on XXXXXXXXXX pursuant to the laws of XXXXXXXXXX and was varied by court order on XXXXXXXXXX. The Family Trust is a personal trust, the beneficiaries of which are:

(a) a person who is a child, grandchild or other issue of XXXXXXXXXX (hereafter referred to as Mr. A);

(b) a person who is or has been the husband or wife of a child, grandchild or other issue of Mr. A;

(c) a trust established for the benefit of a person or group of persons included in paragraph (a) and/or (b);

(d) a corporation owned or controlled by a person or group of persons included in paragraph (a) and/or (b) and/or (c);

(e) a religious, charitable or educational institution, corporation or foundation; and

(f) a corporation, foundation or other organization which, in the opinion of the trustees of the Family Trust, is operated for the public benefit.

The order varying the Family Trust enlarged the class of persons who may own or control a corporation described in paragraph 3(d) to include a trust described in paragraph 3(c).

4. Under the terms of the Family Trust, the trustees have the discretion to pay or transfer all or any part of the capital of the trust to one or more of the beneficiaries.

5. Mr. A has four surviving children: XXXXXXXXXX (“B”), XXXXXXXXXX (“C”) and XXXXXXXXXX (“E”), each of whom is resident in Canada and XXXXXXXXXX (“D”), a resident of the United States. Mr. A’s fifth child, XXXXXXXXXX (“F”) passed away leaving a spouse and two children, all of whom are resident in Canada.

6. The current trustees of the Family Trust are Mr. A, a resident of Canada, B and C. Pursuant to the terms of the trust, there shall be at least three trustees (except that there may be temporarily less than three trustees following the death or resignation of a trustee). The power to appoint trustees rests with Mr. A and one other trustee while Mr. A is a trustee. Mr. A does not intend to appoint any new trustees as part of the series of transactions or events contemplated by this ruling request.

7. Substantially all of the assets of the Family Trust consist of the common shares of DC. These shares are held by the Family Trust as capital property. Prior to March, 1995, the trustees of the Family Trust filed an election pursuant to subsection 104(5.3) to defer the deemed disposition of the property of the Family Trust that otherwise would have occurred on June 30, 1993 pursuant to subsection 104(4).

8. DC's only activity consists of managing its investments which consist of common shares and Class A and Class B preferred shares of XXXXXXXXXX ("Opco") and an investment portfolio comprised principally of publicly-traded securities. DC owns XXXXXXXXXX of the voting shares of Opco.

9. Immediately before the proposed transactions described in paragraphs 17 to 26 below, the balance in DC's capital dividend account will be positive. DC expects that its refundable dividend tax on hand at the end of its taxation year which includes the proposed transactions will also be positive.

Proposed Transactions

10. The Family Trust will incorporate two new companies. One company will be established under the BCA (“Xco”) and the other company will be established as an unlimited liability company under the laws of XXXXXXXXXX (“Yco”).

11. The authorized share capital of Xco will consist of the following five classes of shares:

(a) Class A - voting non-participating shares.

(b) Class B - non-voting and entitled to discretionary dividends not to exceed $XXXXXXXXXX per annum and retractable by Xco on the death of F’s surviving spouse for $XXXXXXXXXX.

(c) Class C - non-voting and entitled to discretionary dividends; fully participating with Class D shares on winding up or liquidation; retractable by Xco at any time prior to XXXXXXXXXX for $XXXXXXXXXX.

(d) Class D - non-voting and entitled to discretionary dividends; fully participating with Class C shares on winding up or liquidation; retractable by Xco at any time prior to XXXXXXXXXX for $XXXXXXXXXX.

(e) Class E - non-voting and non-participating while either the Class C and D shares are outstanding. On XXXXXXXXXX, the shares are automatically retracted for $XXXXXXXXXX if either Class C or D shares are outstanding. The Class E shares become fully participating if both the Class C and D shares are retracted and cancelled prior to XXXXXXXXXX.

12. Immediately following the incorporation of Xco, the Family Trust will subscribe for XXXXXXXXXX Class A shares for a subscription price of $XXXXXXXXXX per share. The Trust will also subscribe for XXXXXXXXXX Class B, C and D shares for a subscription price of $XXXXXXXXXX per share. XXXXXXXXXX (the “Foundation”) will subscribe for XXXXXXXXXX Class E shares of Xco for a subscription price of $XXXXXXXXXX per share.

13. The Family Trust and the Foundation will enter into a unanimous shareholders agreement providing that until XXXXXXXXXX:

(a) all rights to vote that each may have must be voted as the trustees of the Family Trust directs;

(b) no shares of Xco may be transferred without the consent of the trustees of the Family Trust;

(c) the authority of the directors shall be restricted such that the authority to declare dividends and retract shares shall vest in the trustees of the Family Trust; and

(d) the agreement constitutes a unanimous shareholder agreement such that a transferee of shares is bound by the agreement and the existence of the agreement will be endorsed on any share certificates.

14. The authorized share capital of Yco will consist of one class of voting, non-participating shares and one class of non-voting, fully participating shares. The holders of the voting shares will not be entitled to receive any dividends and will be limited to receiving $XXXXXXXXXX per share on the dissolution of Yco.

15. Immediately following the incorporation of Yco, the Family Trust will subscribe for XXXXXXXXXX voting, non-participating shares of Yco for a subscription price of $XXXXXXXXXX per share. D will subscribe for XXXXXXXXXX non-voting, participating shares of Yco for a subscription price of $XXXXXXXXXX per share.

16. The Family Trust will distribute:

(a) the Class B shares of Xco to F’s surviving spouse;

(b) the Class C shares of Xco to a trust (the “C Trust”) described in paragraph (g) of the definition of a trust in subsection 108(1) settled for the exclusive benefit of F’s elder son (XXXXXXXXXX) all interests in which have vested indefeasibly in XXXXXXXXXX and no interest in which may become effective in the future; and

(c) the Class D shares of Xco to a trust (the “D Trust”) described in paragraph (g) of the definition of a trust in subsection 108(1) for the exclusive benefit of F’s younger son (XXXXXXXXXX) all interests in which have vested indefeasibly in XXXXXXXXXX and no interest in which may become effective in the future.

The distributions to F’s surviving spouse, the C Trust and the D Trust will be made in satisfaction of each beneficiary’s capital interest in the Family Trust. The C Trust and the D Trust will be settled by DC XXXXXXXXXX. The first trustee of each of the C Trust and the D Trust will be Mr. A. The Family Trust will retain the Class A shares of Xco.

17. The Family Trust will cause four new companies to be incorporated under the BCA (the “BX Holdcos”) and one unlimited liability company to be incorporated under the laws of XXXXXXXXXX (the “BY Holdco”)(each of the BX Holdcos and the BY Holdco is also referred to herein as a “Holdco” or collectively as the “Holdcos”). Each Holdco will be a private corporation and a taxable Canadian corporation.

18. The authorized share capital of each BX Holdco will consist of an unlimited number of voting, non-participating shares, an unlimited number of non-voting, fully participating shares and an unlimited number of redeemable, retractable, voting preferred shares. The holders of the voting, non-participating shares will not be entitled to receive any dividends and will be limited to receiving $XXXXXXXXXX per share on the dissolution of the BX Holdco. The authorized share capital of the BY Holdco will be similar except that the number of authorized shares of each class will be fixed. On the incorporation of each of the Holdcos, the Family Trust will subscribe for XXXXXXXXXX voting, non-participating shares for a subscription price of $XXXXXXXXXX per share.

19. The Family Trust will simultaneously transfer to each of the Holdcos 20% of the common shares of DC in exchange for XXXXXXXXXX non-voting, fully participating shares of each Holdco. The Family Trust and each Holdco will jointly elect, pursuant to subsection 85(1), in prescribed form and within the time limit specified in subsection 85(6), in respect of the transfers. The agreed amount for each transfer will be equal to the adjusted cost base of the common shares of DC to the Family Trust (which amount is less than the fair market value of the shares so transferred). No share of the capital stock of any Holdco will be owned immediately after the exchange by any person or partnership other than the Family Trust and the fair market value, immediately before the distribution described in paragraph 21, of the Family Trust’s shares of the capital stock of each of the Holdcos will be equal to or approximate the amount determined by the formula

				A x B/C + D

as set out in subparagraph (b)(iii) of the definition of “permitted exchange” in subsection 55(1).

20. Immediately before the transfers described in paragraph 21 below, the property of DC (other than its shares of Opco) will be classified into the following three types of property for the purposes of paragraph 55(3)(b):

(a) cash and near cash property, comprising all of the current assets of DC including cash, prepaid expenses and accounts receivable;

(b) investment property, comprising all of the assets of DC (other than cash or near cash property), any income from which would constitute income from property or from a specified investment business (such assets include DC’s investment portfolio); and

(c) business property, comprising all of the assets of DC, not included in (a) or (b), any income from which would be income from a business (other than a specified investment business).

It is anticipated that DC will not own any business property at the time of the transfers.

For greater certainty, any tax accounts of DC, including the balance of its refundable dividend tax on hand, its capital dividend account and any losses available for carryforward, will not be considered property of DC for the purposes of the transactions described below.

21. DC will transfer XXXXXXXXXX% of its Opco shares and properties representing XXXXXXXXXX% of the fair market value of each type of property described in paragraph 20 to each of the Holdcos (collectively, the "Transferred Property") with the result that the fair market value of each type of property transferred to each Holdco will be equal to that proportion of the fair market value of all the property of DC of that type determined immediately before such transfer that:

(a) the aggregate fair market value immediately before such transfer of all of the shares of DC owned by such Holdco,

is of

(b) the aggregate fair market value immediately before such transfer of allof the issued and outstanding shares of DC.

22. The aggregate transfer price of the Transferred Property will be equal to the fair market value of such property at the time of the transfer and will be satisfied by each of the Holdcos as follows:

(a) the assumption of XXXXXXXXXX% of the liabilities of DC (the "Assumed Liabilities"); and

(b) the issue by each Holdco to DC of preferred shares (the "Holdco Preference Shares") having an aggregate redemption amount and an aggregate fair market value equal to the amount by which the fair market value of the Transferred Property acquired by such Holdco at the time of the transfer exceeds the amount of the Assumed Liabilities.

23. In respect of the transfers described in paragraph 21 above, DC and each Holdco will file a joint election under subsection 85(1) in prescribed form and within the time referred to in subsection 85(6) with respect to each property that is an eligible property. The agreed amount in respect of each property for the purposes of the Act will be the lesser of the cost amount of the property to DC immediately before the transfer and the fair market value thereof at the time of the disposition.

24. DC and each Holdco will allocate the Assumed Liabilities to specific property such that the portion of the Assumed Liabilities allocated to a particular property will not exceed the lesser of the cost amount of the property and its fair market value at the time of the disposition.

25. For purposes of the BCA, the aggregate amount that will be added to the stated capital account of the Holdco Preference Shares issued by each BX Holdco, as described in paragraph 22 above, will be equal to the aggregate cost (as determined under section 85, where applicable) of the Transferred Property acquired by such Holdco less the amount of the Assumed Liabilities. In the case of the BY Holdco, the par value of the Holdco Preference Shares will be equal to the aggregate cost of the Transferred Property (as determined under section 85, where applicable) acquired by such Holdco less the amount of the Assumed Liabilities.

26. Each Holdco will redeem all of its outstanding Holdco Preference Shares and will issue to DC, as payment therefor, a demand non-interest bearing promissory note having a face amount and fair market value equal to the aggregate redemption amount of the Holdco Preference Shares so redeemed by it (collectively, the "Holdco Notes"). DC will accept the Holdco Notes as full satisfaction for the redemption price of the Holdco Preference Shares. Each of the Holdcos will select this day as its first taxation year-end such that the redemption of the Holdco Preference Shares will occur in the first taxation year of each of the Holdcos.

27. On the day following the transactions described in paragraph 26, the Holdcos, as the shareholders of DC, will, by special resolution, resolve to liquidate and dissolve DC pursuant to the provisions of the BCA. Under the terms of the winding-up, DC will assign and distribute each of the Holdco Notes to the particular Holdco which is the debtor under the note. As a result of the assignment and distribution of the Holdco Notes, the obligations under the Holdco Notes will be cancelled. DC will file an election in prescribed manner and prescribed form pursuant to subsection 83(2) on or before the date of the winding up in respect of the full amount of the dividend referred to in subparagraph 88(2)(b)(i) of the Act which is deemed to be paid out of its capital dividend account.

28. Any dividend refund to which DC becomes entitled as a result of the proposed transactions described herein will be distributed (under the terms of the winding-up) equally to each of the Holdcos (such proportion being equal to that proportion of the issued and outstanding common shares of DC owned by each Holdco). Following the distribution of all its property, including its dividend refund, Articles of Dissolution will be filed and DC will be dissolved.

29. The Holdcos will cause a new company ("Newco") to be incorporated under the BCA. The authorized share capital of Newco will consist of an unlimited number of common shares. Newco will be a private corporation and a taxable Canadian corporation.

30. Each of the Holdcos will transfer all of its common shares and Class A and Class B preferred shares of Opco to Newco in exchange for XXXXXXXXXX common shares of Newco. For the purposes of the BCA, the amount added to the stated capital account for the common shares of Newco on the issue of such shares will be equal to the aggregate adjusted cost base of the Opco shares transferred to Newco. Each Holdco and Newco will jointly elect, pursuant to the provisions of subsection 85(1) in prescribed form and within the time limit specified in subsection 85(6) such that the agreed amount in respect of each class of Opco shares transferred to Newco will be equal to the lesser of the cost amount of the shares of such class to the particular Holdco, which amount, in each case, will be less than the fair market value of such shares.

31. The Family Trust will distribute the non-voting, fully participating shares of one of the BX Holdcos to each of B, C, E and Xco in satisfaction of their capital interests in the Family Trust. The non-voting, fully participating shares of BY Holdco will be distributed to Yco in satisfaction of its capital interest in the Family Trust.

32. Yco and the BY Holdco will amalgamate pursuant to the provisions of the XXXXXXXXXX. Following the amalgamation the Family Trust will control the company resulting from the amalgamation.

Additional Information

33. Other than in the ordinary course of carrying on DC's business, or the business of any corporation controlled by DC, or as otherwise described herein, no liabilities have been or will be incurred by, and no assets, including those specifically described herein, have been or will be acquired by or disposed of, by DC, or any corporation controlled by it in contemplation of the transactions described above.

34. None of the shares of any of the Holdcos or DC has been or will be subject to a guarantee agreement, within the meaning referred to in subsection 112(2.2), that is given by a specified financial institution or a “specified person” in relation to any specified financial institution for any of the purposes described in that subsection. The expression "specified person" has the meaning assigned by paragraph (h) of the definition "taxable preferred share" in subsection 248(1).

35. 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).

36. None of the shares of any of the corporations referred to in this letter 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).

37. None of DC or any of the Holdcos is, or will be, at any time before the completion of the proposed transactions described herein, a corporation described in any of paragraphs (a) to (f) of the definition "financial intermediary corporation" in subsection 191(1).

Purpose of the Proposed Transactions

38. The purpose of the proposed transactions is to divide the assets of DC into five (5) corporate entities and to distribute the participating shares of these entities, (prior to the date on which the Family Trust will be deemed to have disposed of such property) to beneficiaries of the Family Trust so that the beneficiaries may engage in separate estate planning without affecting the ultimate control of the voting rights attaching to the shares of Opco.

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. The provisions of subsection 85(1) will apply, subject to the application of subsection 26(5) of the Income Tax Application Rules, to the transfer of the common shares of DC by the Family Trust to each of the Holdcos, as described in paragraph 19 above, in respect of which an election under subsection 85(1) is made, such that the agreed amount in respect of each transfer of such shares will be deemed to be DC’s proceeds of disposition and each Holdco’s cost thereof pursuant to paragraph 85(1)(a).

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

B. The provisions of subsection 85(1) will apply, subject to the application of subsection 26(5) of the Income Tax Application Rules, to the transfer of each eligible property by DC to the Holdcos, as described in paragraph 21 above, in respect of which an election under subsection 85(1) is made, such that the agreed amount in respect of each transfer of such property will be deemed to be DC’s proceeds of disposition and each Holdco’s cost thereof pursuant to paragraph 85(1)(a).

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

C. The provisions of subsection 85(1) will apply, subject to the application of subsection 26(5) of the Income Tax Application Rules, to the transfer of the common shares and Class A and Class B preferred shares of Opco by each of the Holdcos to Newco as described in paragraph 30 above, with the result that the amounts agreed upon in such elections will, pursuant to paragraph 85(1)(a), be deemed to be the proceeds of disposition thereof to the Holdcos and the cost thereof to Newco.

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

D. That on the redemption by the Holdcos of the Holdco Preference Shares and as a result of the distributions by DC in the course of its winding-up:

(a) by virtue of paragraphs 84(3)(a) and 84(3)(b), each of the Holdcos will be deemed to have paid, and DC will be deemed to have received, a taxable dividend at that time equal to the amount, if any, by which the amount paid by each corporation to redeem its Holdco Preference Shares exceeds the PUC of those shares immediately before the redemption;

(b) (i) pursuant to paragraph 88(2)(b) and subsection 84(2), but subject to (ii) to (iv) herein, each of the Holdcos will be deemed to have received a dividend (the “winding-up dividend”) on its shares of DC equal to the proportion of the amount by which the aggregate fair market value of the property of DC distributed by DC on the winding-up in consideration for the cancellation of its shares exceeds the PUC thereof that the number of shares of each class held by each of the Holdcos is of the number of shares cancelled;

(ii) pursuant to subparagraph 88(2)(b)(i), such portion of the winding-up dividend referred to in (b)(i) as does not exceed DC’s capital dividend account determined immediately before the payment of the winding-up dividend shall be deemed to be the full amount of a separate dividend;

(iii) pursuant to subparagraph 88(2)(b)(ii), the portion of the winding-up dividend that is equal to the lesser of:

(A) DC’s pre-1972 capital surplus on hand as determined immediately before the payment of the winding-up dividend, and

(B) the amount by which the winding-up dividend exceeds the portion, if any, in respect of which DC will elect under subsection 83(2)

shall be deemed not to be a dividend; and

(iv) pursuant to subparagraph 88(2)(b)(iii), the winding-up dividend, to the extent that it exceeds the portion thereof referred to in (ii) herein that is deemed to be a separate dividend and the portion referred to in (iii) herein that is deemed not to be a dividend, shall be deemed to be a separate dividend that is a taxable dividend;

(c) to the extent that the deemed dividends described in (a) and (b) above are taxable dividends, such dividends will be included in the income of the recipient corporation pursuant to paragraph 12(1)(j) and will be deductible in computing the taxable income of the recipient corporation for the year in which the dividends are deemed to have been received pursuant to subsection 112(1) and such deduction will not be denied by any of subsections 112(2.2) to (2.4);

(d) the amount of the deemed dividends described in (a) and (b) above will be excluded from the proceeds of disposition of the shares and any loss arising from such disposition of those shares will be reduced by the amount of such dividends pursuant to subsection 112(3); and

(e) by virtue of subsections 186(2) and 186(4) of the Act, each of the Holdcos will be connected with DC and DC will be connected with each of the Holdcos. Consequently,

(i) provided that each of the Holdcos is not entitled to a dividend refund (within the meaning of subsection 129(1) of the Act) in respect of its taxation year in which it is deemed to pay the dividend referred to in (a) above, DC will not be subject to Part IV tax in respect of such dividend, and

(ii) each of the Holdcos 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 DC will become entitled for its taxation year in which the dividends referred to in (b) above, are paid, that the amount of each such dividend received by the particular Holdco is of the aggregate of all taxable dividends paid by DC in its taxation year in which such dividend is paid.

E. The deemed dividends referred to in ruling D will not be subject to tax under Parts IV.1 or VI.1 of the Act on the basis that DC will have a substantial interest in each of the Holdcos and each of the Holdcos will have a substantial interest in DC and, therefore, such dividends are “excepted dividends” and “excluded dividends” within the meaning of section 187.1(b) and paragraph 191(1)(a), respectively.

F. 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 ruling D, above. For greater certainty, subsection 55(3.1) will not apply to preclude the application of paragraph 55(3)(b) to the transactions as proposed herein.

G. Subject to the application of subsection 107(4.1), the provisions of subsection 107(2) will apply to the distribution of the shares of Xco and the Holdcos described in paragraphs 16 and 31 above, such that the Family Trust will be deemed to have disposed of the shares of Xco and the Holdcos for proceeds of disposition determined in accordance with paragraph 107(2)(a) and the recipients of such shares will be deemed to have acquired the shares at a cost determined in accordance with paragraph 107(2)(b).

H. The cost amount to the Foundation of the Class E shares of Xco will be equal to the subscription price of $XXXXXXXXXX per share for the purposes of subsections 189(1) and (3).

I. Subsections 15(1), 56(2) and 246(1) will not apply as a result of the proposed transactions, in and by themselves.

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

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 affect the rulings provided herein.

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 dissolution of DC, are completed by XXXXXXXXXX.

Caveat

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 the adjusted cost base of any particular asset or the paid-up capital of any shares referred to in this advance ruling; or

(b) any tax consequences relating to the facts and proposed transactions described herein other than those specifically described in the rulings given above and, in particular, the tax consequences relating to the variation of the Family Trust described in paragraph 3 above.

Yours truly,

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

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