1999 Ruling 9902483 - 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 which contains several
issues

Position: (See Statement of Principal Issues)

Reasons: (See Statement of Principal Issues)

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Attention: XXXXXXXXXX

XXXXXXXXXX, 1999

Dear Sirs:

Re: XXXXXXXXXX
Advance Income Tax Ruling Request

This is in reply to your letter of XXXXXXXXXX in which you requested an advance income tax ruling on behalf of the above-noted taxpayer. In your letters 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 the taxpayer 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 the taxpayer or a related person;

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

(iv) is before the. courts or, if a judgement 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) Unless otherwise indicated, all references to statute are to the Income Tax Act (Canada), R.S.C. 1985 (5th Supp.), c.1, as amended ( the "Act");

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

(c) "arm's length" has the meaning assigned by subsection 251(1);

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

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

(f) "capital dividend" has the meaning assigned by subsection 83(2);

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

(h) "capital loss" has the meaning assigned by paragraph 39(1)(b)

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

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

(k) "dividend refund" has the meaning assigned by subsection 129(1):

(1) "paid-up capital" ("PUC") has the meaning assigned by subsection 89(1);

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

(n) "private holding corporation" has the meaning assigned by subsection 191(1);

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

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

(q) "short-term preferred shares" has the meaning assigned by subsection 248(1);

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

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

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

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

(v) "taxable preferred shares" has the meaning assigned to that term by subsection 248(1) of the Act; and

(w) "valuation day" ("V-day") has the meaning assigned by section 24 of the Income Tax Application Rules.

FACTS

1. XXXXXXXXXX ("DC") is a CCPC and a TCC. DC was incorporated on XXXXXXXXXX and is governed by the provisions of the BCA.

The authorized share capital of DC includes:

(a) XXXXXXXXXX common shares;

(b) an unlimited number of Class B special shares; and

(c) XXXXXXXXXX Class C special shares.

The Class C special shares are similar to the common shares except that:

(d) they are entitled to a $XXXXXXXXXX per share non-cumulative dividend in priority to a $XXXXXXXXXX per share dividend to the common shares and any dividend in excess of the $XXXXXXXXXX per share to the Class C special shares and common shares will be paid pro rata among the Class C special shares and common shares; and

(e) the Class C special shares do not vote. The issued share capital of DC consists of

(f) XXXXXXXXXX common shares which are held by the XXXXXXXXXX (the "Trust"), with an aggregate PUC of
$XXXXXXXXXX; and

(g) XXXXXXXXXX Class C special shares, of which

(i) XXXXXXXXXX shares are held by XXXXXXXXXX ("Individual A");

(ii) XXXXXXXXXX shares are held by XXXXXXXXXX ("Individual B");

(iii) XXXXXXXXXX shares are held by XXXXXXXXXX ("Individual C");

(iv) XXXXXXXXXX shares are held by XXXXXXXXXX ("Individual D")

(v) XXXXXXXXXX shares are held by XXXXXXXXXX ("Individual E");

(vi) XXXXXXXXXX shares are held by XXXXXXXXXX ("Xco."); and

(vii)XXXXXXXXXX shares are held by the XXXXXXXXXX ("Yco.").

The aggregate PUC of the Class C shares of DC is $XXXXXXXXXX.

Xco is a CCPC and a TCC. All the issued shares of Xco are owned by XXXXXXXXXX ("Individual F")

Yco is a CCPC and a TCC which is controlled by XXXXXXXXXX ("Individual G") as the owner of all the issued XXXXXXXXXX voting special shares and XXXXXXXXXX Class A non-voting preferred shares of Yco. The issued XXXXXXXXXX non-voting common shares of Yco are owned by the XXXXXXXXXX (the "Foundation"), a private foundation of which Individual G and her XXXXXXXXXX children are all the directors of the Foundation.

Each of Xco and Yco has an RDTOH balance.

Individual A is the mother of Individuals B, C, D, E, F and G.

Individual A acquired XXXXXXXXXX Class C special shares of DC from Individual F in XXXXXXXXXX for $XXXXXXXXXX and XXXXXXXXXX Class C special shares of DC from Xco in XXXXXXXXXX for $XXXXXXXXXX.

Individual C acquired XXXXXXXXXX Class C special shares of DC prior to 1972 from treasury of DC for $XXXXXXXXXX and received XXXXXXXXXX Class C special shares of DC from Individual A as a gift in XXXXXXXXXX when these shares had a fair market value of $XXXXXXXXXX at that time.

None of Individual A or any of her children has ever claimed a deduction under section 110.6 of the Act with respect to any gains from the disposition of any of the Class C special shares of DC.

All the common shares and Class C special shares of DC were issued by DC prior to 1972. The common shares and Class C special shares of DC are not currently taxable preferred shares or short-term preferred shares and they represent capital property to the current owner thereof. None of the shares of DC were acquired by their current owner in contemplation of the proposed transactions described herein.

2. The Trust is an inter-vivos trust resident in Canada. Its trustees are XXXXXXXXXX (the "Trustees").

The Trust was established by a trust agreement ("Agreement") between XXXXXXXXXX (deceased), as Settlor, and XXXXXXXXXX as Trustees, dated XXXXXXXXXX, and was settled by the Settlor for the benefit of his issue. Prior to the distribution date as stipulated in the Agreement, the Trust is required to pay the annual income to the children of the Settlor or, if a child is deceased, his or her issue. The Trust is distributable upon the death of the last surviving child of the Settlor and is distributable among the issue of the children of the Settlor. The Settlor has XXXXXXXXXX surviving children, the youngest of whom is presently age XXXXXXXXXX. The Settlor's surviving spouse is Individual A. Individual A is related to each of the beneficiaries of the Trust for the purposes of section 55 of the Act; consequently pursuant to subparagraph 55(5)(e)(ii) Individual A is related to the Trust for the purposes of section 55.

Individual A and the Trust deal with each other at arm's length.

3. DC is an investment holding company. It's assets consist of:

(a) investments which are made up of publicly traded Canadian and U.S. stocks and bonds, other financial instruments, interests in foreign currency pools and non-U.S. foreign securities (the "marketable securities"): and

(b) a relatively small amount of cash.

DC's marketable securities are managed by Investment Managers who endeavor to keep the portfolios fully invested in publicly traded stocks, bonds and currencies at all times. DC's cash at any point in time thus represents dividends received, interest received or the proceeds from sales of securities which are in the process of being reinvested in new securities.

The marketable securities described above are capital properties to DC and represent portfolio investments of DC as it does not have significant influence, within the meaning of section 3050 of the CICA Handbook, over any corporation in which it holds shares.

DC's investment in interests in foreign currency pools and non-U.S. foreign securities are held through XXXXXXXXXX (the "agent securities") and are not distributable in specie as DC does not own the agent securities outright. As at XXXXXXXXXX, the agent securities had an approximate fair market value of $XXXXXXXXXX and an approximate ACB of $XXXXXXXXXX.

The aggregate fair market value as at XXXXXXXXXX of DC's assets (before deducting DC's debts) was approximately $XXXXXXXXXX and the aggregate ACB of such assets was approximately $XXXXXXXXXX.

Certain marketable securities of DC have accrued capital losses (“loss properties"). As at XXXXXXXXXX the aggregate capital losses accrued on the loss properties of DC was approximately $XXXXXXXXXX. It is not expected that the accrued capital losses on loss properties held at the time of the proposed transactions as described herein will be materially different than this amount.

DC does not have any liabilities other than current liabilities. The current liabilities of DC include income tax liabilities and accrued professional fees which result from the ongoing operations of DC. The current liabilities of DC do not exceed the aggregate fair market value of the cash or near cash property of DC.

DC's fiscal year ends on XXXXXXXXXX. It is expected that the RDTOH of DC at XXXXXXXXXX, will be approximately $XXXXXXXXXX.

As at XXXXXXXXXX, DC had a balance in its CDA of approximately $XXXXXXXXXX.

On or about XXXXXXXXXX, DC paid the first regular XXXXXXXXXX quarterly taxable dividend in the amount of $XXXXXXXXXX to the current holders of its common shares and Class C special shares on a pro rata basis.

On or about XXXXXXXXXX DC paid the second regular xxxxxxxxxx quarterly dividend by way of two separate dividends to the current holders of its common shares and Class C special shares on a pro rata basis:

(c) the first dividend was in the amount of $XXXXXXXXXX and was paid out of DC's CDA. DC has elected in prescribed manner and prescribed form pursuant to subsection 83(2) in respect of the full amount of the first dividend; and

(d) the second dividend was in the amount of $XXXXXXXXXX and was a taxable dividend.

You have advised that both the XXXXXXXXXX quarterly dividends paid by DC did not exceed its regular quarterly dividend paid in recent years and they were not part of a series of transactions which includes the proposed transactions as described herein.

PROPOSED TRANSACTIONS

4. The Trust will sell at fair market value its XXXXXXXXXX common shares of DC for cash consideration to Individual A. The purpose of this share sale is to have Individual A control DC such that DC will be controlled, within the meaning of subsection 186(2) of the Act, by each of the new corporations referred to in paragraph 5 below.

Individual A will hold the XXXXXXXXXX common shares of DC as capital properties.

DC will, pursuant to paragraph 111(4)(e), designate in its return of income for the taxation year that ends immediately before control of DC is acquired by Individual A, certain of the capital properties it owns (other than the loss properties) immediately before control of DC is acquired.

5. Each of Individual A, Individual C, Individual E and Yco will incorporate a new corporation: Transferee1, Transferee3, Transferee5, and Subco2, respectively, all pursuant to the laws of the Province of XXXXXXXXXX.

Each of Individual D and Xco will incorporate a new corporation: Transferee4 and Subco1, respectively, pursuant to either the laws of the Province of XXXXXXXXXX or the laws of the Province of XXXXXXXXXX. Individual B will incorporate Transferee2 pursuant to the Canada Business Corporations Act, R.S.C. 1985, c.C-44, as amended.

Each of Transferee1, Transferee2, Transferee3, Transferee4, Transferee5, Subco1 and Subco2 (collectively, the "new corporations", individually a “new corporation") will be a TCC, a private holding corporation and will not be a specified financial institution.

The share capital of each new corporation will consist of:

(a) a class of common shares; and

(b) a class of special shares designated as Class A special shares with the following share attributes:

(i) voting;

(ii) redeemable and retractable at a redemption amount ("Redemption Amount") of $XXXXXXXXXX per share;

(iii)for the purpose of subsection 191(4) of the Act, the terms and conditions of the Class A special shares to be issued as described in paragraph 15 below will, at the time of their issue, specify $XXXXXXXXXX per share as the amount for which the share is to be redeemed, acquired or cancelled which amount will be equal to the fair market value of the property received by the particular new corporation as consideration for such share;

(iv) entitled to an annual non-cumulative dividend, not to exceed xxxxxxxxxx % per annum of their Redemption Amount, to be paid at the discretion of the directors of the particular new corporation; and

(v) the stated capital of these special shares will be determined on the date of issuance.

6. Xco and Yco will subscribe for 1 common share of Subco1 and Subco2, respectively, for a cash consideration of $XXXXXXXXXX. Where permitted under the corporate law in the jurisdiction where it is created, no shares of any of Transferee1, Transferee2, Transferee3, Transferee4, or Transferee5 will be issued prior to the transactions described in paragraphs 7 through 11 below.

Where the law of the jurisdiction where a new corporation is incorporated requires that shares be issued at the time of incorporation, the incorporator of such new corporation, being Individual A, Individual B, Individual C, Individual D, Individual E, Xco or Yco, as the case may be, will subscribe for a nominal number of common shares for a nominal subscription price.

7. Individual A will transfer her XXXXXXXXXX common shares and XXXXXXXXXX Class C special shares of DC to Transferee1 at fair market value. As the sole consideration, Transferee1 will issue to Individual A XXXXXXXXXX common shares of its capital stock having a fair market value equal to the fair market value at that time of the shares of DC so transferred to Transferee1.

Individual A and Transferee1 will jointly elect in prescribed form and within the time period referred to in subsection 85(6) to have the provisions of subsection 85(1) apply to the transfer. The agreed amount in respect of the shares so transferred will be equal to the lesser of the amounts described in subparagraphs 85(1)(c.1)(i) and (ii) of the Act.

For the purposes of the applicable legislation, the amount to be added to the stated capital of the Transferee1 common shares will be equal to the aggregate ACB, as determined pursuant to paragraph 84.1(2)(a.1) of the Act, to Individual A of the XXXXXXXXXX Class C special shares and common shares of DC so transferred to Transferee1.

8. Individual B will transfer her XXXXXXXXXX Class C special shares of DC to Transferee2 at fair market value. As the sole consideration, Transferee2 will issue to Individual B XXXXXXXXXX common shares of its capital stock having a fair market value equal to the fair market value at that time of the Class C special shares of DC so transferred to Transferee2.

Individual B and Transferee2 will jointly elect in prescribed form and within the time period referred to in subsection 85(6) to have the provisions of subsection 85(1) apply to the transfer. The agreed amount in respect of the shares so transferred will be 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 applicable legislation, the amount to be added to the stated capital of the Transferee2 common shares will be equal to the aggregate PUC of the Class C special shares of DC so transferred to Transferee2.

9. Individual C will transfer his XXXXXXXXXX Class C special shares of DC to Transferee3 at fair market value. As the sole consideration, Transferee3 will issue to Individual C XXXXXXXXXX common shares of its capital stock having a fair market value equal to the fair market value at that time of the Class C special shares of DC so transferred to Transferee3.

Individual C and Transferee3 will jointly elect in prescribed form and within the time period referred to in subsection 85(6) to have the provisions of subsection 85(1) apply to the transfer. The agreed amount in respect of the shares so transferred will be 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 applicable legislation, the amount to be added to the stated capital of the Transferee3 common shares will be equal to the aggregate ACB, as determined pursuant to paragraphs 84.1(2)(a) and (a.1) of the Act, to Individual C of such Class C special shares of DC so transferred to Transferee3.

10. Individual D will transfer her XXXXXXXXXX Class C special shares of DC to Transferee4 at fair market value. As the sole consideration, Transferee4 will issue to Individual D XXXXXXXXXX common shares of its capital stock having a fair market value equal to the fair market value at that time of the Class C special shares of DC so transferred to Transferee4.

Individual D and Transferee4 will jointly elect in prescribed form and within the time period referred to in subsection 85(6) to have the provisions of subsection 85(1) apply to the transfer. The agreed amount in respect of the shares so transferred will be 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 applicable legislation, the amount to be added to the stated capital of the Transferee4 common shares will be equal to the aggregate PUC of the Class C special shares of DC so transferred to Transferee4.

11. Individual E will transfer his XXXXXXXXXX Class C special shares of DC to Transferee5 at fair market value. As the sole consideration, Transferee5 will issue to Individual E XXXXXXXXXX common shares of its capital stock having a fair market value equal to the fair market value at that time of the Class C special shares of DC so transferred to Transferee5.

Individual E and Transferee5 will jointly elect in prescribed form and within the time period referred to in subsection 85(6) to have the provisions of subsection 85(1) apply to the transfer. The agreed amount in respect of the shares so transferred will be 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 applicable legislation, the amount to be added to the stated capital of the Transferee5 common shares will be equal to the aggregate PUC of the Class C special shares of DC so transferred to Transferee5.

12. Before the transfers of property as described in paragraph 15 below, DC will sell the agent securities at fair market value for cash consideration.

13. Immediately before the transfers of property as described in paragraph 15 below, the property of DC will be classified into three types of property for the purposes of the definition of "distribution" in subsection 55(1), as follows:

(a) cash or near cash property, comprising all of the current assets of DC, including any cash, marketable securities (other than portfolio investments) , accounts receivable, inventory and prepaid expenses;

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

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

It is anticipated that DC will not have any business property immediately before the transfer of property as described in paragraph 15 below. For greater certainty, the marketable securities which are held as portfolio investments will be classified as investment property.

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

As DC will liquidate the agent securities before the transfers of property described in paragraph 15 below, the cash from the liquidation of the agent securities will be included in the cash or near cash property of DC for purposes of the proposed transactions.

14. DC's only liabilities will consist of current liabilities, including income taxes payable for the year of the proposed transactions. Consequently, for the purposes of determining the net fair market value of each type of property of DC immediately before the transfers of property as described in paragraph 15 below, the current liabilities of DC will be allocated to the cash or near cash property of DC. The allocation of current liabilities as described herein will not exceed the aggregate fair market value of the cash or near cash property of DC.

For greater certainty, the amount of any deferred income taxes will not be considered a liability for the purposes of the proposed transactions as described herein because such amount does not represent a legal obligation of DC.

15. DC will transfer to each of Transferee1, Transferee2, Transferee3, Transferee4, Transferee5, Subco1 and Subco2 at fair market value a proportionate share of its:

(a) cash or near cash property;

(b) business property, if any; and

(c) investment property;

such that, immediately after the transfer, the net fair market value of each type of property of DC (after allocating and deducting, in the manner described in paragraph 14 above, the liabilities of DC which are to be assumed by Transferee1, Transferee2, Transferee3, Transferee4, Transferee5, Subco1 and Subco2 as described below) which is transferred to each of Transferee1, Transferee2, Transferee3, Transferee4, Transferee5, Subco1 and Subco2 as described herein, will approximate that proportion of the net fair market value of all of that type of property of DC, determined immediately before the transfers referred to herein that:

(d) the aggregate fair market value of the common shares and Class "C" special shares of DC owned by each of Transferee1, Transferee2, Transferee3, Transferee4, Transferee5, Xco and Yco, as the case may be, immediately before the transfer,

is of

(e) the aggregate fair market value of all of the issued and outstanding common shares and Class "C" special shares of DC immediately before the transfer.

For greater certainty, the portion of the net fair market value of each type of DC's property that is transferred to each of Subco1 and. Subco2 as described herein will represent Xco's and Yco's pro rata share of the net fair market value of that type of property of DC, respectively.

For the purpose of this paragraph, the expression "approximate that proportion" means that the discrepancy from that proportion, if any, would not exceed XXXXXXXXXX%, determined as a percentage of the fair market value of each type of property which each of Transferee1, Transferee2, Transferee3, Transferee4, Transferee5, Subco1 and Subco2 has received as compared to what each of them would have received had each of them received 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 DC transferred to each of Transferee1, Transferee2, Transferee3, Transferee4, Transferee5, Subco1 and Subco2 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 DC immediately before the transfer.

As consideration for the transfer of property as described herein, each of Transferee1, Transferee2, Transferee3, Transferee4, Transferee5, Subco1 and Subco2 will:

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

(g) issue Class A special shares of its capital stock, having an aggregate fair market value and redemption amount equal to the fair market value of the property of DC transferred to it as described herein less the amount of the liabilities of DC assumed by it as described in paragraph (f) above.

16. DC and each of Transferee1, Transferee2, Transferee3, Transferee4, Transferee5, Subco1 and Subco2 will jointly elect pursuant to subsection 85(1) of the Act, in prescribed form and within the time referred to in subsection 85(6) of the Act, with respect to the transfer to each of such transferee of any eligible property of DC that has a fair market value in excess of its cost amount. Specifically, the agreed amount in each joint election will be equal to the lesser of the amounts specified in subparagraphs 85(1)(c.1)(i) and (ii), in the case of property described in paragraph 85(1)(c.1).

For greater certainty, the agreed amount for any capital property included in the subsection 85(1) elections referred to herein will not be less than the amount of any liabilities assumed by the transferee as consideration for the transfer of such property and will not exceed the fair market value of each such property.

Pursuant to the provisions of the applicable legislation, the addition to the stated capital of each transferee corporation in respect of the issuance of the Class A special shares of its capital stock, will equal the amount by which the aggregate of the cost (determined pursuant to subsection 85(1) of the Act, where relevant) of the property transferred to it as described in paragraph 15 above exceeds the principal amount of the liabilities of DC assumed by it as described in subparagraph 15(f).

17. Immediately following the transfers of property as described in paragraph 15, each of Transferee1, Transferee2, Transferee3, Transferee4, Transferee5, Subco1 and Subco2 will redeem from DC all of its Class A special shares for an amount equal to their fair market value, being the aggregate of the Redemption Amounts of its Class A special shares so redeemed, and will issue to DC in consideration therefor a demand non-interest bearing promissory note with a principal amount and fair market value equal to the aggregate of the Redemption Amounts of its Class A special shares (the "Redemption Note") . DC will accept the Redemption Notes of each of Transferee1, Transferee2, Transferee3, Transferee4, Transferee5, Subco1 and Subco2 as full payment of the Redemption Amounts of its respective Class A special shares so redeemed with the risk of the notes being dishonored.

18. At the end of the day on which the Class A special shares of Transferee1, Transferee2, Transferee3, Transferee4, Jransferee5, Subco1 and Subco2 are redeemed:

(a) each of Transferee1, Transferee2, Transferee3, Transferee4 and Transferee5 will cause its first taxation year to end; and

(b) Subco1 and Subco2 will be wound up into Xco and Yco, respectively, pursuant to subsection 88(1). All properties of Subco1 and Subco2 will be distributed to Xco and Yco, respectively, and all liabilities of Subco1 and Subco2 including the obligations under the Redemption Notes of Subco1 and Subco2 will be assumed by Xco and Yco, respectively. Subco1 and Subco2 will seek a consent from DC with respect to the assumption of their respective Redemption Notes by Xco and Yco prior to the winding-up of Subco1 and Subco2.

19. On the day following the redemption of the Class A special shares as described in paragraph 17 above, the shareholders of DC will, by special resolution, resolve to wind up and dissolve DC under the applicable provisions of the BCA. No agreement or resolution relating to the winding up of DC or the distribution of its property will provide for the cancellation of any shares of DC. In connection with the winding-up of DC, DC will distribute to each of Transferee1, Transferee2, Transferee3, Transferee4, Transferee5, Xco and Yco the particular Redemption Notes owing by it to DC. As a result of the assignment and distribution of the aforesaid notes, the obligations under each of the notes will be cancelled.

Prior to the distribution of such notes, DC will elect, pursuant to subsection 83(2) of the Act, in prescribed manner and prescribed form that the full amount of any resulting dividend referred to in subparagraph 88(2)(b)(i) of the Act be deemed to be a capital dividend.

Following receipt of the dividend refund to which DC will become entitled as a result of the proposed transactions described herein, DC will distribute such refund to the holders of its common shares and Class C special shares in proportion to their shareholdings. The refund will not arise until after the end of the fiscal period in which the dividend was paid (or deemed paid).

All properties and liabilities of DC will have been distributed or discharged, as the case may be. Articles of Dissolution will then be executed and filed with the

appropriate Corporate Registry. Upon receipt of the Certificate of Dissolution, DC will be dissolved.

ADDITIONAL INFORMATION

20. None of the corporations referred to herein is or will be, at any time during the series of transactions herein described, a specified financial institution or a restricted financial institution.

21. No property has been or will be acquired by DC, and no liabilities have been or will be incurred by DC, in contemplation of and before the transfers of property as described in paragraph 15, except in the ordinary course of business or as described herein.

22. None of Transferee1, Transferee2, Transferee3, Transferee4, Transferee5, Subco1, Subco2, Xco or Yco has any specific intention of disposing of any property acquired by it as described in paragraphs 15 or 18(b) above to a partnership or to an unrelated person following the proposed transactions as described herein except in the ordinary course of its business and none of them will dispose of any of its assets as part of a series of transactions which includes the proposed transactions.

23. There are not, and will not be at any time prior to the completion of the proposed transactions, any agreements or undertakings which constitute or include a "guarantee agreement", as defined in subsection 112(2.2), in respect of any of the shares of DC, Transferee1, Transferee2, Transferee3, Transferee4, Transferee5, Subco1 or Subco2.

24. None of DC, Iransferee1, Transferee2, Transferee3, Transferee4, Transferee5, Subco1, or Subco2 has, or will have, entered into a "dividend rental arrangement", as defined in subsection 248(1), in respect of any of the shares described herein.

25. None of the shares of DC, Transferee1, Transferee2, Transferee3, Transferee4, Transferee5, Subco1, or Subco2 has been or will be issued or acquired as part of a series of transactions of the type described in subsection 112(2.5) of the Act.

26. None of DC, Transferee1, Transferee2, Transferee3, Transferee4, Transferee5, Subco1, or Subco2 has been, or will be, at any time before the completion of the proposed transactions as described herein, a corporation described in any of paragraphs (a) to (f) of the definition of "financial intermediary corporation" in subsection 191(1) of the Act.

27. Each of Transferee1, Transferee2, Transferee3, Transferee4, Transferee5, Subco1 and Subco2 will have the financial capacity to honour, upon presentation for payment, the amount payable under the promissory note issued by it as part of the proposed transactions.

PURPOSE OF THE PROPOSED TRANSACTIONS

28. The purpose of the proposed transactions is to transfer to the DC shareholders, through a holding corporation controlled by them (where necessary), their proportionate share of the cash, marketable securities and other portfolio investments currently held in DC in order that each such shareholder will be able to:

(a) independently set the future investment policies regarding the distributed assets without being bound by or influenced by the investment policies considered most appropriate by the other holders; and

(b) independently plan their personal estates.

RULINGS

Provided that the preceding statements constitute a complete and accurate disclosure of all 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. For purposes of subsections 111(4) and 249(4) , control of DC will be acquired by Individual A as a result of the acquisition of all the common shares of DC by Individual A from the Trust as described in paragraph 4 above.

B. (a) Pursuant to paragraph 111(4)(c), in computing the ACB to DC of any particular loss property at any time after control of DC is acquired by Individual A, there shall be deducted the amount, if any, by which the ACB to DC of that loss property immediately before control of DC is acquired by Individual A (referred to as "that time") exceeds its fair market value immediately before that time. The amount required to be deducted in computing the ACB to DC of each loss property shall be deemed by paragraph 111(4)(d) to be a capital loss of DC for the taxation year that ends immediately before that time from the disposition of that loss property and, subject to paragraph 111(4)(a) of the Act, can be applied by DC against its taxable capital gains realized in the year that ends immediately before that time and the three immediately preceding taxation years.

(b) Where DC has designated, pursuant to paragraph 111(4)(e), in its return of income for the taxation year that ends immediately before that time, any capital property (other than a loss property) owned by it immediately before that time, the capital property shall be deemed by paragraph 111(4)(e) to have been disposed of by DC immediately before the time that is immediately before that time for proceeds of disposition equal to the lesser of:

(i) the fair market value of the capital property immediately before that time, and

(ii) the greater of the ACB to DC of the capital property immediately before the disposition and such amount as is designated by DC in respect of the capital property,

and shall be deemed to have been reacquired by it at that time at a cost equal to the proceeds of disposition thereof.

C. (a) Subject to the application of the provisions of subsection 26(5) of the Income Tax Application Rules, the provisions of subsection 85(1) will apply to the transfer by each of Individual A, Individual B, Individual C, Individual D and Individual E of his or her common shares and Class C special shares of DC, as the case may be, to each of Transferee1, Transferee2, Transferee3, Transferee4, and Transferee5, as the case may be, as described in paragraphs 7 through 11 above such that the agreed amount in respect of each transfer will be deemed to be the proceeds of disposition to the transferor and the cost thereof to each of the transferees pursuant to paragraph 85(1)(a). For greater certainty, paragraph 85(1)(e.2) will not apply to the transfers referred to herein.

(b) Subject to the application of the provisions of subsection 26(5) of the Income Tax Application Rules, to the application of subsection 69(11) of the Act and of paragraph 88(2.2)(b) of the Act, which applies for the purpose stated in the preamble to subsection 88(2.2) of the Act, the provisions of subsection 85(1) will apply to the transfer by DC to each of Transferee1, Transferee2, Transferee3, Transferee4, Transferee5, Subco1 and Subco2 as described in paragraph 15 above, of each eligible property which is the object of the election described in paragraph 16 above such that the agreed amount in respect of each transfer will be deemed to be the proceeds of disposition to the transferor and the cost thereof to each of the transferees pursuant to paragraph 85(1)(a). For greater certainty, paragraph 85(1)(e.2) will not apply to the transfers referred to herein.

D. As a result of the redemption by Transferee1, Transferee2, Transferee3, Transferee4, Transferee5, Subco1 and Subco2 of their Class A special shares held by DC, as described in paragraph 17 above, and as a result of the distributions by DC in the course of its winding-up, as described in paragraph 19 above:

(a) By virtue of paragraphs 84(3)(a) and 84(3)(b) of the Act, each of Transferee1, Transferee2, Transferee3, Transferee4, Transferee5, Subco1 and Subco2 will be deemed to have paid, and DC will be deemed to have received, a taxable dividend equal to the amount by which the amount paid in respect of the redemption by each of Transferee1, Transferee2, Transferee3, Transferee4, Transferee5, Subco1 and Subco2 of their Class A special shares exceeds the PUC of such shares; and

(b)(i)pursuant to paragraph 88(2)(b) and subsection 84(2), but subject to (ii) to (iv) herein, each of Transferee1, Transferee2, Transferee3, Transferee4, Transferee5, Xco and Yco will be deemed to have received a dividend (the "winding-up dividend") on the common shares and Class C special shares of DC, as the case may be, equal to the proportion of the amount by which the aggregate fair market value of the property of DC distributed by DC to each of Transferee1, Transferee2, Transferee3, Transferee4, Transferee5, Xco and Yco on the winding-up exceeds the amount by which the PUC of the common shares and Class C special shares of DC, as the case may be, is reduced as a result of the distribution, that the number of shares of such class held by Transferee1, Transferee2, Transferee3, Transferee4, Transferee5, Xco and Yco, as the case may be, is of the number of issued shares of such class outstanding immediately before the distribution;

(ii) pursuant to subparagraph 88(2)(b)(i), such portion of the winding-up dividend referred to in (i) herein as does not exceed DC's CDA determined immediately before the payment of the winding-up dividend shall be deemed, for the purposes of the subsection 83(2) election referred to in paragraph 19 above, 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 thereof 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)(i)By virtue of subsection 186(2) and paragraph 186(4)(a) of the Act, each of Transferee1, Transferee2, Transferee3, Transferee4, Transferee5, Subco1 and Subco2 will be connected with DC. Provided that each of Transferee1, Transferee2, Transferee3, Transferee4, Transferee5, Subco1 and Subco2 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 (a) above, DC will not be subject to Part IV tax under subsection 186(1) in respect of such dividend; and

(ii) By virtue of subsection 186(2) and paragraph 186(4)(a) of the Act, DC will be connected with each of Transferee1, Transferee2, Transferee3, Transferee4, Transferee5, Xco and Yco. Consequently, each of Transferee1, Transferee2, Transferee3, Transferee4, Transferee5, Xco and Yco 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 as a result of the payment of the dividends referred to in (b)(iv) above, that the amount of each such dividend received by Transferee1, Transferee2, Transferee3, Transferee4, Transferee5, Xco and Yco, as the case may be, is of the aggregate of all taxable dividends paid by DC in its taxation year in which such dividend is paid.

(d) The taxable dividends deemed to have been received by DC and each of Transferee1, Transferee2, Transferee3, Transferee4, Transferee5, Xco and Yco, as a result of the redemption of the Class A special shares of Transferee1, Transferee2, Transferee3, Transferee4, Transferee5, Subco1 and Subco2 and the winding-up of DC described in paragraph (a) and subparagraph (b)(iv) herein will:

(i) 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;

(ii) 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; and

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

E. With respect to the taxable dividends described in Ruling D:

(a) the deemed dividends referred to in Ruling D will not be subject to tax under Part IV.1 on the basis that such dividends will be excepted dividends by virtue of paragraph (c) of the definition of "excepted dividend" in section 187.1; and

(b) the taxable dividend described in Ruling D(a) will not be subject to tax under Part VI.1 on the basis that each such dividend will be paid by a private holding corporation and will be an excluded dividend by virtue of paragraph (b) of the definition of "excluded dividend" in subsection 191(1).

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

(a) a disposition of property in the circumstances described in subparagraph 55(3.l)(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.l)(d):

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

G. The extinguishment of the debt obligations as a result of the cancellation of the Redemption Notes, as described in paragraph 19 above, will not give rise to a "forgiven amount" within the meaning of subsection 80(1) or 80.01(1) of the Act.

H. The application of subsection 84.1(1) of the Act to the transfer of the common shares and Class C special shares of DC by Individual A, Individual B, Individual C, Individual D and Individual E to Transferee1, Transferee2, Transferee3, Transferee4 and Iransferee5, as the case may be, as described in paragraphs 7 through 11 above, will not result in a reduction of the PUC of the common shares of Transferee1, Transferee2, Transferee3, Transferee4, and Transferee5 or in a dividend deemed to have been paid by Transferee1, Transferee2, Transferee3, Transferee4, or Transferee5 to Individual A, Individual B, Individual C, Individual D or Individual E, respectively.

I. Neither the common shares of DC nor the Class C special shares of DC will, as a result of the implementation of the proposed transactions as described above, in and by themselves, become taxable preferred shares or short-term preferred shares.

J. The provisions of subsection 15(1), 55(2) and 245(1) of the Act will not apply. to any of the proposed transactions as described above, in and by themselves.

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

These rulings are given subject to the limitations and qualifications set out in Information Circular 70-6R3 issued by Revenue Canada, Customs, Excise and Taxation on December 30, 1996 and are binding 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 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 share or the fair market value on V-day of any shares 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