2020 Ruling 2019-0818261R3 - Split-Up Farm Butterfly

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

Principal Issues: Whether the butterfly dividends are exempt from 55(2) as a result of qualifying under 55(3)(b)?

Position: Yes.

Reasons: Proposed transactions meet the requirements of 55(3)(b).

XXXXXXXXXX								2019-081826

XXXXXXXXXX, 2020

Dear XXXXXXXXXX

Re: Advance Income Tax Ruling
XXXXXXXXXX

We are writing in response to your request dated XXXXXXXXXX for an advance income tax ruling on behalf of the above-noted taxpayers (the “Taxpayers”). We also acknowledge the additional information provided in your various email correspondence, as well as information provided during telephone conversations.

We understand that to the best of your knowledge and that of the Taxpayers, none of the proposed transactions and/or issues involved in this ruling are the same as or substantially similar to transactions and/or issues that are:

i. in a previously filed return of the Taxpayers or a related person and;

A. 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;

B. under objection by the Taxpayers or a related person;

C. the subject of a current or completed court process involving the Taxpayers or a related person; or

ii. the subject of a ruling previously considered by the Income Tax Rulings Directorate in relation to the Taxpayers or a related person.

The tax account numbers, Tax Services Offices and the Tax Centres and addresses of the Taxpayers involved are as follows:

XXXXXXXXXX

The above-referenced Taxpayers have confirmed that the proposed transactions described herein will not affect their ability to pay any of their outstanding tax liabilities.

DEFINITIONS

Unless otherwise stated:

i. all references herein to a part, section, subsection, paragraph or subparagraph is a reference to the relevant provision of the Income Tax Act, R.S.C. 1985 (5th Suppl.) c.1, as amended, (the Act);

ii. all terms and conditions used in this ruling that are defined in the Act (or in the Regulations) have the meaning given in such definition;

iii. all references to monetary amounts are in Canadian dollars; and

iv. the singular should be read as plural and vice versa where the circumstances so require.

The following abbreviations, terms and expressions have the meanings specified, and the relevant parties to the Proposed Transactions (as defined below) will be referred to as follows:

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

“Act1” means the XXXXXXXXXX;

“agreed amount” means the amount that a transferor and a transferee have agreed on in a joint election under subsection 85(1) in respect of the transfer of an “eligible property”;

“arm’s length” has the meaning assigned by subsection 251(1);

“BN” means “business number” as that term is defined in subsection 248(1);

“capital property” has the meaning assigned by section 54;

“CCPC” means “Canadian-controlled private corporation” as that expression is defined in subsection 125(7);

“CDA” means “capital dividend account” as that expression is defined in subsection 89(1);

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

“CRA” means the Canada Revenue Agency;

“DC” means XXXXXXXXXX, a corporation incorporated under the laws of XXXXXXXXXX;

“DC Redemption Note” means the promissory note issued by DC on the purchase for cancellation of its Class “A” common shares and redemption of its Class “B” shares as described in Paragraph 24;

“DC Transfer” refers to the transfer of property by DC to TC1 on the Distribution as described in Paragraph 20;

“Distribution” has the meaning assigned by subsection 55(1);

“eligible dividend” has the meaning assigned by subsection 89(1);

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

“ERDTOH” means “eligible refundable dividend tax on hand” as that expression is defined in subsection 129(4);

“Farm Property” means the following whole parcels of real property owned by DC that will be transferred by DC to TC1 on the DC Transfer as described in Paragraph 20:

XXXXXXXXXX

“FMV” means “fair market value” or more specifically the highest price available in an open and unrestricted market, between informed prudent parties, acting at arm’s length and with no compulsion to act, expressed in terms of money or money’s worth;

“GRIP” means “general rate income pool” as that expression is defined in subsection 89(1);

“Mr. A” means XXXXXXXXXX, an individual who is resident in Canada for the purposes of the Act;

“Mr. B” means XXXXXXXXXX, an individual who is resident in Canada for the purposes of the Act;

“NERDTOH” means “non-eligible refundable dividend tax on hand” as that expression is defined in subsection 129(4);

“Paragraph” refers to a numbered paragraph in this letter;

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

“property” has the meaning assigned by subsection 248(1);

“Proposed Transactions” means the transactions described in Paragraphs 11 to 26;

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

“RDTOH” means “refundable dividend tax-on-hand” as that expression is defined in former subsection 129(3);

“Relatedco” means XXXXXXXXXX, a corporation incorporated under the laws of XXXXXXXXXX;

“related person” means, in relation to a particular person, another person who is related to the particular person by virtue of subsection 251(2), modified for the purposes of section 55 by paragraph 55(5)(e) where applicable;

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

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

“SIN” means Social Insurance Number;

“specified financial institution” has the meaning assigned by subsection 248(1);

“specified investment business” has the meaning assigned by subsection 125(7);

“taxable dividend” has the meaning assigned by subsection 89(1);

“taxable preferred shares” has the meaning assigned by subsection 248(1);

“TCC” means “taxable Canadian corporation” as that expression is defined in subsection 89(1);

“TC1” means a corporation to be incorporated under Act1 by Mr. B; and

“TC1 Redemption Note” means the promissory note issued by TC1 on the redemption of the Class “A” Special Shares as described in Paragraph 23.

FACTS

1. DC is a corporation that was incorporated on XXXXXXXXXX under the laws of Act1. DC is, and will be, at all relevant times, a TCC and a CCPC.

2. DC carries on a XXXXXXXXXX farming business in XXXXXXXXXX.

3. Relatedco is a corporation that is a TCC and a CCPC. Relatedco operates separate XXXXXXXXXX farming business in XXXXXXXXXX. All the issued and outstanding shares of Relatedco are owned by Mr. A (XXXXXXXXXX%) and Mr. B (XXXXXXXXXX%).

4. DC’s taxation year and fiscal period ends on XXXXXXXXXX of each year and DC reports its income from its XXXXXXXXXX farming business for tax purposes using the cash method.

5. DC’s authorized share capital consists of:

a) an unlimited number of fully participating, no par value voting Class “A” common shares ( having XXXXXXXXXX per share);

b) an unlimited number of Class “B” shares which are non-participating, non-voting, entitling the holder to discretionary non-cumulative dividends at a rate or amount determined by the Board of Directors of the corporation. The Class “B” shares are redeemable and/or retractable at $XXXXXXXXXX per share together with all declared and unpaid dividends thereon, and which rank, in regards to the payment of dividends and the return of capital on the liquidation, dissolution or winding-up of the corporation, in priority to the holders of all other issued and outstanding classes of shares of the capital stock of DC; and,

c) an unlimited number of Class “C” shares which are non-participating, voting (XXXXXXXXXX per share), entitling the holder to discretionary non-cumulative dividends at a rate or amount determined by the Board of Directors of the corporation. The Class “C” shares are redeemable and/or retractable at an amount equal to the result obtained when the amount in the stated capital account for the Class “C” shares is divided by the number of issued and outstanding Class “C” shares together with all declared and unpaid dividends thereon, and which rank, in regards to the payment of dividends and the return of capital on the liquidation, dissolution or winding-up of the corporation, in priority to the holders of all issued and outstanding Class “A” common shares of the capital stock of DC.

The issued and outstanding share capital of DC (along with their respective share attributes) are held as follow:

Shareholder		Shares		PUC	ACB	Redemption	Estimated
								Amount	FMV

Mr. A			XXXX Class “A”	XXXX	XXXX	N/A		XXXX
Mr. A			XXXX Class “B”	XXXX	XXXX	XXXX		XXXX
Mr. B			XXXX Class “A”	XXXX	XXXX	N/A		XXXX
Mr. B			XXXX Class “B”	XXXX	XXXX	XXXX		XXXX

6. As at XXXXXXXXXX, DC had a GRIP balance of $XXXXXXXXXX, a CDA balance of $XXXXXXXXXX, and no RDTOH balance. DC is not expected to have any NERDTOH or ERDTOH balance at the end of its first taxation year beginning after XXXXXXXXXX and it is not anticipated that the tax accounts of DC will change before the commencement of the Proposed Transactions.

7. Mr. A and Mr. B are XXXXXXXXXX and related persons. Each is related to DC.

8. Mr. A and Mr. B form a group of persons having de jure control of DC and have always acted jointly and in concert with respect of all important business and financial decisions regarding DC.

9. The significant assets of DC include accounts receivable, XXXXXXXXXX account, prepaid expenses and inventory (XXXXXXXXXX), equipment & vehicles, a XXXXXXXXXX and land and buildings (including XXXXXXXXXX personal residences situated on land owned by DC as well as XXXXXXXXXX rental properties). DC’s liabilities consist of current liabilities which includes; bank overdraft, accounts payable, accrued liabilities, income tax payable, and short-term debts, amounts due to the shareholders; and, amounts due to Relatedco as well as long term debt.

PROPOSED TRANSACTIONS

The following transactions will be implemented in the order presented unless otherwise indicated.

Incorporation of transferee corporation - TC1

10. TC1 will be incorporated pursuant to the provisions of the Act1. TC1 will, at all relevant times, be a TCC and a CCPC. TC1’s taxation year and fiscal period will end on XXXXXXXXXX. The authorized share capital of TC1 will consist of the following:

a) an unlimited number of fully participating, no par value voting Class A Common Shares (having XXXXXXXXXX per share);

b) an unlimited number of fully participating, no par value voting Class B Common Shares, (having XXXXXXXXXX per share);

c) an unlimited number of Class A Special Shares which are non-participating, non-voting, entitling the holder to discretionary non-cumulative dividends. The Class A Special Shares are redeemable and/or retractable at $XXXXXXXXXX per share together with all declared and unpaid dividends thereon, and which rank, in regards to the payment of dividends and the return of capital on the liquidation, dissolution or winding-up of the corporation, in priority to the holders of all other issued and outstanding classes of shares of the capital stock of TC1; and,

d) an unlimited number of Class B Special Shares which are non-participating, voting (having XXXXXXXXXX per share), entitling the holder to discretionary non-cumulative dividends at a rate per annum of the redemption/retraction amount which shall not exceed the prescribed interest rate in effect at the time of the dividend plus XXXXXXXXXX percent. The Class B Special Shares are redeemable and/or retractable at $XXXXXXXXXX per share together with all declared and unpaid dividends thereon, and which rank, in regards to the payment of dividends and the return of capital on the liquidation, dissolution or winding-up of the corporation, in priority to the holders of all issued and outstanding Class A common shares and Class B common shares of the capital stock of TC1.

12. Mr. B will subscribe for XXXXXXXXXX Class A Common Shares of TC1 for an amount of $XXXXXXXXXX per share.

Prior to the implementation of any of the transactions described below, DC will transfer legal title to the Farm Property to TC1 such that TC1 will agree to hold legal title to the Farm Property, but not beneficial ownership of such property, as bare trustee prior to the subsequent transfer of beneficial ownership of such property by DC to TC1 described in Paragraph 20 below. In particular, DC will enter into a bare trust agreement with TC1 in respect of the Farm Property, the terms of which will include the following:

TC1 will hold legal title to the property described above as nominee, agent and bare trustee for the sole benefit and account of DC, and for greater certainty, DC will be the only beneficiary of such trust and will remain the beneficial owner of such property;

and

TC1, as agent for DC, will deal with the property described in (a) exclusively as directed by DC.

Following the subsequent transfer of the beneficial ownership of the Farm Property by DC to TC1 as described in Paragraph 20, TC1 shall become both the legal and beneficial owner of the Farm Property thus terminating the bare trust agreement.

Transfer of DC shares to newly incorporated TC1.

13. Mr. B will transfer his XXXXXXXXXX Class “A” common shares and his XXXXXXXXXX Class “B” shares of DC to TC1. As sole consideration for such transfers, TC1 will issue a number of Class B Special Shares to Mr. B having an aggregate redemption amount and FMV equal to the total of: the aggregate FMV of the XXXXXXXXXX Class “A” common shares of DC plus the aggregate redemption amount and FMV of the XXXXXXXXXX Class “B” shares of DC so transferred to TC1 by Mr. B.

14. Mr. B will jointly elect with TC1 in prescribed form and within the time limit referred to in subsection 85(6), to have the provisions in subsection 85(1) apply to the transfers described in Paragraph 14. The respective agreed amounts will not be less than the lesser of the amounts described in subparagraphs 85(1)(c.1)(i) and (ii) as they apply to each transfer of shares, nor will such agreed amounts, in the aggregate, exceed the aggregate FMV of the Class “A” common shares and Class “B” shares so transferred to TC1. For greater certainty, the aggregate of the agreed amounts is expected to be an amount that will equal to the aggregate ACB of Mr. B’s Class “A” common shares and Class “B” shares of DC immediately prior to such transfer.

15. The amount added to the stated capital account of the TC1 Class B Special Shares issued to Mr. B as described in Paragraph 14 will be restricted to the greater of (i) the aggregate PUC, immediately before the disposition, of the Class “A” common shares and Class “B” shares of DC transferred by Mr. B to TC1; and (ii) the aggregate ACB to Mr. B, immediately before the disposition, of such shares transferred to TC1 as determined in accordance with paragraph 84.1(2)(a.1). For greater certainty, the increase to the PUC of the TC1 Class B Special Shares will not exceed the maximum amount that could be added to the PUC of such shares without an adjustment under paragraph 84.1(1)(a).

Types of Property

16. Immediately before the DC Transfer, the property of DC will be classified into the following three types of property for the purposes of the Distribution as follows:

a) cash or near cash property, comprising all of the current assets of DC, including any accounts receivable, short-term investments (XXXXXXXXXX), prepaid expenses and inventory;

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 specified investment business), including the XXXXXXXXXX personal residences and the Farm Property; and

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

18. For greater certainty, for the purposes of the Distribution by DC, the following principles will apply:

(i) deferred expenses, which were expenditures deferred and amortized for accounting purposes but fully deducted for tax purposes, will not be considered property;

(ii) loans receivable or advances that that have no specified terms of repayment or are due on demand will be considered cash or near-cash property;

(iii) any tax accounts of DC, such as any non-capital loss, net capital loss, the balance of any ERDTOH, NERDTOH or CDA, will not be considered property or a liability, as the case may be;

(iv) any amount in respect of refunds of taxes, and interest thereon, actually receivable will be treated as cash or near-cash property and any potential refunds of taxes and interest thereon will, due to their contingent nature, be ignored; and

(v) no amount will be considered a liability unless it represents a true legal liability capable of quantification.

19. In determining the net FMV of each type of property of DC immediately before the DC Transfer, the liabilities of DC will be allocated to, and deducted in the calculation of the net FMV of each such type of property of DC in the following manner:

a) Current liabilities of DC, which include amounts owing by DC that have a term of less than XXXXXXXXXX, that are due on demand or that are otherwise normally classified as current liabilities (other than the portion of long-term debt renewable during the year), will be allocated to each cash or near-cash property of DC in the proportion that the FMV of each such property is of the aggregate FMV of all cash or near-cash property of DC. The total amount of DC’s current liabilities to be allocated to DC’s cash or near cash property is not expected to exceed the aggregate FMV of all of DC’s cash or near-cash property;

b) following the allocation of the current liabilities, described in Paragraph 19(a), any remaining net FMV of accounts receivable, taxes receivable, inventory, prepaid expenses will be reclassified as business property and excluded from the net FMV of DC’s cash or near-cash property, to the extent that such property will be collected, sold or consumed by DC or TC1, as the case may be, in the ordinary course of the business to which they relate (for clarity, cash will not be reclassified as business property);

c) liabilities of DC, other than those described in Paragraph 19(a), that relate to a particular property will then be allocated to the particular property (and effectively to the type of property to which the particular property belongs) to the extent of its FMV. The liabilities that pertain to a type of property but not to a particular property will be allocated to that type of property, but not in excess of the net FMV of such type of property after the allocation of liabilities to a particular property, as described herein; and

if any liabilities remain after the allocations described in Paragraphs 19(a) and (c) are made, such remaining liabilities will then be allocated to the cash or near-cash property, business property and investment property of DC, on the basis of the relative net FMV of each type of property immediately prior to the allocation of such remaining liabilities, but after the allocation of the liabilities as described in Paragraphs 19(a) and (c). However, where DC is considered to have a negative amount of a type of property because of the allocations in Paragraphs 19(a) or (c), for the purposes of allocating the remaining liabilities, the net FMV of that type of property will be deemed nil resulting in none of those remaining liabilities being allocated to that type of property.

DC Transfer

20. Immediately following the determination of the net FMV of the three types of property of DC as described above, DC will transfer to TC1 its pro rata proportion of each type of property owned by it at that time, including for greater certainty, its beneficial ownership of the Farm Property, such that immediately following the transfer of the properties and the assumption of DC’s liabilities as described in Paragraph 21(a), the aggregate net FMV of each type of property transferred by DC to TC1 will be equal to or approximate that proportion of each type of property determined by the formula:

A x B/C, where

A is the net FMV (determined as described above), immediately before the DC Transfer, of all property of that type owned at that time by DC;

B is the FMV, immediately before the DC Transfer, of all the issued and outstanding shares of the capital stock of DC owned, at that time, by TC1; and

C is the FMV, immediately before the DC Transfer, of all the issued and outstanding shares of the capital stock of DC.

For the purposes of this Paragraph, the expression “approximate that proportion” means that the discrepancy from that proportion, if any, will not exceed XXXXXXXXXX percent (XXXXXXXXXX%), determined as a percentage of the net FMV of each type of property that TC1 has received on such transfer as compared to what it would have received had it received its exact pro rata share of the net FMV of that type of property.

21. As consideration for the property transferred by DC to TC1, TC1 will:

a) assume such liabilities of DC, as appropriate, such that TC1 will receive a proportionate share of the net FMV of each type of property owned by DC; and,

b) issue a number of Class A Special Shares to DC that will have an aggregate redemption amount and FMV equal to the amount by which the aggregate FMV at the time of the DC Transfer of all the properties received by TC1, exceeds the aggregate amount of all the liabilities of DC assumed by TC1, as described in (a).

22. DC and TC1 will jointly elect under subsection 85(1) in prescribed form and within the time limits referred to in subsection 85(6) in respect of each property of DC that is an eligible property transferred to TC1. The agreed amount in respect of each eligible property so transferred will not be greater than the FMV of such property nor will it be less than the lesser of the FMV and the cost amount to DC of such property. For greater certainty, the aggregate of such elected amounts will be greater than the aggregate amount of DC’s liabilities so assumed for such properties.

Specifically, the agreed amount under such election in respect of each eligible property so transferred will be within the limits prescribed as follows:

a) in the case of depreciable property of a prescribed class, an amount equal to the least of the amounts specified in subparagraphs 85(1)(e)(i), (ii) and (iii);

b) in the case of property described in paragraph 85(1)(c.1), an amount equal to the lesser of the amounts specified in subparagraphs 85(1)(c.1)(i) and (ii), and

c) in the case of farm inventory owned in connection with the farming business carried on by DC, an amount determined in accordance with the formula set out in paragraph 85(1)(c.2).

TC1 will add to its stated capital account for the Class A Special Shares, an amount equal to the aggregate of (a) the agreed amounts, in the case of each eligible property transferred to TC1, and (b) the aggregate FMV, in the case of each property transferred to TC1 that is not an eligible property, less (c) the aggregate amount of DCs liabilities assumed by TC1 as described in Paragraph 21(a). For greater certainty, the amount to be added to the stated capital account for TC1’s Class A Special Shares issued as partial consideration for the property transferred to it on the DC Transfer will not exceed the maximum amount that could be added to the PUC of such shares without a reduction taking place pursuant to subsection 85(2.1).

Redemption of Special Shares

23. Immediately after the transfer of property by DC to TC1 on the DC Transfer, TC1 will redeem the Class A Special Shares it issued to DC as described in Paragraph 21 for their redemption amount. As consideration therefore, TC1 will issue to DC a non-interest bearing demand promissory note (the “TC1 Redemption Note”) having a principal amount and FMV equal to the aggregate redemption amount and FMV of the Class A Special Shares so redeemed by it. DC will accept the TC1 Redemption Note as payment in full for the redemption of such shares.

24. Immediately following the share redemption described in Paragraph 23 above, DC will purchase for cancellation its XXXXXXXXXX Class “A” common shares and redeem its XXXXXXXXXX Class “B” shares that are owned by TC1 for an amount equal to their aggregate FMV and/or aggregate redemption amount, as applicable. As consideration therefore, DC will issue to TC1 a non-interest bearing demand promissory note (the “DC Redemption Note”) having a principal amount and FMV equal to the aggregate FMV and/or aggregate redemption amount, as applicable, of such shares so purchased for cancellation or redeemed. TC1 will accept the DC Redemption Note as payment in full for the purchase for cancellation and redemption of such shares, as the case may be.

25. To the extent that DC has a GRIP balance at the time of the purchase for cancellation and the redemption of shares by DC, DC will designate, pursuant to subsection 89(14), to treat a portion, equal to half of the GRIP balance, of the deemed dividend resulting from the purchase for cancellation and the redemption of shares to be an eligible dividend by notifying TC1 in writing, within the time limit prescribed in subsection 89(14), that the portion of such dividend is an eligible dividend.

26. The DC Redemption Note will be set-off in full against the corresponding TC1 Redemption Note and such notes will be cancelled without payment.

Subsequent Event

27. Sometime following the Distribution of DC’s property on the DC Transfer, Mr. B will sell his shares of Relatedco to Mr. A on a taxable basis.

ADDITIONAL INFORMATION

28. Except as described in this letter, no property has been or will be acquired, and no liabilities have been or will be incurred or paid by DC in contemplation of and before the Proposed Transactions, other than in a permitted transaction described in subparagraphs 55(3.1)(a)(i) to (iv).

29. There has not been and will not be, as part of a series of transactions or events that includes the Proposed Transactions, any disposition or acquisition of property in circumstances described in subparagraphs 55(3.1)(b)(i) or (iii), or an acquisition of control in the circumstances described in subparagraph 55(3.1)(b)(ii).

30. None of the property received by TC1 on the DC Transfer will be acquired by a person unrelated to TC1, or by a partnership, as part of a series of transactions or events that includes the Proposed Transactions, in the circumstances described in paragraph 55(3.1)(c).

31. None of the property retained by DC after the DC Transfer will be acquired by a person unrelated to DC, or by a partnership, as part of a series of transactions or events that includes the Proposed Transactions, in the circumstances described in paragraph 55(3.1)(d).

32. None of the shares of any corporation described herein (including any shares to be issued as described in the Proposed Transactions) is or will be, at any time throughout the series of transactions or events that includes the Proposed Transactions:

a) the subject of any agreement or undertaking which constitutes a “guarantee agreement” as defined in subsection 112(2.2);

b) a share that is issued or acquired as part of a transaction, event or series of transactions or events of the type described in subsection 112(2.5); or,

c) the subject of a dividend rental arrangement.

33. None of the corporations referred to herein is, or will be, a specified financial institution.

34. None of the corporations referred to herein will be a corporation described in any of paragraphs (a) to (f) of the definition of “financial intermediary corporation” in subsection 191(1).

35. Each of DC and TC1 will have the financial capacity to honour, upon presentation for payment, the amount payable under their respective promissory notes issued as part of the Proposed Transactions as described in Paragraphs 23 and 24.

36. The Proposed Transactions will not result in any of the Taxpayers or a related person being unable to pay its existing tax liabilities.

PURPOSES OF THE PROPOSED TRANSACTIONS

37. The purpose of the divisive reorganization is to allow Mr. A and Mr. B to have direct and separate control of their respective share of DC’s property to allow each person to operate a XXXXXXXXXX farming business independently from the other.

38. The purpose of the transfer by DC of its legal title to the Farm Property to TC1 as described in Paragraph 13, and prior to the subsequent transfer of the beneficial ownership of such property to TC1 on the DC Transfer, is to allow for the parties to claim an exemption of the land transfer tax arising under section XXXXXXXXXX of the XXXXXXXXXX.

RULINGS GIVEN

Provided that the preceding statements constitute a complete and accurate disclosure of all relevant facts, proposed transactions and purposes of the Proposed Transactions, and provided that the Proposed Transactions are completed in the manner described above, we confirm the following:

A. Subject to the application of subsection 69(11), provided the appropriate joint elections are filed in the prescribed form and manner within the prescribed time specified in subsection 85(6) and provided each particular property so transferred is an eligible property in respect of which shares have been issued as full or partial consideration therefor, the provisions of subsection 85(1) will apply to:

a) the transfer by Mr. B of all of his XXXXXXXXXX Class “A” common shares and XXXXXXXXXX Class “B” shares to TC1 as described in Paragraph 14; and

b) the transfer of each eligible property owned by DC to TC1 on the DC Transfer as described in Paragraph 20,

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

For purposes of the joint elections, when determining the agreed amount of depreciable property in the course of the distribution, the reference in subparagraph 85(1)(e)(i) to the “undepreciated capital cost to the taxpayer of all the property of that class immediately before the disposition” shall mean that proportion of the UCC to DC of all the property of that class immediately before the distribution that the FMV at that time of the property that is transferred is of the aggregate FMV of all the property of that class at that time.

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

B. On the redemption by TC1 of its Class A Special Shares owned by DC, as described in Paragraph 23, by virtue of paragraph 84(3)(a) and (b), TC1 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 in respect of the redemption of the Class A Special Shares of TC1 exceeds the aggregate PUC in respect of those particular shares immediately before the redemption.

C As a result of the purchase for cancellation and redemption by DC of XXXXXXXXXX Class “A” common shares and XXXXXXXXXX Class “B” shares owned by TC1, as described in Paragraph 24, by virtue of subsection 84(3):

(a) DC will be deemed to have paid, and TC1 will be deemed to have received, a taxable dividend at that time equal to the amount, if any, by which the amount paid in respect of the purchase for cancellation of the XXXXXXXXXX Class “A” common shares exceeds the aggregate PUC in respect of those shares immediately before the purchase for cancellation; and

(b) DC will be deemed to have paid, and TC1 will be deemed to have received, a taxable dividend at that time equal to the amount, if any, by which the amount paid in respect of the redemption of the XXXXXXXXXX Class “B” shares exceeds the aggregate PUC in respect of those shares immediately before the redemption.

D. The taxable dividends described in Rulings B and C:

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

b) will, pursuant to subsection 112(1), be deductible by the recipient corporation in computing its taxable income in the year in which such dividend is deemed to have been received and, for greater certainty, such deduction will not be prohibited by any of subsections 112(2.1), (2.2), (2.3) or (2.4);

c) will, pursuant to paragraph (j) of the definition of “proceeds of disposition” in section 54, be excluded in determining the proceeds of disposition to the recipient corporation of the shares so redeemed or purchased;

d) will, pursuant to subsection 112(3), reduce the loss, if any, in respect of the disposition of the shares on which the dividend is deemed to be received;

e) will, by virtue of paragraph (b) or (c) of the definition of “excepted dividend” in section 187.1 and paragraph (a) of the definition of “excluded dividend” in subsection 191(1), not be subject to tax under Parts IV.1 or VI.1; and

f) will not be subject to tax under Part IV except to the extent of the amount, if any, determined under paragraph 186(1)(b).

E. Provided that as part of the series of transactions or events that includes any of the Proposed Transactions, there is not:

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

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

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

d) an acquisition of shares of DC as described in subparagraph 55(3.1)(b)(iii);

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

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

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

F. The set-off and cancellation of the TC1 Redemption Note and DC Redemption Note as described in Paragraph 26 will not, in and of itself, give rise to a “forgiven amount” within the meaning of either subsection 80(1) or section 80.01. In addition, neither DC nor TC1, as the case may be, will realize any gain or incur a loss as a result of such set-off and cancellation.

G. The provisions of subsection 15(1), 56(2), 69(1) and 246(1) will not apply to any of the Proposed Transactions, in and by themselves.

H. The provisions of subsection 245(2) will not be applied as a result of the Proposed Transactions, in and by themselves, to redetermine the tax consequences confirmed in the rulings given herein.

These rulings are given subject to the limitations and qualifications set forth in Information Circular 70-6R9 issued on April 23, 2019, and are binding on the CRA, provided that the Proposed Transactions are completed on or before XXXXXXXXXX.

The above rulings are based on the Act in its present form and do not take into account any proposed amendments to the Act, which if enacted, could have an effect on the rulings provided herein.

OTHER COMMENTS

Unless otherwise confirmed in the above rulings, nothing in this letter should be construed as implying that the CRA has confirmed, reviewed or has made any determination in respect of:

a) The PUC of any share or the ACB or FMV of any property referred to herein;

b) The balance of the CDA, GRIP, RDTOH, ERDTOH or NERDTOH of any corporation; The amount of any capital loss or terminal loss of any entity referred to herein;

c) to the extent that a deemed dividend arises from a corporation redeeming, acquiring or purchasing for cancellation its shares, a problem of circularity may possibly arise when computing the Part IV tax and the dividend refund of each corporation. We do not provide any comment on this possible circularity issue; and

d) The income tax consequences pertaining to any of the transactions or events described in Paragraph 27.

Any other tax consequence relating to the facts, Proposed Transactions, additional information, or any transaction or event taking place either prior to the Proposed Transactions or subsequent to the Proposed Transactions, whether described in this letter or not, other than those specifically described in the rulings given above, including whether any of the Proposed Transactions would also be included in a series of transactions or events that includes other transactions or events that are not described in this letter. Nothing in this letter should be construed as confirmation, express or implied, that, for the purposes of any of the rulings given above, any adjustment to the FMV of the properties transferred or the redemption amount of the shares issued as consideration, whether pursuant to a price adjustment clause or otherwise, will be effective retroactively to the time of the transfer and issuance of shares. Furthermore, none of the rulings given in this letter are intended to apply to or in the event of the operation of a price adjustment clause, since such adjustment will be due to circumstances that do not constitute proposed transactions that are seriously contemplated.

The general position of the CRA with respect to price adjustment clauses is stated in Income Tax Folio S4-F3-C1 Price Adjustment Clauses.

An invoice for our fees in connection with this ruling request will be forwarded to you under separate cover.

Yours truly,

XXXXXXXXXX
For Division Director
Reorganizations Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch