2021 Ruling 2021-0906111R3 - XXXXXXXXXX Post-mortem Pipeline

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: 1) Whether section 84.1 applies to deem the alter ego trust to have received a dividend on the disposition of shares to the new corporation. 2) Whether subsection 84(2) applies to the proposed transactions. 3) Whether subsection 245(2) applies to the proposed transactions.

Position: 1) No. Favourable ruling given. 2) No. Favourable ruling given. 3) No. Favourable ruling given.

Reasons: Based on the provisions of the Act, jurisprudence and CRA publications.

XXXXXXXXXX									2021-090611

XXXXXXXXXX, 2021

Dear XXXXXXXXXX

Re: Advance Income Tax Ruling – XXXXXXXXXX

This is in reply to your letter dated XXXXXXXXXX in which you requested an advance income tax ruling (the “Ruling”) on behalf of the trustees of the above named taxpayer. The tax account numbers, Tax Services Offices, and Tax Centres of the taxpayers involved are as follows:

XXXXXXXXXX

(collectively, the “Taxpayers”)

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

a) in a previously filed tax return of the Taxpayers or a related person and:

i. being considered by the CRA in connection with such return;

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

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

b) the subject of a ruling request previously considered by the Income Tax Rulings Directorate.

This letter is based solely on the facts and Proposed Transactions described below. The documentation submitted with the request does not form part of the facts and Proposed Transactions, and any references thereto are provided solely for the convenience of the reader.

DEFINITIONS

Unless otherwise stated:

a) all references to a statute are to the relevant provision of the Income Tax Act, R.S.C. 1985 (5th Supp.), c.1, as amended, (the "Act"), or, where appropriate, the Income Tax Regulations, C.R.C., c.945, as amended, (the "Regulations");

b) all terms and conditions used in this Ruling that are defined in the Act (or in the Regulations) have the meaning given in the Act or the Regulations, as applicable;

c) all references to monetary amounts are in Canadian dollars; and

d) 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 will be referred to as follows:

"ACB" means "adjusted cost base" and has the meaning assigned in section 54;

"ACo" means XXXXXXXXXX., a corporation amalgamated under Act1;

"ACo Common Shares" means the common shares in the capital of ACo as described in Paragraph 5(a);

"Act1" means the Business Corporations Act XXXXXXXXXX;

"Act2" means the Companies Act (XXXXXXXXXX);

"agreed amount" means the amount agreed on by the transferor and transferee in respect of a transfer of an eligible property in a joint election filed pursuant to subsection 85(1);

"Amalco" means a corporation to be formed on the amalgamation of ACo and Newco, as described in the Proposed Transactions;

"Amalco Common Shares" means the common shares of Amalco as further described in Paragraph 43.

"Amalco Preferred Shares" means the preferred shares of Amlaco as further described in Paragraph 43.

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

"Beneficiaries" means the beneficiaries of the Trust, being Father during his lifetime and, following the death of Father, the Siblings and the issue of the Siblings in respect of certain property held by the Trust and the spouse of Father in respect of the balance of the property held by the Trust;

"Business" means the business of ACo as further described in Paragraph 1(c);

"capital gain" has the meaning assigned in paragraph 39(1)(a);

"capital property" has the meaning assigned in section 54;

"CCPC" means "Canadian-controlled private corporation" and has the meaning assigned in subsection 125(7);

"CRA" means the Canada Revenue Agency;

"Deeds of Gift" means the separate Deeds of Gift executed by Father in favour of the Trustees on XXXXXXXXXX relating to the transfer of certain property from Father to the Trustees to be held by the Trustees in accordance with the terms and conditions of the Trust Agreement;

"disposition" has the meaning assigned in subsection 248(1);

"Division Date" has the meaning assigned in the Trust Agreement, being the date on which Father died which was XXXXXXXXXX;

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

"Estate" means the Estate of XXXXXXXXXX;

"Executors" means Sibling 1, in his capacity as co-executor of the Estate, and XXXXXXXXXX, in his capacity as co-executor of the Estate;

"Father" means XXXXXXXXXX, an individual who was a resident of Canada at all material times, including immediately prior to his death on XXXXXXXXXX;

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

"listed personal property" has the meaning assigned in section 54;

"Newco" means a corporation to be incorporated under the provisions of Act1, as described in Paragraph 33;

"Newco Common Shares" means the common shares in the capital of Newco of which Newco will be authorized to issue an unlimited number, as described in Paragraph 33(a);

"Newco Notes" means XXXXXXXXXX identical non-interest-bearing promissory notes to be issued by Newco to the Trust as described in Paragraph 35(i);

"Newco Preferred Shares" means the Preferred Shares in the capital of Newco of which Newco will be authorized to issue an unlimited number, as described in Paragraph 33(b);

"Paragraph" refers to a numbered paragraph in this letter;

"proceeds of disposition" has the meaning assigned in section 54;

"Proposed Transactions" means the proposed transactions that are described under the heading Proposed Transactions below;

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

"resident of Canada" means resident of Canada for the purposes of the Act;

"Sibling 1" refers to XXXXXXXXXX, the son of Father and the sibling of Sibling 2 and Sibling 3;

"Sibling 2" refers to XXXXXXXXXX, the daughter of Father and the sibling of Sibling 1 and Sibling 3;

"Sibling 3" refers to XXXXXXXXXX, the daughter of Father and the sibling of Sibling 1 and Sibling 2;

"Siblings" means, collectively, Sibling 1, Sibling 2 and Sibling 3;

"Specified Date" has the meaning assigned to such phrase in section 4.3(b)(iv) of the Trust Agreement as a date, to be chosen by the Trustees in their absolute discretion that is within XXXXXXXXXX years of the date of death of Father and as a consequence of that death, on which the Trustees will deal with the balance of the Trust Fund then remaining in accordance with section 4.3(b)(iv) of the Trust Agreement;

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

"Trust" means the XXXXXXXXXX, an inter vivos trust settled on XXXXXXXXXX pursuant to the Trust Agreement;

"Trust ACo Common Shares" means the XXXXXXXXXX ACo Common Shares currently held by the Trust which shares were gifted by Father to the Trustees pursuant to a Deed of Gift;

"Trust Agreement" means the agreement entered into between Father, as settlor, and the Trustees, as trustees, on XXXXXXXXXX setting forth the terms and conditions of the Trust;

"Trust Fund" means the assets of the Trust as outlined in Paragraph 18;

"Trustees" means the Trustees of the Trust, being Sibling 1, Sibling 2 and Sibling 3;

"Valuation Report" means the report prepared by XXXXXXXXXX to establish the FMV of the assets held by the Trust as of the date of death of Father; and

"V-Day basis" means the amount, if any, described in subparagraph 84.1(2)(a.1)(i) for purposes of element "B" of paragraph 84.1(1)(a) and element "E" of paragraph 84.1(1)(b).

FACTS

A complete description of all the relevant facts is as follows:

1. ACo is a CCPC and a taxable Canadian corporation with a taxation year end of XXXXXXXXXX.

(a) ACo was originally incorporated under Act2 on XXXXXXXXXX and continued under Act1 on XXXXXXXXXX. ACo amalgamated with XXXXXXXXXX on XXXXXXXXXX and continued under the name of ACo and further amalgamated with a wholly-owned subsidiary, XXXXXXXXXX, on XXXXXXXXXX and continued under the name of ACo.

(b) Prior to the amalgamation of ACo and XXXXXXXXXX, Father held XXXXXXXXXX common shares of the predecessor ACo and XXXXXXXXXX common shares of XXXXXXXXXX Upon such amalgamation, Father was issued XXXXXXXXXX ACo Common Shares in exchange for his common shares in predecessor Aco and XXXXXXXXXX

(c) ACo is a family investment company that has a significant investment portfolio managed by third party investment managers, as well as a XXXXXXXXXX and operates as a family office (the "Business"). ACo primarily earns revenue from investments, including dividends and capital gains, and from its XXXXXXXXXX.

2. ACo’s significant assets currently consist of:

(a) a diverse portfolio of bonds and equities that are managed through several discretionary investment managers including XXXXXXXXXX;

(b) a XXXXXXXXXX and acreage in XXXXXXXXXX known as XXXXXXXXXX;

(c) interests in several privately-held and managed real estate property developments in XXXXXXXXXX;

(d) a non-controlling interest in XXXXXXXXXX, a privately-held, independent investment management firm; and

(e) interests in oil and gas properties.

3. ACo's assets are substantially similar to those held immediately before Father's death. With respect to the investment portfolios, the same investment managers that managed ACo's investment portfolio before Father's death continue to manage ACo's investment portfolio. Aco's risk tolerance with respect to its investment portfolio and the investment approach taken by the investment managers in managing the investment portfolio has not changed since Father's death.

4. ACo currently holds an amount of cash that represents approximately 1.7% of the aggregate fair market value of all of ACo's assets and near cash assets equal to approximately 1.3% of the aggregate fair market value of ACo's assets (such that the cash and near cash represents an aggregate of approximately 3% of the aggregate fair market value of all of ACo's assets). The cash and near cash assets currently held by ACo are consistent with the amount of cash and near cash held by ACo prior to Father's death.

5. ACo is authorized to issue an unlimited number of ACo Common Shares, Class A Redeemable Preferred Shares and Class B Redeemable Preferred Shares having the following terms and conditions:

(a) ACo Common Shares, which entitle the holder to one vote per share at the meetings of the shareholders, entitle the holder to dividends as and when declared, and entitle the holder to participate in the remaining assets of ACo in the event of a wind-up, liquidation or dissolution of ACo.

(b) Class A Redeemable Preferred Shares, which are non-voting, entitle the holder to non-cumulative preferential dividends as and when declared, are redeemable for $XXXXXXXXXX per share and in the event of a wind-up, liquidation or dissolution of ACo, entitle the holder to $XXXXXXXXXX per share plus any declared but unpaid dividends in priority to any participation by the holders of Class B Redeemable Preferred Shares or Common Shares.

(c) Class B Redeemable Preferred Shares, which are non-voting, entitle the holder to non-cumulative preferential dividends as and when declared, are redeemable for $XXXXXXXXXX per share and in the event of a wind-up, liquidation or dissolution of ACo, entitle the holder to $XXXXXXXXXX per share plus any declared but unpaid dividends in priority to any participation by the holders of ACo Common Shares.

6. There are no Class A Redeemable Preferred Shares or Class B Redeemable Preferred Shares currently issued or outstanding.

7. Currently there are XXXXXXXXXX ACo Common Shares issued and outstanding. The aggregate stated capital and PUC of the ACo Common Shares is $XXXXXXXXXX.

(a) Prior to XXXXXXXXXX, Father held XXXXXXXXXX ACo Common Shares, representing approximately 50.5% of the issued and outstanding ACo Common Shares, with an aggregate ACB and PUC of $XXXXXXXXXX. Father acquired the XXXXXXXXXX ACo Common Shares upon the amalgamation of ACo and XXXXXXXXXX on XXXXXXXXXX described in Paragraph 1(a) in exchange for common shares held in predecessor ACo and XXXXXXXXXX and, as such, Father has held ACo Common Shares since at least XXXXXXXXXX.

(b) Each Sibling holds, and continues to hold, XXXXXXXXXX ACo Common Shares, representing approximately 16.5% of the issued and outstanding ACo Common Shares. The aggregate ACB of the ACo Common Shares held by each Sibling is $XXXXXXXXXX.

(c) As a consequence of the transfers described in Paragraph 11, the Trust currently holds the Trust ACo Common Shares, representing approximately 50.5% of the issued and outstanding ACo Common Shares. The aggregate ACB and PUC of the Trust ACo Common Shares is $XXXXXXXXXX, and $XXXXXXXXXX, respectively.

8. On XXXXXXXXXX, Father settled the Trust pursuant to the Trust Agreement upon the transfer of $XXXXXXXXXX bill in Canadian currency to the Trustees. Pursuant to the Trust Agreement, if the Trust has only two trustees appointed at any one time, the decisions of the trustees must be unanimous, and if there are three or more trustees appointed at any one time, the decisions of the trustees must be made by a majority of the trustees. At all times since its creation, the Trust has had three trustees, being the Trustees.

9. All of the Trustees are residents of Canada and the central management and control of the Trust is exercised by the Trustees in Canada.

10. Prior to the Division Date (i.e., prior to the death of Father), the Trustees were required to pay any income of the Trust solely to or for the benefit of Father and only Father was entitled to receive or obtain the use of any of the income or capital of the Trust.

11. On XXXXXXXXXX, pursuant to XXXXXXXXXX separate Deeds of Gift, Father gifted the following additional properties to Trustees to be held by the Trustees in accordance with the terms and conditions of the Trust Agreement:

(a) XXXXXXXXXX ACo Common Shares;

(b) a receivable from ACo in the amount of $XXXXXXXXXX;

(c) certain pieces of artwork; and

(d) cash in the amount of $XXXXXXXXXX.

12. The XXXXXXXXXX ACo Common Shares were capital property to Father and the artwork was listed personal property.

13. The Trust is an alter ego trust as defined in subsection 248(1) on the basis of the following:

(a) the Trust was created after 1999;

(b) Father was 65 years or older at the time the Trust was settled;

(c) the Trust was created during Father's lifetime;

(d) Father was entitled to receive all of the income of the Trust that arose before his death;

(e) before Father's death, no person except Father was entitled to receive or obtain the use of any of the income or capital of the Trust;

(f) Father and the Trust were each residents of Canada at all material times, including at the time of the transfers described in Paragraph 11; and

(g) Father did not make an election under subparagraph 104(4)(a)(ii.1).

14. As a result of the foregoing, the transfer of the properties described in Paragraph 11 by Father to the Trustees was, to the extent necessary, tax-deferred under subsections 73(1.01) and 73(1.02) and the Trust acquired such properties, including the Trust ACo Common Shares, at a cost equal to the ACB of such properties to Father.

15. The transfer of the Trust ACo Common Shares to the Trustees resulted in the Trustees, in their capacities as such, having de jure control of ACo.

16. The Trust was established, and the Deeds of Gift were executed, by Father as part of his estate planning solely for the purpose of simplifying the administration of his estate upon his anticipated death and ensuring protection of his privacy by limiting the amount of assets that were subject to probate following the death of Father. Had the Trust not been formed, the properties listed in Paragraph 11 would have been transferred to the Executors and administered through the Estate. In this regard, the Trust was an alternative to having such property form part of the Estate or having such property distributed to the Siblings during the lifetime of Father.

17. Father passed away on XXXXXXXXXX at his home in XXXXXXXXXX at the age of XXXXXXXXXX. At all material times, including immediately prior to the time of Father’s death, Father was a resident of Canada. The death of Father triggered the Division Date under the Trust Agreement.

18. As of the Division Date, the Trust Fund included the following properties:

(a) a $XXXXXXXXXX bill in Canadian currency;

(b) the Trust ACo Common Shares;

(c) a receivable from ACo in the amount of $XXXXXXXXXX;

(d) certain pieces of artwork; and

(e) cash in the amount of $XXXXXXXXXX.

19. All of the property that comprises the Trust Fund was held by the Trust on the Division Date, and continues to be held by the Trust, as capital property.

20. As a consequence of Father’s death, the Trust was deemed pursuant to subparagraph 104(4)(a)(iv) to have disposed of, among other properties, the Trust ACo Common Shares immediately prior to his death and to have received proceeds of disposition equal to the FMV of those shares at that time and to have reacquired such shares at the cost of their FMV. Following this deemed disposition, the aggregate ACB of the Trust ACo Common Shares was $XXXXXXXXXX.

21. The Trustees obtained the Valuation Report from XXXXXXXXXX to estimate the FMV of the assets held by the Trust as of the Division Date, including the Trust ACo Common Shares. The Valuation Report estimated the FMV of the Trust ACo Common Shares to be in the range of $XXXXXXXXXX, at the low end, and $XXXXXXXXXX, at the high end. The mid-range of the valuation range for the Trust ACo Common Shares was $XXXXXXXXXX.

22. The deemed disposition outlined in Paragraph 20 gave rise to a capital gain to the Trust, which was reported in the Trust’s income tax return for the taxation year ending on XXXXXXXXXX. Specifically, the Trust reported proceeds of disposition for the Trust ACo Common Shares in the amount of $XXXXXXXXXX and a capital gain in the amount of $XXXXXXXXXX in its XXXXXXXXXX income tax return.

23. Following the Division Date, the Trustees were required by the Trust Agreement to:

(a) pay out of the income or capital of the Trust Fund, or both, some or all of the funeral expenses of Father and any executor fees and expenses of administration of Father's estate and any taxes imposed by any jurisdiction that were payable by Father or by his estate (the "Estate Expenses"), including by way of reimbursement of Father's personal representatives for Estate Expenses;

(b) distribute the artwork held by the Trust among the Siblings in the manner described in section 4.3(b)(ii) of the Trust Agreement;

(c) divide the Trust ACo Common Shares (or any property substituted for such shares) into as many equal portions as is necessary to transfer one equal portion to each Sibling who is living on the Specified Date or, in the event a Sibling is not alive on the Specified Date, to distribute one equal portion to the personal representative(s) of a deceased Sibling; and

(d) to transfer the balance of the Trust Fund to the spouse of Father if she is living on the Specified Date or to her personal representative(s) in the event she is not alive on the Specified Date.

24. From the Division Date to the Specified Date, the Trustees have the discretion to pay or apply as much or all of the annual income arising from the Trust Fund, together with as much of the capital thereof, to or for the benefit of any one or more of the Siblings as the Trustees consider appropriate in their absolute discretion. Any income not so paid or applied is to be accumulated and added to capital.

25. On XXXXXXXXXX, ACo declared a capital dividend on all of the issued and outstanding ACo Common Shares in the aggregate of $XXXXXXXXXX.

26. On XXXXXXXXXX, ACo declared an eligible dividend on all of the issued and outstanding ACo Common Shares in the aggregate of $XXXXXXXXXX.

27. The dividends described in Paragraphs 25 and 26 were consistent with ACo's prior practice of paying dividends (including deemed dividends) to its shareholders and were partially funded from the sale of securities in the investment portfolio managed by XXXXXXXXXX and partially from ACo's cash on hand in its investment account, consistent with ACo's prior practice.

28. On XXXXXXXXXX, the Trustees exercised their discretion to distribute the capital dividend and the eligible dividend among the Siblings in equal shares (being $XXXXXXXXXX on account of the capital dividend and $XXXXXXXXXX on account of the eligible dividend to each Sibling). The Trustees designated, pursuant to subsections 104(19) and 104(20), that the respective amounts be deemed to be a dividend received by each of the Siblings.

29. On XXXXXXXXXX, the Trustees exercised their discretion to further distribute the interest income earned by the Trust in XXXXXXXXXX in the aggregate amount of $XXXXXXXXXX among the Siblings in equal shares.

30. The Trust is a resident of Canada, and its first taxation year-end ended on the death of Father on XXXXXXXXXX. The T3 Trust Income Tax and Information Return for the Trust’s first taxation year ending XXXXXXXXXX and its second taxation year ending XXXXXXXXXX were filed on or before XXXXXXXXXX.

31. Each Sibling and each Beneficiary of the Trust is currently, and at all material times has been, a resident of Canada.

32. The Trustees have not yet chosen the Specified Date for the purposes of dealing with the balance of the Trust Fund.

PROPOSED TRANSACTIONS

The Proposed Transactions will occur in the order presented unless otherwise indicated, with the exception of filing the applicable election forms, which will be filed within the applicable due dates following the completion of the Proposed Transactions.

33. The Trust will incorporate Newco under Act1. Newco will be a CCPC and a taxable Canadian corporation. Newco will be authorized to issue an unlimited number of Newco Common Shares and an unlimited number of Newco Preferred Shares with the following terms and conditions:

(a) Newco Common Shares:

(i) entitle the holder to one vote per share at the meetings of the shareholders;

(ii) entitle the holder to non-cumulative dividends as and when declared by the board of directors to the exclusion of any other class of shares. No dividend may be declared or paid on the Newco Common Shares if such dividend would result in Newco having insufficient net assets to redeem any issued and outstanding Newco Preferred Shares, or to pay the redemption amount on the Newco Preferred Shares in part or in full in the event of a wind-up, dissolution or liquidation of Newco; and

(iii) entitle the holder to participate in the remaining assets of Newco in the event of a wind-up, liquidation or dissolution of Newco.

(b) Newco Preferred Shares:

(i) non-voting;

(ii) redeemable and retractable at a redemption price equal to the FMV of the property transferred to Newco in exchange for the issuance of Newco Preferred Shares, subject to a price adjustment clause;

(iii) entitle the holder to non-cumulative dividends at a rate of XXXXXXXXXX% of the redemption price as and when declared by the board of directors of Newco, to the exclusion of any other class of shares. Any amount distributed as a return of capital to the Newco Preferred Shares will reduce, in equal amount, the redemption price of the Newco Preferred Shares; and

(iv) entitle the holder to the redemption price in priority to any participation by the holders of the Newco Common Shares on the winding-up, liquidation or dissolution of Newco.

34. On incorporation, the Trust will subscribe for XXXXXXXXXX Newco Common Shares for $XXXXXXXXXX. The Trustees, in their capacities as such, will have de jure control of Newco.

35. The Trust will transfer the Trust ACo Common Shares to Newco in exchange for consideration consisting of:

(i) Newco Notes with the aggregate principal amount and FMV equal to the lesser of:

(A) the ACB of the Trust ACo Common Shares at the time of transfer less $XXXXXXXXXX; and

(B) the FMV of the Trust ACo Common Shares at the time of transfer less $XXXXXXXXXX,

subject to a price adjustment clause to adjust the aggregate principal amount of the Newco Notes, should the FMV of the Trust ACo Common Shares on the date of transfer be determined to be less than their ACB of $XXXXXXXXXX; and

(ii) XXXXXXXXXX Newco Preferred Shares with an aggregate redemption value equal to $XXXXXXXXXX plus the positive difference (if any) between the FMV of the Trust ACo Common Shares and the ACB of the Trust ACo Common Shares. An aggregate of $XXXXXXXXXX will be added to the stated capital and PUC of the XXXXXXXXXX Newco Preferred Shares.

36. The Trust and Newco will make a joint election under subsection 85(1), in the prescribed form and within the time limits set out in subsection 85(6), so that the rules in subsection 85(1) apply to the transfer outlined in Paragraph 35. For greater certainty the agreed amount agreed to by the Trust and Newco for the Trust ACo Common Shares will be equal to the lower of the ACB of the said shares held by the Trust and the FMV of the shares at that time (i.e., the lower of the amounts described in subparagraphs 85(1)(c.1)(i) and (ii)).

37. ACo will continue to carry on its Business in the same manner as it is currently conducted and the Business will not be materially changed or altered for at least one year following the transfer of the Trust ACo Common Shares to Newco. During the one year period following the transfer, consistent with its prior practices, ACo may declare and pay dividends to the holders of ACo Common Shares, which includes Newco, but there will not be any repayment of the Newco Notes in part or in whole nor will any Newco Preferred Shares be redeemed or retracted during that period of time. Also during that one year period, it is not the intention to sell significant assets outside of the ordinary course of business in order to fund payments of dividends on the ACo Common Shares. Any dividends will be funded from the sale of securities in the ordinary course of business (similar to prior years) and the quantum of any dividends will be consistent with the quantum of dividends paid in prior years such that the dividends are not expected to be material when compared to the fair market value of ACo's assets.

38. On a date to be determined following the transfer described in Paragraph 35 and that is within XXXXXXXXXX years of the date of death of Father, the Trustees will chose the Specified Date and will, on the Specified Date, distribute the XXXXXXXXXX Newco Common Shares, the XXXXXXXXXX Newco Preferred Shares and the Newco Notes equally among the Siblings, in their capacities as Beneficiaries of the Trust, as capital distributions from the Trust in satisfaction of all or a portion of their capital interests in the Trust.

39. Pursuant to subsection 107(2), the Trust will be deemed to have disposed of the Newco Common Shares, the Newco Preferred Shares and the Newco Notes for proceeds of disposition equal to their respective ACB, resulting in no capital gain to the Trust.

40. Pursuant to subsection 107(2), each of the Siblings will be deemed to have acquired the Newco Common Shares, the Newco Preferred Shares and the Newco Notes at a cost equal to the ACB of such properties to the Trust and to have disposed of their capital interests in the Trust for an equal amount.

41. As a result of the transfers described in Paragraph 38, the Siblings (in their personal capacities) will collectively hold 100% of the shares of Newco and directly or indirectly hold 100% of the shares of ACo.

42. ACo and Newco will enter into an amalgamation agreement and will amalgamate in a long-form amalgamation under Act1 to form Amalco after a period of one year has elapsed from the time of the transfer described in Paragraph 35. In accordance with Act1 and the amalgamation agreement and as required by subsection 87(1):

(a) all of the property of each of ACo and Newco immediately before the amalgamation (other than the ACo Common Shares held by Newco) will become property of Amalco by virtue of the amalgamation;

(b) all of the liabilities of each of ACo and Newco immediately before the amalgamation (including the amounts owing by Newco under the Newco Notes) will become liabilities of Amalco by virtue of the amalgamation; and

(c) all of the shareholders (other than a predecessor corporation) who owned shares of the capital stock of Aco or Newco immediately prior to the amalgamation will receive shares of the capital stock of Amalco because of the amalgamation.

43. On the amalgamation:

(a) the XXXXXXXXXX Newco Common Shares held by each Sibling will be exchanged for XXXXXXXXXX Amalco Common Shares having terms and conditions identical to the terms and conditions attached to the Newco Common Shares;

(b) the XXXXXXXXXX ACo Common Shares held by each Sibling will be exchanged for XXXXXXXXXX0 Amalco Common Shares;

(c) the XXXXXXXXXX Newco Preferred Shares will be exchanged for XXXXXXXXXX Amalco Preferred Shares having terms and conditions identical to the terms and conditions attached to the Newco Preferred Shares; and

(d) the XXXXXXXXXX ACo Common Shares held by Newco will be cancelled without payment of any consideration.

44. The aggregate PUC of the newly issued Amalco Common Shares will be equal to the aggregate of the PUC of the Newco Common Shares and the PUC of the ACo Common Shares held directly by the Siblings immediately prior to the amalgamation. In this regard, no amount will be added to the PUC of the Amalco Common Shares in respect of the XXXXXXXXXX ACo Common Shares held by Newco that will be cancelled upon the amalgamation.

45. The aggregate PUC of the newly issued Amalco Preferred Shares will equal the aggregate PUC of the Newco Preferred Shares (which, for greater certainty, will be $XXXXXXXXXX as described in Paragraph 35(ii)).

46. Pursuant to subsection 87(4) of the Act:

(a) the ACB of the Amalco Common Shares received by a Sibling on the amalgamation will be equal to, and no greater than, the aggregate of the ACB of the Newco Common Shares and the ACo Common Shares held by the Sibling immediately prior to the amalgamation; and

(b) the ACB of the Amalco Preferred Shares received by a Sibling on the amalgamation will be equal to, and no greater than, the ACB of the Newco Preferred Shares held by the Sibling immediately prior to the amalgamation.

In this regard, no amount will be added to the ACB of the Amalco Common Shares or the Amalco Preferred Shares in respect of the XXXXXXXXXX ACo Common Shares held by Newco that will be cancelled upon the amalgamation.

47. Subsequent to the amalgamation, Amalco will begin to gradually make payments on the Newco Notes to the Siblings and/or gradually redeem the Amalco Preferred Shares. For greater certainty, the aggregate amount paid on the Newco Notes to the Siblings during the first year immediately following the amalgamation will not exceed 10% of the aggregate principal amount of the Newco Notes when they were first issued. Additionally, absent extraordinary events, the intention is to repay no more than 10% per year of the aggregate principal amount of the Newco Notes.

48. Amalco will continue to carry on the Business as described in Paragraph 1(c) in the same manner as it is currently conducted and the Business will not be materially changed or altered for the foreseeable future.

49. Prior to, during, or subsequent to the Proposed Transactions, the Trust may make additional distributions of income or capital to the Beneficiaries in accordance with the terms of the Trust Agreement. Such income or capital distributions will be funded through the distribution of the income or capital of the Trust Fund.

ADDITIONAL INFORMATION

50. Neither Father nor the Trust claimed a deduction under section 110.6 in respect of the Trust ACo Common Shares or any other shares for which they were substituted, within the meaning of subsection 248(5). Moreover, there was no person not dealing at arm’s length with Father or with the Trust that previously claimed a deduction under section 110.6 in respect of any ACo Common Shares, or any other shares of ACo for which such shares were substituted, within the meaning of subsection 248(5).

51. For greater certainty, there is no V-day basis included in the ACB of any class of ACo shares.

52. The Proposed Transaction steps in Paragraphs 33 to 36 are to be implemented within 6 months of receiving the advance income tax ruling.

PURPOSES OF PROPOSED TRANSACTIONS

53. The purposes of the Proposed Transactions are:

(a) to return to the Trust, or subsequently to the Siblings, an amount up to the FMV of the Trust ACo Common Shares immediately before Father’s death, while minimizing the inherent double tax exposure that can result from the application of sections 104(4)(a), 84(2), 84(3) and 84.1; and

(b) to allow each Sibling to undertake his or her personal estate and other financial planning with respect to his or her ownership of ACo Common Shares.

RULINGS

Provided that the preceding statements constitute a complete and accurate disclosure of all relevant facts, Proposed Transactions, additional information, and purposes of the Proposed Transactions, and provided that the Proposed Transactions are completed in the manner described above, and there are no other transactions which may be relevant, we confirm the following:

A. Section 84.1 will not apply to deem the Trust to have received a dividend from Newco on the disposition of the Trust ACo Common Shares to Newco, as described in Paragraph 35, provided that the aggregate FMV of the Newco Notes, immediately after the disposition, is equal to or less than the ACB of the Trust ACo Common Shares to the Trust, immediately before the disposition, as modified by paragraph 84.1(2)(a.1).

B. Subsection 84(2) will not apply as a result of the Proposed Transactions, in and by themselves, to deem ACo to have paid, and the Trust or the Siblings to have received, a dividend on the ACo Common Shares or the Amalco Common Shares.

C. The provisions of subsection 245(2) will not apply as a result of the Proposed Transactions, in and by themselves, to redetermine the tax consequences stated in the rulings given above.

The above rulings are given subject to the limitations and qualifications set forth in Information Circular 70-6R8 issued on November 1, 2018 and are binding on the CRA, provided that the Proposed Transactions are completed within the time frame described in this letter.

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

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

(a) the FMV or ACB of any property referred to herein, including the Trust ACo Common Shares, or the PUC in respect of any share referred to herein;

(b) the balances of the general rate income pool, CDA or any other tax account for any corporation described herein;

(c) whether the Trust is, at any particular time, an alter ego trust under the Act;

(d) whether subsections 73(1.01) and 73(1.02) applied to the transfer of properties described in Paragraph 14;

(e) the Trustees’ ability to complete the Proposed Transactions under the terms of the Trust;

(f) whether subsection 107(2) applies to the transactions described in Paragraphs 38, 39, and 40;

(g) whether any person described herein deals, or does not deal, with any other person at arm's length; or

(h) any other tax consequence (including provincial tax consequences) relating to the facts, Proposed Transactions 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 purpose 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 or 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, updated to November 26, 2015.

Yours truly,

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