2020 Ruling 2020-0853221R3 - Split-up butterfly: investment company

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: Will the exception to subsection 55(2), in paragraph 55(3)(b) apply to the proposed transactions?

Position: Yes.

Reasons: Conditions for application have been met and the "butterfly denial rules" in subsection 55(3.1) do not apply.

XXXXXXXXXX							  2020-085322

XXXXXXXXXX, 2020

Dear XXXXXXXXXX,

Re: Advance Income Tax Ruling
XXXXXXXXXX(Collectively referred to as the “Taxpayers”)

We are writing in response to your request for an advance income tax ruling (“Ruling request”) dated XXXXXXXXXX on behalf of the above-noted Taxpayers. We also acknowledge the additional information provided in various email correspondence, as well as the 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 request 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 any such tax return;
(ii) under objection by the Taxpayers or a related person;
(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 Ruling Directorate in relation to the Taxpayers or a related person.

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

XXXXXXXXXX

This document is based solely on the facts and proposed transactions described below. The documentation submitted with the Ruling 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:

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 request that are defined in the Act (or in the Regulations to the Act) 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:

“Act1” means the Canada Business Corporations Act and, where applicable, its predecessor statutes;

“ACB” means “adjusted cost base” as that expression is defined in section 54;

“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);

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

“CRA” means the Canada Revenue Agency;

“capital dividend” has the meaning assigned by subsection 83(2);

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

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

“connected” has the meaning assigned by subsection 186(4);

“DC” means XXXXXXXXXX as described in Paragraphs 1 and 2;

“DC CDA Purchase Note #1” means the non-interest bearing demand promissory note to be issued by DC to TC1 on the purchase for cancellation of the first tranche of its DC Common Shares owned by TC1, described in Paragraph 33;

“DC CDA Purchase Note #2” means the non-interest bearing demand promissory note to be issued by DC to TC2 on the purchase for cancellation of the first tranche of its DC Common Shares owned by TC2, described in Paragraph 35;

“DC Class A Preferred Shares” means the voting, non-participating preferred shares of DC, as described in Paragraph 3;

“DC Class B Preferred Shares” means the non-voting, non-participating preferred shares of DC, as described in Paragraph 3;

“DC Common Shares” means the non-voting common shares of DC, as described in Paragraph 3;

“DC Non-CDA Purchase Note #1” means the non-interest bearing demand promissory note to be issued by DC to TC1 on the purchase for cancellation of the second tranche of its DC Common Shares and on the redemption of its DC Class A Preferred Shares owned by TC1, described in Paragraph 34;

“DC Non-CDA Purchase Note #2” means the non-interest bearing demand promissory note to be issued by DC to TC2 on the purchase for cancellation of the second tranche of its DC Common Shares and on the redemption of its DC Class A Preferred Shares owned by TC2, described in Paragraph 36;

“DC Purchase Notes to TC1” means the DC Non-CDA Purchase Note #1 and the DC CDA Purchase Note #1, collectively;

“DC Purchase Notes to TC2” means the DC Non-CDA Purchase Note #2 and the DC CDA Purchase Note #2, collectively;

“DC Shares” means the DC Common Shares and the DC Class A Preferred Shares, collectively;

“DC Transfers” refer to the transfers of property by DC to TC1 and TC2, respectively, as described in Paragraphs 27 to 29;

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

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

“distribution property” has the meaning assigned in Paragraph 27;

“dividend refund” has the meaning assigned by subsection 129(1);

“dividend rental arrangement” has the meaning assigned by subsection 248(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 term is defined in subsection 129(4);

“Estate” refers to the estate of the late XXXXXXXXXX, daughter of Father and sibling of Sibling 1 and Sibling 2;

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

“Father” refers to XXXXXXXXXX;

“financial intermediary corporation” has the meaning assigned by subsection 191(1);

“forgiven amount” has the meaning assigned by subsection 80(1);

“GRIP” means “general rate income pool” and has the meaning assigned by subsection 89(1);

“Marketable Securities” means a diversified portfolio of investments including cash and cash equivalents, fixed income instruments such as government and corporate bonds, shares of public corporations and units in mutual and segregated funds;

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

“non-resident” has the meaning assigned by subsection 248(1);

“PUC” means “paid-up capital” and has the meaning assigned by subsection 89(1);

“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 13 to 38 of this letter;

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

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

“Shareholder Loan” means the amount due from DC to Father, that is unsecured, non-interest bearing and due on demand with no fixed terms of repayment;

“Sibling 1” refers to XXXXXXXXXX, daughter of Father and sibling of Sibling 2;

“Sibling 2” refers to XXXXXXXXXX, daughter of Father and sibling of Sibling 1;

“significant influence” has the meaning assigned by section 3051.05 of the Accounting Standards for Private Enterprises;

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

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

“stated capital account” refers to an account that each of DC, TC1 and TC2 are required to maintain for each class and series of their respective share capital, issued in accordance with Act1, and reflects the aggregate amount of the stated capital for each class and series of shares in the share capital of each of DC, TC1 and TC2, respectively;

“substantial interest” has the meaning assigned by subsection 191(2);

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

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

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

“taxation year” has the meaning assigned by subsection 249(1);

“TC1” refers to a corporation to be incorporated as a part of the Proposed Transactions, as described in Paragraph 13;

“TC1 Class A Preferred Shares” means the Class A preferred shares in the capital of TC1 described in Paragraph 14;

“TC1 Class B Preferred Shares” means the Class B preferred shares in the capital of TC1 described in Paragraph 14;

“TC1 Common Shares” means the common shares in the capital of TC1 described in Paragraph 14;

“TC1 Redemption Note” means the non-interest bearing demand promissory note to be issued by TC1 to DC on the redemption of its TC1 Class B Preferred Shares owned by DC, as described in Paragraph 30;

“TC2” refers to a corporation to be incorporated as a part of the Proposed Transactions, as described in Paragraph 16;

“TC2 Class A Preferred Shares” means the Class A preferred shares in the capital of TC2 described in Paragraph 17;

“TC2 Class B Preferred Shares” means the Class B preferred shares in the capital of TC2 described in Paragraph 17;

“TC2 Common Shares” means the common shares in the capital of TC2 described in Paragraph 17; and

“TC2 Redemption Note” means the non-interest bearing demand promissory note to be issued by TC2 to DC on the redemption of its TC2 Class B Preferred Shares owned by DC, as described in Paragraph 31.

FACTS

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

1. DC was incorporated under Act1 on XXXXXXXXXX. DC is a TCC and a CCPC. DC is a resident of Canada under the Act, and has a XXXXXXXXXX taxation year end.

2. DC carries on a specified investment business, and trades various types of marketable securities in the ordinary course of its business operations, based on advice from its independent investment advisors. DC does not exercise significant influence over any corporation, partnership or other entity in which it invests.

3. DC’s authorized share capital consists of an unlimited number of DC Common Shares, DC Class A Preferred Shares and DC Class B Preferred Shares, with the following rights:

(a) The DC Common Shares are non-voting, without nominal or par value, and include the right to participate and receive the remaining property of DC on a liquidation, dissolution or on the winding-up of DC. DC has never paid dividends on these shares.

(b) The DC Class A Preferred Shares are voting, non-participating, and redeemable for an amount equal to their stated capital, plus any declared and unpaid dividends thereon. These shares have a non-cumulative dividend entitlement of up to XXXXXXXXXX% per annum of the stated capital of the shares. DC has never paid dividends on these shares.

(c) The DC Class B Preferred Shares are non-voting, non-participating, and are redeemable and retractable for the amount of consideration received by DC upon issuance of the shares, plus any declared and unpaid dividends thereon. These shares have a non-cumulative dividend right of up to XXXXXXXXXX% per annum on the consideration received by DC upon issuance of the shares. These shares rank below the DC Class A Preferred Shares in terms of their dividend entitlement and right to the remaining property of the DC on dissolution.

4. The directors of DC are Sibling 1 and Sibling 2.

5. The issued and outstanding share capital of DC, and the tax attributes at XXXXXXXXXX are as follows:

	Shareholder	Number		Share Class		FMV($)	ACB($)	PUC($)
	Father	XXXXX		DC Class A Preferred	XXXXX	      XXXXX	      XXXXX
	Sibling 1	XXXXX		DC Common		      XXXXX	      XXXXX	      XXXXX
	Sibling 2	XXXXX		DC Common		      XXXXX	      XXXXX	      XXXXX
	Estate	XXXXX		DC common		      XXXXX	      XXXXX	      XXXXX
	Total							      XXXXX	      XXXXX	      XXXXX

None of the shares of DC were acquired by the shareholders in contemplation of the Proposed Transactions.

6. The DC Shares are capital property to Sibling 1, Sibling 2, Father and Estate, and, all DC Shares are eligible property.

7. Father, Sibling 1 and Sibling 2 are residents in Canada under the Act.

8. Estate is a non-resident trust and is not deemed resident in Canada by virtue of section 94.

9. As at XXXXXXXXXX, DC has an ERDTOH balance of $XXXXXXXXXX, a NERDTOH balance of $XXXXXXXXXX, a GRIP balance of $XXXXXXXXXX and a CDA balance of approximately $XXXXXXXXXX.

10. As at XXXXXXXXXX, pursuant to its unaudited financial statements, DC had the following assets: cash, a life insurance policy with a cash surrender value, and the Marketable Securities.

11. As at XXXXXXXXXX, pursuant to its unaudited financial statements, DC had the following liabilities: income taxes payable and the Shareholder Loan.

Since its XXXXXXXXXX taxation year end, there has not been a material change in the composition of DC’s assets and liabilities described above that would impact the Proposed Transactions. Moreover, there will not be any significant change in DC’s assets or liabilities (except as contemplated in the Proposed Transactions) from the date of this letter until the date that the Proposed Transactions are completed.

12. The approximate FMV of the assets of DC on XXXXXXXXXX are as follows:

	Assets							FMV ($)
	Cash							XXXXX
	Cash surrender value of life insurance policy		XXXXX
	Marketable Securities					XXXXX
	Total							XXXXX

The approximate FMV of the liabilities of DC on XXXXXXXXXX are as follows:

	Liabilities			FMV ($)
	Taxes payable			XXXXX
	Shareholder Loan		XXXXX
	Total				XXXXX

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, unless otherwise indicated, following the completion of the Proposed Transactions.

Incorporation of TC1 and TC2

13. Prior to XXXXXXXXXX, Sibling 1 will incorporate TC1 under Act1. TC1 will be a TCC and a CCPC at all relevant times.

14. The authorized share capital of TC1 will consist of an unlimited number of the following shares:

(a) TC1 Common shares that will be voting, participating and without nominal or par value. These shares will include the right to participate in and receive the remaining property of TC1 on a liquidation, dissolution or on the winding-up of TC1.

TC1 may also authorize additional classes of common shares.

(b) TC1 Class A Preferred Shares that will be voting, non-participating, and redeemable for an amount equal to their stated capital, plus any declared and unpaid dividends thereon. These shares will have a non-cumulative dividend entitlement of up to XXXXXXXXXX% per annum of the stated capital of the shares. These shares rank below the TC1 Class B Preferred Shares in terms of their right to receive the remaining property of TC1 on a liquidation, dissolution or on the winding-up of TC1.

(c) TC1 Class B Preferred Shares that will be non-voting, non-participating, and are redeemable and retractable for the amount of consideration received by TC1 upon issuance of the shares (redemption amount), plus any declared and unpaid dividends thereon. These shares will have a non-cumulative dividend right of up to XXXXXXXXXX% per annum on the redemption amount of the shares.

15. Sibling 1 will subscribe for 100 TC1 Common Shares for aggregate consideration of $XXXXXXXXXX.

16. Prior to XXXXXXXXXX, Sibling 2 will incorporate TC2 under Act1. TC2 will be a TCC and a CCPC at all relevant times.

17. The authorized share capital of TC2 will consist of an unlimited number of the following shares:

(a) TC2 Common Shares that will be voting, participating and without nominal or par value. These shares will include the right to participate in and receive the remaining property of TC2 on a liquidation, dissolution or on the winding-up of TC2.

TC2 may also authorize additional classes of common shares.

(b) TC2 Class A Preferred Shares that will be voting, non-participating, and redeemable for an amount equal to their stated capital, plus any declared and unpaid dividends thereon. These shares will have a non-cumulative dividend entitlement of up to XXXXXXXXXX% per annum of the stated capital of the shares. These shares rank below the TC2 Class B Preferred Shares in terms of their right to receive the remaining property of TC2 on a liquidation, dissolution or on the winding-up of TC2.

(c) TC2 Class B Preferred Shares that will be non-voting, non-participating, and are redeemable and retractable for the amount of consideration received by TC2 upon issuance of the shares (redemption amount), plus any declared and unpaid dividends thereon. These shares will have a non-cumulative dividend right of up to XXXXXXXXXX% per annum on the redemption amount of the shares.

18. Sibling 2 will subscribe for XXXXXXXXXX TC2 Common Shares for aggregate consideration of $XXXXXXXXXX.

19. On XXXXXXXXXX at XXXXXXXXXX, Sibling 1 will transfer all XXXXXXXXXX DC Common Shares to TC1. As consideration for the XXXXXXXXXX DC Common Shares, Sibling 1 will receive XXXXXXXXXX additional TC1 Common Shares with an aggregate FMV equal to the aggregate FMV of the 100 DC Common Shares, at the time of the transfer.

Sibling 1 and TC1 will jointly elect, in the prescribed form and within the time limit referred to in subsection 85(6), to have the provisions of subsection 85(1) apply to this transfer. The agreed amount will not be less than the lesser of the amounts described in subparagraphs 85(1)(c.1)(i) and (ii), nor will the agreed amounts exceed the FMV of the 100 DC Common Shares transferred to TC1 at the time of the transfer.

The amount added to the stated capital account of the TC1 Common Shares issued to Sibling 1 will be restricted to the greater of (i) the PUC, immediately before the disposition, in respect of the XXXXXXXXXX DC Common Shares transferred to TC1; and (ii) the ACB to Sibling 1, immediately before the disposition, of the XXXXXXXXXX DC Common Shares transferred to TC1, determined in accordance with paragraph 84.1(2)(a.1). For greater certainty, the addition to the PUC of the TC1 Common 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).

20. On XXXXXXXXXX at XXXXXXXXXX, Sibling 2 will transfer all XXXXXXXXXX DC Common Shares to TC2. As consideration for the XXXXXXXXXX DC Common Shares, Sibling 2 will receive XXXXXXXXXX additional TC2 Common Shares with an aggregate FMV equal to the aggregate FMV of the XXXXXXXXXX DC Common Shares, at the time of the transfer.

Sibling 2 and TC2 will jointly elect, in the prescribed form and within the time limit referred to in subsection 85(6), to have the provisions of subsection 85(1) apply to this transfer. The agreed amount will not be less than the lesser of the amounts described in subparagraphs 85(1)(c.1)(i) and (ii), nor will the agreed amounts exceed the FMV of the XXXXXXXXXX DC Common Shares transferred to TC2 at the time of the transfer.

The amount added to the stated capital account of the TC2 Common Shares issued to Sibling 2 will be restricted to the greater of (i) the PUC, immediately before the disposition, in respect of the XXXXXXXXXX DC Common Shares transferred to TC2; and (ii) the ACB to Sibling 2, immediately before the disposition, of the XXXXXXXXXX DC Common Shares transferred to TC2, determined in accordance with paragraph 84.1(2)(a.1). For greater certainty, the addition to the PUC of the TC2 Common 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).

21. [Reserved]

22. On XXXXXXXXXX at XXXXXXXXXX, Father will undertake the following two transfers:

(a) Father will transfer XXXXXXXXXX DC Class A Preferred Shares to TC1. As consideration for the XXXXXXXXXX DC Class A Preferred Shares, Father will receive XXXXXXXXXX TC1 Class A Preferred Shares with an aggregate FMV equal to the aggregate FMV of the XXXXXXXXXX DC Class A Preferred Shares, at the time of the transfer.

Father and TC1 will jointly elect, in the prescribed form and within the time limit referred to in subsection 85(6), to have the provisions of subsection 85(1) apply to this transfer. The agreed amount will not be less than the lesser of the amounts described in subparagraphs 85(1)(c.1)(i) and (ii), nor will the agreed amounts exceed the FMV of the XXXXXXXXXX DC Class A Preferred Shares transferred to TC1 at the time of the transfer.

The amount added to the stated capital account of the TC1 Class A Preferred Shares issued to Father will be restricted to the greater of (i) the PUC, immediately before the disposition, in respect of the XXXXXXXXXX DC Class A Preferred Shares transferred to TC1; and (ii) the ACB to Father, immediately before the disposition, of the XXXXXXXXXX DC Class A Preferred Shares transferred to TC1, determined in accordance with paragraph 84.1(2)(a.1). For greater certainty, the addition to the PUC of the TC1 Class A Preferred 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).

(b) Father will transfer XXXXXXXXXX DC Class A Preferred Shares to TC2. As consideration for the XXXXXXXXXX DC Class A Preferred Shares, Father will receive XXXXXXXXXX TC2 Class A Preferred Shares with an aggregate FMV equal to the aggregate FMV of the XXXXXXXXXX DC Class A Preferred Shares, at the time of the transfer.

Father and TC2 will jointly elect, in the prescribed form and within the time limit referred to in subsection 85(6), to have the provisions of subsection 85(1) apply to this transfer. The agreed amount will not be less than the lesser of the amounts described in subparagraphs 85(1)(c.1)(i) and (ii), nor will the agreed amounts exceed the FMV of the XXXXXXXXXX DC Class A Preferred Shares transferred to TC2 at the time of the transfer.

The amount added to the stated capital account of the TC2 Class A Preferred Shares issued to Father will be restricted to the greater of (i) the PUC, immediately before the disposition, in respect of the XXXXXXXXXX DC Class A Preferred Shares transferred to TC2; and (ii) the ACB to Father, immediately before the disposition, of the XXXXXXXXXX DC Class A Preferred Shares transferred to TC2, determined in accordance with paragraph 84.1(2)(a.1). For greater certainty, the addition to the PUC of the TC2 Class A Preferred 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).

23. Immediately after the share transfers described in Paragraphs 19, 20 and 22, each of TC1 and TC2 will own XXXXXXXXXX DC Common Shares and XXXXXXXXXX DC Class A Preferred Shares. These will be the only assets of TC1 and TC2 and they will be held by both TC1 and TC2 as capital property.

24. None of Sibling 1, Sibling 2 or Father desires to confer a benefit on a related person as a result of the above transfers of their respective shares.

Types of Property

25. Immediately before the DC Transfers described below, the property owned by DC will be classified into the following three types of property for the purposes of the definition of “distribution” as follows:

(a) cash or near-cash property, comprising all of DC’s current assets, including cash and cash equivalents, accounts receivable, prepaid expenses, the cash surrender value of the life insurance policy and marketable securities (other than portfolio investments);

(b) 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 income from a specified investment business, and including the excess of the FMV of the insurance policy over the cash surrender value, if any; and

(c) business 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 a business (other than a specified investment business).

It is anticipated that DC will not own any property classified as business property immediately before the DC Transfers, based on this methodology for classification.

For greater certainty, for purposes of the DC Transfers:

(d) any tax accounts of DC, such as the balances in its ERDTOH and NERDTOH accounts, GRIP and CDA, will not be considered property;

(e) advances by DC that have a term of less than 12 months, that have no fixed term for repayment, or that are due on demand, if any, will be considered cash or near-cash property;

(f) deferred tax assets and deferred expenses (which are capitalized and amortized for accounting purposes but deducted for income tax purposes), if any, will not be considered property; and

(g) 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, not be considered property.

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

(a) all current liabilities and the Shareholder Loan 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 allocation of current liabilities and the Shareholder Loan described herein cannot exceed the aggregate FMV of all cash or near-cash property of DC. However, it is possible that the aggregate amount of current liabilities and Shareholder Loan will exceed the FMV of the cash or near-cash property, and will therefore constitute excess unallocated liabilities. The treatment of excess unallocated liabilities is discussed below, in Paragraph 26(c).

(b) liabilities of DC, other than those described in Paragraph 26(a), if any, 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, if any, 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

(c) if there are any excess unallocated liabilities after the allocations described in Paragraphs 26(a) and (b), such remaining liabilities will then be allocated to the cash or near-cash property, investment property, and business 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 26(a) and (b). However, where DC would have a negative amount of a type of property because of the allocations in Paragraphs 26(a) or (b), 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.

For greater certainty, for the purposes of determining the net FMV of each type of property of DC:

(d) the amount of deferred income tax liability, if any, will not be considered a liability because such amount does not represent a legal obligation;

(e) amounts owing by DC that have a term of less than 12 months or are due on demand with no fixed terms of repayment (i.e., the Shareholder Loan) are deducted from cash or near cash property;

(f) current liabilities include amounts normally classified as current liabilities, including taxes payable; and

(g) no amount will be considered to be a liability unless it represents a true legal liability that is capable of quantification.

DC Transfers

27. On XXXXXXXXXX at XXXXXXXXXX DC will contemporaneously transfer to each of TC1 and TC2, a proportionate share of each type of property owned by DC at that time (collectively referred to as the “distribution property”), such that immediately following the DC Transfers of property and the assumption by TC1 and TC2 of DC’s liabilities, as described in Paragraphs 28(a) and 29(a), the net FMV of each type of property transferred by DC to TC1 and TC2, respectively, 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, immediately before the DC Transfers, of all property of that type owned at that time by DC;

B is the FMV, immediately before the DC Transfers, of all the DC Shares owned, at that time, by either TC1 or TC2, as the case may be; and

C is the FMV, immediately before the DC Transfers, of all the issued and outstanding DC Shares.

The expression “approximate that proportion” means that the discrepancy from that proportion, if any, will not exceed one percent (1%), determined as a percentage of the net FMV of each type of property that each of TC1 and TC2 will receive 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 of DC.

28. As consideration for the DC Transfer by DC to TC1, TC1 will:

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

(b) issue TC1 Class B Preferred Shares to DC which will have an aggregate redemption amount and aggregate FMV equal to the amount by which the aggregate FMV, at the time of the DC Transfer, of the distribution property received by TC1, exceeds the aggregate amount of DC’s liabilities assumed by TC1, as described in Paragraph 28(a).

DC will hold the TC1 Class B Preferred Shares as capital property. The TC1 Class B Preferred Shares will be taxable preferred shares.

DC and TC1 will jointly elect, in prescribed form and within the time allowed by subsection 85(6), to have the provisions of subsection 85(1) apply to the transfers of each eligible property of DC that is transferred by DC to TC1. The agreed amount in respect of each eligible property so transferred will not be less than the lesser of the amounts described in subparagraphs 85(1)(c.1)(i) and (ii), nor will the agreed amount exceed the FMV of each such eligible property.

The amount of the liabilities assumed by TC1, which are allocated to a particular eligible property that is subject to an election under subsection 85(1), will not exceed the agreed amount for that particular property. The amount of liabilities assumed by TC1 which are allocated to a particular property that is not subject to an election under subsection 85(1) will not exceed the FMV of any such property.

TC1 will add to the stated capital account for the TC1 Class B Preferred 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 FMV, in the case of each property transferred to TC1 that is not an eligible property, less (c) the aggregate principal amounts of the liabilities of DC assumed by TC1. For greater certainty, the amount added to the stated capital account for the TC1 Class B Preferred Shares to be issued by TC1 as partial consideration for the distribution property will not exceed the maximum amount that could be added to the PUC of the TC1 Class B Preferred Shares without a reduction taking place pursuant to subsection 85(2.1).

29. As consideration for the DC Transfer by DC to TC2, TC2 will:

(a) assume such liabilities of DC, as appropriate, so that TC2 will receive a proportionate share of the net FMV of each type of property owned by DC; and

(b) issue TC2 Class B Preferred Shares to DC which will have an aggregate redemption amount and aggregate FMV equal to the amount by which the aggregate FMV, at the time of the DC Transfer, of the distribution property received by TC2, exceeds the aggregate amount of DC’s liabilities assumed by TC2, as described in Paragraph 29(a).

DC will hold the TC2 Class B Preferred Shares as capital property. The TC2 Class B Preferred Shares will be taxable preferred shares.

DC and TC2 will jointly elect, in prescribed form and within the time allowed by subsection 85(6), to have the provisions of subsection 85(1) apply to the transfers of each eligible property of DC that is transferred by DC to TC2. The agreed amount in respect of each eligible property so transferred will not be less than the lesser of the amounts described in subparagraphs 85(1)(c.1)(i) and (ii), nor will the agreed amount exceed the FMV of each such eligible property.

The amount of the liabilities assumed by TC2, which are allocated to a particular eligible property that is subject to an election under subsection 85(1), will not exceed the agreed amount for that particular property. The amount of liabilities assumed by TC2 which are allocated to a particular property that is not subject to an election under subsection 85(1) will not exceed the FMV of any such property.

TC2 will add to the stated capital account for the TC2 Class B Preferred Shares, an amount equal to the aggregate of (a) the agreed amounts, in the case of each eligible property transferred to TC2, and (b) the FMV, in the case of each property transferred to TC2 that is not an eligible property, less (c) the aggregate principal amounts of the liabilities of DC assumed by TC2. For greater certainty, the amount added to the stated capital account for the TC2 Class B Preferred Shares to be issued by TC2 as partial consideration for the distribution property will not exceed the maximum amount that could be added to the PUC of the TC2 Class B Preferred Shares without a reduction taking place pursuant to subsection 85(2.1).

Redemptions: TC1 and TC2

30. On XXXXXXXXXX at XXXXXXXXXX, TC1 will redeem all of the issued TC1 Class B Preferred Shares owned by DC for an amount equal to the aggregate redemption amount of such shares. As consideration therefor, TC1 will issue the TC1 Redemption Note to DC, which will have a principal amount and FMV equal to the aggregate redemption amount of the TC1 Class B Preferred Shares so redeemed. DC will accept the TC1 Redemption Note as payment in full for the TC1 Class B Preferred Shares so redeemed.

31. On XXXXXXXXXX at XXXXXXXXXX, TC2 will redeem all of the issued TC2 Class B Preferred Shares owned by DC for an amount equal to the aggregate redemption amount of such shares. As consideration therefor, TC2 will issue the TC2 Redemption Note to DC, which will have a principal amount and FMV equal to the aggregate redemption amount of the TC2 Class B Preferred Shares so redeemed. DC will accept the TC2 Redemption Note as payment in full for the TC2 Class B Preferred Shares so redeemed.

32. On XXXXXXXXXX, at XXXXXXXXXX, each of TC1 and TC2 will have its first taxation year-end.

Redemptions/share purchases: DC

33. On XXXXXXXXXX at XXXXXXXXXX, DC will purchase for cancellation from TC1, a portion of the XXXXXXXXXX DC Common Shares owned by TC1 having a FMV equal to one-half of DC’s CDA at that time. DC will elect pursuant to the provisions of subsection 83(2) such that the dividend deemed to be paid to TC1 as a result of such purchase for cancellation shall be deemed to be a capital dividend paid out of DC’s CDA. In consideration therefor, DC will issue to TC1 the DC CDA Purchase Note #1, with a principal amount and FMV equal to the aggregate FMV of such DC Common Shares purchased for cancellation. TC1 will accept DC CDA Purchase Note #1 as payment in full for the DC Common Shares so purchased for cancellation.

34. Immediately after the transaction described in Paragraph 33, DC will purchase for cancellation from TC1 all of the remaining DC Common Shares held by TC1 for an amount equal to their FMV at that time, and will redeem all DC Class A Preferred Shares held by TC1 for their aggregate redemption amount. As consideration therefor, DC will issue to TC1 the DC Non-CDA Purchase Note #1, with a principal amount and FMV equal to the total of (i) the aggregate FMV of the remaining DC Common Shares so purchased for cancellation and (ii) the aggregate redemption amount of all the DC Class A Preferred Shares so redeemed. TC1 will accept the DC Non-CDA Purchase Note #1 as payment in full for all the remaining DC Common Shares and DC Class A Preferred Shares so purchased for cancellation and redeemed.

DC will designate, pursuant to subsection 89(14), to treat a portion of the taxable dividend resulting from the purchase for cancellation in this Paragraph to be an eligible dividend by notifying TC1 in writing, at the time of the purchase for cancellation, the portion of the dividend that is an eligible dividend. The amount designated as an eligible dividend will equal one-half of DC’s GRIP balance at the end of DC’s taxation year in which the purchase for cancellation occurred.

35. Concurrently, with the redemption described in Paragraph 33, DC will purchase for cancellation from TC2, a portion of the XXXXXXXXXX DC Common Shares owned by TC2 having a FMV equal to one-half of DC’s CDA at that time. DC will elect pursuant to the provisions of subsection 83(2) such that the dividend deemed to be paid to TC2 as a result of such purchase for cancellation shall be deemed to be a capital dividend paid out of DC’s CDA. In consideration therefor, DC will issue to TC2 the DC CDA Purchase Note #2, with a principal amount and FMV equal to the aggregate FMV of such DC Common Shares purchased for cancellation. TC2 will accept the DC CDA Purchase Note #2 as payment in full for the DC Common Shares so purchased for cancellation.

36. Immediately after the transaction described in Paragraph 35 and concurrent with the transaction described in Paragraph 34, DC will purchase for cancellation from TC2 all of the remaining DC Common Shares held by TC2 for an amount equal to their FMV at that time, and will redeem all DC Class A Preferred Shares held by TC2 for their aggregate redemption amount. As consideration therefor, DC will issue to TC2 the DC Non-CDA Purchase Note #2, with a principal amount and FMV equal to the total of (i) the aggregate FMV of the remaining DC Common Shares so purchased for cancellation and (ii) the aggregate redemption amount of all the DC Class A Preferred Shares so redeemed. TC2 will accept the DC Non-CDA Purchase Note #2 as payment in full for all the remaining DC Common Shares and DC Class A Preferred Shares so purchased for cancellation and redeemed.

DC will designate, pursuant to subsection 89(14), to treat a portion of the taxable dividend resulting from the purchase for cancellation in this Paragraph to be an eligible dividend by notifying TC2 in writing, at the time of the purchase for cancellation, the portion of the dividend that is an eligible dividend. The amount designated as an eligible dividend will equal one-half of DC’s GRIP balance at the end of DC’s taxation year in which the purchase for cancellation occurred.

37. Following the redemptions, DC will enter into an agreement with each of TC1 and TC2 under which the DC Purchase Notes to TC1 and the DC Purchase Notes to TC2 will be set-off in full and cancelled without payment against the TC1 Redemption Note and the TC2 Redemption Note, respectively.

38. Immediately following the above Proposed Transactions, the net FMV of each type of DC’s property retained by DC, determined in the manner described in Paragraphs 25 and 26, will be equal to or approximate that proportion of the net FMV of each type of property of DC, determined immediately before the DC Transfers that:

(a) the aggregate FMV, immediately before the DC Transfers, of all the DC Shares owned at that time by Father and Estate,

is of

(b) the aggregate FMV, immediately before the DC Transfers, of all the issued and outstanding DC Shares.

The expression “approximate that proportion” means that the discrepancy from that proportion, if any, will not exceed one percent (1%), determined as a percentage of the net FMV of each type of property retained by DC as compared to what it would have retained had it retained its exact pro rata share of the net FMV of that type of property of DC.

ADDITIONAL INFORMATION

39. 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 transaction described in subparagraphs 55(3.1)(a)(i) to (iv).

40. There has not been and will not be, as part of the 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).

41. TC1 and TC2 will continue to carry on the business of DC with their pro rata share of the distribution property received on the DC Transfers.

42. DC will continue to carry on its business with the property retained after the DC Transfers.

43. None of DC, TC1 or TC2 is, or will be, at any time during a series of transactions or events that includes the Proposed Transactions, a specified financial institution, a restricted financial institution or a corporation described in any of the paragraphs (a) to (f) of the definition of financial intermediary corporation.

44. None of the shares of DC, TC1 or TC2 has been or will be at any time before or during the series of transactions and events that includes the Proposed Transactions:

(a) the subject of any undertaking or agreement that is referred to in subsection 112(2.2) as a “guarantee agreement”;

(b) the subject of a dividend rental arrangement;

(c) issued or acquired as part of a transaction or event or series of transactions or events of the type described in subsection 112(2.5);

(d) the subject of any secured undertaking of the type described in paragraph 112(2.4)(a); or

(e) issued for consideration that is or includes:

i. an obligation of the type described in subparagraph 112(2.4)(b)(i), other than an obligation of a corporation that is related (otherwise than by reason of a right referred to in paragraph 251(5)(b)); or
ii. any right of the type described in subparagraph 112(2.4)(b)(ii).

45. Except as described in this letter, no shares of DC, TC1 and TC2 will be acquired or disposed of as part of a series of transactions or events that includes the Proposed Transactions.

46. Immediately before the redemptions of the TC1 Class B Preferred Shares and the TC2 Class B Preferred Shares owned by DC, DC will be connected to TC1 and TC2 pursuant to paragraph 186(4)(a) and subsection 186(2). Furthermore, DC will have a substantial interest in each of TC1 and TC2, at that time.

47. Immediately before the redemptions and purchases for cancellation of the DC Shares owned by TC1 and TC2, TC1 and TC2 will be connected to DC pursuant to paragraph 186(4)(a) and subsection 186(2). Furthermore, TC1 and TC2 will each have a substantial interest in DC, at that time.

48. Each of DC, TC1 and TC2 will have the financial capacity to honor, upon presentation for payment, the amount payable under their respective promissory notes issued as part of the Proposed Transactions.

49. The Proposed Transactions will not result in any of the Taxpayers being unable to pay its existing tax liabilities.

50. The Proposed Transactions will be legally effective under Act1.

PURPOSE OF THE PROPOSED TRANSACTIONS

The purpose of the Proposed Transactions is to permit the shareholders of DC to separate their interests in DC on a tax-deferred basis in order to enable each shareholder to own, manage and administer such interests independently of each other.

RULINGS

Provided that the preceding statements constitute a complete and accurate disclosure of all relevant facts, additional information, proposed transactions and purpose 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 time limit specified in subsection 85(6), subsection 85(1) will apply to:

(a) the transfer of the XXXXXXXXXX DC Common Shares by Sibling 1 to TC1. as described in Paragraph 19;

(b) the transfer of the XXXXXXXXXX DC Common Shares by Sibling 2 to TC2 as described in Paragraph 20;

(c) the transfer of the XXXXXXXXXX DC Class A Preferred Shares by Father to TC1 as described in Paragraph 22(a);

(d) the transfer of the XXXXXXXXXX DC Class A Preferred Shares by Father to TC2 as described in Paragraph 22(b);

(e) the transfer of each eligible property owned by DC to TC1 on the DC Transfer, as described in Paragraphs 27 and 28; and

(f) the transfer of each eligible property owned by DC to TC2 on the DC Transfer, as described in Paragraphs 27 and 29

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

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

B. As a result of the redemption by TC1 of the TC1 Class B Preferred Shares, and the redemption by TC2 of the TC2 Class B Preferred Shares, as described in Paragraphs 30 and 31, by virtue of subsection 84(3), each of TC1 and TC2 will be deemed to have paid, and DC will be deemed to have received, dividends at that time equal to the amount, if any, by which the amount paid by:

(a) TC1, in respect of the redemption of all the TC1 Class B Preferred Shares, exceeds the aggregate PUC of those shares immediately before the redemption; and

(b) TC2, in respect of the redemption of all the TC2 Class B Preferred Shares, exceeds the aggregate PUC of those shares immediately before the redemption.

C. As a result of the purchases for cancellation by DC of the XXXXXXXXXX DC Common Shares owned by each of TC1 and TC2 and of the redemptions by DC of the XXXXXXXXXX DC Class A Preferred Shares, owned by each of TC1 and TC2, as described in Paragraphs 33 to 36, by virtue of subsection 84(3):

(a) DC will be deemed to have paid, and each of TC1 and TC2 will be deemed to have received, dividends at that time equal to the amount, if any, by which the amount paid in respect of the purchases for cancellation of the XXXXXXXXXX DC Common Shares exceeds the aggregate PUC of those shares immediately before the purchases for cancellation; and

(b) DC will be deemed to have paid, and each of TC1 and TC2 will be deemed to have received, dividends at that time equal to the amount, if any, by which the amount paid in respect of the redemption of the XXXXXXXXXX DC Class A Preferred Shares exceeds the aggregate PUC of those shares immediately before the redemption.

D. The taxable dividends described in rulings B and C above:

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

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

(c) will be excluded in determining the recipient corporation’s proceeds of disposition of the shares so redeemed, purchased or cancelled pursuant to paragraph (j) of the definition of proceeds of disposition;

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

(e) will not be subject to tax under Part IV.1 or Part VI.1; and

(f) will not be subject to tax under Part IV except to the extent that the payer corporation is entitled to a dividend refund for its taxation year in which it is deemed to pay dividends, pursuant to paragraph 186(1)(b).

E. Provided that, as part of a series of transactions or events that includes 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); or;

(d) an acquisition of a share in the circumstances described in subparagraph 55(3.1)(b)(iii)

which has not been described in this letter, then by virtue of paragraph 55(3)(b), subsection 55(2) will not apply to the taxable dividends referred to in rulings B and C above, 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 TC1 Redemption Note and the DC Purchase Notes to TC1, and the set-off and cancellation of the TC2 Redemption Note and the DC Purchase Notes to TC2, as described in Paragraph 37, will not, in and of itself, give rise to a forgiven amount. In addition, none of DC, TC1 and TC2 will otherwise realize a gain or incur a loss as a result of such set-offs and cancellations.

G. Subsections 15(1), 56(2), 69(1), 69(4) and 246(1) will not apply to any of the Proposed Transactions, in and by themselves.

H. Subsection 245(2) will not apply to the Proposed Transactions, in and by themselves, to re-determine the tax consequences confirmed in the rulings given above.

The above rulings are given subject to the limitations and qualifications set forth in Information Circular 70-6R10 issued on September 29, 2020, and are binding on the CRA provided that the Proposed Transactions are completed 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.

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 or the PUC in respect of any share referred to herein (with respect to the FMV of the DC Class A Preferred Shares, please refer to Income Tax Technical News No. 38, released on September 22, 2008, “Value of Company Attributable to Voting Non-Participating Shares” and CRA’s answer to question 26 of the Round Table on Federal Taxation of the 2009 APFF Conference);

(b) the balance of the ERDTOH, NERDTOH, GRIP or CDA for any corporation described herein;

(c) the residence of Estate; or

(d) 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
Manager
for Division Director
Reorganizations Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch