2024 Ruling 2024-1037241R3 - Double-wing 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 dividend is exempt from 55(2) as a result of qualifying under 55(3)(b)?

Position: Yes.

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

XXXXXXXXXX									2024-103724

XXXXXXXXXX, 2024

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 taxpayers described below (Taxpayers). We also acknowledge the additional information provided in your various email correspondence (XXXXXXXXXX).

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:

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

i. being considered by the Canada Revenue Agency 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 previously considered by the Income Tax Rulings Directorate.

The tax account number, Tax Services Office and the Tax Centre of XXXXXXXXXX is as follows:

XXXXXXXXXX

Unless otherwise stated:

i. all statutory references are to the relevant provisions of the Income Tax Act (Canada)(the “Act”), or, where appropriate, the Income Tax Regulations (the “Regulations);

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

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

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

Definitions

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:

(a) "Act1" means the XXXXXXXXXX, as amended;

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

(c) "CCPC" means "Canadian-controlled private corporation" as that term is defined in subsection 127(7);

(d) "CDA" means "capital dividend account" as that term is defined in subsection 89(1);

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

(f) "DC" means XXXXXXXXXX;

(g) "DC Class A Special Shares" means the Class A Special Shares of DC, as described in Paragraph 5;

(h) "DC Class B Special Shares" means the Class B Special Shares of DC, as described in Paragraph 5;

(i) "DC Class C Special Shares" means the Class C Special Shares of DC, as described in Paragraph 5;

(j) "DC Common Shares" means the Common Shares of DC, as described in Paragraph 5;

(k) "DC Shares" means, collectively, the shares of the capital stock of DC;

(l) "DC Transfer" means the transfer of property by DC to TC1 and TC2, as described in Paragraph 33;

(m) "DC Winding-Up Dividend" means the dividend deemed to be paid by DC on the wind-up of DC pursuant to subsection 84(2), as described in Paragraph 41;

(n) "distribution" has the meaning assigned by subsection 55(1);

(o) "Effective Date" means a date chosen by the relevant parties to implement certain Proposed Transactions in sequential order, beginning with the transfer of DC Shares to TC1 and TC2;

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

(q) "ERDTOH" or "eligible refundable dividend tax on hand" has the meaning assigned to subsection 129(4);

(r) “excluded dividend” has the meaning ascribed by subsection 191(1);

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

(t) "GRIP" means "general rate income pool" as that term is defined in subsection 89(1);

(u) "NERDTOH" or "non-eligible refundable dividend tax on hand" has the meaning assigned by subsection 129(4);

(v) "Paragraph" means a numbered paragraph in this letter;

(w) "proceeds of disposition" has the meaning assigned by section 54;

(x) "Property A" means XXXXXXXXXX;

(y) "Property B" means XXXXXXXXXX;

"Property C" means XXXXXXXXXX;

(z) "Property D" means XXXXXXXXXX;

(aa) "Proposed Transactions" means the transactions described in Paragraphs 15 to 42;

(bb) "qualified small business corporation share" has the meaning assigned by subsection 110.6(1);

(cc) "XXXXXXXXXX" means Property A, Property B, Property C and Property D;

(dd) "related" 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;

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

(ff) "Sibling 1" means XXXXXXXXXX, an adult individual resident in Canada and XXXXXXXXXX of Sibling 2;

(gg) "Sibling 1 Trust" means an inter-vivos Trust governed by the laws of the Province of XXXXXXXXXX known as the "XXXXXXXXXX" evidenced by Deed of Settlement dated XXXXXXXXXX whose Trustees and Beneficiaries are as follows:

	Trustees:		XXXXXXXXXX

	Beneficiaries: 	XXXXXXXXXX

(hh) "Sibling 2" means XXXXXXXXXX, an adult individual resident in Canada and XXXXXXXXXX of Sibling 1;

(ii) "Sibling 2 Trust" means an inter-vivos Trust governed by the laws of the Province of XXXXXXXXXX known as the "XXXXXXXXXX" evidenced by Deed of Settlement dated XXXXXXXXXX whose Trustees and Beneficiaries are as follows:

	Trustees:		XXXXXXXXXX 

	Beneficiaries: 	XXXXXXXXXX

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

(kk) "TC1" refers to a corporation to be incorporated under the Act1, as described in Paragraph 15 and a transferee corporation in respect of the DC Transfer described in Paragraph 33;

(ll) "TC1 Butterfly Shares" means the Class B Special Shares of TC1, as described in Paragraph 16(c);

(mm) "TC1 Class A Special Shares" means the Class A Special Shares of TC1, as described in Paragraph 16(b);

(nn) "TC1 Common Shares" means the Common Shares of TC1, as described in Paragraph 16(a);

(oo) "TC1 Nominee" refers to a corporation to be incorporated under the Act1, as described in Paragraph 19;

(pp) "TC1 Redemption Note" means the non-interest-bearing promissory note issued by TC1 to DC on the redemption of the TC1 Butterfly Shares held by DC, as described in Paragraph 38;

(qq) "TC1 Special Voting Shares" means the Class V Special Shares of TC1, as described in Paragraph 16(d);

(rr) "TC2" refers to a corporation to be incorporated under the Act1, as described in Paragraph 17 and a transferee corporation in respect of the DC Transfer described in Paragraph 33;

(ss) "TC2 Butterfly Shares" means the Class B Special Shares of TC2, as described in Paragraph 18(c);

(tt) "TC2 Class A Special Shares" means the Class A Special Shares of TC2, as described in Paragraph 18(b);

(uu) "TC2 Common Shares" means the Common Shares of TC2, as described in Paragraph 18(a);

(vv) "TC2 Nominee" refers to a corporation to be incorporated under the Act1, as described in Paragraph 20;

(ww) "TC2 Redemption Note" means the non-interest-bearing promissory note issued by TC2 to DC on the redemption of the TC2 Butterfly Shares held by DC, as described in Paragraph 38;

(xx) "TC2 Special Voting Shares" means the Class V Special Shares of TC2, as described in Paragraph 18(d);

(yy) "TC" refers to either TC1 or TC2, as the context may require, and "TCs" collectively refers to TC1 and TC2;

(zz) "TCC" means "taxable Canadian corporation" as that expression is defined by subsection 89(1); and

(aaa) "UCC" means "undepreciated capital cost" as that expression is defined by subsection 13(21).

Facts

The relevant facts are as follows:

1. DC was incorporated under the Act 1 on XXXXXXXXXX. DC does not have any subsidiaries. The head office of DC is located at XXXXXXXXXX.

2. DC is a TCC and a CCPC and its taxation year ends on XXXXXXXXXX. For purposes of the Act, other than section 55, DC is controlled by a related group composed of Sibling 1 and Sibling 2.

3. The business of DC is the XXXXXXXXXX. The income from such business is treated as income from a "specified investment business" within the meaning of subsection 125(7). XXXXXXXXXX.

4. The DC Shares and the shares of TC1 and TC2 to be issued pursuant to the Proposed Transactions are not, and will not be, qualified small business corporation shares.

5. The authorized capital of DC consists of an unlimited number of the following classes of shares:

(a) Common shares (“DC Common Shares”) – voting, fully participating, non-cumulative discretionary dividends, and having no par value;

(b) Class A Special Shares (“DC Class A Special Shares”) – voting, fixed rate non-cumulative dividends payable at a maximum rate of XXXXXXXXXX% of the aggregate redemption amount thereof, non-participating, redeemable and retractable at $XXXXXXXXXX per share and liquidation entitlement limited to the aggregate redemption amount plus declared and unpaid dividends thereon;

(c) Class B Special Shares (“DC Class B Special Shares”) – voting, redeemable and retractable at $XXXXXXXXXX per share, non-cumulative discretionary dividends and liquidation entitlement limited to the aggregate redemption amount plus accrued and unpaid dividends; and

(d) Class C Special Shares (“DC Class C Special Shares”) – voting, no entitlement to receive dividends or participate in profits, liquidation entitlement limited to the aggregate amount paid-up in respect of such shares.

6. DC's issued and outstanding shares are held as follows:

	Shareholder			Shares					PUC		ACB		FMV
	Sibling 1			XXXXX DC Class A Special Shares	XXXXX		XXXXX		XXXXX
	Sibling 1			XXXXX DC Class B Special Shares	XXXXX		XXXXX		XXXXX
	Sibling 2			XXXXX DC Class A Special Shares	XXXXX		XXXXX		XXXXX
	Sibling 2			XXXXX DC Class B Special Shares	XXXXX		XXXXX		XXXXX
	Sibling 1 Trust		XXXXX DC Common Shares			XXXXX		XXXXX		XXXXX
	Sibling 2 Trust		XXXXX DC Common Shares			XXXXX		XXXXX		XXXXX
	Sibling 2 Trust		XXXXX DC Class C Special Shares	XXXXX		XXXXX		XXXXX

7. All of the issued and outstanding shares of DC are held as capital property by Sibling 1, Sibling 2, Sibling 1 Trust and Sibling 2 Trust and all such shares are eligible Property. In addition, none of the shares in DC were acquired by Sibling 1, Sibling 2, Sibling 1 Trust or Sibling 2 Trust in contemplation of the Proposed Transactions or as part of the series of transactions or events that includes the Proposed Transactions.

8. As at XXXXXXXXXX, the FMV of DC's assets, net of liabilities, was approximately $XXXXXXXXXX.

There is not expected to be any material change in the composition of DC's assets or liabilities, or in the FMV of the assets or the amount of the liabilities from the date of this letter until the date the Proposed Transactions are completed, except for fluctuations in the value of DC's assets due to market conditions.

9. The tax attributes of the XXXXXXXXXX and the FMV thereof as at XXXXXXXXXX is as follows:

	Property		ACB		UCC		FMV
	Property A
	XXXXX			XXXXX		XXXXX		XXXXX
	Property B
	XXXXX			XXXXX		XXXXX		XXXXX
	Property C
	XXXXX			XXXXX		XXXXX		XXXXX
	Property D
	XXXXX			XXXXX		XXXXX		XXXXX

10. The main liabilities of DC are its accounts payable and rental deposits. There are no XXXXXXXXXX liabilities of DC with respect to XXXXXXXXXX.

11. DC had an ERDTOH balance of $XXXXXXXXXX as at the end of its XXXXXXXXXX taxation year. The balance of the ERDTOH is expected to change during its XXXXXXXXXX taxation year.

12. DC had a NERDTOH balance of $XXXXXXXXXX as at the end of its XXXXXXXXXX taxation year. The balance of the NERDTOH is expected to change during its XXXXXXXXXX taxation year.

13. DC had a GRIP balance of $XXXXXXXXXX as at the end of its XXXXXXXXXX taxation year.

14. DC had a CDA balance of $XXXXXXXXXX as at the end of its XXXXXXXXXX taxation year. DC has not disposed of any capital property since the end of its XXXXXXXXXX taxation year.

Proposed Transactions

Incorporation of TC1 and TC2

15. Sibling 1 will incorporate a new corporation, TC1, under the Act1. TC1 will be a TCC and a CCPC.

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

(a) Common Shares (“TC1 Common Shares”) – voting (XXXXXXXXXX vote per share), fully participating, non-cumulative discretionary dividends, and having no par value;

(b) Class A Special Shares (“TC1 Class A Special Shares”) – voting (XXXXXXXXXX vote per share), discretionary non-cumulative dividend entitlement not to exceed XXXXXXXXXX percent per annum of the aggregate redemption amount, redeemable and retractable at any time (subject to applicable law), for an aggregate amount equal to the aggregate FMV of the consideration received on the issuance thereof (excluding the amount of any liabilities assumed) plus any declared but unpaid dividends, priority over all shares of any other class of capital stock (except for the TC1 Butterfly Shares) on a liquidation or other dissolution, no dividends or other distribution will be paid on shares ranking junior to the Class A Special Shares if the effect of such dividends or other distribution would be to reduce the net realizable value of the assets to an amount less than the aggregate redemption amount of the issued and outstanding Class A Special Shares;

(c) Class B Special Shares (“TC1 Butterfly Shares”) - voting (XXXXXXXXXX vote per share), will entitle the holder to discretionary non-cumulative dividends not to exceed XXXXXXXXXX percent per annum, will be redeemable and retractable at any time (subject to applicable law) for an aggregate amount equal to the aggregate FMV of the consideration received by TC1 on the issuance thereof (less the amount of any liabilities assumed) plus any declared but unpaid dividends, subject to a price adjustment clause, and will have priority over a share of any other class of shares of capital stock on a liquidation or other dissolution. No dividends or other distribution will be paid on shares ranking junior to the TC1 Butterfly Shares if the effect of such dividends or other distribution would be to reduce the net realizable value of the assets to an amount less than the aggregate redemption amount of the issued and outstanding TC1 Butterfly Shares;

(d) Class V Special Shares (“TC1 Special Voting Shares”) – voting (XXXXXXXXXX vote per share), no entitlement to receive dividends or participate in profits, liquidation entitlement limited to the aggregate amount paid-up in respect of such shares.

17. Sibling 2 will incorporate a new corporation, TC2, under the Act1. TC2 will be a TCC and a CCPC.

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

(a) Common Shares (“TC2 Common Shares”) – voting (XXXXXXXXXX vote per share), fully participating, non-cumulative discretionary dividends, and having no par value;

(b) Class A Special Shares (“TC2 Class A Special Shares”) – voting (XXXXXXXXXX vote per share), discretionary non-cumulative dividend entitlement not to exceed ten (XXXXXXXXXX%) percent per annum of the aggregate redemption amount, redeemable and retractable at any time (subject to applicable law), for an aggregate amount equal to the aggregate FMV of the consideration received on the issuance thereof (excluding the amount of any liabilities assumed) plus any declared but unpaid dividends, priority over all shares of any other class of capital stock (except for the TC2 Butterfly Shares), on a liquidation or other dissolution, no dividends or other distribution will be paid on shares ranking junior to the Class A Special Shares if the effect of such dividends or other distribution would be to reduce the net realizable value of the assets to an amount less than the aggregate redemption amount of the issued and outstanding Class A Special Shares;

(c) Class B Special Shares (“TC2 Butterfly Shares”) - voting (XXXXXXXXXX vote per share), will entitle the holder to discretionary non-cumulative dividends not to exceed nine (XXXXXXXXXX%) percent per annum, will be redeemable and retractable at any time (subject to applicable law) for an aggregate amount equal to the aggregate FMV of the consideration received by TC2 on the issuance thereof (less the amount of any liabilities assumed) plus any declared but unpaid dividends, subject to a price adjustment clause, and will have priority over a share of any other class of shares of capital stock on a liquidation or other dissolution. No dividends or other distribution will be paid on shares ranking junior to the TC2 Butterfly Shares if the effect of such dividends or other distribution would be to reduce the net realizable value of the assets to an amount less than the aggregate redemption amount of the issued and outstanding TC2 Butterfly Shares;

(d) Class V Special Shares (“TC2 Special Voting Shares”) – voting (XXXXXXXXXX vote per share), no entitlement to receive dividends or participate in profits, liquidation entitlement limited to the aggregate amount paid-up in respect of such shares.

Incorporation of TC1 Nominee and TC2 Nominee

19. Sibling 1 will incorporate a new corporation, TC1 Nominee, under the Act1. The authorized share capital of TC1 Nominee will consist of an unlimited number of fully participating, voting common shares. Sibling 1 will subscribe for XXXXXXXXXX common shares at a subscription price of $XXXXXXXXXX in aggregate. TC1 Nominee will be a TCC and CCPC.

20. Sibling 2 will incorporate a new corporation, TC2 Nominee, under the Act1. The authorized share capital of TC2 Nominee will consist of an unlimited number of fully participating, voting common shares. Sibling 1 will subscribe for XXXXXXXXXX common shares at a subscription price of $XXXXXXXXXX in aggregate. TC2 Nominee will be a TCC and CCPC.

21. Pursuant to a Nominee Agreement between DC and each of TC1 Nominee and TC2 Nominee, each of TC1 Nominee and TC2 Nominee will agree to hold legal title only to one or more parcels of XXXXXXXXXX for which DC has beneficial ownership, as the nominee, agent and bare trustee for the sole benefit of DC. Each of TC1 Nominee and TC2 Nominee will be prohibited from dealing with such property that each holds, without receiving the prior written instruction, consent or direction of DC.

22. Each of TC1 Nominee and TC2 Nominee will continue to hold legal title to the XXXXXXXXXX that it will hold, throughout and subsequent to the completion of the Proposed Transactions, as bare trustee for the beneficial owners of such property, including DC, TC1 or TC2, as the case may be.

Transfer of DC Shares to TCs

23. On a contemporaneous basis, each of Sibling 1 and Sibling 2 will transfer all of their DC Class A Special Shares and DC Class B Special Shares to their respective TC on the Effective Date.

24. Sibling 1 will transfer XXXXXXXXXX DC Class A Special Shares and XXXXXXXXXX DC Class B Special Shares to TC1 in exchange for TC1 issuing XXXXXXXXXX TC1 Class A Special Shares as sole consideration therefore having an aggregate FMV equal to the aggregate FMV of the XXXXXXXXXX DC Class A Special Shares and XXXXXXXXXX DC Class B Special Shares transferred.

25. Sibling 2 will transfer XXXXXXXXXX DC Class A Special Shares and XXXXXXXXXX DC Class B Special Shares to TC2 in exchange for TC2 issuing XXXXXXXXXX TC2 Class A Special Shares as sole consideration therefore having an aggregate FMV equal to the aggregate FMV of the XXXXXXXXXX DC Class A Special Shares and XXXXXXXXXX DC Class B Special Shares transferred.

25.1 Sibling 1 and Sibling 2, as the case may be, will jointly elect with their respective TC 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 the transfers. The agreed amount in respect of the shares of DC so transferred will not be greater than their FMV nor will such agreed amounts be less than the lesser of the amounts described in subparagraphs 85(1)(c.1)(i) and (ii).

26. The amount to be added to the corporate stated capital account maintained for the TC1 Class A Special Shares in the capital of TC1 as a result of the aforesaid transfer will not exceed the maximum amount that could be added to the PUC of the shares, without being subject to adjustment under paragraph 84.1(1)(a).

The amount to be added to the corporate stated capital account maintained for the TC2 Class A Special Shares in the capital of TC2 as a result of the aforesaid transfer will not exceed the maximum amount that could be added to the PUC of the shares, without being subject to adjustment under paragraph 84.1(1)(a).

27. Sibling 1 Trust will transfer its XXXXXXXXXX DC Common Shares to TC1 in exchange for TC1 issuing XXXXXXXXXX TC1 Common Shares as sole consideration therefor having an aggregate FMV equal to the aggregate FMV of the XXXXXXXXXX DC Common Shares transferred.

28. Sibling 2 Trust will transfer its XXXXXXXXXX DC Common Shares and XXXXXXXXXX DC Class C Special Shares to TC2 in exchange for TC2 issuing XXXXXXXXXX TC2 Common Shares as sole consideration therefor having an aggregate FMV equal to the FMV of the XXXXXXXXXX DC Common Shares and XXXXXXXXXX Class C Special Shares transferred.

29. Sibling 1 Trust and Sibling 2 Trust, as the case may be, will jointly elect with their respective TC 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 the transfers. The agreed amount in respect of the shares of DC so transferred will not be greater than their FMV nor will such agreed amounts be less than the lesser of the amounts described in subparagraphs 85(1)(c.1)(i) and (ii).

30. The amount to be added to the corporate stated capital account maintained for the TC1 Common Shares in the capital of TC1 as a result of the aforesaid transfer will not exceed the maximum amount that could be added to the PUC of the shares, without being subject to adjustment under paragraph 84.1(1)(a).

The amount to be added to the corporate stated capital account maintained for the TC2 Common Shares in the capital of TC2 as a result of the aforesaid transfer will not exceed the maximum amount that could be added to the PUC of the shares, without being subject to adjustment under paragraph 84.1(1)(a).

Type of property

31. The property of DC will be classified into the following types of property in anticipation of the DC Transfer:

(a) cash or near-cash property, comprised of DC’s cash, accounts receivable, taxes receivable, advances to related parties and prepaid expenses;

(b) investment property (including, XXXXXXXXXX), 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

(c) business property, consisting of all of the assets of DC, other than cash or near-cash property and investment property.

For purposes of the DC Transfer:

(i) DC will not have any business property at the time of the DC Transfer;

(ii) 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, for purposes of the Proposed Transactions;

(iii) deferred expenses, if any, which are expenses that are deferred and amortized for accounting purposes, but fully deducted for tax purposes, and any deferred income tax or future income tax assets recorded in the financial statements of DC, if any, will not be considered property;

(iv) the amount of any loan or advance owing to DC that is due in less than 30 days or is due on demand, if any, will be considered cash or near-cash property;

(v) the amount of any loan or advance owing by DC that is due in less than 30 days or is payable on demand, if any, will be considered a current liability; and

(vi) no amount will be considered a liability unless it represents a true legal liability capable of quantification. For greater certainty, the amount of any deferred income tax liability or future income taxes owing, if any, will not be considered a liability because such amount will not represent a legal obligation of DC at the time of the Proposed Transactions.

32. 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) all current liabilities, will be allocated to each cash or near-cash property in the proportion that the FMV of each such property is of the aggregate FMV of all cash or near-cash property. The total amount of current liabilities to be allocated to cash or near cash property will not exceed the aggregate fair market value of cash or near-cash property;

(b) liabilities of DC, other than those described in Paragraph 32(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

(c) if any liabilities remain after the allocations described in Paragraphs 32(a) and XXXXXXXXXX are made, such remaining liabilities will then be allocated to the cash or near-cash 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 32(a) and 32(b).

DC Transfer

33. Immediately following the determination of the net FMV of each type of property of DC, as described in Paragraphs 31 and 32, DC will contemporaneously transfer to each of TC1 and TC2, a pro rata portion of the net FMV of each type of property owned by it at that time, such that immediately following the transfer of the properties and the assumption of DC’s liabilities as described in Paragraph 34, the aggregate net FMV of each type of property transferred by DC to TC1 or TC2, as the case may be, will be equal to or approximate that proportion of each type of property determined by the formula: A × 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 or TC2, as the case may be; 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 one percent (XXXXXXXXXX%), determined as a percentage of the net FMV of each type of property that TC1 and TC2 will receive on the DC 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.

34. As consideration for the property transferred by DC to TC1 and TC2, each of TC1 and TC2, as the case may be, will:

(a) assume such liabilities of DC, as appropriate, so that each of TC1 and TC2 will receive a proportionate share of the net FMV of each type of property owned by DC; and

(b) issue a number of its Butterfly 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 property received by such TC, exceeds the aggregate amount of the liabilities of DC assumed by such TC, as described in Paragraph 34(a).

35. DC will jointly elect with TC1 and TC2, as the case may be, in prescribed form within the time limit referred to in subsection 85(6), to have the provisions of subsection 85(1) apply to the transfer of each eligible property that is transferred by DC to TC1 or TC2. 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 FMV, at the time of disposition, of the consideration therefor other than shares of the capital stock of TC1 or TC2, as the case may be, or a right to receive such shares. In addition, the amount of the liabilities of DC assumed by TC1 or TC2, as the case may be, 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.

36. For greater certainty, the agreed amount in respect of each such eligible property will be within the limits as follows:

(a) in the case of capital property (other than depreciable property of a prescribed class), an amount equal to the lesser of the amounts described in subparagraphs 85(1)(c.1)(i) and (ii); and

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

37. Each of TC1 and TC2, as the case may be, will add to its respective stated capital account for the Butterfly Shares, an amount equal to the aggregate of (a) the agreed amounts, in the case of each eligible property transferred to such TC, less (b) the aggregate amount of DCs liabilities assumed by such TC as described in Paragraph 34(a). For greater certainty, the amount to be added to the stated capital account of each of TC1 and TC2 for the Butterfly 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 TC1 Butterfly Shares and the TC2 Butterfly Shares

38. Immediately after the transfer of the property to TC1 and TC2 on the DC Transfer, each of TC1 and TC2 will redeem its Butterfly Shares owned by DC for an amount equal to the aggregate redemption amount and FMV of such shares. As consideration therefore, TC1 and TC2, as the case may be, will issue to DC the TC1 Redemption Note in respect of TC1’s share redemption and the TC2 Redemption Note in respect of TC2’s share redemption, each having a principal amount and FMV equal to the redemption amount of such TC’s Butterfly Shares. DC will accept the TC1 Redemption Note and TC2 Redemption Note respectively, as payment in full for the redemption of that particular TC’s Butterfly Shares.

39. Immediately after the redemption of the TC1 Butterfly Shares and the TC2 Butterfly Shares, the first taxation year of TC1 and TC2, as the case may be, will end. TC1 and TC2 will each adopt a corresponding fiscal period.

Winding-Up of DC

40. On the day that follows the Effective Date, and after the first taxation year-ends of each of TC1 and TC2, DC will be wound up under the applicable provisions of Act1. In connection with the winding-up of DC:

(i) the TC1 Redemption Note and TC2 Redemption Note will be assigned and distributed to TC1 and TC2 respectively. As a result of the assignment and distribution of the TC1 Redemption Note and TC2 Redemption Note, the obligation of TC1 and TC2 under the respective notes will be extinguished and the notes will be cancelled;

(ii) any residual assets of DC, including the rights to any tax refunds, will be distributed pro rata (in the same proportion as the principal amount of the Redemption Notes) to each of TC1 and TC2; and

(iii) any residual liabilities of DC will be assumed pro rata (in the same proportion as the prinicpal amount of the Redemption Notes) by each of TC1 and TC2.

Upon the receipt of a dividend refund, or any other receipt or repayment to which DC will become entitled as a result of the Proposed Transactions, DC will transfer the amount thereof pro rata (in the same proportion as the principal amount of the Redemption Notes) to each of TC1 and TC2.

For greater certainty, articles of dissolution will be filed within a reasonable period of time subsequent to the winding-up of DC.

41. To the extent that there is a positive balance in the CDA of DC immediately prior to the distributions of the TC1 Redemption Note and the TC2 Redemption Note, DC will elect, in the prescribed manner and prescribed form required under subsection 83(2), to treat the portion of the DC Winding-Up Dividend referred to in subparagraph 88(2)(b)(i) as a separate capital dividend.

42. To the extent that DC has GRIP at the time of its winding-up and immediately prior to the distributions of the TC1 Redemption Note and the TC2 Redemption Note described in Paragraph 40, DC will designate a portion of the DC Winding-Up Dividend referred to in subparagraph 88(2)(b)(iii) to be an eligible dividend by notifying each of TC1 and TC2 in writing within the time prescribed in subsection 89(14) that the portion of such dividend is an eligible dividend.

Additional Information

43. Except as described in this letter, DC did not own shares of any other corporation over which it exercise significant influence.

44. 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).

45. 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).

46. None of the property received by a TC on the DC Transfer will be acquired by a person unrelated to a TC, 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).

47. At any time before and during the series of transactions and events that include the Proposed Transactions, none of the shares of DC, TC1 or TC2, as the case may be, will be:

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

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

(c) the subject of a dividend rental arrangement within the meaning of subsection 112(2.3);

(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).

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

49. 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).

50. Each of TC1 and TC2 will each have the financial capacity to honour, upon presentation for payment, the amount payable under the promissory note issued by it as part of the Proposed Transactions.

51. Immediately before the redemption of the TC1 Butterfly Shares and the TC2 Butterfly Shares held by DC as described in Paragraph 38, TC1 and TC2 will each be connected with DC pursuant to paragraph 186(4)(b).

52. The dividends resulting from the redemption of the TC1 Butterfly Shares and the TC2 Butterfly Shares held by DC, as the case may be, will be excluded dividends for the purposes of Part VI.1.

53. Immediately before the commencement of the winding-up of DC, as described in Paragraph 41, DC will be connected with each of TC1 and TC2, as the case may be, within the meaning of subsection 186(4).

54. Each of TC1 and TC2 will have a substantial interest in DC immediately before the winding-up of DC, such that the dividends resulting from the winding-up of DC that are deemed to be received by TC1 and TC2, as the case may be, will be excluded dividends for the purposes of Part VI.1.

55. DC does not have any outstanding tax liabilities that could be affected by the Proposed Transactions and no transactions are contemplated involving TC1 or TC2 aside from holding the assets each will acquire as a result of the Proposed Transactions and there is no intention to transfer any other assets into TC1 or TC2 or to wind-up or amalgamate these corporations.

Purposes of the Proposed Transactions

56. The overall purpose of the Proposed Transactions is to allow Sibling 1 and Sibling 2 (and the associated Sibling 1 and Sibling 2 Trusts) to separate their interest in DC in a tax-efficient manner and to allow the shareholders to carry on business separately and to facilitate the making of future investment and estate planning decisions independent from one another.

57. The purpose for each of TC1 and TC2 choosing to end its respective first taxation year in the manner described in Paragraph 39, and prior to the commencement of the winding-up of DC, as described in Paragraph 40, is to cause the taxable dividends resulting from the cross-redemption to be paid and received in separate taxation year-ends to avoid a possible Part IV tax "circularity" issue.

58. The purpose of the transfer by DC of its legal title to XXXXXXXXXX to TC1 Nominee and TC2 Nominee, as described in Paragraph 21, and prior to the subsequent transfer of the beneficial ownership of such property to TC1 and TC2, as the case may be, on the DC Transfer, is to ensure that the division of the XXXXXXXXXX between the shareholders of DC is eligible for an exemption from the land transfer tax otherwise arising under section 3 of the Land Transfer Tax Act 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 of the DC Class A Special Shares and DC Class B Special Shares held by Sibling 1 and Sibling 2 to their respective TC as described in Paragraphs 24 and 25;

(b) the transfer of DC Common Shares by Sibling 1 Trust to TC1 as described in Paragraph 27;

(c) the transfer of DC Common Shares and DC Class C Special Shares by Sibling 2 Trust to TC2, as described in Paragraph 28; and

(d) the transfer of each eligible Property owned by DC to TC1 and TC2, as the case may be, on the DC Transfer described in Paragraph 33;

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 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 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. Subsection 84(3) will apply on the redemption of:

(a) the TC1 Butterfly Shares held by DC, as described in Paragraph 38, to deem TC1 to have paid, and DC to have received, a dividend on such

shares equal to the amount, if any, by which the amount paid by TC1 on the redemption of all of the TC1 Butterfly Shares, exceeds the aggregate PUC in respect of such shares immediately before the redemption; and

(b) the TC2 Butterfly Shares held by DC, as described in Paragraph 38, to deem TC2 to have paid, and DC to have received, a dividend on such shares equal to the amount, if any, by which the amount paid by TC2 on the redemption of all of the TC2 Butterfly Shares, exceeds the aggregate PUC in respect of such shares immediately before the redemption.

C. Subsection 84(2) and paragraph 88(2)(b) will apply to the distributions by DC described in Paragraph 40 such that:

(a) subject to Rulings C(b) and (c) below, DC will be deemed to have paid a dividend (the "DC Winding Up Dividend") on the particular class of shares held by each of TC1 and TC2, as the case may be, equal to the amount, if any, by which:

i. the amount or value of the funds or property distributed with respect to the shares of that class, as the case may be,

exceed

ii. the amount, if any, by which the aggregate PUC in respect of the shares of that class is reduced on the distribution, as the case may be,

and each of TC1 and TC2 will be deemed to have received a dividend on such class equal to that proportion of the amount of the excess that the number of shares of that class held by each of TC1 and TC2, as the case may be, immediately before the distribution is of the number of shares of that class outstanding immediately before the distributions;

(b) to the extent that the CDA of DC has a positive balance immediately prior to its winding up, pursuant to subparagraph 88(2)(b)(i), such portion of any winding-up dividend referred to in (a) above as does not, in aggregate, exceed DC’s CDA (if any) immediately before the payment of such winding-up dividend will be deemed, for purposes of the election under subsection 83(2) referred to in Paragraph 41, to be the full amount of a separate dividend;

(c) pursuant to subparagraph 88(2)(b)(iii), the winding up dividend arising from the distributions, to the extent that it exceeds the amount referred to in (b) above, will be deemed to be a separate dividend that is a taxable dividend; and

(d) each of TC1 and TC2 will be deemed to have received that proportion of any separate dividend, as described in (b) and (c) above, as determined pursuant to subparagraph 88(2)(b)(iv).

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 in the year in which such a dividend is deemed to have been received, and, for greater certainty, 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 proceeds of disposition of the shares so redeemed, purchased or cancelled pursuant to paragraph (j) of the definition of “proceeds of disposition” in section 54;

(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 be received;

(e) will not give rise to tax under Part IV except as provided in paragraph 186(1)(b); and

(f) will not be subject to tax under Part IV.1 or VI.1.

E. The extinguishment of the TC1 Redemption Note and the TC2 Redemption Note, as described in Paragraph 40 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, none of DC, TC1, or TC2, as the case may be, will realize any gain or incur a loss as a result of such extinguishment.

F. By virtue of paragraph 55(3)(b), subsection 55(2) will not apply to the taxable dividends referred to in Rulings B and C provided that there is not, as part of the series of transactions or events that includes these dividends, a disposition of property or an acquisition of property or control not described herein that would be described in paragraph 55(3.1)(a) or any of paragraphs 55(3.1)(b), (c) or (d).

G. The provisions of subsection 15(1), 56(2) 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 re-determine the tax consequences confirmed in the rulings given herein.

These rulings are given subject to the limitations and qualifications set forth in Information Circular 70-6R12 issued on April 1, 2021, and are binding on the CRA, provided that the Proposed Transactions are completed no later than six (6) months after the date of this letter.

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, ERDTOH or NERDTOH of any corporation;

(c) the allocation of safe income attributable to any share of any corporation referred to herein (see generally, CRA documents 2020-0861031C6 and 2021-0889611E5 and the paper titled “CRA Update on Subsection 55(2) and Safe Income – Where Are We Now” delivered to the Canadian Tax Foundation on December 22, 2023, for guidance on the allocation of safe income on a corporate reorganization));

(d) any other tax consequence relating to the facts, the transactions described in this letter, additional information, or any transaction or event taking place either prior to the transactions described in this letter or subsequent thereto;

(e) whether any of the transactions described in this letter 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. Furthermore, the operation of a price adjustment clause may invalidate one or more of the rulings provided. 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