2012-0446701R3 Butterfly reorganization

Principal Issues: Whether DC's distribution to BCo and CCo qualifies for the butterfly exemption found in paragraph 55(3)(b)

Position: Yes

Reasons: The proposed reorganization satisfies all the requirements governing the butterfly exemption

Author: XXXXXXXXXX
Section: 55(3)(b)

XXXXXXXXXX                                                                                                                            2012-044670

Attention: XXXXXXXXXX

XXXXXXXXXX, 2014

Dear Sir:

Re:   XXXXXXXXXX

We are writing in response to your request for an advance income tax ruling on behalf of the above-referenced taxpayer.  The documents submitted as part of your request are only part of this document to the extent described herein.

To the best of your knowledge and that of the above-referenced taxpayer, none of the issues involved in this ruling is:

(a)   in an earlier return of the above-referenced taxpayers or related person;
(b)   being considered by a tax services office or taxation centre in connection with a previously filed tax return of the above-referenced taxpayers or a related person;
(c)   under objection by the above-referenced taxpayers or a related person;
(d)   before the courts; or
(e)   the subject of a ruling previously issued by the Income Tax Rulings Directorate.

The above-referenced taxpayer has confirmed that the proposed transactions described herein will not affect its ability to pay any outstanding tax liabilities.

All statutory references herein are to provisions or parts of the Income Tax Act (Canada),
R.S.C. 1985 (5th Supp.) c. 1, as amended to the date hereof (the “Act”) and all references to monetary amounts are in Canadian dollars.

DEFINITIONS:

In this letter, the following terms have the meanings specified:

“ACB” means adjusted cost base as that term is defined in section 54.

“Agreed Amount” means the amount agreed upon by a transferor and a transferee in a joint election filed pursuant to subsection 85(1) in respect of the transfer of an Eligible Property.

“B” means XXXXXXXXXX, who is an individual resident in Canada.

“BCo” means a taxable Canadian corporation and a CCPC to be incorporated under the XXXXXXXXXX, which will have a taxation year ending on XXXXXXXXXX of every year.

The authorized share capital of BCo will include an unlimited number of Class A voting common shares, Class B voting common shares, Class C non-voting common shares, Class D voting preferred shares, Class E voting preferred shares, Class F non-voting preferred shares, Class G non-voting preferred shares, Class H voting preferred shares, Class I voting preferred shares, Class J non-voting preferred shares, Class K non-voting preferred shares, Class L voting preferred shares and Class W non-voting preferred shares  

The Class D, E, F, G, H, I, J, K preferred shares are entitled to non-cumulative dividends of an amount as determined by the Directors but not exceeding XXXXXXXXXX% per annum.  The Class D, E and F preferred shares have a redemption amount that will be set by the directors at the time of issue and which will be equal to the difference between the FMV of property acquired for their issuance and the non-share consideration paid by BCo for such property, but subject to adjustment if a dispute arises with the CRA as to the FMV of the property transferred.  The Class G preferred shares specify an amount in respect of which they are to be redeemed, acquired or cancelled.  The amount to be specified: (i) will be expressed as a dollar amount, (ii) will not be determined by a formula, and (iii) will not exceed the FMV of the property to be received by DC. The Class H, I, J and K preferred shares have a set redemption amount of $XXXXXXXXXX per share. 

A dividend may be declared on any class of shares to the exclusion of any other class of shares, common or preferred.  All dividends will be restricted to an amount that will leave sufficient equity in the company to fully redeem any outstanding preferred shares.

The Class L preferred shares do not carry any right to receive dividends and are redeemable by the company at their face value.  The Class W preferred shares will have identical attributes to the Class D preferred shares in DC.

“Business Property” means all of the assets of DC, other than Cash or Near-Cash Property, any income from which would, for the purposes of the Act, be income from the business of DC (other than a specified investment business). The inventory of DC will be considered to be Business Property (prior to reclassification of certain Cash or Near-Cash Property as Business Property) to the extent that its disposition gives rise to business income. 

The net FMV of the Business Property, immediately before the transfer of DC’s property to BCo as described in Paragraph 29, will be calculated as follows: (i) liabilities, other than current liabilities, that relate to a particular Business Property will be allocated to that property to the extent of its FMV; (ii) liabilities that pertain to Business Property but not to a particular property will be allocated to Business Property; (iii) deferred revenue, representing revenue received or receivable in the ordinary course of DC’s business, the recognition of which has been deferred due to the legal obligation of DC to render services or deliver products from which such revenue was received, will be considered a liability only to the extent that it gives rise to a legal obligation to repay the amount should the services not be provided or the products not be delivered; (iv) any deferred charges, deferred taxes, and tax accounts will be ignored in determining the net FMV of Business Property; (v) provided that the amount of Cash or Near-Cash Property exceeds DC’s current liabilities, the FMV of all accounts receivable, inventory and prepaid expenses of DC that will relate to the DC’s business, net of allocated liabilities, will be reclassified as Business Property and the net FMV thereof will be included in the net FMV of the Business Property and will not be included in the net fair market value of the Cash or Near-Cash Property; (vi) any liabilities that remain after the allocation to Cash or Near-Cash Property and the allocations and reclassifications described above in this definition will be allocated to the Business Property based on the relative net FMV of the Business Property prior to the allocation of such excess unallocated liabilities. To the extent that the liabilities allocated to Business Property exceed the total fair market value of the Business Property, DC will be considered to have a negative amount of Business Property.

“C” means XXXXXXXXXX, who is an individual resident in Canada. 

“Capital Property” has the meaning assigned by section 54.

“Cash or Near-Cash Property” means all the current assets of DC, including: (i) cash; (ii) accounts receivable; (iii) inventory; (iv) income taxes recoverable; (v) prepaid expenses; and (vi) deposits and advances to related persons, shareholders of DC or persons related to such shareholders that are due within the next XXXXXXXXXX months or those with no fixed term of repayment. 

In determining the net FMV of the Cash or Near-Cash Property, immediately before the transfer: (i) current liabilities will be allocated to a Cash or Near-Cash Property of DC in the proportion that the net FMV of each such property is of the FMV of all its Cash or Near-Cash Property; (ii) deferred revenue, representing revenue received or receivable in the ordinary course of DC’s business, the recognition of which has been deferred due to the legal obligation of DC to render services or deliver products from which such revenue was received, will be considered a liability only to the extent that it gives rise to a legal obligation to repay the amount should the services not be provided or the products not be delivered; (iii) any deferred charges, deferred taxes, and tax accounts will be ignored in determining the net fair market value of the Cash or Near-Cash Property.  Current liabilities will include accounts payable, accrued liabilities, amounts owing to shareholders, income taxes payable and the current portion of long-term debt. 

“CCo” means a taxable Canadian corporation and a CCPC to be incorporated under the XXXXXXXXXX, which will have a taxation year ending on XXXXXXXXXX of every year.

The authorized share capital of CCo will include an unlimited number Class A voting common shares, Class B voting common shares, Class C non-voting common shares, Class D voting preferred shares, Class E voting preferred shares, Class F non-voting preferred shares, Class G non-voting preferred shares, Class H voting preferred shares, Class I voting preferred shares, Class J non-voting preferred shares, Class K non-voting preferred shares, Class L voting preferred shares and Class W non-voting preferred shares  

The Class D, E, F, G, H, I, J and K preferred shares will be entitled to non-cumulative dividends of an amount as determined by the Directors but not exceeding XXXXXXXXXX% per annum.  The Class D, E and F preferred shares will have a redemption amount that will be set by the directors at the time of issue and which will be equal to the difference between the FMV of property acquired for their issuance and the non-share consideration given by CCo for such property, but subject to adjustment if a dispute arises with the CRA as to the FMV of the property transferred.  The Class G preferred shares specify an amount in respect of which they are to be redeemed, acquired or cancelled.  The amount to be specified: (i) will be expressed as a dollar amount, (ii) will not be determined by a formula, and (iii) will not exceed the FMV of the property to be received by DC. The Class H, I, J and K preferred shares will have a set redemption amount of $XXXXXXXXXX per share.  A dividend may be declared on any class of shares at the exclusion of any other class of shares, common or preferred.  All dividends will be restricted to an amount that will leave sufficient equity in the company to fully redeem any outstanding preferred share.

The Class L preferred shares will not carry any right to receive dividends, and will be redeemable by the company at their face value.  The class W preferred shares will have identical attributes to the Class D preferred shares in DC.

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

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

“Class G Redemption Amount” in respect of the Class G preferred shares to be issued by BCo or CCo means the amount equal to the excess of the FMV of the property received by BCo or CCo as described in Paragraphs 29 or Paragraph 32 divided by the number of Class G preferred shares issued by BCo  or CCo.

“Cost Amount” has the meaning assigned by subsection 248(1).

“D” means XXXXXXXXXX, who is an individual resident in Canada.

“DC” means XXXXXXXXXX, which is a Taxable Canadian Corporation and a CCPC that was incorporated on XXXXXXXXXX in XXXXXXXXXX and continued on XXXXXXXXXX pursuant to XXXXXXXXXX, and which has a taxation year ending on XXXXXXXXXX of every year.   

DC’s authorized share capital includes an unlimited number of Class A and B common shares, and an unlimited number of Class C and D preferred shares having the following terms and conditions:

Class A common shares: (i) right to carry one vote at all meetings of the shareholders, (ii) right to participate equally with the Class B common shares in DC’s net income after the preferred dividends have been paid to the holders of the Class C and D preferred shares, (iii) right to be distributed assets on a pro rata basis with the Class B common shares upon DC’s liquidation after the preferred claims of the Class C and D shares have been paid.  The class A common shares are not redeemable and retractable.

Class B common shares: (i) right to carry one vote only at the meetings of the shareholders where issues such as the amendment of the articles of incorporation, a proposed amalgamation and the disposition of substantially all of DC’s property are considered, (ii) right to participate equally with the Class A shares in DC’s net income after the preferred dividends have been paid to the holders of the Class C and D shares, (iii) right to be distributed assets on a pro rata basis with the Class A shares upon DC’s liquidation after the preferred claims of the Class C and D shares have been paid. The class B common shares are not redeemable and retractable.

Class C preferred shares: (i) right to carry one vote only at the meetings of the shareholders where issues such as the amendment of the articles of incorporation, a proposed amalgamation and the disposition of substantially all of DC’s property are considered, (ii) right to receive a cumulative dividend equal to XXXXXXXXXX% of the amount of the consideration for which such share was issued, (iii) right to be distributed an amount equal to the amount of consideration for which such share was issued upon DC’s liquidation.  The class C preferred shares are redeemable and retractable at an amount equal to the consideration for which the shares were issued plus any unpaid cumulative dividend thereon.

Class D preferred shares: (i) right to carry one vote only at the meetings of the shareholders where issues such as the amendment of the articles of incorporation, a proposed amalgamation and the disposition of substantially all of DC’s property are considered, (ii) right to receive a non-cumulative dividend at the sole and absolute discretion of DC’s directors, (iii) right to be distributed an amount equal to the amount of the consideration for which such share was issued upon DC’s liquidation. The class D preferred shares are redeemable at an amount equal to the consideration for which the shares were issued plus any unpaid cumulative dividend thereon.

“Dividend Rental Arrangement” has the meaning assigned by subsection 248(1).

“Dividend Refund” has the meaning assigned by subsection 129(1).

“E” means XXXXXXXXXX, who is an individual resident in Canada.

“Effective Date” means the day in which the Proposed Transactions will be carried out.

“Eligible Property” has the meaning assigned by subsection 85(1.1).

“Estate Freeze” means the estate freeze completed by S, N, T and E on XXXXXXXXXX as fully described at Paragraphs 13 to 15 below.

“Excepted Dividend” has the meaning assigned by paragraph 187.1(1)(b).

“Excluded Dividend” has the meaning assigned by paragraph 191(1)(a).

“F” means XXXXXXXXXX, who is an individual resident in Canada.

“Financial Intermediary Corporation” has the meaning assigned by subsection 191(1).

“FMV” means fair market value, which refers to the amount, expressed in money terms, that is the highest price available in an open and unrestricted market between informed and prudent parties dealing at arm’s length.

“Forgiven Amount” has the meaning assigned by subsection 80(1) or section 80.01.

“G” means XXXXXXXXXX, who is an individual resident in Canada.

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

“H” means XXXXXXXXXX, who is an individual resident in Canada.

“I” means XXXXXXXXXX, who is an individual resident in Canada.

“Investment Property” means all of the assets other than Cash or Near-Cash Property, any income from which would, for the purposes of the Act, be income from property or from a Specified Investment Business of that entity.  Any liabilities of that entity other than current liabilities or liabilities allocated to Business Property will be allocated to the Cash or Near-Cash Property, Investment Property and Business Property of that entity, based on the relative net FMV of each Type of Property prior to the allocation of such excess unallocated liabilities but after the allocation of the other liabilities.

“J” means XXXXXXXXXX, who is an individual resident in Canada.

“K” means XXXXXXXXXX, who is an individual resident in Canada.

“L” means XXXXXXXXXX, who is an individual resident in Canada.

“M” means XXXXXXXXXX, who is an individual resident in Canada.

“N” means XXXXXXXXXX, who is an individual resident in Canada.

“O” means XXXXXXXXXX, who is an individual resident in Canada.

“P” means XXXXXXXXXX, who is an individual resident in Canada.

“Paragraph” means a numbered paragraph in this letter.

“Proceeds of Disposition” has the meaning assigned by section 54.

“Promissory Note #1” means the non-interest-bearing demand promissory note that BCo will issue to DC on the redemption of the class G preferred shares that DC holds in BCo.  The principal amount and FMV of Promissory Note #1 will be equal to the aggregate Class G Redemption Amount for the Class G preferred shares so redeemed by BCo.

“Promissory Note #2” means the non-interest-bearing demand promissory note that CCo will issue to DC on the redemption of the class G preferred shares that DC holds in CCo.  The principal amount and FMV of Promissory Note #2 will be equal to the aggregate Class G Redemption Amount for the Class G preferred shares so redeemed by CCo.

“Promissory Note #3” means the non-interest-bearing demand promissory note that DC will issue to BCo on the redemption of the class D preferred shares that BCo holds in DC.  The principal amount and FMV of Promissory Note #3 will be equal to the aggregate redemption value of the Class D preferred shares so redeemed by DC.

“Promissory Note #4” means the non-interest-bearing demand promissory note that DC will issue to CCo on the redemption of the class D preferred shares that CCo holds in DC.  The principal amount and FMV of Promissory Note #4 will be equal to the aggregate redemption value of the Class D preferred shares so redeemed by DC.

“Promissory Note #5” means the non-interest-bearing demand promissory note that DC will issue to BCo on the purchase for cancellation of the XXXXXXXXXX Class A common shares that BCo holds in DC.  The principal amount and FMV of Promissory Note #5 will be equal to the aggregate FMV of the XXXXXXXXXX Class A common shares so redeemed by DC.

“Promissory Note #6” means the non-interest-bearing demand promissory note that DC will issue to CCo on the purchase for cancellation of the XXXXXXXXXX Class A common shares that CCo holds in DC.  The principal amount and FMV of Promissory Note #6 will be equal to the aggregate FMV of the XXXXXXXXXX Class A common shares so redeemed by DC.

“Proposed Transactions” means the transactions described in the Proposed Transactions section of this letter.

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

“Q” means XXXXXXXXXX, who is an individual resident in Canada.

“R” means XXXXXXXXXX, who is an individual resident in Canada.

“RDTOH” means refundable dividend tax on hand as this term is defined by subsection 129(3).

“Redemption Agreement” means the agreement entered into by S, N, T, E, B and C governing the redemption of the Class D preferred shares issued by DC to S, N, T and E in the course of the Estate Freeze.

“Restricted Financial Institution” has the meaning assigned by subsection 248(1).

“S” means XXXXXXXXXX, who is an individual resident in Canada.

“Specified Financial Institution” has the meaning assigned by subsection 248(1).

“Substantial Interest” has the meaning assigned by subsection 191(2).

“T” means XXXXXXXXXX, who is an individual resident in Canada who died on XXXXXXXXXX.

“Taxable Canadian Corporation” has the meaning assigned by subsection 89(1).

“Taxable Preferred Shares” has the meaning assigned by subsection 248(1).

“Type of Property” means one of the following three (3) types of property into which DC’s property may be classified:  (a) Cash or Near-Cash property; (b) Business Property; and (c) Investment Property.  For greater certainty, any tax accounts, such as the balance of non-capital losses, refundable dividend tax on hand or CDA will not be considered as a Type of Property.

FACTS:

DC

1.    DC carries on the business of XXXXXXXXXX and reports its income for tax purposes under the cash method. 

2.    DC’s assets include capital assets such as XXXXXXXXXX equipment, buildings, land, XXXXXXXXXX, XXXXXXXXXX and XXXXXXXXXX inventory as well as investments.  DC’s liabilities include accounts payable, bank indebtedness and income taxes payable.

3.    At the time of the Proposed Transactions, DC’s issued and outstanding capital will be held as Capital Property by the following individuals:

Shareholder         # of shares       Class       PUC           ACB           FMV
B                          XXXX                A             $ XXXX      $ XXXX      $ XXXX
C                         XXXX                 A             $ XXXX      $ XXXX      $ XXXX
Subtotal               XXXX                                $ XXXX      $ XXXX      $ XXXX

Shareholder      # shares    Class    PUC            ACB           FMV
D                       XXXX         D          $ XXXX      $ XXXX      $ XXXX
E                       XXXX         D          $ XXXX      $ XXXX      $ XXXX
F                       XXXX         D          $ XXXX      $ XXXX      $ XXXX
G                      XXXX         D          $ XXXX      $ XXXX      $ XXXX
H                      XXXX         D          $ XXXX      $ XXXX      $ XXXX
I                        XXXX         D          $ XXXX      $ XXXX      $ XXXX
J                        XXXX        D          $ XXXX      $ XXXX      $ XXXX
K                        XXXX        D          $ XXXX      $ XXXX      $ XXXX
L                        XXXX        D           $ XXXX      $ XXXX      $ XXXX
M                       XXXX        D           $ XXXX      $ XXXX      $ XXXX
N                        XXXX        D           $ XXXX      $ XXXX      $ XXXX
O                        XXXX        D            $ XXXX      $ XXXX      $ XXXX
P                        XXXX        D            $ XXXX      $ XXXX      $ XXXX
Q                        XXXX        D            $ XXXX      $ XXXX      $ XXXX
R                        XXXX        D            $ XXXX      $ XXXX      $ XXXX
S                        XXXX        D            $ XXXX      $ XXXX      $ XXXX
Subtotal              XXXX                      $ XXXX      $ XXXX      $ XXXX

4.    As of XXXXXXXXXX, the outstanding balance of DC’s GRIP and RDTOH was respectively equal to $XXXXXXXXXX and nil.

DC’s shareholding

5.    B and C are cousins.

6.    E is the mother of B.  She is also the aunt of C. 

7.    T was the father of B.  He also was the uncle of C.

8.    D, F, G, H, I, J, K and L are the siblings of B.  They are also the cousins of C.

9.    N and S are respectively the mother and the father of C.  They are also the aunt and the uncle of B.

10.   [Reserved]

11.   M, O, P, Q, R are the brothers of C.  They are also the cousins of B.

12.   S and T were siblings.

Pre-butterfly transactions

The Estate Freeze

13.   On XXXXXXXXXX, S and N completed an estate freeze under subsection 85(1) pursuant to which:
(a)   S transferred the XXXXXXXXXX Class A common shares that he held in DC in exchange for XXXXXXXXXX Class D preferred shares in DC having a PUC and an ACB of $XXXXXXXXXX, and a FMV of $XXXXXXXXXX, and
(b)   N transferred the 1 Class A common share that she held in DC in exchange for XXXXXXXXXX Class D preferred shares in DC having a PUC and an ACB of $XXXXXXXXXX, and a FMV of $XXXXXXXXXX.
14.   On XXXXXXXXXX, T and E completed an estate freeze under subsection 85(1) pursuant to which:
(a)   T transferred the XXXXXXXXXX Class A common share that he held in DC in exchange for XXXXXXXXXX Class D preferred shares in DC having a PUC and an ACB of $XXXXXXXXXX, and a FMV of $XXXXXXXXXX, and
(b)   E transferred the 1 Class A common share that she held in DC in exchange for XXXXXXXXXX Class D preferred shares in DC having a PUC and an ACB of $XXXXXXXXXX, and a FMV of $XXXXXXXXXX.
15.   Immediately after the Estate Freeze, B and C respectively subscribed for XXXXXXXXXX Class A common shares in DC for a cash consideration of $XXXXXXXXXX.
16.   According to the Redemption Agreement, XXXXXXXXXX of the Class D preferred shares in DC owned by S, N, T and E are to be redeemed on XXXXXXXXXX of each year over a period of XXXXXXXXXX years effective XXXXXXXXXX.
The transfer of the class D preferred shares in DC to the children of S, N, T and E
17.   On XXXXXXXXXX, T transferred XXXXXXXXXX Class D preferred shares in DC to each of D, F, G, H, I, J, K and L (XXXXXXXXXX in aggregate) on a tax-deferred basis pursuant to subsections 73(4) and (4.1). 
18.   On XXXXXXXXXX, S transferred XXXXXXXXXX Class D preferred shares in DC to M, O, P, Q and R (XXXXXXXXXX in aggregate) on a tax-deferred basis pursuant to subsections 73(4) and (4.1).
19.   Further to T`s death on XXXXXXXXXX, the XXXXXXXXXX Class D preferred shares that he held in DC were assigned to E.
 DC`s acquisition of parcels of land from XXXXXXXXXX
20.   On XXXXXXXXXX DC entered into an agreement to purchase the following parcels of land: XXXXXXXXXX.
The incorporation of BCo and CCo
21.   B will incorporate BCo prior to the Proposed Transactions.
22.   C will incorporate CCo prior to the Proposed Transactions.
23.   Each of BCo and CCo will qualify as a taxable Canadian corporation and a CCPC.
PROPOSED TRANSACTIONS:
The Proposed Transactions will occur in the order presented unless otherwise indicated, with the exception of filing the applicable election forms, which will be filed within the applicable due dates following the completion of the Proposed Transactions.

The transfer of the DC shares held by B to BCo

24.   B will transfer the XXXXXXXXXX Class A common shares that he holds in DC to BCo in exchange for XXXXXXXXXX Class A common shares in BCo having a FMV equal to the FMV of the DC shares that B transferred to BCo.

B and BCo will jointly elect under subsection 85(1), in prescribed form and within the time limits prescribed by subsection 85(6), in respect of the transfer of the DC Class A common shares to BCo.  The Agreed Amount in respect of the transfer will not be greater than the FMV of the XXXXXXXXXX Class A common shares in DC at the time of the transfer. Specifically, the Agreed Amount will not be less than the lesser of the amounts specified in subparagraphs 85(1)(c.1)(i) and (ii).
The aggregate amount to be added to the stated capital of the BCo Class A common shares to be issued to B will be equal to the PUC attributable to the Class A common shares in DC that B transferred to BCo.

25.   Each of D, E, F, G, H, I, J, K and L will transfer all his/her Class D preferred shares in DC to BCo in exchange for the same number of Class W preferred shares in BCo having a FMV equal to the FMV of the Class D preferred shares in DC so transferred to BCo.

Each of D, E, F, G, H, I, J, K and L and BCo will jointly elect under subsection 85(1), in prescribed form and within the time limits prescribed by subsection 85(6), in respect of the transfer of the DC Class D preferred shares to BCo.  The Agreed Amount specified by each of D, E, F, G, H, I, J, K , L and BCo in respect of the transfer will not be greater than the FMV of the Class D preferred shares that he/she respectively holds in DC at the time of the transfer. Specifically, the Agreed Amount will not be less than the lesser of the amounts specified in subparagraphs 85(1)(c.1)(i) and (ii).

The aggregate amount added to the stated capital of the BCo Class W preferred shares to be issued to each of D, E, F, G, H, I, J, K and L will be equal to the PUC attributable to the DC Class D preferred shares transferred to BCo as described in this Paragraph.

The transfer of the DC shares held by C to CCo

26.   C will transfer the XXXXXXXXXX Class A common shares that he holds in DC to CCo in exchange for XXXXXXXXXX Class A common shares in CCo having a FMV equal to the FMV of the DC shares transferred to CCo.

C and CCo will jointly elect under subsection 85(1), in prescribed form and within the time limits prescribed by subsection 85(6), in respect of the transfer of the DC Class A common shares to CCo.  The Agreed Amount in respect of the transfer will not be greater than the FMV of the XXXXXXXXXX Class A common shares in DC at the time of the transfer. Specifically, the Agreed Amount will not be less than the lesser of the amounts specified in subparagraphs 85(1)(c.1)(i) and (ii).

The aggregate amount to be added to the stated capital of the CCo Class A common shares to be issued to C will be equal to the PUC attributable to the Class A common shares in DC that C transferred to CCo.

27.   Each of M, N, O, P, Q, R and S will transfer all his/her Class D preferred shares in DC to CCo in exchange for the same number of Class W preferred shares in CCo having a FMV equal to the FMV of the Class D preferred shares in DC so transferred to CCo.

Each of M, N, O, P, Q, R and S and BCo will jointly elect under subsection 85(1), in prescribed form and within the time limits prescribed by subsection 85(6), in respect of the transfer of the DC Class D preferred shares to CCo.  The Agreed Amount specified by each of M, N, O, P, Q, R, S and CCo in respect of the transfer will not be greater than the FMV of the Class D preferred shares that he/she respectively holds in DC at the time of the transfer. Specifically, the Agreed Amount will not be less than the lesser of the amounts specified in subparagraphs 85(1)(c.1)(i) and (ii).

The aggregate amount added to the stated capital of the CCo Class W preferred shares to be issued to each of M, N, O, P, Q, R and S will be equal to the PUC attributable to the DC Class D preferred shares transferred to CCo as described in this Paragraph.
The classification of DC’s property

28.   Immediately before the transfers of property described in Paragraphs 29 and 32 below, DC’s property will be classified into three Types of Property. For the purposes of determining the FMV of each Type of Property, no amount will be considered to be a liability of DC unless it represents a true legal liability that is capable of quantification. Furthermore, the amount of any deferred income tax will not be considered a liability for the purposes of the distribution because such amount does not represent a legal obligation of DC.

The transfer of a pro rata portion of each type of property held by DC to BCo

29.   DC will transfer to BCo property of each Type of Property owned by DC such that immediately after such property transfers and the corresponding liability assumptions, the net FMV of the property of each Type of Property so transferred to BCo will approximate the proportion determined by the formula:

A x B/C

where:

A:    is the net FMV, immediately before the transfer, of all property of that Type of Property owned at that time by DC;

B:    is the aggregate FMV, immediately before DC’s transfer of property to BCo, of all of the shares of DC owned by BCo at that time; and

C:    is the aggregate FMV, immediately before DC’s transfer of property to BCo, of all of the issued and outstanding shares of the capital stock of DC.

For the purposes of this Paragraph, the expression “approximate the proportion” means that the discrepancy of the proportion, if any, between the percentage of the net FMV of all the property of each Type of Property which BCo will receive as compared to what BCo would have received had BCo received its appropriate pro rata share of the net FMV of all the property of that Type of Property will not exceed XXXXXXXXXX percent (XXXXXXXXXX%).

30.   As consideration for DC’s transfer of property to BCo:

(a)   BCo will assume a portion of the liabilities owing by DC that the aggregate FMV, immediately before DC’s transfer of property to BCo, of all of the shares of DC owned by BCo at that time is of the aggregate FMV, immediately before DC’s transfer of property to BCo, of all of the issued and outstanding shares of the capital stock of DC; and

(b)   BCo will issue Class G preferred shares to DC, which will have an aggregate redemption amount and an aggregate FMV equal to the Class G Redemption Amount.

For greater clarity, the aggregate FMV of all such consideration to be paid by BCo to DC will be equal to the aggregate FMV of each Type of Property so transferred to BCo.

31.   In respect of the property transfer described in Paragraph 29 above, DC will jointly elect with BCo in prescribed form and within the time allowed by subsection 85(6), to have the provisions of subsection 85(1) apply to the transfer of each property of DC that is an Eligible Property transferred to BCo.

In each case, the Agreed Amount will not exceed the FMV of the respective property, nor will it be less than the amount permitted under paragraph 85(1)(b).  For greater certainty, the aggregate of such elected amounts will be greater than the aggregate amount of DC’s liabilities so assumed by BCo.

Specifically, the Agreed Amount in respect of each of the Eligible Property will be as follows:

(a)   In the case of property described in paragraph 85(1)(c.1), an amount equal to the lesser of the amounts specified in subparagraphs 85(1)(c.1)(i) and (ii);
(b)   In the case of inventory described in paragraph 85(1)(c.2), an amount determined by the formula listed in subparagraph 85(1)(c.2)(i);
(c)   In the case of Eligible Capital Property, an amount equal to the least of the amounts specified in subparagraphs 85(1)(d)(i), (ii) and (iii); and
(d)   In the case of Depreciable Property of a prescribed class, an amount equal to the least of the amounts specified in subparagraph 85(1)(e).
For the purpose of the joint elections under subsection 85(1) described in this Paragraph, the reference to the undepreciated capital cost to the taxpayer of all the property of that class immediately before the disposition in subparagraph 85(1)(e)(i) will be read to mean the proportion of the undepreciated capital cost to DC of all the property of that class that the capital cost of the property immediately before the disposition is of the aggregate capital costs of all property of that class immediately before the disposition.

The aggregate amount to be added to the stated capital of the class G preferred shares to be issued by BCo as partial consideration for the transferred property described in Paragraph 29 will not exceed the aggregate cost to BCo of such property less the amount of DC’s liabilities so assumed by BCo.   For greater certainty, the increase to the stated capital of the BCo class G preferred shares will not exceed the aggregate maximum amount that could be added to the stated capital of such shares pursuant to subsection 85(2.1).

The transfer of a pro rata portion of each type of property held by DC to CCo

32.   DC will transfer to CCo property of each Type of Property owned by DC such that immediately after such property transfers and the corresponding liability assumptions, the net FMV of the property of each Type of Property so transferred to CCo will approximate the proportion determined by the formula:

A x B/C

where:

A:    is the net FMV, immediately before the transfer, of all property of that Type of Property owned at that time by DC;

B:    is the aggregate FMV, immediately before DC’s transfer of property to CCo, of all of the shares of DC owned by CCo at that time; and

C:    is the aggregate FMV, immediately before DC’s transfer of property to CCo, of all of the issued and outstanding shares of the capital stock of DC.

For the purposes of this Paragraph, the expression “approximate the proportion” means that the discrepancy of the proportion, if any, between the percentage of the net FMV of all the property of each Type of Property which CCo will receive as compared to what CCo would have received had CCo received its appropriate pro rata share of the net FMV of all the property of that Type of Property will not exceed XXXXXXXXXX percent (XXXXXXXXXX%).

33.   As consideration for DC’s transfer of property to CCo:

(a)   CCo will assume a portion of the liabilities owing by DC that the aggregate FMV, immediately before DC’s transfer of property to CCo, of all of the shares of DC owned by CCo at that time is of the aggregate FMV, immediately before DC’s transfer of property to CCo, of all of the issued and outstanding shares of the capital stock of DC; and

(b)   CCo will issue Class G preferred shares to DC, which will have an aggregate redemption amount and an aggregate FMV equal to the Class G Redemption Amount.

For greater clarity, the aggregate FMV of all such consideration to be paid by CCo to DC will be equal to the aggregate FMV of each Type of Property so transferred to CCo.

34.   In respect of the property transfer described in Paragraph 33 above, DC will jointly elect with CCo in prescribed form and within the time allowed by subsection 85(6), to have the provisions of subsection 85(1) apply to the transfer of each property of DC that is an Eligible Property transferred to CCo.

In each case, the Agreed Amount will not exceed the FMV of the respective property, nor will it be less than the amount permitted under paragraph 85(1)(b).  For greater certainty, the aggregate of such elected amounts will be greater than the aggregate amount of DC’s liabilities so assumed by BCo.

Specifically, the Agreed Amount in respect of each transferred Eligible Property will be as follows:

(a)   In the case of property described in paragraph 85(1)(c.1), an amount equal to the lesser of the amounts specified in subparagraphs 85(1)(c.1)(i) and (ii);
(b)   In the case of inventory described in paragraph 85(1)(c.2), an amount determined by the formula listed in subparagraph 85(1)(c.2)(i);
(c)   In the case of Eligible Capital Property, an amount equal to the least of the amounts specified in subparagraphs 85(1)(d)(i), (ii) and (iii); and
(d)   In the case of Depreciable Property of a prescribed class, an amount equal to the least of the amounts specified in subparagraph 85(1)(e).
For the purpose of the joint elections under subsection 85(1) described in this Paragraph, the reference to the undepreciated capital cost to the taxpayer of all the property of that class immediately before the disposition in subparagraph 85(1)(e)(i) will be read to mean the proportion of the undepreciated capital cost to DC of all the property of that class that the capital cost of the property immediately before the disposition is of the aggregate capital costs of all property of that class immediately before the disposition.

The aggregate amount to be added to the stated capital of the class G preferred shares to be issued by CCo as partial consideration for the transferred property described in Paragraph 32 will not exceed the aggregate cost to CCo of such property less the amount of DC’s liabilities so assumed by CCo.   For greater certainty, the increase to the stated capital of the CCo class G preferred shares will not exceed the aggregate maximum amount that could be added to the stated capital of such shares pursuant to subsection 85(2.1).

The redemption of the Class G preferred shares that DC holds in BCo and CCo

35.   Immediately after the transfers described in Paragraphs 29 and 32 above:
(a)   BCo will redeem all of the Class G preferred that DC holds in BCo at their Class G Redemption Amount in exchange for Promissory Note #1.  DC will accept Promissory Note #1 as payment in full for the Class G preferred shares that it holds in BCo, and

(b)   CCo will redeem all of the Class G preferred that DC holds in CCo at their Class G Redemption Amount in exchange for Promissory Note #2.  DC will accept Promissory Note #2 as payment in full for the Class G preferred shares that it holds in CCo.

The redemption of the class D preferred shares, and the purchase for cancellation of the Class A common shares that BCo and CCo hold in DC

36.   Further to BCo’s and CCo’s redemption of the Class G preferred shares that DC holds in BCo and CCo:
(a)   DC will redeem all of the Class D preferred shares that BCo holds in DC in exchange for Promissory Note #3.  BCo will accept Promissory Note #3 as payment in full for the Class D preferred shares that it holds in DC; and
(b)   DC will redeem all of the Class D preferred shares that CCo holds in DC in exchange for Promissory Note #4.  CCo will accept Promissory Note #4 as payment in full for the Class D preferred shares that it holds in DC.

36.1 Immediately after DC`s redemption of the Class D preferred shares held by BCo and CCo:

(a)   DC will purchase for cancellation the XXXXXXXXXX Class A common shares that BCo holds in DC in exchange for Promissory Note #5. BCo will accept Promissory Note #5 as payment in full for the XXXXXXXXXX Class A common shares that it holds in DC; and

(b)   DC will purchase for cancellation the XXXXXXXXXX Class A common shares that CCo holds in DC in exchange for Promissory Note #6. CCo will accept Promissory Note #6 as payment in full for the XXXXXXXXXX Class A common shares that it holds in DC.

The set-off of the promissory notes

37.   The principal amount owing by BCo to DC under Promissory Note#1 will be set-off against the principal amount owing by DC to BCo under Promissory Note#3 and Promissory Note#5 such that each such note will be cancelled in full satisfaction of their respective underlying obligations.

38.   The principal amount owing by CCo to DC under Promissory Note#2 will be set-off against the principal amount owing by DC to CCo under Promissory Note#4 and Promissory Note#6 such that each such note will be cancelled in full satisfaction of their respective underlying obligations.

The dissolution of DC

39.   DC will be dissolved further to the completion of the Proposed Transactions.

ADDITIONAL INFORMATION:

40.   No property has or will become property of DC and no liabilities have been or will be incurred or discharged by DC in contemplation of and before the Proposed Transactions, except as described in the Proposed Transactions.

41.   There will not be any material change in the composition of DC's assets or liabilities (except as contemplated in the Proposed Transactions) from the date of this letter until the date the Proposed Transactions described herein are completed.

42.   Except as described in this letter, none of B or C will dispose of any shares of DC as part of the series of transactions or events that includes the Proposed Transactions.

43.   Except as described in this letter, none of D, E, F, G, H, I, J, K, L, M, N, O, P, Q, R will dispose of any shares of BCo and CCo as part of the series of transactions or events that includes the Proposed Transactions. 

44.   None of DC, BCo or CCo is at any time during the series of transactions or events that includes the Proposed Transaction described herein, a Specified Financial Institution, a Restricted Financial Institution or a corporation described in any of paragraphs (a) to (f) of the definition of  “Financial Intermediary Corporation”.

45.   None of DC, BCo or CCo is or will be, at any time during the Series of Transactions or Events that includes the Proposed Transactions:

(a)   the subject of any undertaking or agreement that is a guarantee agreement, within the meaning referred to in subsection 112(2.2);

(b)   the subject of a Dividend Rental Arrangement;

(c)   a share that is issued or acquired as part of a transaction, event or Series of Transactions or Events of the type described in subsection 112(2.5).

46.   Each of DC, BCo and CCo will have the financial capacity to honour, upon presentation for payment, the amount payable under the promissory note issued by it as part of the Proposed Transactions.

PURPOSE OF THE PROPOSED TRANSACTIONS:

The Proposed Transactions are being undertaken to allow each of B and C to carry on separate farming operations from one another, and to independently formulate and implement a strategic development plan in respect of the portion of DC’s property to be transferred to BCo and CCo.

RULINGS:

Provided that the above statements of facts, Proposed Transactions and purpose of the Proposed Transactions are accurate and constitute complete disclosure of all relevant facts and proposed transactions, our rulings are as follows:

A.    Subject to the application of subsection 69(11) and paragraph 85(1)(b), and provided that the appropriate elections are filed in the prescribed form and manner within the time limits specified in subsection 85(6), and  that 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 DC’s transfers of the property to BCo and CCo described in Paragraphs 29 and 32 with result that the Agreed Amount in respect of each transfer of Eligible Property will be deemed pursuant to paragraph 85(1)(a) to be the proceeds of disposition thereof to DC and the cost thereof to BCo and CCo.  For greater certainty, paragraph 85(1)(e.2) shall not apply to the property transfers described in Paragraphs 29 and 32.

B.    On the redemption by BCo and CCo of the Class G preferred shares issued to DC as described in Paragraph 35, BCo and CCo will respectively be deemed by paragraph 84(3)(a) to have paid and DC will be deemed by paragraph 84(3)(b) to have received a taxable dividend at that time equal to the amount by which the Class G Redemption Amount paid by BCo and CCo exceeds the PUC of the Class G preferred shares so redeemed by BCo and CCo.

C.    On the purchase for cancellation of the XXXXXXXXXX Class A common shares and the redemption of the Class D preferred shares owned by each of BCo and CCo by DC as described in Paragraphs 36 and 36.1, DC will be deemed by paragraph 84(3)(a) to have paid and BCo and CCo will respectively be deemed by paragraph 84(3)(b) to have received a taxable dividend at that time equal to the amount by which the amount paid by DC on the purchase for cancellation of the XXXXXXXXXX Class A common shares, and on the redemption of the Class D preferred shares exceeds the PUC of the XXXXXXXXXX Class A common shares so cancelled and the Class D preferred shares so redeemed by DC.

D.    To the extent that a dividend described in Ruling B is a taxable dividend, such dividend:

(i)   will be excluded in determining DC’s Proceeds of Disposition of the Class G preferred shares that it holds in BCo and CCo pursuant to paragraph (j) of the definition of Proceeds of Disposition;

(ii)  will be included in computing DC’s income pursuant to subsection 82(1) and paragraph 12(1)(j);

(iii) will be deductible in computing DC’s taxable income for the taxation year in which such a dividend is deemed to be received pursuant to subsection 112(1), and, for greater certainty, the provisions of subsections 112(2.1), (2.2), (2.3), or (2.4) will not apply to deny the deduction of such deemed dividend;

(iv)  will reduce any loss that would otherwise be realized as a result of DC’s disposition of the Class G preferred shares in BCo and CCo on which the dividend is deemed to be received pursuant to subsection 112(3);

(v)   will be subject to tax under Part IV under paragraph 186(1)(b) to the extent that the payor of the dividend is entitled to a Dividend Refund for the taxation year in which it paid such dividend; and

(vi)  will not be subject to tax under Part IV.1 and VI.1.

E.    To the extent that each of the dividends described in Ruling C is a taxable dividend, such dividend:

(i)   will be excluded in determining BCo and CCo’s Proceeds of Disposition of the XXXXXXXXXX Class A common shares, and the Class D preferred shares that BCo and CCo respectively hold in DC pursuant to paragraph (j) of the definition of Proceeds of Disposition;

(ii)  will be included in computing BCo and CCo’s income pursuant to subsection 82(1) and paragraph 12(1)(j);

(iii) will be deductible in computing BCo and CCo’s taxable income for the taxation year in which such a dividend is deemed to be received pursuant to subsection 112(1), and, for greater certainty, the provisions of subsections 112(2.1), (2.2), (2.3), or (2.4) will not apply to deny the deduction of such deemed dividend;

(iv)  will reduce any loss that would otherwise be realized as a result of BCo and CCo’s disposition of the Class A common shares, and of the Class D preferred shares that they respectively held in DC on which the dividend is deemed to be received pursuant to subsection 112(3);

(v)   will be subject to tax under Part IV under paragraph 186(1)(b) to the extent that the payor of the dividend is entitled to a Dividend Refund for the taxation year in which it paid such dividend; and

(vi)  will not be subject to tax under Part IV.1 and VI.1 since the Class A common shares that BCo and CCo will hold in DC do not qualify as Taxable Preferred Shares.

F.    Provided that, as part of the series of transaction or events that includes the Proposed Transactions, there is not:

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

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

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

(iv)  an acquisition of shares in the circumstances described in subparagraph 55(3.1)(b)(iii); or

(v)   an acquisition of property in the circumstances described in paragraph 55(3.1)(c) and (d)

which has not been described herein, 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.  For greater certainty, subsection 55(3.1) will not apply to deny the exemption under paragraph 55(3)(b).

G.    The set-off and cancellation of Promissory Note #1 against Promissory note #3 and Promissory Note #5 and the set-off and cancellation of Promissory Note #2 against Promissory note #4 and Promissory Note #6 described in Paragraphs 37 and 38 will not, in and of itself, give rise to a Forgiven Amount, and neither DC nor BCo and CCo will realize a gain or incur any loss as a result of such set-off and cancellation.

H.    The provisions of subsections 15(1), 56(2), 56(4) and 246(1) will not apply to the Proposed Transactions, in and by themselves.

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

These rulings are given subject to the limitations and qualifications set forth in Information Circular 70-6R5 issued on May 17, 2002, and are binding on the CRA, provided that the Proposed Transactions are completed no later than six months of the date of this letter.

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

COMMENTS:

Nothing in this ruling should be construed as implying that the CRA has agreed to or reviewed:

a)    the determination of the amount of the ACB, PUC or FMV of any shares referred to herein;

b)    the balance of GRIP or RDTOH of any corporation;

c)    the safe-income on hand attributable to any shares of any corporation; or

d)    any tax consequences relating to the Definitions, Facts and Proposed Transactions described herein, other than those described in the rulings given above, including whether any subsequent transaction or event is or is not considered to be part of the series of transactions or events described herein.

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

Yours truly,

XXXXXXXXXX
Reorganizations Division
Income Tax Ruling Directorate
Legislative Policy and Regulatory Affairs Branch

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