2014-0540881R3 Multi-wing split-up butterfly

Principal Issues: Whether the proposed transactions qualify for the butterfly exemption found in paragraph 55(3)(b).

Position: Yes

Reasons: The proposed transactions meet the requirements found in paragraph 55(3)(b), and are not subject to any of the butterfly exemption denial rules found in 55(3.1).

Author: XXXXXXXXXX
Section: 85(1), 87(1), 55(3)(b), 55(3.1), 55(3.2)

XXXXXXXXXX
                                                      2014-054088

XXXXXXXXXX, 2015

Dear XXXXXXXXXX,

Re:   Advance Income Tax Ruling
         XXXXXXXXXX

This is in reply to your letter in which you requested an advance income tax ruling on behalf of the above-referenced taxpayers.  We also acknowledge the additional information provided to us in subsequent letters and email correspondence and during our various telephone conversations.  The information that you provided in the aforementioned letter and our email correspondence only forms part of this letter to the extent described herein.

To the best of your knowledge and that of the above-referenced taxpayers, none of the issues raised in this letter is:

(i)   in an earlier income tax return of the above-referenced taxpayer or a person related to that taxpayer;

(ii)  being considered by a tax services office or a taxation centre in connection with a previously filed tax return of the above-referenced taxpayer or a person related to that taxpayer;

(iii) under objection by the above-referenced taxpayer or a person related to that taxpayer;

(iv)  before the courts or, if a judgement has been issued, the time limit for appeal to a higher court has not expired; or

(v)   the subject of a ruling previously issued by the Income Tax Rulings Directorate.

Furthermore, the above-referenced taxpayers have confirmed that the proposed transactions described herein will not result in the taxpayers or any person related to the taxpayers being unable to pay any of their outstanding tax liabilities.

Unless otherwise expressly stated, all statutory references herein are to sections or subsections, paragraphs or subparagraphs and clauses or subclauses of the Income Tax Act (Canada), R.S.C. 1985 (5th Supp.) c.1, as amended from time to time and consolidated to the date of this letter, and all references to monetary amounts are in Canadian dollars.

DEFINITIONS:

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

“ACB” means adjusted cost base, as defined in section 54;

“Aco” means XXXXXXXXXX, a corporation formed under the Canada Business Corporations Act;

“A” means XXXXXXXXXX, an individual resident of Canada;

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

“B” means XXXXXXXXXX, an individual resident of Canada;

“BN” means business number;

“C” means XXXXXXXXXX, an individual resident of Canada;

“CCPC” means a Canadian-controlled private corporation, as defined in subsection 125(7);

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

“D” means XXXXXXXXXX, an individual resident of Canada;

“DC1” means XXXXXXXXXX, a corporation formed under the XXXXXXXXXX;

“DC1 Class A shares” means voting Class A common shares of the capital stock of DC1;

“DC1 Class F shares” means Class F preferred shares of the capital stock of DC1 that have the following attributes: non-voting, redeemable, retractable and non-participating;

“DC2” means XXXXXXXXXX, a corporation formed under the XXXXXXXXXX;

“DC2 Class A shares” means voting Class A common shares of the capital stock of DC2;

“DC2 Class C shares” means Class C preferred shares of the capital stock of DC2 that have the following attributes: voting, redeemable automatically upon the death of the holder and non-participating;

“DC-Amalco” means a corporation formed under the XXXXXXXXXX upon the amalgamation of DC1 and DC2;

“DC-Amalco class A shares” means the class A common shares of the capital stock of DC-Amalco that have the following attributes: voting, without par value, entitled to dividends at the discretion of the directors and participate in all surplus on a winding up;

“DC-Amalco class D shares” means the class D preferred shares of the capital stock of DC-Amalco that have the following attributes: non-voting, redeemable, retractable and non-participating;

“DC-Amalco class E shares” means the class E preferred shares of the capital stock of DC-Amalco that have the following attributes: first-ranking non-voting preferred shares, redeemable, retractable and non-participating, and entitled to a fixed non-cumulative dividend;

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

“E” means XXXXXXXXXX, an individual resident of Canada;

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

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

“F” means XXXXXXXXXX, an individual resident of Canada;

“FMV” means fair market value;

“Forgiven Amount” has the meaning assigned by subsection 80(1) and 80.01(1);

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

“N” means XXXXXXXXXX, an individual resident in Canada;

“Paragraph” means a numbered paragraph in this letter;

“Proposed Transactions” means the transaction set out herein under the heading “PROPOSED TRANSACTIONS”;

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

“RDTOH” means refundable dividend tax on hand, as defined in subsection 129(3);

“Real Estate” means the following immovable property interest, as owned by the persons set forth below;

Property    Address           Beneficial owner        Ownership stake

XXXX        XXXX                    DC2                       XXXX%
XXXX        XXXX                    DC2                       XXXX%
XXXX        XXXX                    DC1                       XXXX%
                                               TC1                        XXXX%
                                               A                            XXXX%
XXXX        XXXX                    DC1                       XXXX%
                                               A                            XXXX%
XXXX        XXXX                    DC1                       XXXX%
XXXX        XXXX                    DC1                       XXXX%
                                               TC1                        XXXX%

“Regulations” means the Income Tax Regulations;

“Rental property” has the meaning assigned by subsection 1100(14) of the Regulations;

“Significant Influence” has the meaning assigned by section 3051.04 of the Accounting Standards for Private Enterprises;

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

“SubTC1” means a new corporation incorporated for the purposes of the Proposed Transactions under the XXXXXXXXXX;

“SubTC1 common shares” means common shares of the capital stock of SubTC1 that have the following attributes: no par value, voting, entitled to dividends at the discretion of the directors and participate in all surplus on a winding up;

“SubTC1 Special Shares” means the preferred shares of the capital stock of SubTC1 that have the following attributes: non-voting, conditionally entitled to dividends, entitled to a preference on liquidation and redeemable and retractable at an amount equal to the aggregate FMV of the consideration for which such shares were issued (plus any declared but unpaid dividends);

“SubTC2” means a new corporation incorporated for the purposes of the Proposed Transactions under the XXXXXXXXXX;

“SubTC2 common shares” means common shares of the capital stock of SubTC2 that have the following attributes: no par value, voting, entitled to dividends at the discretion of the directors and participate in all surplus on a winding up;

“SubTC2 Special Shares” means the preferred shares of the capital stock of SubTC2 that have the following attributes: non-voting, conditionally entitled to dividends, entitled to a preference on liquidation and redeemable and retractable at an amount equal to the aggregate FMV of the consideration for which such shares were issued (plus any declared but unpaid dividends);

“SubTC3” means a new corporation incorporated for the purposes of the Proposed Transactions under the XXXXXXXXXX;

“SubTC3 common shares” means common shares of the capital stock of SubTC3 that have the following attributes: no par value, voting, entitled to dividends at the discretion of the directors and participate in all surplus on a winding up;

“SubTC3 Special Shares” means the preferred shares of the capital stock of SubTC3 that have the following attributes: non-voting, conditionally entitled to dividends, entitled to a preference on liquidation and redeemable and retractable at an amount equal to the aggregate FMV of the consideration for which such shares were issued (plus any declared but unpaid dividends);

“SubTC4” means a new corporation incorporated for the purposes of the Proposed Transactions under the XXXXXXXXXX;

“SubTC4 common shares” means common shares of the capital stock of SubTC4 that have the following attributes: no par value, voting, entitled to dividends at the discretion of the directors and participate in all surplus on a winding up;

“SubTC4 Special Shares” means the preferred shares of the capital stock of SubTC4 that have the following attributes: non-voting, conditionally entitled to dividends, entitled to a preference on liquidation and redeemable and retractable at an amount equal to the aggregate FMV of the consideration for which such shares were issued (plus any declared but unpaid dividends);

“TC1” means XXXXXXXXXX, a company incorporated under the XXXXXXXXXX;

“TC1 Class A shares” means voting Class A common shares of the capital stock of TC1;

“TC1 Class C shares” means Class C preferred shares of the capital stock of TC1 having the following attributes: XXXXXXXXXX votes per share, not entitled to dividends, entitled to receive an amount equal to the paid-up capital of the Class C shares upon a liquidation or dissolution, pari passu with the TC1 Class A and TC1 Class B shares, redeemable at the option of the holder in consideration of payment of an amount equal to their issue price and right of veto for the creation of new class of shares, modification of rights and reduction of capital involving the distribution of its assets to the holders of other classes of shares;

“TC1 Class E shares” means Class E preferred shares of the capital stock of TC1 having the following attributes: non-voting, redeemable, retractable and non-participating;

“TC1 Class G shares” means Class G preferred shares of the capital stock of TC1 having the following attributes: fixed redemption value, non-voting, redeemable at any time, retractable at any time following the XXXXXXXXXX year anniversary of their issuance, entitled to a dividend accruing only following the XXXXXXXXXXth week after their issuance, at the rate of XXXXXXXXXX% per annum, which shall be reduced to XXXXXXXXXX% per annum to the extent such shares are redeemed within XXXXXXXXXX months of their issuance and a non-impairment clause stipulating that no dividend can be paid on any class of shares if it would reduce the FMV of the TC1 Class G shares below their redemption price or result in TC1 not having the necessary assets for the redemption or retraction of the TC1 class G shares;

“TC2” means XXXXXXXXXX, a corporation incorporated under the XXXXXXXXXX;

“TC2 Class A shares” means voting Class A common shares of the capital stock of TC2;

“TC3” means XXXXXXXXXX, a corporation incorporated under the XXXXXXXXXX;

“TC3 Class A shares” means voting Class A common shares of the capital stock of TC3;

“TC4” means XXXXXXXXXX, a corporation incorporated under the XXXXXXXXXX;

“TC4 Class A shares” means voting Class A common shares of the capital stock of TC4;

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

“Trust” means XXXXXXXXXX, a testamentary spousal trust created upon the death of the late B, E’s late husband, pursuant to the terms of his last will and testament.

The relevant facts, proposed transactions and the purpose of the proposed transactions are as follows:

FACTS

General Background Information

1.    B, C, A and D are siblings.

2.    E is B, C, A and D’s mother.

3.    The Trust is a testamentary spousal trust established by the will of the late F, all of the net income of which is to be paid to or for the benefit of E, during her lifetime. Following her death, the Trust’s property is to be distributed equally among B, C, A and D. The trustees of the Trust are A, C and N.

4.    The majority of the assets of DC1 and DC2 consist of cash, investments in marketable securities, an investment in a private corporation and the Real Estate.

Facts Relating to DC1

5.    DC1 is a CCPC and a TCC. DC1 was formed on XXXXXXXXXX. DC1’s fiscal period and taxation year ends on XXXXXXXXXX.

6.    The authorized capital of DC1 consists of an unlimited number of Class A shares, Class B shares, Class C shares, Class D shares, Class E shares, Class F shares and Class G shares.

7.    The only shares of DC1 that are issued and outstanding are the following:

i.    XXXXXXXXXX DC1 Class A shares owned in equal parts (XXXXXXXXXX Class A shares each) by B, C, A and D; and

ii.   XXXXXXXXXX DC1 Class F shares, XXXXXXXXXX of which are owned by E and XXXXXXXXXX of which are owned by the Trust.

8.    The aggregate PUC of the DC1 Class A shares is $XXXXXXXXXX. The aggregate PUC of the DC1 Class F shares is $XXXXXXXXXX.

9.    Each of B, C, A and D acquired their XXXXXXXXXX DC1 Class A shares on XXXXXXXXXX by way of transfer by F, who formerly held such shares in trust for each of them. The ACB of the DC1 Class A shares to each of B, C, A and D is approximately $XXXXXXXXXX. The DC1 Class A shares are held by each of B, C, A and D as capital property and were not acquired in contemplation of the Proposed Transactions.

10.   E acquired her DC1 XXXXXXXXXX Class F shares on XXXXXXXXXX by way of rollover. The ACB of the DC1 Class F shares to E is approximately $XXXXXXXXXX. The DC1 Class F shares are held by E as capital property and were not acquired in contemplation of the Proposed Transactions.

11.   The Trust acquired its XXXXXXXXXX DC1 Class F shares on XXXXXXXXXX, upon the death of the late F, pursuant to the terms of his last will and Testament. The late F had, himself, acquired XXXXXXXXXX of such shares on XXXXXXXXXX, by way of rollover and XXXXXXXXXX of such shares on XXXXXXXXXX, by way of rollover. The ACB of the DC1 Class F shares to the Trust is approximately $XXXXXXXXXX. The DC1 Class F shares are held by the Trust as capital property and were not acquired in contemplation of the Proposed Transactions.

12.   By agreement made as of XXXXXXXXXX, E, A, B, D, C, TC1, the Trust and DC1 agreed to certain terms in respect of the Proposed Transactions, including the making of the present Ruling Request.  Such agreement does not result in any right being acquired by a party to the agreement.

13.   DC1 is a corporation engaged in the business of XXXXXXXXXX real estate. Immediately prior to the Proposed Transactions, DC1’s main assets will consist of the following:

i.    cash and cash-like assets;
ii.   an investment in shares of DC2;
iii.  an investment in shares of Aco;
iv.   marketable securities; and
v.    its interests in the Real Estate.

14.   As at XXXXXXXXXX, the liabilities of DC1 consist of advances from shareholders of $XXXXXXXXXX and advances from DC2 of $XXXXXXXXXX, all of which are loans payable on demand, and other current liabilities in the aggregate amount of approximately $XXXXXXXXXX, and a mortgage payable of $XXXXXXXXXX.

15.   As at XXXXXXXXXX, the balance in DC1’s CDA was $XXXXXXXXXX. As at XXXXXXXXXX, the balance in DC1’s RDTOH account was $XXXXXXXXXX. As at XXXXXXXXXX, the GRIP balance of DC1 was $XXXXXXXXXX.

16.   Historically, DC1 has always reported the income from the Real Estate owned by it as income from an active business, as opposed to income from property. Accordingly, DC1 considers the Real Estate owned by it to be business property for the purposes of the distributions contemplated as part of the Proposed Transactions.

Facts Relating to DC2

17.   DC2 is a CCPC and a TCC. DC2 was formed on XXXXXXXXXX. DC2’s fiscal period and taxation year ends on XXXXXXXXXX.

18.   The authorized capital of DC2 consists of an unlimited number of Class A common shares, Class B common shares, Class C preferred shares, Class D preferred shares, Class E preferred shares, Class F preferred shares, Class G preferred shares, Class H preferred shares and Class I preferred shares.

19.   The only shares of DC2 that are issued and outstanding are the following:

i.    XXXXXXXXXX DC2 Class A shares, XXXXXXXXXX of which are owned by DC1 and XXXXXXXXXX of which are owned by TC1; and
ii.   XXXXXXXXXX DC2 Class C shares, all owned by DC1.

20.   The aggregate PUC of the DC2 Class A shares is $XXXXXXXXXX. The aggregate PUC of the DC2 Class C shares is $XXXXXXXXXX.

21.   DC1 acquired its XXXXXXXXXX DC2 Class A shares on XXXXXXXXXX by way of subscription. The ACB of the DC2 Class A shares to DC1 is approximately $XXXXXXXXXX. The DC2 Class A shares are held by DC1 as capital property and were not acquired in contemplation of the Proposed Transactions.

22.   TC1 acquired its XXXXXXXXXX DC2 Class A shares on XXXXXXXXXX by way of transfer by B. The ACB of the DC2 Class A shares to TC1 is approximately $XXXXXXXXXX. The DC2 Class A shares are held by TC1 as capital property and were not acquired in contemplation of the Proposed Transactions.

23.   DC1 acquired its XXXXXXXXXX DC2 Class C shares on XXXXXXXXXX, by way of subscription. The ACB of the DC2 Class C shares to DC1 is approximately $XXXXXXXXXX. The DC2 Class C shares are held by DC1 as capital property and were not acquired in contemplation of the Proposed Transactions.

24.   DC2 is a corporation engaged in the business of XXXXXXXXXX real estate. DC2’s assets consist primarily of cash, advances to corporate shareholders, and interests in the Real Estate. Immediately prior to the Proposed Transactions, DC2’s main assets will consist of the following:

i.    cash and cash-like assets;
ii.   advances to corporate shareholders in the form of demand loans; and
iii.  its interests in the Real Estate.

25.   The liabilities of DC2 consist of current liabilities in the aggregate amount of approximately $XXXXXXXXXX as at XXXXXXXXXX.

26.   As at XXXXXXXXXX, the balance in DC2’s CDA was $XXXXXXXXXX. As at XXXXXXXXXX the balance in DC2’s RDTOH account was XXXXXXXXXX as a result of a taxable dividend of $XXXXXXXXXX paid in DC2’s taxation year ending XXXXXXXXXX to DC1 and TC1.

27.   Historically, DC2 has always reported the income from the Real Estate owned by it as income from an active business, as opposed to income from property. Accordingly, DC2 considers the Real Estate owned by it to be business property for the purposes of the distributions contemplated as part of the Proposed Transactions.

Facts Relating to Aco

28.   Aco is a CCPC and a TCC. Aco was formed on XXXXXXXXXX. 

29.   Aco has XXXXXXXXXX Class A common shares issued and outstanding, of which XXXXXXXXXX% is owned by DC1 and the other XXXXXXXXXX% is owned by XXXXXXXXXX, an arm’s length third party.

30.   Immediately prior to the Proposed Transactions, Aco’s property will include real property held for development and resale and demand loans receivable from its shareholders.

Facts Relating to TC1

31.   TC1 is a CCPC and a TCC. TC1 was formed on XXXXXXXXXX. TC1’s BN is XXXXXXXXXX. TC1’s fiscal period and taxation year ends on XXXXXXXXXX. TC1’s tax affairs are administered by the XXXXXXXXXX Tax Services Office and its corporate tax returns are filed at the XXXXXXXXXX Taxation Centre.

32.   The authorized capital of TC1 consists of an unlimited number of Class A shares, Class B shares, Class C shares, Class D shares, Class E shares and Class F shares.

33.   The only shares of TC1 that are issued and outstanding are the following:

i.    XXXXXXXXXX TC1 Class A shares, having an aggregate PUC of $XXXXXXXXXX, all owned by B; and
ii.   XXXXXXXXXX Class E shares, all owned by B.

34.   B acquired the XXXXXXXXXX TC1 Class A shares on XXXXXXXXXX, by way of subscription. The ACB of the TC1 Class A shares to B is approximately $XXXXXXXXXX. The TC1 Class A shares are held by B as capital property and were not acquired in contemplation of the Proposed Transactions.

35.   B acquired the XXXXXXXXXX TC1 Class E shares on XXXXXXXXXX, by way of rollover. The TC1 Class E shares are held by B as capital property and were not acquired in contemplation of the Proposed Transactions.

36.   TC1 is an investment holding corporation. TC1’s assets include an investment in shares of DC2 and its interest in the Real Estate. Immediately prior to the Proposed Transactions, TC1’s assets will include the following:

i.    XXXXXXXXXX DC2 Class A shares; and
ii.   its interest in the Real Estate.

Facts Relating to TC2

37.   TC2 is a CCPC and a TCC. TC2 was formed on XXXXXXXXXX, with C as sole director and incorporator. TC2’s BN is XXXXXXXXXX. TC2’s fiscal period and taxation year ends on XXXXXXXXXX. TC2’s tax affairs will be administered by the XXXXXXXXXX Tax Services Office and its corporate tax returns will be filed at the XXXXXXXXXX Taxation Centre.

38.   The authorized capital of TC2 consists of an unlimited number of class A common shares, class B common shares, class A preferred shares, class B preferred shares, class C preferred shares and class D preferred shares.

39.   The only shares of TC2 that are issued and outstanding are 1 TC2 class A share owned by C.

40.   The aggregate PUC of the TC2 class A shares is $XXXXXXXXXX.

41.   C acquired the TC2 class A shares of TC2 on XXXXXXXXXX by way of subscription, in exchange for a subscription price of $XXXXXXXXXX. The ACB of the TC2 class A shares to C is approximately $XXXXXXXXXX. The TC2 Class A shares of TC2 are held by C as capital property.

42.   TC2 is an investment holding corporation. TC2’s assets consist of a nominal amount of cash. Immediately prior to the Proposed Transactions, TC2’s main assets will consist of a nominal amount of cash.

Facts Relating to TC3

43.   TC3 is a CCPC and a TCC. TC3 was formed on XXXXXXXXXX, with A as sole director and incorporator. TC3’s BN is XXXXXXXXXX. TC3’s fiscal period and taxation year ends on XXXXXXXXXX. TC3’s tax affairs will be administered by the XXXXXXXXXX Tax Services Office and its corporate tax returns will be filed at the XXXXXXXXXX Taxation Centre.

44.   The authorized capital of TC3 consists of an unlimited number of class A common shares, class B common shares, class A preferred shares, class B preferred shares, class C preferred shares and class D preferred shares.

45.   The only shares of TC3 that are issued and outstanding are one TC3 class A share, owned by A.

46.   The aggregate PUC of the TC3 class A shares is $XXXXXXXXXX.

47.   A acquired the TC3 class A shares on XXXXXXXXXX by way of subscription, in exchange for a subscription price of $XXXXXXXXXX. The ACB of the TC3 class A shares to A is approximately $XXXXXXXXXX. The TC3 Class A shares are held by A as capital property.

48.   TC3 is an investment holding corporation. TC3’s assets consist of a nominal amount of cash. Immediately prior to the Proposed Transactions, TC3’s main assets will consist of a nominal amount of cash.

Facts Relating to TC4

49.   TC4 is a CCPC and a TCC. TC4 was formed on XXXXXXXXXX, with D as sole director and incorporator. TC4’s BN is XXXXXXXXXX. TC4’s fiscal period and taxation year ends on XXXXXXXXXX. TC4’s tax affairs will be administered by the XXXXXXXXXX Tax Services Office and its corporate tax returns will be filed at the XXXXXXXXXX Taxation Centre.

50.   The authorized capital of TC4 consists of an unlimited number of class A common shares, class B common shares, class A preferred shares, class B preferred shares, class C preferred shares and class D preferred shares.

51.   The only shares of TC4 that are issued and outstanding are one TC4 class A share, owned by D.

52.   The aggregate PUC of the TC4 class A shares is $XXXXXXXXXX.

53.   D acquired the TC4 class A share on XXXXXXXXXX, by way of subscription, in exchange for a subscription price of $XXXXXXXXXX. The ACB of the TC4 class A share to D is approximately $XXXXXXXXXX. The TC4 Class A share is held by D as capital property.

54.   TC4 is an investment holding corporation. TC4’s assets consist of a nominal amount of cash. Immediately prior to the Proposed Transactions, TC4’s main assets will consist of a nominal amount of cash.

Significant Transactions

55.   The following are all significant transactions which have been completed or which are intended to be completed prior to the completion of the Proposed Transactions and independently from the Proposed Transactions:

i.    on XXXXXXXXXX, DC2 sold an immovable property XXXXXXXXXX, to an unrelated third party, for proceeds of $XXXXXXXXXX. Upon this sale, DC2 realized a capital gain of $XXXXXXXXXX and an amount of $XXXXXXXXXX as recaptured depreciation pursuant to subsection 13(1);

ii.   DC1 will sell a XXXXXXXXXX% undivided interest in a property forming part of the Real Estate, namely the property XXXXXXXXXX, to B for cash. Upon this sale, DC1 expects to realize a capital gain of approximately $XXXXXXXXXX and an amount of approximately $XXXXXXXXXX as recaptured depreciation pursuant to subsection 13(1). If necessary for limited liability purposes, B will transfer this interest in XXXXXXXXXX to a newly formed limited partnership for cash. In order to unite the ownership of XXXXXXXXXX in one entity, TC1 may transfer the interest it already owns in XXXXXXXXXX to the partnership in exchange for limited partnership units and file a related election under subsection 97(2). The partnership will be formed by B with the subscription of limited partnership units for cash sufficient to purchase the XXXXXXXXXX property, and a newly formed corporation resident in Canada and wholly owned by B as general partner with a XXXXXXXXXX% interest acquired for a nominal amount of cash. The partnership will then use the cash from B’s subscription to acquire B’s interest in XXXXXXXXXX; and

iii.  DC1 will repay shareholder loans in the aggregate amount of $XXXXXXXXXX (a current liability).

PROPOSED TRANSACTIONS

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

Transfer of shares of DC1

56.   The following share transfers will be made:

i.    B will transfer his XXXXXXXXXX DC1 Class A shares to TC1 in exchange for XXXXXXXXXX TC1 class C shares. Immediately before, at the time of, and immediately after, the transfer described in this paragraph (but subject to the acquisition by the Trust of shares of the capital stock of TC1 as set out in Paragraph 58), B will own all of the issued and outstanding shares of the capital stock of TC1. Following such transfer, B will not own any shares of the capital stock of DC1.

i.    B and TC1 will jointly elect, in prescribed form and within the time referred to in subsection 85(6), to have the provisions of subsection 85(1) apply to the transfer of the XXXXXXXXXX DC1 Class A shares transferred by B to TC1. The agreed amount in respect of the shares so transferred will be an amount not less than the lesser of the amounts described in subparagraphs 85(1)(c.1)(i) and (ii) and will not exceed the FMV thereof.

ii.   The amount to be added to the corporate stated capital account maintained for the TC1 class C 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).

ii.   C will transfer his XXXXXXXXXX DC1 Class A shares to TC2 in exchange for XXXXXXXXXX TC2 class A shares. Immediately before, at the time of, and immediately after, the transfer described in this paragraph, C will own all of the issued and outstanding shares of the capital stock of TC2. Following such transfer, C will not own any shares of the capital stock of DC1.

i.    C and TC2 will jointly elect, in prescribed form and within the time referred to in subsection 85(6), to have the provisions of subsection 85(1) apply to the transfer of the XXXXXXXXXX DC1 Class A shares  by C to TC2. The agreed amount in respect of the shares so transferred will be an amount not less than the lesser of the amounts described in subparagraphs 85(1)(c.1)(i) and (ii) and will not exceed the FMV thereof.

ii.   The amount to be added to the corporate stated capital account maintained for the TC2 class A 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).

iii.  A will transfer his XXXXXXXXXX DC1 Class A shares to TC3 in exchange for XXXXXXXXXX TC3 class A shares. Immediately before, at the time of, and immediately after, the transfer described in this paragraph, A will own all of the issued and outstanding shares of the capital stock of TC3. Following such transfer, A will not own any shares of the capital stock of DC1.

i.    A and TC3 will jointly elect, in prescribed form and within the time referred to in subsection 85(6), to have the provisions of subsection 85(1) apply to the transfer of the XXXXXXXXXX DC1 Class A shares by A to TC3. The agreed amount in respect of the shares so transferred will be an amount not less than the lesser of the amounts described in subparagraphs 85(1)(c.1)(i) and (ii) and will not exceed the FMV thereof.

ii.   The amount to be added to the corporate stated capital account maintained for the class A common shares in the capital of TC3 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).

iv.   D will transfer his XXXXXXXXXX DC1 Class A shares to TC4 in exchange for XXXXXXXXXX TC4 class A shares. Immediately before, at the time of, and immediately after, the transfer described in this paragraph, D will own all of the issued and outstanding shares of the capital stock of TC4. Following such transfer, D will not own any shares of the capital stock of DC1.

i.    D and TC4 will jointly elect, in prescribed form and within the time referred to in subsection 85(6), to have the provisions of subsection 85(1) apply to the transfer of the XXXXXXXXXX DC1 Class A shares by D to TC4. The agreed amount in respect of the shares so transferred will be an amount not less than the lesser of the amounts described in subparagraphs 85(1)(c.1)(i) and (ii) and will not exceed the FMV thereof.

ii.   The amount to be added to the corporate stated capital account maintained for the TC4 class A shares in the capital of TC4 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).

57.   TC1 will amend its articles to create TC1 Class G shares.

58.   The Trust will transfer its XXXXXXXXXX DC1 Class F shares to TC1 in exchange for XXXXXXXXXX TC1 class G shares. Immediately after the transfer described in this paragraph, the Trust and B will own all of the issued and outstanding shares of the capital stock of TC1. Following such transfer, the Trust will not directly own any shares of the capital stock of DC1.

i.    The Trust (by its trustees) and TC1 will jointly elect, in prescribed form and within the time referred to in subsection 85(6), to have the provisions of subsection 85(1) apply to the transfer of the XXXXXXXXXX DC1 Class F shares  by the Trust to TC1. The agreed amount in respect of the shares so transferred will be an amount not less than the lesser of the amounts described in subparagraphs 85(1)(c.1)(i) and (ii) and will not exceed the FMV thereof.

ii.   The amount to be added to the corporate stated capital account maintained for the TC1 class G 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, having regard to paragraph 84.1(1)(a).

Amalgamation of DC1 and DC2 to form DC-Amalco

59.   DC1 will be continued under the XXXXXXXXXX and DC1 and DC2 will be amalgamated to form DC-Amalco. The purpose of the amalgamation is to create a single distributing corporation which can distribute each type of asset pro-rata to its shareholders. DC-Amalco will be a CCPC and a TCC. DC-Amalco’s fiscal period and taxation year end will be the same as that of DC1. On the amalgamation, all property (except amounts receivable from any predecessor corporation or shares of the capital stock of any predecessor corporation) of the predecessor corporations immediately before the amalgamation will become property of DC-Amalco. All liabilities (except amounts payable to any predecessor corporation) of the predecessor corporations immediately before the amalgamation will become liabilities of DC-Amalco.

The authorized capital of DC-Amalco will consist of an unlimited number of class A common shares, class B common shares, class A preferred shares, class B preferred shares, class C preferred shares, class D preferred shares and class E preferred shares.

For greater certainty, none of the activities of DC1 or DC2 will be interrupted by, before or after this amalgamation.

60.   The shares held by the former shareholders of DC1 and DC2 in such entities will be converted into shares of DC-Amalco upon the amalgamation as follows:

Share
holder              Shares of DC1 or DC2                                 Shares of DC-Amalco

TC1                 XXXX DC1 Class A shares                           XXXX DC-Amalco class A shares
                        XXXX DC1 Class F shares                           XXXX DC-Amalco class D shares
                        XXXX DC2 Class A common shares            XXXX DC-Amalco class E shares
TC2                 XXXX DC1 Class A shares                           XXXX DC-Amalco class A shares
TC3                 XXXX DC1 Class A shares                           XXXX DC-Amalco class A shares
TC4                 XXXX DC1 Class A shares                           XXXX DC-Amalco class A shares
E                      XXXX DC1 Class F shares                           XXXX DC-Amalco class D shares
DC1                 XXXX DC2 Class A shares                           N/A (shares cancelled)  
                        XXXX DC2 Class C shares                           N/A (shares cancelled)

Butterfly Distribution of DC-Amalco’s Assets

61.   TC1, TC2, TC3 and TC4 will each incorporate a wholly-owned subsidiary corporation, respectively SubTC1, SubTC2, SubTC3 and SubTC4. SubTC1, SubTC2, SubTC3 and SubTC4 will be a CCPC and a TCC and the authorized share capital of each will include:

i.    an unlimited number of common shares; and
ii.   an unlimited number of preferred shares.

62.   [Reserved]

63.   Immediately prior to the transfers of property described in Paragraph 65, the property of DC-Amalco will be classified into three types of property for the purposes of the transfers described in Paragraph 65, and the aggregate net FMV of each type of property in the following manner:

a)    The property of each of DC-Amalco and any corporation or partnership referred to in b) (in this letter, Aco) will be classified into the following types of property:

i.    cash or near-cash property, comprising of all the current assets, including any cash, term or other deposits, accounts receivable and prepaid expenses;

ii.   investment property, comprising of 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 a specified investment business, including for greater certainty, DC-Amalco’s portfolio of marketable securities; and

iii.  business property, comprising 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 a business (other than a specified investment business), including, for greater certainty, the Real Estate and the real property owned by Aco.

For greater certainty:

iv.   tax accounts or other tax related amounts, such as the balance of non-capital losses, net capital losses, CDA, GRIP and RDTOH will not be considered property;

v.    advances that are payable on demand or that are due within the next XXXXXXXXXX months will be considered cash or near-cash property;

vi.   no amount will be considered to be a liability unless it represents a true legal liability which is capable of quantification;

vii.  the amount of any deferred tax will not be considered to be a property or a liability, as the case may be;

viii. any amount of taxes payable pursuant to an assessment or reassessment (whether such assessments or reassessments have been objected to or not) and any amount of taxes that is the subject of a proposed assessment (to the extent that any such amount is accrued as a liability) will be classified as a current liability and will, to the extent that any objection in respect of such unpaid taxes has not been resolved, be deducted from the net FMV of the cash or near cash property; and

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

b)    the aggregate net FMV of each type of property of a corporation or partnership will be determined as follows:

i.    an amount equal to the result of the multiplication of the FMV of its equity or receivable in a corporation or partnership over which it has the ability to exercise significant influence by the fraction corresponding to the proportion that the net FMV of the corresponding type of property of such corporation or partnership represents of the aggregate net FMV of all the property owned by such corporation or partnership (as determined in accordance with the methodologies described herein); for greater certainty, the amount will be negative if the net FMV of the corresponding type of property of such corporation or partnership is negative and the resulting negative amount might result in a negative net FMV;

ii.   its current liabilities, which include loans payable on demand, will reduce the aggregate FMV of its cash or near-cash properties in the proportion that the FMV of each such property is of the aggregate FMV of its cash or near-cash properties; if the aggregate amount of its current liabilities exceed the aggregate FMV of its cash or near-cash properties, the aggregate net FMV of its cash or near-cash properties will be negative by such excess;

iii.  its accounts receivable, trade receivables, inventories and prepaid expenses will be reclassified as business property (and not cash or near cash property) to the extent that they will be collected, sold or used in the ordinary course of the business to which such property relates and that the aggregate FMV of the remaining cash or near-cash properties does not become negative; and

iv.   a liability, other than a current liability, that relates to a particular property will reduce the FMV of the particular property (and effectively the aggregate FMV of the type of properties to which the particular property belongs); if the amount of that liability exceeds the FMV of the property, the aggregate FMV of the properties of the same type will be reduced by that excess and the net FMV of property of such type may become negative;

c)    the aggregate net FMV of each type of property owned by DC-Amalco will be determined as described in b)(i) to (iv) above; for greater certainty, where the aggregate net FMV of a type of property of a corporation or partnership over which it has the ability to exercise significant influence and such corporation or partnership is negative and DC-Amalco owns equity or a receivable in that corporation or partnership, the negative amount will reduce the aggregate FMV of the corresponding type of property of DC-Amalco and if the aggregate net FMV of a type of property of DC-Amalco is negative, such negative amount will reduce the aggregate net FMV of its other types of property on the basis of the relative aggregate net FMV of such type of property.

64.   Based on the methodologies described above, it is anticipated that DC-Amalco will have three types of property at the time of transfers described in Paragraph 65.

65.   DC-Amalco will contemporaneously transfer to each of SubTC1, SubTC2, SubTC3 and SubTC4 a pro rata portion of the net FMV of each type of property owned by DC-Amalco, such that immediately following such property transfers and liability assumptions, the net FMV of each of the three types of property of DC-Amalco so transferred to each of SubTC1, SubTC2, SubTC3 and SubTC4 will, for greater certainty, approximate that 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 owned at that time by DC-Amalco;

B is the FMV, immediately before the transfer, of all of the shares of the capital stock of DC-Amalco owned, at that time, by TC1 (for the transfer made to SubTC1), TC2 (for the transfer made to SubTC2), TC3 (for the transfer made to SubTC3) and TC4 (for the transfer made to SubTC4), respectively; and

C is the FMV, immediately before the transfer, of all the issued and outstanding shares of the capital stock of DC-Amalco at that time.

For greater certainty, the portion of the net FMV of each type of property that is transferred to SubTC1, SubTC2, SubTC3 and SubTC4, as described in this Paragraph, will represent respectively TC1, TC2, TC3 and TC4’s pro rata share of the net FMV of that type of property of DC-Amalco.

For the purposes of this paragraph and Paragraph 66 below, the expression “approximate that proportion” means that the discrepancy from that proportion, if any, will not exceed XXXXXXXXXX percent (XXXXXXXXXX%), determined as a percentage of the net FMV of each type of property, that SubTC1, SubTC2, SubTC3 and SubTC4, as the case may be, will receive as compared to what it would have received had it received the appropriate pro rata share that TC1, TC2, TC3 and TC4, as the case may be, had in the net FMV of that type of property of DC-Amalco.

66.   Immediately following the transfer of properties by DC-Amalco as described in Paragraph 65, the net FMV of each type of property remaining in DC-Amalco, will be equal to or will approximate that proportion of the net FMV of that particular type of property of DC-Amalco immediately before such transfer of properties described herein that:

a)    the aggregate FMV, immediately before the transfer, of all of the DC-Amalco shares owned by E at that time,

is of

b)    the aggregate FMV, immediately before the transfer, of all the issued and outstanding shares of DC-Amalco at that time.

67.   As consideration for the transfer of properties by DC-Amalco as described in Paragraph 65, each of SubTC1, SubTC2, SubTC3 and SubTC4, as the case may be, will:

a)    assume an appropriate amount of liabilities of DC-Amalco (so that on a net basis SubTC1, SubTC2, SubTC3 and SubTC4, as the case may be, will receive the pro rata share of TC1, TC2, TC3 and TC4, as the case may be, of each type of property owned by DC-Amalco); and

b)    issue to DC-Amalco a number of SubTC1 Special Shares, SubTC2 Special Shares, SubTC3 Special Shares and SubTC4 Special Shares, as the case may be, having an aggregate redemption amount and aggregate FMV equal to the aggregate FMV of the properties received by SubTC1, SubTC2, SubTC3 and SubTC4, as the case may be, less the amount of the liabilities of DC-Amalco assumed by SubTC1, SubTC2, SubTC3 and SubTC4, as the case may be, as described in (a) above.

The liabilities assumed by each of the SubTCs will not exceed the aggregate of the agreed amounts in respect of such properties.

The amount to be added to the respective corporate stated capital accounts maintained in respect of the SubTC1 Special Shares, the SubTC2 Special Shares, the SubTC3 Special Shares the SubTC4 Special Shares, as the case may be, will not exceed the maximum amount that could be added to the PUC of the shares, without resulting in an adjustment under subsection 85(2.1).

68.   Each of DC-Amalco and SubTC1, DC-Amalco and SubTC2, DC-Amalco and SubTC3, and DC-Amalco and SubTC4, as the case may be, will jointly elect, in prescribed form and within the time referred to in subsection 85(6), to have the provisions of subsection 85(1) apply to the transfer of each eligible property transferred by DC-Amalco to SubTC1, SubTC2, SubTC3 and SubTC4, respectively. The agreed amount in respect of each eligible property so transferred will be as follows:

a)    in the case of capital property (other than depreciable property of a prescribed class), an amount not less than the lesser of the amounts described in subparagraphs 85(1)(c.1)(i) and (ii);

b)    in the case of depreciable property of a prescribed class, an amount not less than the least of the amounts described in subparagraphs 85(1)(e)(i), (ii) and (iii); and

c)    in the case of eligible capital property, an amount not less than the least of the amounts described in subparagraphs 85(1)(d)(i), (ii) and (iii).

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).

69.   SubTC1, SubTC2, SubTC3 and SubTC4 will redeem the SubTC1 Special Shares, the SubTC2 Special Shares, the SubTC3 Special Shares and the SubTC4 Special Shares held by DC-Amalco, respectively, and will each issue to DC-Amalco, in full payment of the aggregate redemption price payable therefor, a demand, non-interest bearing, Canadian dollar denominated, promissory note having a principal amount and FMV equal to the redemption amount of the preferred shares so redeemed (the “SubTC1 Note”, the “SubTC2 Note”, the “SubTC3 Note” and the “SubTC4 Note”, respectively).

70.   The SubTC will be wound-up into their parent corporations.  In particular,

a)    SubTC1 will be wound-up into its parent corporation, TC1. As a consequence, SubTC1’s assets will be transferred to TC1 and TC1 will assume SubTC1’s liabilities, including the SubTC1 Note.

b)    SubTC2 will be wound-up into its parent corporation, TC2. As a consequence, SubTC2’s assets will be transferred to TC2 and TC2 will assume SubTC2’s liabilities, including the SubTC2 Note.

c)    SubTC3 will be wound-up into its parent corporation, TC3. As a consequence, SubTC3’s assets will be transferred to TC3 and TC3 will assume SubTC3’s liabilities, including the SubTC3 Note.

d)    SubTC4 will be wound-up into its parent corporation, TC4. As a consequence, SubTC4’s assets will be transferred to TC4 and TC4 will assume SubTC4’s liabilities, including the SubTC4 Note.

71.   DC-Amalco will purchase for cancellation all the shares in its capital that are owned by TC1, TC2, TC3 and TC4 and, in consideration therefor, DC-Amalco will issue to TC1, TC2, TC3 and TC4 a demand, non-interest bearing, Canadian dollar denominated, promissory note having a principal amount and FMV equal to the aggregate FMV of DC-Amalco shares so repurchased (respectively the “DC-TC1 Note”, the “DC-TC2 Note”, the “DC-TC3 Note” and the “DC-TC4 Note”).

72.   The Notes issued on the redemption and purchase for cancellation of shares as described in Paragraphs 69 and 71 above will be settled in the following manner:

a)    The SubTC1 Note and the DC-TC1 Note will be settled in full through the set-off of such notes in full satisfaction of the respective obligations of SubTC1, TC1 and DC-Amalco thereunder and each such note will be extinguished and cancelled.

b)    The SubTC2 Note and the DC-TC2 Note will be settled in full through the set-off of such notes in full satisfaction of the respective obligations of SubTC2, TC2 and DC-Amalco thereunder and each such note will be extinguished and cancelled.

c)    The SubTC3 Note and the DC-TC3 Note will be settled in full through the set-off of such notes in full satisfaction of the respective obligations of SubTC3, TC3 and DC-Amalco thereunder and each such note will be extinguished and cancelled.

d)    The SubTC4 Note and the DC-TC4 Note will be settled in full through the set-off of such notes in full satisfaction of the respective obligations of SubTC4, TC4 and DC-Amalco thereunder and each such note will be extinguished and cancelled.

ADDITIONAL INFORMATION

73.   E will be the only remaining shareholder of DC-Amalco after the Proposed Transactions.

74.   With respect to any deemed dividends arising from the purchases for cancellation described in Paragraph 71, DC-Amalco may, on (or before) the date of such purchases for cancellation:

a)    make an election under 83(2) to deem, to the extent of the unused positive amount of its CDA, such deemed dividends to be capital dividends; or

b)    designate to the extent of its GRIP balance, such deemed dividends to constitute “eligible dividends”, the whole in compliance with the provisions of subsection 89(14).

75.   DC-Amalco will, to the extent deemed necessary or useful by the parties, continue to hold title as the registered owner of the Real Estate, as agent and mandatary for the beneficial owner(s) thereof, but may also transfer such registered title to any or all of the Real Estate to the beneficial owner(s) thereof or to one or more nominee corporations all of the shares of the capital stock of which are owned by DC-Amalco and which shall act solely as agent and mandatary for the beneficial owner(s) thereof. In the latter case, the issued and outstanding shares of the capital stock of a nominee corporation may also, at a later time, be transferred by DC-Amalco to the beneficial owner(s) on behalf of which such nominee holds registered title to property forming part of the Real Estate.

76.   Some of the properties owned by DC-Amalco prior to the transfer described in Paragraph 65 might be co-owned by any of TC1, TC2, TC3 and TC4 following such transfer.  The co-owners will enter into a co-ownership agreement. The co-ownership agreement will indicate that: (i) the co-owners do not create a partnership in respect of the co-owned property; (ii) no co-owners can act on behalf of another co-owner without obtaining prior consent from that co-owner; (iii) each co-owner has a well-defined separation of interests in and ownership of the properties subject to the co-ownership agreement; (iv) a co-owner cannot charge and/or grant security over the co-owned properties as a whole (i.e., the other co-owners interest) as each co-owner only has the right to deal with its own interest in the co-owned properties; (v) profit and loss is calculated by each co-owner individually and there is no mechanism in the agreement that deals with the allocation of profit or loss; and (vi) the liability of the co-owners is limited to their own expenses. The co-owners will enter into a property management agreement governing the day-to-day management of the property for a fee. The property manager may be one of the co-owners or a party related to such co-owner.

77.   A portion not exceeding XXXXXXXXXX% of the FMV of the net assets (other than money and indebtedness that is not convertible into other property) ultimately received by TC1, TC2, TC3 and TC4 may be sold by each of them to persons that are not related to the seller.

78.   The share provisions relating to the SubTC1 Special Shares, the SubTC2 Special Shares, the SubTC3 Special Shares and the SubTC4 Special Shares will provide that in the event that it is subsequently held or determined by a final decision of any competent authority or by a negotiated settlement with any revenue authority that the aggregate net FMV of any property that is relevant to the determination of the redemption price of such shares is different than the FMV assigned thereto, the redemption amounts of such shares shall be automatically adjusted retroactively, nunc pro tunc, to reflect the aggregate net FMV so held or determined.

79.   Except as described in this letter, no liabilities have been or will be incurred by, and no assets have been or will be acquired by or disposed of by any of DC1, DC2, DC-Amalco, Aco, TC1, TC2, TC3 and TC4 in contemplation of or before the Proposed Transactions.

80.   Except as described in this letter, no property transferred to any corporation in the course of the reorganization contemplated herein will, thereafter, be transferred directly or indirectly, in the course of that reorganization to an unrelated person.

81.   None of the shares of DC1, DC2, DC-Amalco or SubTC1, SubTC2, SubTC3, SubTC4, TC1, TC2, TC3 or TC4 has been, or will be, at any time during the implementation of the Proposed Transactions:

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

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

c)    the subject of a dividend rental arrangement as defined in subsection 248(1).

82.   None of the relevant parties is, or will be at the time of the Proposed Transactions described herein, a specified financial institution as defined in subsection 248(1).

PURPOSE OF THE PROPOSED TRANSACTIONS

83.   The purpose of the Proposed Transactions is to allow B, C, D, A, E and the Trust to separate their respective indirect economic interests in the assets of DC1 and DC2 from those of one another in order to pursue independent indirect ownership of such assets through TC1, TC2, TC3 and TC4 (as the case may be) and, in the case of E, DC-Amalco.  Subject to Paragraph 77, the Proposed Transactions are not carried out in contemplation of any sale to an unrelated person.

RULINGS

Provided that the above statements of Facts, Proposed Transactions, Additional Information and Purpose of the Proposed Transactions are accurate and constitute complete disclosure of all relevant information, 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 the transfers described in Paragraphs 56, 58 and 64 such that the agreed amount in respect of each transfer of Eligible property will be deemed to be the transferor’s proceeds of disposition and the transferee’s cost thereof pursuant to paragraph 85(1)(a).  For greater certainty, paragraph 85(1)(e.2) will not apply to such transfer.

B.    On the amalgamation of DC1 and DC2 to form DC-Amalco described in Paragraphs 59 and 60:

a)    The provisions of subsection 87(1) will apply;

b)    Provided the shares of the capital stock of DC1 and DC2 were capital property to the shareholders thereof immediately before the amalgamation, the provisions of paragraphs 87(4)(a) and 87(4)(b) will apply;

c)    Provided that the FMV of the shares of the capital stock of DC-Amalco immediately after the amalgamation received in exchange for the shares of either DC1 or DC2 by its shareholder immediately before the amalgamation, paragraphs 87(4) (c), 87(4)(d) and 87(4)(e) will not apply.

C.    As a result of the redemption by SubTC1 of the SubTC1 Special Shares, the redemption by SubTC2 of its SubTC2 Special Shares, the redemption by SubTC3 of its SubTC3 Special Shares and the redemption by SubTC4 of its SubTC4 Special Shares, each described in Paragraph 69, by virtue of subsection 84(3),

a)    SubTC1 will be deemed to have paid, and DC-Amalco will be deemed to have received, a taxable dividend equal to the amount by which the amount paid by SubTC1 in respect of the redemption of the SubTC1 Special Shares owned by DC-Amalco exceeds the PUC of such SubTC1 Special Shares immediately before the redemption;

b)    SubTC2 will be deemed to have paid, and DC-Amalco will be deemed to have received, a taxable dividend equal to the amount by which the amount paid by SubTC2 in respect of the redemption of its SubTC2 Special Shares owned by DC-Amalco exceeds the PUC of such SubTC2 Special Shares immediately before the redemption;

c)    SubTC3 will be deemed to have paid, and DC-Amalco will be deemed to have received, a taxable dividend equal to the amount by which the amount paid by SubTC3 in respect of the redemption of its SubTC3 Special Shares owned by DC-Amalco exceeds the PUC of such SubTC3 Special Shares immediately before the redemption; and

d)    SubTC4 will be deemed to have paid, and DC-Amalco will be deemed to have received, a taxable dividend equal to the amount by which the amount paid by SubTC4 in respect of the redemption of its SubTC4 Special Shares owned by DC-Amalco exceeds the PUC of such SubTC4 Special Shares immediately before the redemption.

D.    As a result of the purchase for cancellation by DC-Amalco of the shares in its capital owned by TC1, TC2, TC3 and TC4, described in Paragraph 71, by virtue of subsection 84(3),

a)    DC-Amalco will be deemed to have paid, and TC1 will be deemed to have received, a taxable dividend equal to the amount by which the amount paid by DC-Amalco in respect of the purchase for cancellation of the shares in the capital of DC-Amalco owned by TC1 exceeds the PUC of such shares immediately before such purchase for cancellation.

b)    DC-Amalco will be deemed to have paid, and TC2 will be deemed to have received, a taxable dividend equal to the amount by which the amount paid by DC-Amalco in respect of the purchase for cancellation of the shares in the capital of DC-Amalco owned by TC2 exceeds the PUC of such shares immediately before such purchase for cancellation;

c)    DC-Amalco will be deemed to have paid, and TC3 will be deemed to have received, a taxable dividend equal to the amount by which the amount paid by DC-Amalco in respect of the purchase for cancellation of the shares in the capital of DC-Amalco owned by TC3 exceeds the PUC of such shares immediately before such purchase for cancellation; and

d)    DC-Amalco will be deemed to have paid, and TC4 will be deemed to have received, a taxable dividend equal to the amount by which the amount paid by DC-Amalco in respect of the purchase for cancellation of the shares in the capital of DC-Amalco owned by TC4 exceeds the PUC of such shares immediately before such purchase for cancellation

E.    The taxable dividends described in Rulings C and D above:

a)    will be included in the recipient's income pursuant to subsection 82(1) and paragraph 12(1)(j);

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

c)    will be excluded from the proceeds of disposition of the shares so redeemed or purchased for cancellation, 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 be subject to tax under Part IV except as provided in paragraph 186(1)(b);

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

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

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

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

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

d)    an acquisition of property in the circumstances described in subparagraph 55(3.1)(b)(iii).

which has not been described in the Proposed Transactions, then by virtue of paragraph 55(3)(b), subsection 55(2) will not apply to the portion of the dividends described in Rulings C and D above that constitute taxable dividends.  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 the Notes as described in Paragraph 72 will not, in and of itself, give rise to a Forgiven Amount, and neither DC-Amalco, TC1, TC2, TC3 or TC4 will realize a gain or incur a loss as a result of such set-off and cancellation.

H.    Subject to subsection 69(11), the provisions of subsection 88(1) will apply to the windings-up of SubTC1, SubTC2, SubTC3 and SubTC4, as described in Paragraphs 70.

I.    Provided that the condition specified in paragraph 1100(2.2)(f) of the Regulations is satisfied, the relevant provisions of paragraph 1100(2.2)(h) to (k) of the Regulations will apply in respect of the acquisition of depreciable property of a prescribed class to be transferred by DC-Amalco to SubTC1, SubTC2, SubTC3 and SubTC4 on the transfer described in Paragraph 65 and, subsequently, by TC1, TC2, TC3 and TC4 on the windings-up described in Paragraph 70.

J.    Provided that a Rental property of DC-Amalco that is included in the depreciable property and will constitute Rental property to SubTC1, SubTC2, SubTC3 and SubTC4 on the transfer described in Paragraph 65 and subsequently to TC1, TC2, TC3 and TC4 and on a winding-up described in Paragraph 70, and provided that each such property was a Rental property included in a prescribed class of such corporation other than a separate class prescribed under paragraph 1101(1)(ac) of the Regulations, each such property will be deemed not to be a property of a separate class prescribed under paragraph 1101(1)(ac) of the Regulations to that corporation by reason of the application of subsection 1101(1ad) of the Regulations.

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

L.    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 above.

These rulings are given subject to the limitations and qualifications set forth in Information Circular 70-6R6 issued on August 29, 2014, and are binding on the CRA, provided that the Proposed Transactions are completed within 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, CDA or RDTOH of any corporation; or

c)    any other tax consequence relating to the Facts, Proposed Transactions, Additional Information or any transaction or event taking place either prior to the Proposed Transactions or subsequent to the Proposed Transactions, whether described in this letter or not, other than those specifically described in the rulings given above, including whether any of the Proposed Transactions would also be included in a series of transactions or events that includes other transactions or events that are not described in this letter.

Nothing in this letter should be construed as a confirmation, express or implied, that, for the purpose of any of the rulings given above, any adjustment to the FMV of the properties transferred or the redemption amount of the shares issued as consideration, whether pursuant to a price adjustment clause or otherwise, will be effective retroactively to the time of the transfer and issuance of shares.  Furthermore, none of the rulings given in this letter are intended to apply to or in the event of the operation of a price adjustment clause, since such adjustment will be due to circumstances that do not constitute proposed transactions that are seriously contemplated.  The general position of the CRA with respect to price adjustment clauses is stated in Income Tax Folio S4-F3-C1, Price Adjustment Clauses, which replaces and cancels Interpretation Bulletin IT-169.

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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