2014-0554231R3 Split-up Butterfly

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

Position: Yes.

Reasons: The proposed transaction meets the statutory requirements.

Author: XXXXXXXXXX
Section: 55(2), 55(3)(b)

XXXXXXXXXX
                                               2014-055423

XXXXXXXXXX, 2015

Dear XXXXXXXXXX:

Re:   Advance Income Tax Ruling – XXXXXXXXXX

This is in reply to your letter of XXXXXXXXXX in which you requested an advance income tax ruling on behalf of the above-noted taxpayers.  We also acknowledge the information provided by you in the e-mails of XXXXXXXXXX and during various telephone conversations in connection with your ruling request (XXXXXXXXXX).

We understand that to the best of your knowledge and that of the taxpayers involved, none of the issues described herein is:

(i)   dealt with in an earlier return of the taxpayers or a related person,

(ii)  being considered by a tax services office or taxation centre in connection with a previously filed tax return of the taxpayers or a related person,

(iii) under objection by the taxpayers or a related person,

(iv)  before the courts or if a judgment has been issued, the time limit for appeal to a higher court has expired, or

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

Unless otherwise stated, all references to a statute are to 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 unless otherwise expressly stated, every reference to a part, section or subsection, paragraph or subparagraph and clause or subclause is a reference to the relevant provision of the Act.

Unless otherwise indicated, all references to monetary amounts are in Canadian dollars.

Throughout this letter, except in Paragraph 44, the corporate and individual taxpayers will be referred to as follows:

(a)   “A” refers to XXXXXXXXXX (sibling of B);

(b)   “B” refers to XXXXXXXXXX (sibling of A);

(c)   “DC” refers to XXXXXXXXXX;

(d)   “TC1” refers to a corporation to be incorporated by A under the Canada Business Corporations Act of which A will be the only shareholder, as described in Paragraph 12;

(e)   “TC2” refers to a corporation to be incorporated by B under the Canada Business Corporations Act of which B will be the only shareholder, as described in Paragraph 12;

(f)   “TCs” refers to TC1 and TC2.

DEFINITIONS

      In this ruling, unless otherwise noted, the following terms have the meaning specified herein:

(a)   “ACB” has the meaning assigned to the expression “adjusted cost base” in  section 54;

(b)   “agreed amount” has the meaning assigned by subsection 85(1);

(c)   “arm’s length” has the meaning assigned by subsection 251(1), as modified, for the purposes of section 55, by paragraph 55(5)(e);

(d)   “capital dividend” means a dividend to which subsection 83(2) applies;

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

(f)   “CCPC” has the meaning assigned to the expression “Canadian-controlled private corporation” in subsection 125(7);

(g)   “CDA” has the meaning assigned to the expression “capital dividend account” in subsection 89(1);

(h)   “Class A shares” and “Class E shares” have the meaning assigned in Paragraph 12;

(i)   “Class E redemption price” means the amount for which the Class E shares of the capital stock of the TCs will be redeemed as described in Paragraph 22;

(j)   “cost amount” has the meaning assigned by subsection 248(1);

(k)   “CRA” means the Canada Revenue Agency;

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

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

(n)   “distribution property” has the meaning assigned in Paragraph 21;

(o)   “dividend refund” has the meaning assigned to that expression in subsection 129(1);

(p)   “dividend rental arrangement” has the meaning assigned by subsection 248(1);

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

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

(s)   “excess unallocated liability” has the meaning assigned in Paragraph 20 of this ruling request;

(t)   “FMV” means fair market value;

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

(v)   “forgiven amount” has the meaning assigned by subsections 80(1) or 80.01(1);

(w)   “GRIP” has the meaning assigned to the expression “general rate income pool” in subsection 89(1);

(x)   “guarantee agreement” has the meaning assigned by subsection 112(2.2);

(y)   “ITAR” means the Income Tax Application Rules;

(z)   “Paragraph” refers to a numbered paragraph in this letter;

(aa)  “pre-1972 CSOH” means “pre-1972 capital surplus on hand” as that expression is defined in subsection 88(2.1);

(bb)  “principal amount” has the meaning assigned by subsection 248(1);

(cc)  “proceeds of disposition” has the meaning assigned by section 54;

(dd)  “Proposed Transactions” means the transactions described in Paragraphs 12 to 35;

(ee)  “PUC” has the meaning assigned to the expression “paid-up capital” in subsection 89(1);

(ff)  “RDTOH” means “refundable dividend tax on hand” within the meaning assigned by subsection 129(3);

(gg)  “Redemption Note” or “Redemption Notes” have the meaning assigned in Paragraph 25;

(hh)  “related person” means, in relation to a particular person, another person who is related to the particular person by virtue of subsection 251(2), as modified, for the purposes of section 55, by paragraph 55(5)(e);

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

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

(kk)  “short-term preferred shares” has the meaning assigned by subsection 248(1);

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

(mm)  “TCC” has the meaning assigned to the expression “taxable Canadian corporation” in subsections 89(1);

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

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

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

(qq)  “term preferred share” has the meaning assigned by subsection 248(1).  

FACTS

1.    DC was incorporated by letters patent under XXXXXXXXXX.  DC was continued under XXXXXXXXXX and it is currently governed by the Business Corporations Act (XXXXXXXXXX).  DC engages in XXXXXXXXXX activities.

2.    DC is and will be at any relevant time and for all purposes of the Act, a CCPC and a TCC.

3.    The authorized share capital of DC consists of:

      (a)   an unlimited number of voting common shares without nominal or par value;

   (b)   an unlimited number of Class “A” preferred shares, which are non-voting, entitled to an annual non-cumulative dividend of $XXXXXXXXXX per share in preference to the common shares and thereafter entitled to discretionary dividends pari passu with the common shares, and redeemable for the amount paid thereon.

    (c)   an unlimited number of Class “B” preferred shares, which are non-voting, entitled in priority to the common and Class “A” preferred shares to a fixed non-cumulative dividend of XXXXXXXXXX percent (XXXXXXXXXX%) per annum on the amount paid thereon, upon a liquidation of the company, entitled to receive the amount paid on such Class “B” preferred shares plus any declared and unpaid dividends, and redeemable for the amount paid thereon.

4.    As of XXXXXXXXXX, the balance sheet of DC consisted of:

      (a)   a small amount of cash to cover some operating expenses;

      (b)   investment in publicly traded marketable securities managed by a broker;

      (c)   nominal payables and accrued liabilities related to the operation of the company.

      The composition of the assets and liabilities of DC has not changed for many years and there will be no material change in the composition of DC’s assets or liabilities (other than as contemplated herein) from the date of this letter until the Proposed Transactions herein are implemented.

5.    As at XXXXXXXXXX, DC had a RDTOH balance of approximately $XXXXXXXXXX, a GRIP balance of approximately $XXXXXXXXXX and DC was entitled to a dividend refund of approximately $XXXXXXXXXX.  At the time the Proposed Transactions described below are implemented, DC is not expected to have any balance of CDA, pre-1972 CSOH, capital losses or non-capital losses.

6.    The current shareholdings of DC are as follows:

Shareholder       No.&Class                    ACB         PUC    Approx. FMV
                           of Shares  

      A                  XXX common              $XXX        $XXX        $XXX
                          XXX Class “A”pref.      $XXX        $XXX        $XXX
                          XXX Class “B” pref.     $XXX        $XXX        $XXX

      B                  XXX common              $XXX        $XXX        $XXX
                          XXX Class “A”pref.      $XXX        $XXX        $XXX
                          XXX Class “B” pref.     $XXX        $XXX        $XXX

                                                                                Total:        $XXX

7.    There has been no change to the shareholding of DC described above since XXXXXXXXXX.

8.    None of the shares of DC were acquired by the shareholders referred to hereinabove in contemplation of the Proposed Transactions outlined herein.

9.    A and B have de jure control of DC, prior to the commencement of the Proposed Transactions.

10.   A and B are siblings and are both resident in Canada for purposes of the Act.  Since they are siblings, they are deemed to be dealing with each other at arm’s length and not to be related to each other for the purposes of section 55.

11.   All of the issued and outstanding shares of the capital stock of DC are capital property to each of the shareholders referred to hereinabove.

PROPOSED TRANSACTIONS

Incorporation of the TCs

12.   Each of A and B will incorporate a new company under the Canada Business Corporations Act.  The authorized capital of each TC will consist 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 with the following attributes for the Class “A” and the Class “E” shares:

(a)   an unlimited number of voting and participating common shares without nominal or par value (the “Class A shares”), and

(b)   an unlimited number of voting preferred shares without nominal or par value.  Each share will be entitled to a non-cumulative preferential dividend of XXXXXXXXXX of XXXXXXXXXX percent (XXXXXXXXXX%) of the amount of the consideration for which the share was issued.  Upon a liquidation of the corporation, the share will be entitled to the consideration for which the share was issued.  Each share will be redeemable and retractable for the consideration for which the share was issued (the “Class E shares”).

13.   A will be the sole director of TC1 and B will be the sole director of TC2.

14.   TC1 and TC2 will not issue any shares at the time of their incorporation.

15.   Each of TC1 and TC2 will be, at any relevant time and for all purposes of the Act, a CCPC and a TCC.

Permitted Exchanges

16.   A will transfer XXXXXXXXXX DC common shares, XXXXXXXXXX DC Class “A” preferred shares and XXXXXXXXXX DC Class “B” preferred shares to TC1.  A and TC1 will make a joint election in prescribed form and within the time limit referred to in subsection 85(6), to have the provisions of subsection 85(1) apply to the transfer.  The agreed amount will be an amount equal to the lesser of the amounts described in subparagraphs 85(1)(c.1)(i) and (ii).  Consideration for the transfer of the XXXXXXXXXX DC common shares, XXXXXXXXXX DC Class “A” preferred shares and XXXXXXXXXX DC Class “B” preferred shares will consist of XXXXXXXXXX Class A shares of the capital stock of TC1 with a FMV equal to the aggregate FMV of the XXXXXXXXXX DC common shares, XXXXXXXXXX DC Class “A” preferred shares and XXXXXXXXXX DC Class “B” preferred shares transferred. 

TC1 will add an amount equal to the aggregate PUC of the XXXXXXXXXX DC common shares, XXXXXXXXXX DC Class “A” preferred shares and XXXXXXXXXX DC Class “B” preferred shares transferred to the stated capital of the XXXXXXXXXX Class A shares of the capital stock of TC1.

For greater certainty, the increase in the stated capital of the TC1 XXXXXXXXXX Class A shares will not exceed the greater of the aggregate PUC and the aggregate ACB (as adjusted by paragraphs 84.1(2)(a) and (a.1)) of the XXXXXXXXXX DC common shares, XXXXXXXXXX DC Class “A” preferred shares and XXXXXXXXXX DC Class “B” preferred shares that A holds in DC in accordance with subsection 84.1(1). 

17.   B will transfer XXXXXXXXXX DC common shares, XXXXXXXXXX DC Class “A” preferred shares and XXXXXXXXXX DC Class “B” preferred shares to TC2.  A and TC2 will make a joint election in prescribed form and within the time limit referred to in subsection 85(6), to have the provisions of subsection 85(1) apply to the transfer.  The agreed amount will be an amount equal to the lesser of the amounts described in subparagraphs 85(1)(c.1)(i) and (ii).  Consideration for the transfer of the XXXXXXXXXX DC common shares, XXXXXXXXXX DC Class “A” preferred shares and XXXXXXXXXX DC Class “B” preferred shares will consist of XXXXXXXXXX Class A shares of the capital stock of TC2 with a FMV equal to the aggregate FMV of the XXXXXXXXXX DC common shares, XXXXXXXXXX DC Class “A” preferred shares and XXXXXXXXXX DC Class “B” preferred shares transferred.

TC2 will add an amount equal to the aggregate PUC of the XXXXXXXXXX DC common shares, XXXXXXXXXX DC Class “A” preferred shares and XXXXXXXXXX DC Class “B” preferred shares transferred to the stated capital of the XXXXXXXXXX Class A shares of the capital stock of TC2.

For greater certainty, the increase in the stated capital of the TC2 XXXXXXXXXX Class A shares will not exceed the greater of the aggregate PUC and the aggregate ACB (as adjusted by paragraphs 84.1(1)(a) and (a.1)) of the XXXXXXXXXX DC common shares, XXXXXXXXXX DC Class “A” preferred shares and XXXXXXXXXX DC Class “B” preferred shares that A holds in DC in accordance with subsection 84.1(1).

18.   The shares issued to A and B pursuant to Paragraphs 16 to 17 will represent the only issued and outstanding shares in the capital stock of the TCs.

Pro Rata Distribution

19.   Immediately prior to the transfers of property described in Paragraph 21, all the property owned by DC will be determined and classified into two types of property for the purposes of the definition of distribution, as follows:

        (i)   cash or near-cash property, including DC’s cash, accounts receivable, prepaid expenses, short term investments and other marketable securities; and

            (ii)  investment property comprising assets of DC other than cash or near-cash property, any income from which would, for purposes of the Act, be income from property.

      DC will have no business property immediately prior to the transfers of property described in Paragraph 21.

      For greater certainty, for the purposes of the distribution outlined herein:

      (iii) tax accounts or other tax related amounts of DC, such as CDA, pre-1972 CSOH, GRIP and RDTOH will not be considered property for the purposes of the distribution;

      (iv)  no amount will be considered to be a liability unless it represents a true legal liability which is capable of quantification; and

    (v)   the amount of any deferred tax will not be considered to be a property or a liability, as the case may be, for the purposes of the Proposed Transactions.

20.   In determining the net FMV of its cash or near cash property and investment property immediately before the transfers, as described in the preceding Paragraph, the liabilities of DC will be allocated to and deducted in the calculation of the net FMV of each such type of property of DC in the following manner:

            (i)   current liabilities of DC will be allocated to cash or near cash property (including any cash, accounts receivable, prepaid expenses, short term investments and other marketable securities) in the proportion that the FMV of each such property is of the FMV of all cash or near cash property.  The allocation of current liabilities as described herein will not exceed the aggregate FMV of all cash or near cash property of DC;

            (ii)  liabilities of DC, other than current liabilities, that relate to a particular property, will then be allocated to the particular property (and effectively to the type to which the particular property belongs) to the extent of its FMV.  Liabilities that pertain to a type of property, but not to a particular property, will then be allocated to that type of property, but not in excess of the net FMV of such type of property after the allocation of liabilities to a particular property, as described herein;
            (iii) if any liability (hereinafter referred to as “excess unallocated liability”) remains after the allocations described in steps (i) and (ii) are made, such excess unallocated liabilities will then be allocated to the cash or near cash property and investment property of DC based on the relative net FMV of each type of property prior to the allocation of such excess unallocated liabilities.

21.   Subsequent to the determination of the types of property, DC will contemporaneously transfer to each TC XXXXXXXXXX percent (XXXXXXXXXX%) of each type of property owned by DC immediately before the transfer (hereinafter the “distribution property”) as determined in accordance with the previous Paragraph.

22.   In consideration for the distribution property transferred by DC to each TC as described in the preceding Paragraph, each TC will:

      (a)   assume an appropriate amount of liabilities of DC (so that on a net basis, each TC will receive its pro rata share of each type of property owned by DC), and

      (b)   issue to DC, XXXXXXXXXX Class E shares having an aggregate FMV (and a redemption value) equal to the FMV of the property received at the time of the transfer less the amount of the liabilities of DC assumed by the transferee as described in Subparagraph 22(a) (herein the “Class E Redemption Price”).

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

23.   DC will make a joint election under subsection 85(1) with each TC in prescribed form and in accordance with subsection 85(6) in respect of the eligible properties transferred by DC in each of the transactions described in Paragraph 21.

24.   The agreed amount in each of the joint elections will be equal to the lesser of the amount specified in subparagraph 85(1)(c.1)(i) and (ii).  In addition, in each case, the agreed amount will not exceed the FMV of the property transferred, nor will it be, subject to the application of paragraph 85(1)(e.3), less than the amount permitted under paragraph 85(1)(b).  The increase to the PUC of the Class “E” shares of the capital stock of each TC will not exceed the maximum amount that could be added to the PUC of such shares without adjustment according to subsection 85(2.1).

Permitted Redemptions

25.   Each of TC1 and TC2 will redeem the Class E shares that were issued to DC as consideration for the transfer of property described above in Paragraph 21 for an amount equal to the Class E Redemption Price.  Each of TC1 and TC2 will issue to DC, in full payment of the Class E Redemption Price, a non-interest bearing promissory note (herein the “Redemption Note”), payable on demand, having a principal amount and FMV equal to the Class E Redemption Price of the Class E shares so redeemed.  DC will accept the TC Redemption Note as payment in full for the Class E shares redeemed.

26.   Immediately after the share redemptions described in the preceding Paragraph, the first taxation year of each of TC1 and TC2 will end.

Winding-Up of DC

27.   After the end of their first taxation year, TC1 and TC2 will resolve to wind up and dissolve DC pursuant to the relevant provisions of the Business Corporations Act (XXXXXXXXXX).

28.   In connection with the winding up of DC, DC will:

      (a)   assign and distribute the Redemption Note issued by TC1 to TC1;

      (b)   assign and distribute the Redemption Note issued by TC2 to TC2.

29.   As a result of the assignment and distribution of the Redemption Note held by DC as described in Paragraph 28, the obligation of each of TC1 and TC2 under its own note will be extinguished by confusion pursuant to XXXXXXXXXX.

30.   To the extent that there is CDA in DC at the time of the dissolution, DC will elect, in the manner and form required under subsection 83(2), to treat the portion of the winding-up dividend referred to in subparagraph 88(2)(b)(i) as a separate capital dividend paid on the DC common shares. Pursuant to subparagraph 88(2)(b)(iv), TC1 and TC2 will each be deemed to have received a proportionate capital dividend from DC.

31.   To the extent that there is pre‑1972 CSOH in DC at the time of the dissolution, the portion of the winding-up dividend determined pursuant to subparagraph 88(2)(b)(ii) shall be deemed not to be a dividend and will be included in determining the proceeds of disposition of the DC shares owned by TC1 and TC2 pursuant to paragraph (i) of the definition of “proceeds of disposition” in section 54.

32.   To the extent that there is GRIP in DC, DC will designate, pursuant to subsection 89(14), to treat a portion of the winding-up dividend referred to in subparagraph 88(2)(b)(iii), which is deemed to be a separate dividend, to be an eligible dividend by notifying each of TC1 and TC2 in writing, in a timely manner, that the dividend is an eligible dividend.

33.   Immediately after the distribution of the Redemption Notes as described in Paragraph 28, but before the formal dissolution of DC, DC will not own or acquire any property or carry on any activity or undertaking.

34.   Any dividend refund to which DC becomes entitled as a result of the Proposed Transactions described herein, or any tax refund as a result of over-payment of tax instalments, will be distributed (under the terms of the agreement governing the winding-up of DC) equally to each of TC1 and TC2.

35.   Within a reasonable time following the distribution of such tax refund, articles of dissolution will be filed by DC with the appropriate Corporate Registry and upon receipt of a certificate of dissolution, DC will be dissolved.

ADDITIONAL INFORMATION

36.   Except as described in the Facts and the Proposed Transactions, no property has been or will be acquired by DC in contemplation of and before the transfer by DC of its properties to each of TC1 and TC2 as described in Paragraph 21.

37.   Except as described in this letter, none of the shareholders of DC and/or of TC1 and/or TC2 are or will be contemplating, at the time of the Proposed Transactions, the sale or transfer of any shares of DC or TC1 and/or TC2.

38.   On completion of the Proposed Transactions:

(a) TC1 will hold and only dispose of the portfolio investments it received from DC in the normal course of its XXXXXXXXXX activities; and

(b) TC2 will hold and only dispose of the portfolio investments it received from DC in the normal course of its XXXXXXXXXX activities.

For greater certainty, each of TC1 and TC2 will hold and sell the portfolio investments so received from DC in the course of carrying on its normal XXXXXXXXXX activities in a similar manner to that which DC would have done had the Proposed Transactions not been executed.

39.   None of DC, TC1 or TC2 is or will be, at any time during a series of transactions or events that includes the Proposed Transactions, a specified financial institution or a restricted financial institution.

40.   None of the shares of the capital stock of DC nor any of the shares of the capital stock of TC1 or TC2 (including the shares to be issued as described in the Proposed Transactions) is or will be, at any time during a series of transactions or events that includes the Proposed Transactions:

(a)   the subject of any undertaking or agreement that is a guarantee agreement;

(b)   the subject of a dividend rental arrangement; or

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

41.   Neither DC nor any of TC1 or TC2 is or will be, at any time during a series of transactions or events that includes the Proposed Transactions, a corporation described in any of the paragraphs (a) to (f) of the definition of financial intermediary corporation.

42.   None of the common shares of the capital stock of DC is a taxable preferred share, a short-term preferred share or a term preferred share.

43.   Each of DC, TC1 and TC2 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.

44.   The federal business number or the social insurance number of the parties referred to herein, the location of the tax services office and taxation centre where their returns are filed, and the address of their head office are as follows:

      XXXXXXXXXX
      Business Number:                          XXXXXXXXXX
      Tax Services Offices:                      XXXXXXXXXX
      Tax Centre:                                     XXXXXXXXXX
       Address:                                         XXXXXXXXXX

       XXXXXXXXXX
      Social Insurance Number:               XXXXXXXXXX
      Tax Services Offices:                       XXXXXXXXXX
      Tax Centre:                                      XXXXXXXXXX
      Address:                                           XXXXXXXXXX

      XXXXXXXXXX
      Social Insurance Number:                XXXXXXXXXX
      Tax Services Offices:                       XXXXXXXXXX
      Tax Centre:                                      XXXXXXXXXX
      Address:                                           XXXXXXXXXX

PURPOSE OF THE PROPOSED TRANSACTIONS

45.   The purpose of the Proposed Transactions is to carry out a divisive reorganization so as to allow the shareholders of DC to own directly their pro rata share of the property in DC in order to allow them to invest their share of the distribution property in the manner that best meets their objectives and XXXXXXXXXX goals, and address personal estate planning objectives on an individual and independent basis.

RULINGS GIVEN

Provided that the preceding statements constitute a complete and accurate disclosure of all relevant Facts, Proposed Transactions, Additional Information and Purposes of the Proposed Transactions, and provided that the Proposed Transactions are completed in the manner described above, we confirm the following:

A.    Subject to the application of the provisions of subsection 26(5) of the ITAR, to the application of paragraph 88(2.2)(b), which applies for the purposes stated in the preamble to subsection 88(2.2) and subject to the application of subsection 69(11), provided the appropriate joint elections are filed in the prescribed form and manner within the time limits specified in subsection 85(6) and provided that each particular property so transferred is an eligible property in respect of which shares have been issued as full or partial consideration therefor, subsection 85(1) will apply to:

(a)   the transfer of the XXXXXXXXXX common shares, XXXXXXXXXX Class “A” preferred shares and XXXXXXXXXX Class “B” preferred shares of the capital stock of DC by A to TC1 and by B to TC2 described in Paragraphs 16 and 17; and

(b)   the transfer of each property owned by DC to TC1 and TC2 described in Paragraphs 21 to 24;

such that the agreed amount in respect of each such transfer will be deemed to be the transferor’s proceeds of disposition of the particular property and the transferee’s cost amount thereof, and the transferor’s cost amount of the shares received as consideration for such disposition.

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

B.    On the redemption by each of TC1 and TC2 of its Class E shares owned by DC, as described in Paragraph 25, by virtue of paragraphs 84(3)(a) and 84(3)(b), each of TC1 and TC2 will be deemed to have paid, and DC will be deemed to have received, a taxable dividend at that time equal to the amount, if any, by which the amount paid in respect of the redemption of the Class E shares issued by each of TC1 and TC2 exceeds the PUC of such class of shares immediately before the redemption.

C.    Subsection 84(2) and paragraph 88(2)(b) will apply to the distributions by DC described in Paragraphs 28 to 35 such that:

(a)   subject to (b), (c), (d) and (e) herein, DC will be deemed to have paid a dividend (hereinafter a “winding-up dividend”) on the issued common shares, Class “A” preferred shares and Class “B” preferred shares of DC, equal to the amount, if any, by which:

(i)   the amount or value of the funds or property distributed, as the case may be, exceeds

(ii)  the amount, if any, by which the PUC in respect of the issued shares of DC, is reduced on the distribution.

and each of TC1 and TC2 will be deemed to have received a taxable dividend equal to that proportion of the amount of the excess that the number of the common shares, Class “A” preferred shares and Class “B” preferred shares, as the case may be, held by the recipient is of the number of common, Class “A” preferred and Class “B” preferred shares, as the case may be, outstanding before the distribution;

(b)   to the extent that DC has a CDA immediately prior to its dissolution, pursuant to subparagraph 88(2)(b)(i), the portion of a winding-up dividend which arises from the distribution described in Paragraphs 28 to 35 as does not exceed DC’s CDA determined immediately before the payment of the winding-up dividend will be deemed, for the purposes of the subsection 83(2) election referred to in Paragraph 30, to be the full amount of a separate dividend which will be referred to as the “capital dividend”;

(c)   to the extent that DC has a pre-1972 CSOH, the portion of the winding-up dividend which arises from the distribution described in Paragraphs 28 to 35 that is equal to DC’s pre-1972 CSOH, as determined immediately before the payment of the winding-up dividend pursuant to subparagraph 88(2)(b)(ii), shall be deemed not to be a dividend;

(d)   pursuant to subparagraph 88(2)(b)(iii), the winding-up dividend arising from the distribution described in Paragraphs 28 to 35, to the extent that it exceeds the amount referred to in (b) and (c), will be deemed to be a separate dividend that is a taxable dividend; and

(e)   pursuant to subparagraph 88(2)(b)(iv), each of TC1 and TC2 will be deemed to have received its proportional share of the dividends described in (b) and (d) herein.

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

(a)   will be included in computing the income of the person deemed to have received such a dividend 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 such a dividend is deemed to have been received, and, for greater certainty, such deduction will not be prohibited by subsections 112(2.1), (2.2), (2.3) or (2.4);

(c)   will be excluded in determining the recipient’s proceeds of disposition of the shares so redeemed, purchased or cancelled pursuant to paragraph (j) of the definition of “proceeds of disposition” in section 54;

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

(e)   will not be subject to tax under Part IV.1 of the Act by virtue of paragraph (b) of the definition of “excepted dividend” in section 187.1;

(f)   will not be subject to tax under Part VI.1 as the dividends will be “excluded dividends” pursuant to paragraph 191(1)(a);

(g)   will not be subject to tax under Part IV except to the extent that the payer corporation is entitled to a dividend refund for its taxation year in which it paid such dividend, which, for greater certainty, will include the taxable dividends described in rulings B and C above; and

(h)   will, provided such a dividend or portion of such a dividend is designated to be an eligible dividend in the prescribed manner and within the time referred to in subsection 89(14), be added to the GRIP accounts of TC1 and TC2 to the extent of the portion of the dividend that each of TC1 and TC2 received, in the taxation year in which it received that portion from DC, pursuant to variable E of the definition of GRIP in subsection 89(1).

E.    The capital dividend described in Ruling C above:

(a)   will not be included in the income of TC1 and TC2 pursuant to paragraph 83(2)(b);

(b)   will be added to the CDA of TC1 and TC2 pursuant to paragraph (b) of the definition of “capital dividend account” in subsection 89 (1); and

(c)   will be excluded in determining the proceeds of disposition of the common shares, Class “A” preferred shares and Class “B” preferred shares of DC pursuant to paragraph (j) of the definition of “proceeds of disposition” in section 54.

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

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

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

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

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

(e)   an acquisition of property in the circumstances described in paragraphs 55(3.1)(c) or 55(3.1)(d);

which has not been described in the Facts and the Proposed Transactions, then by virtue of paragraph 55(3)(b), subsection 55(2) will not apply to the taxable dividends referred to in rulings B and C above, and, for greater certainty, subsection 55(3.1) will not apply to deny the exemption under paragraph 55(3)(b).

G.    The extinguishment of the Redemption Notes described in Paragraph 29 of the Proposed Transactions will not give rise to a “forgiven amount” within the meaning of subsections 80(1) or 80.01(1). In addition, neither DC nor TC1 or TC2 will otherwise realize any gain or loss as a result of the extinguishment of the Redemption Notes.

H.    Subsections 15(1), 56(2), 56(4) and 246(1) will not apply to the Proposed Transactions.

I.    Subsection 245(2) will not apply to the Proposed Transactions, in and by themselves, to redetermine the tax consequences confirmed in the ruling given.

The above 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 before XXXXXXXXXX.

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

COMMENTS

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

a)    the FMV or ACB of any property referred to herein or the PUC in respect of any share referred to herein; 

b)    the outstanding balance of various tax accounts such as GRIP, RDTOH, CDA and Pre-1972 CSOH for any of the corporate entities described herein;

c)    the amount of any non‑capital loss or net capital loss of any entities referred to herein; or

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

Nothing in this letter should be construed as confirmation, express or implied, that, for the purpose of any of the rulings given above, any adjustment to the FMV of the properties transferred and 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, dated March 28, 2013. 

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

Yours truly, 

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

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