2015-0582421R3 Single-wing split-up butterfly

Principal Issues: Whether the butterfly dividends are exempt from the application of subsection 55(2) by virtue of paragraph 55(3)(b).

Position: Yes, favourable Rulings given.

Reasons: Complies with paragraph 55(3)(b) and previous CRA positions.

Author: XXXXXXXXXX
Section: 53(1)(b); 55(3)(b); 88(1); 112(1); 245(2)

XXXXXXXXXX
                                                2015-058242

XXXXXXXXXX, 2015

Sir,

Re:   Advance Income Tax Rulings
         XXXXXXXXXX

This is in reply to your letter of XXXXXXXXXX wherein you requested an advance income tax ruling on behalf of the above-referenced taxpayers. The documents submitted as part of your request are only part of this document to the extent described herein. We also acknowledge the information provided in various emails and telephone conversations.

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

(a)   in a previously filed return of any of the above-referenced taxpayers or any related person to them;

(b)   being considered by a tax services office or taxation centre in connection with a previously filed tax return of any of the above-referenced taxpayers or any related person to them;

(c)   under objection by any of the above-referenced taxpayers or any related person to them;

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

(e)   the subject of a ruling previously considered by the Income Tax Rulings Directorate.

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

DESIGNATION OF THE PARTIES INVOLVED

In this letter, except for Paragraph 56, the names of the taxpayers are replaced with the following:

XXXXXXXXXX  DC
XXXXXXXXXX  Holdco A
XXXXXXXXXX  Holdco B
XXXXXXXXXX  Holdco C
XXXXXXXXXX  DCo
XXXXXXXXXX  A
XXXXXXXXXX  B
XXXXXXXXXX  C
Trust described in Paragraph 8      B Family Trust
Trust described in Paragraph 9      C Family Trust

DEFINITIONS

In this letter, unless otherwise stated, the following terms have the meanings specified below and, where the circumstances so require, the singular should be read as plural and vice versa:

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

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

(c)   “arm’s length” has the meaning assigned by section 251;

(d)   “Articles” means, in relation to a particular corporation, the constating documents of the corporation;

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

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

(g)   “Capital dividend account” (“CDA”) has the meaning assigned by subsection 89(1);

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

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

(j)   “DC Common Shares” means the common shares of the capital stock of DC that are currently issued and outstanding;

(k)   “DC CDA Common Share Purchase Amount” has the meaning assigned in Paragraph 35;

(l)   “DC CDA Purchase Note” has the meaning assigned in Paragraph 35;

(m)   “DC Non-CDA Common Share Purchase Amount” has the meaning assigned in Paragraph 36;

(n)   “DC Non-CDA Purchase Note” has the meaning assigned in Paragraph 36;

(o)   “DCo Transaction” means the transaction described in Paragraph 46;

(p)   “DC Stub Fiscal Year” has the meaning assigned in Paragraph 19;

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

(r)   “Distribution Property” has the meaning assigned in Paragraph 25;

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

(t)   “fair market value” (“FMV”) means the highest price available in an open and unrestricted market between informed prudent parties acting at arm’s length and under no compulsion to act and contracting for a taxable purchase and sale, expressed in terms of cash;

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

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

(w)   “Framework of Settlement” means the understandings and agreements among the taxpayers referred to in Paragraph 44;

(x)   “general rate income pool” or “GRIP” has the meaning assigned to that term in subsection 89(1);

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

(z)   “Holdco A Sub” has the meaning assigned in Paragraph 13;

(aa)  “Holdco A Sub Special Shares” has the meaning assigned in Paragraph 13(b);

(bb)  “Holdco A Sub Special Share Redemption Amount” has the meaning assigned in Paragraph 13(b)(iii);

(cc)  “Holdco A Sub Redemption Note” has the meaning assigned in Paragraph 37;

(dd)  “Nominee” means the corporation to be incorporated as described in Paragraph 15;

(ee)  XXXXXXXXXX;

(ff)  XXXXXXXXXX;

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

(hh)  “Paragraph” means a numbered paragraph in this letter;

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

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

(kk)  “Proposed Transactions” means those transactions and events described in Paragraphs 13 through and including 42;

(ll)  XXXXXXXXXX;

(mm)  “refundable dividend tax on hand” (“RDTOH”) has the meaning assigned by subsection 129(3);

(nn)  “Regulations” means the Income Tax Regulations;

(oo)  “related persons” or “persons related to each other” has the meaning assigned by subsection 251(2);

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

(qq)  “safe-income determination time” has the meaning assigned to that term by subsection 55(1);

(rr)  “safe income on hand” in respect of a particular share of a corporation at a particular time means the portion of the unrealized gain inherent in such share of the corporation at that time that cannot reasonably be considered to be attributable to anything other than income earned or realized (as determined pursuant to subsection 55(5)), to the extent that it is on hand, by any corporation after 1971 and before the safe-income determination time for the transaction, event or series of transactions or events that includes the Proposed Transactions described herein;

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

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

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

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

(ww)  “taxable Canadian corporation” (“TCC”) has the meaning assigned by subsection 89(1);

(xx)  “taxable dividend” has the meaning assigned by subsection 89(l); and

(yy)  “taxable preferred share” has the meaning assigned by subsection 248(1).

FACTS

DC

1.    DC is and will be, at any relevant time and for all purposes of the Act, a CCPC and a TCC. It has a taxation year ending XXXXXXXXXX.

DC was formed on XXXXXXXXXX under the XXXXXXXXXX by an amalgamation of XXXXXXXXXX predecessor corporations, XXXXXXXXXX. At that time, the father and the mother of A, B and C received respectively XXXXXXXXXX Class A preferred shares and XXXXXXXXXX Class B preferred shares of the capital stock of DC. Those shares were redeemed by DC mostly between XXXXXXXXXX and XXXXXXXXXX.

DC is neither a bank nor an insurance corporation within the meaning of the Act.

The issued and outstanding share capital of DC consists of XXXXXXXXXX common shares (“DC Common Shares”). Each of Holdco A, Holdco B and Holdco C owns XXXXXXXXXX DC Common Shares.

The XXXXXXXXXX DC Common Shares held by Holdco A were acquired by Holdco A on XXXXXXXXXX from A.

The XXXXXXXXXX DC Common Shares held by Holdco B were acquired by Holdco B on XXXXXXXXXX from B.

The XXXXXXXXXX DC Common Shares held by Holdco C were acquired by Holdco C on XXXXXXXXXX from C.

The PUC of the DC Common Shares is $XXXXXXXXXX per share.

The ACB of the DC Common Shares to each of Holdco A, Holdco B and Holdco C is $XXXXXXXXXX per share.

The DC Common Shares are participating and are entitled to one vote per share.

Each of Holdco A, Holdco B and Holdco C holds its DC Common Shares as capital property.

DC is controlled by a group formed by A, B and C.

2.    DC’s assets consist of the following:

(a)   cash;

(b)   income taxes receivable;

(c)   marketable securities;

(d)   XXXXXXXXXX percent (XXXXXXXXXX %) of the issued and outstanding shares of the capital stock of XXXXXXXXXX, a CCPC;

(e)   furniture having a FMV of $XXXXXXXXXX; and

(f)   XXXXXXXXXX

3.    At the end of the taxation year ending on XXXXXXXXXX, DC had a GRIP of $XXXXXXXXXX, a RDTOH of $XXXXXXXXXX and a CDA of $XXXXXXXXXX.

4.    DC’s liabilities include:

(a)   current liabilities, which consist of:

(i)   accounts payable and accrued liabilities;

(ii)  XXXXXXXXXX

(iii) loans and other amounts payable to one or more shareholders, including unpaid dividends from time to time referred to in paragraph 55; and

(b)   long-term liabilities XXXXXXXXXX.

5.    XXXXXXXXXX.

6.    None of the depreciable property owned by DC has been acquired within the last year.

Holdco A

7.    Holdco A is and will be, at any relevant time and for all purposes of the Act, a CCPC and a TCC. Holdco A has a taxation year ending XXXXXXXXXX.

Holdco A was incorporated on XXXXXXXXXX.

Holdco A is an investment holding company. Its assets include XXXXXXXXXX DC Common Shares. Holdco A acquired these XXXXXXXXXX DC Common Shares from A on XXXXXXXXXX pursuant to a sale subject to an election made under subsection 85(1).

The issued capital of Holdco A consists of:

-     XXXXXXXXXX common shares held by A;
-     XXXXXXXXXX Class D voting, fixed-value, redeemable and retractable preference shares held by A;
-     XXXXXXXXXX Class E voting, fixed-value, redeemable and retractable preference shares held by A;
-     XXXXXXXXXX Class A voting, fixed-value, redeemable and retractable preference shares held by the estate of the father of A;
-     XXXXXXXXXX Class B voting, fixed-value, redeemable and retractable preference shares held by the estate of the father of A;
-     XXXXXXXXXX Class C voting, fixed-value, redeemable and retractable preference shares held by the mother of A.

A controls Holdco A by virtue of his ownership of all the common shares of the capital stock of Holdco A and various preference shares of the capital stock of Holdco A which entitle him to more than XXXXXXXXXX% of the votes that may be cast at meetings of its shareholders. The preference shares owned by A were issued to him as part of the aforementioned sale of XXXXXXXXXX DC Common Shares from A to Holdco A. 

Each of the shareholders of Holdco A is a Canadian resident.

Holdco B

8.    Holdco B is and will be, at any relevant time and for all purposes of the Act, a CCPC and a TCC. Holdco B has a taxation year ending XXXXXXXXXX.

Holdco B was incorporated on XXXXXXXXXX.

Holdco B is an investment holding company. Its assets include XXXXXXXXXX DC Common Shares. Holdco B acquired these XXXXXXXXXX DC Common Shares on XXXXXXXXXX from B by a transfer made under subsection 85(1) as part of an estate freeze undertaken by B in relation to his interest in DC and another corporation.

The issued capital of Holdco B consists of:

-     XXXXXXXXXX common shares held by B Family Trust;
-     XXXXXXXXXX Class E voting, fixed-value, redeemable and retractable preference shares held by B;
-     XXXXXXXXXX Class D voting, fixed-value, redeemable and retractable preference shares held by B;
-     XXXXXXXXXX Class A voting, fixed-value, redeemable and retractable preference shares held by the estate of the father of B;
-     XXXXXXXXXX Class B voting, fixed-value, redeemable and retractable preference shares held by the father of B;
-     XXXXXXXXXX Class C voting, fixed-value, redeemable and retractable preference shares held by the mother of B.

On January XXXXXXXXXX, XXXXXXXXXX Class B shares held by the father of B were redeemed by Holdco B. On XXXXXXXXXX, XXXXXXXXXX Class C shares held by the mother of B were redeemed by Holdco B. On XXXXXXXXXX, XXXXXXXXXX Class D shares held by B were redeemed by Holdco B. On XXXXXXXXXX, XXXXXXXXXX Class D shares held by B were redeemed by Holdco B. On XXXXXXXXXX, XXXXXXXXXX Class D shares held by B were redeemed by Holdco B. On XXXXXXXXXX, XXXXXXXXXX Class D shares held by B were redeemed by Holdco B.

B controls Holdco B by virtue of his ownership of preference shares of the capital stock of Holdco B which entitle him to more than XXXXXXXXXX% of the votes that may be cast at meetings of its shareholders. The preference shares owned by B were issued to him as part of the aforementioned estate freeze.  

All of the issued and outstanding common shares of the capital stock of Holdco B are owned by the trustees of an inter vivos trust created XXXXXXXXXX for the benefit of B’s children and remoter issue (“B Family Trust”). The trust acquired its common shares of the capital stock of Holdco B on XXXXXXXXXX as part of the aforementioned estate freeze.

Each of the shareholders of Holdco B is a Canadian resident.

Holdco C

9.    Holdco C is and will be, at any relevant time and for all purposes of the Act, a CCPC and a TCC. Holdco C has a taxation year ending XXXXXXXXXX.

Holdco C was incorporated on XXXXXXXXXX.

Holdco C is an investment holding company. Its assets include XXXXXXXXXX DC Common Shares. Holdco C acquired these XXXXXXXXXX DC Common Shares from C on XXXXXXXXXX by a transfer made under subsection 85(1) as part of an estate freeze undertaken by C in relation to her interest in DC.

The issued capital of Holdco C consists of

-     XXXXXXXXXX common shares held by C Family Trust;
-     XXXXXXXXXX Class E voting, fixed-value, redeemable and retractable preference shares held by C;
-     XXXXXXXXXX Class D voting, fixed-value, redeemable and retractable preference shares held by C;
-     XXXXXXXXXX Class A voting, fixed-value, redeemable and retractable preference shares held by the estate of the father of C;
-     XXXXXXXXXX Class B voting, fixed-value, redeemable and retractable preference shares held by the father of C;
-     XXXXXXXXXX Class C voting, fixed-value, redeemable and retractable preference shares held by the mother of C;

On XXXXXXXXXX, XXXXXXXXXX Class A shares held by the father of C were redeemed by Holdco C. On XXXXXXXXXX, XXXXXXXXXX Class B shares held by the father of C were redeemed by Holdco C. On XXXXXXXXXX, XXXXXXXXXX Class C shares held by the mother of C were redeemed by Holdco C. On XXXXXXXXXX, XXXXXXXXXX Class D shares held by C were redeemed by Holdco C. On XXXXXXXXXX, XXXXXXXXXX Class D shares held by C were redeemed by Holdco C. On XXXXXXXXXX, XXXXXXXXXX Class D shares held by C were redeemed by Holdco C. On XXXXXXXXXX, XXXXXXXXXX Class D shares held by C were redeemed by Holdco C.

Most of the preference shares are owned by C, who controls Holdco C by virtue of the voting rights attached to the preference shares owned by her which confer upon her more than XXXXXXXXXX% of the votes that may be cast at meetings of its shareholders. The preference shares owned by C were issued to her as part of the aforementioned estate freeze.

All of the issued and outstanding common shares of the capital stock of Holdco C are owned by the trustees of an inter vivos trust created XXXXXXXXXX for the benefit of C’s children and remoter issue (“C Family Trust”). The trust acquired its common shares of the capital stock of Holdco C on XXXXXXXXXX as part of the aforementioned estate freeze.

Each of the shareholders of Holdco C is a Canadian resident.

10.   A, B and C are siblings.

11.   There is no guarantee agreement in respect of the issuance of the DC Common Shares.

DCo

12.   DCo is a CCPC and a TCC.

The issued and outstanding shares of the capital stock of DCo are held by Holdco A, Holdco B and Holdco C in equal proportions (XXXXXXXXXX).

DCo is a XXXXXXXXXX% co-owner with an arm’s length party of XXXXXXXXXX.

PROPOSED TRANSACTIONS

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

Incorporation of Holdco A Sub

13.   Holdco A will incorporate a new corporation pursuant to the XXXXXXXXXX (“Holdco A Sub”). Holdco A Sub will be authorized to issue:

(a)   an unlimited number of common shares; and

(b)   an unlimited number of Holdco A Sub special shares (“Holdco A Sub Special Shares”), which will have the following attributes:

(i)   the Holdco A Sub Special Shares will be non-voting;

(ii)  the Holdco A Sub Special Shares may only be issued to DC and only in connection with the transactions contemplated in this Ruling Letter;

(iii) each Holdco A Sub Special Share will be redeemable and retractable at an amount (“Holdco A Sub Special Share Redemption Amount”) equal to the amount by which

1.    the aggregate FMV of the Distribution Property transferred to Holdco A Sub, at the time of the transfer by DC to Holdco A Sub, as described in Paragraph 25,

exceeds

2.    the aggregate amount of the liabilities of DC assumed by Holdco A Sub for the acquisition of such property, as described in Paragraph 28,

the whole divided by the number of Holdco A Sub Special Shares issued as consideration for such transfer, plus all declared but unpaid dividends on such share;

(iv)  the Holdco A Sub Special Shares will entitle the holder to receive a preferential non-cumulative dividend of XXXXXXXXXX% of the Holdco A Sub Special Share Redemption Amount;

(v)   the Holdco A Sub Special Shares will rank in priority to the common shares of the capital stock of Holdco A Sub with respect to the payment of dividends and amounts paid on the wind-up or dissolution of Holdco A Sub or other return of capital event; and

14.   Holdco A will subscribe for XXXXXXXXXX common share of the capital stock of Holdco A Sub for $XXXXXXXXXX.

Transfer of Legal Title of Real Property Forming Part of the Distribution Property to Nominee

15.   DC will incorporate a new corporation pursuant to the XXXXXXXXXX (“Nominee”). Nominee will be authorized to issue an unlimited number of common shares and DC will subscribe for XXXXXXXXXX common share of the capital stock of Nominee for $XXXXXXXXXX.

16.   DC will transfer legal title to the real property interests forming part of the Distribution Property to be conveyed to Holdco A pursuant to the transfers described in Paragraph 25(b) below to Nominee which will agree in writing to hold such interests in trust for DC unless and until further directed such that DC will remain the beneficial owner of such interests after the conveyances and until it directs Nominee otherwise.

Nominee will agree to hold legal title of the properties in trust for the beneficial holder of such property and will deal with the properties exclusively as directed by the beneficial owner at all times and carry on no other duties. Therefore, the trust arrangement will be a bare trust.

17.   XXXXXXXXXX.

PUC Increase, Change in Fiscal Year for DC and Proportionate Allocation of RDTOH

18.   Pursuant to the terms of the Framework of Settlement, Holdco A is to receive its proportionate (XXXXXXXXXX) share of DC’s tax accounts, including RDTOH. Therefore, to the extent possible, the Proposed Transactions are to be structured so as to achieve this result. It is acknowledged by the taxpayers that a proportionate distribution of DC’s RDTOH among Holdco A, Holdco B and Holdco C could be achieved through the implementation of a “triple-wing butterfly” with DC fully distributing all of its assets to Holdco A, Holdco B and Holdco C followed by the winding-up and dissolution of DC. However, B and C wish to continue the activities, undertakings and business of DC within DC itself, the whole as a going concern following the distribution of XXXXXXXXXX of DC’s assets to Holdco A and following the implementation of the Proposed Transactions. Thus, it was agreed in the Framework of Settlement to structure the Proposed Transactions as a “single‑wing butterfly”. The taxpayers further acknowledge that it is difficult to achieve a proportionate distribution of DC’s RDTOH to Holdco A under the terms of the Act in the context of a “single-wing butterfly”. In order to most closely approximate a proportionate distribution of DC’s RDTOH to Holdco A, the taxpayers propose to implement the portions of the Proposed Transactions involving the payment and receipt of dividends by DC (Paragraphs 35 to 37) in a short fiscal year, one in which DC will earn the least practical amount possible of investment income giving rise to RDTOH. Since DC earns investment income on a continual basis, this objective can be achieved, to the mutual satisfaction of the parties, by DC having a separate short fiscal year, such year not to exceed 31 days in duration.

19.   Upon receiving the Rulings Letter in respect of the Proposed Transactions, if not earlier, DC will apply to change the end of its fiscal year beginning on XXXXXXXXXX to a date within 31 days following the commencement of such year (such short fiscal year is referred to herein as the “DC Stub Fiscal Year”). Except as otherwise provided herein, all of the Proposed Transactions will occur within the DC Stub Fiscal Year and in the order in which they are set out herein. Except for the deemed dividend resulting from the purchase for cancellation of Holdco A’s shares in the capital stock of DC, as described in Paragraph 35 hereof, DC will not declare or pay any taxable dividends in the DC Stub Fiscal Year, nor will it enter into transactions causing DC to be deemed to have paid any taxable dividends in the DC Stub Fiscal Year.

20.   On the last day of its taxation year ending XXXXXXXXXX and in any event before the Proposed Transactions described below, DC will increase the PUC in respect of the DC Common Shares by an amount equal to the lesser of (i) XXXXXXXXXX times DC’s RDTOH balance at the end of its XXXXXXXXXX fiscal year (and for such purpose, such balance shall be computed on the basis that such PUC increase did not occur) and (ii) the safe income on hand attributable to the common shares at the safe-income determination time. Such increase of PUC will not be by way of one of the transactions or events described in paragraphs (a) to (c.3) of subsection 84(1), and will specifically not be as a result of the conversion of contributed surplus into PUC.

The PUC increase does not involve the payment of a stock dividend by DC therefore paragraph 84(1)(a) does not apply. As a result of the increase in the PUC, the value of the assets of DC less its liabilities will neither increase nor decrease and therefore paragraph 84(1)(b) will not apply. For the purposes of paragraph 84(1)(d), the amounts determined under subparagraphs 84(1)(b)(i) and (ii) will be nil. The PUC of other classes of shares of the capital stock of DC will not be affected by the aforementioned PUC increase, therefore paragraph 84(1)(c) will not apply. For the purposes of paragraph 84(1)(e), the amount of the reduction referred to in paragraph 84(1)(c) will be nil. DC is neither a bank nor an insurance corporation within the meaning of the Act, therefore neither 84(1)(c.1) or (c.2) will apply to the aforementioned PUC increase. Moreover, the aforementioned increase in PUC is not the conversion of any contributed surplus of DC that arose after March 31, 1977 and therefore paragraph 84(1)(c.3) will not apply to the aforementioned PUC increase. Thus, for the purposes of paragraph 84(1)(f), the amounts referred to in paragraphs 84(1)(c.1), (c.2) and (c.3) are nil.

21.   The purpose of the PUC increase described in Paragraph 20, and the change of fiscal year end described in Paragraph 19, is to ensure, to the extent practicably possible, a proportionate distribution of DC’s current RDTOH balance to Holdco A. As a result of the regular, periodic annual taxable dividend to be paid by DC (see Paragraph 55) and the PUC increase described in Paragraph 20, DC’s RDTOH balance at the end of its fiscal year ending XXXXXXXXXX less the dividend refund with respect to those dividends is anticipated to be XXXXXXXXXX. During the DC Stub Fiscal Year, DC will experience the following transactions and operations having an effect on its RDTOH:

(a)   Payment of a deemed taxable dividend (pursuant to subsection 84(3)) in an amount equal to the DC Non‑CDA Common Share Purchase Amount less the PUC of the DC Common Shares repurchased by DC pursuant to the transaction described in Paragraph 36;

(b)   Receipt of a deemed taxable dividend (pursuant to subsection 84(3)) from Holdco A Sub in an amount equal to the Holdco A Sub Redemption Note less the PUC of the Holdco A Sub Special Shares redeemed by Holdco A Sub pursuant to the transaction described in Paragraph 37;

(c)   The earning of ordinary investment income by DC over the course of the DC Sub Fiscal Year.

It is anticipated that Holdco A Sub will wind-up and distribute all its property (Paragraphs 38 and 42) on the same day and immediately following the acquisition by Holdco A Sub of the Distribution Property (Paragraphs 25 to 30). Thus, it is anticipated that Holdco A Sub will earn little, if any, investment income during its existence and that therefore the share redemption described in Paragraph 37 and referred to in Paragraph 21(b) will generate a nominal refund of RDTOH to Holdco Sub A and thus a nominal amount of Part IV tax in the hands of DC. It is further anticipated that the deemed dividend to be paid by DC to Holdco A described in Paragraph 36 and referred to in Paragraph 21(a) will far exceed XXXXXXXXXX times any additions to DC’s RDTOH pursuant to paragraph 129(3)(a) during the DC Stub Fiscal Year as a result of DC’s earning of ordinary investment income over the course of the DC Stub Fiscal Year. Therefore, it is anticipated that at the conclusion of DC’s Stub Fiscal Year, its RDTOH balance will be XXXXXXXXXX.

Types of Property of DC

22.   Immediately before the transfer of property described in Paragraph 25, the property owned by DC will be classified into the following three types of property for the purposes of the definition of “distribution” in subsection 55(1), as follows:

(a)   cash or near-cash property, consisting of all the current assets of DC, including cash, account receivables, prepaid property taxes, deposits, deferred expenses and a dividend refund receivable;

(b)   investment property, consisting of all of the assets of DC, other than cash or near-cash property, any income from which would, for purposes of the Act, be income from property or from a SIB;

(c)   business property, consisting of all of the assets of DC, other than cash or near-cash property, any income from which would, for purposes of the Act, be income from a business carried on by DC (other than a SIB).

23.   For greater certainty, for purposes of this distribution:

(a)   XXXXXXXXXX

(b)   any tax accounts, such as the balance of any non-capital losses, net capital losses, RDTOH or CDA of DC, will not be considered property.

DC will not have the ability to exercise significant influence over any corporation or other entity in which it shall have an investment immediately before the distribution. 

24.   It is expected that DC will only have cash or near-cash property and investment property immediately before the transfer of property described in Paragraph 25.

Single-wing Split-up Gross Butterfly of DC’s Assets

25.   Effective XXXXXXXXXX or on such later date during the DC Stub Fiscal Year as shall be agreed upon by DC and Holdco A, DC will transfer to Holdco A Sub a proportionate share (being XXXXXXXXXX) of its:

(a)   cash or near-cash property;

(b)   investment property XXXXXXXXXX

(c)   business property, if any,

(collectively referred to as the “Distribution Property”) such that, immediately after such property transfers and liability assumptions described in Paragraph 28, the FMV of each such type of property of DC so transferred to Holdco A Sub will approximate that proportion of the FMV of that type of property of DC, determined immediately before the transfer that:

(d)   the aggregate FMV, immediately before the transfer, of all of the DC Common Shares owned by Holdco A,

is of

(e)   the aggregate FMV, immediately before the transfer, of all of the issued and outstanding shares of the capital stock of DC.

The actual transfer of cash and near-cash property may occur within a period of XXXXXXXXXX days after the transfer of the other type(s) of property.

26.   For greater certainty, the portion of the FMV of each type of DC’s property that is transferred to Holdco A Sub, as described in Paragraph 25, will represent Holdco A’s XXXXXXXXXX pro rata share of the FMV of that type of property of DC.

27.   For the purposes of this Paragraph and Paragraph 25, the expression “approximate that proportion” means that the discrepancy from that proportion, if any, will not exceed one percent (1%), determined as a percentage of the FMV of each type of property of DC that Holdco A Sub has received (or DC has retained) as compared to what Holdco A Sub would have received (or DC would have retained) had it received (or retained) its appropriate pro rata share of the FMV of that type of property of DC.

28.   As consideration for the property transferred by DC to Holdco A Sub described in Paragraph 25, Holdco A Sub will:

(a)   assume certain undertakings of DC, if any XXXXXXXXXX;

(b)   assume XXXXXXXXXX of the liabilities of DC, XXXXXXXXXX

(c)   issue to DC such number of Holdco A Sub Special Shares as have an aggregate redemption amount and aggregate FMV equal to the aggregate FMV, at the time of the transfer, of the Distribution Property received by Holdco A Sub, less the amount of the liabilities of DC assumed by Holdco A Sub, as described in (a) and (b) above.

29.   XXXXXXXXXX.

30.   Concurrent with DC’s transfers of property as described in Paragraph 25, DC will transfer all of the shares that it owns in Nominee to Holdco A Sub for a nominal amount.

Section 85 Elections

31.   DC will jointly elect with Holdco A Sub, in prescribed form and within the time referred to in subsection 85(6), but prior to the dissolution of Holdco A Sub, as described in Paragraph 42, to have the provisions of subsection 85(1) apply to the transfer described in Paragraph 25 of each eligible property of DC. The agreed amount in respect of each such eligible property will not be greater than the FMV of such property nor will it be less than the amount permitted under paragraph 85(1)(b). For greater certainty, the agreed amount in respect of each such transferred property will be within the limits prescribed 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); and

(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) to (iii).

32.   For purposes of the joint election, the portion, if any, of the principal amount of any liability of DC assumed by Holdco A Sub that otherwise relates to a particular property transferred to Holdco A Sub and that exceeds the least of the permitted agreed amounts in respect of such property as determined under Paragraph 31(a) or (b) above shall be assumed in consideration for the transfer of other property by DC so that

(a)   the amount of liabilities assumed by Holdco A Sub in respect of any particular eligible property that is the subject of the election shall not exceed the agreed amount under subsection 85(1) in respect of such eligible property; and

(b)   the aggregate amount of liabilities assumed by Holdco A Sub shall not exceed the aggregate of the agreed amounts under subsection 85(1) in respect of all eligible property transferred to Holdco A Sub.

33.   The increase to the PUC of the Holdco A Sub Special Shares that are issued to DC as consideration for the property transferred by DC to Holdco A Sub, as described in Paragraph 25, will not exceed the aggregate cost of such property to Holdco A Sub, as determined pursuant to subsection 85(1), where applicable, less the aggregate amount of DC’s liabilities assumed by Holdco A Sub for such property, as described in Paragraph 28. For greater certainty, the increase to the PUC of the Holdco A Sub Special Shares will not exceed the maximum amount that could be added to the PUC of such shares, having regard to subsection 85(2.1).

Subsection 20(24) Election

34.   DC will make payments to Holdco A Sub in consideration for Holdco A Sub assuming undertakings of DC to which paragraph 12(1)(a) applies. Any such payments made by DC to Holdco A Sub will be considered to be part of the distribution, as described in Paragraph 25, made by DC to Holdco A Sub. For purposes of paragraph 20(24)(b), Holdco A Sub or Holdco A (after the winding-up of Holdco A Sub) will receive the amounts in the course of the business and will include the amount in income under paragraph 12(1)(a). Holdco A Sub and DC will elect, jointly and in prescribed form within the time referred to in subsection 20(25), to have the rules in subsection 20(24) apply.

Share Purchases and Redemptions

35.   Immediately subsequent to the transactions described in Paragraphs 25 to 34, DC will purchase for cancellation, a portion of the DC Common Shares having a FMV equal to XXXXXXXXXX the CDA of DC at that time. DC will elect pursuant to the provisions of subsection 83(2) such that the dividend deemed to be paid to Holdco A as a result of such purchase for cancellation of DC Common Shares shall be deemed to be a dividend paid out of the capital dividend account of DC and in consideration therefor, DC will issue to Holdco A a non-interest bearing note (the “DC CDA Purchase Note”) payable on demand and having a principal amount and FMV equal to the aggregate FMV of such DC Common Shares (the “DC CDA Common Share Purchase Amount”). Holdco A will accept the DC CDA Purchase Note as full payment for all the aggregate FMV of the DC Common Shares being purchased.

36.   Immediately subsequent to the transaction described at Paragraph 35, all of the remaining DC Common Shares held by Holdco A will be purchased for cancellation by DC, and in consideration therefore, DC will issue to Holdco A a non-interest bearing note (the “DC Non‑CDA Purchase Note”) payable on demand and having a principal amount and FMV equal to the aggregate FMV of such DC Common Shares (the “DC Non‑CDA Common Share Purchase Amount”). Holdco A will accept the DC Non-CDA Purchase Note as full payment for all the aggregated FMV of the DC Common Shares being purchased.

37.   Holdco A Sub will redeem all of the Holdco A Sub Special Shares held by DC. In consideration of such redemption, Holdco A Sub will issue to DC a demand note in an amount equal to the aggregate Holdco A Sub Special Shares Redemption Amount of the shares so redeemed. This demand note will be referred to as the “Holdco A Sub Redemption Note”. DC will accept the Holdco A Sub Redemption Note as full payment for the aggregate Holdco A Sub Redemption Amount of the shares so redeemed.

Wind-Up of Holdco A Sub

38.   Immediately after the redemption of the Holdco A Sub Special Shares, Holdco A will by special resolution resolve to wind-up and dissolve Holdco A Sub pursuant to the XXXXXXXXXX. On the winding-up of Holdco A Sub and under the terms of the agreement governing its winding-up:

(a)   all of the property of Holdco A Sub, including all of the property that it received from DC as described in Paragraph 25, will be distributed to Holdco A; and

(b)   all of the liabilities of Holdco A Sub, including the Holdco A Sub Redemption Note, will be assumed by Holdco A.

39.   XXXXXXXXXX.

Mutual and Reciprocal Offset of Notes

40.   The DC CDA Purchase Note and the DC Non-CDA Purchase Note on one hand (collectively, the “DC Notes”) and the Holdco A Sub Redemption Note on the other hand will be mutually and reciprocally offset and cancelled whether the amount of the Holdco A Sub Redemption Note and the aggregate of the amounts of the DC Notes are equal or not.

Fiscal Year End

41.   The DC Stub Fiscal Year commencing on XXXXXXXXXX will come to a close at the end of the DC Stub Fiscal Year (assuming the request for a change in year end is granted by the Tax Services Office).

Holdco A Sub Dissolution

42.   Following completion of the above Proposed Transactions and subsequent to receiving a CRA assessment for the taxation year in which the winding-up of Holdco A Sub occurs and governmental approval to dissolve, Holdco A Sub will file Articles of Dissolution pursuant to the XXXXXXXXXX. Upon receipt of a certificate of dissolution, Holdco A Sub will be dissolved.

43.   After the purchase for cancellation of the DC common shares held by Holdco A, DC will be controlled by a group formed by B and C.

PURPOSE OF THE PROPOSED TRANSACTIONS

44.   XXXXXXXXXX.

45.   Thus, the purpose of the Proposed Transactions is to implement the “single-wing butterfly” portion of the Framework for Settlement by dividing rateably, proportionately and on an income tax deferred basis, DC’s assets, liabilities and tax accounts (including undepreciated capital cost, CDA and RDTOH) between Holdco A on one hand and DC on the other hand in order to provide Holdco A with direct ownership of XXXXXXXXXX of DC’s assets under the separate and independent control and management of A and leave DC with ownership of XXXXXXXXXX (XXXXXXXXXX) of such assets remaining under the control and management of B and C.

46.   XXXXXXXXXX.

ADDITIONAL INFORMATION

47.   Except as described herein, no property has been or will be acquired by DC, in contemplation of and before the transfer, by DC, of its properties to Holdco A Sub as described in Paragraph 25, other than in a transaction described in subparagraphs 55(3.1)(a)(i) to (iv).

48.   None of DC, Holdco A Sub or Holdco A has any expectation or intention of disposing any property owned by it, as part of a series of transactions or events that includes the Proposed Transactions, to a person who is not a related person or, as part of the series, ceased to be related, or to a partnership, other than in the ordinary course of such corporation’s business.

49.   None of DC, Holdco B, Holdco C, Holdco A Sub or Holdco A is or will be, at any time during a series of transactions or events that includes the Proposed Transactions,

(a)   a specified financial institution;

(b)   a restricted financial institution; or

(c)   a corporation described in any of paragraphs (a) to (f) of the definition of “financial intermediary corporation.”

50.   None of the shares of the capital stock of DC, Holdco B, Holdco C and Holdco A Sub (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 as defined in paragraph 248(1); or

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

51.   None of the DC Common Shares is a taxable preferred share or a short-term preferred share.

52.   Holdco A did not acquire any of the DC Common Shares as part of a series of transactions in which one of the purposes of such series was to receive a capital dividend.

53.   None of the DC common shares was acquired by Holdco A in a transaction or as part of a series of transactions for the purposes of enabling DC to obtain a dividend refund.

54.   Holdco A, Holdco B and Holdco C each owns XXXXXXXXXX of the issued shares in the capital stock of DCo. It is contemplated that DCo will purchase for cancellation all of Holdco A’s shares in the capital stock of DCo for an amount equal to the FMV of such interest, such value being determined by third-party independent evaluators engaged by DCo on a joint retainer basis with its shareholders.

55.   XXXXXXXXXX Thus, beginning in XXXXXXXXXX, DC began a practice of paying substantial annual dividends to its shareholders, Holdco A, Holdco B and Holdco C. These dividends have been paid out of the large cash surpluses accumulated by DC in the ordinary course of its business. Subsequent to the filing of the Rulings and prior to the Proposed Transactions, DC may pay another annual dividend to its shareholders.

56.   The business number, tax services office, tax centre and address of the taxpayers are as stated below:

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

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

RULINGS GIVEN

Provided that the preceding statements constitute a complete and accurate disclosure of all of the relevant facts, proposed transactions, purposes of the proposed transactions and additional information, and provided that the proposed transactions are undertaken in the manner described above, our Rulings are set forth below:

A.    As a result of the transactions described in Paragraph 20:

(a)   pursuant to subsection 84(1), as a result of the increase by DC of the PUC in respect of the common shares of its capital stock, DC will be deemed to have paid at that time a dividend on those shares equal to the amount of the increase of the PUC and Holdco A, Holdco B and Holdco C will be deemed to have received at that time such a dividend proportionately;

(b)   pursuant to paragraph 53(1)(b), the amount of this taxable dividend will be added to the ACB of the recipient’s DC common shares; and

(c)   subsection 55(2) will not apply to such dividend deemed to have been received by each of Holdco A, Holdco B and Holdco C provided that such dividend received by each of them does not exceed the amount of safe income on hand that is attributable to the common shares of the capital stock of DC held by each of them at the safe income determination time for the series of transactions that includes the payment of the dividend.

B.    The taxable dividend described in Ruling A:

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

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

(c)   will be deductible by Holdco B or Holdco C, as the case may be, pursuant to subsection 112(1) in computing its taxable income in the year in which the dividend is deemed to have been received and, for greater certainty, such deduction will not be denied by any of the provisions of subsections 112(2.1), (2.2), (2.3) and (2.4);

(d)   will not be subject to tax under Part IV, except as provided for in paragraph 186(1)(b), as each recipient is connected with DC at that time by virtue of paragraph 186(4)(b); and

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

C.    Subject to the application of subsection 69(11), provided that the requisite joint elections are filed by DC and Holdco Sub A in prescribed form and manner within the prescribed time 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, the provisions of subsection 85(1) will apply to the DC’s transfers of property to Holdco A Sub referred to in Paragraphs 25 to 33 above such that the agreed amount in respect of each such transfer will be deemed pursuant to paragraph 85(1)(a) to be DC’s proceeds of disposition of the particular property and Holdco A Sub’s cost thereof.

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

For greater certainty, the provisions of paragraph 85(1)(b) will not be applicable in respect of the transfer of a particular property where the portion of the XXXXXXXXXX or other liability of DC that relates to that particular property, that exceeds the agreed amount with respect to the particular property, is not assumed by Holdco A Sub as consideration for the transfer of that particular property but is assumed by Holdco A Sub as consideration for the transfer of another property as described in Paragraph 32.

For purposes of determining the agreed amount with respect to depreciable property that will be transferred to Holdco A Sub, the reference to “the undepreciated capital cost to the taxpayer of all the property of that class immediately before the disposition” in subparagraph 85(1)(e)(i) shall be interpreted to mean the portion of the undepreciated capital cost to DC of all the property of that class immediately before the transfer that the FMV of the assets of that class transferred to Holdco A Sub is of the FMV of all assets of that class owned by DC.

D.    By virtue of subsection 20(24), DC will be entitled to deduct in computing its income for the taxation year in which the assumption occurs, the amount paid to Holdco A Sub in respect of the undertakings of DC to which paragraph 12(1)(a) applies and are assumed by Holdco A Sub, as described in Paragraph 34 and which are the subject of an election described in Paragraph 34, to the extent that the payments are reasonable, and the amount so assumed will be deemed to be an amount described in paragraph 12(1)(a) in respect of Holdco A Sub or Holdco A (after the winding-up of Holdco A Sub).

E.    Subsection 84(3) will apply on the purchase for cancellation of the DC common shares held by Holdco A described in Paragraph 35, to deem DC to have paid a dividend on a separate class of shares making up those shares purchased for cancellation and to deem Holdco A to have received a dividend on such separate class of shares of an amount equal to the amount, if any, by which the DC CDA Purchase Note exceeds the aggregate PUC in respect of such shares immediately before the purchase for cancellation. Any such dividend with respect to the purchase for cancellation described in Paragraph 35 above:

(a)   will be deemed by subsection 83(2) to be a capital dividend to the extent of DC’s CDA immediately before the purchase for cancellation and will not be included in computing the income of Holdco A, in accordance with paragraph 83(2)(a) and (b), provided that DC elects in respect of the full amount of such deemed dividend in prescribed manner and prescribed form within the time required by subsection 83(2);

(b)   will be added to the CDA of Holdco A in accordance with paragraph (b) of the definition of “capital dividend account” in subsection 89(1); and

(c)   will not be subject to subsection 55(2).

For greater certainty, subsection 83(2.1) will not apply to deem the dividend resulting from the aforementioned purchase for cancellation of DC common shares held by Holdco A not to be a capital dividend.

F.    Subsection 84(3) will apply on the redemption or purchase for cancellation, as the case may be, of:

(a)   the DC common shares held by Holdco A described in Paragraph 36, to deem DC to have paid and Holdco A to have received a dividend on such shares equal to the amount, if any, by which the DC Non-CDA Purchase Note exceeds the aggregate PUC in respect of such shares immediately before the purchase for cancellation; and

(b)   the Holdco A Sub Special shares held by DC described in Paragraph 37, to deem Holdco A Sub to have paid and DC to have received a dividend on such shares equal to the amount, if any, by which the Holdco A Sub Redemption Note exceeds the aggregate PUC in respect of such shares immediately before the redemption.

G.    The taxable dividends as described in Ruling F 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 any of the provisions of 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, as the case may be, by virtue 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); and

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

For greater certainty, subsection 129(1.2) will not apply to deem the dividend resulting from the purchase for cancellation of DC common shares held by Holdco A not to be a taxable dividend for purposes of subsection 129(1).

H.    Provided that, as part of the series of transaction 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);

(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, Proposed Transactions and Additional Information, then by virtue of paragraph 55(3)(b), subsection 55(2) will not apply to the taxable dividends referred to in Ruling F above and for greater certainty, subsection 55(3.1) will not apply to deny the exemption under paragraph 55(3)(b).

For greater certainty, the redemption or purchases for cancellation described in Paragraph 35, 36 and 37 above will be “permitted redemptions” as defined in subsection 55(1).

I.    The set-off and cancellation of the DC CDA Purchase Note and the DC Non–CDA Purchase Note against the Holdco A Sub Redemption Note described in paragraph 40 above will not, in and of itself, give rise to a “forgiven amount” within the meaning of subsections 80(1) or 80.01(1). In addition, neither DC nor Holdco A or Holdco A Sub will otherwise realize a gain or incur any loss as a result of such set-off and cancellation.

J.    The provisions of subsection 88(1) will apply to the winding-up of Holdco A Sub into Holdco A as described in Paragraph 38, such that:

(a)   Holdco A Sub will be deemed, pursuant to paragraph 88(1)(a), to have disposed of its assets (the Distribution Property) in each case for an amount equal to the cost amount to Holdco A Sub of the particular asset immediately before the winding-up;

(b)   Holdco A will be deemed, pursuant to paragraph 88(1)(b), to have disposed of the Holdco A Sub common shares that Holdco A owns for proceeds of disposition equal to the greater of the amounts described in subparagraphs 88(1)(b)(i) and (ii); and

(c)   Holdco A will be deemed, pursuant to paragraph 88(1)(c), to have acquired the assets of Holdco A Sub that are distributed to Holdco A on the winding-up for an amount equal to the proceeds of disposition to Holdco A Sub of each property; and

(d)   pursuant to paragraph 88(1)(f), where property that was depreciable property of a prescribed class of Holdco A Sub has been distributed to Holdco A and the capital cost of the property to Holdco A Sub exceeds the amount deemed by paragraph 88(1)(a) to be Holdco A Sub’s proceeds of disposition, for the purposes of sections 13 and 20 and any regulations made under paragraph 20(1)(a), the capital cost to Holdco A of the property will be deemed to be the amount that was the capital cost of the property to Holdco A Sub and the excess will be deemed to have been allowed to Holdco A in respect of the property under regulations under paragraph 20(1)(a) in computing income for taxation years before the acquisition by Holdco A of the property.

K.    Provided that the condition specified in paragraph 1100(2.2)(g) of the Regulations is satisfied, paragraph 1100(2.2)(h) of the Regulations will apply so that no amount will be included by Holdco A under paragraph 1100(2)(a) of the Regulations in respect of depreciable property of a prescribed class that is property acquired by Holdco A Sub from DC, on the transfer described in Paragraph 25 above, and then by Holdco A from Holdco A Sub, on winding-up of Holdco A Sub, as described in Paragraph 38 above.

L.    The provisions of subsections 15(1), 56(2), 56(4), 69(1), 69(4) and 246(1) will not apply to the Proposed Transactions, in and by themselves.

M.    Subsection 245(2) will not apply as a result of the Proposed Transactions, in and by themselves, to redetermine 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 before XXXXXXXXXX.

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

COMMENTS

Unless otherwise expressly confirmed, nothing in this letter should be construed as implying that the CRA has confirmed, reviewed or has made any determination in respect of:

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

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

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

d)    any other tax consequences relating to the Definitions, Facts, Proposed Transactions and Additional Information described herein, 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. In addition, any such adjustment could affect the ruling given in Ruling H above. 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.

OPINION

On July 31, 2015, legislative proposals relating to the Income Tax Act and Regulations were issued by the Department of Finance. Under the proposed legislation, there is some changes to subsection 55(2) and the addition of subsection 55(2.1). If the legislation is enacted as proposed, ruling A(c) would be changed considering a new definition of “safe income on hand” that could read as follows:

“safe income on hand” in respect of a particular share of a corporation at a particular time means the income earned or realized (as determined pursuant to subsection 55(5)), to the extent that it is on hand, by any corporation (after 1971 and before the safe-income determination time for the transaction, event or series of transactions or events that includes the Proposed Transactions described herein) that could reasonably be considered to contribute to the capital gain that could be realized on a disposition at FMV, immediately before the dividend, of the shares on which the dividend is received;

Ruling A(c) would read as follows:

“subsection 55(2) will not apply to such dividend deemed to have been received by each of Holdco A, Holdco B and Holdco C provided that such dividend received by each of them does not exceed the amount of safe income on hand that could reasonably be considered to contribute to the capital gain that could be realized on a disposition at FMV, immediately before the dividend, of the common shares of the capital stock of DC held by each of them at the safe income determination time for the series of transactions that includes the payment of the dividend.”

In the legislative proposals relating to the Income Tax Act and Regulations, there is an amendment to subparagraph 53(1)(b)(ii). Accordingly, if the legislation is enacted as proposed, Ruling A(b) would read as follows:

“pursuant to paragraph 53(1)(b), the amount of this taxable dividend will be added to the ACB of the recipient’s DC common shares provided that such dividend would not be subject to subsection 55(2) because the amount of the dividend would not exceed the amount of the safe income on hand that could reasonably be considered to contribute to the capital gain that could be realized on a disposition at FMV, immediately before the dividend, of the shares on which the dividend is received; and”

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

Yours truly,

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

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