2015-0582431R3 Butterfly Reorganization

Principal Issues: Do the Proposed Transactions qualify for the butterfly exemption under paragraph 55(3)(b)?

Position: Yes

Reasons: Standard butterfly reorganization.

Author: XXXXXXXXXX
Section: Paragraphs 55(3)(b) and 55(3.1)(a)

XXXXXXXXXX                                                                                                                           2015-058243

XXXXXXXXXX, 2016

Dear XXXXXXXXXX:

Re:   XXXXXXXXXX
         Advance Income Tax Ruling Request

This is in reply to your letter dated XXXXXXXXXX, 2015, in which you requested an advance income tax ruling on behalf of the above-noted taxpayers.  We also acknowledge the information provided in subsequent letters, e-mails and telephone discussions (XXXXXXXXXX).  The information that you provided in such correspondence and in the telephone discussions form part of this letter but, only to the extent described herein.

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 person related to any of the taxpayers;

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

(iii) under objection by the taxpayers or a person related to any of the taxpayers;

(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 statutory references 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, all statutory reference are to the relevant provisions of the Act.

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

DEFINITIONS

In this ruling, unless otherwise noted, the following terms have the meaning specified herein.  All references in the singular include the plural.

“ACB” means ‘adjusted cost base’ as that term is defined in section 54;

“active business” has the meaning assigned by subsection 248(1);

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

“arm's length” has the meaning assigned by subsection 251(1);

“BCA” means XXXXXXXXXX;

“BN” means ‘business number’ as that term is defined in subsection 248(1);

XXXXXXXXXX;

“capital dividend” has the meaning assigned by subsection 83(2);

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

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

“CDA” means ‘capital dividend account’ as that term is defined in subsection 89(1);

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

“CRA” means the Canada Revenue Agency;

“DC” means XXXXXXXXXX;

“DC Common Shares” means the Class A common shares in the capital of DC referred to in Paragraph 5;

“DC Class K Shares” means the Class K preferred shares in the capital of DC referred to in Paragraph 5;

“DC Class L Shares” means the Class L preferred shares in the capital of DC referred to in Paragraph 5;

“DC Shares” means collectively the DC Common Shares, the DC Class K Shares and the DC Class L Shares;

“DC Transfers” refers to the transfers of property by DC to TC1 and TC2 described in Paragraph 25;

“depreciable property” has the meaning assigned by subsection 13(21);

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

“distribution property” has the meaning assigned by Paragraph 25;

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

“dividend refund” has the meaning assigned by subsection 129(1);

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

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

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

“FMV” means ‘fair market value,’ which refers to the amount, expressed in money terms, that is the highest price available in an open and unrestricted market between informed and prudent parties dealing at arm’s length and under no compulsion to act and contracting for a taxable purchase and sale, expressed in terms of cash;

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

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

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

“Mr. A” means XXXXXXXXXX, an individual who is resident in Canada;

"Mr. B" means XXXXXXXXXX, an individual who is resident in Canada;

XXXXXXXXXX

“Paragraph” means a numbered paragraph of this letter;

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

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

“Promissory Note #1” means the non-interest bearing demand promissory note to be issued by TC1 to DC on the redemption of the preferred shares in the capital of TC1 held by DC described in Paragraph 28(a);

“Promissory Note #2” means the non-interest bearing demand promissory note to be issued by TC2 to DC on the redemption of the preferred shares in the capital of TC2 held by DC described in Paragraph 28(b);

“Proposed Transactions” means the transactions described in Paragraphs 15 to 36;

“RDTOH” means ‘refundable dividend tax on hand’ as that term is defined in subsection 129(3);

“Redemption Notes” means collectively Promissory Note #1 and Promissory Note #2;

“related persons” 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);

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

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

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

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

“Shareholder Loans” means the amounts due from DC to Mr. A and Mr. B described in Paragraph 12;

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

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

“SIN” means social insurance number;

“Subject Transactions” means the transactions described in Paragraphs 11.1 to 11.3;

“substantial interest” has the meaning assigned by subsection 191(2);

“stated capital account” has the meaning assigned under the BCA;

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

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

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

“TC1” refers to the corporation to be incorporated by Mr. A as described in Paragraph 15;

“TC1 Preferred Shares” refers to the class of preferred shares in the capital of TC1 described in Paragraph 16;

“TC2” refers to the corporation to be incorporated by Mr. B as described in Paragraph 18;

“TC2 Preferred Shares” refers to the class of preferred shares of TC2 described in Paragraph 19;

“TCC” means ‘taxable Canadian corporation’ as that term is defined in subsection 89(1);

“UCC” means ‘undepreciated capital cost’ as that term is defined in subsection 13(21); and

“winding-up dividend” means the dividend arising on the winding-up of DC by virtue of subsection 84(2) and paragraph 88(2)(b), as described in Paragraphs 31 and 32, and Ruling C.

FACTS

1.    Mr. A is a resident of Canada and resides in the XXXXXXXXXX.

2.    Mr. B is a resident of Canada and resides in the XXXXXXXXXX.

3.    Mr. A and Mr. B. are brothers.

4.    DC is a TCC and a CCPC incorporated on XXXXXXXXXX and is governed under the BCA.  The head office of DC is located in XXXXXXXXXX.  DC files it tax returns with the XXXXXXXXXX and deals with the XXXXXXXXXX.  The taxation year of DC ends on XXXXXXXXXX each year.

5.    The authorized share capital of DC consists of the following:

(a) Class A (“DC Common Shares”), B, C and D voting common shares without nominal or par value;

(b) Class E, F, G, H non-voting common shares without nominal or par value;

(c) Class I voting, redeemable common shares;

(d) Class J non-voting, redeemable common shares;

(e) Class K (“DC Class K Shares”) voting, redeemable and retractable preferred shares without nominal or par value; and

(f) Class L (“DC Class L Shares”) non-voting, redeemable and retractable preferred shares without nominal or par value.

6.    The dividend entitlement of the DC Common Shares is described in article XXXXXXXXXX of DC’s articles of incorporation as follows:

XXXXXXXXXX

7.    The dividend entitlement of the DC Class K Shares and DC Class L Shares is described in article XXXXXXXXXX of DC’s articles of incorporation as follows:

XXXXXXXXXX

8.    The issued and outstanding share capital of DC is held as follows:

Shareholder Class                                                        $ACB     $PUC        $Redemption Value

Mr. A       XXXX DC Common Shares                           XXXX     XXXX        XXXX
Mr. A       XXXX DC Class K Shares preferred              XXXX     XXXX        XXXX
Mr. A       XXXX DC Class L Shares                              XXXX     XXXX        XXXX
                                                                                       XXXX     XXXX

Mr. B       XXXX DC Common Shares                            XXXX     XXXX        XXXX
Mr. B       XXXX DC Class K Shares preferred               XXXX     XXXX        XXXX
Mr. B       XXXX DC Class L Shares                               XXXX     XXXX        XXXX
                                                                                        XXXX     XXXX

Total       XXXX DC Common Shares                              XXXX     XXXX
               XXXX DC Class K Shares                                XXXX     XXXX
               XXXX DC Class L Shares                                XXXX      XXXX

The DC Class L Shares and the DC Class K Shares are taxable preferred shares and short-term preferred shares.  The DC Common Shares are not taxable preferred shares nor short-term preferred shares.

9.    The history of the DC share issuances is as follows:

(a)   On XXXXXXXXXX Mr. A subscribed for XXXXXXXXXX DC Common Shares for XXXXXXXXXX and Mr. B subscribed for XXXXXXXXXX DC Common Shares for XXXXXXXXXX.

(b)   On XXXXXXXXXX, Mr. A transferred XXXXXXXXXX assets with an aggregate FMV of XXXXXXXXXX to DC in consideration of DC issuing (i) XXXXXXXXXX DC Class L Shares with an aggregate FMV and redemption amount of XXXXXXXXXX and (ii) debt for the balance.  An election was made with respect to the transfer under subsection 85(1).

(c)   On XXXXXXXXXX, Mr. B transferred XXXXXXXXXX assets with an aggregate FMV of XXXXXXXXXX to DC in consideration of DC issuing (i) XXXXXXXXXX DC Class L Shares with an aggregate FMV and redemption amount of XXXXXXXXXX; and (ii) debt for the balance.  An election was made with respect to the transfer under subsection 85(1).

(d)   On XXXXXXXXXX a partnership called “XXXXXXXXXX” in which Mr. A and Mr. B were XXXXXXXXXX partners, transferred XXXXXXXXXX assets with an aggregate FMV of $XXXXXXXXXX to DC in consideration of DC issuing (i) XXXXXXXXXX DC Class K Shares with an aggregate FMV and redemption amount of XXXXXXXXXX and (ii) debt for the balance. An election was made with respect to the transfer under subsection 85(2).  The XXXXXXXXXX partnership was wound up within XXXXXXXXXX days of the transfer, pursuant to subsection 85(3).  As a result of the winding up of the partnership, the consideration received by the partnership from DC on the transfer of the XXXXXXXXXX assets was distributed equally between Mr. A and Mr. B.

(e)   On XXXXXXXXXX, Mr. A transferred XXXXXXXXXX assets with an aggregate FMV of $XXXXXXXXXX to DC in consideration of DC issuing (i) XXXXXXXXXX DC Class L Shares with an aggregate FMV and redemption amount of $XXXXXXXXXX and (ii) debt for the balance.  An election was made with respect to the transfer under subsection 85(1).

(f)   On XXXXXXXXXX, Mr. B transferred XXXXXXXXXX assets with an aggregate FMV of $XXXXXXXXXX to DC in consideration of DC issuing (i) XXXXXXXXXX DC Class L Shares with an aggregate FMV and redemption amount of $XXXXXXXXXX; and (ii) debt for the balance. An election was made with respect to the transfer under subsection 85(1).

None of the DC Class K Shares or DC Class L Shares issued as part of the foregoing transactions has been redeemed by DC and remain issued and outstanding as at the date hereof.

As a result of the averaging of the aggregate PUC of the DC Class L Shares arising from the issuances of the DC Class L Shares to Mr. A and Mr. B described in Paragraphs 9(b), (c), (e) and (f), the PUC of each DC Class L Share held by Mr. A exceeds its ACB, and the PUC of each DC Class L Share held by Mr. B is less than its ACB.

There have been no changes to DC’s authorized or issued share capital since XXXXXXXXXX.

10.   Mr. A and Mr. B each hold their respective shares in DC as capital property for the purposes of the Act and all of such shares are eligible property.  Mr. A and Mr. B also own XXXXXXXXXX other XXXXXXXXXX.

11.   DC’s principal business is XXXXXXXXXX.  All of the property that will be transferred by DC to either TC1 or TC2 pursuant to the DC Transfers and which will be subject to an election made pursuant to subsection 85(1), are eligible property.

11.1. DC’s assets include XXXXXXXXXX.  The XXXXXXXXXX were purchased by DC on XXXXXXXXXX, for a purchase price of $XXXXXXXXXX.  The XXXXXXXXXX were purchased by DC between XXXXXXXXXX and XXXXXXXXXX for an aggregate purchase price of $XXXXXXXXXX. 

11.2. The purchase price for the XXXXXXXXXX was financed, in part, by borrowing $XXXXXXXXXX from the XXXXXXXXXX at an interest rate of prime plus XXXXXXXXXX%.  This loan is repayable in annual instalments of $XXXXXXXXXX.  The outstanding balance of this loan as at XXXXXXXXXX, was $XXXXXXXXXX.

11.3. The aggregate purchase price of the XXXXXXXXXX was financed, in part, by a loan from the XXXXXXXXXX that was approved to a maximum of $XXXXXXXXXX at an interest rate of prime plus XXXXXXXXXX%.  This loan is repayable in annual instalments of $XXXXXXXXXX.  The outstanding balance of this loan as at XXXXXXXXXX, was $XXXXXXXXXX.

The transactions described in Paragraphs 11.1 to 11.3 are referred to collectively as the Subject Transactions.

12.   As at XXXXXXXXXX, DC owed the following amounts to Mr. A and Mr. B as Shareholder Loans:

Mr. A                         $XXXXXXXXXX
Mr. B                         $XXXXXXXXXX

Total                         $XXXXXXXXXX

13.   As at XXXXXXXXXX DC had the following tax account balances:

RDTOH                   $XXXXXXXXXX
GRIP                       $XXXXXXXXXX
CDA                        $XXXXXXXXXX

14.   On XXXXXXXXXX, DC declared and paid a dividend in the amount of $XXXXXXXXXX on the DC Common Shares.  The dividend was sufficient to obtain a full refund of the balance of the RDTOH of DC as at its XXXXXXXXXX taxation year end.  The purpose of the dividend was to avoid a circular RDTOH calculation that could otherwise arise if DC had an RDTOH balance at the time of the implementation of the Proposed Transactions.  DC does not expect that any additional amounts will be added to its RDTOH following the payment of the foregoing dividend and prior to the dissolution of DC as described in Paragraph 35.

PROPOSED TRANSACTIONS

The Proposed Transactions will occur in the order presented unless otherwise indicated, with the exception of filing the applicable election forms, which will be filed within the applicable due dates, unless otherwise indicated, following the completion of the Proposed Transactions.

15.   TC1 will be incorporated under the BCA.  Mr. A will be the sole shareholder of TC1.  TC1 will be a TCC and a CCPC.

16.   The authorized share capital of TC1 will include at least XXXXXXXXXX of preferred shares (“TC1 Preferred Shares”) and XXXXXXXXXX of common shares.  A TC1 Preferred Share will be entitled to receive dividends, be redeemable and retractable for a redemption amount equal to the FMV of the consideration for which such share was issued, subject to a price adjustment clause; and be entitled to receive such redemption amount together with any declared and unpaid dividends on the liquidation, dissolution or winding-up of the corporation.

17.   No shares in the capital of TC1 will be issued on incorporation.

18.   TC2 will be incorporated under the BCA.  Mr. B will be the sole shareholder of TC2.  TC2 will be a TCC and a CCPC.

19.   The authorized share capital of TC2 will include at least XXXXXXXXXX of preferred shares (“TC2 Preferred Shares”) and XXXXXXXXXX of common shares. A TC2 Preferred Share will be entitled to receive dividends, be redeemable and retractable for a redemption amount equal to the FMV of the consideration for which such share was issued, subject to a price adjustment clause; and be entitled to receive such redemption amount together with any declared and unpaid dividends on the liquidation, dissolution or winding-up of the corporation.

20.   No shares in the capital of TC2 will be issued on incorporation.

21.   Mr. A will transfer all of his DC Shares to TC1.  As consideration for the transfer, Mr. A will receive common shares in the capital of TC1 with an aggregate FMV equal to the aggregate FMV, at the time of the transfer, of the DC Shares transferred to TC1.  Mr. A and TC1 will elect, jointly, in the prescribed form and within the time limit referred to in subsection 85(6), to have the rules in subsection 85(1) apply to the transfer of the DC Shares by Mr. A to TC1.  The agreed amount will be the lesser of the amounts described in subparagraphs 85(1)(c.1)(i) and (ii).  The amount added to the stated capital account of the common shares of TC1 issued to Mr. A will be restricted to the greater of (i) the aggregate PUC, immediately before the disposition, in respect of the DC Shares transferred to TC1; and (ii) the aggregate ACB to Mr. A, immediately before the disposition, of the DC Shares transferred to TC1, determined in accordance with paragraphs 84.1(2)(a) and (a.1).  Immediately after the transfer, the DC Shares will be the only asset of TC1.  TC1 will hold its DC Shares as capital property.

22.   Mr. B will transfer all of his DC Shares to TC2.  As consideration for the transfer, Mr. B will receive common shares in the capital of TC2 with an aggregate FMV equal to the aggregate FMV, at the time of the transfer, of the DC Shares transferred to TC2.  Mr. B and TC2 will elect, jointly, and in the prescribed form and within the time limit referred to in subsection 85(6), to have the rules in subsection 85(1) apply to the transfer of the DC Shares to TC2.  The agreed amount will be the lesser of the amounts described in subparagraphs 85(1)(c.1)(i) and (ii). The amount added to the stated capital account of the common shares of TC2 issued to Mr. B will be restricted to the greater of (i) the aggregate PUC, immediately before the disposition, in respect of the DC Shares transferred to TC2; and (ii) the aggregate ACB to Mr. B, immediately before the disposition, of the DC Shares transferred to TC2, determined in accordance with paragraphs 84.1(2)(a) and (a.1).  Immediately after the transfer, the DC Shares will be the only asset of TC2.  TC2 will hold its DC Shares as capital property.

23.   Immediately prior to the DC Transfers, the property of DC will be classified into the following three types of property for the purposes of the definition of distribution as follows:

(a) cash or near-cash property, comprising all of the current assets of DC, including cash, marketable securities, accounts receivable, trade receivables, a dividend refund receivable, inventory and prepaid expenses;

(b) business property, comprising all of the assets of DC, other than cash or near-cash property, any income from which would, for purposes of the Act, be income from an active business (other than a specified investment business) including goodwill; and

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

For greater certainty, for purposes of the DC Transfers:

(i) any tax accounts, such as the balance of any non-capital losses of DC or the balance of any RDTOH, GRIP or CDA of DC, if any, will not be considered property;

(ii) deferred taxes will not be considered property; and

(iii) advances that have a term of less than XXXXXXXXXX months or are due on demand are considered cash or near-cash property.

24.   In determining the net FMV of each type of property of DC immediately before the DC Transfers, the liabilities of DC will be allocated to, and deducted in the calculation of the net FMV of each such type of property of DC in the following manner:

(a) current liabilities of DC will be allocated to the cash or near-cash property of DC in the proportion that the FMV of each such property is of the aggregate FMV of all cash or near-cash property of DC. The total amount of DC’s current liabilities to be allocated to DC’s cash or near cash property will not exceed the aggregate FMV of all of DC’s cash or near-cash property;

(b) liabilities of DC, other than current liabilities, that relate to a particular property will be allocated to the particular property (and effectively to the type of property to which the particular property belongs) to the extent of its FMV. The liabilities that pertain to a type of property but not to a particular property will be allocated to that type of property, but not in excess of the net FMV of such type after the allocation of liabilities to a particular property, as described in Paragraph 24(b); and

(c)   any liabilities that remain after the allocations described in Paragraphs 24(a) and (b) are made, will then be allocated to the cash or near-cash property, business property and investment property of DC, on the basis of the relative net FMV of each type of property immediately prior to the allocation of such excess, but after the allocation of the liabilities as described in Paragraphs 24(a) and (b).

For greater certainty, for purposes of the determination described in Paragraph 24:

(i) the amount of any deferred income tax will not be considered a liability because such amount does not represent a legal obligation;

(ii) amounts owing that have a term of less than XXXXXXXXXX months or are due on demand are considered current liabilities;

(iii) current liabilities include amounts normally classified as current liabilities, including accounts payable, bonuses payable, and the current portion of any long-term debt; and

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

The Shareholder Loans will be considered current liabilities to the extent that they are repayable within the year, repayable on demand, or would normally be included as current liabilities.

25.   Immediately following the determination of the types of property and the net FMV of each type of property described in Paragraphs 23 and 24, DC will transfer (the “DC Transfers”) simultaneously to each of TC1 and TC2 a proportionate share of all of its three types of property (collectively referred to as the “distribution property”), such that immediately following the DC Transfers and liability assumptions described in Paragraph 26(a), the net FMV of the cash or near-cash property, business property and investment property transferred by DC to TC1 and TC2 will approximate the proportion of the net FMV of all the assets of DC of a corresponding type of property determined immediately before the DC Transfers that:

a) the aggregate FMV, immediately before the DC Transfers, of the DC Shares owned by TC1 or TC2, as the case may be, at that time,

      is of

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

For the purpose of Paragraph 25, the expression “approximate” means that the discrepancy from that proportion, if any, would not exceed XXXXXXXXXX%, determined as a percentage of the net FMV of each type of property which each of TC1 and TC2 has received as compared to what the amount of property that TC1 or TC2 would have received had it received its appropriate pro rata share of the net FMV of that type of property at that time.

26.   As consideration for the DC Transfers, TC1 and TC2, as the case may be, will:

(a)   assume such liabilities of DC, as appropriate, so that TC1 and TC2, respectively, will receive a proportionate share of the net FMV of each type of property owned by DC, as determined in accordance with Paragraphs 23 and 24; and

(b)   issue TC1 Preferred Shares or TC2 Preferred Shares, as the case may be, to DC which will have an aggregate redemption amount and aggregate FMV equal to the amount by which the aggregate FMV, at the time of the DC Transfers, of the distribution property received by TC1 and TC2, as the case may be, exceeds the aggregate amount of the liabilities of DC assumed by TC1 and TC2, as the case may be, as described in Paragraph 26(a).  DC will hold the TC1 Preferred Shares and the TC2 Preferred Share as capital property.  The TC1 Preferred Shares and the TC2 Preferred Shares will be taxable preferred shares and short-term preferred shares.

27.   In respect of the DC Transfers, DC will jointly elect with TC1 or TC2, as the case may be, in prescribed form and within the time allowed by subsection 85(6) but prior to the dissolution of DC described in Paragraph 35, to have the provisions of subsection 85(1) apply to the transfers of each eligible property of DC that is transferred by DC to TC1 and TC2, as the case may be.  The agreed amount in respect of each such eligible property will be as follows:

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

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

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

(d)   in the case of XXXXXXXXXX owned in connection with the XXXXXXXXXX business of DC, an amount determined in accordance with the formula set out in paragraph 85(1)(c.2).

The amount of the liabilities assumed by TC1 or TC2, as the case may be, which are allocated by DC to a particular eligible property that is subject to an election under subsection 85(1), will not exceed the agreed amount for that particular property.  The amount of liabilities assumed by TC1 or TC2, as the case may be, which are allocated by DC to a particular property that is not subject to an election under subsection 85(1), will not exceed the FMV of any such property.

TC1 and TC2 will add to the stated capital account for the TC1 Preferred Shares and TC2 Preferred Shares issued to DC, as the case may be, an amount equal to the amount by which the aggregate of the agreed amounts, in the case of each eligible property, and the aggregate FMV, in the case of other properties, in respect of the distribution property transferred to TC1 and TC2, respectively, exceeds the liabilities of DC assumed by TC1 and TC2, respectively.  For greater certainty, the amount added to the stated capital account for the TC1 Preferred Shares and TC2 Preferred Shares to be issued by TC1 and TC2, respectively, as partial consideration for the DC Transfers, will not exceed the maximum amount that could be added to the aggregate PUC of the TC1 Preferred Shares or the TC2 Preferred Shares without a reduction taking place pursuant to subsection 85(2.1).

28.   Immediately after the DC Transfers, each of TC1 and TC2 will redeem all of the issued TC1 Preferred Shares and TC2 Preferred Shares, as the case may be, held by DC for an amount equal to the aggregate redemption amount and FMV of such shares.  As consideration therefor: (a) TC1 will issue a promissory note which will have a principal amount and FMV equal to the aggregate FMV and the redemption amount of the TC1 Preferred Shares (“Promissory Note #1”); and (b) TC2 will issue a promissory note which will have a principal amount and FMV equal to the aggregate FMV and the redemption amount of the TC2 Preferred Shares (“Promissory Note #2”), to DC.  DC will accept Promissory Note #1 and Promissory Note #2 as payment in full for the preferred shares so redeemed.

29.   Following the DC Transfers, TC1 and TC2 will resolve to wind-up and dissolve DC pursuant to the relevant provisions of the BCA.

30.   In connection with the winding-up of DC, DC will distribute all of its assets to TC1 and TC2 in accordance with their shareholdings.  In particular, DC will:

(a)   assign and distribute Promissory Note #1 issued by TC1 to TC1; and

(b)   assign and distribute Promissory Note #2 issued by TC2 to TC2.

As a result of the assignment and distribution of the Redemption Notes held by DC as described in Paragraph 30, the obligation of each of TC1 and TC2 under its own note will merge and be extinguished.

31.   To the extent that there is CDA in DC at the time of the winding-up of DC and immediately prior to the distribution of the Redemption Notes by DC to TC1 and TC2 as described in Paragraph 30, DC will elect, in the prescribed manner and prescribed 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.

32.   To the extent that there is GRIP in DC at the time of the winding-up of 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) to be an eligible dividend by notifying each of TC1 and TC2 in writing, within the time limit prescribed in subsection 89(14), that the portion of such dividend is an eligible dividend.

33.   Any tax refund that DC is entitled to as a result of over-payment of tax instalments, will be distributed (under the terms of the agreement governing the winding-up of DC) pro rata to each of TC1 and TC2.

34.   After the distribution of the Redemption Notes as described in Paragraph 30 and the distribution of any tax refunds as described in Paragraph 33, but immediately before the formal dissolution of DC described in Paragraph 35, DC will not own or acquire any property or carry on any activity or undertaking.

35.   Within a reasonable time following the distribution of any tax refund described in Paragraph 33 by DC, 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.

36.   Following the DC Transfers, TC1 and TC2 may, from time to time, on arm’s-length commercial terms, rent equipment acquired by the other from DC as a result of the DC Transfers.  The equipment will be rented in situations where there are commercial reasons, such as XXXXXXXXXX.

ADDITIONAL INFORMATION

37.   DC does not exercise significant influence over any corporation or partnership.

38.   Except as described in this letter, no property has been or will be acquired, and no liabilities have been or will be incurred or paid by DC in contemplation of and before the Proposed Transactions, other than in a transaction described in subparagraphs 55(3.1)(a)(i) to (iv).

39.   There has not been and will not be, as part of a series of transactions or events that includes the Proposed Transactions, any disposition or acquisition of property in circumstances described in subparagraph 55(3.1)(b)(i) or (iii), or an acquisition of control in the circumstances described in subparagraph 55(3.1)(b)(ii).

40.   None of the distribution property received by TC1 or TC2 on the DC Transfers will be acquired by a person unrelated to TC1 or TC2, as the case may be, or by a partnership, as part of a series of transactions or events that includes the Proposed Transactions, in the circumstances described in paragraph 55(3.1)(c).

For greater certainty, the joint use of any of the distribution property described in Paragraph 36 will not result in the formation of a partnership nor the acquisition of any such property by either TC1 or TC2, as the case may be, the aggregate FMV of which will, at the time of that acquisition, be greater than 10% of the aggregate FMV, at the time of the DC Transfers, of all of the distribution property received by TC1 or TC2, as the case may be.

41.   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, a restricted financial institution or a corporation described in any of the paragraphs (a) to (f) of the definition of financial intermediary corporation.

42.   During the implementation of the Proposed Transactions, none of the shares of DC, TC1 or TC2 will be:

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

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

(c) the subject of a dividend rental arrangement;

(d)   the subject of any secured undertaking of the type described in paragraph 112(2.4)(a); or

(e)   issued for consideration that is or includes:

(i)   an obligation of the type described in subparagraph 112(2.4)(b)(i), other than an obligation of a corporation that is related (otherwise than by reason of a right referred to in paragraph 251(5)(b)); or

(ii)  any right of the type described in subparagraph 112(2.4)(b)(ii).

43.   Immediately before the redemption of the TC1 Preferred Shares and the TC2 Preferred Shares held by DC described in Paragraph 28, DC will be connected with each of TC1 and TC2 pursuant to paragraph 186(4)(a) and subsection 186(2) and will have a substantial interest in each of TC1 and TC2.

44.   Immediately before the distributions of property by DC to TC1 and TC2 on the winding-up of DC described in Paragraphs 30 and 33, each of TC1 and TC2 will be connected with DC pursuant to paragraph 186(4)(a) and subsection 186(2) and will have a substantial interest in DC.

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

46.   The Proposed Transactions will not result in DC or a related person being unable to pay its existing tax liabilities.

47.   No interest in the XXXXXXXXXX will be transferred to DC.

47.1. None of the Subject Transactions was undertaken in contemplation of any of the Proposed Transactions and each would have been undertaken irrespective of whether any of the Proposed Transactions will be implemented.

None of the Proposed Transactions will be undertaken in contemplation of any of the Subject Transactions and each would have been undertaken irrespective of whether any of the Subject Transactions was implemented.

PURPOSE OF THE PROPOSED TRANSACTIONS

48.   XXXXXXXXXX. The overall purpose of the divisive reorganization is to allow Mr. A to manage his estate separately from Mr. B and vice versa XXXXXXXXXX.

RULINGS

Provided that the preceding statements constitute a complete and accurate disclosure of all relevant facts, proposed transactions and Purpose of the Proposed Transactions, and provided that the Proposed Transactions are completed in the manner described above, we confirm the following:

A.    Subject to the application of subsection 69(11), provided the appropriate joint elections are filed in the prescribed form and manner within the time limit specified in subsection 85(6), subsection 85(1) will apply to the transfer of each eligible property owned by DC to TC1 and TC2 on the DC Transfers 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 eligible property and the transferee’s cost thereof.

For purposes of the joint elections, when determining the agreed amount of depreciable property in the course of the DC Transfers, the reference in subparagraph 85(1)(e)(i) to “the undepreciated capital cost to the taxpayer of all of the property of that class immediately before the disposition” shall mean that proportion of the UCC to the taxpayer of all the property of that class immediately before the disposition that the FMV at that time of the property that is transferred is of the aggregate FMV at that time of all the property of that class.

For greater certainty, paragraph 85(1)(e.2) will not apply to the DC Transfers.

B.    On the redemption by each of TC1 and TC2 of the TC1 Preferred Shares and TC2 Preferred Shares, as the case may be, owned by DC, as described in Paragraph 28, 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 TC1 Preferred Shares and the TC2 Preferred Shares, as the case may be, exceeds the aggregate PUC in respect of those shares immediately before the redemption.

C.    Subsection 84(2) and paragraph 88(2)(b) will apply to the distributions by DC described in Paragraphs 30 and 33 such that:

(a) subject to Rulings C(b), (c) and (d), DC will be deemed to have paid a dividend (a “winding-up dividend”) on the DC Class K Shares, DC Class L Shares and DC Common Shares held by TC1 and TC2, as the case may be, equal to the amount, if any, by which:

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

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

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

(b)   to the extent that DC has a CDA immediately prior to its winding-up, pursuant to subparagraph 88(2)(b)(i), such portion of the winding-up dividend which arises from the distributions 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 31, to be the full amount of a separate dividend that is a capital dividend;

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

(d)   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 Rulings C(b) and C(c).

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

(a)   will be included in computing the income of the recipient corporation deemed to have received such a dividend pursuant to subsection 82(1) and paragraph 12(1)(j);

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

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

(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 have been received;

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

(f)   will not be subject to tax under Part IV except to the extent provided under paragraph 186(1)(b).

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

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

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

which has not been described in this letter, 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) in respect of those dividends.

F.    The distribution and extinguishment of the Redemption Notes described in Paragraph 30 will not give rise to a forgiven amount.  In addition, none of DC, TC1 nor TC2 will otherwise realize any gain or incur any loss therefrom.

G.    The provisions of subsections 15(1), 56(2), 69(4) and 246(1) will not apply to any of the Proposed Transactions.

H.    The provisions of subsection 245(2) will not be applied to the Proposed Transactions, in and by themselves, to redetermine the tax consequences confirmed in the rulings given above.

The above rulings are given subject to the limitations and qualifications set forth in Information Circular 70-6R7 issued on April 22, 2016, 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 RDTOH, GRIP or CDA for any of the corporate entities described herein;

(c)   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 or the redemption amount of the shares issued as consideration, whether pursuant to a price adjustment clause or otherwise, will be effective retroactively to the time of the transfer or issuance of shares.  Furthermore, none of the rulings given in this letter are intended to apply to, or in the event of, the operation of a price adjustment clause, since such adjustment will be due to circumstances that do not constitute proposed transactions that are seriously contemplated.  The general position of the CRA with respect to price adjustment clauses is stated in Income Tax Folio S4-F3-C1, Price Adjustment Clauses, dated March 28, 2013.

Yours truly,

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

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